The number of carbon pricing schemes is expected to increase and pricing policies are forecast to spread as governments introduce ways to help transition economies to net-zero emissions, according to a report by S&P.
More countries are expected to adopt some form of carbon pricing policies, which is seen as one of the most efficient levers to reduce greenhouse gas emissions as companies start to account for the environmental cost of emissions, the report said.
“We think that we are not going to see a global carbon price in the near future … but we still expect a spread of carbon pricing policies on a more localised level,” said Marion Amiot, head of climate economics at S&P.
Carbon pricing policies typically implement a carbon tax or establish a compliance-based carbon market, such as an emissions trading system. The EU ETS was established in 2005 and is the longest-running scheme in the world.
The carbon pricing regulations that are in place cover less than a quarter of global CO2 emissions. The largest markets by emissions coverage are in the EU and China, while others are in place in the UK, Canada, some US states and Asia.
"The number of carbon pricing schemes are generally increasing but maybe not at the pace we would obviously like to see," said Michael Evans, a global carbon compliance markets analyst at S&P. "It's great to have all these schemes in place but they need to be targeted at where the majority of emissions are coming from."
Pricing soaring
The EU’s carbon price is around €80 per tonne of CO2-equivalent, supported by its "Fit for 55" package, which aims to reduce emissions by 55% by 2030 and its RePower EU programme, which is designed to reduce Europe’s reliance on Russian gas.
S&P expects the EU’s carbon allowance prices to exceed €100 per tonne of CO2-equivalent from 2025, and sees further increases as the EU steps up its transition to net zero.
"We expect carbon prices in the EU Emissions Trading System to reach €120 per tonne of CO2 on an average annual basis by 2030," Evans said.
The price of EU Allowances – the region’s emissions allowances – more than doubled between 2020 and 2021, and are averaging 50% higher on 2021 so far this year, which is set to play an increasingly significant role in corporate funding and strategy.
"The exposure businesses have to these carbon prices will become an increasingly significant part of their decision-making processes," Evans said.
Companies with the highest emissions will be most exposed to high carbon prices, particularly those from the utilities, materials, energy and transport sectors, where emissions as a share of revenue are highest.
"It's most likely that companies that emit the most may be more affected by carbon pricing going up, but it's also interesting to consider emissions as a share of revenue. It's another metric to think about when you think about the financial materiality of carbon pricing for a company,” Amiot said.
The effects will also be felt in sectors with lower emissions that are not emitting directly, but use energy and operate real estate, which may still face pressure as a result of emissions embedded in their supply chains.
Widespread carbon pricing policies and higher carbon prices could also give a competitive advantage to companies that have already adapted to lower emissions and adjusted their business models to be less exposed.
Rising prices are also attracting more investors to the EU’s carbon market and the volume of allowances that they are holding and trading has increased, S&P said. Banks, funds, investors and utilities' trading desks are active players and new ETFs are being set up with investment portfolios centred around carbon allowances.
"Financial actors continue to look at carbon market policy reforms in the context of net-zero commitments, as a potential opportunity for their returns," Evans said.