The European carbon market—the largest in the world—is poised for a significant price shift, attracting investor interest, according to Michele Della Vigna, head of natural resources research for Europe, the Middle East, and Africa (EMEA) at Goldman Sachs (NYSE: GS).
In an interview with Bloomberg, he highlighted a break from the historical link between lower gas prices and lower carbon prices, driven by changing market dynamics and shrinking emissions caps.
Industries are now the primary buyers of pollution permits, replacing power producers, Della Vigna said.
Investors are purchasing carbon allowances in anticipation of rising prices, which Goldman Sachs believes will continue to increase.
The European Union’s (EU) response to Russia’s invasion of Ukraine led to a surge in renewable energy production and significant investment in liquefied natural gas (LNG) infrastructure.
Goldman Sachs predicts global LNG supplies will rise by 50% in the next five years, reducing gas prices by half.
This reduction in gas prices is expected to stabilize inflation and impact carbon prices.
Della Vigna suggested that even with higher carbon prices, energy inflation in Europe will be mitigated, benefiting both consumers and the industry.
He asserted that lower gas prices will support higher carbon prices, as cheaper gas enables the resurgence of European heavy industry, leading to higher emissions and a tighter carbon market by 2026.
Goldman Sachs forecasts carbon allowance prices on the EU Emissions Trading System (ETS) could reach €130 ($142) per ton by 2028, up from the current average of €66 per ton.
Analysts at BloombergNEF predict that prices could approach €150 by 2030, driven by increasing compliance obligations and a tightening market.
The EU aims to achieve net-zero emissions by mid-century, gradually reducing ETS allowances to force sectors to decarbonize.
Since the ETS began in 2005, emissions from covered companies have dropped by 41%, contributing to a 28% overall decline in EU emissions.
Future decarbonization will require higher carbon prices, ranging from €100 to €130 per ton, to incentivize industrial decarbonization and make large-scale carbon capture and storage (CCS) profitable, Della Vigna said.
source: carbon herald
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