Tag: Carbon Markets

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Emissions Trading and Border “Adjustments”

Emissions trading schemes were in the news last week, and China was at the center of the news.

China’s long awaited ETS went live on Friday, after operating seven pilot programs since 2011. It covers 2,225 power plants, responsible for over 40% of China’s national emissions, and is being called the world’s biggest carbon market. Certainly in terms of sheer coverage it is. The 4,000 megatonnes of carbon encompassed in the scheme represents about 12.4% of the global total of 32,300 reported by BP in last week’s Statistical Review of World Energy.

Critics are already pointing out the holes in the scheme.

  • The maximum penalty under the scheme is around $4,600. It’s not a meaningful deterrent.
  • The scheme is unlike other “cap and trade” systems which use a declining cap to drive down emissions annually. Instead, permits are allocated on the basis of plant size and carbon intensity, and given out freely. If a plant exceeds its emissions cap then it needs to go to the market to buy additional permits. However, in practice the quantity of permits issued means that any plant operating at below 85% capacity will have excess allowances.
  • The maximum number of allowances that any non-compliant plant will be required to buy is up to 20% of their allocation. Even if operating at 50% above the allocation, they are only required to buy 20% more. It’s a free pass for the dirtiest of plants.
  • Gas plants are effectively exempt from the scheme. Analysts expect that they will always be net sellers of allowances. Some are even calling the scheme a subsidy for gas power.
  • The market price per ton is set at about $7, far below global averages.

Carbon Brief has a detailed Q&A, with many more data points. Bottom line is that “The ETS in its current form will likely have no impact” (Transition Zero, “Turning the Supertanker”, page 4). China says it’s in a preliminary benchmarking phase. Much will depend on how China enlarges it, and how carbon is priced in the future.

Separately, last week the EU released more details on it’s proposed “Carbon Border Adjustment Mechanism” (CBAM) as part of it’s “Fit for 55” initiative. The Europeans are careful to call this an adjustment mechanism, and not a border tariff. They claim that it’s neutral and will comply with current WTO rules. Essentially, CBAM requires that products imported into the EU have to meet the same emissions criteria as products produced in the EU. Imports will have to be accompanied by emissions certificates, and if they don’t comply they will have to purchase emissions credits on the open market in order to bring them into compliance. The goals are to both prevent European companies from relocating manufacturing to less stringent countries, and to encourage manufacturers in foreign countries to produce clean products for export to Europe.

CBAM is being received by European partners as a tax, and potentially an illegal tax under the terms of the WTO. It’s a headache for the US which has no emissions trading scheme in place. It’s also a headache for China, which will face (potentially) steep tariffs unless it gets its own house in order. Some believe that CBAM could be a forcing function to get global agreements on emissions trading, as it will put exporters at a disadvantage competing in large markets unless they’re willing to comply.

And that brings us back to China. The world has legitimate complaints about China. It is the world’s largest emitter. China also exports more CO2e than any other economy in the world. As the dominant manufacturing country in the world, China’s dirty power makes its way to the shores of every other nation in the world not just as air pollution, but also as scope 3 emissions in the form of the products we buy and use.

Src: WEF Net Zero Challenge: The Supply Chain Opportunity

Bottom line: CBAM, and schemes like it, are the medicine needed to clean up global supply chains, and to force emitters to mend their ways.

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“Carbon-neutral” natural gas? Really?

Natural gas liquefaction plant

Can a container ship filled with liquified natural gas be “carbon neutral”? Shell Oil and Cheniere Energy want you to believe that. In May, the two companies delivered a shipment of gas to Europe in which emissions associated with the upstream costs of processing and liquifying the gas were offset by carbon credits purchased from Shell’s portfolio of nature-based projects. Emissions were offset to the “FOB delivery point”. This means that Shell and Cheniere have offset the emissions all the way to the point of delivery, as indicated by this statement in their joint press release.

The companies worked together to offset the full lifecycle greenhouse gas emissions associated with the LNG cargo by retiring nature-based offsets to account for the estimated carbon dioxide equivalent (CO2e) emissions produced through the entire value chain, from production through use by the final consumer (all scopes).

Shell Oil Press Release, May 5 2021

Really carbon-neutral?

What they’re claiming is that independent of how the customer uses the product they’ve delivered, the product itself has been produced in a carbon-neutral fashion. And, of course, their shipping partners are eager to tout their new green credentials too. Astomos Energy, for example, put out a press release stating that they are now purchasing “carbon-neutral LPG”. The appetite for Cheniere’s new products was strong enough that they posted a 40% increase in revenues from a year ago, and bumped guidance, rewarding investors with a 74% increase in the stock price from this time last year.

