Here’s How Trump’s Paris Plan May Hurt the EU Carbon Market

President Donald Trump’s plan to exit the Paris climate accord is seen curbing the willingness of European Union lawmakers to tackle low carbon prices.

Europe will probably need to focus on protecting its industry from economic costs the U.S. now won’t bother with, said Andrei Marcu, a senior fellow at the International Centre for Trade and Sustainable Development in Geneva, which promotes environmental trade policy. That will limit their readiness to push for higher prices needed to cut greenhouse gas emissions at a faster pace to meet targets in the pact, he said.

EU carbon allowances are set to almost quadruple by the end of the decade under a draft proposal approved by nations in February, according to Bloomberg New Energy Finance. The region has been seeking to fix its market, the world’s largest, for about eight years after prices plunged because of oversupply.

“Trump’s plan may erode the ability of the EU to be ambitious and will indirectly curb prices,” Marcu said. “Today, we might be feeling brave, but in two years time, when we want the EU carbon price to be 20 euros ($23), four times its current levels, companies will balk at that price because their international competitors won’t have the cost.”

One way lawmakers may react will be to ensure factories in the program, from steelmakers to chemical companies, continue to get almost all of the carbon allowances they need for free, eroding trading volumes and price signals in the market, said Louis Redshaw, founder of carbon trading company Redshaw Advisors Ltd. in London.

“For example, Germany will want industry to get more free allocation if Trump is becoming ever-more protectionist,” Redshaw said. “So, senior management won’t focus on carbon prices because it’ll remain a box-ticking exercise rather than a carbon-buying exercise.”

Watered Down

It’s not clear that the EU will water down its carbon market in the wake of Trump’s decision, but there are ways to do it if that’s the path it decides to follow, said Jahn Olsen, an analyst in London at BNEF. 

Europe could set aside 400 million tons of allowances for new companies entering the market in the future from a planned market reserve, rather than from a pool of permits to be given away in the 10 years through 2030, Olsen said. That volume over the decade is the equivalent of about 22 percent of one year’s supply.

Carbon allowances rose 1.8 percent Friday to 5.17 euros a metric ton on ICE Futures Europe in London, trimming the weekly loss to 0.4 percent.

The EU “deeply regrets” Trump’s decision to pull out of the accord, Climate Commissioner Miguel Arias Canete, said Thursday after Trump revealed his plan. “Today’s announcement has galvanized us rather than weakened us, and this vacuum will be filled by new broad committed leadership.”

Before the announcement, Chinese Premier Li Keqiang said the world’s No. 1 polluter will stick to its pledges to tackle global warming. The U.S. produces the second-biggest volume of emissions and is the country most responsible for climate change, based on greenhouse-gas output since 1890, according to the International Energy Agency.

Any impact on the carbon markets of Trump’s decision may be short lived, said Josh Margolis, managing director of environmental markets at the China program of New York-based Environmental Defense Fund.

“I would expect a rebound when policymakers vow to carry on and in some cases, double down on their climate-mitigation programs,” he said. “Market fundamentals matter much more than White House proclamations.”

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