HomeEurope NewsEU carbon price on track to reach €90 by 2030 – EURACTIV.com

EU carbon price on track to reach €90 by 2030 – EURACTIV.com

High gas prices, combined with a recent decision to raise the EU’s climate goals for 2030, have combined to form a “perfect storm” on the EU carbon market, according to a market analyst who predicts a carbon price of €90 per tonne by the end of the decade.

Florian Rothenberg is an analyst on EU power and carbon markets at ICIS, an independent commodity intelligence services firm. He spoke to EURACTIV’s energy and environment editor, Frédéric Simon.


  • Current high carbon prices on the EU ETS are driven by: 1) the 2018 ETS reform; 2) high gas prices, and; 3) expectations of a tighter supply of CO2 allowances until 2030.
  • High gas prices have triggered a switch back to coal generation.
  • New players have entered the EU carbon market, driving speculation and increasing market volatility, a trend that is expected to continue in the coming years.
  • By 2030, ICIS estimates carbon prices on the EU ETS will hit €90 per tonne and electricity firms have built reserves of CO2 allowances in anticipation of a tighter market.
  • Poland and Spain have highlighted concerns about carbon prices escalating too quickly, an issue that is likely to come up again in the political debate on the reform the EU emissions trading scheme.
  • The reformed EU ETS will need to bridge the gap between EU countries like France, which already have a low-carbon electricity mix, and poorer coal-reliant countries like Poland. A redistribution of ETS revenues will be needed to bridge that gap.
  • ICIS expects a new wave of renewable energy investments in the coming years, driven by the high price of carbon and electricity, which are making renewables more profitable for investors.
  • For energy-intensive industries, the green transition will take longer because of continued allocation of free ETS allowances and higher CO2 abatement costs. Decarbonisation there requires a higher carbon price as well as protection from carbon leakage.


EURACTIV: The carbon price on the ETS reached €50 per tonne for the first time this year, and even got close to €60 at the beginning of July. What caused this market rally in your view? Is it the latest reform of the ETS that was decided in 2018 or was it fuelled by speculation about the next reform and a tighter emissions cap for 2030?

Florian Rothenberg: It’s a combination of factors. We have indeed seen already a big reform of the ETS in 2018, which introduced the market stability reserve (MSR). Before that, carbon prices were hovering around €5 per tonne and the belief in the EU’s determination to go forward with the carbon market was quite low.

The 2018 reform dealt with this historic oversupply of allowances on the market. And our expectation for quite a long time was that the years 2021, 22 and 23 would be extremely tight in terms of supply of carbon allowances because the MSR would withdrew around 300 million allowances annually during that period. And the auction supply that comes to the market is actually not enough to meet the demand of power producers for example. As a result, the market is crowding out the oversupply that is there.

Now, although this rally in carbon prices is in line with our expectation, we weren’t expecting it to reach such levels that fast. In our view, other important factors were at play. One was definitely when the European Commission confirmed its ambition to stay the course on climate policy and reduce the EU’s emission by at least 55% by 2030, even after the COVID pandemic hit Europe,

Before the pandemic, the Commission was talking about a 50-55% target, now is “at least 55%.” That was really an important element in the past 6-12 months, which has attracted new players in the market.

And in addition to that, we still are in a market, which is mainly driven by power producers. And especially high gas prices have been extremely important in the last six months as a driver of the carbon price.

While gas prices in 2019 and 2020 were quite low, there were high levels of fuel switching, with a lot of gas replacing coal power production. This year, the winter has been extremely long, we see low gas storage across Europe and extremely high gas prices as a result. And that has basically triggered a switch back to coal generation, which means that power producers had to purchase EUAs again to cover the emissions from their coal power units.

So, we have on the one hand this long-term element, which is the prospect of a really tight EUA market towards 2030. Then on the other hand you have the general fundamental tightness on the market triggered by the market stability reserve. And then the last element, which is more short term, you had the  gas market. After all we have seen kind of a perfect storm for such high prices.

What hedging strategies have market players adopted to deal with the higher carbon prices on the ETS? Do you believe some market players may be hoarding on their emission allowances in anticipation of a tighter market in the coming years?

We have seen some large power producers already in 2018 starting to build up reserves. For example, RWE announced that they were financially hedged until 2030 to cover their lignite and coal power plants against any fluctuation in carbon prices. In other words, they are holding some kind of reserve of allowances as a financial hedge to secure against rising carbon prices in the coming years.

And we have seen that with other power producers as well – they have been active in the market for quite a long time and understand quite well how the system works.

What’s interesting is that they don’t only hedge, they are also active players in the market in terms of trading. For instance, we saw a big interest in 2019 when the EU made clear it was preparing to raise its greenhouse gas reduction target. And because these players are planning for the long term, they already kind of knew what’s coming, and built up significant positions in preparation for that.

