Growth of Carbon Credit Market | Sigma Earth
Exponential Growth in 2021
2021 recorded a dramatic increase in the price of carbon. Europe, the world’s biggest emissions trading system by value, saw the highest growth in carbon prices.
Carbon prices in the EU at the end of 2021 were at 80 euros per ton, double their cost at the end of 2020.
In the North American carbon markets, prices rose by 70% in 2021 from 202 values.
Surging carbon prices led to a high turnover of 760 billion euros at the end of the year. This is a 164% increase from 289 billion euros in 2020.
The carbon credit market in 2021 was more than five times the value in 2020. It was the fifth consecutive year that global carbon trading hit a new record – the fifth straight year of growth. Every carbon market recorded growth in 2021.
Key Drivers
In the run-up to the climate summit at Glasgow in November 2021, many national governments pledged to tighten the limits for carbon emissions. With tighter caps, businesses knew that government would strictly penalize them for going beyond their emission limits. Tighter caps increased the demand for carbon credits. Therefore, carbon market participants foresaw a major increase in the demand and supply of emission allowances. This was reflected in the price surge over 2021.
China began its Emission Trading Systems (ETS) in July last year. Europe, South Korea, New Zealand, and some other countries have already been using carbon pricing to help them achieve their climate mitigation goals. These countries arrived at the conference with even more ambitious goals. This meant that their ETS would get stricter.
The European Commission proposed the ‘Fit for 55’ program. The program seeks to cut Europe’s greenhouse gas emissions by at least 55% below 1990 levels.
No one exactly knows how tightening an ETS will help reach more ambitious climate goals. But, carbon market participants clearly see future increases in demand-supply ratios for emission allowances. This was reflected in the carbon credit market’s price surge over 2021.
In the EU, particularly, high carbon prices resulted from its extraordinary energy situation. Because natural gas prices in the EU soared, there was an increased demand for power from coal which was relatively cheaper. The increased power production from coal resulted in high demand for buying carbon credits, making them more expensive.
More Carbon Trading on the Horizon
The 2021 Climate Summit finally saw parties settle on how to cooperate on reducing emissions. They also discussed the possibility of crediting greenhouse gas emissions outside their own countries. This discussion raised the potential for international carbon trading between countries. It also raised the prospect of trading among business entities in the voluntary carbon credit market.
The International Civil Aviation Organization settled on requiring air carriers to offset their emissions growth above 2020 levels. Those offsets must be certified according to the newly agreed rules at the climate summit.
However, even with global agreements at the climate summit, the world is still not on a course toward an international carbon price.
Every country has a different Emission Trading System (ETS). They have different rules about allocating emission allowances and using offsets.
North America’s ETS addresses the emissions from electricity generation, industrial production, and transport. On the other hand, China’s ETS covers only the emissions from power plants.
Despite these differences, many countries worldwide are considering carbon pricing and setting up carbon markets. This is partially due to Europe’s Carbon Border Adjustment Mechanism (CBAM). The CBAM is a levy on carbon emissions associated with goods produced in other countries. Goods made in countries with climate policies similar to Europe will face lower or no fees. The CBAM aims to level the field for European manufacturers. Before, European manufacturers were at a disadvantage because they had to pay for the emissions released while producing their products.
On the other hand, manufacturers abroad exporting their goods to Europe did not have to pay for the carbon emissions associated with the production of the product. The CBAM requires manufacturers in Europe and abroad to pay for emitting greenhouse gases during the production of goods sold in the EU.
Therefore, experts expect to see more countries and regions looking at carbon trading as a key to achieving their climate mitigation goals. All signs point to an equally robust carbon credit market in 2022.
Article 6 Boost
At the COP26 climate summit in Glasgow in November last year, countries finally approved the Article 6 Rulebook. Article 6 of the Paris Agreement deals with international carbon trading.
The revised Article 6 of the Paris Agreement outlines a structure for future carbon credit markets. A carbon credit market is crucial to reducing carbon and greenhouse gas emissions. The market enables investments in emissions reduction technologies.
The decision at the climate summit last year proved to be an ambitious outcome. It established a framework to support expanding carbon credit markets to help companies, businesses, and governments deliver highly ambitious climate targets.
At the summit, countries agreed to adjust their carbon trading policies to avoid ‘double counting’ in carbon offset transactions. The acceptance of Article 6 by countries could lead to broader adoption of carbon offsets.
The negotiations at the COP26 also resulted in allowing a few Certified Emission Reductions (CERs) produced under the Kyoto Protocol, i.e., pre-2020, to be used against climate commitments for 2030. This raised opposition from many countries because allowing parties to carry forward credits would not directly reduce emissions. Therefore, under the updated Article 6, the members agreed to discount by 2% any CERs that countries will carry forward.
The International Emissions Trading Association (IETA) shared the same concerns but accepted this compromise. It is believed that discounting pre-acquired CERs will maintain a flow of revenue to developing countries until the new mechanism is fully functional.
As the carbon credit market and trading rules undergo further revisions, observers remain confident that the carbon market will continue its rapid growth well into the future years. Article 6 could facilitate new momentum for combating climate change and limiting global warming.
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