BAKU, Azerbaijan, July 19. The EU has emerged as the leader in emissions trading, boasting the most developed system worldwide. Despite facing challenges in its early stages, such as an excess of carbon allowances and low prices, the EU took decisive steps to strengthen the system. Key measures included the establishment of a market stability reserve, higher emissions reduction targets, faster annual cap reductions, and reduced free allocations. These initiatives led to a significant surge in prices, rising from an average of EUR 15.9/tCO2e in 2017 to EUR 80.9/tCO2e in 2022.
BMI, a Fitch Solutions company told Trend that further price gains are anticipated in the coming years. As the bloc continues to tighten its environmental policies, deeper decarbonization efforts will drive long-term price increases, with EUAs projected to average comfortably above EUR 100/tCO2e by the mid-2020s, up from the current EUR 87/tCO2e.
The EU's experience in developing its emissions trading system presents valuable lessons for other countries, enabling them to navigate early carbon market evolution with fewer pitfalls.
Central & Eastern Europe (CEE) Faces Challenges in Carbon Pricing Initiatives
In contrast, the Central & Eastern Europe (CEE) region currently has few and underdeveloped carbon pricing initiatives (CPIs). This can be attributed to a lack of political will to enact or improve such policies, with energy access and affordability concerns taking precedence over sustainability in domestic policy agendas. Additionally, the region's high reliance on fossil fuels, fuel subsidization, and prevalence of state-owned enterprises pose obstacles to carbon emissions reduction efforts.
Despite these challenges, the CEE region provides a compelling example of how carbon border adjustment mechanisms (CBAMs), like the one proposed by the EU, can boost carbon price growth in other markets. The CBAM, set to enter its transitional phase in October 2023, involves the EU increasing carbon levies on imports of cement, iron, steel, aluminium, fertilizers, electricity, and hydrogen over the period 2026-2034.
Given the deep trade links with Western nations, CEE economies outside the EU may be incentivized to expand and fortify the use of CPIs in response to the EU's CBAM. Failing to adapt could result in challenges maintaining market share in the EU or necessitate product discounts to offset the import levy imposed by the bloc. Introducing CPIs is in the best interest of CEE governments, as they would reduce their companies' obligations under the CBAM, and the generated revenues would remain in-country instead of being transferred to Brussels.
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