What lies behind the rise in the price of carbon?
carbon tax
The end of July and the beginning of August have become a period of rising prices for carbon.

   Ample evidence of that is shown by developments on the futures market for carbon trading units measured in tonnes of CO2 and traded on the Intercontinental Exchange (ICE – part of the NYSE). On 22nd July futures prices stood at 50.80 euros, but rose to 54.20 euros by 3rd August.

    One of the reasons behind the increase was the proposal by the EU Executive Commission to introduce changes in the rules governing trade in emissions quotas as announced on 14th July – the same day as the entire series of documents outlining the essence of the “Green Deal”.

    Introduced in the EU in 2005, trade in quotas has been a major influence on sectors with a heavy energy content (for instance, oil refining, electricity generation, steel production) which, all told, account for about 50 % of CO2 emissions within the EU.

     Emission limits

    The exchange is de facto an instrument to regulate the carbon footprint. In the event they exceed yearly limits on CO2 emissions, enterprises must make up the difference by buying emission quotas. And should they have unused quotas, these may be sold.

    And limits on emissions are becoming stricter.

    In 2018, the European Commission announced a decision according to which limits would be reduced by 2.2 % every year between 2021 and 2030. That move prompted the rise in carbon prices even before it came into effect. The cost of a European carbon trading unit climbed from 25.10 euros at the end of 2018 to 26.70 euros at the end of 2019 and 32.70 euros at the end of 2020.

    In practice, this imposed a greater burden on sectors with a heavy carbon content. These included coal-fired power generation. In 2019, according to BP, generation from coal declined in the EU by 24 %  and in 2020 by a further 21 %.

     A further toughening of regulations is liable to produce a similar effect – according to the European Commission’s 14th July announcement, the annual reduction is now to stand not at 2.2 %, but at 4.2 %. This is aimed at helping achieve by 2030 a 55 % reduction in emissions compared to 1990 levels.

    Air, sea and land transport 

    The inclusion of sea transport operators – due to take place between 2023-2026 – could cause a further rise in the value of emissions quotas. This is to affect transport not only within the EU, but also, in part, beyond its borders — if, for instance, a European port is one of the points on a trade itinerary.

    Toughening the regulations will also affect air transport. Limits on emissions, now distributed freely among air carriers, will become available only on the exchange from 2027.

    Another change will affect land transport which, along with housing, will be governed by a “parallel” system of trade in quotas. It will not be homeowners and motorists taking part in in the system, but rather companies and distributors of petrol and diesel as well as oil products used in communal housing. Housing accounts for 36 % of emissions in Europe, according to data from the European Insulation Manufacturers Association.

    The inclusion of housing in emission quotas trading could therefore help reduce the carbon footprint.

   Spending on decarbonisation

   Last on the list – but by no means the least affected in terms of substitution – are European companies producing fertiliser, aluminium, cement, iron and steel – goods which, from 2026, will be subject to the Carbon Border Adjustment Mechanism (CBAM). 

    For European companies in these sectors, the temporary “threshold” will be shifted, starting with limits on CO2 emissions, which will no longer be distributed freely (from 2030 to 2036).    And from 2026, when the CBAM goes fully into effect, limits on emissions will undergo yearly reductions of 10 %. That will, without any doubt, lead to an increase in “carbon payments” for which programmes are now being financed to encourage adaptation by the economies of EU member-states to the challenges of decarbonisation.

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