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One of the most important things in global commodities right now is happening in a market that many wrote off a decade ago as an ignominious failure. The rising price of European carbon credits—which have climbed 170% over the past 12 months, after tripling in value over the previous three years—is quietly starting to remake the continent’s power and industrial sectors. That could have profound implications for the world’s ability to tackle its emissions over the decades ahead.

The European Union’s Emissions Trading System, or ETS, is the last and largest example of an approach to tackling pollution that was most in vogue during the 2000s: Set a shrinking annual cap on emissions above which high fines are levied, and allow major polluters to own and trade allowances so the market can find the most efficient path toward zero.

For many years, Europe’s ETS itself was thought to be little more effective than America’s cap-and-trade law, which never made it through Congress—or Australia’s, which was repealed with a change of government in 2014. An over-allocation of permits and the economic slump after the 2008 financial crisis meant that carbon allowances traded at too low a price to make any significant difference, dropping to zero for most of 2007 and averaging €5.89 over the five years through 2017.

Those issues have been ironed out as the EU has tweaked the set-up of the plan, and the result has been astonishingly effective. Since the start of 2018, the 433% jump in the price of carbon permits means they’ve proved a better investment than Bitcoin, which is up 283%, not to mention iron ore, palladium or lumber. They hit a record of €42.99 a metric tonne last Wednesday.

That’s not just numbers on a screen. Indeed, prices at those levels start having real-world effects. High carbon costs, combined with competition from cheap gas and renewables, pushed the price of Germany’s low grade lignite coal-based power deep into loss-making territory last year. Generation from RWE AG’s lignite plants has fallen by half over the past three years, defying expectations that relatively low operating costs would see them outlive less polluting technologies.

Power generation isn’t the only sector where carbon prices at current levels could flip the script. Zero-carbon steel, a technology that many still treat as science fiction, is estimated to be competitive with the traditional, highly polluting, product at carbon prices above €40 a tonne. At the same levels, Finnish forest land becomes more valuable as a carbon sink than as a source of wood and pulp, according to a 2020 study. Even carbon storage, which has been largely written off thanks to its early failures, is expected to become viable for some industrial processes such as ammonia, ethanol and hydrogen production as the U.S. implements a $50 tax credit for carbon capture over the coming years.

Across the world, we could achieve the Paris Agreement goals of keeping warming below two degrees Celsius with a global price of $40 to $80 a tonne in 2020, according to a 2017 study by economists Joseph Stiglitz and Nicholas Stern.

Europe, at least, is now well within that range—and the fact that major holders of carbon permits such as RWE are holding onto their allocations rather than selling into the current price strength is a strong indicator they don’t expect the market to fall from here.

That’s not enough on its own. The EU accounts for less than 10% of the world’s emissions, and three-quarters of the planet’s total is not priced at all. As a result, global average prices are on the order of a few dollars at most—far too little to change behaviour.

Where emissions are priced, however, their cost is following Europe’s rising path, thanks to the ever-tightening caps on emissions. Canada’s carbon tax will hit C$50 ($40) a tonne in 2023 before rising to C$170 per tonne in 2030. California’s emissions price has exceeded $18 per tonne in recent months and South Korea’s hit the equivalent of $34.79 last year. Even participants in China’s nascent carbon markets expect to see prices averaging 71 yuan a tonne ($11 per tonne) by 2025.

The answer for carbon pricing is not to write it off, but to make it more robust, covering more sectors and offering more opportunities for international trade.

Capitalism by its nature is constantly innovating new products, many of which carry substantial carbon footprints that aren’t factored into existing regulation—think sport-utility vehicles, Bitcoin or non-fungible tokens.

If we don’t want to be caught out by that, we’ll need a future where throughout our economies a price on carbon is as inevitable as death and taxes.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies.

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