TOKYO -- Prices for greenhouse gas emissions allowances have swelled this year as governments set increasingly ambitious goals to tackle climate change.
The cost of a permit to emit 1 ton of carbon dioxide under the European Union's cap-and-trade system has surged roughly 30% since the end of last year, fueling concerns about a financial burden on companies that risks reducing competitiveness. A similar program in Japan could cost businesses an estimated $24 billion a year.
The EU system, which accounts for about 90% of the global carbon credit market, sets caps on emissions in such sectors as power and oil refining. Companies must buy enough allowances to cover their emissions, through either government auctions or trading, or face hefty fines.
EU businesses bought about 594 million tons in carbon permits at auction in 2019 -- equivalent to nearly 20% of the bloc's overall emissions -- with a total value of 14.6 billion euros ($17.3 billion at current rates).
The market is shifting as major economies look to achieve net-zero emissions by 2050. Brussels decided last year to target a 55% reduction in greenhouse gas emissions from 1990 levels by 2030, and the U.K. aims for a 68% reduction over the same period. Lower targets give polluters less leeway.
This dynamic and brisk trading by hedge funds have driven up prices. The cost of credits hovered around 20 to 30 euros per ton last year but surged in 2021, climbing as high as 42.8 euros on March 17.
Prices could reach 70 or 80 euros per ton in 2030, by some estimates, as the EU accelerates its emissions cuts, forcing companies to take tougher measures to keep up and squeezing the supply of allowances.
Japan recently began considering an emissions-trading system as a step toward its goal of net-zero emissions by 2050. Takehito Yamamoto of the Mizuho Research Institute estimates that an EU-style cap-and-trade program here would cost businesses roughly 2.6 trillion yen ($23.9 billion) a year, rising to 4.3 trillion yen in 2030 as prices for carbon allowances climb.
But even if Tokyo decides against such a system, businesses could face a similar burden if other countries adopt so-called carbon border adjustment mechanisms of the sort that the EU plans to implement by 2023.
The tax will raise prices of imports from countries that are not doing enough to rein in greenhouse gas emissions. This aims to address concerns that the additional economic burden from the carbon-trading system will make European companies less competitive and drive business elsewhere.
The U.S. is considering a carbon border tax as well. If it goes that route, foreign enterprises that operate in or trade with Europe or America could face additional costs when they do business across borders.
As financial incentives against pollution expand, emissions-cutting innovations will be essential for companies to keep costs down and remain competitive.