Europe rises to the challenge of climate ambition

INC feb 2019
“Of all risks, it is in relation to the environment that the world is most clearly sleepwalking into catastrophe”. This was the stark warning from the World Economic Forum’s Global Risks Report, launched at the Forum’s annual Davos gathering in January. It comes on the heels of another year of extreme weather, with the most costly single event being the $16 billion Camp Fire in Northern California. According to Munich Re, who compiled the data, “there are clear indications of the influence that man-made climate change has had on devastating wildfires in California, which, like last year, again caused billions in losses in 2018”.

Never has the need for action been greater, and Europe is rising to that challenge. In November 2018, the European Commission published a strategy for Europe to become the world’s first major economy to go climate neutral by 2050. With just over 30 years to achieve this, all scenarios outlined in the strategy will require action at an unprecedented scale, which will impact all parts of the economy.

At the heart of the EU’s climate plans lies the EU ETS, which caps around half of Europe’s total emissions and remains the largest carbon market in the world. 2018 was record year for the EU ETS; traded volume increased by 51% from the previous year with nearly 8 billion allowances changing hands, market value quadrupled from 2017’s levels to hit €130 billion, and the average allowance price tripled over the course of the year. Unsurprisingly, European carbon allowances finished 2018 as the best-performing major global commodity.

2019 already looks to be a busy year, starting with the launch of the Market Stability Reserve (MSR) on 1st January. Over the course of the year, the MSR is expected to reduce supply by nearly 400 million allowances and, over the next five years, should eliminate the market’s historic oversupply. The shadow of Brexit also looms large over the market, with questions over the UK’s participation in the system going forward. However, even if the market loses one participating country in 2019, it looks set to gain another in 2020 with the start of the link to the Swiss ETS. This passed another regulatory stage in January, as the commission of the Swiss parliament’s upper house approved legislation to link the systems.

Although the Swiss market is very small, the launch of a fully functional two-way link to the EU ETS in 11 months’ time could lay the groundwork for more such linkages in the future. In 2018, the European Commission agreed deals to collaborate on carbon markets with California, China and New Zealand. The experiences from linking with Switzerland could open the door to greater market integration in the 2020s.

As usual, IETA will be working hard over the course of 2019 to keep our EU members informed in these turbulent times, and to advocate for stronger and more effective carbon markets to be deployed around the world to meet the climate challenge. An ideal place to catch up with us is at the inaugural European Climate Summit, being held in Lisbon in April – more information is available online.

Simon Henry
Director of Carbon Market Development

For more information on IETA and our work, see www.ieta.org

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