The long term price of emission

Clearing the industrial decarbonisation bottleneck will require significantly higher carbon prices

Most emission trading schemes (ETS) at least cover emissions from the power generation sector (i.e., the combustion of fossil fuels for electricity generation), and from high emitting industries (i.e., process emissions from companies involved with steel, cement, and chemicals among others).

The power sector in particular is particularly well-suited to being included under a carbon cap-and-trade schemes. It benefits from a diverse set of relatively cost-effective mitigation options and generation occurs only in a relatively small number of locations. The ETS can incentivise the retirement of particularly high-emitting plants (e.g. older thermal coal plants), and / or by incentivising low-carbon investments (e.g. renewable generation and ultra-high voltage transmission lines)

Achieving ambitious carbon emission targets will require much more from the industrial sector. However, industrial decarbonisation faces very different challenges to that faced by the power generation sector. Ultimately, the economics won’t stack up for industry unless carbon prices rise much higher and sooner than current consensus estimates suggests, and stay there for an extended period of time.

This article looks into the scale of the challenge, and where carbon prices will ultimately need to be and when.