“ If prices are linked you will see hedging in real markets , because that ’ s what traders do ”
Checking carbon at
The EU ’ s plan to price carbon on its borders is taking shape , writes Siobhan Hall .
A European Commission proposal is expected on 14 July to make importers buy virtual ETS allowances to cover the carbon embedded in their products from selected sectors . Intended to protect the EU ’ s global competitiveness as it pursues an ambitious goal to have net-zero emissions by 2050 , the carbon border adjustment mechanism ( CBAM ) idea has come a long way from the carbon border tax first mooted by France back in 2009 .
Now backed by all 27 EU leaders , who want the EC to start applying it by 1 January 2023 , the CBAM virtual allowances would mirror ETS carbon prices to ensure importers face the same carbon constraints and costs as EU producers .
Achieving that balance will be a delicate task , however , and the EC still has many open questions to answer in its July proposal . These include when such virtual allowances would have to be surrendered , and whether they could be stockpiled and traded in a secondary market for hedging .
More contentious still is what happens to the free allowances allocated to EU producers in the ETS , which is how the EU currently protects its industry from the risk of energy intensive industry production shifting to regions with less strict carbon constraints . This is called carbon leakage and is a very politically sensitive issue , linked as it is to jobs and economic growth .
Heavy industry is reluctant to give up its free allowances for an untested CBAM , particularly with EU carbon prices on the rise , breaching EUR 50 / t for the first time ever in May for the benchmark Dec 21 EUA contract . Free allowances for heavy industry are being gradually phased out under the current ETS rules , but the EC will propose changes to the emissions capand-trade scheme as well in July . This is all part of its “ Fit for 55 ” package to help the EU achieve its new 2030 target to cut CO2 by at least 55 % from 1990 levels , up from at least 40 %. The package will also include proposals for higher 2030 renewables and energy efficient targets , as well as changes to energy taxation , along with the new CBAM .
All these EC proposals will need at least 18 months or two years to be agreed and confirmed by the European Parliament and EU Council , representing national governments . This means EU power and carbon traders are heading into a period of uncertainty on the detail of new rules , although the long-term decarbonisation goal is clear . The EC said in its updated EU industrial strategy on 5 May that it would keep “ existing tools ” – ie free allowances – for managing carbon leakage risks until “ fully effective alternative arrangements are in place .” The European Parliament also narrowly backed keeping free allowances for industry in a non-binding opinion on the CBAM in March . The vote gives the EC an idea of how
Montel Magazine 2 – 2021