Environmental Impact Data

Series

07. Carbon Pricing & Markets

Part 7 of 12

Overview. Carbon pricing is the central policy tool to internalize the cost of greenhouse gas emissions. Governments use two main approaches—carbon taxes and emissions trading systems (ETS)—while voluntary and compliance markets create pricing signals that shape corporate behavior and investment flows.

1) Policy Instruments

  • Carbon taxes: A fixed price per ton of CO2e emitted. Provides price certainty but not volume certainty. Examples: Sweden (~€120/t), Canada (federal backstop rising to C$170/t by 2030).
  • Emissions Trading Systems (ETS): Cap-and-trade systems set an overall emissions cap, issue allowances, and let the market determine the price. Examples: EU ETS, California-Quebec, China national ETS.
  • Hybrid systems: Minimum price floors or price collars within ETS to stabilize volatility.

2) Global Landscape

  • ~70 carbon pricing initiatives implemented worldwide as of 2024, covering ~23% of global GHG emissions.
  • EU ETS: Largest and most liquid carbon market, with allowance prices fluctuating around €80–100/t in 2023–2024.
  • China ETS: World’s largest by volume, currently covering power sector, expanding gradually to heavy industry.
  • Emerging schemes: UK ETS post-Brexit, Korea ETS, pilot schemes in Latin America and Africa.

3) Corporate Implications

  • Compliance costs: Direct emitters must surrender allowances or pay taxes, impacting EBIT margins.
  • Shadow carbon pricing: Many multinationals use internal carbon prices (€50–100/t) for capex appraisal and risk management.
  • Supply chain pressure: Carbon costs passed through via input prices; suppliers benchmarked by carbon intensity.
  • Investor expectations: Disclosure of carbon pricing assumptions is increasingly requested (CDP, TCFD, ISSB S2).

4) Market Dynamics

  • Allowance allocation: Free allocation vs auctioning; carbon leakage provisions; benchmarking by sector.
  • Volatility drivers: Policy changes, energy mix, fuel prices, weather events, speculative trading.
  • Linkage & fragmentation: Regional ETS linking can increase liquidity but requires harmonized MRV.

5) Voluntary Carbon Markets (VCM)

  • Companies purchase credits from offset projects (renewables, forestry, CCS).
  • Quality concerns: additionality, permanence, leakage, double counting.
  • Core Carbon Principles (ICVCM) and Article 6 of the Paris Agreement aim to standardize quality.

6) Case Example – EU ETS Phase IV

  • Cap declining ~4.3% annually (linear reduction factor).
  • Free allocation phasing down; CBAM introduced to prevent leakage.
  • Allowance prices reached €100/t in 2023, driving fuel switching (coal → gas → renewables).

7) Strategic Takeaways for Companies

  • Integrate carbon prices into financial planning and scenario analysis.
  • Adopt internal shadow pricing for investment decisions and procurement.
  • Monitor global carbon policy expansion to anticipate compliance obligations.
  • Use credible offsets only as a complement to real emission reductions.
Key takeaways.
  1. Carbon pricing (taxes + ETS) is the dominant policy lever for decarbonization.
  2. Coverage is expanding globally, with major schemes in EU, China, US (regional), and others.
  3. Companies must prepare for both compliance costs and investor scrutiny of carbon assumptions.
  4. Voluntary markets are evolving but face credibility challenges—quality and transparency are critical.

Note: Carbon pricing levels vary widely—some jurisdictions below €10/t, others above €100/t. This divergence creates competitive and policy risks, reinforcing the case for border adjustments (e.g., EU CBAM).