The legislative package presented last week by the European Commission, Fit for 55, has reopened the debate on the Emissions Trading System (ETS EU). Its goal is to further reduce CO2 by 2030, from 40% to 55%. But with a price per ton of carbon on the way to 60 euros, gas at record highs and, therefore, with the price of electricity going through the roof, industrialists say they can’t take it anymore.
This is mainly due to the fact that industry emissions have not been reduced as much as expected, as explained to Invertia Javier Diaz Carmona, responsible for the Energy Consulting area of Ayming, an international consulting company specialized in improving business performance.
Over the last decade, the EU emissions trading system has been effective in reducing carbon emissions from the electricity sector (by 43.5% from 2012 to 2020), but other carbon-intensive sectors have seen a stagnation during the same period. This is largely due to free allocation provisions designed to prevent carbon leakage, which was somewhat less stressed thanks to the importation and sale of emission rights, which is also expected to experience a significant rise in price per tonne.
CO2, through the roof
The European market has reached its all-time highs in 2021, touching 57 euros per ton of CO2, while only a year earlier it stood at 25 euros. “Politics is so influencing in this market that the price started to rise when the first drafts of the Fit for 55 and there was talk of adopting stricter measures. ”
“But just when the final text of 55.46 euros / Tn CO2 was finally released, it fell to 52 euros, because Europe is going to wait to reduce the free allocation of rights to the industry,” says Díaz Carmona.
“It has been estimated that CO2 could rise in the short term to 60 euros, but with the first drafts there was talk of prices around 80-100 euros / Tn CO2”.
Brussels will force the implementation of current renewables to be multiplied by two in just a decade and will require a growth rate never seen before, but which may have a crucial impact on Spanish industry, since, currently, the price of emission rights is unsustainable.
Electricity, in historical record
This has a direct consequence: the price of electricity. 2021 is going to become the most expensive year in history in the price of electricity. Only in the first six months the average price of electricity in the wholesale market reached an average of 83,29 euros/MWh, a historical record. The previous maximum was 2008, according to OMIE, the manager of that market.
“The situation is unsustainable for industrialists, because they will not be able to support these prices maintained over time,” adds the expert.
“The European Union must ensure compliance with the Green Pact, but also to safeguard European industry.”
The Community Executive will also address a more than possible tax hike for fossil fuels that can cause a significant impact for sectors such as transportation, automotive, construction or agriculture, which are crucial in our country.
Solutions for Spain
With this set of factors, where the price of gas is set in international markets and the price of CO2 in Europe, what else can be done?
“The first thing the European Commission would have to do is publicly express its concern about CO2 price levels, and only with that would have an effect on the ETS market,” explains the head of the Ayming consultancy.
“And then it should limit the role that financial investors have in this market.” According to some sources in the sector, up to 60% of all the rights that are bought and sold could be in the hands of international investment funds, which do not participate directly because the law prohibits it, but they are with contracts for difference.
An unlikely possibility after the statements of Frans Timmermans, Vice-President of the Commission and Head of the European Green Deal, in a video conference last May.
“It is a market and we must be very careful when intervening because it will create a non-market based price and will definitely undermine the credibility of the emissions trading system, “he said at the time..
“It is a claim effect for investors,” says Díaz Carmona.
But there is one more option, the role that Spain can play in this decision.
“Our country has an important weight in Brussels and it would be time to defend the control of this market, because even if the price of CO2 fell from the barrier of 50 euros, the process of decarbonization of the industry would still be unappealable”.
Hacienda could enter this year 2,500 million euros from the sale of CO2 rights. And the high prices of electricity also allow to increase the income from taxes, charges and fees that bears electricity, which account for about 60% of the bill. “If we take this into account, it could be understood that nothing is done, but in the long run it will have enormous damage for the industry in Spain and after that, for the economy as a whole,” he concludes.