For many years carbon prices have been too low to effectively incentivise enough of the actions needed to meet climate targets. There are now signs that this is changing.
Carbon pricing is widely seen as crucial for securing cost-effective emissions reductions. However for many years carbon prices have mainly been too low to bring on the changes required to limit climate change[i]. Prices of $50-100/tCO2 or more are likely to be needed[ii]. However, even in 2020, the World Bank’s annual report on the State and Trends of Carbon Pricing showed that almost half of emissions covered by carbon pricing were seeing a price of less than $10/tCO2, and around 85% were seeing a price of less than $30/tCO2. At the time this included emissions under the EUETS[iii].
However there are now signs that this is changing. The price under the EU ETS, the world’s largest carbon market, was below €10/ tCO2 for much of the period from 2012 to 2017 (see chart). However, prices have risen strongly over the last few years, as a result of reforms to the system, and of the prospect of tighter caps in future as the EU moves towards greater emissions reduction. Prices are now around €40/tCO2. This is much closer to what’s needed.
Chart: Prices for allowances in the EUETS (€tCO2)
Note: Dates on axis correspond to start of the year. Source: Ember.
Looking ahead, there is an emerging trend towards much higher prices in some places. Several jurisdictions have set intended levels for prices in 2030 that are around two to five times current prices under the EUETS. Prices under the carbon tax for industry in the Netherlands are due to rise to €125/tCO2 by 2030 (see previous post). Norway has now proposed an even more ambitious carbon tax, reaching a price of €200/tCO2 by 2030[iv]. (Like the Dutch tax it will be a top-up tax, adding to the EUA price to reach the target level in the covered sectors.) Canada intends that prices will reach C$170/tCO2 [v],while Ireland has set a target level for its carbon tax of €80/tCO2[vi], again both in 2030 (see table).
Target carbon prices for 2030
|Jurisdiction||Target carbon price per tonne for 2030|
|Netherlands||€125 for industry €32 for power generation|
At the moment such examples are too few and volumes covered are too small for this to be regarded as a global trend. However, such price levels have the potential to reframe expectations of carbon price levels, and so help enable similar prices elsewhere.
As carbon prices rise it will be essential to make sure that increases are politically acceptable (see an earlier post for some ways this can be achieved). And although higher carbon prices have the potential to accelerate decarbonisation, to be fully effective they need to be accompanied by appropriate supply side measures, such reinforcement of grids and support for new technologies
Nevertheless, the higher prices we are now beginning to see offer hope of much more effective carbon pricing over the next few years.
Adam Whitmore – 17th March 2021
[i] I previously noted the problem of carbon prices being too low in a post back in 2015. https://onclimatechangepolicydotorg.wordpress.com/2015/06/02/carbon-prices-around-the-world-are-consistently-too-low/
[ii] For example, in 2017 the International High Level Commission on Carbon Pricing stated that the explicit carbon-price levels consistent with the Paris temperature target were at least US$40–80/tCO2 by 2020 and US$50–100/tCO2 by 2030. See https://static1.squarespace.com/static/54ff9c5ce4b0a53decccfb4c/t/59244eed17bffc0ac256cf16/1495551740633/CarbonPricing_Final_May29.pdf
[iii] https://openknowledge.worldbank.org/handle/10986/33809. See figure 2.4.