Italy's carbon reform and the ETS decree

Italy has launched one of the most controversial proposals in the European energy market in years.

In a bid to lower electricity prices and boost the competitiveness of Italian industry, the government has proposed shifting the cost of carbon emissions from gas-fired power plants to consumers. Supporters say the move could reduce wholesale power prices and ease pressure on businesses facing high energy costs.

But critics warn it could undermine the foundations of the EU Emissions Trading System (ETS); the cornerstone of Europe’s climate policy.

In this episode, Richard speaks with international experts about why carbon prices have been falling, what Italy’s proposed reforms could mean for the power market, and the potential impact on renewable investment and corporate PPAs. They also discuss whether the proposal could distort electricity markets across Europe and the legal challenges the European Commission may raise.

Host: Richard Sverrisson - Editor-in-Chief, Montel News

Guests: Hæge Fjellheim - Head of Carbon Analysis at Veyt
               Gaia Stigliani - Senior Principal at AFRY Management Consulting
               Lorenzo Parola - Managing Partner at Parola Associati
               Enza Tedesco - Montel News

Editor: Oscar Birk

Producer: Alex Carlon

#EnergyMarkets #EUETS #EnergyTransition #CarbonMarkets #ClimatePolicy #EnergyPolicy #RenewableEnergy #EnergyTrading #EnergyEconomics #EuropeanEnergy #CleanEnergy #Decarbonisation #EnergyPodcast 

Transcript

Richard Sverrisson - Editor-in-Chief, Montel News: 0:07

Hello listeners and welcome to Plugged In - the Energy News podcast from Montel, where we bring you the latest news issues and changes happening in the energy sector. The EU emissions training scheme has been operation for over 20 years. It has significantly lowered Europe's carbon emissions, but the reduction has come at a high price for industry. The European Commission is now looking at how it can make it more efficient, but Italy is calling for radical reforms in the wholesale market price setting mechanism even for the ETS to be suspended until the reforms are implemented. Will others follow suit? Is a suspension even possible? If it is, would it undermine the EUs credibility as a climate leader? And what will it mean for investment in green energy? Now I'm joined by Enza Tedesco, our Italy editor. A warm welcome to you Enza, and welcome back to the pod.

Enza Tedesco - Montel News: 1:04

Thank you so much, Richard. Nice to be here.

Richard Sverrisson - Editor-in-Chief, Montel News: 1:06

Obviously the Italian government through the cat amongst the pigeons a couple of weeks ago, and it's had reverberations throughout the markets. Geopolitical events have taken a turn for the worse as well. But let's talk about this proposal, this decree by the Italian government. Was it a surprise, Enza?

Enza Tedesco - Montel News: 1:22

Well, yes and no. Or rather certain parts where because we had already seen some draught versions of the decree circulating since last year. So some of the proposals discussed at that time were ultimately retained in the package approved last month. Others had been hinted at, but it was not yet clear how they were going to be executed or implemented, and the rest definitely caught observers by surprise, particularly the provisions concerning carbon costs. So obviously when we look at this decree, there's a lot. To unpack because it basically touches every part of the market from wholesale, gas, power prices and renewables to the subsidy schemes and the EU ETS.

Richard Sverrisson - Editor-in-Chief, Montel News: 2:11

Enza what does Rome hope to achieve through this decree?

Enza Tedesco - Montel News: 2:15

Well, the goal is very clear. It's an attempt to. Cuts power costs, particularly for energy intensive industrials, which have been pressuring on this for years. And let's remember for a second that more than 40% of power generation in Italy is produced by cast fire plants, and that's what makes Italy's power prices among the highest in Europe. So Italy is basically blaming the ETS for undermining the industry's competitiveness. So for gas plants these measures mean reimbursement for gas, transport, cost, and compensation for the carbon allowances that they have to buy under the EU ETS. That means basically that the gas plants would offer in today head market prices stripped. Of ETS and gas transport costs, therefore lowering wholesale power prices. So obviously if, and there are a lot of ifs at this point, these measures were implemented as expected by the government in 2027. The Italian wholesale power prices could fall between 20 and 30% according to several analysts. So on paper, obviously, this sounds really promising. The problem is that this plan. Could actually not really serve its purpose, especially like you said right now in light of recent events in the Middle East, because of all the tensions in Iran and the stop of LNG flows from Qatar. So disruption to the gas price to Europe have once again sent prices to multi-year highs. So the, just earlier on Tuesday, they reached 65 euro per megawatt hour, and that's multi-year highs since I think 2023. So it's once again a reminder that Italy is still heavily reliant on imported energy and specifically gas. So even if these measures were to get the European Commission blessing, it will still not prevent gas and power prices to surge.

