A Different Sort of Political Risk Will Make the U.K. Carbon Market Fun to Trade

OPINION

By Mathew Carr

April 30, 2021 — LONDON: Britain’s new post-Brexit carbon market will be fun to trade, and potentially financially dangerous, because of the multiple political risks on the table.

When the market officially kicks off in three week’s time, traders bidding in the first auction and buying and selling futures contracts on ICE Futures Europe will have plenty to think about.

Initially, prices won’t trade too low because there’s a 22 pound per ton reserve price at auctions. The country also has a separate floor support system with complicates comparisons between the EU and U.K. programs (see story linked below).

The British government intends to withdraw its reserve price as the market “matures,” according to guidance updated April 28 (see link below).  “The government will consult on its intent to withdraw the auction reserve price as part of the planned consultation to appropriately align the U.K. emissions trading system cap with a net zero trajectory which will be launched later this year.”

There’s plenty for traders and potential traders to think about in that sentence right there.

But there’s also plenty of potential market shifts, should prices surge, because that’s when “cost containment” measures will kick in.

The Cost Containment Mechanism (CCM) will provide “a process for the U.K. government and devolved administrations to address significant extended price spikes in the market. The UK CCM will have lower price and time triggers in the first 2 years of the U.K. ETS when compared to the equivalent EU ETS mechanism.

This will allow quicker intervention in the early years if appropriate. If the CCM is triggered, a meeting of the UK ETS Authority is called to consider what intervention, if any, to make. If there is no agreement on what action to take, the final decision will be taken by HM Treasury (HMT). This intervention can include:

  • redistributing allowances between the current year’s auctions
  • bringing forward auctioned allowances from future years to the current year
  • drawing allowances from the market stability mechanism account
  • auctioning up to 25% of the remaining allowances in the New Entrants Reserve

All of these decisions will require complicated analysis and traders seeking to second guess the authority and then potentially Treasury will probably need sophisticated models to predict the various potential outcomes.

I imagine the U.K. cost containment system will indeed be able to be nimble compared with the EU, should prices spike. That’s what the British government is aiming for and that may prove attractive to traders. EU rulemaking is notoriously laborious, yet even so has its own logic for traders with the stamina to get to know it.

So even after EU carbon prices surged this year, the first year of the Paris climate deal, there are going to be plenty of opportunities, and risks, going forward for traders. See this two-year chart:

ICE Futures Europe EUA price chart in euros/ton. Prices as of Thursday April 29. Traded down 0.4% at 47.82 euros a ton as of 11am April 30

The U.K. market may initially dent the EU market, as traders divide their time, potentially sell EU futures to finance purchases of U.K. contracts. On the other hand, increasing interest from the wider global investment community will probably more than make up for those short-term shifts.

ICE was appointed to host emissions auctions on behalf of the U.K. governments as the new market replaces the country’s participation in the EU ETS.

According to ICE:
Full details of the U.K. Allowance (UKA) auctions, including the auction calendar, can be found here. ICE plans to launch UKA Futures contracts on May 19, coinciding with the launch of the first auction, with UKA Daily Futures following on May 21, subject to regulatory approval. These will clear at ICE Clear Europe alongside ICE’s global environmental complex, including European Union Allowances (EUA), California Carbon Allowances (CCAs) and California Carbon Offsets (CCOs).

“We believe the UK ETS will be pivotal in supporting the climate ambitions of the U.K.,” said Gordon Bennett, Managing Director of Utility Markets at ICE, in an emailed statement. “Reliable and liquid carbon and energy benchmarks are critical for markets to deliver an efficient transition from high to low carbon energy generation and carbon cap and trade programs have proved to be an incredibly successful policy tool in abating emissions.”

ICE provides access to the largest and most liquid environmental markets in the world. More than 14 billion metric tons of carbon trades on ICE annually, which is equivalent to about 40% of the world’s total annual energy-related emissions footprint based on current estimates, it said.

Environmental markets have been offered for nearly two decades. A wide and increasing group of investors and emitters use the price signals from markets and indices to help assess and manage climate-action risk in their portfolios of stocks, bonds and commodities.

February UK carbon story: https://carrzee.org/2021/02/24/five-years-later-and-after-the-fact-brexits-still-set-to-roil-europes-carbon-market/

Updated U.K. guidance: https://www.gov.uk/government/publications/participating-in-the-uk-ets/participating-in-the-uk-ets#auctioning-and-market-operation

UN Climate Talks Leadership Mocked for its Inability to Collaborate

By Mathew Carr

April 16, 2021 — LONDON: The U.K., which is planning to host UN climate talks later this year, is being mocked for its apparent inability to collaborate.

The European Federation of Energy Traders called for the linking of the post-Brexit U.K. emissions trading system, still under construction, with the EU CO2 market, the world’s biggest.

Brexit forced the UK out of the EU market.

Alistair McGirr, Head of Strategic Policy at UK utility SSE, said this:

“Progress on linking between the UK ETS and the EU ETS has been disappointing/non-existent. Time is running out for it to be done by COP26, where it could be used as a headline case study for collaboration under Article 6 of the Paris Agreement. Over 40 EU and UK trade associations have written to the EU institutions and the UK Government to try and get things moving. If the UK and the EU can’t agree to collaborate on issues such as climate, why should they expect others to? Announcing an ETS link by COP26 should be a key priority for both the EU and the UK to help make Glasgow a success.” (See note below for LinkedIn link)

PERSONALLY, I wouldn’t write off the U.K. just yet. There’s a chance Britain is seeking to collaborate with an even wider group of countries than just the EU. G7? G20? Even Africa?

