Markets Are Failing Investors on Sustainability: Mother of All Market Regulators

By Mathew Carr

Feb. 25, 2021 — LONDON: The mother of all market regulators says global markets are in a mess on sustainability.

Investors wanting clear disclosure on the climate and natural-environment impact of the bonds and shares they buy are not being well served, the International Organization of Securities Commissions said yesterday.

“Companies often report sustainability-related information selectively, referencing different frameworks,” the organization said in a statement on its website:

IOSCO said there was an “urgent need” for globally consistent, comparable and reliable sustainability disclosure standards.

On the same day, the Division of Corporation Finance of the Securities Exchange Commission was ordered to enhance its focus on climate-related disclosure in public company filings. SEC staffers “will review the extent to which public companies address the topics identified in the 2010 guidance,” said Acting Chair of the SEC Allison Herren Lee.
See this:

Allison Herren Lee

At the end of 2020 various organisations jointly released a ‘prototype’ climate financial disclosure standard “cobbled together in some haste from existing offerings,” according to this column in Responsible Investor from last month:

The landscape is acronym city.

“Whilst anyone familiar with Taskforce on Climate-related Financial Disclosures (TCFD), integrated reporting and the Global Reporting Initiative (GRI) Standards is likely to be favourably disposed to the proposed reporting requirements, the conceptual framework underpinning them is flawed,” said Carol Adams, Professor of Accounting at Durham University Business School and technical expert to the UNDP’s Sustainable Development Goal Impact Team..

Instead of simply making polluters pay, regulators are getting caught up in this sort of stuff (I’m not claiming it’s easy — check out of the chart on the last page of this):

UPDATED: The 3 New Friends of Aggressive Climate Action, Their 2 Enablers: What it Means for Investors Globally (2)

By Mathew Carr

NEWS/OPINION: Nov. 10-11, 2020 — LONDON: Big emission cuts hinge on three technologies and how they link together, and on how the biggest countries incentivise them.

The world — big emitters the EU, the U.S. and China at least — seems to be, finally, getting on board, but it still might be too late.

Natural gas, carbon capture and hydrogen, working together, are set to change the world, cutting emissions, according to an influential group advising the British government.

Number 1 technology: Gas will provide a bridge to much lower emissions, but ONLY if it’s used to produce hydrogen (Number 2 technology — H2) and/or its burning results in clean electricity generation because that includes capturing and storing of the associated carbon dioxide (Number 3 technology — CCS).

This three-way friendship will be underpinned by at least two enablers, according to the U.K. Climate Change Committee, which advises government: higher carbon prices (Number 1 enabler) will spur a shift away from unabated gas burning, while contracts for difference (Number 2 enabler) will prevent new investment in unabated coal, oil and gas and encourage spending ONLY on the three, interlinked friends.

What this means for investors: Think very carefully before selling carbon allowances and credits at current prices, because carbon prices will need to rise to create the new investment environment, according to CCC.

The committee is clear: Its plan to cut British emissions by almost 80% vs 1990 levels by 2035 means don’t invest in new natural gas projects now unless they can include carbon capture and storage AND/OR clean-hydrogen production.

Otherwise, your investment may end up as a stranded asset.

See this from the CCC:

There is a choice between:
• ‘Green hydrogen only’. Limiting the role of hydrogen over the next 20 years only to what can be supplied via electrolysis from zero-carbon sources, likely placing substantial limits on hydrogen’s potential contribution to getting to Net Zero; or
• ‘Blue hydrogen bridge’. This would entail supplementing electrolysis with scalable production from routes involving carbon capture and storage (CCS) to enable sufficient low-carbon hydrogen production to meet a fuller range of emerging demands.

We recommend the latter approach, as this will both reduce emissions more quickly in the near-term (compared to lesser use of hydrogen to displace unabated fossil fuels) as well as developing the role of hydrogen across a range of sectors, reducing risks around achieving Net Zero.

Source: p140 of the policies report here:

To be sure: the committee says electrification is preferred immediately over hydrogen (which is less energy efficient and more expensive)

The committee recommends policies that may include carbon prices that are more than double current levels.

