The EU carbon price has extended its record-breaking rally to jump higher than €50 a tonne for the first time, pushing up the cost of polluting in the bloc to more than double its pre-pandemic level.
The EU Emissions Trading System (ETS), which is designed to put a cost on CO2 for some of the most highly polluting industries from power generation to aviation, has rallied by more than 50 per cent since the start of the year.
As recently as December last year the carbon price had never traded consistently above €30 a tonne, but prices have surged as traders bet the availability of carbon allowances will need to tighten in the coming years if the EU is to meet aggressive climate targets, including cutting emissions by 55 per cent by 2030.
The surge has made carbon one of the world’s hottest commodities, even as a rise in the sector has raised inflation fears. While environmentalists have welcomed the rising cost of pollution for power suppliers and industry, there are fears that the pace of the rise is faster than companies can easily adapt to.
Last week companies from the steel sector and other heavily polluting industries such as petrochemicals and cement called on the EU to accelerate plans to implement a carbon border adjustment tax for imports from countries outside the scheme, fearing they were being put at a competitive disadvantage.
The steel sector in Europe, for example, would face carbon costs of about €2bn this year at current price levels, despite being given the majority of its carbon allowances for free by member countries.
Under the bloc’s ETS, companies are allocated a set number of allowances to cover at least part of their emissions. If they cut the amount they pollute, such as by using renewable fuels or natural gas instead of coal, they are free to sell the leftover allowances for profit. But if they increase pollution they need to buy additional allowances to cover their emissions, under the so-called cap-and-trade model.
The surge in carbon prices has attracted the attention of hedge funds and other financial investors who have been moving deeper into carbon trading, alongside utilities and other industries that trade the credits.
Some analysts in the sector have suggested prices may reach €100 a tonne by the end of the decade, a price they argue is necessary to make alternative fuels such as “green” hydrogen competitive.