The only number that matters

A market based approach to pricing carbon is founded on the most basic of economics problems – scarcity.

The science of climate change makes the case that there is a limit to how much additional carbon dioxide can be pumped into the atmosphere before we hit certain thresholds associated with global warming. The 2015 Paris Agreement backed a long-term goal of limiting global average temperatures to “well below 2°C”.

The scarcity is the Earth’s ability to absorb this extra carbon, sometimes known as the carbon budget. If we exceed this budget limit then it becomes more likely that the negative impacts associated with climate change will accelerate, with each additional threshold leading to non-linear impacts.

And so the only number that really matters is the amount of greenhouse gases that are released into the atmosphere.

Based on preliminary estimates, European emissions are likely to have declined between 2021 and 2022, with further falls likely to occur in 2023. Is this the start of trend, a longer term sequence of annual emission reductions? It will need to be if the EU has any hope of meeting its net zero targets?

Greenhouse gas emissions from Germany, Europe’s biggest economy, declined by 1.9% in 2022, according to preliminary data published yesterday by UBA, the country’s environment agency. UBA report that increased output from renewables and energy saving measures on behalf of households and industry were behind the decline - the energy industry accounts for around one-third of Germany’s GHG emissions.

Although no longer a member of the EU, preliminary estimates of UK GHG emissions point to even larger declines. According to an analysis conducted by Carbon Brief, UK emissions fell by 3.4% in 2022. Similar to Germany and elsewhere in Europe, emissions have been under pressure from the strong growth in renewables, coupled with high energy prices that have dampened demand.¹

Verified data on EU ETS covered emissions will be published in two weeks on 1st April. Approximately half of the EU’s emissions are covered by the EU ETS so preliminary data provides a strong indication of the magnitude of the move in official data. Remember that this data release gives a sense of the total amount of EUAs that obligated emitters will have to show that they have purchased (or received free allocations for) by the end of April.