EU Proposes Carbon Market Reform to Limit Price Spikes

Policymakers in the European Union are looking at carbon market reforms. The goal is to make it easier for policymakers to interfere in the system if prices climb too quickly.

The EU emissions trading system (ETS) comprises a dwindling number of carbon offset permits that emitters must purchase to offset their emissions.

In the last year, the carbon prices increased by almost 150%, recently reaching record highs of 98.49 Euros per tonne of CO2.

The proposed amendment goal is to make it easier to issue additional carbon offset purchase licenses during periods of rapid price increases.

The rationale for the modification according to German lawmaker Peter Liese is that “high carbon prices have led to concerns regarding excessive price increases and market volatility. Any intervention, however, should avoid price shocks or sudden volatility”

The current regulations of the EU ETS allow nations to add more permits under certain circumstances.  If the carbon price is 3x the average price in the 2 prior years for at least 6 months, they can add more permits.

Some policymakers are arguing that this does not reflect market realities. Their plan is to release an additional 100 million carbon permits from its “market stability reserve” if the carbon price is 2x the average price in the 2 prior years for at least 6 months.

The market stability reserve is a pool of surplus permits that have been pulled from the market to help provide stability.

Before Parliament and EU governments draft the final law, EU parliamentarians will discuss and vote on their final position in June.

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