A minimum price for carbon emissions only hides the real solution

by: Hans van Cleef

In just a few months, the price for carbon emission rights in Europe jumped to levels above EUR 21 from below EUR 8/tonne at the start of this year. The decision by the European Commission to remove the surplus of emission rights via the Market Stability Reserve mechanism led to strong demand. Higher demand due to increased power consumption also proved to be supportive. This proves that the Emission Trade Scheme (ETS) is working properly: lower supply and a rise in demand leads to higher prices.

Although we know by now that a rapid increase in prices is often followed by a sudden price correction lower, we nonetheless believe that the uptrend will continue in the coming years. The European policy is to continually remove emission rights, in order to support the shift towards sustainable options across different sectors. Both the recent price trend (higher ETS prices) as well as signs of a shift out of fossil fuels (more investments in renewable energy) look promising. There will always be people who believe that these developments are not going fast enough, and that the price of carbon emissions should be much higher. However, the energy transition should not only be done in a timely manner, but also carefully. Fast and good do not often go together. Besides that, the carbon reduction goals are set for 2050. As indicated before, this means that we should speed up the energy transition, but we should do so in a responsible way. Ultimately, the goal is carbon reduction, not necessarily a high price for carbon emissions.

Recently the Ministry of Economic and Climate Affairs and the Ministry of Finance submitted a bill for a minimum CO2-price for power generation in the Netherlands subject for discussion. According to this proposal, the minimum CO2-price will exist from a combination of the ETS  carbon price and a local levy. The minimum price will rise from EUR 18/tonne in 2020 to EUR 43 in 2030. Both the Dutch industrial sector and the electricity sector are opposing such a minimum price for carbon emissions. This bill may have a negative effect on the competitiveness of these sectors compared to similar sectors in nearby countries, as electricity will be more expensive than in surrounding countries. The security of supply can be affected as the Netherlands may become more dependent on imports which may result in shortages during peak demand. Also, recent research by Frontier Economics showed that such a measure would lead to more exports of carbon emissions, or in other words, more imports of electricity. However, with a current spot price of EUR 21/tonne, a minimum price of EUR 18 in 2020 would likely have little impact, and is only politically symbolic.

Arguably, if prices are trading above the minimum level anyway – and are expected to continue to trade above this level – the industrial and electricity sectors should not care about such a measure. Therefore, I believe that the main reason to oppose a minimum price for carbon emissions has more to do with trust than with competition and security of supply. Trust in the European Commission to continue its support for improvements in the ETS mechanism and thus the uptrend in prices (even if this starts to affect the financial results of industries and businesses). Trust in the Dutch political willingness to remain committed to improve the ETS in an international and regional context as suggested in the presentation of the new prospective Climate Agreement. In other words, trust in policy which would justify investments in sustainability within these sectors for a longer period of time.

The question is, whether the Dutch government should indeed introduce such a minimum price for carbon emission rights. They can support a minimum price of carbon, but perhaps what’s more important is to make it credible – to engender trust. This can for instance be done by planning a long term policy which would support new investments in sustainability over a number of years. Policy which would not suddenly take companies by surprise by taking a U-turn only a few years from now, like what we have experienced with the three new Dutch coal power plants[1] recently. If the government decides to play an active role in creating support for carbon emission prices, it may be wise to buy some of these carbon rights themselves. For instance buying – and destroying – emission rights to compensate for lower emissions due to the closure of these coal power plants, or the construction of new wind parks. That would have a significant impact on carbon emission prices, maintain competitiveness for industries on a European level, and create trust in politics at the same time!

 

This blog was earlier posted in Dutch on Energiepodium.nl

 

 

[1] The order to build new coal power plants at the Maasvlakte (2x) and the Eemhaven was given by the minister of Economic Affairs Brinkhorst in 2003. Security of supply and the coupling of gas prices to the continuously higher trading oil prices were given as the main reasons.  Although the lifespan of an average coal power plant is 35 years on average the government recently decided to forbid using coal as a fuel for power generation. Unless these coal power plants are converted in power plants which will be driven by other, sustainable fuels, they should be closed in 2030. Only thirteen years after the opening, and thus well before the expiration of its economic life.