Carbon Prices at an All-Time High; What’s Ahead?

Summary

• The prices of carbon have touched an all-time high during this week.
• The trend is expected to continue, on the back of implementation of more reforms to reduce greenhouse gas emissions in the near future.
• The European Union (EU) is home to the world's largest carbon trading program.
• The EU is contemplating to introduce a new tax on imported goods, whose production takes place in industries that are at risk of carbon leakage.

The European carbon market is heating up. The benchmark carbon price reached an all-time high of EUR56 per tonne on 17 May 2021. Also, early this month, the prices exceeded the EUR50 mark for the first time ever. Analysts believe that there is still room for further price surge.  

The climate change policy is playing a crucial role in driving carbon prices to new heights. The EU has capped the level of carbon emissions for several businesses and put in place an allowance policy for every cut in emission, which is traded in the market.

The global carbon market registered strong growth in 2020, despite global carbon emissions declining by 7% last year. The COVID-19 led measures have resulted in a decline in the emission levels.

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Carbon pricing is the process to ascertain the cost a business needs to pay for its emissions. The concept of carbon trading was introduced back in 2005, and currently, the European Union (EU) is the world’s largest carbon trading hub. The EU Emissions Trading System (ETS) operates in all EU countries, in addition to Iceland. It limits emissions from nearly 10,000 installations from the power and manufacturing industries spread across the EU.

This system is a cornerstone of the EU's policy to address climate change. The ETS is designed in such a fashion that it penalises the emitters and incentivises those who comply with the target of reducing carbon emissions by 55% by 2030 and aim to become net-zero emitters by 2050.

Also read: Carbon emissions hit lowest level for 25 years in Australia

What does the surge in carbon prices mean?

Before the onset of the deadly pandemic, carbon was trading at EUR20 per tonne.  Since November 2020, the uptrend in prices has been remarkable, with the prices moving from EUR23 per tonne to its highest level of EUR56.3 per tonne in May 2021. The prices have more than doubled. The companies that are focusing on emission reduction are expected to realise better prices for their efforts.

Good read: Mission Possible Partnership brings 400 global leaders to accelerate worldwide decarbonisation

Coal-based power plants are among the top producers of carbon and are often accused of greenhouse gas emissions responsible for climate change. With better carbon prices, the power plants would plan their transition into gas prior to their set targets.

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More renewable energy players are expected to come forward to install new projects. Additionally, the manufacturing and mining industries are likely to revamp their modi operandi to lower emission levels.

Read here: Exxon Mobil Shifts Gears to Clean Technologies Amid Investors’ Pressure

More Reforms in Waiting

The EU is working on a new kind of ‘carbon tax’, which is aimed at promoting emission reduction efforts by the sources located outside Europe.

Several companies have their corporate and head offices in Europe, but they have outsourced their manufacturing units. The proposed carbon tax will be levied on the imported goods.

The guiding idea behind this ‘border adjustment tax’ is that the relative cost of carbon emissions in Europe is higher with respect to other countries. Thus, companies may find the easy solution to this additional cost by setting up their manufacturing units outside Europe.

Good read: EU Will Not classify Gas Power Plants Sustainable Unless They Meet Emissions Limit

But analysts believe that in the short term, the border adjustment tax can hamper trade relations with other countries. Many countries depend hugely on exports, and increased tariffs could hit their trade volumes. Most of the countries are working to reduce their emission levels, but they may not keep pace with the efforts of the EU. They will end up paying higher taxes in the short term as long as they do not level up with the steps taken by the EU member countries.

The rollout of the border adjustment tax is expected by 2023 with an additional revenue of up to EUR5-14 billion for the EU.

Elon Musk, the founder of Tesla, Inc. (NASDAQ:TSLA), has also supported the deal of a tax on carbon, mentioning it as the most effective method to deal with greenhouse gas emissions. As per him, one of the best ways to control and lower the emissions is to levy taxes on industries and companies that emanate carbon emissions. Meanwhile, he has highlighted that his idea was rejected by the Biden administration, citing it as “too politically difficult”.

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