[Carbon Emission Allowance Surge] Speculative Demand Joins... Price Reaches Up to 100 Euros

[Asia Economy Reporter Byunghee Park] The reason carbon credit prices are rising sharply is that the supply of carbon credits is limited, while the United States and the European Union (EU) are accelerating their response to climate change, significantly increasing demand. Additionally, hedge funds are joining in to drive prices up. As prices surge in Europe, the largest carbon credit trading market, there could be indirect effects on South Korea as well. With the burden on companies inevitably increasing, there are calls for urgent government measures.

◆ Speculative Demand Joins the Carbon Credit Market = In December last year, the EU approved the European Commission’s proposal at the summit to reduce greenhouse gas emissions to 55% of 1990 levels by 2030. This is a significant strengthening of the previous target of a 40% reduction.

U.S. President Joe Biden is also reinforcing eco-friendly policies that were neglected during the Donald Trump administration, aligning with the EU. On his first day in office last month, Biden declared the U.S. would rejoin the Paris Climate Agreement and signed an executive order to halt construction of the Keystone XL pipeline, a major oil pipeline project between Canada and the U.S. He also announced plans to hold a global summit on climate change on Earth Day (April 22) this year.

Based on these positive developments, carbon credit prices are rising, attracting speculative buying as well. Murad Farahat, an analyst at ClearBlue Markets, said, "A lot of new money is flowing into the carbon credit market," indicating the influx of speculative funds.

Global Investment Scale in Renewable Energy Sector [Image Source= Bloomberg]

Casey Dwyer, manager at hedge fund Endurance Capital Management, predicted that carbon credit prices could rise to 100 euros per ton. He said, "I am confident in the rise of carbon credit prices," adding, "Prices could reach 100 dollars per ton as early as the end of this year."

Wolf Eck, Chief Investment Officer (CIO) of UK hedge fund Northlander, stated that carbon credit prices need to rise further to meet greenhouse gas reduction targets. He forecasted that prices would rise to 50 euros per ton this year and reach 70 euros per ton by 2025.

◆ "Government Should Increase Incentives for Carbon Reduction Investments" = From a corporate perspective, rising carbon credit prices inevitably increase the cost burden, as companies must pay more to emit greenhouse gases. The EU is expected to reduce the volume of carbon market allowances over the coming years to encourage companies to cut emissions. However, if the recent rapid price increases continue, there is speculation that the pace may need to be adjusted to avoid excessive cost burdens on companies.

South Korea’s government has set a plan through a revised roadmap to reduce national greenhouse gas emissions from 709.1 million tons in 2017 to 536 million tons by 2030. However, the industry is voicing complaints that the reduction targets are too stringent.

Experts point out that since the cost of purchasing carbon credits is rising significantly, the government should expand incentives for companies’ facility investments aimed at reducing carbon emissions.

Meanwhile, last year, global investment in greenhouse gas reduction exceeded $500 billion for the first time ever. According to a report released last month by Bloomberg New Energy Finance, global investment in renewable energy last year reached $501.3 billion, a 9% increase compared to 2019. This surpassed $400 billion in 2017 and crossed the $500 billion mark within three years.

Last year, renewable energy accounted for a larger share of electricity production than fossil fuels in the EU for the first time. According to the German think tank Ember & Agora Energiewende, renewable energy made up 38% of the EU’s electricity production last year, surpassing fossil fuel production at 37% for the first time in history.