What is the cost of a tonne of CO₂

Although it makes no difference to our planet where and why CO₂ gets emitted, there is no global CO₂ emissions price. The vast majority of worldwide greenhouse gas emissions continue with impunity to be released into the Earth’s atmosphere for free. For the small remainder of emissions that are subject to costs, the price ranges from just a few cents to over USD 150 per ton. If even only moderately ambitious climate targets are to be reached, the CO₂ emissions price must increase substantially worldwide in the long term. Investors by now can also partake in the potential presented by continually expanding emissions trading.

Greenhouse gas emissions trading: On the dispensation of indulgences…

The public debate over markets for CO₂ emissions not infrequently focuses on the unregulated trading of voluntary carbon credits to finance, for example, forest protection or other environmental projects. However, with a volume of just USD 2 billion per annum, the voluntary carbon credits market is not only relatively small, but is also very questionable to boot because, normally, unregulated carbon offset credits are issued solely on the basis of advance estimates of a project’s success while systematic evidence of actually achieved emissions reductions is missing. A study conducted by the Swiss Federal Institute of Technology in Zurich in collaboration with the University of Cambridge found, for example, that only 12% of carbon offsets sold actually result in emissions reductions.¹ Whereas the unregulated trading of voluntary carbon credits is thus often disparaged as being nothing more than the buying and selling of “climate indulgences,” the trading mechanism in the much larger (USD 800 billion) market for mandatory carbon credits is perfectly clear.

…and regulated markets

That market works on the “cap & trade” principle. An upper limit (the cap) determines the maximum total amount of CO₂ that is permitted to be emitted. A corresponding quantity of emission allowances is then allocated to market participants, partly for free and partly through auctions. Companies that generate high emissions must purchase additional emission allowances while those that cause less emissions can sell their carbon credits (the “trade” part of cap & trade). This trading establishes a market price for greenhouse gas emissions. That price and the continual lowering of the upper emissions limit over time are intended to give corporate participants in the emissions trading system an incentive to reduce their emissions. The idea is that as soon as the traded CO₂ price exceeds the cost of averting emissions, companies begin to decarbonize because that becomes the only way to maximize profits. The incentive price needed to bring about a reduction in emissions varies depending on the industry in question because not all emissions are equally easily avertable. Whereas the cost incentive threshold for complete decarbonization is estimated at around USD 60 per ton of CO₂ in the steel sector, for instance, it is much higher in the cement industry (USD 130), the aviation sector (USD 230) and the maritime shipping industry (USD 350).

Demonstrably effective | Mandatory carbon credits lower EU emissions level

Emissions in European emissions trading (in million of tons of CO₂ equivalent)

Sources: EUTL, European Environment Agency, Kaiser Partner Privatbank

Europe: Leading by example

The market for European emissions allowances (EUAs) exemplarily demonstrates that regulated CO₂ emissions trading actually works. It was launched back in 2005 and has since cut emissions in the industries it covers by almost 50%. Today the European Emissions Trading Scheme (EU ETS) is already in its fourth implementation stage. In contrast to the earlier stages, today practically no more carbon credits are issued to companies for free, but are instead allocated through an auction mechanism. The fine for companies that exceed their emissions allowance has been sharply increased. In addition, the upper limit for total emissions will be lowered by 2.2% per annum in the future, which is a much faster pace than in previous stages.

Supply and demand | Scarcity drives up the price

Quantity and price of European emissions allowances (EUAs)

Sources: EUTL, ICE, EEX, Kaiser Partner Privatbank

CO₂ emissions trading is gradually coming of age in Europe, as reflected not least in the price for European emissions allowances. Whereas a ton of CO₂ traded for a little under five euros in 2016, its price has increased severalfold in recent years. The envisaged mechanism works: if the compulsory upper limit is lowered faster than companies can cut their emissions, this reduction in supply leads (ceteris paribus) to a higher price. The price of CO₂ therefore must increase (further) in the long run. In the near and medium term, though, a host of other factors influence price formation. For example, the market registered a recent supply overhang in 2024, mainly due to the early sale of carbon credits to finance the REPowerEU plan and due to the issuance of additional emissions allowances for the maritime shipping sector, which is now also covered by the EU ETS. The logical consequence of the resulting supply overhang was a falling CO₂ price (intermittently by almost 50%). This recent episode shows in no small way that prices for greenhouse gas emissions are subject to parameters set by policymakers and thus ultimately are political. Certain price risks therefore cannot be completely disregarded. In the EU example, for instance, there’s at least a theoretical risk that policymakers might reduce the quantity of emissions allowances less quickly than originally planned out of fear of putting European companies at a competitive disadvantage (particularly versus China). That would put the European CO₂ price back under downward pressure.

