The European Carbon Market – EU ETS II 07.11.2023

At the beginning of this week, the price of the EUA certificate reached the lowest level in the last five months, closing the ICE ECX futures market in London at 75.66 euros/tCO2 (06.11.2023). In October, prices were 3.2% lower than in September. A similar downward trend can be observed on the European energy market, as a result of forecasts regarding a mild winter, as well as the decrease in gas demand from the North Sea and a decrease in nuclear energy production in France.

The European Social Fund and the EU ETS II

As part of the revision of the EU ETS ‘’Fit for 55’’ package, the European Commission has proposed to extend the emission reduction obligation to buildings and road transport sectors as well, creating a true parallel ETS, in fact called EU ETS II, which will operate by auctioning allowances only. To address the social impact arising from this new system, the Commission has proposed to introduce the Social Climate Fund, an economic fund to address challenges of the energy transition and achieving emissions neutrality by 2050 based on the data collected from a 2021 European Commission study in which 34 million people in Europe, nearly 9% of the population, said they lacked the financial support needed for sufficient heating in their homes.

Regulation 2023/955 is the legal basis establishing EU ETS II and the Fund and entered into force on June 5, 2023.

The main purpose of the Climate Social Fund is to provide temporary direct income support to the most vulnerable citizens and micro-enterprises affected by rising energy costs, particularly for heating and transportation due to the increased environmental obligations resulting from the introduction of ETS II. The fund, however, also aims to incentivize investments in member states that reduce emissions in the road transport and building sectors to improve the efficiency of both sectors and reduce environmental impact and social pressure together.

In this regard, the European Commission introduced two new contents during discussions on the Fit for 55 Package:

• “Energy Poverty” which shows households to lack sufficient economic resources to access essential energy services, such as heating, cooling, lighting, and energy to power appliances, and thus does not allow for the right to health and a decent standard of living;
• “Mobility Poverty”  – the Commission refers to the condition in which households face substantial costs to get around, having limited access to affordable means of transportation, with a specific focus on critical locations such as islands, mountainous regions, and less developed remote areas. These two concepts have been the basis for all discussions of the Social Climate Fund.

Part of the Fund will be financed by the earnings from the auctioning of ETS II emission allowances (up to 65 billion euros), with an additional 25 percent coming from resources made available nationally by member states, for a total of about 86.7 billion euros. Projects targeted for investments will have to meet the principle of “no significant harm” and will have to demonstrate actual emission reductions.

The existing Innovation Fund, which is under the ETS, will also receive significant support, with an increase in dedicated resources, again from the auctioning of allowances, from 450 million to 575 million allowances until 2030.

The Social Climate Fund will be operational from 2026, while the new ETS II for buildings and transport, will come into effect the following year, in 2027, or 2028, if energy prices continue to be too high.

The European Commission also included a requirement for governments to submit a “Social Climate Plan” by June 30, 2025, with the goal of stating which projects they want to target the Fund’s investments on, feasibility studies, long-term environmental goals, and state-specific needs to address and mitigate negative revenue impacts in the short-term. The Commission also urged states to consult with local governments and civil society organizations during the development of their Social Climate Plans to make sure that demands of those to whom the Fund’s aid is directed can truly be heard. Without a doubt, the adoption of the Social Climate Fund represents an important social justice milestone on the long road to energy transition and a clean, low-carbon economy.

Source: The European Commission, Brussels & Aither Group, Switzerland

The European Carbon Market: Maritime Transport – 28/08/2023

The EUA continued to increase last week towards the level of 85 euros/tCO2. If it exceeds the resistance line of 91 euros/tCO2, it is estimated that it can exceed the highest levels reached insofar.

 The maritime sector and the EU ETS

Maritime transport emissions account for about 3 percent of global emissions. There was a long negotiation on maritime transport and the Fit for 55 Package operation among European organizations, and an agreement was reached after intensive lobbying. On April 18, the European Council approved the final text for including maritime transport in the ETS from January 2024. The final legislative text was published in the European Official Journal in May and entered into force within 20 days of publication. Directive 2003/87/EC of the European Parliament and the Council establishing the ETS was therefore amended by Regulation 2023/957 to include maritime transport activities in the ETS. This ensures that these activities contribute to the emission reductions set by Regulation 2021/119, which establishes the European Green Deal and the Union’s binding climate neutrality target by 2050.