The best climate solution is global. Otherwise, countries can ride for free on others’ efforts or continue to engage in the damaging climate brinkmanship we’ve seen the past 30 years.

Photo by vectors icon on Pexels.com

NOTES:

McGirr link:

https://www.linkedin.com/posts/alistairmcgirr_euets-ukets-activity-6788450089930174465-RdfG

Missed opportunity to show the world, not just tell the world? https://carrzee.org/2021/03/02/nudges-tax-and-trade-boris-johnson-rishi-sunak-can-set-their-legacy-tomorrow-theres-a-small-chance-theyll-do-it/

Five Years Later, Brexit’s Still Set to Roil Europe’s Carbon Market (1)

By Mathew Carr

Feb. 24, 2021: LONDON — As utilities with U.K. coal and natural gas generation switch to new British carbon allowances during the next few months, the value of those permits and the European Union ones are set to fluctuate wildly, according to traders.

The U.K. carbon price seems likely to be higher than that in the EU following Brexit, based on current indications.

The expected implementation of the post-Brexit U.K. market by June will be complicated by the country’s floor support. Adding the U.K. floor of 18 pounds a ton to the U.K’s upgraded auction reserve of 22 pounds gives an indicated minimum level of 40 pounds a ton.

Source: ICE Futures Europe, U.K. government data

That’s about 46 euros a ton, or 7.40 euros, 19%, more than current prices for EU carbon futures on the ICE Futures Europe exchange.

According to my survey of traders, some are expecting prices for the traded U.K. allowances near the 22 pound a ton level, yet demand in the secondary market could be strong initially if supplies in the first few auctions — the primary market — are not high.

EU carbon allowances have surged through 40 euros a ton during the past few weeks after breaking through 30 euros for the first time only back in December.

Debate about how Brexit will roil the EU’s carbon market has caused fluctuation in prices ever since the British vote to leave in the middle of 2016.

Photo by Anthony Beck on Pexels.com

Since the end of the transition period in December, some coal and gas generators in Britain have used EU allowances as a proxy for U.K. carbon because the new British contracts are not yet available.

A 19% price difference is certainly wide enough to boost demand in Britain for EU-generated power, which could be a boon for mainland Europe generators, according to a trader at a big bank.

British fossil-fuel generators have had a great start to 2021, because the winter cold snap and low levels of wind generation caused demand for power and gas to surge.

When these utilities switch into U.K. allowances by selling the EU permits they have built up, that will probably still shift prices.

See this:
https://carrzee.org/2021/02/10/u-k-utilities-get-huge-4000-quid-mwh-windfall-as-low-wind-winter-demand-means-fossil-fuels-win/

(Updates with chart)

EEX’s Open Positions in EU Carbon Futures Rise Year on Year Amid Brexit (1)

By Mathew Carr

Dec. 8, 2021 — LONDON: Open interest, a measure of trading positions that have not closed, advanced 23% to 157,470 EU carbon futures contracts by the end of the year vs the same time in 2019, according to EEX.

The exchange uses the measure “synthetic net OI futures,” which has advanced slightly since then to 158,754 contracts, according to the EEX website.

Still, the exchange has a small portion of the market versus ICE Futures Europe, based in London, which had open interest of 1.18 million lots at the end of the year, including options.

So, as the U.K. exited from the EU market, the world’s biggest carbon program by traded volume, there were apparently no huge shifts, according to traders.

But prices have repeatedly hit higher record levels as EU nations have halted daily auctions until Jan. 29.

See this: https://carrzee.org/2021/01/07/eu-carbon-trading-comes-away-unscathed-as-brexit-otherwise-takes-toll/

December volumes for EU carbon futures rose 69% to 52 million tons vs Dec. 2019, EEX said today by email.

See figures for carbon futures here (Note the Dec. future is the most commonly traded, so interest drops each year from end of Nov. to end of Dec. as the future gets delivered):

From EEX email

EEX summary data for all markets here:

Climate in the Frame as EU members back China investment deal (2)

–China retains access to EU markets and gets investment possibilities in renewable energy, the Financial Times reports

By Mathew Carr

Dec. 28-29, 2020– LONDON: Agreement ‘could be reached as early as Tuesday’ following movement on major sticking point, Newspapers reported.

“No country had raised ‘stop sign’ clearing way for political endorsement, source says,” according to the South China Morning Post.

For China, it retains access to EU markets and offers investment possibilities in renewable energy, the Financial Times reports.

The endorsement of the deal came after EU negotiators said there were “positive developments” on Beijing’s commitments on labour standards, one of the major sticking points.

The EU and China have been cooperating on carbon pricing. China’s national carbon pricing system has been delayed as U.S. President Donald Trump resisted climate action. With Trump being replaced by Joe Biden next month, more cooperation on the climate crisis is seen between China, the U.S. and EU, which last year had 44% of the world’s energy emissions.

Yet trade tensions remain high across the world, and the climate transition, or lack of it, is seen potentially upsetting existing economic relationships.

