Global markets for CO2 permits rocketed a record 164% and peaked at $851 billion in 2021, showing growing global demand for the green energy transition and the ESG agenda.
The EU’s Emissions Trading System (EU ETS) accounted for approximately 90% of all permits issued globally, according to a report from Refinitiv on last year’s carbon markets.
In 2021, prices in the EU ETS reached more than EUR 80 per tonne, twice the previous year. The decision to push forward the EU Green Deal and reduce emissions by 55% by 2030 contributed to the upward trend for CO2 permits. The measures promise to make the market even tighter in the coming years.
The EU launched ETS in 2005, and it is currently considered the world’s most established carbon market. ETS is a market-based tool meant to limit greenhouse gas emissions and cap corporations’ or entire nations’ emissions. Businesses and nations that exceed the set limits have to purchase additional carbon credits.
The success of the mechanism shows that corporates and traders are taking green policies seriously. That will apply pressure on corporate decision making to find – or buy – greener power as the cost of emissions gets higher.
Dwindling EU domestic natural gas output, a period of idle winds, and economic recovery from the pandemic has sent prices for natural gas soaring. And that has had serious knock-on effects.
The main effect is that utilities and corporates are turning to cheap yet dirty coal for power generation. Coal generation is then paired with purchases of carbon permits to offset emissions, spurring demand for permits and making them more expensive.
High natural gas prices will likely continue to impact the EU market, at least through the winter this year.
While the rise of renewable energy has yet to dent coal consumption, coal is increasingly looking like a necessary evil. Any business logically would rather pay for clean energy and gain the investment interest that comes with it, rather than commit to dirty fuel and associated rising permit costs.
The Western Climate Initiative and the Regional Greenhouse Gas Initiative – the two regional carbon markets in North America – grew at a more modest rate. However, traded volumes also hit record highs as the caps on these schemes are much tighter through 2030 than to the end of 2020.
China’s national emissions trading scheme launched in mid-July 2021, based on emissions intensity. Last year, approximately 179 million tonnes of Chinese emissions permits were traded during the first five and a half months, which is a relatively modest amount compared to the more liquid carbon markets in the Western world.
Beijing hopes to boost the number of ETS by relaunching the China Certified Emission Reduction (CCER) scheme, its voluntary carbon credits plan, nearly five years after it was terminated. As a critical supplementary mechanism to the ETS, the CCER will play a significant role in achieving carbon dioxide reduction goals.
Last November, the voluntary carbon market, where companies, organizations, or individuals purchase carbon credits generated from projects to reduce emissions, had a turnover of $1 billion, an all-time high annual value. Carbon neutrality goals and pledges to cut emissions promise to further accelerate growth rates in the medium-term.
