Carbon values are rising around the world and are prompting activity as they do. The expectation of a high carbon tax in Canada has spurred investment plans for low carbon fuels, methanol, hydrogen, and ammonia all using carbon capture, and the rising European carbon price is an indication that carbon credit demand will increase to the point that many of the CCS plans in Europe make better economic sense.
Source: European Energy Exchange, Bloomberg, C-MACC Analysis, April 2021
The European prices – as shown in the Exhibit above – have moved up meaningfully from almost irrelevant lows in 2016/17. In our view, the lows were caused by a miscalculation on the part of the regulators who set up the system concerning just how much CO2 could be reduced quickly. The plan set too slow a movement in the Cap, and companies were able to lower CO2 emissions as fast or faster than the Cap moved, creating limited demand for credits. At the same time, some government-supported sequestration projects created a surplus of credits too quickly. As Caps have steadily declined, the supply and demand for credits has come more into balance and is now rising sharply because the next tranches of CO2 reduction are getting more expensive to achieve as they fit in the higher cost categories shown in the Exhibit below. We hear encouraging reports of advances in carbon capture technology, which is the major expense for dilute streams of CO2, but prices may have to rise much further in Europe before broader (unsubsidized) CCS becomes economic, and they have further to go in the US also – hence our thought that an additive carbon credit market could move the needle assuming that sequestered carbon was deemed to create a carbon credit that could be sold as an offset for those looking to partly buy their way to carbon neutrality because of the nature of their business – airlines for example. At €45, the European carbon price today is well above the US 45Q value which is around $38 per ton rising to $50 in 2026.