China’s economic growth aims to meet the Chinese people’s aspiration for a better life and inject impetus into global economic recovery. China is still the biggest developing country in the world, where uneven and inadequate development remains a prominent problem. Development is the underpinning force for tackling all challenges. As we work to develop a new development paradigm for high quality development, China will play a more active role in global market, deepen cooperation with other countries, and share development opportunities for win-win results,” said China Foreign Ministry Spokesperson Zhao Lijian on Dec. 28 at a regular press conference.

For report:
https://www.scmp.com/news/china/diplomacy/article/3115588/all-eu-member-states-back-china-investment-deal-sources-say

(Updates Monday afternoon with analysis, Tuesday morning with FT and comment from China)

EU Carbon Surges to Record After Brexit Deal, as Freezing Weather Approaches; Natural Gas Jumps to Year High (1)

By Mathew Carr

Dec. 28, 2020 (LONDON) — EU carbon prices rose to their highest ever ahead of a period of freezing weather across much of Europe early next week. Natural gas contracts surged.

EU December 2021 allowances advanced as high as 33.50 euros a ton and were up 2.5% at 32.98 euros at 1pm in London, according to data from the website of the ICE Futures Europe exchange. (The price might have been even higher as the data provided on the website does not include every trade.)

The gain also followed the striking of a Brexit trade deal Dec. 24.

See this snip for cold weather coming up and click the link for a weather loop from WeatherOnline:

Loop: https://www.weatheronline.co.uk/cgi-app/weathercharts?LANG=en&MAPS=vtn&CONT=euro&LAND=__&ZEIT=202012281308&LOOP=1

Front-month (Jan. 2021) Dutch natural gas jumped to 19.425 euros per MWh, its highest in more than a year.

Higher carbon prices make it more expensive to burn coal and lignite for power, spurring utilities to prefer gas where possible. Coal generators need about double the carbon allowances compared with those burning gas.

For Brexit trade deal carbon and climate story: https://carrzee.org/2020/12/25/u-k-eu-disputes-on-climate-to-be-governed-by-bespoke-panel-of-experts-after-brexit/

(Updates Monday afternoon to add natural gas surging too.)

A Polar Bear Dreams Up January 2021 Climate Resolutions –Not All of 2021 (2)

–Young bear hit by oil drilling, dashing hopes for ambitious January

By Mathew Carr and others

Dec. 27, 2020-Jan. 9, 2021 — LONDON: Since nearly 200 nations were supposedly set to finish tightening their contributions to the Paris agreement by the end of last year (Dec. 31 — we assume, because there’s a deadline under that ratified UN deal), they’ll be up for getting cracking on unprecedented climate action starting January 2021.

Here’s how a fictional baby polar bear, let’s call him Yao, would like to see humans play January out, day by day … but it hasn’t gone so well so far.

(I’ll update this during the next few days/weeks – please send ideas my way for specific January 2021 climate actions at mathewncarr@gmail.com — can be for the record or you can indicate off-record steers … there are plenty of gaps to fill):

Photo by Robert Anthony Carbone on Pexels.com


Friday, Jan. 1.

Among the most cost-effective and politically expedient climate action is cutting low-hanging-fruit emissions in emerging nations, financed by wealthier nations most responsible for the climate crisis. These moves also help heal climate injustices, Yao reckons.

Yao likes the idea of cutting many tons of emissions with 32 euros rather than just one ton (– that’s the closing 2020 price on the world’s biggest carbon market in Europe, according to ICE Futures Europe).

Countries are already using Article 6 of the Paris climate deal (for instance) to drive cost-efficient emission cuts via projects worth at least $1.4 billion, a fourfold rise within 18 months, according to Carbon Pulse. See this from a fascinating report this month by Climate Finance Innovators:

https://www.climatefinanceinnovators.com/wp-content/uploads/2020/12/Climate-Finance-Innovators_Article-6-piloting_State-of-play-and-stakeholder-experiences_December-2020.pdf

Since the European Union and it’s former member Britain have set more ambitious emission targets for 2030, Yao dreams they could resolve to provide an extra incentive to emerging nations by AGAIN tightening their Paris pledges, too, first thing in 2021 — preferably on Jan. 1.

The EU could pledge to go for a 75% emissions cut by 2030 vs 1990 instead of its current target of 55%.

It could do so by promising to help finance cheaper greenhouse gas reductions in the emerging world, using article 6. Similarly, the U.K. could go for 80% instead of its new 68% reduction target.

Yao’s not the only one dreaming of this. So is Yvo De Boer, former executive secretary of the UNFCCC:
https://carrzee.org/2020/12/06/capitalism-2-0-in-sight-as-climate-added-to-profit-as-market-goal/

Tighter targets will get climate money flowing where it is most cost effective.

By sending this signal, the European nations could show they are very serious about hitting Paris’s target for keeping temperature gains as low as 1.5C above pre-industrial levels.

Yao likes these moves because they help modernize developing nations, many of which have signalled they are willing to adopt tighter 2030 targets assuming the promised finance and assistance and technology — promised by richer nations for three decades — finally arrives.

The landscape is already becoming impressive:

Climate Finance Innovators: https://www.climatefinanceinnovators.com/wp-content/uploads/2020/12/Climate-Finance-Innovators_Article-6-piloting_State-of-play-and-stakeholder-experiences_December-2020.pdf

THIS HAPPENED TO SOME EXTENT WITH ADJUSTMENTS MADE BY NATIONS IN THEIR NDCS

Saturday, Jan. 2

Dozens of nations announce they’ll participate in reverse auctions to win finance to protect forests and grow new ones, absorb greenhouse gases using new farming techniques, slash industrial emissions, shift away from fossil fuels, Yao hopes.

