Oil price slide prompts calls to strengthen Europe's carbon market

The joint shock of the coronavirus and record low oil prices hit the energy markets shortly after the EU announced its Green Deal

European Commission vice-president in charge for European Green Deal, Frans Timmermans, during a video hearing by European parliament on April 21. EPA

The oil market collapse is opening a new debate in Europe about strengthening the carbon market, a key tool in the region’s bid for climate neutrality.

European Union energy ministers are set to discuss on Tuesday the security of supplies and the role of the industry in a plan for an economic recovery from the coronavirus pandemic.

The joint shocks of the viral outbreak and record low oil prices hit the energy markets shortly after the EU announced its Green Deal. That has prompted France to urge bolstering the bloc’s carbon market through measures including a floor price.

“Recent events have in particular led to extremely low fossil fuel prices that do not reflect their true cost for climate,” according to a French document for the ministerial meeting obtained by Bloomberg. “These market conditions place a heavy risk on our energy transition policies. They cancel incentives carefully put in place over the past decade to decarbonise our economies and bring uncertainties, which are detrimental to investments in the energy transition.”

The cost of carbon allowances in the EU Emissions Trading System (ETS), the world’s largest cap-and-trade programme, slumped to an almost two-year low in March. Demand for energy fell amid factory closures and draconian limits on public life, reducing the need for factories and power generators to buy the permits.

Projections of a deep recession stoked concerns that the supply of carbon credits will significantly outstrip demand. That would repeat the experience of the last big recession, which left the market glutted for years and cut carbon prices to a level that had little influence on industry.

France wants a floor for carbon prices that would ensure “appropriate visibility” and leave the market a signal that the ETS will maintain pressure for investments needed to shift the economy away from fossil fuels. This call is set to be back by the Netherlands, a long-time advocate of such a tool.

Introducing a price floor would need approval by EU member states and the European Parliament. The European Commission, which proposes legislation, has so far opposed such measures, saying they go against the market character of the ETS.

The ETS imposes declining pollution caps on thousands of manufacturers and utilities, enabling those who emit less to sell their allowances to those who discharge more carbon dioxide.

Benchmark European emissions permits closed at €20.28 per tonne on Monday, rebounding from as low as €14.3 in mid-March.

To counter the risk of oversupply plaguing the market again, the French government wants to reinforce the Market Stability Reserve, a mechanism that automatically soaks up excess carbon allowances.

“In this context there is an urgent need to build consensus on the order of magnitude of the additional surplus of allowances generated by the crisis and to consider additional measures such as MSR rules, to deal with this surplus with the aim of not falling behind the EU’s climate trajectory,” France said in the document.