Regulation 2023/957 establishes rules for monitoring, reporting, and verification of CO2 emissions with respect to ships arriving at, sailing in, or departing from ports under the jurisdiction of a member state. From 2024 all ships traveling to and from European ports, of all flags, regardless of their port of origin, will be subject to ETS obligations, while for non-European voyages only 50 percent of emissions will be covered by the scheme. Maritime operators must compulsorily open an account in the Union ETS Registry to trade EUAs, submitting the necessary documentation to the operator’s home national administration, which will collect and verify the information. Importantly, from 2024 all ships entered into the system will not receive free allocation of allowances, and thus permission to pollute will have to be purchased through the auction mechanism or authorized financial intermediaries.
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Monitoring, reporting, and verification of CO2 emissions

The Regulation also mentions the MRV system. Ships within and above 5,000 Gigatonnes (GT), transiting the European maritime space and within EU ports, must monitor and report their fuel consumption and emissions, information that an EU-accredited body must then verify. This process is formally defined by EU Regulation 2015/757. The phase-in period is gradual: cargo and passenger ships within and above 5,000 G.T. to 40 percent of ETS obligations in 2024, 70 percent in 2025, and 100 percent in 2026. Offshore vessels over 5000 GT will have a 100% obligation directly from 2027. Ships of less than 5000 GT will not be included from 2024, because the EU wanted to avoid assuming an unnecessary regulatory burden for ships that consume only a small amount.

The Regulation also includes a section on the administrative authority of shipping companies. For shipping companies registered outside the Union, the administrative authority is the member state where the fleet has transited most in the last two years. For fleets that are still registered in a non-EU country but have yet to make any voyages to or from Europe in the past two years, the administrative authority becomes the Member State from which the fleet finished its first voyage since the ETS came into force.

In conclusion, from January 1, 2024, shipping companies must start monitoring their emissions until December 31, 2024. Verification of emissions by certifying bodies has a deadline of March 31, 2025, and the surrender of allowances must take place by September 30, 2025.

The Regulation under analysis also mentions the failure to surrender allowances, which will result in a penalty of 100 euros per ton, which is the standard penalty for ETS operators in the case of violation. Failure to surrender allowances for two or more consecutive periods will result in the expulsion of the shipping company from the ETS.

Source: European Commission, Aither Group AG.

The Carbon Market – 20.03.2023

The new carbon border adjustment mechanism (CBAM)

Initially, CBAM will cover the most emission-intensive sectors: iron and steel, cement, fertilisers, aluminium, electricity. The new agreements from 13th of December 2022, however, also feature hydrogen, certain precursors and other downstream products such as screws and bolts as imports under CBAM. In addition, the EU Commission will assess the inclusion of other products that might be at risk of carbon leakages such as organic chemicals and polymers into CBAM from 2030 onwards. Indirect emissions at the production facility might also have to be part of the emissions to be reported and consequently paid for by importing companies.

Timeframe for implementation

From October 2023 importers in the sectors covered by CBAM must be ready for their monitoring, reporting and verification obligations (MRV).

The pricing mechanism shall be launched in 2026.

At the same time and rate as European industries will not receive free allocations of EUA anymore, importers of certain goods into the EU will have to pay for the emissions of their products. This carbon border adjustment mechanism (CBAM) should on the one hand create a level-playing field between EU and non-EU industries for products in the EU (both paying a similar carbon price) and increase climate ambition in non-EU states (climate instruments and carbon pricing abroad can reduce necessary payments for importers).

Two main contentious issues remain for CBAM

• How will reporting and verification methods and schemes really look like and work for imported goods? October is almost near and the MRV rules have not been yet set up.
• How to compensate or support companies that produce in the EU and must purchase EUAs but export to non-EU countries where no or less ambitious carbon pricing rules exist? Although signatories of the Climate Change Paris Agreement, regional, national or subnational mechanisms have different rules. Some 47 countries and 36 cities, states and provinces already use carbon pricing mechanisms, with more planning to implement them in the future.  Together the carbon pricing schemes now in place cover about half their emissions, which translates to about 23 percent of annual global greenhouse gas emissions.

