April 14, 2021 — LONDON: The shipping industry needs to boost its focus on futures contracts for cleaner fuel, or risk missing its targets to cut emissions by 2030.
An immediate challenge is that it needs to get over a surge in shipping demand as economies recover from the coronavirus pandemic.
Futures contracts could be introduced within two-to-three years, as liquefied natural gas, biofuels and green hydrogen become more physically traded, replacing dirtier bunker fuels, according to EEX’s Richard Heath, Head of Business Development, Global Commodities.
But, as in most industries, money is getting in the way of environmental imperatives.
Global shipping CO2 emissions decreased only 1% last year, even as cruise ship emissions dropped 45% during the health crisis, according to Hellenic Shipping News, citing maritime data provider Marine Benchmark.
This year, the incentive to ship goods, and produce emissions doing so, is on the rise.
That places plans to cut emissions in the industry, a key sector of economic growth during the next three decades and beyond, at severe risk.
IEA
EEX’s Dry Bulk Freight business set a new all time record in March 2021, achieving a total traded volume of 122,544 lots, which marks an increase of 35% compared to March 2020. This was mostly driven by the futures market, which jumped by 71% to a volume of 114,509 lots traded.
The bouyancy indicates the industry needs to begin urgently preparing for more sustainable practices that help protect the environment, including offering clean-fuel alternatives.
Shipping needs to learn from the industry tension caused by regulation designed to remove sulfur from bunker fuels through last year, Heath says.
“The sulfur reduction has been a big success,” he said by phone. The industry “can take that implementation and put that into carbon reduction.”
The pollution reduction shows the industry can be a showcase of forward thinking, he said.
On Dry Bulk Freight futures, EEX offers out to 84 months (7 years). While most of the liquidity is in the shorter end of the curve, the exchange is starting to see more regular trading out to 5 years.
Calendar 2027 has traded for the first time recently. Cleaner fuel contracts could start 2 to 3 years out in order to build up some liquidity, before extending further out over time.
“We can see that the shipping industry has in the past found ways to meet the environmental targets which it has set for itself. I have a high level of confidence that the industry will rise to this challenge, as it has to others, and achieve the IMO reduction targets,” Heath said. But, it needs to get moving, or the opportunity may be lost, he said. Cleaner fuels are needed.
“We see several such initiatives use new zero carbon fuels to power vessels. At the moment these projects are being piloted in parts of the industry where the geographical scope of operations for the vessels is limited to a specific area. Other examples are the first methanol power container ship (to be delivered to Maersk in 2023) and plans for electric powered ferries in the Baltic Sea for mid-decade. These type of initiatives are great proving grounds for these new technologies. The limited geographical scope of operations allows the required infrastructure in ports to fuel such ships to be developed. If successful, such infrastructure can then be deployed in a more widespread way, allowing other vessel types to start using these solutions.”
The International Marine Organization will consider a work plan and working arrangements to implement GHG reduction measures, according to S&P Global Platts.
This is part of the plan: The initial GHG strategy envisages a reduction in carbon intensity of international shipping… (to reduce CO2 emissions per transport work, as an average across international shipping, by at least 40% by 2030, pursuing efforts towards 70% by 2050, compared to 2008); and that total annual GHG emissions from international shipping should be reduced by at least 50% by 2050, compared to 2008.
There’s a proposal for the use of global market based measures — the Marshall Islands and the Solomon Islands suggested a levy of $100/metric ton of CO2-equivalent in order to promote the uptake of alternative fuels.
Trafigura, the commodity trading group, is seeking a price as high as $300 a ton in the industry to cut emissions and speed the climate shift.
Gunvor, another trader, says 100% of owned ships and 75% of time charter shipping fleet will be “eco-vessels” by 2022, with an overall 100% before 2027.
In Rotterdam, new processes around hydrogen and co-processing of vegetable oil are being developed. In Antwerp, terminal activities continue at the site, and future development opportunities are being assessed for the land and the mothballed refinery. In Singapore, artificial intelligence is boosting port efficency.
New tech can give live feeds on where containers are and when they will be moved, paying freight bills on a cellphone and clearing customs before vessels dock.