Naturally, this has commentators crying foul. Salon labelled it a greenwashing scam. Cleantechnica simply said A tanker full of fossil fuels isn’t carbon neutral. That’s not how it works.

I agree.

Decarbonizing supply chains is hard.

What this illustrates, quite neatly in fact, is the complexity of decarbonizing supply chains. At Davos this year, the WEF unveiled a report titled “Net-Zero Challenge: the supply chain opportunity“. The central thesis was that 8 supply chains accounted for over 50% of the world’s emissions, and that decarbonizing those supply chains would have impact. The energy industry wasn’t one of the eight supply chains named directly. Why not? Energy is an input into every supply chain. You literally cannot decarbonize supply chains without decarbonizing energy itself.

Let that sink in.

It’s good that Shell and Cheniere have taken the small step of offsetting the emissions associated with creating and shipping their polluting products, even if the marketing of those products as net-zero LPG is deceitful. The next step is to decarbonize energy generation itself — Shell and Cheniere’s customers.

Policy is part of the answer

So how do you decarbonize energy itself? Aside from technology solutions, policy is an incredibly important tool. Yesterday the UNEP Net-Zero Alliance, a group of investment managers representing $6.6 trillion of assets under management, released a position paper calling on governments to adopt common approaches on emissions pricing, to apply emissions pricing to every sector of economies (not just the heavy emitters), to swiftly phase out fossil fuel subsidies, and to fund research and create incentives to decarbonize hard-to-abate sectors. This approach — carrot and stick — works. You can see it visually by checking out the current price of European Usage Allocations futures (as at July 7). Emissions in Europe are now nearly $60/ton, up from $20 in April.

EUA December Contract prices, courtesy Ember

What’s next?

We’re still a long way from where we need to be. Analysts say that the price today needs to be closer to $85, rising to $145 by 2030, in order to reach a 1.5C global warming target. Emissions pricing schemes still only apply to 17% of the world’s carbon emissions. So long as emissions prices stay low, and customers exist that aren’t covered by pricing schemes, there will be a market for green-washed inputs like (unfortunately) fossil fuels.

As individuals, there are are two actions we can take.

  1. When emissions trading becomes a political issue in your country, vote in favor of emissions markets, or cap-and-trade solutions. There will always be those who claim that “the market” is the solution. The market is clearly not infallible, as the Shell / Cheniere announcement shows. Vote for emissions trading schemes with teeth, not un-regulated markets.
  2. When you have the option, buy green energy from your local supplier. Do your homework first, though. Make sure that you aren’t being sold green-washed fossil fuel energy, but rather energy from non-emitting sources like wind, solar, or nuclear.

And Shell, Cheniere… we know you have to serve your shareholders, but shame on you for such cynical marketing tactics. We deserve better.

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Nova Scotia Carbon Lots Price at 74% Premium

Nova Scotia has implemented a “cap and trade” program in order to price emissions. Twice a year, the province auctions off emissions allowances, which give the purchasers the rights to emit a fixed amount of green house gases. Each allowance is equivalent to one ton of emitted CO2. As a business you may emit up to the limit of the allowances you purchased. Any emissions beyond that are priced at a stiff 3x price of the auction price. The funds from the auction are paid into the provincial Green Fund, which is then used to make investments into sustainability projects.

Over time, the allowances made available reduce in number, increasing the price of emissions and providing the emitters an incentive to run cleaner business. This paper from Osler has more details.

  • 13,683,000 in 2019
  • 12,725,000 in 2020
  • 12,258,000 in 2021
  • 12,148,000 in 2022

That’s how it works.

On Wednesday, the province announced the results of their July 9 auction, which is the third since the program was implemented. The headline was that the settlement price was C$36.71/ton, a premium of 74% over the reserve price of $21.09. Two other facts:

  • 767,000 allowances were offered.
  • There were an average of 1.23 bids per allowance.

