Sweden to oversee implementation of the ETS and REPowerEU agreements

The Czech EU presidency managed to reach agreement on a series of Fitfor55 files in December 2022, some 18 months after the European Commission presented its draft proposals in July 2021. Some stakeholders are now drawing the conclusion that the European energy and climate policy scene will be relatively quiet during the Swedish presidency that lasts until end of June 2023. Sweden’s priorities include “putting Fit or 55 into action” and to tackle high and volatile energy prices while also reforming the energy market reform. In short, we are not so sure that climate and energy policy will be off the radar in the coming months.

To be fair, the files most directly relevant for the EU ETS – ETS and CBAM – have indeed reached the stage of political agreement. What remains is to finalise official versions of the agreed texts and present them for approval/confirmation in the European Parliament and in the Council. We are still awaiting the final texts from the trilogues that were concluded on 18 December. Speaking at a carbon market event on 12 January, key negotiators from the European Parliament and the European Commission confirmed that the documents are currently being reviewed by linguists and lawyers. There is also a need to the agree on the wording of the recitals (the non-binding explanatory text that precedes the articles). European Parliament’s environment committee (ENVI) discussed the files yesterday, as a “report back from interinstitutional negotiations”, but this was not based on finalised texts, which are expected to be still some 2-3 weeks away. Assuming no hiccups they can be put to the vote in ENVI in February and in plenary in March.

On the Council side, the first occasion to take stock politically of the trilogue conclusion will be in one of the weekly COREPER meetings of the member states’ permanent representatives (“ambassadors”). If the trilogue outcome is approved politically there, it can be officially sanctioned by any Council configuration of ministers (not necessarily energy ministers). The first scheduled (informal) meeting of energy ministers is in Sweden in late February.

REPowerEU: when will the extra auctions start?

The other important carbon related policy file to be concluded last year was the REPowerEU, the European Commission’s plan for how to accelerate the deployment of renewables and finding alternative sources for fossil fuels to transition away from the dependence on Russian oil and gas. REPowerEU will largely be financed by the corona recovery funds, but an additional €20 billion is set to be raised from selling EUAs in the coming years. Assuming prices stay around €80/t, that would mean selling some 250 million EUAs.

The Commission proposed sourcing this volume from the Market Stability Reserve, but that triggered angry reactions in the European Parliament, which saw it is an attack on the integrity of the EU ETS. Instead, the Parliament wanted to frontload the sale of EUAs that were scheduled to be auctioned by the member states’ governments in the years up to 2030. The member states, on the other hand, wanted to source the lion’s share of the €20 billion worth of allowances from the Innovation Fund.

The compromise solution reached on 14 December envisages that 8 billion will be raised by an earlier auctioning of national emission allowances under the EU ETS (volumes otherwise destined to be sold in 2027-2030), while 12 billion will be monetised by frontloading the Innovation Fund. No revenue raised through the ETS can be used for investments in fossil fuel.

The REPowerEU sales are set to end by August 2026. A start date is not defined, but the Commission and lawmakers will no doubt seek to start as early as possible. Given the need to finalise and implement the REPowerEU regulation and to update the EUA auction calendar for 2023, we might expect a start in September or October 2023. That would leave some 35 or 36 months for the monetisation.

Assuming an average carbon price of €80/t, the EU will need to sell 250 million EUAs to raise €20 bn. Spread out evenly over 35 or 36 months – something that will not happen as the price is bound to fluctuate – we would see additional monthly auction volumes of around 7 million in the period October 2023 to August 2026.

Pending files: renewables, efficiency, removals

In addition to REPowerEU and the carbon relevant files listed above, there are other FF55 files that will need to be advanced during the Swedish presidency, most notably on renewable energy and energy efficiency.

Also, lawmakers will address the relatively new topic of carbon removals. Whereas carbon capture in trees and plants is already covered under the LULUCF directive (Land-Use and Land-Use Change) that reached a political agreement in late 2022, the idea now is to open also for direct capture from the air, in the soil, and possibly in manufactured products like concrete.

A key question will be where to draw the line between temporary and permanent removals. The European Commission is set to present delegated acts on this, based on the understanding that these are technical rather than political decisions. That said, if member states find the Commission rules too lax or too strict, this could quickly turn into a political rather than a technical issue.

Finally, there is the looming question of power market reform. Following a year of energy crisis caused by Putin’s invasion of Ukraine, the European Commission seems intent to propose a full overhaul of the wholesale power market. The previous months’ discussion on a gas price cap showed that there is strong pressure for intervention to bring down power prices, and curb the extraordinary profits collected by renewable and nuclear generators.

France, Spain, and others will likely push for a suspension of the existing price setting mechanism under which the marginal (the most expensive) producer sets the price for all electricity delivered onto the grid. This group of countries argue that the price cap on gas for power in the Iberian Peninsula – in place since June – has led to much cheaper electricity.

Free market champions such as Germany and the Nordics, on the other hand will likely seek to limit the changes to the existing European power market set-up. They say a high price is just what is needed to curb demand and incentivise the deployment of new renewables.

To some extent the member states’ position on this topic reflects their financial capacity to continue supporting their households and industries. E.g. Germany has put in place an approximately 200 bn euro scheme, meaning that generators can continue to charge very high rates, while the consumers receive cash that helps them foot the electricity bill. Many member states do not have this leeway and seek instead to tackle the problem by curbing prices or by decoupling gas (typically the most expensive element in the power mix since the invasion of Ukraine cut supply) from the power price setting mechanism.

It remains to be seen what the approach of the European Commission will be. Sweden is generally seen as pro market but will probably take the role of an honest broker in the upcoming negotiations. Spain, which is next in the rotating presidency, might let go of neutrality and decide to push its own interests in this question.

The European Parliament has so far been largely quiet on the question of price intervention and market reform, most likely because the big party groups are internally divided. When the EP will start to discuss the upcoming Commission proposal, we might see both EPP and S&D split along national lines.

News

Week 12: Pennsylvania governor forms working group to analyze the benefits of maintaining its RGGI membership

GO Week 12 Overview - 2022 GOs reach 7 EUR before 31 March deadline

Week 12: Benchmark contract follows macroeconomic behavior 

Week 12: CME’s CBL voluntary carbon offset futures continue slipping due to the negative press

Week 12: Recovery cut short by banking crisis, part two 

Week 12: KAU22 continues to fluctuate due to policy uncertainty

The EU gas market reform: The updated timeline on the Gas Package

A new beginning for financial players in China's carbon markets?  

ETS expansion to maritime will aggravate EUA scarcity

Commission proposal to extend gas reduction measures

Union database – March update to timelines

March 2023 HUPX Pan-European auction 

EAC Market Report - In The Midst Of A Bullish Wave

A platform with real-time GO data and insights, reporting prices and market fundamentals for Wind, Hydro, Solar, Biomass, Biomethane and RGGOs. 

Our community offers access to webinars, discussions and updates from industry leading experts and analysts. 

With the trilogue on ETS review largely over many expect quieter months ahead on the European climate and energy policy scene. Even so, there are still some key elements left to decide that could have an impact on carbon prices, most notably the start date for the extra auctions of EUAs to part-finance REPowerEU. Also, the coming structural reform of the European power market could bring significant changes to price setting, and thereby to the fuel mix and the demand for EUAs.

Our Platform gives you unfettered access to price benchmarking, analytics, new and insights covering the green certificates markets. 

Register for a trial now and someone from our team will be in touch with you to learn more about your involvement in the markets and to answer any questions you may have.