Global carbon prices should double by 2020 to around US$20, triple by 2030 to $30 and potentially sextuple to $60 per tonne by 2030, according to market forecasts.
Price rises like this will have a dramatic effect on the global economy.
The signals they’ll send will dramatically affect energy markets, reducing investment in coal and natural gas and raising it for solar, wind and other low emission energy technologies.
If these forecasts prove correct, it implies carbon prices will rise by about 10% per year from now to 2030. But there will be bumps along the way.
For instance, global carbon markets are moribund at present, hamstrung by a surplus of permits in the benchmark European Union Emissions Trading System (EU ETS) that may last until 2020.
This is holding prices down around US$10 per tonne and could do so for the next four years under the market’s current rules, which can’t be revised until 2020. At that point, prices are forecast to suddenly leap from $10 to $20 per tonne, and then potentially double again by 2030, to $40 or higher.
Despite these problems, the world’s fledgling carbon markets — led by the EU — are achieving their aim: influencing long-term price expectations for carbon and energy investments based upon these expectations.
These expectations can be seen in the various ‘shadow’ (or hypothetical) or internal planning carbon prices that corporations now use in evaluating new investment. Therefore, while traded carbon prices remain low, future expectations of higher prices are now influencing investment behavior.
This demonstrates the growing role that evolving carbon markets are playing in solving climate change. Carbon markets like the EU’s are only a decade old. As their early structural kinks get fixed, their effectiveness will rise.
Among other things, the upward trend in carbon prices they’re now signalling will steer huge pools of investment capital away from carbon intensive industries (like coal) and into lower emission energy like solar, wind, geothermal, biomass and others.
In 2015, the money changing hands through market-based carbon pricing schemes rose by nearly one-third to $22 billion compared $15 billion in 2014. But despite this growth, there’s still a long way to go. Only about 10% of global carbon emissions are now covered by some form of pricing.
Unfortunately, United Nations officials are tamping down hopes next month’s COP21 global climate change negotiations in Paris can agree to any global price for carbon.
That leaves — at least for now — the EU ETS as the pace-setter for global carbon pricing. Operating since 2005, the EU ETS accounts for roughly three-quarters of the global carbon pricing market.
A growing number of financial analysts now actively follow the market. Many of them provide forecasts on expected long-term price trends.
These include PointCarbon (a subsidiary of Reuters), Synapse (a US-based research and consulting firm) and ICIS (a global commodity analyst owned by Reed Information Services).
Each is now forecasting benchmark prices for future years, usually 2020 and 2030. Grenatec has taken these benchmark prices and ‘filled in’ prices for the years in between to create a inferred future price curve.
All the analysts expect EU ETS prices to hover around $10 per tonne until 2020 due to an oversupply of permits in the market. Unfortunately, these can’t be withdrawn until around 2020 under current market rules.
At that point, likely reforms may include either creating a ‘price floor’ below which prices can’t fall, or giving market administrators the power to withdraw permits from the market in periods of price weakness.
The aim of either reform, of course, would be to create an upward-sloping, multi-decade price expectation curve for carbon. That, in turn, would increase confidence for long-term investment in carbon saving technologies and infrastructure.
The good news in the market is that while actual prices may remain weak for several more years, long-term price expectations are shifting upwards, and this is what matters.
Both Synapse and Point Carbon forecast EU carbon prices will hit a Euro-denominated equivalent of US$20 in 2020, while price bull ISIS expects 2020 prices of $35 per tonne.
By 2030, Synapse foresees prices of $35, ICIS about $42 and bullish Point Carbon nearly $60. These infer 15-year annual price increase expectations ranging from 9-13% per year.
But even with this rapid growth, only the most bullish of the 2030 carbon price forecasts crosses over the US General Accounting Office’s (GAO’s) estimation of the US$50 ‘social price’ of carbon emissions in 2030.
This brave extrapolation represents the GAO’s best estimate of the ‘negative externality’ cost of burning carbon.
This ‘negative externality’ cost attempts to capture the negative impacts of unpriced carbon emissions on human health, the natural environment, government spending, weather disasters and reduced quality of life.
While the GAO doesn’t explicitly say so, the biggest ‘social cost’ to society from carbon emissions is almost certainly the roughly $5.3 trillion of implicit subsidies transferred from taxpayers to the global fossil fuels industry each year.
These subsidies encourage fossil fuel use by distorting the price system. This creates two huge problems simultaneously: climate change and higher tax burdens.
To limit the destructive effects of climate change and keep global warming below 2C between now and 2050, experts agree a combination of higher carbon prices and abolished fossil fuels subsides is needed.
At present, most future forecasts of carbon prices don’t see market carbon prices ‘crossing-over’ the GAO’s ‘social cost’ of carbon until 2030 at the earliest, when market traded carbon price estimates range from $35 and $50 per tonne.
Intriguingly, this $30-$50 price range is roughly in line with what many private corporations are
penciling in for future investment using what’s known as a ‘shadow’ — or hypothetical — carbon price.
These now range from $10-$150 per tonne, with many large oil and gas exploration companies ranging from Exxon-Mobil to ConocoPhilips to Royal Dutch Shell penciling in mid-range prices of $40-80.
All of the above is relevant to China, India and Russia as they open their own carbon markets and their corporations develop their own ‘shadow prices’ for investment in new capacity.
What all of the above indicates is that while carbon markets are still undergoing painful teething problems, they are playing an important role in setting long-term carbon price expectations.
Therefore, the ‘big game’ is being won. It just may not look like it right now on the ground.
In addition to reducing fossil fuel subsidies and creating higher price expectations for carbon, the third big need in solving climate change is to expand carbon pricing beyond just the roughly 10% of global carbon emissions now covered by pricing schemes.
It will also open the way for various derivative (ie secondary) markets to develop to help take on or shed carbon price risk. These mechanism can include either market traded of over-the-counter derivatives such as puts, calls, swaps and traditional insurance.
They will also presumably lead to more transparent and liquid markets in trading energy, particularly across borders as countries with high emissions seek to import lower emission energy from more efficient producers.
All of this will attract growing pools of capital seeking reinvestment in lower carbon-emitting technologies. This will spur innovation, competition and technological advance.
This can be expected to lead to greater investment in cross-border energy delivery infrastructure such as high-capacity power lines and multi-fuel gas and liquid pipelines. These will reduce rigidities in markets that have given rise to long-term energy supply contracts to ensure security and continuity of supply.
This in turn will encourage creation of ‘spot’ markets, creating price signals for supply for immediate delivery – adding another important liquidity element to the spectrum of market trading. This is already occurring in Asia in the creation of Liquid Natural Gas ‘spot’ markets to supplement (and progressively replace) long-term LNG supply contracts at inflexible prices as wall as the inefficient legacy oil-indexed pricing of natural gas in Asia shipped as LNG.
The bottom line here is that while global carbon prices may be stuck in neutral until 2020 or so, deep underlying structural dynamics of new markets are being created through the refinement of future energy and carbon price expectations.
The good news is that all this should lead to less waste, greater competition, enhanced innovation and increased supply security — all of which will contribute mightily to solving climate change through applying the discipline of markets.
Advice: watch the carbon markets. We’re on the edge of a global economic restructuring around low emission energy that’s set to create the risk-taking visionary fortunes of the 21st Century.
As this occurs, secondary markets such as options, futures and over-the-counter risk-management derivatives can flourish given adequate liquidity in core carbon trading markets. This will further crystallize future price expectations, making future large scale infrastructure investment less risky.