Although this is an encouraging result, it is also a very limited experiment. Three ways that Nova Scotia could improve their program are:

  • As mentioned above, Nova Scotia’s program creates a fixed number of allowance’s annually, but distributes most of them free of charge to qualifying companies. Only 6.25% of 2021’s allowances went to auction. However, this is also increasing over time. A year ago, at the July 10, 2020 auction, 640,000 allowances were offered which represented 5.1% of the annual allowances. It appears that the province is creating fewer allowances, and charging for more of them, which is driving the auction price to market competitive levels.
  • Link their carbon market with other carbon markets like California and Quebec, so that a more open market for emissions can be created. Right now, Nova Scotia’s program is limited to the province.
  • Expand the scope of companies covered. At this point, only businesses emitting more than 50,000 tons of CO2e in any year are required to participate.

Cap and trade programs make sense, versus carbon taxes. A carbon tax is a blunt tool, penalizing consumers for the emissions of the business they’re buying from. Proponents of carbon taxes like to point out that they can be used to fund governmental green energy initiatives, which is true. Cap and trade programs, however, create incentives for the business to reduce emissions directly and also raise money for green initiatives, which is a double benefit. Nova Scotia is moving in the right direction.

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Another Day… Another Corporate Call for Action

Yesterday, we saw The Investor Agenda call on government to step up with more comprehensive commitments to meeting Paris Accord climate change targets. The World Economic Forum’s CEO Alliance for Climate Change also issued a similar call for action. The CEO Alliance represents roughly 400 of the top 2000 publicly traded global companies. The letter, signed by 78 of the CEOs participating in this group, called on governments to deliver policy changes including:

  • Publish new NDCs, aligned to a 1.5C target, and halving emissions by 2030.
  • Commit to net-zero by 2050, with roadmaps to get there.
  • Ensure that developed countries meet and exceed their $100B commitment to support developing countries mitigate and adapt to climate change.
  • Develop broadly accepted carbon pricing mechanisms, with escalating carbon prices to drive the transition.
  • Compel all business to establish credible decarbonization targets, and fully disclose all emissions.
  • Eliminate fossil fuel subsidies, and cut tariffs on green goods.
  • Boost R&D spending.
  • Invest in climate adaptation. This means resilient cities and infrastructure.
  • Create and implement sector-specific incentives for power, transport, buildings and cities, industry, land and agriculture, and finance.

It encompasses the same policy actions as the Investor Agenda open letter, and then takes them a step further asking government to provide incentives and R&D as well.

Both the Investor Agenda letter, and the CEO group letter ask for the elimination of fossil fuel subsidies, and for synchronized carbon pricing mechanisms to be introduced. What would this do?

  • Direct fossil fuel consumption subsidies are substantial, according to the IEA, at about $320B annually. The incentives and R&D asked for could be funded by the elimination of these subsidies.
  • Similarly, carbon pricing mechanisms send a signal to markets that low-carbon investments will be valuable and also create incentives for companies to be more efficient. Carbon pricing has momentum. According to the World Bank’s 2020 State of Carbon Pricing report, there are now 61 carbon pricing initiatives scheduled or implemented, and to-date some 14,500 projects registered. One challenge for business is the diversity of models. 30 of these initiatives are carbon taxes and 31 are carbon exchange trading systems.

Taken together, these two open letters are a strong endorsement by business. Rather than fight climate change efforts and regulation by government, they are calling for public/private partnerships to make progress more quickly.

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Investors Group Asks Governments to Step Up

The Investor Agenda is a policy advocacy organization with the mission of accelerating a net-zero emissions economy. Today 457 of their members with a combined $41 trillion in assets asked governments to do more than meet their Paris Agreement commitments. Specifically, they are asking government to:

  1. Strengthen their NDCs to align with a 1.5 C target for 2030. NDCs are simply the commitments that governments made at the Paris conference.
  2. Commit to mid-century (2050, presumably) net-zero emissions targets, and outline the interim steps to get there.
  3. Implement policies to deliver these targets, including phasing out fossil fuel subsidies, carbon trading systems and more.
  4. Use COVID-19 recovery plans to double down on the transition to net-zero.
  5. Commit to mandatory climate risk disclosure requirements.

One of the misunderstood stories of the climate transition is the opportunity in it. The capital and operation costs of both solar and wind power are now well below corresponding fossil fuel generation, creating massive opportunities for investment. You can see this in the financial performance of renewable assets as a class. These investors are saying “we have the capital to make help make this transition”. They’re asking governments to commit with them, to require disclosure of climate risk by business, and to remove the subsidies that artificially support the fossil fuel industry.

Transforming the global economy will be a hugely expensive, but hugely profitable opportunity. This is a relatively small, entirely understandable, and fair ask on the part of the investment community.