–Unlikely U.S. carbon legislation will be introduced this year: Morgan Stanley
–EU carbon futures rise to close Wednesday at a record above 43 euros a ton
–U.S. catch-up effort seen world-war like
ANALYSIS SUMMARY, REACTION
By Mathew Carr
March 17-18, 2021 — LONDON: The fact that various countries are tackling the climate crisis at completely different speeds may stoke trade tension, according to analysts at Morgan Stanley.
The introduction of a carbon border adjustment by the EU could encourage a range of responses from Europe’s trading partners, said the bank’s analysts including Jessica Alsford in London.
“The end goal is to incentivise a global approach to pricing carbon, and one possible outcome could be cooperation with complimentary climate policies introduced by key countries, such as the U.S. and China,” she said in a research note.
“However, time horizons may not be compatible and, with Europe progressing at speed, there is the potential for trade tensions to occur in the short term.”
Morgan Stanley’s base case is that the European Commission will put forward a carbon border adjustment proposal this year for implementation in 2023.
Depending on the evolution of the carbon price, the commission estimates that the carbon border adjustment could bring additional resources ranging from €5bn to €14bn.
In the U..S., the bank’s public policy strategists expect the Biden Administration to drive a step change in climate policy, but say it’s unlikely that carbon legislation will be implemented this year, according to the note.
The U.S. may catch up fast, said Tim Williamson, who was an Obama renewable energy official, commenting on LinkedIn.
It’s very likely the U.S. pandemic recovery legislation will be introduced this year, including “Sense of Congress” statements about a low-carbon economy and U.S. achieving net zero emissions by 2050, Williamson said.
“Cross-border adjustment taxes were never envisaged to start in EU-27 in 2021. This leaves plenty of time for high emissions countries to react with policies to avert cross border adjustments hitting their bottom line on high-embodied carbon exports to EU. My sense is, border adjustments are coming before 2025,” he said.
Here is a Morgan Stanley chart detailing some of the varied prices around the world, complicating trade in energy-intensive goods:
While carbon prices globally vary materially, all prices in the table above are below that required to incentivize a net zero pathway, the bank said.
“In an academic study co-authored in 2020 by Noah Kaufman, who is currently serving in the Biden-Harris Administration,
the necessary price of carbon for achieving net zero by 2050 is estimated to be $50/metric ton by 2025, increasing to $100/ton by 2030.
“The EU emissions trading system is the closest to achieving this, trading at around $45/tonne currently. Elsewhere, the IMF has estimated that $75/tonne is necessary to meet the Paris Agreement target of limiting global warming to 2˚C over pre-industrial levels.”
EU carbon futures rose 3.4% to close at a record 43.03 euros a ton on Wednesday — about $51.50
The region is forging ahead with its decarbonization plans, with support for green hydrogen using carbon contracts for difference (CCfD) auctions. Portugal is leading the way by making plans to hold an auction in the second half of 2021, according to Carbon Pulse.
See this story on CCfDs and green hydrogen in Europe: http://carrzee.org/2020/11/20/exclusive-germany-confirms-its-considering-funky-carbon-contracts-to-support-climate-transition/
The challenge for the U.S. and beyond is world-war like, said Doug Houseman, principal consultant at 1898 & Co., a Burns & McDonnell division.
“In the U.S. (not globally) if we are to fully electrify transportation and buildings – we need 1 million 2.5 MW wind turbines (the world today makes about 12,000 of that size turbine or larger) – over 8 years (to meet the 2030 goals) – so if we buy 100% of the global production we have 10% of what we need each year. The wind industry needs to ramp up by 30x minimum. We need 320 acres an hour 24/365 of solar panels and every hour they need to be placed on 640 acres (1 square mile an hour). Just for the U.S. – and in 8 years when we are done we need to demobilize about 80% of the production facilities. This is similar in scale to what the U.S. did during World War II with the scale of the industrial machine that needs to be created,” Houseman said on LinkedIn.
See this cool animation setting out the challenge, even before trade tensions:
(Updates to add extra commentary and EU carbon prices, CCfDs.)
Hopeful story on how policies could align: http://carrzee.org/2020/12/14/britain-touts-world-first-net-zero-carbon-market-as-it-leaves-eu-and-seeks-trade-deal-with-australia/