The RECCESSARY carbon price model assesses how the EU’s July 17 reform proposal could affect carbon prices and the market. (Image: iStock)
The European Commission released its closely watched proposal to revise the EU Emissions Trading System (EU ETS) on July 17, referred to in this article as the July 17 reform proposal. The proposal covers a range of changes to the emissions cap, the Market Stability Reserve (MSR), free allowances and the allocation of EU ETS revenues.
However, these measures do not all point in the same direction. Some would tighten allowance supply, while others signal a more gradual path. With multiple factors interacting, it can be difficult for market participants to assess the proposal’s overall impact on the future allowance market.
This article quantifies the proposed changes and incorporates them into the RECCESSARY carbon price model to simulate their impact on EU allowance prices if the July 17 reform proposal is fully implemented, providing a clearer picture of the potential market impact.
Unlock the full article to explore three key takeaways:
- The model estimates an average carbon price of EUR 148.09 between 2031 and 2040, close to the EU’s official estimate of EUR 150, suggesting that carbon prices could remain at relatively elevated levels despite a more gradual contraction in allowance supply.
- A slower Linear Reduction Factor (LRF) would push back the point at which the emissions cap reaches zero from 2040 to 2048, reducing the risk of a sharp near-term surge in carbon prices and giving companies more time to phase in their decarbonization plans.
- The phaseout of the CBAM factor would be extended to 2038, with the largest reduction occurring in 2030. Exporters should therefore not underestimate the near-term increase in carbon costs.