Source: World Bank, Carbon Pricing Dashboard

EnergyPost.eu

The European Carbon Market – 30.01.2023

The New EU ETS Reform

Right now, the existing EU ETS covers around 40% of the EU’s emissions (energy sector, industrial installations and aviation).

Its scope is being extended to include maritime transport. Maritime transport will be the newcomer and large vessels of 5,000 gross tonnage and above must gradually surrender emission allowances (EUA) for an increasing share of their emissions: 40% in 2024, 70% in 2025 and 100% in 2026. The inclusion of smaller vessels and non-CO2-emissions such as methane and N2O will likely start from 2026 onwards.

On top of that, the overall ambition of EU ETS emission reductions until 2030 compared to 2005 is increased from initial proposed 55% to 62%.

The agreement in the EU Parliament was reached on 18th of December 2022 and it would lead to about 23 million tons less CO2-emissions compared to the EU Commission’s proposal from 2021 and is much more aggressive than the minus 43% that has been the previous reduction target.

To achieve this stronger reduction of 62%, the legislators agreed on a rebasing of emissions:

·      90 million EUA are taken out of the market in 2024 with another 27 million EUA following in 2026;

·      The entire European mission cap will be reduced by 4.3% annually from 2024 to 2027;

·      From 2028 onwards this linear reduction factor (LRF) will rise to 4.4%.

·      The market stability reserve (MSR) will continue to take out 24% of surplus EUAs.

All these reductions will lead to significantly tighter supply of EUAs, drive prices in the next years and shall incentivise more decarbonisation especially in industrial sectors. This brings us to the changes for the industrial sector.

Fundamental change is also coming to the industrial sector, in particular the phase-out of free allocations of EUAs. From 2026 onwards, the number of free allowances handed over to industries will be reduced gradually until 2034 when industries have to procure all of their needed allowances through the auctioning mechanism or on the market.

Next to those sectors that are already under the EU ETS, a lot of emissions from other activities in the EU are not part of an emission pricing scheme. After much uncertainty about its prospects, it is now clear: a new or second emission trading system (EU ETS II) will be implemented as well for buildings and the transport sector, starting from 2025.

Source: EnergyPost.eu

The International Carbon Market – 18.12.2022

Key Take-aways from COP27

The month of December was marked by the UNFCCC COP27 that took place in an international context  distinguished by serious geopolitical tensions, an energy crisis, unprecedented energy prices, inflation and slowing economies. A situation that forced states to rethink their strategies, both to respond to threats to energy security and at the same time to accelerate the shift in economic systems toward clean energy.

This meeting will be remembered as the one that achieved a historic result for climate justice and adaptation policies. In fact, the Loss and Damage Fund was created to support the most vulnerable countries affected by climate-related disasters-a mechanism that has always been at the heart of the claims of developing countries, which are demanding that industrialized states compensate for the effects of climate change, the damage of which they suffer the most even though they have not contributed to the causes. Yet, we remain skeptical if the pledged invoked by the developed countries will conduct to the real implementation and help of poor affected countries. Many details still remain to be worked out: the actual size of the fund, who will pay for these offsets, who will receive them, how impacts will be measured, which countries will be asked to contribute, which will benefit, and according to what criteria.

Positive notes include climate finance and especially market mechanisms. Indeed, discussions related to Article 6 of the Paris Treaty, the article that regulates the emissions market, appeared in all national pavilions at the COP, and this helped provide a significant amount of guidance that will help the operation of emissions markets. In the future, this may be the new model for COPs, with negotiators providing guidance on the implementation of Article 6 and Parties highlighting their progress in its use.

Yet, what is worrying is the lack of ambition on climate change mitigation. COP27 had started out with the goal of following up on the trust of last year’s COP26 in Glasgow, which aimed to make the 2020-2030 decade the transformative one for climate action, with the goal of keeping global warming within 1.5°C of pre-industrial levels, as envisioned by the Paris Treaty. However, there were no steps towards this, and the final text of the conference is effectively a repeat of the COP26 text on decarbonization, fossil fuel use, and emissions reductions. The 1.5°C. goal of halving greenhouse gas emissions by 2030 seems distant at the moment.