Still, the industry doesn’t seem on track to cut emissions anywhere near fast enough vs the targets in the 2015 Paris climate deal, with green fuels still three years away while the world is seeking to cut emissions by half in the decade through 2030.
(Updates with depth of market)
NOTES:
EEX Group’s Richard Heath, Erlend Engelstad and Michael Mervyn Jones examine the role that decarbonization plays in shipping today, explore potential scenarios and solutions as to how it will evolve in the future and discuss how EEX Group, an exchange with a global footprint in both the freight and carbon markets:
–“Reality carbon price” still missing globally; prices too low: Kerry
By Mathew Carr
April 9, 2021 — LONDON: U.S. Special Envoy on Climate John Kerry said talks on carbon markets will intensify “into the next months” because they are an important tool in combating the climate crisis.
Clean tech has plunged in cost, yet the world is continuing its dirty ways amid the coronavirus pandemic recovery because there’s little incentive to shift from the status quo. That’s why carbon prices are desperately needed — polluters need to start paying.
See his comments, speaking in India, April 8:
“Journalist: Jayashree Nandi, Hindustan Times. I have a couple of questions that are related. One, did you have any discussions regarding carbon markets or carbon trading with the Indian officials? And did you have any discussions regarding net zero emissions target – first the 2030 targets and then leading up to net zero emissions later?
Mr. Kerry: Any discussions about what?
Journalist: With the Indian officials, with your Indian counterparts.
Mr. Kerry: About?
Journalist: About carbon trading and carbon markets.
Mr. Kerry: Okay. That’s the main question.
Yes, not in-depth, not a huge one, but we both agree carbon markets exist and need to exist. We need them to be stronger. President Biden believes that at some point in time we need to find out a way to have a price on carbon that’s effective. He hasn’t decided or made an announcement about it, but we all know that one of the most effective ways to reduce emissions is putting a price on carbon. You’re paying a price here now. You have a price on gas, you have a price on coal, and it has some effect but no one has yet put the reality price on anything. The fact is, prices are low enough that it’s just not having the kind of broad effect that we need to have on a global basis. It’s a subject that needs to be discussed. I think going into the next months there will be a lot more talk about whatever tools are available to us and certainly a carbon market is an important tool.“
“He shot America’s credibility in the head and turned his back on science and became the only leader of a nation, let alone one of the biggest nations, but the only leader of any nation who decided to withdraw from the agreement. Without science, without any rational — other than telling something to the American people that wasn’t true, which is that Paris put too big a burden on the United States. Well guess what? Paris didn’t place any burden on the United States. Every country wrote its own plan in Paris. Every country decided itself what it would do“
–This is what success at saving the climate might look like in 2030; these are not answers, but requests for collaborationand better ideas
April 6-7, 2021 — LONDON: The United States should undertake its own “belt and road initiative” to help solve the climate crisis, if it’s genuinely concerned about China’s expansion program.
China’s belt and road initiative is a global infrastructure development strategy adopted by the government in 2013 to invest in nearly 70 countries and international organizations. China’s already starting a domestic carbon market and is helping fund several development banks. The EU has the world’s biggest carbon market, which has given it about 60 billion euros of revenue.
The U.S., with the world’s biggest economy, could help pay for its version by imposing a carbon price at home and by encouraging the same globally. This boosts government revenue as governments sell the remaining space in the atmosphere for fossil-fuel-emissions instead of giving it away for free. It could also implement corporate tax gains and a wealth tax, enhancing social and climate justice simultaneously in the wake of the global coronavirus pandemic.
U.S. Treasury Secretary Janet Yellen and Germany are already backing part of this plan. See below and this Tweet chain:
Fourth, the reestablished G20 sustainable finance group is an important venue to tackle these issues and promote finance that supports our international climate and other sustainability goals.
The good news is that with the right policy, the technology is now ready to be deployed, across the globe to meet the goal of cutting emissions aggressively during the next 10 years. Of course, it’s not going to be easy, but there’s been some work creating ways to cut the risk of climate investment during the past few years.
Here is a potential breakdown of spending that could encourage a solution — emission cuts of about 3 billion tons a year during the next 10 years to about 30 billion tons globally in 2030 — based on science.
