A steep rise in energy prices is currently making news headlines across Europe, with the costs of natural gas and electricity being keenly felt by consumers and industry. Moving away from the news cycle though, the underlying forces at work behind these increases are complex and nuanced. They are also intertwined with the various EU mechanisms being employed to help it become carbon neutral, such as the emissions trading system (ETS), the focus of this paper.
Through the analysis presented here, the key takeaway messages can be summarised as:
- Carbon, electricity and energy prices are interrelated but also have their own dynamics. The ETS price has been gradually rising since 2017 to reflect climate policy fundamentals while energy (i.e. natural gas) markets face an economic shock.
- Energy prices faced by consumers and industry are determined by many factors of which carbon is only a minor one.
- Distributional impacts for citizens should be managed, and ETS auction revenues provide member states with the funds to do so
- The ETS price supports investments in the decarbonisation of the energy system.