Theses reverse auctions could spur 100s of billions of euros of finance (though weirdly it’s unclear how much they’ll be used in 2021).

See this: https://www.bloomberg.com/news/articles/2015-07-17/world-bank-reverse-sale-spurs-carbon-credit-price-5-times-market?sref=fcMjhrdB

Such auctions of put options have previously resulted in price guarantees for emission credits at $2.40 (1.97 euros) a metric ton, five times Thursday’s benchmark price on ICE Futures Europe. In an auction earlier this year, the price was lower — fifteen winners paid $0.30 for the right to sell a carbon credit to a facility at $1.98 per credit.

See this: https://www.worldbank.org/en/news/press-release/2020/03/04/pilot-auction-to-help-reduce-42-tons-of-emissions-in-2020

Such auctions could be enough to start investments in 1,000s of emissions projects around the world, especially in poorer nations where greenhouse gas reductions come cheaper.

I WILL STAY ON THIS ONE

Sunday, Jan. 3

Yao would love it if even more countries around the world agree to stop subsidizing fossil fuels, policies that are effectively paying companies to pollute and worsen the climate crisis.

They are effectively a negative carbon price — effectively rewarding companies for bad behavior.

THE U.S. MAY DO THIS WITHIN TWO YEARS — SEE THIS: https://carrzee.org/2021/01/07/gloves-are-off-in-the-climate-fight-after-democrats-win-control-of-the-u-s-senate/

Monday, Jan. 4

Seeing how the North-South finance is starting to flow, Yao hopes China, India, Brazil and Russia are among countries to announce they are bringing forward plans to price carbon, boosting the incentive to cut emissions and set up better market structures.

They target prices in 2030 below those expected by industrialized nations, where levels are expected around 100 euros a ton, (but not too far below because of the finance).

Here’s one idea from a credible Chinese university:

See this for the apparent alignment:
https://carrzee.org/2020/12/14/britain-touts-world-first-net-zero-carbon-market-as-it-leaves-eu-and-seeks-trade-deal-with-australia/

Tuesday, Jan. 5

Yao sees nations across Africa, South America and Asia announce they will replace plans for coal generation with renewables, especially wind power and solar.

 85% of planned coal projects in Asia cancelled, according to Assad Razzouk, CEO of Sindicatum Renewable Energy

See this:
https://www.linkedin.com/posts/assaadrazzouk_assaad-razzouk-on-twitter-activity-6748898208744828928-2vf1

Wednesday, Jan. 6

Several countries bring forward plans to build gigafactories for battery production. THIS DIDNT HAPPEN.

INSTEAD OF ENHANCED CLIMATE ACTION, Yao the bear is being hit by POTENTIAL oil drilling in the arctic – the complete opposite to what he was hoping for.

https://www.blm.gov/press-release/trump-administration-conducts-first-anwr-coastal-plain-oil-and-gas-lease-sale

The U.S. Bureau of Land Management (BLM) on Jan. 6 received bids covering 552,802 acres at the first oil and gas lease sale for the Coastal Plain of Alaska’s Arctic National Wildlife Refuge (ANWR), furthering the Trump Administration’s goal of securing greater American energy independence and national economic prosperity.  BLM Alaska received 13 bids totaling $14.4 million, according to the bureau’s website. See link above in screen shot.

The bids are under consideration.

The Alaska Industrial Development and Export Authority (AIDEA) was selected as the successful bidder for nine tracts. It’s a state authority, so Yao hasn’t lost all hope.

By acquiring these tracts, Alaska preserves the right to responsibly develop its natural resources. This will create new, good-paying jobs on the North Slope and generate revenue for the local economies of Alaska’s Arctic and the State’s general fund,” said AIDEA Executive Director, Alan Weitzner. http://www.aidea.org/Portals/0/PressReleases/AIDEA%20Selected%20as%20Successful%20Bidder_010621_Final.pdf?ver=tNcQCRJtTuLHZtO8cGNPMw%3d%3d

REMEMBER many states/countries are behaving badly toward the climate at the moment which Yao hopes is just a negotiation stance ahead of trade and climate talks this year.

Many countries/states are urging the world to “bring them back from the brink” by being nice to them in the negotiations, (one person told Yao).

Thursday, Jan. 7

Environmental lobby groups stop resisting the trade in carbon credits just because it’s not perfect.

See this:
https://carrzee.org/2020/12/17/carney-says-developing-countries-to-get-accounting-benefit-under-paris-from-voluntary-carbon-market/

THIS SOFTENING BY ENVIRONMENTAL LOBBY GROUPS MAY BE HAPPENING

Friday Jan. 8

The mainstream media starts to lift the climate debate to include sensible solutions rather than focus on false narratives, such as this, Yao hopes:
https://www.dailymail.co.uk/news/article-8991877/Electric-cars-shock-Manufacturing-green-vehicles-churns-CO2-making-fuel-models.html

Actually, electric vehicles are much better for the climate. See this:
https://www.theguardian.com/business/2020/dec/02/aston-martin-pr-firm-anti-electric-vehicle-study

Monday Jan. 11

Huge oil companies delay indefinitely new expansion plans because of a downward recast of the demand outlook for fuels, Yao hopes. See this $22 billion hit:
https://uk.reuters.com/article/uk-shell-outlook/shell-to-write-down-assets-again-taking-cuts-to-more-than-22-billion-idUKKBN28V0N3

Tuesday Jan. 12

Norway announces it will limit new oil and natural gas exploration, especially in the Arctic — Yao especially loves this dream.