Interesting was India’s position at this COP. Last year in Glasgow, it had strongly opposed the call for abandoning coal as a source for producing energy, and this had resulted in the final document referring to mere “reduction” and not “elimination.” In Sharm El Sheikh, however, it was India that put forward the proposal to move away from fossil fuels, obviously supported by Europe and the United States, while now there were countries such as Saudi Arabia and Russia, which have oil production and trade as the basis of their economies, that prevented the final text from bringing advances. On the issue of moving away from fossil fuels, therefore, next year’s COP28 is eagerly awaited, in the knowledge of an already obvious underlying criticality: it will be hosted by the United Arab Emirates, a country holding some of the world’s largest oil reserves.

Source: UNFCCC and Aither Group

The European Carbon Market – 14.11.2022

We present you below the main EU carbon market policy and market news from the first week of November:

• After a lacklustre start to the week, EU Allowance prices continued to see daily price swings, trading over a €70.50 to €78 range last week;  and opening up today at €75.84/tCO2 at ICE ECX.
• Despite the European Parliament vote on RePowerEU being broadly in line with expectations, EUAs prices fell sharply on Thursday morning to a week low of €70.50 before recovering to close at just over €73 the same day.
• Dec-22 EUAs have rallied back today to over €76 at the time of writing, surprising given the analyst updates, but no doubt helped by reports of progress on the Fit for 55 reforms
• The European Parliament voted on 10th November on the RePowerEU package ahead of trialogue talks later this month – supporting the sale of €20b EUAs but only by “front-loading” 2027-2030 auction sales, NOT form the MSR or Innovation fund as preferred by the EU Council & Commission.
• In other policy news there appeared to be some agreement on a mechanism to manage price spikes (Article 29a) and the EU Parliament agreed to drop its proposal to restrict market access for non-compliance firms, instead pushing for increased market oversight by ESMA
• A survey of 12 analysts by Carbon Pulse showed a 15% drop in forecasts compared to previous expectations – average EUA prices were forecast to be €70.85 by end 2022 and €76.90 over 2023

Source: the European Parliament, Strasbourg, ICE ECX & CF Partners, London

The Carbon Market – 24.08.2022

We would like to announce the launch for public consultation of the RED Carbon Standard, which aims to be a robust and transparent code of rules and principles, so that as many green projects as possible from our country, but also from abroad, can be certified and obtain carbon certificates.

In this difficult period, in which the European legislation in the field of CO2 emissions does not provide for major changes in the sense that Brussels could promote a unitary legislation, which would offer the possibility for companies to obtain carbon credits for energy efficiency projects, renewable energy, forestry or those that invest in sustainable agriculture and because we don’t see this possibility in the coming years, we thought of being useful to local companies, more and more interested in implementing various projects that reduce carbon emissions.

This is how the Restart Energy Democracy Carbon Standard was born, which aims to certify green projects carried out by private companies, NGOs, local communities and give value to their sustainable work by issuing carbon certificates. Please access the weblink page of the public consultation and let us know your feedback: https://redplatform.com/en/red-carbon-standard-public-consultation-page/

Advantages of the RED Carbon Standard and Platform

The RED Carbon Standard and Platform are distinguished from other standards by a number of factors such as:

·       faster and cheaper process of certification

·       all processes are tested to offer an enhanced user experience;

·       everyone, individuals and companies, regardless of their country of origin can be rewarded with carbon credits for their green actions and projects;

·       franchises will guide users through the process if they need information at any time;

·       robust, transparent and safe Registry on blockchain

·       offering an easy-to-use platform, that can be accessed in the web version or by downloading the app on your smartphone;

·       blockchain is transparent, accessible and will hold information of all transactions public.

RED Carbon Standard aims to combine technological advancements with highly specialized expertise in order to give value to green projects on all aspects (carbon, social, community benefits, SDGs).

