The ECB affirms that emission prices have affected energy inflation

The prices of _CO2 emission rights have possibly affected only energy inflation, in particular, electricity prices, according to an article in the economic bulletin of the European Central Bank (ECB), published on Thursday.

The ECB economists analyse in the article the prices of emission rights in the European Union and the ECB’s climate change action plan.

And they recommend that the implications for inflation and output of the ECB’s measures to mitigate climate change should be explored.

The recent rise in emission rights prices is “a cause of recent increases in electricity prices in some euro area countries,” the authors say.

This occurs in countries where electricity prices are not regulated or are only partially regulated and households opt for variable tariffs.

However, in other countries electricity prices react late due to price regulation or are less affected because they use low-carbon electricity.

In the long term, the authors note that “the direct impact of emissions rights prices on inflation will depend on the pace of decarbonization,” including the transition from electricity produced using carbon-intensive fossil fuels to electricity from sources that are emission-neutral.

The share of fossil fuels used in electricity generation in the European Union (EU) fell from 45% in 2018 to 40% in 2020, although the share is very different from country to country.

However, the authors add, this year coal-fired electricity generation has increased despite rising emission rights prices, which likely reflect high gas prices.

ECB economists consider the risk that emission rights prices under current regulation in the EU will translate into a significant increase in headline inflation in the short term is “limited”.

So far, only the energy component of the Harmonized Index of Consumer Prices (HICP) has been affected.

The price of emission allowances traded in the EU has risen from €8 per tonne of _CO2 at the beginning of 2018 to around €60 more recently.

The EU emissions trading system is the system that sets the carbon price in the EU and is the market in which emission rights are negotiated.

Speculation by some investors who take long positions in the market where emission rights are traded because they anticipate that prices will rise further in the coming months has also contributed to the rise in the price of energy.

So far futures prices have been fairly flat, albeit with some upward tilt, ECB economists say.

The reason is that a surplus in emission allowance concessions can be saved to cover needs in the future and thus a link is created between spot and futures prices.

Source: The Energy Newspaper