European carbon market: Denmark offers an alternative to the plan to finance the exit of Russian gas

European carbon market: Denmark offers an alternative to the plan to finance the exit of Russian gas

Disgruntled European Union countries are considering alternatives to an EU plan to use a reserve from the carbon market to help fund their exit from Russian gas.

The European Commission published plans in May to end the EU’s dependence on Russian gas this decade, including a proposal to raise 20 billion euros by allowing countries to sell permits to carbon stored in the “market stability reserve” of the emissions trading system (EU ETS).

This reserve began operating in 2019 to address an oversupply problem that has weighed on carbon prices for years.

The plan to tap into the EU ETS reserve has however been criticized by analysts who have warned it risks undermining confidence in the EU carbon market.

Denmark has reacted by presenting a counter-proposal to the Commission’s plan which it says treats the carbon market as a “money board” rather than as the European Union’s main tool for reducing greenhouse gas emissions.

“This risks undermining the market’s hard-earned confidence in the EU ETS as a credible, rules-based instrument to achieve EU climate goals in a cost-effective way”says the proposal, seen by EURACTIV.

“This will create additional political risk for investors and will have negative impacts on the price of carbon”alerts the document.

The Danish proposal was presented to EU Economy and Finance Ministers on Tuesday (12 July) and diplomats continued discussions on Thursday 14 (July).

Six EU countries expressed support for the Danish plan, while 14 said they were ready to consider alternatives to the Commission’s controversial funding proposal, the diplomats said.

Since the entry into force of the stability reserve, the prices of carbon emission permits have strengthened considerably, reaching a peak of nearly 100 euros per tonne at the beginning of this year.

They fell 10% on the day Brussels published the funding plan, however, and some countries fear the proposal could lead to a prolonged drop in prices. Thus, it would become cheaper to pollute and, ultimately, funds for green investments would be reduced.

Denmark has proposed tapping into the European Innovation Fund, an existing fund made up of carbon market revenues that is expected to increase in value over the coming decade, in line with planned EU ETS reforms.

The current EU ETS Directive earmarks revenues from around 450 million allowances to the Innovation Fund, the Danish document points out. But taking into account the increase in the price of carbon allowances, the fund should reach a total value of more than 55 billion euros between 2021 and 2030, i.e. “almost 20 billion euros more than expected” in the Commission proposal.

According to the Danish document, this revenue surplus could be used to finance the EU’s plan to phase out fossil fuels in Russia “while maintaining both the integrity of the EU ETS and sufficient funding for the Innovation Fund. »

The Commission said that its proposal would be made in such a way as to “do not disturb the market”while any additional excess caused in the carbon market would be reabsorbed by the reserve in future years.

The Commission added that this measure would not affect the long-term objective of the carbon market, which is to reduce emissions by at least 55% over the decade.


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