Projects Eligible for Certification

The Projects registered under the RED Carbon Standard shall meet the International Panel for Climate Change emission categories, as follows:

1.    Energy (renewables, energy efficiency etc.)

2.    Industrial Processes

3.    Other Product Use

4.    Agriculture

5.    Forestry and Other Land Use

6.    Waste

7.    Others

Project developers are encouraged to send their queries for certification with RED Carbon Standard to: info@carbonexpert.ro

The CO2 and Energy Market – 16.08.2022

EUAs posted a 4.8% weekly gain as prices climbed to another six-week high on Friday, 12.08.2022 and had a maximum of 90.71 euro/tCO2 at the end of trade day on ICE ECX on Monday, 15.08.2022 with traders suggesting the market is detached from fundamentals, while natural gas was weaker as countries continued to look for ways to trim demand for the fuel this winter.

European Energy and Gas Market

The European Commission, to protect itself against further supply cuts from Russia, announced on 20.07.2022 a plan to reduce gas demand and required member states to implement immediately, between August 2022 and March 2023, a voluntary 15% reduction in demand compared to the average of the last five years and to have storage facilities filled to at least 80% by November 1st. After a heated week-long discussion, member states agreed to the commitment, which will still entail major efforts.

The first immediate step to filling gas storage to the levels demanded by the Commission before winter is to reduce Europe’s current gas consumption. In part this is already happening because of skyrocketing gas prices, but much more is needed: according to the IEA, savings should be in the order of 12 billion cubic meters in the next three months. The IEA and the European Commission have been addressing the energy crisis since the early days of the invasion of Ukraine.

The International Energy Agency proposes measures for the EU Member States

The message is clear: with timely and sustained action, it is possible to reduce Europe’s dependence on Russian gas imports, and to do so in an orderly manner consistent with the Union’s climate ambitions. Against this backdrop, and following the Commission’s recent call to cut gas consumption and replenish storage, comes a new IEA plan with five concrete actions for European leaders to take immediately for a more coordinated approach to prepare for the coming winter.

• The first action involves introducing auction platforms to incentivize European industrial gas users to reduce demand. Industrial gas consumers can offer a portion of their supply for compensation, which can lead to greater efficiency and competitiveness. Similar auction models have been developed in Germany and proposed in the Netherlands.
•  Energy conservation is the second point. This involves minimizing the use of gas in the power sector, temporarily increasing coal- and oil-fired generation, and accelerating the deployment of low-carbon sources, including nuclear power, which by the way was officially included in the European Green Taxonomy, with the final vote in the European Parliament on July 6.
• The IEA is moving forward with the other three measures: improving coordination between gas and electricity operators in Europe, especially to manage storage; reducing household demand for electricity by setting standards; and finally, harmonizing national and European contingency plans for supply reduction measures and solidarity mechanisms.

National Measures accepted by the EU

In the end, it depends on the Member States if and how they will succeed in implementing these measures to reduce their dependence on gas imports from Russia. But if the IEA and the Commission think policies that suit everyone because this is their role, the powerful states in the EU, such as Germany and France, implement their own measures, such as the reactivation of coal mines or the increase of nuclear energy capacity.

Germany’s decision to delay the retirement of coal plants scheduled to close and re-activate reserve capacity could push EU power sector emissions 5% on 2023 and 2024 higher over the next two years, according to a modeled report from analysts as published by Carbon Pulse. And France has announced a “renaissance” for the French nuclear industry with a vast programme to build as many as 14 new reactors.

In this context, Romania should not only implement the central EU policies, but a redefinition of the national energy strategy, starting from the varied resources of our country (biomass, coal, waste, etc.), is desirable if pursues the good of the Romanians.

Source: The International Energy Agency, the European Commission, Aither Group, Carbon Pulse, ICE ECX.

The CO2 Market EU ETS – 21.04.2022

The ICE ECX market in London closed yesterday, April 20, 2022, the EUA futures contract at the price of 87.82 euro / tCO2, increasing by 9.5%, as a result of the approach of the compliance deadline from the end of this month.

Verified emissions under the EU ETS likely rose by a record 8.3% last year, according to a poll of analysts published by Carbon Pulse, with output rebounding from the pandemic-induced drop in 2020 as utilities burned more coal and the European economy recovered. The EUAs surrender deadline for EU ETS installations is 30th of April companies, and the European Commission will soon make available 2021 verified emissions data.