Richard Sverrisson - Editor-in-Chief, Montel News: 4:26

Absolutely. We're at the helm of global dynamics here, Enza, Italy obviously not exempt from that but what are the experts in Italy and away from Italy saying that about the decreased lightly success?

Enza Tedesco - Montel News: 4:38

As it stands, probably seems unlikely. To be approved. But these measures can be seen in in two different ways in opposing ways rather, on one hand, some are arguing that this is precisely the right moment to intervene, given the surging energy prices and the pressure they're placing on businesses and households. But on the other hand, the current situation could also be seen as a wake up call, an alarm bell for Italy and Europe in general to accelerate energy independence and double down on renewables instead of introducing short term corrective measures. What a lot of people though agree, it's very clear this cannot be addressed just at the national level just as a short term fix for Italy. So any meaningful elastic solution would have to be coordinated at the European level.

Richard Sverrisson - Editor-in-Chief, Montel News: 5:32

Perfect Enza. Thank you very much indeed for joining the Montel Podcast this week.

Enza Tedesco - Montel News: 5:37

Thank you for having me.

Richard Sverrisson - Editor-in-Chief, Montel News: 5:39

So that's the Italian government's argument that compensating gas fired power plants for their ETS costs could lower wholesale electricity prices and help restore competitiveness for Italian industry. But the proposal. Has raised serious questions across the European energy market from potential market distortions to whether shifting the cost of emissions away from power producers undermines the core principles of the EUs internal energy market to explore the legal and regulatory implications. I am joined by Lorenzo Parola, managing partner at the Italian law firm, Parola. Warm. Welcome to the podcast, Lorenzo.

Lorenzo Parola, Managing Partner at Parola Associati: 6:19

Thank you very much Richard. Nice to be here.

Richard Sverrisson - Editor-in-Chief, Montel News: 6:21

We're talking about what has been known in the market as the sort of Italian ETS decree or the power market decree. If you could just give us a brief summary of what the main elements of this proposal are and how it could impact the wholesale energy market.

Lorenzo Parola, Managing Partner at Parola Associati: 6:38

Yeah, thank you for the question, Richard. The decree in itself sets out a mix of different measures. Starting from benefits and discounts to poor families, to intervention in the biome sector, et cetera. But the overall goal of this mix of measures is the declared goal is to reduce power bills to Italian houses and business. I guess the main measure, the one that has been really in the spotlight of the markets and the newspapers over the last 10 days is the measures that shifts the ETS cost from producers of gas, fire plants to the consumers. The whole idea behind that is that because gas fire plants determine in Italy the system marginal price, it means that if we are able to lower this price effectively, that the renewables plants will stop benefiting from the infra marginal revenues and the overall bills will go down.

Richard Sverrisson - Editor-in-Chief, Montel News: 7:51

It seems very clear and simple, but will it work in practise Lorenzo? That's the first question really.

Lorenzo Parola, Managing Partner at Parola Associati: 7:56

Well, I think we have to tackle two different clusters of of issues. Richard, first of all, the first question is an economic wire, which is as the Italian government fully modelled the consequences of that. Okay, because there may be impacts, there may be effects which have not been accounted for. Let me make a couple of of examples, Richard. The first one is that if the electricity wholesale price will go down in Italy, that will boost our. Electricity exports, meaning that maybe the, actually the people with who will actually benefit from our discounted power will be our neighbours. We don't have to forget that we the energy market, it's not just an Italian market, but is actually a European market. Okay. And we're also neighbouring countries like Switzerland and Montenegro, to which we are fully interconnected. Another side effect, which I'm not too sure has been modelled is the fact that by reducing the energy, wholesale price is effectively the contract for differences which have been entered into by renewables, iPPs will actually cost more for obvious reasons. The other issue is that this is creating certain regulatory uncertainties and in an uncertain environment. First of all, there is a case for increased the litigation of on long-term contracts, and also there is less. Trust in negotiating these long-term contracts, in particular PPAs or renewable plants or tolling agreements for best energy storage plants. And therefore, in a way, the decoupling of gas fire generation from reimbursed generation is in a way impaired. So the first cluster of issues is of an economic nature, have all the economic consequences of the decree being fully modelled by the government. That's the first cluster of issue. And then

