I EU Emissions Trading System (ETS) CO2 prices have in recent months fallen from the EUR70-80 range to the mid-EUR50s (Figure 1). This is mostly a normal price response to the reduction in CO2 emissions certificate demand from the rapid retirement of coal fired power plants in the EU and the scaling back of output in many energy-intensive industries across the EU. The principal sectors covered by the ETS are simply emitting less CO2, highlighting the effectiveness of the EU carbon pricing system.
Figure 1. EU ETS Price 2021 – Present
The decline in CO2 prices in recent months has also been driven by the related halving of European natural gas prices since early November (again triggered by the decline in European gas demand + ample global LNG supply), as the TTF benchmark has fallen from ~EUR50 to ~EUR25 today. In a related price action, the rise interest rates has made it more expensive to “bank” ETS emissions certificates today in the expectation that CO2 prices will rise in the future, further temporarily depressing demand.
Several additional supply factors also play a role in the recent price decline. The EU’s RePowerEU fund, which as part of the EU’s general post-Covid Reconstruction and Recovery Fund (RRF) is tasked with funding climate related investments in the EU, has in recent months been selling additional emissions certificates (up to 40mn) to finance these activities. Regular emissions certificate sales have further been brought forward from the 2027-2030 period to today to fund other current EU climate related activities. There has in other words temporarily been an increase in the supply of CO2 emissions certificates in the EU.
Lastly, the ETS’s compliance cycle now works in a way that gives a degree of seasonality in CO2 emission certificate demand. Companies must submit their emissions data to the authorities on March 31 each year, but it is only by September 30th that the actual emissions certificates must be surrendered. Last minute buying of ETS certificates hence tend only to occur in August-September, while more optimistic data submissions in March may see lower purchases early in a calendar year.
It would consequently be wrong to assume that recent declining price action in the EU CO2 market indicates any fundamental weakness in the market, or a return to earlier periods’ extremely low European CO2 prices are in the cards. This will under no circumstances be contemplated by EU authorities, which has designed the ETS with significant annual reductions in emissions certificate supply going forward. Consequently, the strong base case remains for European CO2 prices to rise over time in the coming years. The European Commission’s recent proposal for a 90 percent reduction in the EU’s emissions by 2040, which would entail that no CO2 emissions occur in the sectors covered by the ETS from the late 2030s, indicates of the EU’s undimmed climate and CO2 price ambitions.
II Several noteworthy political developments have occurred in Europe recently. Geert Wilders have now abandoned his attempt to become the next Dutch prime minister, and the Netherlands will therefore not get its first far-right leader in the electoral cycle. At the same time, Wilders’ will invariably remain the likely dominant political force in any new possible Dutch (likely minority) coalition government, meaning he is likely to be at least somewhat successful in his principal policy goal of reducing immigration to the Netherlands. Without him representing the Netherlands at EU summits as the (again blond haired) representative of far-right populism, his ability to expand the appeal of his policies beyond Dutch borders will though be reduced.
French opposition and far right leader Marine le Pen has made a potentially significant foreign policy shift, as she – despite previously taking loans and other financial assistance from Russian state linked institutions – in the French parliament condemned the Russian invasion of Ukraine and pledged to support Kyiv’s fight. This is evidently copying the political position of Italy’s far-right prime minister Giorgia Meloni on Ukraine, and would continue le Pen’s quest to “normalize” her party’s policy positions and on an increasing number of them move to the European mainstream. This is turn is likely to make her a more formidable competitor in the next French presidential and parliamentary elections in 2027.
The German Ampel coalition continues to politically weaken, as the increasingly bitter dispute over delivery of German Taurus cruise missiles to Ukraine splits Chancellor Scholz’ SPD from the Greens and the FDP. While the dramatic decline in electoral support for all three coalition members continue to make the threshold for any premature breakup (and likely early elections) of the coalition likely prohibitively high, the dispute has possible implications for the political options available after the next German federal elections in the Fall of 2025. Currently the opposition CDU/CSU is well ahead in the polls at around 30 percent, a level that if sustained could enable it to form a coalition with just the Green Party, provided the latter gained a little additional voter support relative to current polls. The alignment between the Greens and CDU/CSU on such a high-profile policy area, as Germany’s overall level of support for Ukraine – both parties explicitly want to see Kyiv win the war – suggests the odds of such a next German coalition are rising. Especially as the war in Ukraine is likely to still be raging when Germans go to vote next, and such a black-green coalition already exists in several German state parliaments. A CDU/CSU-Green coalition – if it got a majority – would also serve to keep the AfD out of political influence in Germany.
Lastly, what previously looked like merely a severe electoral drubbing for the U.K.’s ruling Conservative Party in upcoming British elections, now increasingly risks becoming an electoral annihilation of the Tories. Desperate Conservative MPs might even overthrow Prime Minister Sunak in a – likely futile – attempt to reverse their fortunes.
Current polls consistently give Labour an around 25 percent higher voter support, a level that in a FPTP electoral system would mean only a few dozen Conservative MPs elected to the next parliament, and hand Labour leader Keir Starmer a majority counted in the hundreds. Precisely what Labour would do in power with such a majority remains to be seen, but perhaps equally interesting a decimation of the Conservative Party would unleash a fight over what type of (smaller) party it should be in the future. Here the options range from an angry populist party modelled on Trump’s MAGA movement to a more centrist Conservative Party last witnessed in the early years under David Cameron. What is further clear is that an election outcome along the lines of current U.K. polls would likely spell the end of the traditional British two-party system, just as it seems overwhelmingly likely that a dominant Labour Party would dramatically reform the House of Lords, perhaps even abolish its political role entirely. While the result of the upcoming UK election is therefore increasingly not in doubt, the political effects of result could be dramatic.
