The price surcharge on fossil fuels such as heating gas, petrol and diesel under the EU’s new carbon market as of 2027 could be well above the €45 limit EU institutions aim for, experts say, blaming lawmakers for creating false expectations.

Next Tuesday (18 April), the European Parliament is scheduled to vote on the reform of the EU carbon market, which was agreed upon between EU institutions in December 2022.

According to the draft law, a second Emissions Trading System for Buildings and Road Transport is due to start across the bloc as of 2027, which will increase the prices of fossil fuels for heating and driving.

The measure comes alongside a new ‘Social Climate Fund’ of €87 billion, which aims to cushion the impact on the poorest households

As usual in a market system, the price is determined by supply and demand.

EU institutions aim to limit the new carbon price to a maximum of €45 per tonne of CO2 emissions, which equates to a price surcharge of 10 cents per litre of petrol and 12 cents per litre of diesel.

But according to experts, this price may well be exceeded, as the price-dampening mechanism included in the law cannot guarantee that the price won’t go higher.

“Basically, everything is possible in terms of prices,” said Michael Pahle, an expert on carbon markets at the Potsdam Institute for Climate Impact Research (PIK).

“It cannot be said that the additional price stability mechanism can actually guarantee that the price will not go beyond this level,” he told EURACTIV, referring to the €45 maximum cited by policy-makers.

“That doesn’t mean that it will definitely go through the roof either,” Pahle added. “But precisely because we know so little about price formation in the new ETS, it is equally possible that we will have very low prices as well as very high ones.”

Contacted by EURACTIV, Peter Liese, an EU lawmaker for the centre-right EPP group and chief negotiator for the EU’s carbon market reform, admitted that the €45 limit is not a hard price cap.

“Of course, the trilogue agreement cannot absolutely guarantee that prices will not be higher than €45 per tonne, but the probability is relatively high, especially in the first years including 2029,” Liese said.

“The European Commission’s calculations foresee prices of €45,” the German lawmaker added.

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False impressions

When the deal was initially struck in December, lawmakers sounded more certain, giving the impression of a hard price ceiling.

“Based on a market mechanism, it is ensured that the price will not be more than €45,” Liese said in a statement on 18 December.

French EU lawmaker Pascal Canfin (Renew), initially a strong critic of the reform, said that “the strict conditions that we have set […] and in particular the introduction of a price ceiling price of €45 until at least 2030, makes the measure politically acceptable in my view”.

In the non-binding part of the legislation, the so-called recitals, the aim of not exceeding €45 per tonne of CO2 is also put in writing, Pahle notes, but the related mechanism could not guarantee so.

“This paragraph is telling because, on the one hand, it states a price aspiration that can comfort concerned stakeholders and involved parties,” Pahle said. “At the same time, if one looks at the details of the mechanism to deliver it, there is a substantial gap between aspiration and implementation”.

This view is shared by Christian Flachsland, Director of the Centre for Sustainability at Hertie School Berlin.

In practice, a market price of above €45 per tonne of CO2 would trigger additional allowances to be released in the carbon market out of the so-called market stability reserve, in order to better align supply (amount of allowances) with demand (amount of emissions).

However, given that only 20 million additional certificates would be released, while the overall amount of emissions per year covered by the scheme is around 1,000 million tonnes of CO2, “this will not dampen the price decisively if there is upward pressure,” Flachsland told EURACTIV.

Thus, a maximum price of €45 was by no means guaranteed, Flachsland said.

“That’s one of the communication problems,” he said. “It is said: We do this and achieve the goals, and that’s a price of €45. But that just doesn’t work, in my opinion.”

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How high will prices go?

Asked about what price levels to expect, both researchers stressed that this was difficult to predict but named price levels well above €100, which would be more than double the price mentioned by lawmakers.

“No modelling expects prices of €45 – we more likely have €100 to €300,” Flachsland said.

A carbon price of €200 equates to a price surcharge of 53 cents per litre of diesel and 47 cents per litre of petrol.

In extreme cases, if EU countries do not take any additional climate policy measures but rely entirely on carbon pricing to reduce emissions, “we find a range from €175 to €350 per tonne [of CO2] across different modelling approaches,” Pahle said.

“That’s not a likely outcome, but at least a first estimate of the upper bound, so to speak,” he said.

For lawmaker Liese, this scenario is unlikely.

“I find the statements that there could be prices of up to €300 per tonne incomprehensible in view of the said calculations [by the European Commission],” Liese said.

“In my opinion, they are based on the false assumption that no change would result from other legislation, national measures and innovations,” he said.

If the demand for emission allowances is lower, the carbon price would be reduced accordingly. And prices could be brought down further over the next years through additional climate policy measures, the theory goes.

Nevertheless, EU countries should prepare their citizens for a world in which “fossil fuels will be scarce and expensive,” Liese warned.

The German lawmaker also defended the decision not to include a hard price cap.

“It was neither sensible nor possible to decide on an absolute price cap because a fixed price […] would have directly led to us needing unanimity, which could not have been achieved in the Council,” Liese said, adding that this would have jeopardised the achievement of the 2030 climate targets, Liese added.

Both the European Commission and lawmaker Pascal Canfin were asked for a comment but did not respond by the time of publication.

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