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Politics are not a threat to the EU carbon market. Europe has worked hard over the past decades to set effective climate change policies to fight global warming. The bloc is the fastest warming continent and has ambitious targets for the years to come - politicians are making sure that we do our best to keep our planet inhabitable.
Politics are not a threat to the EU carbon market. Europe has worked hard over the past decades to set effective climate change policies to fight global warming. The bloc is the fastest warming continent and has ambitious targets for the years to come - politicians are making sure that we do our best to keep our planet inhabitable. The EU has historically led global climate policy efforts, as seen in initiatives like the Carbon Border Adjustment Mechanism. The cornerstone of the European fight for climate change is the EU Emissions Trading System (ETS) built in 2005, aiming for a 62% reduction by 2030. Despite recent election results with a more rightward-leaning EU Parliament, significant backtracking on climate policies is legally challenging and unlikely. The EU's established climate framework is robust, limiting political risks to European Union carbon allowance (EUA) investments.
In 2023, the European Union as a whole emitted 3.4 billion tons of CO2 - a recent Reuters’ report states that the bloc is the fastest-warming continent. Last year, the main sectors that emitted 59.5% of the bloc’s emissions were “Households”, “Manufacturing” and “Electricity”. The European Union has a long track record of making decarbonization efforts - compared to 2022, CO2 emissions in the bloc decreased by 5.5% in 2023. Climate change policies in the EU are already giving some results but as more actors get involved in the fight for climate change, the outcomes are to be enhanced over the next decades. Reaching climate neutrality by 2050 is no easy task.
The EU has historically been the global leader in climate change policies. At international climate summits, Europe has consistently demonstrated high levels of ambition. For instance, at the latest COP 28 summit, European representatives urged the largest polluting countries to honor their commitments and advocated for a tripling of renewable energy capacity. Another example is the introduction of the Carbon Border Adjustment Mechanism in 2023, which signals the EU regulators' commitment to encouraging more global efforts in decarbonization.
Regarding its decarbonization objectives, the EU has set several milestones for the coming decades. Under the European Green Deal, the EU aims to achieve carbon neutrality by 2050. To reach this, by 2030, the EU plans to reduce its carbon emissions by 55% compared to pre-industrial levels, as outlined in the Fit for 55 agreement. Finally, a recent communication on the 2040 targets announced that the bloc aims to cut 90% of its emissions by that year.
Here is a list of some concrete climate policies in the EU that are already undertaken:
In early June 2024, the results of the EU parliamentary vote indicated a shift towards a more rightward-leaning institution. There are apprehensions that this change could lead to a dampening of EU ambition regarding climate action, as newly elected MEPs may prioritize other issues such as security or economic development.
In their response to the EU parliamentary results and discussions with major EU climate change stakeholders, Reuters has reported that
The legal procedures to backtrack on previously voted complex international legal texts are lengthy. They require the involvement of many national and international representatives over a long period of time. This makes it nearly impossible to cancel prior commitments and decisions. Additionally, the president of the EU Commission plays a crucial role in amending EU texts, and with the election results, it is highly likely that Ursula von der Leyen will remain in power. She is very defensive regarding climate policies and is expected to uphold the EU's climate change policy ambitions.
On the day following the EU election results, there was a slight short-lived initial drop in EUA prices. At 9 AM, EUAs were trading at €68.24, and by 11:45 AM, they had dipped to €67.8. However, the prices rapidly rebounded to the opening levels. Yan Qin, a lead carbon analyst at the London Stock Exchange group,commented "I think the U-shaped recovery also reflected that participants began to realize the 'very limited' impacts of the election outcome on near-term EU ETS dynamics."
The market recovery on the same day of the drop indicates that the initial price reaction was an overreaction. Market participants recognize that the EU ETS fundamental rules and the supply calendar are not likely to be negatively impacted by the new EU Parliament rule.
What happened at the beginning of June shows that the political risk in assessing carbon allowance investment price returns is limited. The scheme is well-established, robust, and sophisticated, with significant involvement from both national and international stakeholders. Such a large-scale framework is unlikely to undergo sudden and drastic changes or U-turns overnight.
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