Richard Sverrisson - Editor-in-Chief, Montel News: 10:21

certainly there is a lot, seems to be a lot of unintended consequences coming from this degree and this proposal as you're saying, or certainly ones that maybe have not been modelled and that will maybe not benefit those in which they were intended to do. If we come to the legal side of it, you are lawyer, Lorenzo, where does this stand in terms of the state aid issues?

Lorenzo Parola, Managing Partner at Parola Associati: 10:44

I'm sure that the, in this very moment, the EU Commission is scrutinising that because of course to the extent that you give a state aid, which is actually given to a specific sector. In other words in our case, is given only to producers that own a gas fire plants, you are effectively creating a problematic situation, particularly because, as I said, this is likely to create distortions, not just in the Italian market but at large in the European market. So of course there are certain guidelines which have been issued by the commission, which in a way relax the constraints of the state aid legislations in the realm of power. But I think that the commission will closely scrutinise this this decree and have something to say. In my view, the state aid issue is not the biggest legal issue, to be honest.

Richard Sverrisson - Editor-in-Chief, Montel News: 11:54

Okay.

Lorenzo Parola, Managing Partner at Parola Associati: 11:54

There are,

Richard Sverrisson - Editor-in-Chief, Montel News: 11:54

what is Lorenzo? Talk us through the biggest legal issues here.

Lorenzo Parola, Managing Partner at Parola Associati: 11:57

I think there are at least, two additional legal issues that will have to be considered by the EU commission. First of all, the underpinning principle, the principle which is really of paramount importance in the ETS system, is the principle of the polluter pace. Okay. And the principle of the polluter pace is a principle which has a rationale because if I'm the polluter, I control the pollution and therefore I can control my cost. To the extent that the producer of gas fired plants, okay, is no longer subject to ETS, and therefore the burden of the ETS is shifted to Lorenzo Parola. Lorenzo has no control of that, and so effectively the principle, the polluter pace is highly affected by this system. The third legal issue that I see, which in my view is actually the most problematic, is that the Italian regulator will have to monitor whether these ETS costs which have been shifted from the producer to the consumers are not included in the pits. That the producers will make into the market. In other words, the regulator will check whether the beads into the energy markets are cost reflective. Okay? And this principle of cost reflectiveness is highly questionable. Why is that? Because in a liberalised market the price is a signal, and in particular, the price is the produce of a fair interplay between supply and demand. There is not such a thing as cost reflectiveness. We're not talking about regulated assets, nature and monopolies like gas distribution or electricity transmission. So introducing the principle of cost reflectiveness in the liberalised market is undoubtedly, a distortion and in effect effectively, if you look carefully. Remit, which is the regulation against market abuse and the interpretation by acer of remit. It's easy to spot that, the problem are not high prices. High prices per se, are not an issue. The issue is when there is an anomaly, when the prices are not high per set, but they are high because there has been some market manipulation. So this whole idea of cost reflectiveness, I see it as a clash and to the principles with the principles underpinning EU energy market liberalisation.

Richard Sverrisson - Editor-in-Chief, Montel News: 15:06

So it goes to the heart of the core foundation of the wholesale energy market the internal energy market, which is a liberalised markets and the absolute prominence that the main pillar, which is the ETS. So this seems to be working against that. Is that, would that be a fair, simplified version of what you've said there, Lorenzo?

