The prices of carbon certificates are kept high by the intervention of financial funds in this market. At the same time, as the main beneficiary, the state has no interest in reducing the prices of emission certificates. In this context, the high quotation of certificates, which directly influences the price of electricity, will continue to exert the same influence during 2023 as well.
“The price of carbon certificates will keep increasing and will have a negative impact on the price of energy. The price of CO2 certificates started to be more volatile than the price of shares on the stock exchange. The prospects are not too good”, said Casiana Fometescu, founder of Carbon Expert and president of the Romanian Carbon Association, at EnergynomicsTalks. “We will continue to depend on energy imports. Things are shaky this year. It is a year in which we will adapt, and we will have to adapt at the psychological level, too”, Casiana Fometescu also said.
The EU Emissions Trading System mechanism (ETS) was created by the European Commission in 2005 with the aim of reducing polluting emissions generated by industry. At that time, each Member State of the community block was allocated a free amount of certificates, much higher than needed at that time.
CO2 certificates were allocated free of charge to companies that were included in the scheme, from industries such as energy, petroleum, metallurgy, chemical, etc. Each company received a certificate for every ton of CO2 it emitted into the atmosphere, and if it exceeded the emission threshold agreed with Brussels, it had to buy the difference from other companies that had excess certificates.
The mechanism kept changing after that. Now the certificates are auctioned in a system similar to the stock market, and the European Commission reduces the allocation of free certificates from year to year with an initial reduction factor of 1.7%, which then increased to 2.2%, and for next year it is proposed to reach 4.3%.
The entry of financial funds into the CO2 trading scheme has radically changed the market and caused the price to skyrocket. From a price of 17 euros per CO2 certificate in 2019, in 2020 this quote reached record levels of 96 or 98 euros per certificate. Finally, these certificates are found in the final price of electricity, which has tripled in the last three years, and one of the main causes is the entry of financial players into the process of trading emission certificates. “It is a closed market, although it was initially open. It became a financial market, so in 2019 investment funds came in, and in 2020 a sharp increase in price was observed. In 2020, the price of the certificate dropped to 17 euros, but later it reached 96 euros, where it is today. This is the result of a big involvement of financial players,” explained Fometescu.
How does the price go up? Financial players are buying so many CO2 certificates that they are no longer available even for producers who really need them – an argument that, officially, the authorities in Brussels do not confirm. “The European Commission wants to show that these mechanisms of price increase do not take place because of financial actors, but if you do an analysis and if you check this out you see that 50% of the transactions are made by financial funds. Now, these financial funds sell the certificates at a price of 90 or so euros, the companies that have to buy them get scared and they buy”, Fometescu added.
The European Commission has already announced that 90 million certificates will be withdrawn from the market in 2024, and this will mean that companies that need them will have fewer available, which will generate further price increases, besides an artificial drive to decrease economic activity.
To protect against these price threats, companies should consider hiring a broker. A number of companies, including some state-owned ones, have already turned to this solution.
In addition, the government has announced that the money it gets from the sale of these certificates will be directed toward environmental investments that reduce pollution. In reality, only 10% of these amounts have reached what the government promised, and there is no transparent mechanism to verify the destination of the funds. For example, part of the money collected from the sale of polluting emissions certificates by the state was allocated to the “Rabla” program, administered by the Environmental Fund Authority, which encourages the purchase of cars, but not investments in machinery or fewer technology pollutants.
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“There is no transparency of this money. The state sells the certificates it receives for free from Brussels, so it is interested in the price being as high as possible. The final price is paid by the consumer because if the companies could not modernize and did not have money, they increased the price of the products. So, in the end, the consumer pays”, said Fometescu.
On the other hand, from this year new price increases are expected for energy and, in fact, for any products, as a result of the introduction, by the European Commission, of a new tax – Carbon Border Adjustment Mechanism – on the import of materials and raw products. Officially, this measure is also intended to ensure the reduction of pollution and the sustainability of the European economy.
Romania should pay more attention to supporting energy production from water and biomass, and this would also contribute to reducing dependence on electricity imports.
“We have been energy importers for some time and this trend will continue, even though we have production capacities. Reforms are needed and we must harness our domestic resources. We do not capitalize on hydropower and biomass, which we do not include in the energy strategy, we only include wind and solar, which are both volatile. We also include hydrogen, but this technology is only at the innovation stage. In contrast, no investments are made in hydro and biomass. It is a shame that these projects that may be viable are not considered. Even if we make offshore wind turbines, we will depend on imports. We have to think about energy storage and I am convinced that such projects will appear in the future”, said Fometescu.