The NYT reckons a recent Supreme Court decision means Norway will drill for more oil in the Arctic. My Norway sources says that’s not necessarily true.

See this: https://www.nytimes.com/2020/12/22/world/europe/norway-supreme-court-oil-climate-change.html#:~:text=Norway’s%20Supreme%20Court%20on%20Tuesday,not%20interfere%20in%20climate%20politics.

Wednesday Jan. 13

Yao is impressed that China seems at least a little willing to embrace some of the changes to global markets that are driving climate action, even despite delays in the official UN negotiations. See this:

“What drives the global environment agenda today is the political economy, not UN climate talks. The price of solar energy has decreased 90 percent in a decade, the price of wind 60 percent and electric batteries 85 percent,” according to Erik Solheim, vice-chairman of the China Council for International Cooperation on Environment and Development and former UN diplomat.

China published the piece on the website of its environment ministry on Dec. 30: http://english.mee.gov.cn/News_service/media_news/202012/t20201230_815433.shtml
 …

Wednesday, Jan. 20

President Joe Biden comes through on his vow to bring the U.S. back into the Paris climate deal shortly after being sworn in.

Thursday Jan. 21

Huge global companies begin to finance voluntarily emission reduction projects in developing countries, Yao hopes. The market for voluntary carbon credits takes off. It may have already started. See this:
https://carrzee.org/2020/12/17/exclusive-carbon-credits-surge-by-one-third-during-coronaviris-pandemic/

So it’s even possible that the voluntary carbon market can help incentivise emission-reduction projects in the next 10 months, before the Glasgow talks, said Dirk Forrister, president of the International Emissions Trading Association, an industrial group that also includes banks, insurers and service providers.

The voluntary markets could go through a real growth spurt in a pre-compliance sense,” said Forrister, who previously advised U.S. President Bill Clinton on climate policy.

The assumption is that both companies and countries would learn from the pioneering work in carbon markets made during the past three decades, including the mistakes, he said by phone.

Voluntary action can help developing countries attract capital over the next few months whether they plan domestic carbon markets or want to enter international emissions trading, he said. The Paris rules allow every nation to choose how they want to undertake climate action.

Friday Jan. 22

Governments around Europe and Australia announce they’ll hold auctions of contracts to support the bringing forward of investments in hydrogen and carbon capture and storage.

These “contracts for difference” are issued to companies guaranteeing a set power price or offering support up to a certain level of carbon prices for terms perhaps extending to 15 years — Yao loves them because they protect against competition from fossil fuels and also protect taxpayers, making them more politically expedient.

See this:
https://carrzee.org/2020/12/11/opinion-contracts-for-difference-have-already-levelled-the-playing-field-in-energy-and-they-could-help-ease-brexit/

Monday Jan. 25

Some of the auctions announced Jan. 2 are held.

Tuesday Jan. 26

Yao dreams several rich countries announce they will make mandatory the recommendations of the Task Force on Climate-related Financial Disclosures.

The U.S. will probably be among countries starting to make mandatory the recommendations, in phases, according to Tim Williamson, who was a senior renewable energy official in the Obama administration.

Also in the U.S., the Securities Exchange Commission will begin cracking down in 2021 on omissions in ESG reporting, including from companies with operations in China, the biggest emitter, Williamson said by phone.

See this: https://carrzee.org/2020/12/29/new-trump-disclosure-law-seen-boosting-climate-action-even-outside-the-u-s/

And this: https://www.congress.gov/bill/116th-congress/senate-bill/945

Wednesday Jan. 27

Sunday Jan. 31

Day of rest. Whew

And finally…

I asked one blunt-speaking teenager what Yao the polar bear would want of humans on climate action in January 2021. The answer from the person, who I won’t name, was short: “Die or f*ck off!”

The coronavirus pandemic has accomplished a little of both (but neither are credible long-term climate measures — eek).

(Updates with extra ideas from readers; inserts Tsinghua University chart that was erroneously left out of earlier version…again…feedback my way)

Photo by Magda Ehlers on Pexels.com

U.K.-EU Disputes on Climate to be Heard by ‘Bespoke Panel of Experts’ After Brexit; 2021 Link Seen (4)

— Parties not obliged to link carbon markets but will consider doing so
–U.K.-EU carbon link seen announced in November
–WTO signals tension on climate coming

By Mathew Carr

Dec. 25-28, 2020 — LONDON: The Brexit trade agreement between the EU and the U.K. includes reciprocal commitments not to reduce the level of environmental or climate protection.

Disputes on climate, environment and trade is “not subject to the agreement’s main dispute resolution mechanism but will instead be governed by a bespoke Panel of Experts procedure.”

Disputes between nations are set to become more common as climate and energy policy impacts trade and countries offer incentives to their companies to make the transition away from fossil fuels more rapidly.

The EU’s planned carbon border adjustment mechanism (CBAM), which some argue is inconsistent with World Trade Organization rules, may be about boosting the region’s economy rather than protecting the environment, according to discussions last month.

