We have maintained all year that the strength in the European carbon price is sustainable and that it should go even higher and consequently, we are not surprised by this week’s move, even if much of the impetus is speculation. The European price is still not high enough to justify unsubsidized CCS or widespread renewable power investments to replace carbon-heavy energy sources, especially as renewable power costs rise. We estimate that a price in the €85-100 per metric ton range would be needed to stimulate investment, but because of the structure of the European market prices could overshoot this level meaningfully and be quite volatile until the level of abatement spending accelerates. When we start seeing investments in Europe to lower carbon that are not highly subsidized by local governments (in addition to the incentive of the carbon price) we will have a better guide around where 45Q needs to go in the US (or other mechanisms) to get investments rolling. Our analysis suggests that the US has some lower-cost abatement opportunities than Europe, especially on the CCS front, but not by much. For more on carbon costs and prices see today's ESG & Climate report.
Source: Bloomberg, C-MACC Analysis, September 2021
