6 february 2018

Floor prices are necessary to support weak EU carbon market

Carbon Market Watch, February 6, 20p18

EU has agreed on its carbon market rules for the 2021-2030 period, but carbon prices will remain below levels required to achieve the Paris climate goals. Meaningful and rising carbon floor prices either at the national or regional level would speed up pollution cuts by incentivising low carbon investments and making coal financially unattractive.

This week, the European Parliament approved the revamped rules for the EU Emissions Trading System (EU ETS), Europe’s tool for reducing emissions from heavy industry and power sector. While taking steps to address the massive market surplus which is suppressing prices, the new rules will not be enough to cut emissions in line with the Paris Agreement goal of limiting global warming to 1.5 degrees.

The system must be complemented by additional action at the national level, for example by setting a carbon floor price for the power sector to provide the necessary incentives to move away from coal and to invest in clean energy.

Floor price drives down emissions and brings investment certainty

So far, the only country in Europe with a carbon floor price is the United Kingdom. Introduced in 2013 at £18/tCO2, the floor price has been successful in driving down coal emissions, resulting in a fall by almost 60% in 2016 compared to the previous year.

In recent months, there has been growing momentum for national and regional carbon floor prices elsewhere in Europe: Following the UK precedent, the Dutch government has announced a rising carbon floor price for its electricity sector, reaching EUR 43 by 2030 and the Nordic countries are considering a Nordic carbon price floor to “secure future green investments in the region”. The French president Macron has on various occasions, most recently in his address to the World Economic Forum, called for a minimum carbon price to incentivise transition towards a low-carbon economy.

A steadily rising floor price would not only drive the urgently needed move away from fossil fuels but also bring investment certainty by allowing investors to incorporate the societal cost of pollution into their activities. A recent paper by Potsdam Institute for Climate Impact Research found that strong climate policies, such as a meaningful price on carbon, can reduce emissions by up to 20% even before coming into effect by getting investors to start pulling their money out of coal power plants in order to avoid stranded assets in the future.

2018 is the year to step up climate action

One of the key elements of the Paris Climate Agreement is that countries ratchet up ambition in line with the goal of limiting global warming to 1.5 degrees. The UN has warned that with the current pledges, we are on track for 3 degrees warming, which would have catastrophic consequences for life on Earth. This year, governments are expected to announce how they intend to increase their ambition in the run-up to 2020 when the updated plans are due.

The EU ETS will need to go through another reform if the EU wants to keep up with its global commitments. In the meantime, we urge more national governments to take up carbon floor prices as the necessary step towards a meaningful price on pollution.

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