Lorenzo Parola, Managing Partner at Parola Associati: 15:27

Yes, I think you're absolutely right Richard. And my personal belief, particularly if you look right now at the current geopolitical situation, which you know, is not a novelty. Of course the war on Iran is a novelty, but is not an unexpected one. And we are in a moment where geopolitical tensions are very high. So of course there is a need for Europe to actually create a competitive market and therefore maybe intervene on the ETS system. That's my personal view. But I think, I'm not convinced that the right approach is to fork the principles of the liberalised European market by creating a subsystem in Italy. Okay. I believe that the right approach would actually be to discuss in Europe these issues and have a common view. The good thing about this decree is that at least is like when you kick the ball at the beginning of a football, again, maybe, this will in a way make the eulogy later think about that and think about some common measures on ETS that philosophically, in my view, the right approach would've been to fight of war at EU level, like rather than a battle at national level.

Richard Sverrisson - Editor-in-Chief, Montel News: 16:56

Yeah, that's, I think it's these kind of national interventions can be quite damaging for that EU project. And we say we're in a very uncertain, very predictable, unsafe geopolitical environment. And that's I think where Europe there is a case for saying Europe should be standing closer together. But in terms of, I think Italy is also called for a suspension of the ETS until these reforms have been discussed. So I think is that likely to succeed from what you are saying for these three legal issues that you've highlighted? It's unlikely to go through as it is, but also on the parts of, according for a suspension of et s that's, that also seems fairly unlikely while the reforms are ongoing.

Lorenzo Parola, Managing Partner at Parola Associati: 17:34

Actually, I don't have a crystal ball Richard, but certainly one should think that in a moment where the TTF price has gone up by this morning, I think was in these days is in the range of, anything between 20 to 35 percent. There is certainly some critical mass in changing things and one should also question whether pushing gas fired plants, and rather than a balanced fuel mix in a situation where the gas price is so volatile and Europe is more and more dependent on LNG is actually the right move. So I'm not too sure what the legislators will do on this one. You know, I'm a lawyer and not political expert. But I believe that on one side, there is the two needs are quite clear. On one side, there must be some relaxation of ETS. I think we need that. And at the same time, we cannot more and more rely on volatile LNG in such a unstable geopolitical environment. And I think that going for a more and more differentiated fuel mix is actually the way to go.

Richard Sverrisson - Editor-in-Chief, Montel News: 18:57

Absolutely. And I think Italy with certain other EU member states has certainly had the wholesale design issues or has questions the price setting mechanisms in the wholesale power market. And I think, with certainly France and Spain joining as well in the energy crisis. So I think this is a discussion that will be certainly thrust to the fore again, given what's happened geopolitically. But is there also a danger here that these kind of proposals could slow down the NG transition, which is a way of lessening our dependence on, on those LNG cargos?

Lorenzo Parola, Managing Partner at Parola Associati: 19:27

Ah, we're certainly observing that. We're certainly observing that, for instance, development projects are being are being stalled. We see that m and a transactions of renewables and best pipelines are being reconsidered. Is an observer in mainly a transactional lawyer in the energy space. We definitely observe that. That's doubt. That, that that's out of that's out of question. Yep.

Richard Sverrisson - Editor-in-Chief, Montel News: 19:57

Yep. Lorenzo, these are very important issues and hopefully some that will be, we certainly will be following very closely on Montel News, but also we'll certainly be coming back to, I think in the coming weeks and months as this this issue develops. So thank you very much for being a guest on the Plugged In Podcast.

Lorenzo Parola, Managing Partner at Parola Associati: 20:13

Thank you very much for having me Richard. Thanks a lot.

Richard Sverrisson - Editor-in-Chief, Montel News: 20:17

I am delighted to be joined by Gaia Stig Leoni, who's senior principal at AFRY Management Consulting and Hæge Fjellheim, who is head of Carbon Analysis at Veyt. So a warm welcome to you both.

Hæge Fjellheim, Head of Carbon Analysis at Veyt: 20:29

Thank you so much, Richard.

Richard Sverrisson - Editor-in-Chief, Montel News: 20:30

We're in the midst of a geopolitical crisis, but I'd like to focus this episode very clearly on the Italian as I've dubbed it, the ETS decree or the proposal to reform some aspects of the wholesale energy market, Hæge, it's been quite a, shall we say, a rough ride for the carbon market in recent weeks. Can you talk us through what happened and what has been the main driver and why people are getting a bit concerned?