The revenue from carbon pricing can protect poorer people from costs caused by richer people, who are most responsible for the climate crisis.
CarrZee and friends
The first column represents a pro-rata estimation of payments needed by each country or region based on 2019 emissions.
Under this scenario, the U.S. would pay for $222 billion of cuts (not necessarily just in the U.S.) in 2030 at $51 a ton. (The EU carbon price is already at this level, btw.)
Democratic lawmakers in America have already reintroduced a carbon pricing bill — last week — which would quickly get prices to the needed level (see below). The U.S. is hosting a climate summit on April 22-23 and it’s invited 40 world leaders.
But, there are several apparent problems with this scenario, according to one emerging-nation climate negotiator, who calls them “lethal flaws”:
(1) You must prorate based on responsibility for warming not on the basis of current share of emissions. (2) Responsibility must be calculated on consumption-based emissions and not on the basis of production-based emissions within the country borders. (3) Similarly current emissions must be based on consumption and not production to estimate the reduction needed. (4) Carbon is taxed differently in different countries. In some poor countries over 50% of the price the consumer pays for energy is taxes. You must normalize these differences across countries. (5) It is not clear to me who pays the fee to generate carbon revenue. Will the developed countries pay it as required under the convention? (6) Countries below an agreed level of per capita GDP/Income should be excluded as they need to develop and deliver a basic threshold level of prosperity. They can follow the low emission path only to the extent that it’s paid for by the developed world inclusive of cost of technology procurement and capacity building — again as provided in the convention.
(Note, the convention referred to here is the UN Framework Convention on Climate Change; consumption emissions take into account that some developed country emissions are produced making energy intensive goods for rich-country consumers — the reverse also happens to a lesser extent.)
So, the second column of numbers seeks to overcome some of this feedback.
Under that alternative scenario, the U.S. contribution surges to $444 billion in 2030 versus the $222 billion under the opening-gambit-pro-rata scenario. It would mean the U.S. funds about 8.7 billion tons of the 30 billion tons of cuts in 2030.
One rich-country source says such a cost would be “dead on arrival” politically in the U.S. But, let’s just consider it for a moment.
The Green Climate Fund is already funding such programs, with private sector money — including from the U.S. (see below).
Carbon pricing is becoming a desirable thing because it attracts capital and gives governments a way to tax the rich with less criticism than increasing income, payroll or sales taxes. Funding emission-reduction projects (wind, solar, batteries, EVs, green hydrogen) may turn out to be lucrative, so paying up in the next 10 years might be a seriously wise move.
“Secretary (John Kerry) – the Special Presidential Envoy for Climate – and I are very interested in how the Development Finance Corporation can help drive investment toward climate solutions, innovation in climate resilience, renewable energy, and decarbonization technologies. This part of the DFC’s work will be front and center at the climate summit on April 22.”
The DFC, created and expanded from other institutions in 2019, is the U.S.’s development bank.
Another way to slice and dice the 30 billion tons of emission reductions needed in 2030 is via some of the structures allowed for under the Paris climate deal, or that stem from its structure. See this:
CarrZee and friends
Here, the required reductions in the opening gambit scenario are mainly filled by country and regional carbon markets, perhaps including those in Europe and new regional linkages in North America and Asia.
This scenario includes a new UN-overseen market under article 6.4 of Paris, so assumes envoys can reach agreement on rules over the next year or two.
The alternative scenario assumes 6.4 negotiations don’t create a new UN-overseen market. Instead, developing and least-developed nations opt to keep much of their economies outside the nationally determined contributions and seek to win capital from the voluntary markets.
I’ve put 6 billion tons as the voluntary market’s contribution to the 30 billion tons of needed reductions, because the voluntary markets already have a head start on whatever the UN can create under article 6.4 (see story link in notes below).
Having said that, it’s possible envoys could create a better UN market than those currently serving the voluntary market. Or they could choose to merge 6.4 with the voluntary market — or even merge 6.2, 6.4 AND the voluntary markets.
Under the alternative scenario, aviation and shipping cut or offset all their industry emissions in 2030 (at approximate 2019 levels), versus half under the opening gambit. I’m assuming this because supply may be higher and prices lower under the alternative scenario.
