A drop in the European Union’s carbon price this year could mean that a fund intended to be among the world’s biggest schemes for new green technologies will be smaller than budgeted for and potentially jeopardise some low-carbon projects in the EU.
After soaring above 100 euros per ton of CO2 last year, the cost of EU carbon permits had nearly halved by February, as emissions covered by the market plunged as a result of lower power demand and higher renewable power generation.
The fall has wiped out 4.1 billion euros ($4.36 billion) in potential revenues for Europe’s budget for low-carbon investments so far this year, analysis of market data shared with Reuters by consultancy Veyt showed.
While the dip in emissions shows the carbon market is helping the bloc meet its climate goals, it also means the scheme is raising less than expected for EU green transition funds and to pay for the climate efforts of member states.
The EU Innovation Fund is the bloc’s main fund for nascent technologies like hydrogen and carbon capture, which the 27-nation bloc is banking on to meet climate change goals.
By the EU’s own estimates, the fund should raise 40 billion euros this decade, if CO2 prices averaged 75eur/t in that period. The benchmark EU carbon price has remained below this level for more than three months. It was trading at around 70eur/t on Wednesday.
As a result, EU carbon revenues so far in 2024 are 30% less than if carbon auctions had achieved the average 2023 price, which was 83.6 eur/t, the data from Veyt shows.
“If there is less money it will affect the number of projects the funds can support,” LSEG carbon analyst Yan Qin said.
The carbon market also feeds a Modernisation Fund to help the poorest EU countries shift away from fossil fuels.
Less cash for the energy transition would be a blow to European industries that are struggling to go green while staying competitive internationally. Some are already shifting investments to the U.S., to benefit from clean tech subsidies.
Holcim said the Innovation Fund had been a trigger for low-carbon investments in Europe. The world’s largest cement maker has already won fund backing for carbon capture projects in Belgium, Croatia, France, Germany and Poland.
“We’ve never invested so much in Europe in decades, and that’s partly thanks to the Innovation Fund,” Holcim Vice President of Public Affairs Cedric de Meeus said, adding it may bid for the fund again in future.
REBOUND?
Analysts say the EU carbon price dip is likely temporary and prices are set to rise this decade since the market is designed to gradually cut the supply of permits each year, while a special “reserve” will also soak up some excess supply.
Still, some have lowered their forecasts. A Reuters survey of analysts in 2022 gave an average price forecast for the benchmark contract of 94 eur/t in 2024. That had dropped to 74 eur/t in a poll in January.
“The market has turned more bearish than anyone expected,” said LSEG’s Yan Qin.
Veyt carbon analyst Ingvild Sorhus said prices are being dampened by short-term factors including a recent EU move to sell millions of extra carbon permits to raise money to help countries quit Russian gas.
A European Commission spokesperson said it has not changed the 75 eur/t carbon price it uses to estimated the size of the Innovation Fund. It does not comment on the carbon market price.
UNCERTAINTY
The Innovation Fund supports low-carbon technologies which developers said lack funding as they are deemed too risky for investors, and national government budgets are stretched.
“Without that (the EU fund), the projects are not really bankable,” said David Strittmatter, CEO of German start-up ICODOS, which launched a pilot plant last year for low-carbon methanol fuel.
“It’s really one of the very few instruments that can help us to get to that scale,” he said, adding that a squeeze on Germany’s national budget has prompted other local climate projects to target the EU fund instead.
The Innovation Fund is heavily oversubscribed. Its latest funding call for large-scale projects last year awarded 3.6 billion euros to 41 projects, after 239 applied. A call for smaller projects also received bids for nearly three times its 100 million euro budget.
German start-up Heatrix is considering bidding for support for its first commercial plant, to convert renewable electricity into high-temperature industrial heat.
Co-founder Wei Wu said the dip in carbon prices should not prompt companies to abandon decarbonisation plans, but could delay investments in emissions-saving projects that a higher EU carbon price would help make economical.
“I hope it’s just a temporary state … And it’s going to rise again,” she said.
($1 = 0.9397 euros)
(Reuters)
