Will the EU 2024 elections impact carbon emissions allowances prices?

In June 2024, European Union citizens will elect their representatives for the European Parliament. This event is very important as it is the institution that oversees matters like security, migration, and of course climate policies. The stakes are particularly high following the EU commission’s communication of the 2040 climate targets in February 2024, setting the stage for further discussions on climate action. Depending on the political shifts within the EU Parliament, the level of climate ambition may either be strengthened or jeopardized.

However, significant fluctuations in carbon emissions allowances prices are not anticipated. The EU CO2 emissions trading scheme has been in existence for too long and has become a sophisticated market, bringing together many actors from different fields (industry, finance, regulation…) - it is hard to imagine regulatory changes that are too drastic. Also, market participants will see the current volatility-inducing political risk as erased, once they know who the elected MEPs are. So, at the time of deciding the concrete targets for the EU ETS, we do not forecast for carbon emissions allowances prices to be negatively affected. 

• What are CO2 emission allowances? A reminder 
• What’s on the table for the EU 2024 elections? 
• Carbon emissions allowance price forecast after the 2024 elections: will EUAs be affected? 

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What are CO2 emission allowances?

“Carbon emissions allowances” to match a “carbon budget”

39 jurisdictions worldwide have implemented emissions trading schemes that use carbon emissions allowances as a policytool. These jurisdictions use those carbon permits to reduce the volumes of CO2 released by the economy. They establish limits on the volumes of greenhouse gasses that can be emitted up to a specified future point in time. This budget is then gradually decreased every year, to reach carbon neutrality by 2050.

What is the definition of emission allowances ? 

After having come up with this “carbon budget”, regulators break it down into yearly limits, ensuring a gradual reduction in emissions to mitigate economic impacts that would be too brutal. Regulators then issue carbon emissions allowances in accordance with the actual CO2 budget over time.

The EU carbon emissions allowances 

European Union Allowances (EUAs), are the emissions allowances in the EU ETS (European Union Emissions Trading Scheme). Established in 2005, the scheme has seen a gradual increase in CO2 emissions prices. Over the last decade, these prices have surged annually by 25%. The factors driving these price movements include dynamics in energy markets, macroeconomic activity, weather patterns, and regulatory decisions and announcements. This is why  it is crucial to assess the potential impact to consider the possible outcomes of the EU 2024 elections, as those can modify the current institutional stances regarding environmental issues.

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What’s on the table for the EU 2024 elections? 

Why is the EU 2024 Parliament election important?

In June, 400 million voters will have the chance to elect their representatives in the EU Parliament. These elections are very important, as recent polling suggests that there can be a potential shift towards more right-wing parties. Those groups, and especially far-right wing representatives, have traditionally been less proactive when it comes to climate-related policies. You can read more on this in our earlier publication.

Will there be new rules for climate change mitigation after the 2024 EU elections? 

The EU communication in February 2024 put forward some environmental objectives to be achieved by 2040. However, it is the newly elected parliament who will have the task to decide on how to transform those into more concrete rules. This will be a long process until 2026. This is why the 2024 elections are so important for the climate policies - the new MEPs will decide on the bloc’s strategies to reach climate neutrality. 

What are the climate talks that will follow the 2024 EU Parliament elections? 

Here's a list of important climate-related EU institutional events following the EU elections:

• June (all month): European Council adopts EU strategic agenda 2024–2029 - Every five years, EU leaders agree on the new political priorities
• 17 June: Environment Council - Regular annual meetings of EU environment ministers.
• Around mid-July (or September): Vote to elect the next president of the European Commission - The candidate for European Commission president will present their policy priorities, followed by an election in the European Parliament
  

“It’s becoming clear that the success of the green revolution will depend on whether policymakers and climate campaigners start taking into consideration those who will bear its greatest costs.” as per the senior climate correspondent Karl Mathniesen. 

How will the EU 2024 elections shape the EU green deal? 

