EU leaders are fighting over the price of carbon as energy costs rise

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A group of EU leaders has asked Brussels to intervene to help curb record CO2 prices, arguing that potential market manipulation increases energy costs and worsens European winter gas crisis.

European Member States, led by France, including Spain, Poland, Hungary, Latvia and the Czech Republic, have objected to the European Commission’s claim that there were no irregularities in the EU carbon market because they are under pressure to ease consumers over rising energy prices.

The objections were raised at an EU summit in Brussels on Thursday, where leaders ultimately failed to bridge divisions and gave up trying to agree on a common language on the energy crisis.

Charles Michel, President of the European Council who chaired the meeting, described the issue as “difficult” after Poland and the Czech Republic requested a reference to emissions trading scheme (ETS) and the forthcoming EU rules on its green “taxonomy” in the summit conclusions. The new German Chancellor, Olaf Scholz, along with Austria and Luxembourg, rejected the requests.

European gas prices reached their highest level since October earlier this week due to concerns about Russia’s new Nord Stream 2 pipeline to deliver natural gas to Europe.

Lack of gas supply has prompted energy producers to switch to cheaper but polluting coal, which has increased demand for carbon emissions under the EU’s system of restrictions and trade. The price of carbon, shown in the ETS, rose to more than 90 euros per tonne of CO2 last week.

Heavy polluters are required to buy ETS permits to cover their carbon emissions, in an attempt to charge for dirty fuel and reduce greenhouse gas emissions.

EU diplomats told the FT that a number of leaders had demanded that the Commission carry out more rigorous monitoring of price dynamics in the ETS. Some have suggested direct political intervention in the emissions market effectively controlled by the commission.

Leaders also clashed over Brussels’ long-awaited rules on green finance, known as taxonomy. The commission is due to publish a bill next week to decide whether nuclear energy and natural gas can be given a “green” label in the classification system, designed to help investors eradicate so-called “greenwashing”.

The vast majority of EU member states, including France, the Netherlands, Poland and Hungary, support the inclusion of nuclear energy in the rules – arguing that it is low-emission technology that is key to reducing greenhouse gas emissions. This has been resisted by environmental groups who say nuclear energy produces toxic waste.

“It is no secret that there are different positions[on the taxonomy]. . . and it was not possible to reach an agreement, ”Michel said.

Disputes over energy and green policies will overshadow the EU’s attempts to agree on more than a dozen laws designed to drastically reduce CO2 emissions over the next three decades.

At the heart of the EU’s net zero plan is the extension of the ETS to sectors such as cars and housing. The proposal is opposed by France, Spain, Portugal and Eastern European countries, which say they will impose a direct tax on consumers who cannot afford to exchange vehicles or domestic goods for vehicles with lower emissions.

The dramatic increase in the price of carbon emissions from 50 euros at the end of July to a high 90.75 euros last week led to predicts it could rise to at least € 200 in the coming years as supply declines.

Poland, which relies on coal for about 70 percent of its energy, has hit attempts to penalize coal use with rising CO2 prices. Prime Minister Mateusz Morawiecki told leaders that the ETS was taking “money from the poor to give it to the rich”, a diplomat familiar with the discussions said.

French President Emmanuel Macron and Czech Prime Minister Andrej Babis also challenged the commission’s assessment that there was little evidence of market speculation.

The first review of the carbon market by the European Securities and Markets Authority and the EU energy body ACER found no evidence of trading irregularities.

The Commission also insisted that the system, which is a central part of the EU’s emission reduction strategy, benefits all Member States by providing them with lucrative revenues from the sale of permits.

Brussels estimates that the price of CO2 has generated at least 11 billion euros in unexpected profits for EU governments this year compared to 2020. It is also estimated that only 10-13 percent of the current increase in energy costs can be attributed to higher carbon prices.

During the summit, one leader suggested that the Commission should set a carbon price cap to prevent excessive volatility, diplomats familiar with the discussions said. Other countries mentioned increasing the supply of allowances to help reduce prices.

Germany’s Scholz defended the ETS, but also expressed concern over the cost of fees, diplomats said. Germany is among the largest supporters of the carbon market and has implemented a comprehensive CO2 trading system.

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