Emission allowances are one of the reasons for high energy prices. Wouldn't it be better to abolish them?

The emission allowance, like any idea or product from the European Union, is a subject of debate that often arouses emotions. These feelings are now all the more heightened as emission allowances are now making already expensive electricity more expensive. What does the EU want from allowances and how do they translate into the final price of electricity?

Emission allowances are intended to help Europe become climate neutral

Background information

In this article I will discuss the EU Emission Allowance (EUA), which will be the most important issue for us. Something similar works in the US, but there is no room for it now.

The basic idea behind the EUA is to reduce emissions of greenhouse gases, which are considered to be carbon dioxide, methane, ozone, or perhaps nitrous oxide. That is, those gases that are produced by burning fossil fuels, waste or wood.

Allowances are issued by the European Union to each Member State according to the carbon intensity of each economy. The state then distributes them among greenhouse gas emitters.

Allowance market

The largest system for trading allowances is the European Union Emissions Trading System (EU ETS). The system covers greenhouse gas emissions, power plants, energy-intensive industries and aircraft flying within the EU, Norway and Iceland.

ETS emissions allowance price development, source: ember-climate.org

This market is a fundamental principle of the EU's fight against climate change caused by greenhouse gas production. The system works by capping the amount of specific greenhouse gases that can be emitted from the atmosphere. The caps are gradually lowered so that the amount of gas emitted decreases. In total, the market has 4 phases, we are currently in phase 4, which is expected to last until 2030 and which has set climate neutrality targets for 2050.

The stumbling block

As we can see in the graph above, the price of allowances is rising astronomically. This is due, among other things, to a gradual reduction in the supply of allowances, or rather the number of allowances. This is also reflected in the price of electricity generated from sources that produce greenhouse gases. In the current situation, it would therefore be advisable to stop issuing allowances altogether, i.e. to suspend trading on the ETS for a while. This was proposed by Poland, but the EU leadership was against it.

Summary

Allowances are of course not the only reason for high electricity prices, there are many more. In fact, I have discussed electricity pricing in this article: What is behind the extreme electricity market price? Something definitely needs to be done about the permit market. I believe that it is more important to ensure that EU citizens get electricity at a price that does not ruin them than to hold on to our idea of a green Europe.

How do you see it? Do you think that allowances have a significant impact on the price of electricity, or is it negligible?