See this: https://www.wto.org/english/news_e/news20_e/mark_16nov20_e.htm

Some members pointed out that the EU’s intention to use the CBAM as a new budgetary source for powering the EU’s economic recovery after COVID-19 suggested that this measure was not aimed at climate protection but rather at economic objectives, including fiscal and protectionist ones.

But the EU says it’s CBAM is simply needed because other nations have not embraced climate protection ambitiously enough. Should that change, the CBAM might not be needed, it says.

The Brexit trade deal doesn’t mention the CBAM.

The U.K. and EU committed not to weaken climate and environment laws “in a manner affecting trade or investment between the Parties” vs the levels at the end of the Brexit transition (that is December 2020), according to the main deal document published by Downing Street (see below for link).

That includes “by failing to effectively enforce its environmental law or climate level of protection.”

The parties would honor reciprocal commitments to cross-economy greenhouse-gas-emission reduction targets. “The Agreement gives both Parties the freedom to set their own climate and environmental policies in the way most appropriate to achieve our world-leading domestic aims,” the summary document said.

The U.K. is seeking to cut emissions by 68% by 2030 vs 1990 levels, while the EU is targeting a 55% drop.

“The domestic supervisory bodies of the U.K. and EU will cooperate to ensure effective enforcement of their respective environmental and climate laws,” they said.

The Brexit trade agreement makes clear both parties will have their own systems of carbon pricing to help fulfil their respective climate goals. Britain will leave the EU carbon market, the world’s biggest, at the end of the month and set up its own emissions trading system.

“The Parties have agreed to cooperate on carbon pricing in future and consider linking their respective systems, although they are not under any obligation to do so,” according to the deal, which needs to be endorsed by lawmakers.

The linking between the EU and the U.K. carbon markets could be announced at UN climate talks in November in Glasgow, said Ian Duncan, who was Parliamentary Under Secretary of State for the Department of Business, Energy and Industrial Strategy from July 2019 to February 2020.

For the U.K., the sun is setting on the EU emissions trading system — though that might be temporary. Credit: tween Iggy Carr, Dec. 25, 2020

International climate negotiations could slow progress for a U.K.-EU link.

As could attempts to tighten the EU system:

The agreement “affirms the parties’ existing commitments to a range of international conventions and other commitments in the area of labour, environment, and climate, in a way that is standard in free trade agreements. This includes committing the parties to the effective implementation of the Paris Agreement.”

See this section: “The Parties shall work together to strengthen their cooperation on trade-related aspects of climate change policies and measures bilaterally, regionally and in international fora, as appropriate, including in the UNFCCC, the WTO, the Montreal Protocol on Substances that Deplete the Ozone Layer, done at Montreal on 26 August 1987 (the “Montreal Protocol”), the International Maritime Organisation (IMO) and the International Civil Aviation organization (ICAO). Such cooperation may cover inter alia:
— policy dialogue and cooperation regarding the implementation of the Paris Agreement, such as on means to promote climate resilience, renewable energy, low-carbon technologies, energy efficiency, sustainable transport, sustainable and climate-resilient infrastructure development,
emissions monitoring, international carbon markets
…”

On compensating industry for the cost of climate policy, the full Brexit trade deal document said:

“If compensation for electricity-intensive users is granted in the event of an increase in electricity cost resulting from climate policy instruments, it shall be restricted to sectors at significant risk of carbon leakage due to the cost increase.”

Carbon leakage is the notion that factories close down or lower production in regions with tight climate measures, only to boost output or expand in areas where environmental rules are more lax.

The EU said in a “questions and answers” document the agreement provides for the possibility to apply unilateral rebalancing measures in the case of significant divergences in the areas of labour and social, environment or climate protection, or of subsidy control, “where such divergences materially impact trade or investment between the parties.”

Those measures might apply for example in a situation where one party significantly increases its levels of protection related to labour or social standards, the environment or climate, which may entail an increase in the costs of production and hence a competitive disadvantage.

“In such cases, a party would be able to adopt measures to rebalance the competitive advantage of the other party,” the EU said. See this: https://ec.europa.eu/commission/presscorner/detail/en/QANDA_20_2532

On airlines and carbon pricing, the deal said: “Aviation shall be included within two years at the latest, if not included already. The scope of the Union system of carbon pricing shall cover departing
flights from the European Economic Area to the United Kingdom.”

Some commentators see the U.K.’s global influence eroding – the nation is currently influential on climate policy:

See full 1,246 page document here:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/948104/EU-UK_Trade_and_Cooperation_Agreement_24.12.2020.pdf

See summary doc here:
https://www.gov.uk/government/publications/agreements-reached-between-the-united-kingdom-of-great-britain-and-northern-ireland-and-the-european-union/summary-explainer

For short story on UK emissions cap:
https://carrzee.org/2020/12/09/the-u-k-s-carbon-market-could-get-very-small-very-quickly-chart/

One on target setting:
https://carrzee.org/2020/12/09/the-u-k-2030-emissions-target-should-be-one-third-stricter-a-91-cut-perhaps/

One on how Britain hopes to lead the world:
https://carrzee.org/2020/12/22/boris-brexit-bullsht-no-six-ways-u-k-will-literally-lead-the-eu-and-the-world-on-climate-and-energy/

(Updates Friday afternoon with context, picture. Updates Saturday with some text from the complete trade document, outside voices, updates Sunday with WTO, updates Monday with examples from the EU.)

