Europe’s $38bn a year carbon market finally starting to work

Bloomberg

Europe’s $38 billion a year carbon market is finally starting to work the way it was intended, reining in pollution with a minimum of squealing from industry.
Thirteen years after it was created to limit carbon-dioxide emissions, prices for the allowances are rising. European Union policymakers have enacted measures expected to keep the cost of pollution on an upward trajectory through 2030, prompting hedge funds that abandoned the market to pile back in.
“For a five-year-plus period, this market was in the desert,” said Per Lekander, a fund manager at Lansdowne Partners UK LLP in London. “What’s happened over the past five months is the investment community is getting behind it again and putting on positions.”
Big polluters have heard the message and are starting to adapt. From automaker Volkswagen AG to RWE AG, which is Germany’s largest power generator, industry is cleaning up its smokestacks by turning towards renewables and bracing for a time when coal plants are regulated out of existence. Some are buying before allowances get even more expensive.
All this is happening without noticeable complaints from industry in part because policymakers from German Chancellor Angela Merkel to UK Prime Minister Theresa May have made it clear they want to phase out coal within the next decade, slashing greenhouse gases.
Companies favor the carbon market because it gives them more flexibility on how to comply with tighter emissions rules than regulation or taxes. The alternative to a market could be much worse for industry.
It’s also a good sign for the global effort to rein in climate change, showing that market mechanisms and government policy can persuade industry to step away from fossil fuels in a way that doesn’t create turmoil in the broader economy.
Europe’s carbon market is the biggest of more than 45 systems working worldwide and a model being tried everywhere from China to Mexico and parts of the US.
“We are very much in favour of the European Emissions Trading System,” said Klaus Schaefer, chief executive officer of the German power generator Uniper SE. “In order to deliver the CO2 reductions that we all agreed to in Europe, you will have to see higher prices.”
Carbon trading wasn’t an immediate success. Europe’s permits surged to more than 29 euros a ton in 2006 and 2008, only to plunge more than 90 percent after the financial crisis hobbled industry and helped create a surplus of the pollution rights. That glut took policymakers years to mop up, culminating in an agreement that got final approval only last month.
Utilities like Uniper will feel the brunt of the impact of higher carbon prices—governments cut off the supply of free permits to most power generators while doling out allocations for industries like steelmakers. EU emission allowances are the
best performing energy commodity this year, according to a report by Bloomberg New Energy Finance.
Higher carbon prices drive up the cost of using hard coal and lignite to run power plants.
It’s one of the mechanisms the 28-nation European Union is using to move industry away from the most polluting fuels and reaching the goals for curbing climate change set out in the 2015 Paris Agreement.
“Climate policy will drive accelerating coal phase-outs in the next few years,” said Phil MacDonald, an analyst at Sandbag, an environmental research group.