Carbon pricing: twists on the winding road to net zero

Incorporating the cost of greenhouse gas emissions into the price of goods and services could be a powerful driver of decarbonisation. At the start of the year, Lex set out the case for an ambitious carbon pricing target of $100 a tonne by 2030.

That would be a formidable challenge. It is 10 times higher than the 2019 global average. But if anything, the $100 target price already looks like an underestimate. The latest analysis from central banks said a price of more than $160 within a decade would be needed to provide an incentive to an orderly transition towards net zero by 2050.

The price of allowances linked to carbon emissions in the EU Emissions Trading System increased at an unexpectedly fast pace. The price of EU carbon allowances approached €90 a tonne in December, a near-tripling since the start of the year. That was not just the result of the market pricing in future reductions in the supply of allowances. The gas supply crunch has made energy producers more reliant on coal, pushing up carbon prices.

Price movements of energy stocks provided another unanticipated twist. Lex argued that coal-based utilities could end up losing as much as 90 per cent of their value, while renewable specialists might more than double theirs.

Acting on that advice might have been costly, at least in the short term. By December, shares in Denmark’s Orsted, the star of Europe’s renewable sector, had dropped more than 30 per cent in value year to date. Meanwhile, oil and gas stocks outperformed amid surging energy prices. Environmentally minded institutions that divested lost out.

There were several causes. One was bubble anxiety caused by the huge inflows into funds bearing the environmental, social and governance tag in 2019 and 2020. There were fears those had pushed up pure-play renewable stocks such as Orsted to unsustainable heights while depressing unfashionable fossil fuel stocks to bargain-basement levels.

The idea that the climate crisis cannot be solved without effective carbon pricing is an increasingly mainstream view. But no one should bet short term on a rising carbon price when energy strategy is disjointed and supply shocks abound.