26/03/13
Carbon - In focus: US-Iran war heightens EU ETS split
Carbon - In focus: US-Iran war heightens EU ETS split
London, 13 March (Argus) — The debate around the role of the EU emissions
trading system (ETS) has intensified this month, as focus shifts towards
concerns that the carbon price is increasing already high energy prices
triggered by the onset of the US-Iran war. EU ETS prices have been treading a
fine line in recent sessions, as support from a sharp increase in natural gas
prices — which has encouraged a switch to more carbon-intensive coal-fired
generation, thereby boosting compliance demand for allowances — is
counterbalanced by broader macroeconomic risk-off sentiment, which has prompted
some speculative participants to close out long positions in the market. This
led to the benchmark front-year EU ETS contract initially holding relatively
stable following the first strike on Iran on 27 February, closing within a range
of €70-75/t of CO2 equivalent (CO2e) in Argus assessments until 11 March. But
the rally in the European wider energy complex following the start of the
conflict has reignited calls from politicians for measures to ease carbon
prices, already seen last month in the context of preserving industrial
competitiveness. Italy has been particularly vocal, with prime minister Giorgia
Meloni urging an immediate suspension of the EU ETS for fossil fuel producers,
to help curb high energy prices until global fossil fuel prices return to
pre-war levels. The EU ETS front-year contract came under firmer downward
pressure on 12 March, falling to its lowest close in 10 months after unconfirmed
reports that the European Commission is considering changes to the system that
could loosen the market's supply-demand balance. Support remains But the
commission has generally maintained a firm stance on the ETS. Commission
executive vice-president Teresa Ribera warned that its suspension would not send
any positive signals, and would ultimately harm the bloc's competitiveness. And
a number of EU member states, along with some industry and non-governmental
organisations (NGOs), have reiterated their support for the scheme in the face
of criticism. Dismantling the ETS would be the "wrong answer" to rising energy
prices, and a rushed reform risks distorting price signals without improving
competitiveness, said Spain in an informal letter to EU institutions. The
country later joined Portugal, the Netherlands, Luxembourg, Slovenia, Denmark,
Finland and Sweden in a non-paper that termed the ETS the "cornerstone" of the
EU's climate policy, and an essential tool to strengthen EU industry. "Making
fundamental changes to the ETS, calling into question the ETS instrument itself,
or suspending it, would constitute a very worrying step backwards," the
non-paper said. Several joint letters, cumulatively signed by around 200
companies, investors and organisations — including Eurelectric, WWF, IKEA and
Volvo — argued that the ETS is not the source of Europe's competitiveness
challenges. Industrial installations received extensive free allowances between
2008-24, which at times exceeded their verified emissions, another joint letter
from 35 NGOs highlighted, and claims that carbon pricing is destroying industry
overlook deeper structural dynamics in the EU. A 50pc fall in emissions covered
by the ETS since 2005 alongside a 17pc rise in economic output is evidence that
the system works, a separate joint statement by a group of 17 energy and trading
firms and associations said. And while concerns about volatile energy prices
owing to global geopolitical uncertainties are "legitimate", EU leaders must
avoid repeating the "ad hoc" market interventions made during the energy crisis
sparked by the Russia-Ukraine conflict, they added. Pressure mounts The latest
discussions on the ETS have emerged ahead of a meeting of EU ministers on 19-20
March, in which the recent rise in energy prices is likely to feature, and with
one eye still on the scheduled ETS revision in July. The commission will likely
have to respond to pressure on the ETS in light of the Iran conflict, an EU
official said this week , describing the timing for holding ETS review
discussions as just about the worst moment possible. But conditions have not yet
been met to declare an emergency allowing for fast-track crisis legislation as
for energy markets in 2022, he said. The start of the conflict between Russia
and Ukraine drove intense volatility in EU ETS prices amid similar concerns
surrounding fossil fuel supply to the EU. The front-year contract dropped to
€87.21/t CO2e on 24 February 2022 — when the conflict began — from €94.74/t CO2e
the session before, eventually tumbling to €58.31/t CO2e on 7 March 2022 before
rebounding to €81.43/t CO2e towards the end of that month.S The EU is not
experiencing an energy crisis as severe as the one seen in 2022, EU
commissioners said this week, pushing back against proposals to intervene in the
market or adjust price settings. "We don't have a security of supply problem as
of yet in Europe. But others in the world are in a different situation," EU
energy commissioner Dan Jorgensen said, noting that gas is not as consequential
in the bloc's energy price setting today as it was in 2022. By Kiara Campagne
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