The arc of carbon’s curve
What does the carbon futures curve tell us and why is it important?
The carbon market has the potential to become the world’s largest and most consequential commodity market. The price at which carbon allowances and carbon credits trade could become one of the most important macroeconomic variables.
Despite appearances there isn’t one single price of carbon.
Carbon allowance prices vary significantly across regulated compliance schemes, and are influenced by the local marginal abatement cost curve, the overall emission reduction target, the relative scarcity of carbon emission allowances, and the credibility that the scheme has in the eyes of market participants.
Carbon credit prices in the voluntary carbon market are influenced by their perceived and actual success in avoiding or removing carbon from the atmosphere; for instance, whether offset projects are real, additional, measurable, and permanent and if they deliver any other social or economic benefits. All of these factors are in turn influenced by geographical, political, and technological factors coupled with often volatile demand side sentiment.
There is another variable that is often forgotten when discussing carbon - its place in time.
