EU carbon prices are set to double by 2021 and could quadruple to €55 a tonne by 2030 if the European Union aligns its emissions targets with the Paris Agreement on climate change, finds a new report by Carbon Tracker, a think tank.
The recent reform of the EU’s Emissions Trading Scheme has already lifted carbon prices from a low of €4.38 per tonne in May 2017 to €13.82 per tonne in April 2018. According to the report ”Carbon Clampdown: Closing the gap to a Paris compliant EU-ETS”, prices are now on course to hit €25-€30 per tonne by 2020-21 as reforms squeeze out surplus supply.
Mark Lewis, Carbon Tracker, says: “Carbon pricing won’t be sufficient on its own to achieve the Paris goal of limiting warming to well below 2˚C, but it does have a vital role to play: Carbon prices put a value on the limited amount of CO2 we can store in the atmosphere if we are to avoid catastrophic climate change. The space left for increased concentrations of greenhouse gases is the ultimate scarce resource, and it is imperative that it be priced accordingly.”
But bringing the EU ETS into line with the Paris Agreement’s 2˚C warming target would require carbon prices to average €45-€55/tonne for a sustained period, the report finds. That would make even the most efficient coal and lignite power plants unprofitable.
“Life is set to get much tougher for EU coal generators,” Mark Lewis says. ”Higher carbon prices will eat further into operating margins that have already been severely eroded by the growth of renewables, forcing less efficient coal plants off the grid altogether. Under a Paris-compliant EU-ETS cap the shock to coal would be even greater, forcing all coal and lignite plants – even the most efficient – either off the grid or to the margin.”
The report concludes that “this is likely to see a major switch from coal to gas in Italy, Spain, Germany and the Netherlands,” noting that the UK has already largely achieved this switch due to domestic policies. High carbon prices are also likely to accelerate the development of large-scale energy storage, smart grids and demand-side response, where energy users shift consumption away from peak periods.
Carbon Tracker is an independent financial think tank that analyzes the impact of the energy transition on capital markets.