The EU carbon price has extended its record-breaking rally to jump above €50 a tonne for the first time, pushing up the cost of polluting in the bloc to more than double its pre-pandemic level.

The EU Emissions Trading System (ETS), which is designed to put a cost on carbon dioxide for some of the most highly polluting industries from power generation to aviation, has rallied more than 50 per cent since the start of the year.

As recently as December last year, the carbon price had never traded consistently above €30 a tonne, but prices have surged as traders bet the availability of carbon allowances will need to tighten in the coming years if the EU is to meet aggressive climate targets, including cutting emissions by 55 per cent by 2030.

The rise has made carbon one of the world’s hottest commodities. While environmentalists have welcomed the rising cost of pollution for power suppliers and industry, there are fears that the pace of the rise is faster than companies can easily adapt to, stoking concerns that the potential costs could be passed on to consumers.

Nevertheless, Fatih Birol, head of the International Energy Agency, on Tuesday described the price rise as “excellent”, arguing that higher carbon prices were necessary for a rapid transition towards cleaner fuels.

“This is an unmistakable signal carbon prices are going to increase,” Birol said in an interview with the Financial Times. “It gives a strong signal to investors and citizens that the direction of travel in the EU is becoming clearer and clearer so they make the next investments, and for citizens too.”

Line chart of € per tonne  showing EU carbon trading prices surge

Companies in the steel sector and other heavily polluting industries such as petrochemicals and cement last week called on the EU to accelerate plans to implement a carbon border adjustment tax for imports from countries outside the scheme, fearing they were being put at a competitive disadvantage.

The steel sector in Europe, for example, would face carbon costs of about €2bn this year at current price levels, despite being given the majority of its carbon allowances for free by member countries.

Under the bloc’s ETS, companies are allocated a set number of allowances to cover at least part of their emissions. If they cut the amount they pollute, such as by using renewable fuels or natural gas instead of coal, they are free to sell the leftover allowances for profit. But if they increase pollution, they need to buy additional allowances to cover their emissions, under the so-called cap-and-trade model.

The EU’s revised goal of cutting greenhouse gas emissions by 55 per cent by 2030, relative to 1990 levels, gives “a clear signal on the way forward”, with market participants expecting the price to continue to rise, said Nils Rokke, executive vice-president of sustainability at Norwegian research group Sintef.

He added that the current level was still “likely to be too low” to reach the target, since “some of the solutions which have to be deployed are more in the €100 to €200 per tonne range”. The EU’s 2030 climate package, which has been delayed from June until July, would drive further price action, he added.

The surge in carbon prices has attracted the attention of hedge funds and other financial investors who have been moving deeper into the carbon market, alongside utilities and other industries that trade the credits.

Marcus Ferdinand, at consultancy ICIS, said carbon was moving from being a “pure” commodity as it attracted not just funds but other companies that were starting to view it as a potential way to hedge their exposure to the energy transition.

“The carbon market is pushing the European economy to a net zero pathway,” said Ferdinand. “It’s become very resilient to potential bearish factors, as there is inherent demand from industry, but also the narrative is still very strong and that has brought in new players to the carbon market.”

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