The market for carbon credits, which consists of businesses and investors who buy and sell carbon credits, determines the carbon price. In many places of the world, where voluntary carbon markets are utilised to protect the environment, they are used to reduce company emissions.

On 21 February 2021, the cost of EU Emissions Trading System (EU ETS) credits—which companies and industries purchase to make up for carbon emissions—rose to a record high of more than €100, surpassing the previous record of €98.49 (in February 2022). This increase represents a significant surge from just a few years ago when it was only priced at around €10 per tonne. Since the beginning of August 2022, the price has increased by 28%.

Why has the EU carbon pricing increased?

By placing a price on carbon, the EU ETS seeks to lower greenhouse gas (GHG) emissions. The cap-and-trade system covers emissions from commercial aircraft, energy-intensive businesses, and power plants. It is among the world’s biggest and most well-established carbon markets.

The carbon price changes in the EU ETS have occurred for many reasons, such as market pressures, changes in policy, and global trends.

Market factors were the main driver behind the price growth. According to traders, the primary cause for the carbon price increase was the sharp increase in gas contracts for delivery in 2019, which increased significantly as Russia reduced supply to the continent.

Another important factor is the region’s pledge to reduce GHG emissions by at least 55% from 1990 levels by 2030. This ambitious objective necessitates a major emissions reduction from the energy sector, which accounts for a sizable portion of the emissions in Europe.

There are a finite number of EU ETS credits available for businesses to emit carbon under a cap-and-trade system. As a result, companies are prepared to pay more when the quota is gradually lowered to satisfy their emission targets, which causes the price of allowances to rise.

Find out more about carbon pricing

What is the history of the EU carbon price? 

The EU ETS was introduced in 2005, and by 2007, when the market was oversupplied due to the global financial crisis, the carbon price fell to almost zero.

The market recovered in 2018 after the EU EST removed excess permits from the market.

In 2021, carbon prices increased by 150% after EU ETS authorities announced their most recent CO2-reduction regulations.

The EU ETS is helping utilities convert from coal to gas, which produces roughly half as much CO2 when burned, reducing carbon fees and emissions.

It has also long been suggested that a carbon price of €100 could encourage the development of advanced technology, improving sustainability efforts.

What impact does the rise have on EU emissions trading?

The commitment to decarbonisation and nature conservation is reflected in the high carbon credit pricing. It also gives companies and investors a strong incentive to make the switch to a sustainable future.

The impact of the high carbon costs on consumers and businesses should however be taken into account. Hence, it will be crucial for the EU to strike a balance between people’s interests and attaining its climate commitments.

The EU ETS’s future will be influenced by several variables. It will therefore be vital to keep an eye on carbon pricing and its effects on the economy and society.

The European Commission announced that certain energy-intensive businesses in Germany, Estonia, Finland, and the Netherlands would be eligible to apply for a partial refund between 2021 and 2030 of the carbon costs that electricity generators pass on, as the rising cost of credits contributed to higher electricity prices.

What does the future hold for the EU ETS?

Going ahead, certain variables, including political factors, technical advancement, and global trends, will affect the EU ETS’s future.

Businesses and investors have a strong incentive to make the switch to a sustainable future because of the high carbon pricing. 

The EU ETS has put protective measures in place for consumers and companies at risk to address any concerns around pricing. They include protections against energy poverty for low-income households and exemptions for specific industries.

What are the benefits of the EU ETS carbon pricing system?

Most people agree that the most economical and adaptable strategy to reduce emissions is to charge for carbon. Carbon pricing has several economic and environmental benefits and helps to facilitate emission paths, such as:

• EU ETS increases the relative expense of employing carbon-intensive technologies to encourage investment and innovation in clean, green technology and research. As a result, companies and individuals looking to reduce their emissions on a budget will support the advancement of clean technologies and direct funding towards green ventures. Promoting green technology research and development also aids nature restoration efforts and reduces the effects of GHG emissions. 

• It allocates funding to sustainable development initiatives and promotes the achievement of Sustainable Development Goals.

• EU ETS also promotes energy security, public health, and society. It is crucial to diplomacy and strives to advance social values, democracy, basic freedoms, and the rule of law all over the world. It further enhances market liquidity and encourages market stability.

Conclusion

The record-high EU carbon price signals commitment to global decarbonisation, incentivising businesses and investors to switch to a sustainable future. The carbon pricing system benefits the economy and environment by encouraging investment in clean technologies, promoting sustainable development initiatives, and enhancing energy security and public health. 

DGB Group sources, develops, and oversees large-scale reforestation and nature-restoration projects. We are the first publicly traded purpose company focused on nature-based solutions to restore biodiversity and ecosystems through carbon credits. We support businesses who want to lessen their carbon footprint and buy carbon offsets, which play a meaningful role in the future of the planet. The rising carbon prices also show how DGB is in the right place at the right time, ideally positioned for impact.

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• Source: https://www.green.earth/blog/the-eu-carbon-price-reached-a-historic-high-of-100