The power behind clean power: carbon pricing

Carbon pricing is not a commodity as such, but it is viewed as the single most effective policy tool to incentivise the shift away from fossil fuel use by increasing the cost of polluting. Therefore, carbon pricing is considered another key tool of the energy transition.

In the previous blog of this series, we covered the role of metals in enabling the shift to clean power. Carbon pricing as a policy tool takes this process to the next level.

Cap and trade schemes cap the total amount of certain greenhouse gases that can be emitted and reduce it over time to meet emission-reduction targets. Stable to rising carbon prices increase the cost of pollution. Lower quantities and greater prices of these allowances make it less and less economical for firms to pollute.

More than 40 countries have carbon pricing mechanisms in existence, but we highlight three carbon allowances schemes as being particularly significant based on their liquidity, size and length of time in existence:

• European Union Allowance (EUA): The world’s first, largest and most liquid market, the EUA makes up 90% of the value of the cap-and-trade market.¹ Targeting power generation, industry and most recently aviation, it targets a 55% reduction in emissions by 2030 compared with 1990 levels.²
• California Carbon Allowances (CCA): The second most liquid market in the world, the CCA targets a 40% reduction in emissions by the power generation, industry, buildings and transport industries from 1990 levels by 2030 and an 80% decline by 2050.³
• Regional Greenhouse Gas Initiative (RGGI): The first mandatory multi-state and market-based US initiative, with a specific focus on the power generation industry, it targets a 30% reduction in emissions compared to the 2020 cap by 2030.⁴
  
  

Together, these three major carbon markets have generated almost $200 billion in revenues since inception to help fund the transition. Globally, carbon pricing is gaining momentum, and the number of hard-to-abate sectors covered by carbon pricing is set to increase.

Demand from the energy transition is putting pressure on already supply-constrained metals. Policy tools such as carbon allowance schemes are another crucial element needed to make the energy transition a reality.

Assumptions, opinions and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass.

 

1. Source: International Carbon Action Partnership, 2024.

2. Source: ibid.

3. Source: ibid.

4. Source: ibid.

5. Source: International Carbon Action Partnership