Supply and demand | Excess supply causes the price to drop

Price of European emissions allowances (EUAs, in euros per ton of CO₂ equivalent)

Sources: EEX, Kaiser Partner Privatbank

Rest of world: Step by step toward a global price

Following the example set by the European Union, an array of other carbon credit trading markets has emerged over the last 15 years. The list of the largest and most liquid trading systems includes the Western Climate Initiative (WCI) in California and Quebec, the Regional Greenhouse Gas Initiative (RGGI) in 11 northeastern US states, and the New Zealand ETS. In the United Kingdom, the UK ETS replaced the country’s previous participation in the EU ETS in January 2021. There are 36 emissions trading systems in operation by now around the world, according to the International Carbon Action Partnership (ICAP). One of the latest newcomers is China, which introduced an emissions trading system for the energy sector in 2021. This marked a major step forward from a global perspective. The introduction of a CO₂ price for the world’s largest polluter increased the amount of global emissions covered by a pricing system by 10% in a single bound.

However, despite the constant growth of CO₂ markets, today it is still the case that only around one-quarter of all greenhouse gas emissions are subject to a pricing mechanism. Although over a dozen additional emissions trading systems are in the works and look set to be rolled out in countries including Japan, Brazil, Mexico, Indonesia, and Turkey in the years ahead, the international greenhouse gas emissions pricing system being advocated by multilateral organizations like the WTO, the IMF, the OECD, and the United Nations remains a pipe dream thus far and is hardly realistic in the foreseeable future. It would be necessary, though, in order to enable the CO₂ market to unlock its full potential.

Still room for improvement | Less than one-quarter of all greenhouse gas emissions have a price

Percentage of global greenhouse gas emissions subject to a pricing system

Sources: World Bank, Kaiser Partner Privatbank

CO₂ emissions as an asset class

The market looks set to grow further in the foreseeable future, and not just with regard to the quantity of CO₂ emissions covered. The same applies to the price level, which climate experts say is still too low, at least if society would like to reach even just moderately ambitious climate targets. If the aim is to limit global warming to a maximum of 2° Celsius above pre-industrial levels as envisaged by the 2015 Paris climate accord, it is estimated that a CO₂ price of around USD 120 per ton would be needed in 2030.² This fact leaves a lot of upside potential from the current price levels. It would imply a price increase of 10% to 12% per annum from the current level in the case of the market for European emissions allowances. If one assumes a risk-free interest rate of 4% (the yield on 10-year US Treasurys), that would equate to a CO₂ premium of 6% to 8% p.a. Investment vehicles that enable investors to partake in this price outlook are few and far between thus far, but there are some scattered opportunities with a multiyear track record. However, interested investors must be aware of the (political) risks of this still-young asset class and must bear its constrained liquidity in mind. Whoever is willing to put up with that will be rewarded in exchange with uncorrelated returns versus traditional asset categories and, for example, can use an allocation to CO₂ markets to hedge the greenhouse gas risk in his or her stock portfolio.

Uncorrelated performance… | …not without (political) risk

World Carbon Fund vs. other asset classes

Sources: Carbon Cap Management LLP, Bloomberg, Kaiser Partner Privatbank

¹ Probst, B., Toetzke, M., Kontoleon, A., Diaz Anadon, L., & Hoffmann, V. H. (2023). “Systematic review of the actual emissions reductions of carbon offset projects across all major sectors.”

² Source: World Carbon Fund (average from four scenarios: Stern Stiglitz Review (USD 75), IEA Net Zero by 2050 (USD 130), Bank of England (USD 150), UK REA Bioenergy Strategy (USD 125)

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