Is the EU ETS threatened by major political changes in the EU ?
Summary
Despite potential political risks and temporary market impacts, a complete reversal of the EU Emissions Trading Scheme (EU ETS) and its carbon pricing is very unlikely due to its robust structure, extensive history, and the complex legal process required for significant changes. The EU-wide directives driving the EU ETS make it unlikely that national policies can cause drastic shifts, reinforcing its role in EU climate policy and providing opportunities for responsible investment and green finance.
Although the European Union Emissions Trading Scheme (EU ETS) has evolved into a robust mix between a policy tool and a financial asset, it is not without its political risks. However, the extensive history and the involvement of numerous stakeholders make a complete political reversal on carbon pricing in Europe and a considerable smash on European Union Allowances (EUAs) prices very unlikely.
Political Risk at the EU institutional level
EU ETS temporary market updates and crises responses
European institutions have the power to make decisions that can temporarily impact the EU ETS market balance. For instance, during times of crisis, such as the energy crisis following the start of the war in Ukraine, the European Commission adopted the RePowerEU package. This policy package included provisions that adjusted the supply and demand dynamics of the EU ETS, which, in turn, had a temporary negative effect on EUA prices.
Such decisions often aim to address immediate challenges and only have short- or medium- term lived consequences. While these decisions might have temporary negative impacts, they rely on the EU ETS’s robustness to stabilize the economy, with the awareness that the scheme is resilient and can recover.
A pan-european retreat from environmental goals
The level of climate ambition set by European institutions also influences the EU ETS. Historically, we have seen that whenever the European Commission has demonstrated increased levels of environmental aspirations through legal packages like Fit for 55, EUA prices have typically risen. For example, following the adoption of the Fit for 55 package, which set more ambitious climate targets for the bloc as a whole and reformed the EU ETS to strengthen its effectiveness, EUA prices rallied for several months.
On the other hand, if there were a dramatic shift away from climate ambition—such as a unanimous retreat from climate goals by member states—EUA prices would be very negatively impacted. However, major changes to the EU ETS require a complex legislative process. It is a long journey of back and forths between the European Parliament, the Commission, and the Council of Europe, and the ratification by all member states is also required. Any substantial rollback of existing climate policies is legally challenging.
Political Risk at the national level
EU member states supporting carbon pricing at different levels
Member states keep their sovereignty, even as they are part of a political union like the EU. The countries’ leaders can express differing levels of support for the EU ETS. For instance, Poland has historically been skeptical of certain aspects of the EU ETS, such as the introduction of the Carbon Border Adjustment Mechanism (CBAM).
However, countries like Germany have shown that they want to be even more ambitious than the EU in their way to tackle climate change. The country has announced that it would voluntarily cancel €12.3 million worth of EUAs to enhance the EU ETS’s impact.
The EU ETS is a union-wide scheme after all
Despite such individual national positions, significant changes to the EU ETS are driven by EU-wide directives and amendments. National governments must transpose these EU policies into domestic law, but the core principles of the EU ETS are determined at the European level. So, while national policies can temporarily influence the EU ETS, they are unlikely to cause drastic shifts in the scheme’s overall direction.
The EU ETS is here to stay
A great deal of work has gone into building the EU ETS as the cornerstone of the EU climate policy. Many stakeholders are involved logistically and making long-term financial decisions based on the scheme. It would be legally and politically very challenging to dismantle it even if there are significant policy shifts.
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