A far-right EU Parliament might impede the progress of the EU Green Deal, potentially prioritizing other matters such as migration and enlargement. 

“As we approach the European elections in June, the big question is whether the Green Deal’s complex (and weakened) legislative framework will manage to emerge somewhat untouched from a destructive and negatively polarized political fight by preserving its initial and challenging ambition. “ says Monica Frassoni, who has held 2 mandates as a member of the EU Parliament, ex co-President of the Green-European Free Alliance Group, and having spent 10 years as the co-President of the European Green Party. 

The climate ambition to be somewhat sustained even in the worst-case scenario

However, as declared by Thomas Pellerin-Carlin, the EU program director at the Institute for Climate Economics, "Let me be 100% clear, if the EU fails to deliver the EU Green Deal, which it has invested so much political capital in, the EU fails as a political project". 

Any overnight drastic changes in the EU climate regulations are not realistic. The efforts made for climate action thus far will not be entirely disregarded, even in the worst case political scenario for the outcome of this summer’s elections. Such a move would undermine the EU's legitimacy and coherence on the international stage. 

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Carbon emissions allowance price forecast after the 2024 elections: will EUAs be affected? 

The light in the tunnel after the 2024 EU elections 

First and foremost, nothing is predetermined yet - let’s all cast our votes and defend what we trust is important. Additionally, it's essential to remember that the Commission is responsible for proposing legislation, not the Parliament. It is very unlikely that, no matter the outcome this June, the President of the Commission ends up being from the far right. 

Also, even in the case of a political shift to the right, climate ambition can also remain at the center of the discussions. Even the most far-right political group, the ECR, write on their website “The ECR Group led through the Parliament, the EU’s Emission Trading Scheme also known as ETS. The agreement reached was a world first, and to date, the largest agreement for cutting man made greenhouse gas emissions. The scheme puts a monetary value on carbon emissions, in order to reflect the costs of climate change and the opportunities for low-carbon options to be introduced into the EU’s production and consumption choices. The changes introduced by this scheme, strike the right balance between the EU’s long-term climate commitments, whilst also ensuring that European industries are protected from being undercut by external competitors operating lower emissions standards.”

Can carbon emissions allowances be completely ruled out?

The EU ETS operates under a structured and complex legislative process. What is the process to adopt an EU directive?

• To enact new European legislation, the European Commission must first propose a legislative framework. 
• Then, the European Parliament (composed of the directly elected Members of the European Parliament) and the European Council (representing the heads of state of all EU member states) must reach agreement on the proposed text for it to become law.

How can a European law or directive be amended?

• In the case of revising existing legislation, any member state, the European Parliament, or the Commission can submit a proposal to the Council of the EU.
• If the European Council decides to review the proposed amendments, a convention is organized by its president, with the representatives from national parliaments, Heads of State or Government of Member States, the Parliament, and the Commission. 
• Then, a conference of representatives of Member States' governments is convened to adopt the proposed amendments by consensus. These changes are implemented only after ratification by all Member States.

Long story short, changing significant aspects of the EU ETS and having too much of a detrimental impact on CO2 allowance prices is very hard to do. Numerous institutional stakeholders must all agree on the desired reforms and be very consistent and patient to pass all the necessary legal processes. 

Carbon emissions allowances trading actors will consider political risk out of the way

Michael Pahle, a carbon pricing economist and advisor, has suggested that the recent decline in EUA prices at the end of 2023 was partly due to political risk. Market players were anticipating the announcement of the 2040 climate targets in February 2024. However, with the upcoming June elections this year, there will be a reduction in political uncertainty. As noted by Bjarne Schieldrop, the chief commodities analyst at the SEB, MEPs hold their seats for four years, so once they are elected, EU ETS market participants will know what to expect. There will be no volatility induced by such  regulatory risk. In fact, the June elections are viewed as a bullish factor for the bank’s carbon allowance (EUA) prices forecast for 2024, with expectations of a positive impact. The SEB has revised their EUA price forecast for 2024 to the upside, now at EUR 105.

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