The last year has seen energy costs soar for industry and consumers as markets have been roiled by geopolitical events and supply/demand dislocations.
Wholesale natural gas and electricity prices rose by as much as ten times in the year to October 2021, according to an International Energy Agency report, due to a combination of low gas stocks and rapidly rising demand as the impact of the Covid-19 pandemic waned.
And the cost of carbon in many jurisdictions also increased. European emission allowance prices trebled in 2021, while prices in California, RGGI, New Zealand and the UK all reached record highs last year.
Some parties were quick to blame the cost of carbon as the main cause of higher energy bills and called for measures to dampen allowance prices, even though studies showed carbon allowances represented around one-fifth of the increased burden.
However, other observers pointed out that high energy prices represent a unique opportunity to double down on climate ambition – to speed up the transition to a low-carbon economy.
A high price of carbon, one that penalises carbon-intensive methods of production, also supports low-carbon alternatives. And higher carbon prices are a policy goal.
For example, the European Commission’s Hydrogen Strategy, published in July 2020, estimated that a carbon price of between €55-90 would be required to render “blue” hydrogen competitive as a feedstock.
Many countries also saw the recovery from the Covid-19 pandemic as a chance to rebuild their economies on more sustainable lines, emphasising climate-friendly development and leveraging the potential of Article 6 of the Paris Agreement as a way to “bake” low-carbon investment into their plans.
Rising fossil energy prices may not be here to stay, but the market is behaving as if they are. Share prices in renewable energy companies are rising rapidly as investors look for strong opportunities in alternative energy. Global investment in renewable generation was expected to rise 10% in 2021, after remaining flat in 2020, according to the IEA.
And much of this can be put down to the impact of carbon pricing. By forcing companies to internalise the cost of climate pollution, carbon markets are continuing to force the pace of change, even as the cost of fossil energy rises due to extraneous influences.
It’s a sign that we are on the right path.
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Head of Public Affairs + Policy, Patch