The EU ETS is a “test case” for carbon pricing schemes around the world and indicates higher prices ahead, the Institute of Energy Economics and Financial Analysis (IEEFA) said on Thursday.
“There is clear economic incentive to implement and increase the revenue generating capacity of carbon pricing schemes,” said the think tank.
Such revenues were expected to help cover the additional costs of moving to lower carbon energy for industry and households, “an important consideration” for achieving targets to cut emissions.
In the EU ETS, for example, governments raise revenues by auctioning emission allowances – permits to pollute – which companies must buy to cover their emissions. The allowances can also be traded.
The benchmark Dec 24 EUA contract has recently been trading in a EUR 70-75/t range, down from EUR 100/t in February 2023 but well up on the EUR 20-30/t seen for most of 2020, according to Montel data.
The IEEFA said there were currently 48 countries with some kind of revenue generating carbon price scheme operating.
CBAM effect
Meanwhile, it described the EU’s carbon border adjustment mechanism (CBAM), which started being phased in from last October, as a “notable policy instrument that will have a significant effect on global carbon pricing”.
Companies importing non-EU products will eventually have to buy CBAM certificates linked to the ETS carbon price to cover the imported products’ emissions outside the EU, unless such products are covered by rules putting an equivalent price on carbon in the producing country.
This obligation starts in 2026 for aluminium, cement, electricity, fertilisers, hydrogen, iron and steel products and could be rolled out to other sectors.
“As the CBAM begins to take effect, the cost to Chinese businesses will be considerable,” said the IEEFA.
Paying the equivalent EU ETS price “will encourage higher pricing” in the Chinese ETS unless it manages to reduce the emissions associated with its exports.
“As a leading exporter and trade partner to the rest of Asia and the US, China may also put pressure on more territories to follow,” said the body.
EC taskforce
The European Commission pledged in February to promote carbon markets around the world at the same time as it called for a 90% net reduction in EU greenhouse gas emissions from 1990 levels by 2040.
It has set up a taskforce on international carbon pricing and markets diplomacy in its climate action department dedicated to encouraging other countries to introduce or improve their own carbon pricing mechanisms.
Revenues from carbon pricing “should provide an important source of funds for climate action”, the EC said at the time.
Brussels wanted to work with competitors such as Brazil, China, India, Korea, Turkey and individual US states to develop carbon pricing and help them learn from the EU experience, Damien Meadows, a carbon markets adviser at the EC, told an industry event this month.
source: montelnews.com (Robin Newbold)