Keeping faith in higher carbon prices as a driver of change

Abstract

Since 2017, in the expectation of the start of operation of the Market Stability Reserve as of 2019, prices under the EU Emissions Trading System (EU ETS) have been steadily increasing, from around €5 in early 2017 to €25 prior to the onset of the coronavirus epidemic. After a wobble during which the price fell back to around €15 in mid-March 2020, the EU allowance price has been on an upward trajectory since. Over the last couple of months, however, the price has jumped from €30 to about €401. These are, without doubt, significant price movements. What can explain them? Market observers have been offering multiple explanations, ranging from the cold weather to the interest hedge funds have been showing in acquiring EU carbon allowances. Some now suggest that more market intervention may be necessary to fight ‘speculation’ and temper ‘volatility’ in the EU’s flagship carbon market. In this Policy Brief, five explanations are offered for the price evolution, linking recent developments with the EU’s climate neutrality goal by mid-century.