Sweden and Malta’s Strategic Move in EU Emissions Trading – 20.08.2024

EUAs posted their third weekly gain in the last month, as modest buying activity was enough to counter active selling pressure, while trading volume shrank as participants headed into the peak summer weekend and UKAs snapped a run of six weekly losses.

Sweden and Malta’s Strategic Move in EU Emissions Trading

In a significant development for the European Union’s climate policy, Sweden and Malta have announced their intention to increase the number of European Union Allowances (EUAs) they plan to cancel under the EU Emissions Trading System (ETS) flexibility mechanism.

The ETS flexibility mechanism, which allows eligible EU member states to cancel a portion of their EUAs instead of auctioning them, was introduced to help countries meet their emission reduction targets under the Effort Sharing Regulation (ESR). The ESR focuses on sectors not covered by the EU ETS, such as transport, agriculture, and waste management, and requires a 40% reduction in these sectors by 2030 compared to 2005 levels.

This decision, which aligns with the EU’s broader targets for reducing greenhouse gas emissions, reflects the commitment of these nations to achieve their emission reduction targets from non-ETS sectors, yet not through concrete emission reduction solutions, but by making some compensations between the allocations distributed to the countries for the EU ETS sectors towards non-ETS sectors, which cannot otherwise fulfill their imposed targets.

Sweden, which had previously refrained from using this flexibility, now plans to cancel up to 5.2 million EUAs, while Malta has increased its cancellation target to 510,300 EUAs.

The timing of this announcement is critical. As the EU gears up for its ambitious 2030 climate targets, the flexibility provided by the ETS is seen as a vital tool for balancing economic growth with environmental responsibility. However, it also highlights the challenges faced by smaller nations like Malta, which must navigate the complex dynamics of the EU’s carbon market while maintaining their economic competitiveness. The introduction of new ETS regulations, particularly in the shipping sector, has raised concerns about the potential economic impact on Malta’s role as a major transshipment hub. The Malta Maritime Forum has warned that the increased costs associated with the EU ETS could lead to a significant loss of business to non-EU ports, particularly in North Africa, threatening Malta’s economic stability and connectivity.

These developments indicate a growing trend within the EU where member states are increasingly utilizing the flexibility mechanisms available to them to meet stringent climate goals while mitigating potential economic drawbacks. As Sweden and Malta move forward with their revised strategies, their actions will likely serve as a benchmark for other EU nations facing similar challenges.

Source: The European Commission, Carbon Credits, Ice.com, Carbon Pulse

EU ETS and the Future of Carbon Pricing – 13.08.2024

The Carbon Emissions Certificate (EUA) closely tracked the natural gas prices on the TTF (Title Transfer Facility) market on Thursday, August 8th, as they once again rebounded from an important technical resistance level before briefly surpassing it at the end of the session. The market struggled to find a clear direction on Friday, August 9th, due to low trading volumes during the summer and the lack of fundamental factors to influence the market. In contrast, Monday’s session on August 12th ended with a significant increase of 4.32% on the ICE ECX exchange compared to the end of last week, reaching a spot price of 72.86 Euro/tCO2.

 Current State of the EU ETS

In 2023, the EU Emission Trading System (EU ETS) ended with a surplus of 2.27 billion emission allowances (EUAs), reflecting a continued trend of high surpluses driven by reduced electricity production and the growth of renewable energy. This surplus, slightly down from the approximately 2.4 billion EUAs in 2022, indicates the ongoing impact of policy interventions and increased renewable energy adoption. Despite these reductions, emissions remain below the system’s cap, allowing the surplus to continue. This surplus is distributed among various reserves, such as the Market Stability Reserve (MSR) and the New Entrants Reserve (NER), ensuring that a significant portion of EUAs remain outside circulation.

The European Commission’s MIX scenario aligned with the EU’s 2030 emission targets presents a different picture. Under this scenario, the surplus could shrink to less than 1.1 billion allowances by 2030. This shift hinges on a significant increase in electricity production to 3,153 TWh by 2030, driven by accelerated renewable energy capacity installation. The MIX scenario also forecasts more aggressive emission reductions across sectors like transport and heating, which would push demand for EUAs, narrowing the surplus and consequently increasing their price. Due to the entrance of these new into the EU ETS in 2026, the EUA certificate price is expected to exceed 100 Euro/tCO2.

The future of the EU ETS is deeply intertwined with the EU’s broader energy transition. As the EU moves towards its 2030 targets, careful consideration of supply and demand dynamics within the ETS will be crucial to ensuring a balanced, effective, and fair carbon market.

Source : European Comission, Carbon Pulse, Carbon Credits, Sandbag