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Carbon trading: international agreements and COP26 could push prices higher

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In the week leading to COP26, the biggest international annual climate conference, carbon prices are trading higher in anticipation what the summit may bring.

Attended by Boris Johnson, Joe Biden and other heads of state, the UN-organised summit is likely to see some large-scale climate pledges and commitments that will have a long term effect on carbon prices.

Carbon prices are notoriously susceptible to political decisions – without any outside incentives they lingered below €10 a tonne for the better part of the last decade and and only started rising closer to €30 in the last three years. The real turning point came in December 2020 when the decision by the European Council to increase the EU’s target on cutting emissions to 55% by 2030 led to prices doubling in the last nine months to around €60/t.

The way political winds are blowing, including Joe Biden’s return to global climate agreements after Trump left office, international commitments on cutting emissions are likely to push this price even higher. The OECD estimates that the carbon price should be closer to €125/t for it to become an effective tool to cut emissions and Glasgow, where the COP will be held, is the place where this will be debated.

UN events are notorious for their acronyms so here is a list of those, and key topics that will come up, to help you navigate the news and what it may mean for the cost of carbon and carbon trading more generally.


COP26

Stands for conference of parties, the 197 signatories of the UN Framework Conference on Climate Change. Expect speeches from Boris Johnson, Joe Biden, all major EU presidents, Canadian Prime Minister Justin Trudeau, Australian Prime Minister Scott Morrison and some high level presence from China, although unlikely the President himself.

Global carbon pricing

For the moment, only Europe and China have a carbon market. Before China launched its trading about three months ago, the EU Emissions Trading System covered most of the world’s carbon trading. The issue of making carbon prices more global is very likely to come up on the agenda – this has already been mooted by the OECD and alliances of investment funds and big industries – particularly with the introduction of the most obvious missing region, the US.

Free allowances

The EU limits how much carbon can be emitted by heavy industries but at the same time gives those industries a certain amount of free emissions allowances. Those allowances are traded on the EU European Trading System. The amount of free allowances is in the process of being reduced every year between now and 2035, hence the cost of carbon is going up.

CBAM

Stands for Carbon Border Adjustment Mechanism. It is a tax on carbon emissions on goods produced outside the EU and imported into the union. Look out for announcements on industries that will be covered by CBAM. For the moment it is only steel, fertilizers, aluminium and cement.

Fit for 55

A set of European regulations which is currently being debated. The regulation includes CBAM and expanding the EU ETS.

Expanding EU ETS

The European Trading System currently covers emissions from electricity, gas, oil, steel, raw materials and commercial aviation but from January it will also include shipping emissions. Look out for emissions from other industries being included. China is also expected to expand its carbon trading to more industries; its markets currently include only emissions from coal.

An ETF that tracks the Carbon price

Product Name ISIN Exchange Ticker Listing Currency
WisdomTree Carbon
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
JE00BP2PWW32 CARP EUR

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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