Europe needs much higher carbon prices to reach net-zero in 2050: FT Summit participants

Carbon markets are currently trading "comfortably" at around Eur50/mt but prices need to rise much higher if net-zero carbon targets are to be met and greenwashing avoided, participants in the Financial Times Global Commodities Summit said June 16.

Ulf Ek, hedge fund manager at Northland Commodity Advisors, said in a panel on carbon trading that he sees EU carbon emissions allowances trading at Eur75/mt by Q3, and maybe higher later. Mark Lewis, head of climate research at Andurand Capital, expressed the opinion that prices of "Eur100/mt would be needed to get to net-zero." The carbon price needs to be at a level that will make green hydrogen competitive, he said.

FT energy editor David Sheppard, chairing the panel, said he foresees significantly higher carbon prices could create "all kinds of ruptures across industry, travel and other sectors... making the idea of a Carbon Border Adjustment Mechanism more pressing... because otherwise (European) industry will move offshore."

European carbon prices have risen rapidly since the Paris Agreement, introduced in late 2015, obliged nations to control carbon emissions. The EU emissions trading and allowances system was set up with prices which remained relatively low for many years. In late 2017, EU carbon allowances (EUAs) traded at Eur7/mt. This had jumped to Eur25/mt a year ago and now stands at more than Eur50/mt.

However, "EU regulators are signaling to the market that this is too low," said Ek.

Prices may rise after the number of free carbon allowances in the EU shrinks as from July, Lewis indicated. "The market is complacent today on carbon prices," he said. The EU has pledged to attain net-zero carbon emissions by 2050.

The panel participants agreed that standardization and transparency are essential in the industry. The price differential between the regulated emissions trading market – now pricing Scope 1 carbon emissions at Eur50/mt or more – and voluntary carbon offsets on Scope 3 emissions (priced at $2/mt to $7/mt) is contradictory, too wide, and needs to change, said Lewis.

'Largest commodity market'

Hannah Hauman, global head of carbon trading at Trafigura, which has formed a stand-alone carbon trading desk, said that carbon is now the largest commodity market in the world, with "massive potential" and already a bigger market than crude oil.

"11 billion mt of carbon are already covered by some form of compliance scheme, with total global emissions of 50 billion mt/year," she said. "There is exposure to carbon in every single area."

Lewis said that carbon is nonetheless a very different kind of market from other commodities because it was launched with the public policy aim of achieving climate targets, in a drive which is now accelerating. "There are no natural sellers in this market: that's why it's different from other commodity markets," he said.

A broader selection of investors can be expected to enter this market, which will become attractive for institutional investors due to its tendency for capital appreciation over time and ESG acceptability, he said.