Carbon markets are set to undergo a politically volatile few years as governments resort to pricing mechanisms and border taxes to reach net-zero goals, the president of the International Emissions Trading Association has said.
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In an interview to S&P Global Commodity Insights, Dirk Forrister said he was confident that by 2030, around 60%-70% of global emissions would be covered by binding emissions limits at a national level, with the next few years likely to be "politically charged" as a result.
"The competitiveness aspects are really going to come to the fore, and hopefully we can emerge with models that provide some market connectivity and continuity, but also give assurance that you're actually progressing toward net-zero," he said.
This comes as the UN Intergovernmental Panel on Climate Change called for more political commitment and coordination to accelerate global climate action.
In its latest report, the UN body said investment in climate mitigation and adaption would have to rise by around three to six times by 2030 for emissions to fall by 43% compared with 2010 levels.
Forrister said carbon markets would be central to the pathway to net-zero, but that it was inevitable that geopolitics would shape its evolution.
"When you look at the IPCC report and the parade of horrible outcomes that we're facing if we don't address emissions, I think it's going to start changing the politics in a way that politicians are going to need to respond more aggressively," he said.
"Now, whether that is done through carbon taxes, cap and trade mechanisms, or command and control -- it doesn't really matter as long as the limits are there."
IETA is a non-profit organization dedicated to advancing international cooperation in emissions trading.
Consequences of CBAM
The EU's Carbon Border Adjustment Mechanism, which will impose a tax on imports of carbon-intensive products, will heighten political tensions, with far-reaching impacts on world trade and the wider energy transition, Forrister said.
"I don't see a simple, easy road. I see this one as being pretty bumpy, politically charged," he said, referring to the responses that the EU's trade partners are formulating.
Progressively from 2026, CBAM will oblige companies that import into the EU to pay a tax or tariff to account for the difference between the carbon price paid in the country of production and the price of carbon allowances in the EU Emissions Trading System.
Forrister said the determination of quantifying carbon intensity in every product would be complicated.
The EU says the measure will help put a fair price on carbon emitted during production of imported products while pushing European industry to decarbonize without being undercut by other geographies.
Many in the industry believe the mechanism will push exporter countries to adopt domestic carbon prices, while some might challenge the measure at the WTO on protectionist grounds.
"We may also see a re-orientation and shuffling of global trade -- where the lowest emitting countries and producers shift a greater share of their exports to meet EU demand," analysts at S&P Global said in a recent note. "Challenges to the legitimacy of CBAM as an environmental tool (and not a trade protectionist tool) through the WTO are possible but unlikely to be successful."
New pricing mechanisms being considered internationally should seek to connect with other existing systems and encourage technological advances, Forrister said.
"You want [a carbon price] that has openness to all of the energy efficiency and renewable technologies that are available," he said. "[One] that has a cap, that is giving clear visibility on the direction of travel and that gives the innovators inspiration to put their best minds on the topic, to come up with better and better solutions."
Compliance markets currently cover 17% (or around 9 gigaton/CO2e) of total global emissions, according to the latest data from the International Carbon Action Partnership.
Carbon-pricing schemes, such as the EU's Emissions Trading System, are considered an effective and economic way to reduce greenhouse gas emissions.
There are currently 28 emissions trading systems in force, with 20 more under development globally, particularly in Latin America and Asia-Pacific.
But so far, the number of countries or regions using such instruments remains relatively small.
Carbon prices also currently vary significantly on a country-to-country basis as there is no global carbon price.
Carbon permits under the EU ETS are currently more than 10 times more expensive than compliance prices in China, the industrial powerhouse of the world.
Platts, part of S&P Global, assessed EU Allowances for December 2023 at Eur87.65/mtCO2e ($94.33/mtCO2e) on March 24.
China's compliance emissions price was valued at Yuan 56.00/mtCO2e ($8.11/mtCO2e) on March 24, according to the Shanghai Environment and Energy Exchange.