Hæge Fjellheim, Head of Carbon Analysis at Veyt: 20:56

Yeah. Yeah, it's definitely been a rough ride in the EU carbon market since the start of the year. And the overarching theme here is really competitiveness of the European industry, and this is the overall goal of the decree from Italy is to lower energy prices and for industry and consumers and the same as many other countries are struggling with right now and addressing it in different ways. But Italy really wants to do a direct conversation on carbon cost at produce level. And it comes in a way in a, as the last piece in a series of attacks on the EU ETS if you can for feasible to call it that. Because taking you through the carbon story this year, I would say it's a story of decline in, in two phases. So it's been coming down from around 20 euros is the start of the year from 1970 with policy being the main driver here. The first wave is really the Trump story with geo-politics. The Greenland, Trump escalating the Greenland crisis with the statesmen threats of new tariffs. So you had a fall in prices back in January with which was deescalated again with during the divorce meeting. So you had investments funds, unwinding hedges. Lowering prices to bit above 80 in January. Then we had a second kind of European induced wave of declines, which is really the, like the self infected European story triggered by European politicians. So it's very much related to the upcoming review of the ETS and the competitiveness concerns, as I mentioned at the start for European industry. So we have the start of February, 05. February, we had headlines, driving prices down from Bloomberg, from huddle spot on rumours that the commission would prolong free allocation and lift the cap for the next trading phase. And lifting the burden in this market for the next phase. I mean, this is in a way all news. We know that the commission is considering auctions for the review and 2040 targets is really anchoring, but that agreement back in December is really anchoring some elements that the commission will have to take into consideration. So this is not really new quite headline driven fall. Then we had the a week later the statements from the German counsellor, a bit off script during the Antwerp industry meeting.

Richard Sverrisson - Editor-in-Chief, Montel News: 23:08

Some of this has also been covered great, very clearly in Montel News Hæge. But if I could turn to you Gaia and talk us through this proposal from the Italian government. In essence, what's it all about?

Gaia Stigliani, Senior Principal at AFRY Management Consulting: 23:20

Thank you, Richard. So yeah, this proposal is about making industry, Italian industry more competitive. And that's the point of the, of the reforms that have been proposed under the law Decre that was published on the 20th of February. So yeah, the objective is to make industry more competitive. And as we know, energy costs are a big chunk of the cost incurred by industry. Italian industrial players paid about 30% more for electricity over the last 12 months compared to neighbouring countries. So I guess these reforms aimed at reducing this this gap with with other European countries. So it's a full package of measure. The measure which has sparked more attention is the one related to the ETS. And essentially what it says is that CCGTs, gas power plants will be compensated for the cost to incur for the emission trading scheme. So with gas power plants being the marginal technology and the price sector in Italy. This means essentially that the power price in Italy is going to reduce. The projection is that it's going to reduce, the reform is going to reduce power prices by about 30 euro per megawatt hour. And the government estimates a net benefit of the measure due to the reduced cost paid by the consumer for yeah. As a result of the measure,

Richard Sverrisson - Editor-in-Chief, Montel News: 24:48

can I just ask so what are the other elements of the decree then, if it's not just about ETS?'cause it's a quite large document, a quite a huge proposal, isn't it? Gaia?

Gaia Stigliani, Senior Principal at AFRY Management Consulting: 24:57

So maybe I can just say just a few more details on top of this that are the other measure are about the, the T-T-F-P-S-B price difference. It includes, a number of measure. Another important measure with which has been proposed is essentially. Anchoring the price of gas in Italy, which is set by the PSB to the TTF, so the European gas price. And between the two there is there is a price gap due to the transport cost. Italy takes gas from Northern Europe and to reduce this gap, essentially the government would like to introduce a facility, a liquidity facility to hundred million. And and essentially under this measure, market operators would need to offer gas at a reduced price. Details to follow. Stickless still a lot needs to be disclosed, but essentially it aims to reduce gas price for Italy. And again, we go back to the original objective of the reform, which is to make Italy more competitive. So that's another measure. There is another measure related to biomethan sector, especially related to the guarantees of origin. And and again, that also aims to reduce prices paid by industrial users in Italy.

