(MENAFN- The Peninsula)
The Peninsula
Doha: Around the world, climate change policies are tightening, and carbon pricing is playing a big part of that. Once carbon pricing systems are in place, countries can apply pressure to emitters at will – representing the stick part of any energy transition policy, alongside the carrot of possible subsidies and guarantees for cleaner options.
New carbon markets have recently been introduced in China, the UK and elsewhere, while prices on the well-established European market have surged as credits are reduced and countries toughen climate change commitments. As prices rise, lower carbon options become more commercially attractive as high emitters incur additional costs.
After testing carbon credit trading at regional level since 2011, China launched a nationwide carbon market for its power sector in February. Initial allocations are free, with prices only expected to be introduced slowly and cautiously to protect investors in the coal sector. The move is part of China's efforts to reach net-zero emissions by 2060 and expected to cover over 4 billion tonnes of greenhouse gas emissions, making it the world's largest.
China's power sector is only responsible for about 30 percent of the country's total emissions, and industries such as cement, metals, and petrochemicals will be added over time. Verified company level emissions must be disclosed to the public, but unlike Europe, only direct exchanges and no carbon financial derivative products will be allowed initially - which some suggest may hamper liquidity and price discovery.
The obligation to buy carbon credits will favour gas-fired (as well as renewable) generation in China – at least in the short to medium term – because the main competitor is coal, which emits about twice the carbon that gas does. However, China's current priority is to meet surging energy demand - coal supply shortages due to strong post-pandemic economic growth, a ban on Australian imports, and a hot start to summer sent demand and coal prices soaring, which is having far more impact on costs than a modest carbon price. Among generators, a recent survey suggested the carbon tax was welcomed, but only at low levels, with expectations averaging just 71 yuan/tCO2e ($11.1/t) in 2030 and 140 yuan/t by 2050 – well below current European levels.
In Europe, where the Emissions Trading System (ETS) has been in operation for power and industry since 2008, prices have risen sharply in recent months as climate pledges among European member states have toughened. This is now having a significant impact on investment decisions. EU prices for December 2021 hit an all-time closing high of €56.65/tCO2e in May - although they have dropped back a little following the launch of a new UK post-Brexit market, as UK long positions were transferred across.
Higher carbon prices in Europe may initially accelerate coal to gas switching, expanding the gas market, but in the mid-to-long-term natural gas will begin to lose out to lower or zero carbon options. This latter stage has already been reached in the UK market, where all coal has now been removed thanks to higher overall carbon prices - and rising wind output is now squeezing the call on gas. Since 2014, the UK has added another £18/t Carbon Price Support (CPS) charge to the EU ETS carbon price in its power sector.
Rising carbon prices and expanded coverage have implications for trade, as it will add costs to many areas of business, putting them at a disadvantage to competitors that have a lower or no carbon price.
In the UK, gas is now largely confined to the times when renewables are not available, and a high carbon price will provide an added incentive to replace it even here, with alternative lower carbon dispatchable sources – such as batteries, hydrogen or biogas – or by adding Carbon Capture and Storage (CCS) to gas-fired plants. That is the plan at several CCGTs in the UK, normally in combination with hydrogen supply plans for nearby refineries and industrial clusters. These include the Shell led Acorn CCS/hydrogen project in Scotland, and BP's H2Teesside hydrogen/CCS project, which has a carbon price assumption of $50/t for 2021-2025, rising to $100/t in 2030. S & P Global Platts said in May that a carbon price of about €70/tCO2e was needed for parity between blue and grey (produced in refineries without CCS) hydrogen, and the European Commission put the figure at €55-90/t in 2020.
The UK Government may decide to go even further. In early June, the Bank of England increased its carbon price forecast to $150/t for 2030. It said this was necessary if the country were to meet its 2050 net-zero target and warned banks that they would suddenly be faced with stranded assets if they failed to prepare now. The number is up sharply from an upward revision to $100/t by 2030 a few months ago. That was the same level as BP's latest internal assumptions, and close to the recommendations put forward by economists Joseph Stiglitz and Nicholas Stern in 2017, of at least $40–80/t by 2020 and $50–100/t by 2030 to achieve the Paris Agreement goals. Carbon credits may also become a welcome source of income for governments, shifting the tax burden towards polluters.
Away from Europe and China, there are also carbon prices in Canada and parts of the US, including California, where prices are around $17/t. There had been talk of a nationwide tax under the new US administration, but so far nothing has been agreed. Canadian prices are set to rise quickly up to C$50/t ($40/t) in 2022. South Korea is also introducing a system, and about 70 percent of all global aviation emissions are due to enter a UN emissions-trading program this year. Nevertheless, most of the world remains uncovered. In mid-2020, only 20 percent of global emissions were subject to a pricing scheme or soon to become so, with an average price of about $15/t, according to The Economist.
Many expect significant progress by the conclusion of COP26 in Glasgow this November, with the recent successful international deal at the G7 on corporation tax suggesting a similar approach for carbon taxes may be proposed.
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