Carbon price data and forecast methodology

Carbon pricing is an instrument that captures the external costs of greenhouse gas (GHG) emissions. A carbon price provides economic signals to emitters and allow them to decide to either decarbonise their operations or continue paying for their emissions. Carbon pricing also helps to mobilise investment to stimulate decarbonisation in the economy.

As such, there is consensus among government and business on the pivotal role of carbon pricing in the energy transition. The number of jurisdictions that implement (or plan to implement) carbon pricing has been growing over the past couple of decades. Jurisdictions can introduce carbon pricing regimes at the regional, national and/or subnational (cities, states, provinces and regions) levels.

Carbon pricing can take different forms. In Lens, carbon pricing refers to an explicit price being put on GHG emissions (a price expressed as a monetary value per ton of carbon dioxide equivalent). Compliance (i.e. mandatory) carbon pricing can take the form of an emission trading system (ETS), a carbon tax, or a hybrid between the two.

The government decides which sectors are covered and trade emission credits in the form of allowances or emission reduction units, and emitters must have enough credits to cover their emissions each year (they can usually buy these credits through auction, or from other market players). ETS are also known as ‘cap and trade’ schemes, as the maximum emissions in the economy are limited (capped) in any given period, and only a corresponding amount of credits is issued. The cap declines over time, consistent with economy- or industry-wide emissions targets. Facilities may be granted free allowances to cover a proportion of emissions.

Examples: EU ETS (allowances), Australian ACCUs (project-based reduction/sequestration units)

A fixed tax rate usually in US$/tCO2e is applied to all CO2 emissions in covered sectors or from covered fuels. Specific projects could be granted an emissions allowance so that only emissions exceeding the threshold are subject to the tax.

Example: Singapore carbon tax (based on emissions), Sweden carbon tax (based on fuels use)

Carbon liability is determined by taking the annual emission profile for each asset and multiplying it by the assumed carbon prices. Value at risk (VAR) is calculated by taking a discounted cash flow of the carbon liability profile. These metrics represent the potential financial risk associated with emissions for an asset, company, country, etc.

Note that this method only considers the impact of potential carbon costs on each asset. It doesn’t consider the impact of any changes in demand for the commodity, or the consequential impact on commodity prices, as a result of changes in market fundamentals associated with a lower carbon future.

Wood Mackenzie’s carbon price model takes into account several country factors to generate a forecast:

Our Historical and Future Indicators model combines data from across Wood Mackenzie research to gauge the level of pressure on countries to institute or increase carbon charges.

For 200+ countries, we include and combine the following data:

For each of the dozens of indicators, we compare each country to a benchmark of its economic and geographic peers. The importance of a given indicator or peer group is dynamically modelled to prioritize the most influential factors.

Each country receives a combined score from this analysis which is then incorporated in our carbon price forecasting model.

The minimum abatement costs model integrates Wood Mackenzie’s extensive research findings in various sectors. We examine the emission abatement technology options and costs in different sectors under different price scenarios：

We consider emission abatement technologies such as:

For 200+ countries, the minimum abatement costs are determined for each type of fossil fuel usage at sectoral level. The minimum abatement costs in a certain sector are determined from the cost assessment based on various factors:

Public policy plays a significant part in shaping the country’s decarbonisation path and pace. Wood Mackenzie tracks climate- and emission-related policy statements, as well as policy setting for carbon pricing regimes for different countries and factor these statements in carbon price forecast.

Country’s emission reduction targets at national level serves as the high-level guidance and we analyse the timeframe of such targets and the gap of current emission from these targets. We include the key emission reduction levers or pathways for getting the climate targets, which are identified by the governments according to their national circumstances. More detailed analysis is facilitated by policy guidance at sectoral level if applicable, which provides specific decarbonisation target, timeframe or pathway.

Policy changes on the carbon pricing regimes also have significant impact on prices. The coverage of mandatory carbon pricing regimes tend to expand, as the governments aim to deepen clean transition in their economies. Coverage expansion is often in geographical or sectoral form. Additionally, some governments announced plans for carbon price increment in the future, which are clear and direct price signals to incentivise clean transition.

Examples:

For existing market-based carbon pricing mechanism such as ETS, we overlay a market component in our modelling, which considers the supply and demand fundamentals of allowances traded in the market.

Allowance demand is evaluated at sectoral level according to the regime coverage. In each sector, the demand is determined from emissions associated fossil fuel consumption in the sector. Sectoral allowance demands will add up to total demand in the market.

Allowance supply is modelled at market level. Carbon pricing regime settings have dominant control over the supply, especially in the near term. The allowance supply in the longer term is guided by the country’s climate targets, such as Nationally Determined Contributions goals and net-zero targets, as well as the country’s emission profile under Wood Mackenzie’s Pledge and Net Zero scenarios.

In the model we consider both market interventions, like market stability reserve or cost containment reserve that influence the amount of allowances in circulation, as well as allowances price floor or ceiling.

As the emitters can decide to either decarbonise or continue paying for their emissions, we include dynamic comparison between established carbon price and minimum abatement costs. The comparison result determines whether relevant emission reduction technology will be adopted. If an abatement technology is put in place, corresponding emission reduction will lead to reduced demand for allowances in the sector.

Wood Mackenzie’s carbon price outlook updates the carbon price forecast (including the current year’s price) on a quarterly basis for key pricing regimes and annually for the remaining regimes.

The carbon price outlook also provides historical carbon prices for countries with carbon pricing regime(s) in place.

Prices are nominal to the current year and real (in current year terms) thereafter.

For countries with multiple carbon pricing regimes, the historical prices assessed in the outlook are the most significant and relevant regimes at the national level.

Wood Mackenzie incorporates primary research to strengthen our in-house deep industry and regional knowledge. This research is combined with public domain information to generate high-quality proprietary data and analysis.

We use a wide variety of public and private sources, but we do not purchase data other than from entities which own the data and are entitled to sell it to us.

The table below shows the attributions to information providers that contribute to our historical prices at the regime level.