It marks the fourth consecutive year of record growth and more than five times the value in 2017. Hæge Fjellheim, Head of Carbon Research at Refinitiv, comments: “It might seem counterintuitive that in a year when emissions dropped significantly due to the pandemic, carbon prices and global market value hit new records.”
“Pandemic-induced crash and ambition-induced boom is our headline explanation. Major carbon markets saw prices and volumes rise on expected tightening of emission caps due to more ambitious climate goals in the future.”
EU ETS with most of the value of the global carbon market
Most of the increase in value comes from the European Emissions Trading System (EU ETS) which accounted for nearly 90 percent of global value and most of the traded volume (totaling 10.3 billion allowances) in 2020. Over 8 billion emission allowances changed hands in the European carbon market in 2020, nearly 20 percent more than in 2019. This happened despite an estimated 14 percent emissions drop in the EU ETS sectors according to Refinitiv Carbon Research.
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Fjellheim continues: “Expectations of a more ambitious 2030 climate target for Europe was a key supporting factor for carbon over 2020, a year that also put the trading system’s market stability reserve to its first real test.
New climate target as driver
“We foresee the trend of high traded values and volumes to continue into 2021, with market players expecting a tightening of the EU ETS required to meet the new 2030 climate target.”
The North American regional carbon markets – the Western Climate Initiative (WCI) and Regional Greenhouse Gas Initiative (RGGI) – followed a similar pattern to Europe, with prices crashing in March/April but recovering by Q4 2020 on expectations of policy changes resulting in tighter future carbon market balances. The WCI and RGGI grew by 16 percent in terms of overall market value from 2019, to €22 billion and €1.7 billion, respectively.
Effects of the Biden presidency
Fjellheim continues: “The Biden presidency undoubtedly brings progress toward increased climate change mitigation, both at the domestic and global level but it will not have an immediate effect on existing carbon markets.”
There is no momentum toward a cap-and-trade system at the national level in the current US Congress, and Biden's administration is pursuing other measures to cut carbon in various economic sectors.
Fjellheim continues: “Biden’s plans for more aggressive US emissions cuts - including making the power sector carbon neutral by 2035 and achieving net zero emissions by 2050 - could go either way in terms of price effects in North American markets, depending on the role they play in reaching climate targets.”
Carbon trading in China starting soon
The Chinese government published long-awaited rules for China’s national ETS in Q4 2020, after President Xi Jinping’s unexpected pledge in September to step up the climate change mitigation targets of the world’s biggest greenhouse gas emitter.
Cathy Liao, analyst at Refinitiv Carbon Research’s China team, comments: “China’s 2060 carbon neutrality pledge gave momentum to the preparations for a national carbon market. All the groundwork is in place for the world’s biggest emission trading system to finally see transactions, and we expect trading to start in the second quarter of 2021 at the latest.”
About Refinitiv
Refinitiv is one of the world’s largest providers of financial markets data and infrastructure, serving over 40,000 institutions in approximately 190 countries. It provides leading data and insights, trading platforms, and open data and technology platforms that connect a thriving global financial markets community - driving performance in trading, investment, wealth management, regulatory compliance, market data management, enterprise risk and fighting financial crime. (hcn)
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