Fit for 55 package to push CO2 prices to EUR 90 by 2030

The Fit for 55 package will lead to a rise in CO2 prices to EUR 90 by 2030, with a price increase expected in particular in the second half of the decade, according to an analysis by the Independent Commodity Intelligence Services (ICIS).

The European Commission has adopted the Fit for 55 package which represents 12 draft laws designed to make Europe climate-neutral by 2050. Among other things, the package taxes jet fuel, introduces a carbon border tax on the import of iron and steel, cement, fertilizer, aluminium, and electricity produced outside the EU, establishes a carbon trading system for the road transportation and building sectors, tightens the existing EU Emissions Trading System (EU ETS), and expands it to shipping.

Fit for 55 is reshaping the European emissions trading landscape

According to the analysis of the impact of Fit for 55 on European industry by Sebastian Rilling, analyst for EU Power & Carbon Markets at ICIS,  the package is reshaping the European emissions trading landscape. The proposal covers all aspects of the existing system, including the overall amount of allowances supplied into the market (“cap”), the allocation of free certificates, and the functioning of the Market Stability Reserve.

At the same time, it introduces sweeping reforms, by expanding emissions trading to the maritime sector, introducing the carbon border adjustment mechanism (CBAM), and proposing a new trading scheme for the road transportation and buildings sectors.

In the absence of any changes to the proposed package, ICIS expects EU ETS prices to reach around EUR 90/tCO2 by 2030, with a price increase expected in particular in the second half of the decade, when the proposed reforms to free allocation would take effect, Rilling said.

The current price is around EUR 50.

Sectors covered by the CBAM face a carbon bill between 2026 and 2030 that is by EUR 32.9 billion higher than in the absence of a phase-out of free allocation

According to an estimate by the ICIS team, this price increase could see sectors covered by the CBAM face a carbon bill between 2026 and 2030 that is by EUR 32.9 billion higher than in the absence of a phase-out of free allocation.

Compliance players will therefore increasingly seek to cover their exposure to volatile CO2 prices by turning towards an active emissions trading strategy, he added.

The proposed changes will change the market fundamentally, likely as of 2024

The proposed changes will change the market fundamentally, likely as of 2024, with the application of the higher annual reduction of the cap, as well as the introduction of maritime emissions into the new system, depending on the legislative timeline.

The discussion around this new ETS itself is likely to face opposition in both the European Parliament and Council, as emission reduction costs in these sectors could impact end-consumer prices and lawmakers anticipate a political backlash. While an adoption by the end of 2022 is possible, the political discussion could therefore reach well into 2023, making an application as of 2024 likely, Rilling concluded.