The price of CO2 in the EU runaway: the ‘bubble’ could push it up to 50 euros

Europe’s emissions trading has become a speculative market, where funds and investors want to make a killing.

Just a year ago, the price of CO2 in the European Union Emission Rights market (EU ETS) was close to 16 euros per ton. However, in recent weeks a wave of speculative purchases has triggered its price and has already exceeded 43 euros . Even some  financial analysts predict that the price of carbon would rise to 50 euros in a couple of months. Which would mean that in just over a year the price would have tripled.

An escalation that has raised concern in European governments. The first has been Denmark’s Climate Minister Dan Jorgensen , who has already said that the EU needs to analyze the impact of investor speculation on the world’s largest carbon market. And one possibility would be to reform the program.

“It is the fashionable commodity ,” explains José María García Berrendero, corporate trader  at Vertis Environmental Finance, a consulting firm specializing in CO2 markets , to Invertia . “It is a safe value for funds and investors who know that there is a captive sector of 11,000 installations in Europe that have the obligation to buy the emission rights in a market with less and less ceiling.” 

A drowned industry

The EU ETS system was launched 16 years ago as a tool for European climate policy. Its objective was to promote the reduction of emissions from the major polluters, energy-intensive industrial plants, electricity generation plants (coal and gas) and later the airlines.

They are given  free emission allowances that allow them to emit an equivalent amount of tons of CO2 during a certain period of time and that are reduced each year. It covers approximately 45% of its greenhouse gas emissions.

However, being a transferable good, they can be bought or sold, and that market is the one that is the protagonist of a bubble with an uncertain future . “If the industry has to reduce emissions at forced marches because the price of CO2 is very high and they do not pay to buy, it would mean that they will have to stop or close, and that would be very dramatic for the sector in Europe, ” adds Berrendero .

For this reason, the most interesting scenario is that “the amount of CO2 in the market is reduced as the sector is transformed, as it is decarbonized”. A path that cannot be traveled in a few months.

Put a stop to speculation

Buying in the CO2 market is almost a safe bet. “There is an overvaluation of the price of carbon at the moment, I could not say if it is a bubble but it could puncture if there is a rumor or a political decision that intervenes in this market,” adds the expert. 

And it is that ” the objective of the European Union is that the CO2 is more and more expensive to force to decarbonize the industry , but now there is a lot of speculation”. 

So is. The pace of gains in the price of carbon has raised concerns in European governments because this spectacular increase will harm the competitiveness of the bloc’s industries . “It could drown them,” says the expert. This has opened up a debate among lawmakers over whether the EU should propose measures to limit speculation.

The restrictions on speculation “would definitely be part of a necessary analysis before making adjustments to our system, that is evident,” said Danish Minister Jorgensen.

To prevent companies from relocating to regions with more lax emissions policies, a phenomenon known as carbon leakage, the EU Commission is drafting a measure to impose a tax on carbon imports at the border . However, they do not finish finding the solution that avoids problems with third countries or with international trade rules. 

“As the price of CO2 continues to rise, this market could die of success,” he concludes. 

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