The surcharge on the prices of fossil fuels such as heating gas, petrol and diesel under the EU’s new carbon market from 2027 could be well above the €45 limit that the institutions are aimed at, experts say, accusing lawmakers of creating false expectations.

Next Tuesday (18 April), the European Parliament is due to vote on the reform of the European carbon market, which was agreed between the EU institutions in December 2022.

According to the bill, a second emissions trading system for buildings and road transport is set to start across the bloc from 2027, which will raise the prices of fossil fuels for heating and driving.

The measure is accompanied by a new 87 billion euro “Social Climate Fund”, which aims to cushion the impact on the poorest households

As usual in a market system, price is determined by supply and demand.

EU institutions aim to limit the new carbon price to a maximum of €45 per tonne of CO2 emissions, equivalent to a price premium of 10 cents per liter of petrol and 12 cents per liter of diesel.

But according to experts, this price may well be exceeded, because the price dampening mechanism included in the law cannot guarantee that the price will not increase.

“Basically anything is possible in terms of price,” said Michael Pahle, a carbon markets expert at the Potsdam Institute for Climate Impact Research (PIK).

“You cannot say that the additional price stability mechanism can really guarantee that the price will not go beyond this level,” he told EURACTIV, referring to the maximum of €45 quoted by policy makers.

“It also doesn’t mean it will definitely blow up,” Pahle added. “But precisely because we know so little about price formation in the new ETS, it is also possible that we have very low prices as well as very high prices.”

Contacted by EURACTIV, Peter Liese, EU lawmaker from the centre-right EPP group and chief negotiator for EU carbon market reform, admitted that the €45 limit is not a hard price cap.

“Of course, the trialogue agreement cannot absolutely guarantee that prices will not be higher than €45 per tonne, but the probability is relatively high, especially in the early years, including 2029,” Liese said.

“The calculations of the European Commission foresee prices of €45,” added the German legislator.

False impressions

When the deal was initially reached in December, lawmakers seemed more certain, giving the impression of a hard price cap.

“Based on a market mechanism, it is ensured that the price will not exceed €45,” Liese said in a statement. statement December 18.

French EU lawmaker Pascal Canfin (Renew), initially a vocal critic of the reform, said that “the strict conditions we have set […] and in particular the introduction of a ceiling price of €45 until at least 2030, makes the measure politically acceptable in my eyes”.

In the non-binding part of the legislation, the so-called recitals, the target of not exceeding €45 per tonne of CO2 is also put in writing, notes Pahle, but the related mechanism could not guarantee this.

“This paragraph is telling because, on the one hand, it articulates an aspiration for the award that can give comfort to affected stakeholders and parties involved,” Pahle said. “At the same time, looking at the details of the mechanism to implement it, there is a substantial gap between aspiration and implementation.”

This view is shared by Christian Flachsland, director of the Center for Sustainability at Hertie School Berlin.

In practice, a market price above €45 per tonne of CO2 would trigger the release of additional allowances on the carbon market from the so-called market stability reserve, in order to better align the supply (quantity of allowances) with demand (quantity of emissions).

However, given that only 20 million additional certificates would be issued, while the overall amount of emissions per year covered by the scheme is around 1,000 million tonnes of CO2, “it will not decisively depress the price if there is upward pressure,” Flachsland told EURACTIV.

Thus, a maximum prize of €45 was by no means guaranteed, Flachsland said.

“That’s one of the communication issues,” he said. “We say: we do this and we achieve the objectives, and it costs €45. But that just doesn’t work, in my opinion.

How high will the prices go?

Asked what price levels to expect, the two researchers pointed out that this was difficult to predict, but named price levels well above €100, which would be more than double the price quoted by lawmakers.

“No modeling is expecting prices of €45 – we more likely have €100 to €300,” Flachsland said.

A carbon price of €200 equates to a price supplement of 53 cents per liter of diesel and 47 cents per liter of gasoline.

In extreme cases, if EU countries take no additional climate action but rely entirely on carbon pricing to reduce emissions, “we find a range of €175 to €350 per tonne [of CO2] through different modeling approaches,” Pahle said.

“It’s not a likely result, but at least a first estimate of the upper bound, so to speak,” he said.

For lawmaker Liese, this scenario is unlikely.

“I find the claims that there could be prices up to €300 per ton incomprehensible in view of said calculations [by the European Commission]”, Liese said.

“In my view, they are based on the false assumption that no changes would result from further legislation, national measures and innovations,” he said.

If the demand for emission allowances is lower, the price of carbon would be reduced accordingly. And prices could fall further over the next few years thanks to additional climate policy measures, the theory goes.

Nevertheless, EU countries must prepare their citizens for a world in which “fossil fuels will be scarce and expensive”, warned Liese.

The German legislator also defended the decision not to include a strict price cap.

“It was neither reasonable nor possible to decide on an absolute price ceiling because a fixed price […] would have led us directly to needing unanimity, which could not have been achieved in the Council,” Liese said, adding that this would have jeopardized the achievement of 2030 climate goals, Liese added.

The European Commission and lawmaker Pascal Canfin were asked to comment but did not respond at press time.

German liberals push for gas price hike instead of burning ban

Germany’s liberal FDP party, which is currently blocking the phasing out of internal combustion engines in the EU for cars, has proposed tackling road transport carbon by raising the price of petrol and diesel through a national carbon price and returning the money to citizens through a direct per capita payment.

[Edited by Nathalie Weatherald and Frédéric Simon]