According to a recent report from ERCST, an independent non-profit organization working on climate change policy,  the decision to increase allowances in circulation to raise €20 billion for REPowerEU purposes created a precedent of discretionary intervention in “critical situations.”

The authors of the report concluded that the massive drop in carbon prices from their all-time high of €100 a year ago was due to two main factors: low industrial activity and increased renewable power. However, the decline “was exacerbated by regulatory intervention to access funds for the REPowerEU program.”

Specifically, the REPowerEU plan would be partially financed by bringing forward €8 billion worth of EUAs from auctions scheduled for 2027-2030 on behalf of member states and selling them to the market between 2023 and 31 August 2026.

However, the report published by ECRST lists several short-term and possibly long-term impacts of this regulatory intervention, as the decision was taken based on a monetary target,  without mentioning an exact number of EUAs, leading to unnecessary market uncertainty.

Given the current price level, more allowances than previously planned would need to be auctioned between 2023-2026 to reach the target of €8 billion. In turn, the number of allowances available for auctions between 2027-2030 will decrease “leading to a potentially major scarcity in the second half of phase IV.”

Furthermore, frontloading allowances send another signal to stakeholders that “the EU ETS is open to ad-hoc discretionary intervention with low visibility/predictability.” In this context, ERCTS warns that carbon price “will become a political variable” and there is a risk of more interventions in the future “should prices rise very steeply.”