All in all, that helps the market to find a price which helps Europe to decarbonise until 2030. The European Commission reckons the price of CO2 in 2030 could be around €85 per tonne, some studies say €120. We would argue that it will be probably in between, with our initial modelling indicating a range slightly above 85€/t CO2 by 2030

Coming back to what you said about electricity companies buying allowances in anticipation of a tighter market. You could call that hoarding, in a way. Has that contributed to creating a shortage of allowances, which has pushed prices up?

There are two elements. Hoarding can be an issue of course if it concentrates power into the hands of a single player. But what we have seen is that there are quite a lot of players active in the market. And if all players hoard a bit, then it balances out in the end.

Speculators buy allowances because they think they are undervalued in the future. And we have seen a growing number of players on the market. If the price now rises, it also means that they can liquidate when they see a chance to make a profit, for example when prices rise too fast.

So you think there’s enough liquidity on the market?

Yes. The proposal by the European Commission allows a liquidity of around 833 million allowances in the market. The rest is put into the market stability reserve gradually.

That means even in a cold winter there is always enough allowances to balance the market and for market participants to hedge their price exposure. In the past we have mainly seen that from power producers but their hedge books will rather decline as the sector decarbonises at fast pace so even if the industry starts hedging more actively there should be sufficient liquidity.

The current ETS was characterised by over-allocation of allowances, which kept prices below €10 for many years. Now, with more sectors joining like maritime and aviation, some are worried about a potential shortage of allowances. Do you see a risk of shortage as well?

Maritime transport is one element, it will be directly added to the current ETS, and it will definitely put more burden on the other sectors.

Shipping has high abatement costs, the technologies there are not as mature as in the power sector, where PV and wind have become super cheap, and are a  great source of abatement.

Now, is there a risk of the market becoming too tight because of shipping? I don’t think that this will be the case, because the price signal will ensure that the market is not too tight.

And if the price escalates too quickly, there are still safety mechanisms in place. If for example, the number of allowances in circulation drops below 400 million, you will get supply back to the market via the market stability reserve, which can release 100 million allowances. This also happens when prices rise to quickly in a short period of time.

This is a topic, which has not attracted much attention yet in the proposal, but we have seen some member states like Poland and Spain that have highlighted their concerns already. So we could see proposals to see these mechanism further strengthened.

What do you believe will be the effect on the carbon price of including road transport and buildings in a new separate ETS?

As this is a separate ETS, we don’t see a direct impact on the EU ETS price, because there is no bilateral validity of the allowances.

However, we have analysed is that the abatement costs in these sectors at the moment are significantly higher, even above €200 per tonne in some countries. This often has to do with the fact that consumer electricity is much more expensive than gas or oil for heating and transport in many countries.

That said, these high abatement costs will decline in the future. And in the Commission proposal, they start phasing in the system as of 2026, by which time electric vehicles and heat pumps will probably be much cheaper.

So I think there are really good chances that the prices in the separate ETS will not reach €200 in the year 2026.

Are you suggesting that carbon prices on the new ETS might reach €200 in 2026?

Not as soon as 2026, no. However, based on current abatement costs, we have analysed that the price by 2030 would probably have to be as high as €200-€250 per tonne in order to trigger some real decarbonisation in those sectors.

But since the system starts a bit later, that gives time to deploy infrastructure for electric mobility and for the renovation of buildings. And there is a chance that the price in 2026 won’t have to be that high.

At the same time, there will be a frontloading of auctions so we won’t expect a super short market immediately. You will likely have a bit of oversupply in the beginning to help market participants to form a price that will then trigger the necessary abatement.

Back to the main EU ETS: with its reform plan, the European Commission said it anticipates a carbon price of around €85 per tonne by 2030, while others anticipate a carbon price of around €100. This is fundamentally different from the current price, which only recently went above €50. What would be the effect of a carbon price of €100 on the EU’s economy?

I think I have to clarify first that ICIS does not believe that the price will reach €100 this year or next.

Industries still receive quite some free allocations this year. Of course it’s a little harder for the power sector to save emissions via fuel switching this year, but overall we still have an oversupply in the market.

We have to see also the political risk if prices reach, let’s say, €90-€100 this year. If prices escalate even further there certainly will be proposals from MEPs to limit speculation. And the market usually reacts quite quickly to these kinds of proposals.

So what we expect is a more steady price increase over the years, with some fluctuations of course, reaching €90 towards 2030.

And, in your view, what are the broader economic consequences of carbon prices reaching close to €100 per tonne by the end of the decade? Will this trigger a real acceleration in the energy transition in the power sector?

Yes, we do expect an acceleration. We have seen already market-driven renewables kicking off thanks to the carbon price and corporate power purchase agreements. If you look at power prices for the coming year, you see prices reaching towards €90 per megawatt hour in Germany, for example. And at the same time, you have a levelised cost of electricity for PV at around €40-€45.

So I think in the years ahead, renewables will be really profitable for investors. And I think that will really kick off in the next years, especially with the high power prices that we have at the moment.