The best-case scenario would be for UN envoys to create a global market that creates a huge supply of reductions for a low price, blasting away my assumption.
(Updates with market-split chart and notes; more Yellen, adds development banks; Feedback sought: I plan to better explain and update this with more of your ideas over the next few days. Russia and Saudi Arabia may not like elements of my first alternative scenario, for instance; My email is mathewncarr@gmail.com)
The World Trade Organization will meet on green-trade rules immediately after the climate talks in Glasgow in November this year, according to Ngozi Okonjo Iweala, director general of the organization.
Greening the flows of goods and services will be a step forward in the climate fight, boosting employment in renewable energy, for instance, she told an IEA conference.
The EU and other nations are pushing for trade to be linked to climate policy to encourage action on cutting emissions by countries wanting to tap global markets.
“We know we need to scale up investments, both public and private,” Okonjo Iweala said. Trade can facilitate it, she said.
China’s senior energy official Zhang Jianhua said international collaboration is important.
Tackling the climate crisis by installing renewable energy is helping India’s ability to give its people their first access to electricity, said Raj Kumar Singh, that country’s minister of power, new and renewable energy.
–Stark Choices: Profit Motive Can Spur Big Emission Cuts Over the Next Five Years –There’s no guarantee the UN can create carbon markets that are better than current voluntary markets
By Mathew Carr
March 29, 2021 — LONDON: This week, the world is discussing how new markets of the Paris climate deal will work to cut greenhouse gas very quickly during the next 5 to 10 years.
Or, the talks will fail yet again.
The United Nations negotiations are crucial if countries are to have any chance at all of meeting the global target to limit temperature rises to less than 1.5C above pre-industrial levels. Annual greenhouse gas production needs to drop by about half by 2030 to reach that limit, scientists estimate.
The negotiations are happening at a time of global angst about the coronavirus pandemic, yet they are much more important for the planet than even that short-term concern. Without a climate solution, the world’s living environment is under acute threat, which could easily become a permanent crisis. Perhaps it already is.
The problem for investors thinking about where to put their money to work for a fairly safe profit cutting emissions is that there still isn’t a solid enough set of rules.
That means they could invest in a clean-tech business and then watch on as dirty fuels make that business uncompetitive in the markets, which still largely favour fossil fuels.
The envoys can now set up a system that would allow investors to sell emission cuts into the Paris framework, where demand should be huge because so many reductions are needed.
In broad terms, demand should be for a 3 billion ton cut of greenhouse gas every year globally, taking the total to about 30 billion tons of CO2 equivalent a year at the end of the decade from almost 60 billion tons now. Even more realistic cuts of 1.5 billion a year might leave the world with an outside chance of limiting temperature gains to 2C and would create a primary market of $75 billion a year at current carbon prices at EU levels about $50 a ton.
That’s a decent incentive but it’s nothing versus the $2.1 trillion wholesale value of crude oil produced each year.
So the UN envoys are still up against it, even though they have been trying for 30 years to fix this problem of markets working against the climate. Now, greenhouse gas cuts need to be so swift the only way to make them at the desired downward trajectory is to allow investors to make money as a reward for producing co2 credits.
The 2015 Paris agreement creates new carbon markets that are meant to link with each other starting this year and also with existing emissions markets. That will inevitably help change the trade in fossil fuels and energy intensive goods such as cement, steel, aluminium, chemicals and fertilizers.
But timing is still super unclear.
Here are the five carbon markets in simplified terms that will probably be created by or impacted by today and tomorrow’s UN talks, which are leading up to negotiations in Glasgow in November.
Article 6.2 of Paris (country by country bilateral/regional cooperation – could potentially include existing programs such as the EU carbon system – the world’s biggest by traded volume) — traded unit is the ITMO, the Internationally Transferred Mitigation Outcome
Article 6.4 of Paris (A new market overseen by the UN) — traded unit is the Article 6.4 emission reduction
Existing Kyoto carbon markets
Existing voluntary carbon markets
Global airline carbon market known as Corsia — the Carbon Offsetting and Reduction Scheme for International Aviation
Merging these markets and further boosting the price – the incentive – to cut emissions would start to level the playing field with fossil fuels. The EU carbon price has almost tripled since just after the start of the pandemic, yet it’s still pretty low when compared with the potential cost of damage.
