On February 20, 2023, EU ETS carbon credits exceeded the value of 100 EUR for the first time. Why, and what does it imply?
Intro
EU ETS carbon credits are a financial instrument used in Europe and Switzerland within the ETS (Emissions Trading Scheme), aimed at putting a price on greenhouse gas emissions from European and Swiss companies (the most polluting ones) subject to the ETS.
In short, the higher the price of credits, the more expensive it is to pollute. In fact, every ton of CO2 emitted by one of these companies must be compensated with a carbon credit.
Switzerland joined the European ETS on January 1, 2020, and since then, the two systems have been interconnected. Swiss companies required to participate are the most polluting ones operating in industrial sectors (e.g., cement production), energy, and aviation (in Switzerland or towards Europe). More information about Swiss companies subject to the ETS is available at the following link.
Price Evolution
In 2022, there was a significant increase in the demand for carbon credits from the European energy sector. One of the main causes was the reduction in the supply of Russian gas, which led to an increased use of coal in Europe for local energy production. Since coal is the most polluting fossil energy source, it greatly increased the CO2 emissions of companies subject to the ETS. As a result, the amount of credits purchased rose sharply, causing a spike in the value of carbon credits.
Implications
The high price of carbon credits can be seen as a positive factor for European climate policy, as it incentivizes companies to increase their investments in favor of the energy transition. On the other hand, the high price of credits is a source of conflict for some companies and participating countries (e.g., Poland, which generates much of its electricity from coal), as it heavily penalizes the most polluting companies, which are forced to pay large sums to compensate for their emissions.
The debate is even more relevant in the context of the introduction of CBAM (Carbon Border Adjustment Mechanism). In fact, this new European regulation will gradually reduce the free allocation of carbon credits. CBAM will therefore place additional financial pressure on affected European companies.
By exceeding the value of 100 EUR, carbon credits have crossed a critical threshold. This is actually defined as the price at which some investments in renewable energy and solutions become more economical compared to fossil alternatives. This should be the necessary incentive for European and Swiss companies (subject to this system) to invest in sustainable alternatives.
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For over 10 years, Positive Organizations has been helping Swiss companies develop corporate management that synergizes with the transformation required for a more sustainable future. We integrate ESG strategies and initiatives capable of creating a real positive impact on the world around them, and we publish ESG reports that communicate the commitments made and the efforts undertaken.
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References
https://www.bafu.admin.ch/bafu/en/home/topics/climate/info-specialists/reduction-measures/ets.html