Spain plans to ask the European Commission to set a maximum price cap on CO2 emission rights. With gas used for power generation pushing wholesale electricity prices higher, the measure is framed as a way to relieve the burden on large industries and consumers alike.
Prime Minister Pedro Sánchez announced on a recent Friday that he intends to submit the proposal to the EU executive. But what exactly are these rights, and how do they work?
CO2 emission rights are a key tool in the European Union’s strategy to reach climate neutrality by 2050. The system limits emissions from power plants, large industrial facilities, and aviation within the bloc.
The Emissions Trading System (ETS) covers over 10,000 installations and accounts for roughly 2,000 million tons of CO2 emissions. In simple terms, it assigns a cap on total emissions and lets participants trade allowances to meet that cap. Practically, this means roughly 45% of the EU’s greenhouse gas output falls under this trading framework.
Emissions trading functions as a market mechanism that provides an economic incentive to cut pollutants. Companies must monitor and manage their emissions to stay within their allowances, or face penalties for overages.
Each year, by the end of April, firms must surrender enough allowances to cover their emissions from the previous year. One allowance equals one tonne of CO2 emitted. Traders can buy, sell, or otherwise transfer rights to fit operational needs. Some participants may also acquire limited international credits linked to verified emission reduction projects around the world.
The European Union launched what is widely considered the most ambitious CO2 market to date on 1 January 2005. It now spans the 27 member states and targets sectors including thermal power generation, cogeneration, large combustion plants over 20 MW, as well as industries such as glass, refineries, coke production, steel, cement, ceramics, and pulp and paper mills.
Emissions rights prices are rising
Prices climbed sharply in 2021, a year when CO2 rights trade freely among market participants. The annual average price hovered around €53.55 per tonne, well below the 2022 average of €83.02. In February 2022, monthly averages peaked at around €90.79 per tonne, as reported by the European CO2 Negotiation System. This agency tracks the market for emissions rights and related trading activity.
For 2022, the average price more than tripled compared with 2020, when the average was about €24.75 per tonne. In 2019 the annual average stood near €24.84, reflecting pre-pandemic conditions. Earlier years also show a steady rise from 2018 at €15.88 per tonne and 2017 at €5.83 per tonne.
Recent data show continued strength in prices. On 28 July, emissions rights closed near €77.78 per tonne with a monthly average close to €81.49, and analysts expect prices to hold above €82 as markets reassess demand and supply. The price momentum has been driven in part by rising coal use, tighter auctions, and the broader energy transition context.
The generation mix remains a factor because rising coal demand can push CO2 costs higher, especially if rights auctions tighten. The market has also drawn interest from speculative traders as prices reach new highs, raising questions about long-term price stability and investment signals for power generation assets.
The higher CO2 rights costs have contributed to the debate about the continued viability of coal-fired generation in Spain, with critics arguing that the current price regime reduces profitability for coal plants. By contrast, gas-fired plants also bear emissions costs, albeit typically at lower absolute levels due to gas’s comparatively cleaner profile.
Impact on the electricity market
The rise in CO2 prices feeds into wholesale electricity markets, affecting bills for consumers on regulated rates, those on price-indexed plans, and those who buy and sell power on a day-ahead basis. In the wholesale market, where prices are determined hourly by supply and demand, the cost of emissions rights is a factor that can push overall prices higher.
When electricity costs began to rise, government discussions in Spain considered measures to reduce windfall gains for hydroelectric, nuclear, and wind producers. Some proposals linked CO2 costs to subsidies or adjustments that would blunt the impact on consumers, seeking a more balanced distribution of benefits across the energy system.
Legislation related to the electricity fund and other sustainability measures has moved through Spain’s parliament, though progress has paused amid broader energy-crisis debates. The interplay between CO2 rights and the price of electricity remains a focal point for policy makers and industry alike.
Beyond electricity pricing, CO2 rights impose costs on major energy users across sectors due to the emissions trading framework. To mitigate these indirect costs, governments sometimes provide targeted support to high-energy-use industries that face competitiveness pressures, ensuring that energy-intensive sectors remain viable while emissions fall.
In the global context, the emissions trading scheme interacts with international credit mechanisms and cross-border initiatives aimed at accelerating decarbonization. The overall effect is to guide investment toward cleaner technology and more efficient operations, helping the EU and its member states progress toward climate targets while balancing energy security and economic growth.