John Kerry, the special U.S. climate envoy, is now saying a global carbon market would be useful and China is building what could become the world’s biggest greenhouse gas program.
Building these markets are still going to take time and the only real game in town for many investors and countries — until the UN envoys get their stuff together — is the voluntary carbon market.
Unless the envoys of the biggest countries decide to urgently form some sort of voluntary carbon club — which is possible — countries will find the voluntary markets attractive because they attract capital from huge global conglomerates seeking to meet net-zero targets.
One guy dealing with emission cutting opportunities for clients is lawyer Peter Zaman, a partner at HFW (Holman Fenwick Willan LLP) in Singapore and one of the world’s most experienced climate advisors.
Zaman argues some of the voluntary structures of the Paris deal are still sinking in for global investors. That nature of that deal, the fact that it gives choice to nations, is crucial. Countries don’t have to choose Paris, even if they are signed up to it. They can choose the voluntary markets.
Countries are allowed to choose where they sell their emission cuts, if they want — where they can get the most money. They can also choose, it seems, how they account for the transaction, at least for now and probably for a few years yet.
To explain: When a country makes a pledge to cut or limit its emissions under Paris, it’s called a nationally determined contribution, or NDC.
As Zaman says: “What the NDCs are asking a country to do is to limit their use of that overall carbon budget until 2100 for the most immediate 5 year period (starting this year).”
“The impact of an NDC should be that a country is voluntarily giving up its ability to burn certain greenhouse gas emissions (that are within its NDC) by way of making its contribution to the overall 1.5C target. By non-developing countries doing this, developing countries get to burn more of that budget,” he says.
While the U.S. is lagging Europe, the richer countries are moving more quickly on emission cuts because they are most to blame for the climate crisis and voters are insisting on a cleaner environment.
When a developing country cuts emissions outside its NDC, “it’s giving up its own future emissions-burning capacity,” Zaman said.
Zaman didn’t say it this bluntly, but one of the upshots of his analysis seems to be that the developing country can decide whether to sell now into the voluntary carbon market and take the money and jobs associated with the emission-reduction project, or wait for potentially years for capital under the Article 6 elements of Paris.
That’s why the envoys meeting virtually today are under considerable pressure to come good, this time.
By selling the credits within the Article 6 mechanisms, the country would be “benefitting another Paris Agreement country that wishes to use the benefit of that activity towards its NDC,” Zaman said.
“The ITMO or Article 6.4 ER is therefore treated as a benefit to that acquiring country and an asset to the host country. If therefore, the same activity has a choice of qualifying under article 6.2, article 6.4 or the voluntary markets, it is natural that a host country would wish to ensure that its asset is sold in the market where it attracts the greatest value.”
But there are no or limited real options right now for many countries under 6.2 and 6.4.
If a current voluntary market activity qualifies as an ITMO or Article 6.4 unit, then it isn’t a voluntary market unit anymore and there’s no accounting overlap problem. But since not all voluntary market credits wish to be ITMOs or Article 6.4 ERs (e.g. some may be CORSIA eligible units), a tension arises as to which markets might pay the best price or offer the best solution.
“Under the Paris Agreement accounting framework that starts from 1 January 2021, this is a choice that should rest with the host country,” Zaman said.
Selling countries won’t want to be seen to be going after quick bucks. But if they have little other choice, they have little other choice.
Today, because the article 6 guidelines don’t exist, there’s no significant alternative to voluntary markets, although ITMO arrangements such as those between Switzerland and Peru are beginning to emerge.
The tension between voluntary and compliance carbon markets is not new, but it’s reaching a bursting point.
Brazil, India, China and many other countries seem to favor UN oversight of global carbon markets and if the world was a democracy with a first-past-the-post voting system, they would have their way. But the structure of the UN climate unit requires all nations to agree — consensus is required.
Given that high hurdle and failure to get agreement after three decades, further delay in changing markets for good does not seem to be an option.