Richard Sverrisson - Editor-in-Chief, Montel News: 26:15

We'll talk about next steps and the timeline here Gaia in a minute, but if I can return to you, Hæge you very clearly said the reforms of the carbon market. They've been there on the table for months. If not almost years. Some of the aspects of it. So why the big fuss now? Is it italy and Germany finding common cause in terms of wanting to see the price impact of the ETS sovereign for to protect their industry is that, that's the core root of it, but how successful can that be?

Hæge Fjellheim, Head of Carbon Analysis at Veyt: 26:43

I think the timing is, the ETS review is coming up in Q3 this year. So it's really review season. It's the year of the proposal from the commission. So countries and stakeholders alike are positioning themselves ahead of that review. We know that stakeholders in particular are pushing very hard on this. We saw the statements from the chemical industry, which will be hard hit policy. We, the rhetorics are hardened. We see policy makers at the highest level possible engaging in this. So we haven't really seen that much engagement ahead of a proposal that's coming up in the summer or just after summer.'Cause normally trusting the process, the commission will put forward a proposal and then the legislators will engage after that. We see like very strong targeting the ETS prices right now and that will have have, we've seen the effects already. If the effects the short term effect is clear the prices are to down, in that sense it's a success. But the longer term effects are lower confidence in the system. This is a system that really the main currency is trust and confidence is a politically created system. And, policymakers have worked hard over the past decade to restore trust and confidence in the system and are now attacking it. There are some longer lasting effects of doing this that should not be underestimated.

Richard Sverrisson - Editor-in-Chief, Montel News: 27:59

Yep. And you mentioned attacks. Is this primarily Rome and Berlin or are there other areas in Europe which are criticising the ETS in the same way?

Hæge Fjellheim, Head of Carbon Analysis at Veyt: 28:07

Eastern European countries have done so that's not a big surprise. So the more surprising thing, I think the statements from Merz was who was backing on that, as from the initial statements, which was bit off script. But we also have Macron talking about a price that should be at 30 40 euros rather than 80 90. So it's clearly even though there is strong support for the policy tool itself, there is targets now to make sure that prices are lowered. But the effective. This semester erode with the master confidence. Of course.

Richard Sverrisson - Editor-in-Chief, Montel News: 28:40

Yeah. And it takes a very short time to erode the trust and a very long time to build it up as we know. So this is, and then, but the, this is obviously the key issue here, but Gaia you know what? What do, what does the timeline look like for Italy? So it is got, the government has 60 days now to sign it into law. The first question is, do you think it will succeed in doing that? And the second step is what, how do you think the European Commission is gonna look at this proposal?

Gaia Stigliani, Senior Principal at AFRY Management Consulting: 29:06

Yes, as you say, Richard, the government until 60 days to send it into law the reaction there has been mixed, mixed feedback. Obviously the industrial community is supportive. But some utilities, some investor are less keen. We shall see which view is going to prevail.

Richard Sverrisson - Editor-in-Chief, Montel News: 29:26

Okay, no problem. And how is the renewable sector looking at the the the decree? What's its views here?

Gaia Stigliani, Senior Principal at AFRY Management Consulting: 29:31

The attention is is on the, impact that this is going to have on power purchase agreement. Both the ones that have already been signed and the new ones. So in terms of the PPAs, which are already been signed as you probably know, that is the option for really negotiating the contract under very specific circumstances such as a change in law. So it could be that offtaker might want to renegotiate the price, following the drop in the, in the electricity price, in the market price. And it's however different analysis on the impact that this could have. But for example I've also heard that some utilities may be exposed to PPA in such a way that their margin might be reduced or completely eroded if a change in law renegotiation was to be requested.

Richard Sverrisson - Editor-in-Chief, Montel News: 30:27

This is always the dangers of some national retrospective regulatory changes. It's a kind of, it's a rocky road and once you go down there you do create this very clear regulatory on surgery that both of you have mentioned that the can potentially erode trust. But, Italy is, renewable sector has been booming. The batteries, the data centres. There's a lot of momentum. Is that now slowing a little bit, Gaia?

