A large increase in the price of fuel is possible if it turns out that the legislators’ assessment was not good, experts warn.
The rise in prices of fossil fuels such as heating gas, petrol and diesel could accelerate significantly from 2027, warn experts who blame lawmakers for fueling false expectations. EU institutions have estimated the limit that will dictate it at €45, but the new carbon market reform could significantly increase that price.
The European Parliament will vote on the reform of that market, which the EU institutions agreed on last December. The draft law envisages a second emissions trading system for buildings and road traffic, which will be activated in 2027 and will increase the price of fossil fuels for heating and driving.
This measure will be implemented at the moment when the Social Climate Fund of 87 billion euros is activated, the aim of which is to amortize the impact of the measure on the poorest households. As is usual in market systems, demand and supply will dictate the price.
The EU Institutions want to limit the new carbon price to a maximum of €45 per ton of carbon dioxide emissions, which would mean an increase in the price of fossil fuels by ten euro cents for gasoline and 12 for diesel. But experts warn that this price could very well be exceeded, because the price reduction mechanism included in the law by no means guarantees that the price will not be higher.
“Essentially, anything is possible when we talk about prices. We cannot claim that the price will ‘break through the roof’, but precisely because we know so little about the formation of the price in the new system, it is equally possible for it to be extremely high and extremely low Michael Pale, an expert on carbon markets at the Potsdam Institute for Climate Impact Research, said for EURACTIV.
The chief negotiator for market reform, Peter Liese from the center-right EPP group, admitted that the €45 limit is not fixed. “Of course, the three-party agreement cannot absolutely guarantee that the price will not be higher than that limit. But the probability is relatively high, especially for the first years, including the year 2029. The European Commission foresees a price of €45 in its calculations,” he said.
Lawmakers, however, sounded much more confident about the details when the deal was being made last December. Then Lize himself said that the price will not be higher than €45.
French MP Pascal Canfan, who initially criticized the reform, then said that the strict conditions, “in particular the introduction of price restrictions until at least 2030”, make the measure politically acceptable. The non-binding part of the agreement also mentions a limitation, but the mechanism cannot guarantee it.
“On the one hand, the paragraph states the aspiration for a price that would appease the concerned parties. At the same time, if you look at the mechanism that should deliver it, there is a significant gap between the aspiration and implementation,” he said. In practice, a price above €45 per ton of carbon dioxide would trigger additional concessions from the so-called stability reserve, in order to match supply with demand.
But since only 20 million additional certificates would be allowed, and the total amount of allowed emissions is about 1,000 million tons of CO2, there would not be a decisive halt to the rise in fuel prices if there is pressure, Christian Flaschsland, director of the Center for Sustainability at Berlin’s Herti School, said.
“Therefore, the maximum price of €45 is not guaranteed in any way. That is one of the problems of communication, because we will say that we will do something and achieve the goal of a fixed price, but it simply will not work, in my opinion,” he said.
What prices can be expected? Both experts say that it is difficult to estimate, but they do not go below €100 in predictions, which would be more than double compared to the forecast of the reform. “No model predicts a price of €45, it is more likely that it will be from €100 to €300,” said Flaschsland.
In extreme cases, if the EU countries do not commit to additional measures but rely only on the price, the range of €175 to €350 per ton of CO2 is reached, according to Pale. “It is not a likely scenario, but it is a first estimate of the upper limit,” he added.
Lize states that such calculations are “incomprehensible” and are based on false assumptions. Nevertheless, he also states that EU countries must prepare their citizens for “life in a world where fossil fuels are expensive and difficult to access.”
“It is not reasonable, nor is it possible to decide on an absolutely fixed price, because that would lead us to seek unanimity, which certainly would not be achieved,” he said, adding that it would further jeopardize the achievement of climate goals by 2030.
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