It recommends expanding the contracts for difference regime that was so successful in cutting offshore windpower costs IN THE U.K. — into CCS and other industries that require big investment including hydrogen fairly immediately.

These contracts for difference auctions may happen as soon as the next two years.

So, all this is happening quicker than you might realise. See this:

p119 of the same CCC report. See link above.

Hydrogen technology is happening more quickly than many think.

This award-winning hydrogen company in Australia is seen providing demand for hydrogen more quickly:

See this story:

Chinese President Xi is scheduled to speak at a virtual UN Climate Ambition Summit on Saturday, where more than 70 leaders will mark the fifth anniversary of the landmark Paris Agreement by sharing new steps their countries are taking to slow global warming. All speakers have to present robust, updated commitments — a requirement that led to the exclusion of major polluters including Australia, Brazil and Saudi Arabia, Bloomberg News reports.

See this:

China and the U.S. is seen working together on climate action as Trump departs White House.

The incoming administration of U.S. President Biden, is seen returning to global climate cooperation, with carbon pricing centre stage of that.

The potential for U.S.-China cooperation is important because together those two nations have a huge portion of global emissions — 44% of global energy emissions in 2019, according to BP Plc data. The EU, with another 10% of global emissions, has approved a much-more ambitious 2030 target. It has not ruled out buying emission credits from emerging nations under the Paris climate deal for additional reductions on top.

Michael Mann, an American climatologist and geophysicist, currently director of the Earth System Science Center at Pennsylvania State University, told a recent BBC Worldwide climate radio program that the cooperation between China and the U.S. is “critical.”

“I am optimistic. China is ready to act. The problem has been the lack of leadership on our part (ie USA).”

“There is every reason to be cautiously optimistic. That having been said, we have to hold their feet to the fire.”

Philip Duffy, president of the Woodwell Climate Research Center, who served as a Senior Analyst in the White House Office of Science and Technology Policy during the Obama administration, said on the same BBC program about the immediate challenges:

“The single most important thing that could be accomplished would be carbon pricing (Number 1 enabler). Because that just changes all the incentives throughout the economy and then allows market forces to do a lot of the work.”

Of the Green Climate Fund created under global climate talks to provide climate finance for emerging nations from richer countries, he said: “That is VERY import. The battle for the climate will be won or lost in the developing world.”

“It’s in the interests of developed countries to make sure the developing countries turn to low-carbon energy sources.”

See this:

(Updated Friday morning to include Star Scientific win, potential for China, U.S. cooperation, EU’s new target)

German Law ‘Ensures Coal Decline Won’t Drive Oversupply in EU Carbon Market’

–How to shut down a whole industry, German style

By Mathew Carr
Dec. 6, 2020 — LONDON: Germany’s phase out of coal and lignite power stations won’t cause an oversupply in the European Union’s carbon market because a reduction in the nation’s carbon allowance sales is enshrined in law, according to an official.

The nation’s Coal Exit Act from July 2020 will ensure a reduction in carbon supply takes place, the official said by email.

On Friday, EU carbon allowances closed above 30 euros a ton for the first time since Sept. 14, according to data from ICE Futures Europe.

Analysts are expecting higher prices in the fourth phase of the market, which begins next year and runs through 2030.

See this story on several reasons why the market is rising:

This from the government official, who is familiar with the situation:

Will the released carbon dioxide certificates lead to more emissions in other countries via the European emissions trading system?
No. The Coal Phase-out Act ensures that the coal phase-out is fully effective for climate protection. What the German coal phase-out brings for climate protection will not be cancelled out by additional emissions elsewhere in the EU. This is ensured by the German government by deleting allowances from the European Emissions Trading Scheme (EU ETS) to the extent that the coal phase-out leads to emission reductions (unless the allowances are already withdrawn from the market by the market stability reserve of the EU ETS). The national cancellation of allowances is done by a notification of the member state to the EU Commission. For this purpose, the member state designates the decommissioned installation and the extent of the planned deletion for subsequent years. The Commission then deletes the allowances from the auction budget of the respective member state. This was legally regulated on July 3, 2020 with the Coal Exit Act. One of the components of this law is the “Amendment to the Act on the Trading of Greenhouse Gas Emission Allowances”, which stipulates the deletion of the CO2 allowances released from the EU ETS.
Sources (in German only):

Open interest in the region’s carbon market has risen to its highest in two years. That’s a measure of trading positions that have not closed. Some hedge funds and investors are looking for investments that track climate-policy ambition.