Gaia Stigliani, Senior Principal at AFRY Management Consulting: 30:52

Yeah, certainly that could also have an impact on future negotiation of power purchase agreements. It's not the first time we've seen this in Italy. It could definitely reduce investor confidence and yeah, certainly something that need to be weighted against the benefits of the reform.

Richard Sverrisson - Editor-in-Chief, Montel News: 31:08

And Hæge, onto the carbon market review and then reforms. Where do we stand there? What are the, what's the main issues here and what's the timeline for those?

Hæge Fjellheim, Head of Carbon Analysis at Veyt: 31:18

The timeline is that the commission is will put forward a proposal for ETS review. It'll also put forward proposals on removals integration with the European system. And also they will need to take a view on international credits as part of the 2040 package. So it's a puzzle with the limited amount of pieces, so to speak, so it only to add up or minus 90%. Let's target for 2040 and the discussions around the cap for the ETS if you lose that cap that bill will have to be picked up somewhere else. So it's quite a delicate balance that the commission will have to put forward and a manoeuvre of next couple of years when you have the this legislation going through the ordinary procedure in Europa.

Richard Sverrisson - Editor-in-Chief, Montel News: 32:01

So does it have a lot of room for manoeuvre here, room for manoeuvre in, in terms of assuaging, some of the fears and the worries that are coming from Italy and Germany or, is it, it's set in stone. A lot of the this legislation, isn't it?

Hæge Fjellheim, Head of Carbon Analysis at Veyt: 32:16

The legislation is not set in stone, but the framework target is there 90%, but there is unlike currently you have the room for reductions from outside of Europe as well. So the role of international credits playing into the overall target is quite key here because it can be used to lower the burden on ETS and other sectors.

Richard Sverrisson - Editor-in-Chief, Montel News: 32:35

Absolutely. And do you expect the commission to agree to this.

Hæge Fjellheim, Head of Carbon Analysis at Veyt: 32:39

This is in the climate law already. So this is already slate. But the actual volumes is not, there's some uncertainties around that. So that's something which will be extremely important.

Richard Sverrisson - Editor-in-Chief, Montel News: 32:50

Can you see any unintended consequences for what Italy is proposing on the ETS, but also the wider internal energy market in Europe?

Hæge Fjellheim, Head of Carbon Analysis at Veyt: 32:58

I think, we run some numbers here. According cloud analysis, these masters could result in a 40% decrease in Italian power prices next year and doubling both gas generation and domestic power sector emissions. So that's Italy. So the uplift is partly offset by a collective emission reduction across the EU ETS because you have more gas replacing coal in Europe. So even if that measures would take down emissions across Europe due to gas replacing coal in the mix, there increased emissions in Italy outweighs the reduced emissions on the continent. So leading to an overall emissions rise across Europe, that's what we find. So we see that emissions in the ETS are increased by three to 8% compared to without this pressure. So and that could lift carbon prices by around 5%. So it's like, it has a bullish impact on carbon which would then increase the cost again for the Italian government and Italian gas payers who would have to pay more for to compensate the gas producers.

Richard Sverrisson - Editor-in-Chief, Montel News: 34:01

And that would be potentially an unintended consequence. Absolutely. Gaia were you gonna jump in there?

Gaia Stigliani, Senior Principal at AFRY Management Consulting: 34:06

Yeah. We run some similar analysis, and if this is going to drive a 30 euro per megawatt hour reduction in power price, we also forecast that this is going to increase the gas generation and where is this going to go? Most of it could be potentially exported to central and Northern Europe. So that's that's one of the consequences. And I guess the question would be whether that way Italy would be subsidising production in other countries. That's something that will need to be carefully assessed.

Richard Sverrisson - Editor-in-Chief, Montel News: 34:37

Absolutely. Gaia and Hæge, thank you very much for being guests on the Plugged In podcast. And to you listeners, thanks for listening to this episode of Plugged In. If you enjoyed this discussion, please rate and follow to make sure you get the latest podcast episodes as soon as we release them every Thursday. We'd also love to read your reviews of the podcast. It helps us to keep up to date with what you, our listeners, think of the podcast and what content you want to receive more of. Finally, you can head to Montelnews.com for more news and analysis from a team of journalists across Europe and beyond. See you next time.