Why are carbon prices in the news?

By: Tim Bennett

The carbon price has been moving up at speed in 2018. Tim Bennett takes a look at why and the implications for consumers and investors.

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Why are carbon prices in the news?

After spending years in the doldrums, the carbon price is making headlines. The question is why and what would a sustained rise mean for consumers and investors/

The only way seems to be up

Whichever way you cut it, the recent surge in the carbon price is impressive. Already some analysts are forecasting big further rises.
Some of this is down to politics and the EU’s desire in particular to limit carbon emissions.

What’s changed?

This agenda, which is being adopted by countries all over the world is hardly new. However, recently the EU has reaffirmed its commitment by changing the way its main carbon trading scheme works. Here are the basic facts about this key scheme.

What is an allowance?

These in essence allow firms to emit. However, there are only a finite number of them available and they can only be obtained in a few ways;

  • Free from the government
  • By auction
  • Purchase in the carbon market
The limit on these allowances puts firms under pressure to become more energy efficient and less polluting, especially when the price starts to rise so buying “cover” becomes more expensive.

Who sells these allowances?

Firms that don’t use their allowances are rewarded by being able to sell them to other firms that need them to avoid fines and being named and shamed.
In very simple terms, a carbon trade would therefore work like this;

Why have prices been so low?

When the scheme was originally launched, before the financial crisis, the EU set a fixed limit on the number of allowances that would be released. They hoped that demand would exceed this supply and drive the price up. In the wake of the financial crisis in 2009, the exact opposite happened and the market was, in effect, flooded.

How is this problem being solved?

The EU has recently announced that the rules of the trading scheme will change, such that a new Market Stability Reserve can underpin the carbon price by holding surplus allowances a bit like a central bank. The effect on the carbon price has been dramatic.

Closing thoughts

This is a space to watch. Should the carbon price rocket, as some analysts predict, it will have ramifications for consumers, firms and investors. On the other hand, the recent price surge may just be a temporary adjustment to a higher “base” price. Either way, carbon prices are firmly back in the news for now.