The price of permits on the European Union carbon market has soared to record levels in the first trading days of the year, hiking costs for polluters as the EU prepares measures to enforce deeper emissions cuts.
The EU emissions trading system (ETS) is the 27-country bloc’s main tool to reduce the greenhouse gas emissions that cause climate change. It forces power plants, factories and airlines running European flights to buy a permit for each tonne of CO2 they emit, effectively putting a price on pollution.
EU carbon permits hit 34.25 euros ($41.99) per tonne of CO2 on Monday, the highest since the market launched in 2005. Prices decreased slightly on Tuesday, but remained around 33 euros per tonne.
Cold weather, which stokes demand for power and heating, and a delay to the start of this year’s carbon permit auctions helped to boost prices.
Analysts say carbon is on a long-term upward climb, as the EU toughens its climate change policies. The price of EU carbon permits has jumped by around 12% since a December meeting when EU leaders agreed a more ambitious target on cutting emissions this decade.
“There’s so much in the way of bullish policymaking that everyone expects to come,” said Trevor Sikorski, head of natural gas and carbon research at consultancy Energy Aspects.
To cut net greenhouse gas emissions at least 55% by 2030, from 1990 levels - the EU’s new goal, which replaces a previous 40% emissions-cutting target - Brussels will publish a package of measures in June to restrict emissions across all sectors.
That will include a revamp of the ETS, to tighten the cap on the number of permits in the market - a supply squeeze that analysts expect to drive prices further in the coming years.
Analysts at Refinitiv expect an EU carbon permit to cost 89 euros per tonne of CO2 by 2030, under the EU’s “at least 55%” emissions-cutting goal. That is far above the 23 euros per tonne of CO2 they had expected by 2030, under the 40% emissions reduction target.
“It’s a massive bump up. Ambition really matters for the ETS,” said Refinitiv analyst Ingvild Sorhus.
The tougher 2030 emissions target is a “game changer” for EU carbon prices, said Tom Lord, head of trading at environmental consultancy and trading firm Redshaw Advisors.
“There will come a point where this market has to move into higher price ranges, because it is tightening so much that there just isn’t the supply out there to meet the demand.”