15 at the time of the first containment, then $30 at the beginning of this year, and already more than doubled with a quotation around $66… As prices rise, attention is growing around the carbon market, and observers are wondering: how high will prices go?
It’s hard to say. One thing is certain: at this rate, the bill could be high for the companies involved. With the next round of negotiations just around the corner, finance departments and buyers are more than ever on the alert!
The companies involved
Although there are more than 20 carbon markets around the world, the European Union Emissions Trading Scheme (EU ETS), established in 2005, is still the world’s largest carbon market.
Its objective? To enable the European Union to fight against greenhouse gas emissions in order to achieve the objective of the Paris Agreements: carbon neutrality by 2050.
Energy producers, refineries, cement manufacturers, airlines by 2023, shipping companies by 2026… Brussels is progressively expanding the list of sectors concerned while reducing the emission caps (allowances) in order to push companies to act.
In practice, the EU ETS issues emission allowances for tons of CO2 each year that companies can receive for free or buy, and then trade.
At the end of the year, the company must have enough allowances to cover all of its emissions or risk being fined. In the event that the company has excess allowances at the end of the year, it can either sell them to another company or decide to keep them for the following year.
Thanks to this trading system, the European Union can control the CO2 emissions of the most polluting companies, progressively reduce the allowances in order to increase the pressure on companies, and above all, ensure that the reduction of emissions is done in an optimal way from an economic point of view.
How to reduce carbon risk?
In addition to the reputational risk, the most polluting companies by the nature of their activities are now not only obliged to pay for their emissions, but also to manage a new risk specific to the volatility of carbon prices: the carbon risk.
And for good reason: while purchasing departments can estimate with relative precision the quantity of allowances to be acquired to cover their company’s CO2 emissions, financial departments have little visibility on the evolution of associated costs.
However, given the high volatility of prices on the carbon market, the financial departments of the companies concerned are gradually taking the measure of what is at stake and are now making sure that carbon risk management is integrated into their financial risk management system.
To avoid blind spots, DeftHedge software allows you to keep a close eye not only on your company’s carbon volume, but also on its foreign currency cost and its impact on your company’s margins, in order to help you make the best decisions under any circumstances.