It’s not even clear that UN system to be able to strike a system that’s better that what the private sector is offering already, said Charlotte Streck, co founder and director at Climate Focus.
“These are different things with different actors, justifications and jurisdictions,” she said in an emailed reply to questions. “I am in favour of plurality of incentives and keeping the private and voluntary separate from the mandatory and public. It is in the hands of the governments to adopt ambitious climate policies that make the voluntary market obsolete.”
“Anything that removes incentives for action just to make sure the accounting is correct, is highly problematic. I am always inclined to support action – rather mitigation outside of NDCs than no mitigation. I am very pragmatic in this. I also think we face a far-too urgent emergency to allow ourselves to discourage actors to invest in mitigation,” Streck said.
So, given the urgency, emissions need to be cut hard, whether or not they happen to fall within a nation’s official Paris contribution.
Many G20 countries should have their NDC covering all sectors and all greenhouse gases already, but not all.
The U.S. has called a meeting of the biggest emitters next month to spur bigger cuts.
For example, “even though China has announced it will be carbon net zero by 2060, that doesn’t necessarily mean it has to include all of its sectors and greenhouse gases into its NDC immediately. Eventually, that will be the case, but it is at China’s determination and pace,” Zaman says.
The Paris Agreement recognises common but differentiated responsibility and respective capabilities, and expressly states at article 4 that “Developing country Parties should continue enhancing their mitigation efforts, and are encouraged to move over time towards economy-wide emission reduction or limitation targets in the light of different national circumstances”.
Similarly, the Paris Agreement decisions therefore distinguish between: (i) what a country has to report regarding its anthropogenic emissions by sources and removals by sinks of greenhouse gases — that is all its greenhouse gas, and (ii) the information necessary to track progress made in implementing and achieving nationally determined contributions.
Having these two sets of accounts is necessary because of the structure of Paris — each country gets to define the contribution that comes into the deal (but separately every nation needs to account for every ton of greenhouse gas, so what portion is inside the NDC may become an important metric for each nation interested in selling emission credits and/or attracting capital.
A country with less of its emissions inside its NDC may find it more difficult to find buyers for its carbon credits, but it should be free to try, according to the Paris rules.
Zaman says: “This dual reporting regime reflects the fact that for some countries some activities, greenhouse gasses and sectors will be inside their NDC and for others, they will be outside their NDC. If a host country wishes to pursue market mechanisms under article 6, this inside vs outside NDC distinction will translate to areas where voluntary market projects have less likelihood of overlap with some of the article 6 opportunities“.
Some may argue that this distinction increases the risk that countries will be disincentivised to increase their ambition under their NDCs.
However, to this, Zaman says according to the Paris Agreement “it’s the role of the Conference of the Parties to the Paris Agreement (CMA) to ensure that ambitions of the countries, reflected through successive county NDCs, are consistent with the Paris Agreement goals“.
It’s not the role of the private sector to determine whether a country is ambitious enough, but buyers of carbon credits will have many options because of the structure of Paris.
Big corporations seeking to hit net-zero targets will probably choose to favor credits from ambitious nations, because that will leave them less vulnerable to public relations risks.
Millennial customers will become a lot less tolerant of greenwash as the climate deteriorates.
The bottom line seems to be that if United Nations envoys don’t move much more decisively this week and over the next few months, the voluntary market is set to make the UN talks irrelevant.
News outlets are right now filled with a potent symbol of trade blockage.
The Taiwan-based Evergreen-operated container ship that’s blocking the Suez Canal is the perfect example of the fragility of global cross-border buying and selling.
That Taiwan is involved, as are the Indian workers that man the vessel, seems representative of the importance of China and India in the world’s biggest blockage — effective climate action.
Can global physical trade and emissions trade be unblocked on the same day?
(Updates with Streck. Adds China example of inside/outside NDC progression. I will update this further with additional points of view. Happy to take feedback at mathewncarr@gmail.com)
Excerpt: Discussion Questions, with acronym explainers
The questions below are intended as guides for Heads of Delegation, who are encouraged to address them in the round in their interventions, focusing on elements of greatest importance to them.
