A Global Carbon Price Is a Mirage
Trading in greenhouse gas emission credits is likely to boom but unlikely to lead to a single global market
By Rochelle Toplensky
Wall Street Journal
Nov. 22, 2021 5:41 am ET
Carbon credits have a bright future. That doesn’t mean economists’ dream of a global carbon price is about to be realized.
One of the most tangible outcomes of this month’s COP26 meeting in Glasgow for business was an agreement on carbon accounting and trading rules. This should help to tame the current Wild West of trading in emissions credits, which leaves the door open to green-washing.
The deal already seems to have attracted fresh interest in the European Union’s carbon-credit market, which is the world’s most developed. The price of a credit reached a new high of €69.36 a metric ton on Friday, equivalent to $78.26. Within the EU framework, companies in power production and some heavily pollutive industries buy the instruments to cover their carbon emissions or sell them if they emit less than their allocated share.
But anyone who expects a global agreement to lead to a global carbon price—often touted by economists as the most financially efficient way to decarbonize the global economy—is misreading this essentially political market. Different industries face such different roads to decarbonization that it seems impossible to implement a single price within the EU, let alone across different jurisdictions.
The market for carbon credits could be massive. Energy consulting firm Wood Mackenzie expects it to be worth $22 trillion by 2050. Today that number is €238 billion, equivalent to $268.48 billion, according to data provider Refinitiv, with prices set much lower than needed to motivate mass decarbonization. The average regulated carbon price in the 20 largest economies is just €4 a metric ton, according to the OECD. Most forecasters think a price of between $75 and $100 a metric ton is necessary by 2030 if the world is to cut emissions to net zero by 2050, as many countries are targeting.
The picture is also highly fragmented. There are 65 regulated national or regional carbon pricing initiatives that currently cover about 21.5% of global greenhouse gas emissions, according to the World Bank. In addition, numerous informal markets allow companies to buy credits generated by carbon removal projects using techniques such as planting trees and direct-from-air capture. Prices vary from a few dollars a metric ton to hundreds of dollars.
The rules agreed at COP26 should help standardize these markets so that countries and companies can sell credits for extra carbon reductions or buy credits to make up for shortfalls. This might bring some prices into greater alignment, potentially leading to arbitrage opportunities similar to those that exist in currency or bond markets. The EU’s carbon border tax on imports could be an additional driver of harmonization.
Still, a single price remains a very long way off, if it is achievable at all in a diverse global economy run by diverse sovereign governments. The EU case is instructive. It wants to expand its carbon market both by adding shipping to its existing program and creating a second one for buildings and transport. Officials believe separate markets are needed to cope with the different regulations, technologies and challenges in dissimilar sectors.
For most governments, a carbon price isn’t even their primary tool for decarbonization, but rather a useful backup mechanism. Politicians are also using fiscal policies such as incentives, targets and industrial plans.
As long as carbon markets are well designed and can be trusted, a host of them isn’t a bad result for governments and sustainability-focused investors. They just shouldn’t be distracted by the economic fantasy of a single carbon price.
A Global Carbon Price Is a Mirage - WSJ |
