European carbon costs continue to rise despite reform

Oil and gas prices are falling, the price of carbon is rising, ...

In recent weeks, oil and gas prices have fallen significantly again amid hopes for a lasting reopening of the Strait of Hormuz. At the same time, however, the price of carbon has risen—and, on balance, has risen more sharply than the price of oil since the outbreak of the war, even though the latter has fluctuated more widely. Furthermore, unlike the price of oil, the trend in the price of carbon continues to point upward.

... and it will continue to rise in line with the trend, ...

One factor supporting the view that the carbon price will continue to rise in line with the trend is that the EU will maintain emissions trading as its primary tool for reducing carbon emissions. The EU will continue to reduce the number of available allowances in the coming years, thereby driving up their price, in order to increase the incentive for further reductions in carbon emissions.

... especially since further burdens are coming, ...

Furthermore, further burdens are incoming. According to current plans, the number of allowances allocated to companies free of charge is to be further reduced. Until now, this has primarily affected the energy sector, while allocations to energy-intensive sectors have declined only slowly, meaning that companies have largely been able to cover their carbon emissions with the free allowances they received. Consequently, they have so far been affected by carbon prices often times only indirectly through higher electricity prices, on which a carbon price is already levied under ETS I. The free allowances are set to decline by an average of 11.5% per year over the next ten years, which would result in a massive increase in their burden. Over the past ten years, the decline averaged about 6.5%.

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