Europe’s Carbon Border Plan Set to Play Havoc With the Crude Oil Market (2)

–Crude oil market is just one of many industries under pressure from the climate transition — and in some surprising ways
–Carbon accounting rises as companies and customers feel pressure to clean up

By Mathew Carr

June 17-18, 2021– (LONDON): Europe’s proposed carbon border adjustment mechanism (CBAM), which is to come into effect by about 2023, is set to play havoc with the crude market.

The oil market will probably split, with low-carbon oil attracting premium prices, according to Occidental, the U.S. oil and carbon-management company.

There’s a 300kg (of carbon dioxide equivalent) difference, embedded in various types of oil produced around the world, said Tony Cottone, senior director, sustainability at Oxy, speaking at an International Emissions Trading Assoc. virtual event. “That’s really important. It should be the lowest-intensity value barrels of oil that get produced for this energy transition,” he said.

It’s possible that crude trading in the future will include a “carbon intensity label” — that takes account of the portion of carbon dioxide equivalent in the barrel, the energy used drilling, electricity used while extracting and shipping, downstream energy intensity, etc, Cottone said.

The 300 kg differential in CO2 means a barrel had a theoretical discount of about $6 a barrel of oil at the beginning of the pandemic last year, had carbon been priced in. Now EU carbon prices have surged, it could be $21 a barrel difference (at recent carbon market levels) and the differential could widen even more by 2023 and have a big financial impact on markets assuming the EU’s carbon border adjustment mechanism captures transport fuels at that time.

The chart above shows the different carbon content of oils around the world, with Kazakhstan, Azerbaijan, the U.S. and Saudi Arabia among those offering the cleaner crude at the left. Canada, Venezuela, China, Iraq, Indonesia and U.S./Alaska are among countries providing some of the dirtier fuels on the right (click the link below the chart, which is interactive if you go to the Carnegie Endowment website).

Analysis of the figures indicates some U.S. crudes could attract premiums of about $4 per barrel, with some Canada crudes suffering a discount of $17 to the average — assuming this year’s EU levels for carbon allowances. See this interactive chart — you can slide the slider to match the carbon price you want to think about.

Carbon pricing is being embraced in a patchy way around the world. An agreement by some or all of the Group of 20 countries on a flexible global carbon price floor would help limit global warming to 1.5 to 2 degrees Celsius, the International Monetary Fund said in a new staff paper released Friday, according to Reuters.

Europe’s CBAM, if put in place, would require importers to pay the equivalent of the EU carbon price on goods in energy intensive industries as they bring them into the EU. The planned measure is seeking to “encourage” other nations around the world to deploy carbon pricing if they want to trade with the bloc.

The most likely form of the CBAM will be a “notional emissions trading system”, where “a separate pool of carbon allowances is purchased on import at the EU emissions trading system price, but not traded,” Morgan Stanley analysts, including Victoria Irving in London, said in May. Details of the EU’s plan are expected July 14 (see also the link below).

Carbon prices in Europe have more than tripled since the beginning of the pandemic to 50 euros a barrel and some analysts are saying they may double again by next year.

The crude market, and others, could split even before 2023, depending on shifts in consumer behavior and as regions insist on more climate transparency.

An Occidental unit is developing a product to help consumers in industries from airline fuels to telecommunications keep track of the carbon footprint of the products they buy and sell.

CarbonSig, which tracks carbon content in pretty much any supply chain, is starting to unveil the sorts of carbon intensities in products, and create a signal for the various consumer markets.

“We’ve designed this to be like (Microsoft) excel for carbon tracking, with high-integrity transactions backed by blockchain. Then if someone wants, and if it’s acceptable to consumers or regulators, they could assign emission instruments to that product and then the end consumer can see the whole story,” said Nick Gogerty, managing director at Oxy’s Carbon Finance Labs, speaking at the same virtual event.

The 4.1 kg of carbon dioxide equivalent embedded in a common plastic bottle used to hold laundry detergent for instance could be offset with a “nano” carbon credit, he said. That’s a story that might be enough to tell a story to a customer and prod them to pay a higher price — boosting the profit margin on the detergent. See this chart:

Source: Carbon Finance Labs

Such a shift is being made necessary not just because of customer preference. As accounting firms hire carbon accountants and auditors in Europe and beyond to help ensure the climate transition is credible, the shift can probably gather pace, said Maria Carvalho, senior consultant, climate policy and carbon pricing at South Pole, which advises on the transition.

Earlier this week, accounting giant PwC said it would create 100,000 jobs and build ESG capability as companies transform to align with the need to save the climate. Not all jobs will be climate related, but many of them will be — when PwC segmented executives responding to a recent survey according to their awareness and prioritization of ESG issues, their personal commitment, and their belief in the potential for business to positively impact society, it found “leaders in most organizations (nearly three-quarters) were in the early stages of their ESG journey.”


(Adds Carnegie data, IMF, PwC, CBAM context; More to come)

Link on CBAM, citing Morgan Stanley analysis:

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