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The carbon market and climate policy are key drivers for the restructuring of the energy system, the profitability of investments and how the use of policy instruments should be organised.
Developments in the European emissions trading system (EU ETS) and climate policy in general are closely linked to developments in the energy markets and affect prices, investments, technology development and energy consumption. The development of the EU’s climate targets and ambitions, the distribution of emission cuts between ETS and non-ETS sectors, and the inclusion of new sectors in the carbon market will affect future carbon prices.
For example, the framework for the development of CCS (carbon capture and storage) and for the capture of emissions from biogenic sources or directly from the air (negative emissions) could significantly impact technology development and market prices in the future.
Climate targets are tightened, and more sectors are included
The EU ETS, of which Norway is also included, sets a price on emissions that depends on the supply and demand for emission allowances. Both industry, power producers, and power consumers are affected by developments in the ETS.
Installations in sectors included in the ETS must purchase allowances corresponding to their CO2 emissions. When there are fewer allowances available, the price increases, and it becomes profitable to implement more costly emission reduction measures.
The ETS framework has been revised and tightened several times. We expect that the system will continue to be revised in the future, both because the EU is tightening its climate goals and because more sectors are being included. This affects the development of the price of allowances. At the same time, there is uncertainty about future mitigation costs and how, for example, national climate policies can affect the carbon market.
Close interaction between the ETS and the energy markets
The development of the emission cap and CO2 emissions, and the abatement measures that are implemented, are closely linked to energy consumption and production. The conversion of all parts of the energy system to zero- or low-emission technologies and the incentives for energy efficiency are largely driven by climate policy. Climate policy affects the value of renewable power, hydrogen and other low-emission technologies, and the cost of different energy carriers and technologies, including infrastructure costs, affect the development of allowance prices, carbon taxes and national regulations.
To understand how the future design of the EU ETS and other climate policy measures can affect the market and the carbon price, and thus actors and national emission targets, thorough analyses of market dynamics and technological development are needed, along with a good overview and understanding of energy and climate policy goals and frameworks.