Carbon Allowance

Carbon allowances represent official permissions granted by a governmental agency, allowing a company to release one ton of CO2 or its equivalent (CO2e). Governments establish emission targets in advance and progressively reduce them over time, aiming to achieve net-zero targets by 2050.

These allowances are integral to compliance markets, where they can be traded. Unused allowances can be sold to other companies in ‘cap and trade’ carbon markets. Conversely, companies can acquire additional allowances if they anticipate exceeding their allotted limit. The existence of these markets motivates companies to align their emissions with government targets or face escalating costs for extra allowances.

Presently, there are approximately 30 cap and trade compliance markets globally, with the largest ones located in the EU, the UK, California, and China. Initially ineffective during their launch in the 2000s due to low credit prices and sporadic implementation, these markets are now functioning well. The average global credit price stands at USD 28 per ton of CO2e, with a significantly higher price of EUR 90 per ton/CO2e within the EU’s Emission Trading Scheme. When combined with carbon taxes, these two pricing mechanisms now cover 20% of global emissions.