Of course power prices will decline a bit with gas prices retreating. But what those high power and carbon prices show is that we need more renewable investments. Of course it always takes some time until it really kicks off. But for the power sector, that should really drive a wave of investments in renewable assets. And I think the updated renewable energy directive is something that will help steer that a bit more.

There’s no more need for subsidy in many places, so it will be just driven by the carbon price and by the market price for power.

And what about energy intensive industries: steel, cement, chemicals, etc.?

For industry, I think it’s harder. It takes them more time to react than the power sector because they are less active in carbon trading, they have a bit of visibility for a couple of years ahead thanks to the free allowances they get. Smaller players in particular haven’t been really active in the ETS for a long time, they often purchase allowances at the last minute, ahead of compliance deadlines.

That won’t work anymore in the next years, they will have to change their buying strategy, especially if free allocations decline. And at the same time, they also have to start thinking about the abatement options for their respective units.

But you can see they are also starting to prepare. We are starting to see big projects for green hydrogen steel here and there. These are only small examples right now, but we expect to see a growing number of projects like this in the next years. And if that does not happen in the next years, I would expect the carbon price to increase further until that happens.

And in terms of abatement costs, we see some of these projects already becoming viable with a carbon price of €50-€60.

Some countries in Europe face a bigger challenge than others when it comes to decarbonisation – notably Poland, which still gets almost 80% of its electricity from coal. Will a higher carbon price help bridge that gap or do you believe it will make those divergences even bigger?

On the one hand, we see growing convergence of power prices in Europe, which is good because everyone pays the same. In France, for instance, you see power prices often driven by coal in Germany.

And then you have countries like Poland, which are heavily coal reliant. They will have higher power prices on average than countries like France, which have an already extremely low carbon power system.

That’s why the ETS will have to make a bridge on where the revenue goes. Poland, for example, has made clear already a couple of months ago that they want more revenues from the ETS in order to help the transition of their energy system. And with a bigger EU modernisation fund under the reformed ETS, Poland will benefit directly.

I think that will be something extremely important in the debate, because as long as fossil-reliant member states  get enough revenues from the ETS, they will be able to make those investments and bridge that gap.

Can the EU modernisation fund ever be big enough to satisfy Poland?

Some countries are quite decarbonised, and they will have to relinquish some of their revenues from ETS auctions if they want other countries to get on board. That’s the trade-off. It’s a European system, and you have to decide what country gets how much of the pot, basically. You have to make sure that there is a fair treatment.

Turning to industries like aluminium, which are big consumers of electricity – should they prepare for higher electricity prices as a consequence of a tighter ETS?   

There are two elements to this. On the one hand, you have increasing volumes of renewables, which tend to lower electricity prices. And at the same time, you have rising carbon prices, which push up the power price when renewables aren’t producing.

This means you get bigger peaks and troughs in prices, which will eventually provide a business case for electricity storage in the coming years. This year is quite special, because we had a cold winter and extremely high gas prices. We expect electricity prices to remain high in the next years, also driven by carbon, that could trigger a wave of renewable investments.

As more renewable electricity is added to the power system, power prices should go down again and remain flat on average. So overall, our expectation is that power prices will be rather stable in the coming years.

Energy intensive industries like steel and cement have already complained about the ETS pushing up electricity prices and undermining their competitiveness. Could higher carbon prices on the ETS be the final nail in the coffin for those industries?

A carbon leakage protection is really important to address this issue. Until now, those industries have received a lot of free allocations from the ETS to alleviate competitiveness concerns. Now, some of them will be covered by the new Carbon Border Adjustment Mechanism (CBAM).

And the political process to get this approved will be really hard, because the Commission is facing pressure internally from the industry and externally from potentially affected countries, which have already expressed concerns.

It will be a big challenge, but I think the industry generally wants a carbon border adjustment and they also want free allocations at the same time. The Commission proposal is a compromise with a gradual phase-out of free allocation, which according to their lawyers should be compatible with WTO rules. The  affected companies will therefore be able adjust gradually to the full price exposure. And companies which produce low carbon steel, they will benefit from that.

It has to be a carefully designed instrument so that there are no windfall profits and that allocations are only distributed to companies which are exposed to the risk of carbon leakage.

Some of those industries have made the point that European manufacturers will be exposed to the EU carbon price for 100% of their production, whereas foreign producers will be exposed to CBAM only for the part of their production which is exported to the EU. This means European companies will still be at a comparative disadvantage…

It’s a valid argument, which is important to highlight. But there are ways of addressing this, for example by applying an average carbon intensity to the entire production of the foreign company. This is something that is likely to come out in the debate when CBAM gets discussed in the EU legislative process and a solution will need to be found.

There is a similar debate about export rebates, which energy intensive industries are also asking for.  But the CBAM is a separate file, it will take time until it is implemented, and a lot can change in the meantime.

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