See this chart:

The coronavirus pandemic has reduced emissions, trimming demand in the market. That’s offset some of the renewed interest in the allowances from investors.

From July:
Key Tweet – hit “translate” if needed after clicking Tweet

EXCLUSIVE: Here’s a Brexit idea from a key carbon-market player: Keep Britain in the EU emissions trading system (2)

By Mathew Carr
Nov. 26-28, 2020 — LONDON: The U.K.’s threat to walk away from carbon markets may simply be a negotiation stance.

Fairly ridiculous negotiation stances have become part and parcel of Brexit negotiations.

See this for some context:

One person who has not given up on the notion that Britain may actually remain in the European Union’s carbon market after the end of the Brexit transition next month is Ken Schneider, president of Grey Epoch LLC, an environmental markets options outfit near Chicago and key participant in the market.

“If we find that out by the end of the year or early next year, then that will be a very bullish catalyst, because it will remove a giant question mark from the system,” Schneider said Wednesday by phone.

The European Commission declined to comment because “EU-UK negotiations are ongoing,” according to an official in Brussels.

Providing EU carbon traders with certainty on Brexit will boost prices because an uplift from the end of the coronavirus pandemic is already factored into market levels, Schneider said. Should the U.K. opt to create its own emissions market or set a carbon tax, that wouldn’t be as bullish for EU carbon prices, he said.

Carbon prices may average 40 euros or more in the 10 years from next year, according to a survey published by Commerzbank. That’s an upside of 44% from Thursday’s close of 27.87 euros a ton on ICE Futures Europe.

See this:

Volkswagen Group said Thursday it’s “committed to a minimum price of 60 euro per ton starting 2023” and is looking for 100 euros in six years.

The EU carbon market has allowed the bloc to cut emissions much faster than the U.S. The region is set to easily exceed its 2020 emissions reduction target of 20% below 1990 levels, especially after the coronavirus pandemic slashed emissions. U.S. emissions are flat in that time period.

Taxes: old-socks policy or the new groovy?

Should the U.K. create its own carbon market, it would be small and traders would probably move prices just by entering and exiting market positions. That will make it less attractive.

Liquidity in the EU market may also suffer because much of the trading and risk management is currently handled in London. One influential trader in mainland Europe countered that notion, saying the bigger system would be able to ride out Britain’s exit without too much trouble, they said by phone, preferring to stay anonymous.

A carbon tax may be simpler and make more sense for Britain, which is already well on the way to decarbonising its power market, said Laurent Segalen, managing partner at Megawatt-X, a platform for selling and buying renewable energy assets.

“In order for a market to be efficient in terms of price discovery, you need liquidity,” Segalen said on LinkedIn. “Only power traders bring liquidity. So either you continue the EU emissions trading system, or you do a U.K. tax.” A British domestic carbon market is never going to work, he said.

Carbon trading also makes taking on ambitious, science-based targets less risky, because a country like Britain will have more options open to it as it complies with its voluntary limits under the Paris climate deal.

Remember: This Brexit adviser left U.K.-government office earlier this month:

(Updated Friday morning, Saturday evening with science-based targets)

EXCLUSIVE: EU Widely Seen Tweaking its Market Structure, Cutting the Risk of a Dramatic Cut in Emissions (4)

— Germany confirms it’s considering funky new carbon contracts to spur green hydrogen sooner than expected

Trade union umbrella group says carbon contracts for difference can soon support the wide investment that workers need, cutting anxiety about the energy shift

–New state-aid rules next year seen giving boost to green shift

By Mathew Carr

Nov. 20-25, 2020 — LONDON: The EU and Germany are serious about using markets to cut the cost of their transition to cleaner tech.

