Given the economic shock to the European carbon market from Covid, the price of EU carbon allowances has held up remarkably well in recent months. From a low of €14.30 a tonne in the early stages of the lockdowns across the EU, the benchmark December 2020 contract recovered to a near-record high of €30.80 a tonne in June, and has held at pre-Covid levels ever since. This seems a clear sign that market participants are starting to think beyond coal-to-gas fuel switching in the power sector — until now the main price driver for the EU-ETS carbon market since its 2005 inception — as the determinant of pricing. Indeed, we think there are three reasons for thinking that a whole new pricing paradigm for carbon could be in the offing. The cost of using green hydrogen — produced via electrolysers powered by wind and solar — instead of grey hydrogen, made via a carbon-intensive process involving natural gas, as fuel for industry is set to become the key pricing parameter over the next decade. This could ultimately lead to a near doubling in the price of EU carbon allowances if market participants’ perception evolves as we would expect. First, given that Brussels’ target of net-zero emissions by 2050 is soon to be EU law, there is now a clear endgame for the EU-ETS. Second, according to the European Commission’s recently launched strategic vision for green hydrogen, net-zero emissions by 2050 cannot be achieved without green hydrogen contributing a significant part of the solution. Third, the prerequisite for making green hydrogen commercially viable as an energy source is to make it commercially viable as an industrial feedstock by 2030.
FT 2nd Oct 2020 read more »