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August 17, 2022

Carbon trading regulation set to grow

By staff

New research predicts an increase in reforms to support the growth in carbon trading schemes favoured by governments keen to hit their emissions targets.

Carbon pricing regulation is expected to intensify in the near future as more governments propose or begin to implement emissions trading systems to help meet net zero targets, and existing programmes are revived.

A report by S&P Global has concluded that policymakers will increasingly rely on carbon trading schemes to meet national climate commitments, with EU carbon prices expected to rise to €100 per metric ton of CO₂ emissions annually by 2025, from today’s €80.

Following the implementation of reforms being negotiated by lawmakers as part of the EU Fit for 55 environmental package, the report forecasts “tighter balances of allowances in the system as a result of policy reforms, which initially will support greater investor interest in trading [carbon allowances under the EU emissions trading scheme, ETS] during the current phase until 2030”.

European carbon prices are also influenced by Russia’s invasion of Ukraine as governments have looked at coal-fire power generation and imports of liquified natural gas to prepare for potential restrictions in Russian oil and gas imports, noted the report.

Globally, according to World Bank data, a total of 68 carbon pricing mechanisms, including both ETSs and carbon taxes, have been implemented.

Some of the most interesting developments, noted Michael Evans, a carbon analyst at S&P Global’s commodity insights division, come from China, where the national ETS became operational in 2021. With the EU, China is the largest carbon market in terms of emissions captured. He also singled out the Indian government’s recent carbon pricing proposal.

However, Evans noted there are challenges in comparing the efficacy of programmes across markets. Further, while the EU carbon price may be rising, S&P Global’s prediction still falls short of the $120 per metric ton of CO₂ used by the OECD as an estimated price needed in 2030 to reach net zero by 2050. The OECD found that in 2018 only 12 per cent of emissions in its member countries were priced at that level, said the report.

In the US – where only fragmented state-level carbon pricing schemes have been developed – carbon prices are far lower. Evans said prices traded yesterday on one of the country’s most established schemes, California’s cap-and-trade programme, were between $30 and $35 per metric ton of CO₂, while others in the US were half those numbers.

In China, carbon price has hovered between the equivalent of $8 to $10, noted Evans. The scheme is still in its infancy and currently captures only fossil power generation; it is expected to expand to heavy manufacturing and other sectors at a later stage. It builds on China’s province-level ETSs, which were introduced in 2013.  

Reaching the $100 carbon price mark by 2030, and applying this to all sectors, would have a significant impact on the Chinese economy as it still relies heavily on polluting industries, leading to a drop in GDP of between 5.1 and 8.6 per cent, according to S&P Global. This compares to a 0.7 to 2 per cent GDP drop in the EU and a 1.3 to 3 per cent drop in the US.


A service from the Financial Times