Carney: Here is How Large Global Companies Like Google and Swiss Re Will Solve an Extra 10% of the Climate Crisis (5)

–Developing countries, where emission cuts come cheaper, will probably get accounting benefit under Paris climate deal: Carney

By Mathew Carr

Dec. 17-18, 2020 — (LONDON): Emerging countries could become a key beneficiary of the voluntary carbon market being promoted by Mark Carney as a key part of the climate solution.

That’s because well-meaning global companies might be about to double down on that market.

A businesses buying emission credits from an Indonesia forest project, for instance, would ideally get to put the emission-reduction into its annual report as it seeks to hit its net-zero target, Carney said Thursday in an online event hosted by the British Museum. He’s the former Bank of England governor and now a United Nations climate envoy.

But the emission cut would probably best remain Indonesia’s, Carney said. That country would benefit from a country accounting point of view, he said, citing the hypothetical example.

The $320 million a year global voluntary carbon market needs to be in the order of $100 billion a year, he said.

Some voluntary carbon credit prices are already rising and the volume of open positions on wider environmental markets in the U.S. and Europe has surged to a record near the end of the year, after President Donald Trump lost the U.S. vote.

See this:
https://carrzee.org/2020/12/17/exclusive-carbon-credits-surge-by-one-third-during-coronaviris-pandemic/
and this:
https://carrzee.org/2020/12/17/global-bets-on-environmental-markets-surge-to-record-after-trump-loses-ice/

At the moment, investors in emission-reduction projects that generate voluntary greenhouse gas credits are worried about which country would be able to account for the emission reduction, because the rules are not set. That means capital is being held back from the climate fight.

The concerns stem from the complicated nature of cross-border carbon trades. There are usually at least four parties involved. The investor in the project, the host-country government, the buying company and the buying company’s country government.

By giving his version of the future, Carney is painting a scenario where the buying company’s country need not be involved in the “trade” because it isn’t really a trade. That cuts the parties involved to at least three from at least four.

Think of it like this: The company gets bragging rights but the country gets accounting rights. This is not double counting. In a world of global companies, it makes sense to cut emissions where you can cut the most emissions for a set amount of money — especially where that will help right climate injustice and speed the transition.

“There’s no double counting. If you want to count on geography, it’s Indonesia and national, on a country basis. If you want to count as a company, it shows up in that company’s annual report. If you just want to count for the planet, there’s only one reduction of carbon, which is the amount taken by the forest,” Carney said.

From ICE: Red star indicates current record level of positions that have not closed

Both countries and companies are setting “net zero” emissions targets to attract capital and persuade voters/customers they are serious about tackling the world’s most acute problem (after the coronavirus pandemic).

Under the Paris climate deal struck in 2015, nations voluntarily set their own emission targets, so the voluntary market would help them meet these. Some of these targets are ambitious, some are less so.

Importantly though, buying companies will benefit too because they will get more emission cuts for their euro or dollar — and they will favor deals in developing nations with ambitious targets — otherwise they may face damage to their brands.

This, in turn, provides an inventive to emerging nations wanting to attract capital to adopt ambitious targets.

Rich, pan-regional corporations focused on their costs will be incentivized to find the cheapest ways to cut emissions, especially once they’ve cut much of the pollution from their own operations.

More and more companies are seeking to burnish their brand by appearing green to increasingly important millennial customers who care about climate protection. But they won’t want to be accused of greenwash, Carney said. That would be a deal breaker.

“It can’t be there and then gone tomorrow. It cannot be greenwashing. It has to be real. We need a professional market,” Carney said.

So it’s a true win win win for the three parties.

(Continues under media)

SEE HERE for video of the arctic shrinking c/o British Museum:
https://share.icloud.com/photos/0KgyBvMddnHQmB7o0t1atgItQ#The_British_Museum

Sled – No longer needed? C/O British Museum

Carney’s comments also may ease fraught climate politics, and that’s crucial because the climate as we know it might be falling apart. Carney’s suggestion gives rich companies most to blame for the climate crisis an easy way to help those less able to deal with it, as least for the first part of the climate transition.

Emerging nations have been suspicious of trading. They are concerned richer countries have used carbon markets to shirk their historical responsibility for the crisis — and their future need to rapidly cut their own heat-trapping emissions.

It will probably be cheaper to cut greenhouse gas in developing countries during the first part of the 30-40-year climate transition because those countries are just getting started and have been starved of global capital needed for modernization and energy efficiency. (Investors like strong credit ratings.)

“A lot of these investments will be in developing economies, because that will be the cheapest and most effective way to reduce carbon. And that is hugely beneficial,” Carney said.

Offsetting will allow companies flexibility. While they invest in and build new, cleaner equipment, they will still need to use their old and dirty facilities.

The thinking will be something like this: “While I’m making those investments, I am going to be reducing my carbon footprint, because I’m going to be buying these offsets,” Carney said.

“This is a crucial point. This is a transitional market, it is not the end solution. It’s preserving a critical part, our very limited carbon budget for a period of time, while companies make the very large investments or the economy as a whole makes the very large investments that are needed to go from where we are today to where we need to get to. So it helps bridge that gap and create some time for us to get there and take carbon out of the atmosphere while it’s doing so. It’s definitely not the end solution,” he said.

