By Alessandro Vitelli

The summer holidays are over. Carbon traders had a fun August in which EUA prices went up €22 and then went back down €22, but now the grown-ups are back from the beach and stuff’s getting real.

The European Commission has hit the ground running, saying it’s planning to intervene in the European gas and power markets to moderate the impact of high costs on consumers. Commission President Ursula von de Leyen is due to present the plan on Sep. 14, while also holding out the promise of a more significant reform of the EU’s power market structure at a later date.

And of course the regular chorus of voices have piped up calling for a cap on the cost of carbon or even the suspension of the EU ETS.

And while the Commission and most market stakeholders have firmly rejected these calls, there appears to be a growing acknowledgement that the carbon market has to accept a new, temporary reality in which climate policy will have to accommodate more pressing concerns.

We should remember first and foremost that the energy crisis is being treated as a temporary challenge, and that Europe is determined to stick to its path of steady decarbonisation. The crisis has simply underlined the need to do it all faster.

There is no sign that the Green Deal or the EU ETS reforms are in danger of being rolled back or delayed. And more recent initiatives from the European Commission imply that the EU ETS has a role to play.

For example, the RePowerEU plan foresees a drastically shortened process for approving new renewable capacity, to ensure that fossil fuels are marginalised even faster than before, thereby cutting the bloc’s dependence on imported energy (for which read “Russian” energy).

Part of the funding to speed up this and other shifts will come from the EU ETS – the RePowerEU plan foresees the sale of €20 billion worth of EUAs from the supply-managing Market Stability Reserve (around 250 million allowances at current prices) over three or four years, as part of more than €200 bln in total funding).

When the RePowerEU plan was first mooted earlier this year, many voices were raised against what was perceived as a breach of good faith by the Commission. Intervening in the market to this vast extent would wipe out the confidence that EUA supply is fixed, they said – or at least, as fixed as it can be.

The interlude of August, when prices spiked to a new record of €99.22 and then fell back to where they started the month, served to distract us all while the energy crisis continued to deepen.

While regulators and lawmakers went on holiday, maybe carbon had a last hurrah before reality really bites?

Well, possibly. As we return to our desks, the mood music appears to be shifting a little and a note of pragmatism is creeping in. You could even call it the opening shot in the EU ETS’ own battle to survive the winter.

Firstly, Jos Delbeke, one of the architects of the EU ETS, said in an interview in Politico this week that the price of carbon needs to be moderated to avoid direct political intervention in the market, the kind of intervention (price caps, suspension) that Poland and Spain are talking about.

“The zone beyond €70 up to €100 is, I think, a critical level that deserves quite a bit of reflection,” the Commission’s former climate boss told Politico. 

To me that sounded like “keep the price at €70 or below, and we can dodge the calls for direct intervention in the EU ETS until this is all over”.

Then Peter Liese, the European Parliament’s lead representative on the yet-to-be-finalised ETS reform bill, indicated that lawmakers are more receptive to proposals that would limit the rise in EUA prices.

“My analysis is that we need to be more careful in increasing prices and more positive towards elements that may reduce them,” he told Carbon Pulse.

Liese also that the initial strong opposition to the idea of bringing additional EUAs from the MSR and selling them to raise funds for RePowerEU is now weakening.

Crucially, he said “I don’t think we can [pursue the transition] without the MSR sales.”

It’s important to bear in mind that there are other price control mechanisms being discussed as part of the ETS reforms: there are proposals to amend the Article 29a trigger, to make it unconditional as well as more sensitive to price increases. And of course there is still the cloud of market access limitations being passed around.

Even market participants are beginning to resign themselves to the fact that the EU ETS is, in the current context, irrelevant. Two weeks ago I wrote that “for some time already EUAs haven’t been able to do the job they were created to do.”

“The price of carbon is nowhere near high enough to force any fuel switching from coal back to gas. That’s logical, given what’s going on around us. The EUA price could be €50, or it could be €150, but coal would still be more profitable than gas.”

None of this is to say that the cost of carbon is a major contributor to the energy crisis. Of course it isn’t. Even von der Leyen said recently that the price of EUAs represents just 6% of the total final cost of power in the EU. 

But carbon is one of the only moving parts that EU lawmakers has any control over. The gas market is a global market and EU buyers have to compete with the rest of the world to attract LNG or pipeline gas.

And it’s notable that the Commission’s recent discussions over how to mitigate the high cost of energy focus on setting price caps in downstream markets, subsidising the cost for domestic and industrial users. When the Commission says it wants to “put a cap on the cost of Russian gas”, it certainly doesn’t mean paying Gazprom less. It means sharing the burden of the cost with utilities.

But the EU ETS is 100% home-grown, and even a small reduction in the EUA price, in that 6% of the total cost of energy, can be spun as a political win. 

And that’s where this new note of pragmatism comes from. 

So, strap yourselves in for the RePowerEU sales, for the “front-loading” of the Innovation Fund and Modernisation Fund EUA auctions, and for a more sensitive Article 29a trigger. 

Perhaps we should wave goodbye to the idea of EUA prices at €80 or more for a while, but that might be a price worth paying if it means there is still an EU ETS with a meaningful target in two or three years’ time.

Alessandro Vitelli is an independent journalist who works for Carbon Pulse on a part-time basis.  The views expressed are his own.