May 14, 2021 ESG

From near-zero to hero

Europe's carbon-pricing scheme is going from strength to strength, increasingly impacting countries with less stringent carbon policies too. Investors should pay attention.

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More than 15 years since the European-Emission-Trading (ETS) scheme was launched, carbon prices have finally breached 50 euros per tonne. In the past, the evolution of carbon prices has gotten little attention in broader financial markets. Outside of a few select niche-segments, carbon prices were arguably too low, and the scope of such schemes too small to trigger much interest. How things have changed. Today, there are just over 60 carbon tax or trading schemes in operation, covering 25% of global-greenhouse-gas (GHG) emissions, compared to just 5% coverage ten years ago.[1] That trend looks set to continue.

For example:

97 countries representing 58% of emissions globally are mentioning carbon pricing in their official climate plans.[1] This makes sense given the growing band of countries committing to net zero, which at the last count had hit 132 countries.[2] Europe has led the charge, boasting the world’s largest carbon market which covers just over 40% of the continent’s emissions[3] and with more sectors set to come into the fold this year, such as road transport and buildings[4] and possibly even the shipping sector.[5]

20210514_Cotw_Carbon_CHART_EN.png

Sources: Bloomberg Finance L.P. and DWS Investment GmbH as of 5/10/21

The strength in European carbon prices, in part, reflects more ambitious climate targets:

the European Union (EU) now pledges to cut GHG emissions by 55% by 2030 compared to 1990s levels versus a previous 40% target reduction.[6] This might help to explain why a chorus of policy officials, from the European-Central-Bank (ECB) President Lagarde[7] to EU Climate Chief Timmermans[8], are highlighting the risks of even higher carbon prices ahead. That message is starting to sink in. More than 850 companies, including many of the world's largest by market capitalization, are already using an internal carbon price to evaluate capital-expenditure decisions, a rise of over 40% since 2018.[9] That share looks set to increase further, given EU proposals to introduce an EU carbon border adjustment tax, indirectly impacting geographies with less stringent carbon policies.[10] Investors better start paying attention.

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1. World Bank. 2020 State and Trends of Carbon pricing https://openknowledge.worldbank.org/handle/10986/33809

2. Energy and Climate intelligence Unit (2021 scorecard). Net zero emissions race https://eciu.net/netzerotracker

3. European Environment Agency (December 2020). The EU emission trading scheme in 2020: trends and projections https://www.eea.europa.eu/themes/climate/the-eu-emissions-trading-system/the-eu-emissions-trading-system

4. Reuters (April 2021). EU to apply CO2 emissions trading to buildings, transport, Commission says https://www.reuters.com/business/environment/eu-apply-co2-emissions-trading-buildings-transport-european-commission-says-2021-04-22/

5. Transport & Environment (April 2021). Europe’s shipowners call for fair and ambitious carbon pricing proposal https://www.transportenvironment.org/press/europe%E2%80%99s-shipowners-call-fair-and-ambitious-carbon-pricing-proposal-%E2%80%98crunch-time%E2%80%99-eu

6. Commission welcomes provisional agreement on European climate law (April 2021) https://ec.europa.eu/commission/presscorner/detail/en/IP_21_1828

7. ECB (25 January 2021). Keynote speech by Christine Lagarde, President of the ESDB, at the ILF conference on Green Banking and Green Central Banking https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210125~f87e826ca5.en.html

8. Reuters (7 May 2021). EU climate chief warns against curbing carbon price rally https://www.reuters.com/article/eu-carbontrading/eu-climate-chief-warns-against-curbing-carbon-price-rally-idUSL4N2MU2O1

9. CDP (April 2021). Putting a price on carbon https://www.cdp.net/en/research/global-reports/putting-a-price-on-carbon

10. EU Green Deal - carbon border adjustment mechanism (October 2002) https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12228-EU-Green-Deal-carbon-border-adjustment-mechanism-_en

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