So the voluntary carbon market can boost the volume of capital available for the world’s poor, improving climate justice, especially if deals are derisked by global development banks or rich-country green banks.

To be sure, Carney is now a UN staffer and Special Envoy on Climate Action and Finance, but he does not set the rules. Indeed, some of the views expressed in his speech he said were personal.

East London graffiti

Negotiations through November will bed down accounting and trading rules of Paris – a so far incomplete and so inadequate global pact.

The voluntary carbon market could probably contribute 5%-10% of the climate solution, he said Thursday.

Companies are being pushed by investors to demonstrate a long-term commitment to address climate change and commit to publishing annual climate-related financial reports in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Some countries are seeking to make the recommendations mandatory.

This may prompt the companies who are targeted by the rules to buy emission credits.

“A number of large multinationals including Unilever, Microsoft, Mars, Maple Leaf Foods, Google, Nike, HSBC, Swiss Re have committed to making their business operations carbon neutral,” said Lisa DeMarco, senior partner at DeMarco Allan LLP and others, in an article published Wednesday on the Energy Regulation Quarterly website. The firm specialises in climate law.

See this: https://carrzee.org/2020/12/17/business-net-zero-limits-climate-disclosure-spurring-co2-credit-demand/

“And any number of entities are purchasing carbon offsets in the voluntary carbon market in order to achieve those targets. These developments herald a new age of climate commitment veracity that are certain to require additional climate-related financial disclosures to both shareholders, investors, and ultimately, end-use customers.

Supporting TCFD organizations represent 77 countries and include companies with a combined market capitalization of over $15 trillion, and more than 750 financial firms, responsible for assets of over $155 trillion.

Over 110 regulators and governmental entities from around the world support the TCFD, including the governments of France, Belgium, Canada, Chile, Denmark, Ireland, Japan, New Zealand, Sweden, and the United Kingdom.

Meanwhile, emerging nations are also disappointed they have not yet received promised technological help for climate action from developed countries, and carbon markets can also help boost collaboration with rich companies, according to sources close to continuing UN negotiations ahead of UN climate talks in Glasgow in November.

Some of the buying companies are high-tech companies indeed (see above) and UN-overseen regulators are digitizing emissions-cutting methodologies created under the Kyoto Protocol, to make them more robust and less prone to fraud or exaggeration.

So it’s even possible that the voluntary carbon market can help incentivise emission-reduction projects in the next 10 months, before the Glasgow talks, said Dirk Forrister, president of the International Emissions Trading Association, an industrial group that also includes banks, insurers and service providers.

“The voluntary markets could go through a real growth spurt in a pre-compliance sense,” said Forrister, who previously advised U.S. President Bill Clinton on climate policy.

The assumption is that both companies and countries would learn from the pioneering work in carbon markets made during the past three decades, including the mistakes, he said by phone.

That is, the new markets would not just repackage “old wine into new bottles,” he said.

Voluntary action can help developing countries attract capital over the next few months whether they plan domestic carbon markets or want to enter international emissions trading, he said. The Paris rules allow every nation to choose how they want to undertake climate action.

“The next big step is for host countries to say what they will include” when they update their contributions or pledges to the Paris agreement during the next few weeks and months, Forrister said. Countries are supposed to rachet up their ambition every five years, including in 2020.

“More clarity from host countries will help,” he said.

(Updates with more from Carney and with context on Thursday evening, DeMarco, adds comments Friday, including from Forrister, updates Sunday with chart and links to market moves.)

Global Bets on Environmental Markets Surge to Record After Trump Loses: ICE (2)

By Mathew Carr

Dec. 17-22 –LONDON: The volume of open positions on environmental markets in the U.S. and Europe together surged to a record near the end of the year, after President Donald Trump lost the U.S. vote.

The volume of open positions on ICE, the biggest exchange for environmental commodities, advanced by approximately 16% from the end of 2019 to about 2.8 million contracts, said ICE spokeswoman Rebecca Mitchell, by phone. The open positions are measured by the metric “open interest.”

Average daily volume in the environmental complex is up by approximately 20%, ICE said.

The complex includes EU carbon allowances, California futures, renewable energy certificates. Futures and options are grouped together.

Here was the situation at the end of November:

ICE website:
https://www.theice.com/microsite/usenvironmentalmonthlymarketreport

“Market-based mechanisms like carbon cap and trade programs are pivotal in allowing policy makers to control the quantity of carbon to align with their net-zero commitments and consequently put a price on the externality of pollution to reach those goals in the most cost-effective manner,” said Gordon Bennett, Managing Director, Utility Markets at ICE, in an emailed statement.

Because EU allowance prices have risen to record highs, the value of Dec. 2020 futures at delivery was a record 8.6 billion euros, Mitchell said.

Now that delivery has taken place in relation to the December futures, open interest will have dropped since the end of Nov. That fall happens each December — see chart.

(Updates Thursday afternoon with chart and comment, Tuesday with updated chart)

To see why there’s more interest in carbon markets, click:
https://carrzee.org/2020/12/14/britain-touts-world-first-net-zero-carbon-market-as-it-leaves-eu-and-seeks-trade-deal-with-australia/

To see how voluntary and compliance carbon markets are set to interact:
https://carrzee.org/2020/12/17/carney-says-developing-countries-to-get-accounting-benefit-under-paris-from-voluntary-carbon-market/