The double edge of the increase in the price of CO ₂

Since the start of the pandemic, the price of carbon dioxide (CO ₂ ) emission rights, mandatory for those companies whose activities are subject to the Emission Rights Trading Scheme (ETS), has multiplied by four. In February of this year it reached an average price of more than 90 euros, when in 2018 it was approximately 15 euros, and in 2019 and 2020 almost 25 euros, and 53 euros in 2021.

The European Union, in order to achieve its climate objective, which involves reducing its emissions by 55% by 2030 compared to 1990, and achieving carbon neutrality by 2050, has mechanisms such as the ETS. This came into operation in 2005 and limits emissions from energy-intensive installations and air transport between EU countries. The ETS, which currently applies to 40% of EU emissions, assigns a price to polluting emissions and is the world’s main carbon market. It is the largest and works on the principle of cap and trade.

The causes of the increase are diverse, some circumstantial, such as the increase in the price of gas and oil, without ruling out others linked to speculation. CO ₂ has become a financial asset that is used by all market operators, including opportunistic funds, taking advantage of the situation of world prices for raw materials. A price increase was expected, but not so soon. Already when the Paris Agreement was signed, in 2015, it was known that the price would rise radically due to the cost of the transformations necessary to achieve the global goal of carbon neutrality. The forecast was to reach around 100 euros an emission right (equivalent to one ton of CO ₂ emission) in 2030 and not in 2022.

And there appears the double edge . On the one hand, current prices are already making some green technologies profitable that until now were not, so betting on them is no longer viewed with suspicion by many boards of directors because it allows them to earn money by being more sustainable. This is a great advance in the fight against Climate Change and will be a growth lever for many companies.

But, at the same time, this increase in the price of CO ₂ can mean that many companies cannot pay for the emission rights acquired, resulting in labor adjustments, closures or relocations outside the EU. This can generate, in the short term, what experts define as “CO ₂ leaks”, a phenomenon whereby the most polluting companies could relocate their production to other countries where the emission reduction targets are less ambitious. However, in the medium and long term, the heterogeneity in the level of ambition between countries is expected to disappear due to the universality of the objectives of the Paris Agreement.

The administrations are aware of this situation. The European Commission’s Fit for 55 proposal, linked to the EU meeting the objectives on “European Climate Legislation”, places emphasis on supporting actors in their transition to a zero-emissions society. Specifically, it will reform the emissions trading system of 2005, while energy producers will be invited to choose less polluting technologies, instead of paying a price per ton of CO ₂ emitted. Another measure is the provision of a carbon emissions border adjustment mechanism to prevent the transfer of EU production and the aforementioned leakage.

In short, let us dedicate our attention and time to the progress and changes that occur in the CO ₂ market, since it is one of the fundamental tools to ensure that our objectives in the fight against climate change are met.

Business and Climate Private Foundation