Lisa Zelljadt explains why carbon prices reached record highs in 2022, and how the global carbon market value grew despite a decrease in transactions.
- Emission trading systems (ETS) across the world saw the cost of emitting greenhouse gases soar in 2022. EU allowances averaged over €80/t, up 50 percent from the previous year. Despite the number of transactions falling more than 20 percent year-on-year, global carbon transactions were worth €865 billion, representing a 14 percent increase from 2021 and reaching a new record for the sixth consecutive year.
- The sustained high prices are partly because of the war in Ukraine affecting the European energy market, which is home to the EU ETS that accounts for most of the carbon market transactions globally.
- More ambitious climate targets are also contributing to the record high prices, as countries/regions tighten their carbon caps to help achieve those targets.
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The year 2022 saw markedly fewer transactions of allowances, or carbon emissions permits than in previous years as the war in Ukraine caused turmoil in energy and commodity markets worldwide.
The prices of those permits, however, were high so the total global carbon market turnover – the number of transactions times their price – grew nearly 14 percent compared with 2021. That’s the sixth straight year of growth.
The high emissions prices were largely the result of global regulators adopting more ambitious climate targets and tightening carbon caps within their emissions trading systems to achieve the carbon reductions pledged under the Paris Agreement.
Higher carbon market prices around the world
In Europe, that “tightening” came under the “Fit for 55” proposal after lawmakers wrangled all year over changes to the EU ETS that would help the bloc meet its updated target of reducing greenhouse gas emissions 55 percent below 1990 levels by 2030.
They settled on a “jumbo package” of policies in December that includes cutting the number of allowances available to emitters going forward – indicating that carbon permits will be in shorter supply, which makes for high prices.
North America’s ETS (the WCI and RGGI) experienced similar developments, with Californian regulators adopting a scoping plan for achieving the state’s more ambitious climate targets: emitters expect the Western Climate Initiative (the carbon market that California is part of, along with the Canadian province of Quebec) to limit allowances to meet those more ambitious climate goals, which in turn increased the price of allowances.
In New Zealand, home to a small but longstanding carbon market involving all sectors of the economy except agriculture, a government advisory body recommended tightening the ETS. There, too, carbon prices hit and remained at all-time highs in expectation of an upcoming dearth of permits.
How has the war in Ukraine affected prices?
The war in Ukraine also influenced prices along the entire energy complex, particularly for fossil fuels, with Europe feeling its impact acutely. Gas prices surged sharply after the EU stopped buying the fuel from Russia, making it relatively cheaper to fire up coal-burning power plants to generate electricity. This caused higher CO2 emissions per unit of power generated, which increased demand for emissions permits, increasing their price.
With the protracted war and the certainty that Europe’s carbon caps will be tight, allowance prices remained high for the year – averaging over €80/t compared to €54/t in 2021 – and are likely to stay high since these bullish factors persist.
The question of whether volumes will pick up in 2023 is another matter after nearly all markets saw a marked decrease in the number of permits changing hands during 2022, as the war-induced economic upheaval spooked market participants who would normally have been more active traders.
Even the voluntary carbon market (VCM) wasn’t spared, with sustainability efforts, like offsetting, taking a back seat to wider geopolitical concerns at most corporate headquarters. This was reflected in a steep drop in VCM volume and prices from the start of the war in Q1.
In contrast to compliance markets, which recovered somewhat over the year, voluntary trading remained slow throughout the year.