How carbon pricing can decarbonise European heavy industry by Elisabetta Cornago, 13 January 2022
To decarbonise heavy industry, the EU needs a high and stable carbon price, an end to free emission permits, a level-playing field with foreign competitors, and support for green investment. Prices on the European carbon market continue to climb, as Europe’s climate targets – and its policies – have become more ambitious. That is a welcome change from the first 15 years of the EU’s Emissions Trading Scheme (ETS), when heavy industry found that emitting carbon was so cheap that reducing emissions was not worth the hassle. A carbon price that bites is a necessary tool to reach the EU’s climate goals. But a high price poses a challenge for Europe’s heavy industry, which competes globally with producers who are not (yet) subject to comparable carbon pricing. Since 2005, the ETS has capped carbon emissions from over 10,500 installations in the European power sector, and in energy-intensive industrial sectors such as oil refining, iron and steel, cement, and more. The cap covers about 36 per cent of total European emissions and is gradually tightened every year to reduce them. The cap is enforced via permits to emit, which are traded on carbon markets, leading to a price for carbon emissions. The problem is that, while the energy sector has cut its emissions by 15 per cent since 2005, the carbon price has, so far, not driven down carbon emissions from heavy industry in a comparable way. That is because between 2012 and 2018, carbon prices remained under €10 a ton, in part because of a surplus of emission permits on the market, and in part because industrial installations under the ETS still enjoy free permits for carbon emissions. To prevent prices for carbon from falling too low, the EU recently created the so-called market stability reserve (MSR) to stash away the surplus of allowances that was flooding the carbon market. In effect, because the MSR is designed to withdraw or release allowances when their number in circulation goes beyond certain pre-defined thresholds, the ETS has become an unconventional cap-and-trade system: while generally cap-and-trade systems allow the price to fluctuate freely, the MSR introduces an indirect lower and upper bound on carbon prices. The ‘Fit for 55’ climate and energy package, announced by the European Commission in July 2021, contains proposals for further reforms to the ETS. First, it lowers the cap on emissions to bring the ETS in line with tougher climate targets. Second, it tightens the conditions under which industrial plants can CER INSIGHT: How carbon pricing can decarbonise European heavy industry 13 January 2022
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