Carbon Border Adjustment Mechanism

The EU’s 27 economy ministers reached an agreement on 15th March to introduce a carbon levy on imports of highly-polluting goods like steel, cement and fertilisers, but kicked the can down the road on controversial aspects like the use of revenues coming from the scheme.

The carbon border adjustment mechanism (CBAM) was proposed by the European Commission last year as a way to protect EU industry from imports of products coming from countries where it is cheaper to pollute.

Making headway on the idea is a priority for France which currently holds the rotating presidency of the EU. The implementation of CBAM is the next step that we shall closely follow.

Source: Carbon Pulse & The European Council

The CO2 Market – 09.03.2022

We would like to write in the following lines some considerations on the carbon market, in these difficult moments we are going through.
With the start of the war in Ukraine, the price of carbon on the European market EU ETS fell by about 40%, from Thursday (24.02), to Monday  (07.03) from 94.97 euro/tCO2 euro to 57.93 euro/tCO2, prices traded on the stock exchange ICE ECX in London.

On the information channels of the foreign professional groups in which we participate, we were warned on Sunday evening (27.02) of the possibility of a market downturn, as a result of anticipating massive sales of certificates held by Russian oligarchs, fearing that their financial assets would be confiscated, as the physical ones were confiscated, and wanting to turn them into liquidity as soon as possible. The market started to decline quite slowly in the first days of March, but sustained. In other words, the news received was true, but no one could have predicted that the market would be so destabilized, no matter how big these assets were. We suspect that other investment funds also began to fear the market downturn and acted in the same direction of selling the certificates purchased in order to make a profit, even if less than they had estimated.

Suddenly, the European carbon market, which analysts say is directly proportional to the energy market, does not know how to explain the rising trend of prices (otherwise artificially inflated by the acquisition of EUA certificates made by the funds of investment and the rich people of this world), no longer had this trend, but behaved based on the rules of supply and demand and decreased dramatically, unlike the energy market, which grew during this period.

Romanian polluting companies breathed a sigh of relief that they can buy certificates at a slightly more reasonable price and started buying as soon as the price fell below 90 euros, in various volumes and according to their budget possibilities. Moreover, some of these companies, having a prudent management and knowing the intransigent EU policy regarding the acquisition of pollution quotas, have decided to buy for the compliance of the current year.

In Brussels, peace, panic … the reforms regarding the EU ETS market were postponed, put in second place and, rightly, the European decision makers had more serious problems to analyze and decide. From time to time, there was a statement (Friday, 04.03) from Frans Timmermans, head of the Green Deal, that the strategy of the European energy market must be rethought and we can resume coal-based activities in Europe, which made the price CO2 to decrease on Monday, 07.03, to the lowest level of 57.93 euro / tCO2. We note that this statement states that the “EU’s environmental objectives” should not be neglected, which was quite contradictory, but we are not surprised. Yesterday, 08.03, European Commissioner Ursula von der Leyer reaffirmed her confidence in the European environmental strategy and said: “We must become independent of Russian oil, coal and gas. … We need to act now to reduce the impact of rising energy prices, diversify gas supply sources for next winter and accelerate the transition to clean energy. ”
And the price of carbon, finally based on an optimistic statement, began to rise in a smooth manner, to 71.82 euros / EUA, at the time of writing this article (09.03, 15 o’clock), ie increased by 20 %, in one day. If you want to read the full statement of the European Commission yesterday, 08.03, please access here.

This is what the European carbon market looks like these days. It depends on the statements of political leaders, their decisions and actions, a geo-political conflict that can escalate at any time. No one can predict in what direction the price of the EUA certificate will go or if there will be another EU ETS market in a year or two. The European Union is not giving up on the climate targets set for 2030 (Fit for ’55), at least declaratively, because it would mean acknowledging that it has failed its own energy and climate strategy. He now claims that he is diversifying energy sources by importing hydrogen from renewable sources, neglecting his own resources, and that in a year’s time he will reduce his dependence on Russian gas by two-thirds. And we Romanians continue to be gullible, obedient and dependent on the decisions of the great international actors.