International natural gas prices are hitting new highs this week, both on an absolute basis and relative to the US - see both charts below. At the same time, we see new contracts being signed for US LNG to move to China and Europe, but mainly China. This is happening despite significant renewable power investments globally in 2021 and it would appear that many have underestimated energy demand growth in projections and policy. The other net effect of the supply/demand imbalance this winter and possibly through 2022 will be increased coal use in Europe and the US, with local governments unable to meet near-term climate goals, especially in Europe, but also in parts of Asia and, at the same time keep the people warm and the lights on. In our ESG and Climate piece tomorrow we will focus on one highly unpopular but likely very practical opportunity for coal as part of a planned energy transition program, and it is likely that, while climate goals may not need to change, some socially unpopular decisions around the use of fossil fuels will be needed to prevent even more socially unpopular inflation or absolute shortages.
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.