EU CO2 price ‘significantly’ influenced by political backing, researchers find

In late 2023, the EU’s CO2 price – covering emissions from the industry and power sectors – collapsed, puzzling observers. A crisis of confidence in politician’s commitment to climate action may be partly to blame, new research suggests.

Prior to this fall, the EU’s CO2 price had experienced a sustained rally in the 2020s. Conversely, this can be attributed to companies at the time taking politicians’ climate credentials seriously, a new article published in the journal Nature said.

As politicians became serious about the EU’s Emission Trading Scheme (ETS), companies began to organise their certificate management in a more forward-looking way – charting a clearer path to climate neutrality in industry and power sector, the researchers assert.

Robert Pietzcker, an energy system researcher who co-authored the study, explained it by drawing on lessons from the euro crisis, when European Central Bank chief Mario Draghi famously vowed to do “whatever it takes” to save the EU’s common currency.

His  assertion was considered credible by market players, and this was enough to stabilise the situation.

In 2021, when the EU’s sluggish CO2 price rallied, the Commission’s executive vice president in charge of the Green Deal, Frans Timmermans, stressed that “if we want to achieve our goals, I think the price should be much higher than it is even at 50 euros.” 

Markets “probably priced this in as important information” that politicians would not “intervene” in the carbon market to cut prices down to pre-2020 levels, the researcher told attendees of an online briefing on 25 June. 

As a consequence, the EU’s carbon prices continued their rally before peaking at €100 per tonne of CO2 in February 2023 – after which prices slowly slumped. 

“If trust in the EU’s climate targets weakens, carbon prices could drop,” explained Joanna Sitarz, a scientist at the German Potsdam Institute for Climate Impact Research, who authored the research. 

Using the LIMES-EU model, the research team had shown “that the effect of political credibility on price is significant,” added Pietzcker. 

“Decision-makers should treat credibility as a key variable,” he said.

Industry not entirely convinced

Joachim Hein, who handles carbon pricing issues for the German industrial association BDI, argued that ETS prices “don’t have much to do with policy credibility”.

Instead he suggested that companies were reacting to new laws and accompanying uncertainty, like the CO2 border duty (CBAM), by stocking up on emissions certificates, which pushed up prices.

Christian Müller, who handles ETS issues at chemicals giant Evonik, expressed similar doubts that there was any strong link between politicians’ statements and CO2 prices: “Sure, you know there’s a [climate neutrality] goal, but how will that be reflected in the ETS in the end?”

However, he simultaneously affirmed a core assertion made by the carbon researchers. “We are also acting very far-sightedly in terms of our certificate procurement activities.”