Energy price crisis must not thwart EU’s carbon trading plans – German govt advisors

The rise of energy costs across Europe could become a major challenge for the European Union’s decarbonisation plans, as the envisaged carbon pricing of fossil energy sources might become very difficult to accept for consumers, economists Veronika Grimm and Andreas Löschel write in a guest article for newspaper Tagesspiegel. The European Green Deal has a key focus on emissions trading, which is supposed to be expanded to not only cover energy production but also the transport and heating sectors. “Comprehensive CO2 pricing and cross-sectoral emissions trading will be key for achieving the EU’s ambitious climate targets,” the two economists, who also act as advisors to the German government, say. But many companies and households are already burdened by the high energy prices, which has prompted several European governments to intervene and support energy consumers financially.

“The short-term answers to the energy price crisis must not run counter to the long-term goals of the Green Deal,” the economists warn, adding that direct market interventions like price caps and support payments thwart the necessary consumption reduction and investments in cleaner technologies and more storage capacity, as these are based on cost expectations. “All these measures are also undermining the effect of CO2 pricing,” Grimm and Löschel write, adding that market incentives are essential for achieving the transformation to climate neutrality. Germany should therefore strive to shield energy markets from state intervention and work towards a cross-sectoral emissions trading system, while simultaneously ensuring that particularly hard-hit customers are protected. In Germany, this could be achieved by doing away with the renewables levy. In the longer run, more renewable power capacity across Europe would be needed to safeguard the energy system from power price hikes.

Prices for gas and electricity have reached new record levels in Europe in recent months due to a wide range of reasons. Economic recovery in many countries around the world after the coronavirus pandemic’s effects have subsided has let demand spike, while renewable power output has been low and gas storages lower than usual after the past cold winter season.