Can EUAs disappear? 5 reasons the carbon market is here to stay

Can EUAs disappear?

We are often asked whether EUAs can disappear, meaning whether Europe, through its institutions or member states, could decide to shut down the market.

Theoretically, anything is possible. Just as it is possible that Europe could end the euro, or that states could decide to abolish currency and return to barter. But there are plenty of reasons why this is highly unlikely. For carbon allowances, it is much the same.

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1. Size: a market that is "too big to go"

European allowances are the trading unit of a mechanism that has existed for over 20 years. The first allowances were put on the market in 2005, just 3 years after the very first euros. This is a market representing 800 billion euros in annual trading volume, involving tens of thousands of companies: industrial sites, energy producers, maritime and aviation operators, but also banks, brokers, and investment funds. This is not something you can shut down at the snap of a finger.

2. The financial case: no one wants to kill the golden goose

This market generates tens of billions of euros in tax revenues every year for member states. Since 2005, that is more than 250 billion euros in total revenues, including 40 billion last year alone. At a time when public finances are stretched thin, this is an enormous and necessary source of funding.

And the higher the allowance price, the greater the revenues. These revenues are redistributed to member states according to their historical share of European greenhouse gas emissions, meaning the highest-emitting countries, those most directly affected by the carbon price, are in fact the primary beneficiaries. And they have no interest in killing the golden goose.

3. The legislative case: dismantling is near-impossible

Unwinding the European carbon market would require a long and complex legislative process, and above all, an agreement between all stakeholders: the 27 member states, the Commission, and Members of the European Parliament. Among these actors, many are strong defenders of the market.

Even if the balance of power shifts, the probability of it shifting enough to dismantle the cornerstone of Europe's climate and energy policy of the past 20 years is extremely low. At worst, its evolution could be slowed or stalled. And even that scenario would require years of legislative procedure. European plurality is a guarantee of its stability.

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4. History: a market that grows stronger through every crisis

Empirically, over 20 years of observation, despite very real crises such as COVID, the 2022 energy crisis, the war in Ukraine, and the commercial rivalry between China and the United States, the market has only strengthened. It has weathered every crisis of the past two decades and has consistently emerged from each one more ambitious than before.

5. Function: carbon pricing, the keystone of European strategy

This is the reason that encompasses all the others. Emissions pricing is the keystone of Europe's strategic challenges for our generation. Over the next 30 years, we must break free from hydrocarbons, being one of the only geographical regions in the world that does not have natural access to them.

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We must massively invest in electrification: a nuclear renaissance, grid modernization, solar and wind deployment, replacing vehicle fleets with electric cars and trucks, battery storage, heat pump heating, geothermal and hydroelectric development. The list of challenges is long, but it is clear and well-known. And one of the fundamental factors that makes these investments possible, enabling them to be both financed and made profitable, is a strong carbon price.

Our conviction since 2018

That is why, despite the posturing and bluster, not only will the market not disappear, it will strengthen. This has been our conviction since 2018, when the allowance price stood at 15 euros. Today it is at 75 euros. And that is still too low.

It is why we created Homaio: to allow you to participate in the rise of the carbon price, in the fight against climate disruption, and in the defence of Europe's strategic interests.