Europe’s €31bn a year carbon market is finally starting to work the way it was intended, reining in pollution with a minimum of squealing from industry.
Thirteen years after it was created to limit carbon-dioxide emissions, prices for the allowances are rising.
EU policymakers have enacted measures expected to keep the cost of pollution on an upward trajectory through 2030, prompting hedge funds that abandoned the market to pile back in.
Higher carbon prices drive up the cost of using hard coal and lignite to run power plants. It’s one of the mechanisms the EU is using to move industry away from the most polluting fuels and reaching the goals for curbing climate change set out in the 2015 Paris Agreement.
“For a five-year-plus period, this market was in the desert,” Per Lekander, a fund manager at Lansdowne Partners, said.
“What’s happened over the past five months is the investment community is getting behind it again and putting on positions,” he said.
Big polluters have heard the message and are starting to adapt. From Volkswagen to RWE, which is Germany’s largest power generator, industry is cleaning up its smokestacks. Some are buying before allowances get even more expensive. All this is happening without noticeable complaints from industry, in part because policymakers from German Chancellor Angela Merkel to UK Prime Minister Theresa May have made it clear they want to phase out coal within the next decade, slashing greenhouse gases.
Companies favour the carbon market because it gives them more flexibility than regulation or taxes. It’s also a good sign for the global effort to rein in climate change, showing that market mechanisms and government policy can persuade industry to step away from fossil fuels.
Europe’s carbon market is the biggest of more than 45 systems working worldwide, and a model being tried everywhere from China to Mexico and parts of the US.
Carbon trading wasn’t an immediate success. Europe’s permits surged to more than €29 a tonne in 2006 and 2008, only to plunge more than 90% after the financial crisis hobbled industry and helped create a surplus of the pollution rights.
That glut took policymakers years to mop up, culminating in an agreement that got final approval only last month. They’ve surged 57% to as much as €13.04 for each ton emitted on March 22 on the ICE Futures Europe exchange.
Jan Kresnik, a portfolio manager at broker Belektron, said prices of €30 a tonne or more “could be reachable.” BNEF estimates it will reach €32 by 2023.