Is the downward trend in the carbon price positive? While a high price is a lever in the fight against global warming, a downward dynamic can reflect the success of decarbonization actions, explains Valérie Mignon.
The carbon price has been on a downward trend for almost a year, which has been particularly pronounced since the beginning of 2024. Should we be worried about such a dynamic in view of the objective of carbon neutrality by 2050?
The carbon price is the result of two main instruments, the climate-energy contribution – commonly known as a “carbon tax” – and the Emissions Trading System (ETS). While the carbon tax is similar to a monetary levy on the sale price of a good, the ETS is a market in which an emissions cap is set and in which participants can buy allowances if they emit too much CO2 or sell it (the case of small emitters). This system thus operates on a polluter-pays basis. While it was close to €100 per tonne a year ago, the carbon price is now close to €60 on the allowance market. What for?
Gas Prices
One of the causes is the gas market. It should be remembered that the price of gas was close to record during the energy crisis triggered by the Russia-Ukraine conflict due to the strong dependence of Western economies, first and foremost Europe, on Russian hydrocarbons. With Europe’s gas supply fears now dissipated, its price has been on a downward trend. This has reduced the use of coal, an energy source that is more polluting than gas, mitigating CO2 emissions and, consequently, the demand for allowances. The slowdown in the price of gas has been accompanied by a fall in the price of carbon.
The acceleration of the deployment of renewable energy in some countries such as Germany, the largest emitter of CO2 in Europe, has also contributed to a decline in demand for allowances and, in turn, the price of carbon. The slowdown in the heavy industrial sector in Europe has also contributed to the reduction in demand for allowances. This is particularly the case for the steel sector, which is a major consumer of allowances and has had to deal with rising energy costs after the pandemic. These developments help to explain the decrease in the price of carbon.
Levering decarbonization
Is such a drop problematic? On the one hand, a carbon price that is too low can discourage companies from decarbonising their activity, thus hindering the energy transition. A high price is costly for high-emitting companies, which pushes them to accelerate the transition by investing in low-carbon processes. On the other hand, a falling price reflects a slowdown in demand for allowances, reflecting a further reduction in CO2 emissions in highly polluting sectors, in line with the fight against climate change. In addition, a high carbon price can be detrimental to the competitiveness of companies that are hampered in their performance, to the purchasing power of households that are affected by the increase in the price of many goods, and thus to economic growth. Sweden, however, is a counter-example, as it has one of the highest prices per tonne in the world, showing that it is possible to combine carbon neutrality with economic growth.
All in all, while a high carbon price is a lever in the fight against global warming, its downward momentum may reflect a reduction in the demand for allowances, a sign of an accelerated decrease in CO2 emissions from the biggest polluters and the need to increase investments in decarbonization.
