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Global carbon market grows 20% to $272 billion in 2020: Refinitiv


Market shrugs off pandemic to increase further

International climate ambition driving growth in value

More than five-fold expansion since 2017

  • Author
  • Frank Watson
  • Editor
  • Alisdair Bowles
  • Commodity
  • Energy Energy Transition
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  • Energy Transition Environment and Sustainability

The value of the global carbon market increased by 20% in 2020 to Eur229 billion ($272 billion), financial analysis company Refinitiv said in a report Jan. 27.

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The increase in value marks the fourth consecutive year of record growth for the global carbon market, which has expanded more than five-fold since 2017.

"It might seem counterintuitive that in a year when emissions dropped significantly due to the pandemic, carbon prices and global value hit new records," said Haege Fjellheim, head of carbon research at Refinitiv.

"Pandemic-induced crash and ambition-induced boom is our headline explanation. Major carbon markets saw prices and volumes rise on expected tightening of emissions caps due to more ambitious climate goals in the future," she said in a statement.

Most of the increase in value in 2020 came from the EU Emissions Trading System which accounted for nearly 90% of global value and most of the total market trading volume at 10.3 billion allowances – each worth 1 mt of CO2 equivalent.

Over 8 billion carbon allowances changed hands in the EU ETS in 2020, almost 20% more than in 2019, according to the report.

This growth in trading happened despite an estimated 14% drop in emissions under the EU ETS in 2020, Refinitiv said.

"Expectations of a more ambitious 2030 climate target for Europe was a key supporting factor for carbon over 2020, a year that also put the trading system's Market Stability Reserve to its first real test," said Fjellheim.

The MSR is a design feature that removes carbon allowances from auction volumes each year, tightening supply over time.

"We foresee the trend of high traded values and volumes to continue into 2021, with market players expecting a tightening of the EU ETS required to meet the new 2030 climate target," she said in the statement.

North American markets grow

The North American regional carbon markets – the Western Climate Initiative and the Regional Greenhouse Gas Initiative – showed a similar trend to Europe, with prices crashing in March and April in the wake of the global pandemic, but recovering by Q4 2020 on expectations of policy changes resulting in tighter future carbon market balances, Refinitiv said.

The WCI and RGGI grew by 16% in terms of overall market value from 2019, to Eur22 billion and Eur1.7 billion, respectively, it said.

"The Biden presidency undoubtedly brings progress toward increased climate change mitigation, both at the domestic and global level, but it will not have an immediate effect on existing carbon markets," said Fjellheim.

There is no momentum toward a national level cap-and-trade system in the current US Congress, and the Biden administration is pursuing other measures to cut carbon emissions in various economic sectors, Refinitiv said.

"Biden's plans for more aggressive US emissions cuts – including making the power sector carbon neutral by 2035 and achieving net-zero emissions by 2050 – could go either way in terms of price effects in North American markets, depending on the role they play in reaching climate targets," said Fjellheim.

China moves on cap-and-trade, 2060 climate target

Meanwhile, the Chinese government published long-awaited rules for China's national Emissions Trading System in Q4 2020, after President Xi Jinping's unexpected pledge in September to step up the country's climate change mitigation targets.

As the world's largest emitter of greenhouse gases, China's efforts to decarbonize will play a large role in determining whether the world can avoid the worst effects of rising global temperatures over the long term.

The country's GHG emissions have been rising sharply due to rapid economic growth as well as a significant use of coal for electricity generation, while emissions in Europe and the US have shown a decline in recent years as cleaner energy takes over from the most emissions-intensive fuels.

"China's 2060 carbon neutrality pledge gave momentum to the preparations for a national carbon market," said Cathy Liao, an analyst at Refinitiv's carbon research China team.

"All the groundwork is in place for the world's biggest emissions trading system to finally see transactions, and we expect trading to start in the second quarter of 2021 at the latest," she said.