Rising EU Carbon Prices Push Asia Back Onto Coal; Levels Surge to Yet Another Record (3)

OPINION By Mathew Carr

May 12, 2021 — LONDON: A surge in EU carbon permits has perversely created a risk that Asia will revert to coal-fired power, hampering the climate transition.

Higher carbon prices, which traded today (Wednesday) at their highest ever above 55 euros a ton, have boosted demand for natural gas in Europe. That’s because utilities burning gas need about half the carbon permits versus those using coal.

Intraday chart

(Higher gas prices also tend to boost demand for carbon permits, so the relationship is a little complex — not just one way).

The increased gas price in Europe in turn has dragged up Asian gas prices.

That, again in turn, has increased the attractiveness for electricity generators in Asia of relatively cheap coal. (U.S. natural gas prices have remained more modest, improving the competitive advantage of American industry.)

These steps are showing how high carbon prices in Europe could be influencing commodity prices around the world.

It underlines the need for a more global pattern of carbon prices, according to Dirk Forrister, president of the International Emissions Trading Association and a former climate advisor to President Bill Clinton.

“We’re in a time of transition, when the real imperative is for more countries to adopt emissions-trading programs and price carbon effectively, so the pricing signal is felt everywhere and not just in Europe,” Forrister said in a phone interview.

Yesterday, UBS AG, the Swiss bank with a well-regarded team of equity and market analysts, said it saw the U.S. joining the China-EU collaboration on climate and carbon pricing, creating a global solution to a worldwide problem.

“I see, for example, the new joint platform of the EU and China as an open arrangement between two major jurisdictions that the Americans should, and in my view will, join,” said Axel Weber, chairman of the bank, speaking at an online UBS climate seminar.

Here’s how the EU carbon price is arguably creating a perverse incentive in global commodities markets:

STEP ONE: EU CARBON RISES

Two-year chart; ICE Futures Europe

STEP TWO: EUROPEAN NATURAL GAS JUMPS (AND SO DOES ASIAN GAS [ JKM CONTRACTS])

STEP THREE: COAL DEMAND INCREASES (AND SO DOES THE COAL PRICE)

SO … EU CARBON RISKS BOOSTING COAL USE AS LNG FLOWS TO EUROPE

Here is an illustration of how the natural gas market has joined up (via shipments of liquefied natural gas)

ICE: How the natural gas market became global

The somewhat joined-up markets show why the European Union is planning to introduce a carbon border adjustment mechanism to protect its industry from unfair, dirty competition from 2023.

Europe’s threat is spurring countries and regions around the world to get more serious about ambitious climate action, because they are keen to protect their ability to sell products to EU nations. The U.K., which currently leads the G7 countries, is also seeking to encourage CO2 border adjustments.

Emerging countries have previously expressed concern that trade barriers are being erected in the name of climate action.

Story on the EU carbon adjustment mechanism, how it might work:
https://carrzee.org/2021/05/07/carbon-border-adjustment-seen-driving-europes-co2-prices-higher/

(Adds intraday chart and new record for carbon; updates with additional Forrister comment and UBS)

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