Big changes are seen during the next several months.

The largest economy in the EU confirmed Friday it’s considering offering carbon contracts for difference as one option to protect industries that make big investments to cut emissions and help the bloc achieve ambitious greenhouse-gas targets for 2030 and 2050.

“Carbon contracts for difference are one possible option for encouraging investment in low-carbon technologies and we are looking into it,” the Federal Ministry for Economic Affairs and Energy said in an emailed response to questions. “However, there are a number of issues related to such an instrument, namely the associated cost and state-aid questions.”

CCfDs issued by countries or the EU Innovation Fund would pay out the difference between the price of EU emissions allowances and the contract price, thus ensuring a guaranteed carbon price would protect the green-hydrogen-production project, for example, from competition from otherwise-cheaper fossil fuels.

The CCfDs would also protect taxpayers, because if carbon prices are higher, the hydrogen project would return the difference to the government, which could use the money to help support poorer people whose finances are being hurt by the climate transition, or those made unemployed.

For more information on CCfDs and how they work to protect clean investment and taxpayer costs, see this:

The German economy ministry is determined to support energy-intensive industry “in its transition toward the carbon-free production of steel,” it said in its emailed response. “If we want to achieve  this, we need to solve the challenge of high operational costs for green hydrogen in the starting phase.”

Green hydrogen can be created from surplus solar and wind power, via electrolysis. In theory, this fuelmaking could help balance power grids.

With 30 years to wipe out emissions under its 2050 target, the EU needs to make sure that any factories and equipment being replaced now is compatible with zero emissions. Some equipment built to last 30 years actually remains operational 50 years, so that is why a net-zero target in 2050 — as the EU has — is important to investors right now.

The EU this week signalled it might use CCfD auctions to distribute cash from its Innovation Fund.

See this:

For the period 2020-2030, the fund is set to hand out about 10 billion euros, depending on the carbon price, according to its website. Projects already pitched for support by last month (see below).

Support for clean investment is sorely needed because without it the energy and climate transition will scare workers and voters, as shown the U.S. presidential election. It’s an acute political risk that explains why the world has timidly tried to cut emissions for 30 years.

South London deer park

Workers are worried they will get caught between the strategies of multinational companies and government climate policy and lose their jobs, said Judith Kirton-Darling, deputy general secretary at industriAll, the umbrella trade union group in Brussels.

“This is where the anxiety is coming from,” she said Friday by phone.

CCfD can help reduce those fears by encouraging spending now as fossil-fuel demand wanes, rather than in 10 or 20 years, she said. “Our technical experts inside the trade union movement are optimistic about the role that they could play in supporting investment in energy intensive industry,” Kirton-Darling said.

Europe has about 1 trillion euros of green projects ready to go, but probably only a small portion of them would be supported by CCfDs.

See this:

“We are pressing for further investment,” Kirton-Darling said. The CCfDs would probably offer “a kind of certainty and investment stability.”

Bicyclist rides past graffiti at night, East London

As for Germany’s concern about state-aid rules, Kirton-Darling said that if the EU is serious about reaching net zero in just 30 years, the state-aid rules will need to be adjusted to “follow that logic.”

That adjustment in the rules is seen happening in the first half of next year. Use of the Innovation Fund itself may partly get around the state-aid rule concern. Those rules are meant to prevent member states from unfairly supporting “national-champion” companies and are designed to keep cross-border competition fair.

If done properly, the new state-aid rules won’t just underpin big business, they’ll upgrade the EU’s entire industrial base, Kirton-Darling said.

On Monday, motor company Hyundai and chemicalmaker INEOS said they will jointly investigate opportunities for the production and supply of hydrogen as well as the worldwide deployment of hydrogen applications and technologies.


See Innovation Fund website for call for projects of more than 7.5 million euros:

For more on EU worker anxiety:

(Updated Saturday morning with Innovation Fund, recast Saturday afternoon, tweaked Tuesday morning to remove garble and make smoother, earlier version corrected to remove Star Scientific at top, bottom, pending clarification, updates with Hyundai and Ineos Wednseday.)