● What are the key issues that require the attention of Heads of Delegations, and what solutions can we consider to overcome the existing divergences on those issues, in light of the compromise options proposed in COP25 (UN climate talks in Madrid hosted by Chile held at end of 2019)? ● How can we work together most effectively as Heads of Delegation this year to make progress on these key issues? ● What decisions (if any) could be needed from the CMP (conference, meeting of the parties — the overarching decision making body of the UNFCCC, including the Kyoto and Paris deals), for example to support any transition between the CDM (Clean Development Mechanism – existing UN carbon market) and Article 6.4 mechanism, and what work could the Presidencies do with Parties in advance of Glasgow to prepare for any such decisions?
–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:
Source: Morgan Stanley
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.”
Source: Morgan Stanley
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.
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:
–US emissions-cutting plan crucial as big 20 consider each others’ 2030 carbon limits through October, ahead of UN climate talks in November –Will President Biden speed the pace of cuts vs Obama ambition?
By Mathew Carr
March 9, 2021 — LONDON: The U.S. is still seeking to widen the responsibility for cleaning up the climate crisis mess, which it’s most responsible for.
In a TV interview with Newsnight in London, visiting U.S. special climate envoy John Kerry ducked a question about whether the world’s biggest economy would lead in emission cuts.
Kerry is instead seeking to enlist other big countries into the global effort, even those with much lower per capita emissions and less responsibility for the world’s most risky situation.
“The 20 countries that are the equivalent of 81% of all emissions, those 20 countries have a particular responsibility to take the lead in reducing greenhouse gas emissions…All have to be part of this effort,” Kerry told BBC presenter Emily Maitlis.
But take a look at this UN Emissions Gap Report chart:
Kerry didn’t mention this context when explaining the situation: when taking the trade of energy intensive goods into account, rich nations are even more responsible for the climate crisis (a high portion of developing-nation GHG is linked to their production of goods consumed in the most wealthy countries).
Kerry met with U.K. Prime Minister Boris Johnson and Chancellor Rishi Sunak, who are helping oversee the UN climate talks in November in Glasgow, Scotland. Kerry is also meeting with the European Commission today and French government officials later.
Kerry said Tuesday from the EU commission he was seeking to “align” with Europe. “It’s important for us to align ourselves now, which is what we will discuss today. There are trillions of dollars or euros, or whatever the currency, that will be required.” The private sector will be crucial.
“Every single economic analysis makes it clear. It’s more expensive for our citizens not to respond and do what we need to do than it is to do it.”
Under the Paris Agreement in 2015, President Barack Obama committed the U.S. to reduce greenhouse gas emissions 26-28% by 2025, from 2005 levels.
So will the U.S. now lead on cutting emissions at an even faster pace?
“It’s imperative that the United States step up with a very realistic and achievable, measurable level of our reductions and we will. President Biden will make that announcement either on April 22nd at our (climate) summit or in the week preceding,” Kerry told Newsnight Monday.
Missing from this sentence was the word “ambitious,” or even a synonym of that.
“But there’s no question. The U.S. has been absent from this effort the last four years, at least as a federal government,” Kerry said.
Paris commitments so far imply a temperature rise of 3.7C above pre-industrial levels, he said.
“That’s catastrophic.” And since countries seem to be failing to live up to those commitments, the temperature increase is looking like it might rise even higher than 3.7C, Kerry said. He didn’t name the countries.
Given the U.S. is most responsible for climate change and has only 4% of the global population, it’s target update, known as a nationally determined contribution (NDC) to the Paris deal, is key.
Here is the state of play for emissions and NDCs in two linked charts, again, from the UN Gap Report.
UN Gap Report (see above for link). A conditional NDC is more ambitious than an unconditional one, though depends on minimum levels of climate finance from outside countries, for instance
The U.S. target is crucial also because it’s likely to demonstrate to poorer nations whether it’s learned to ration its own future use of the remaining global carbon budget, implied in the Paris target to keep temperatures from rising 1.5C.
Kerry suggested the U.K. plan to cut its emissions by 68% from 1990 in 2030 was ambitious. That’s also more than the EU plan for a 55% drop, so I’m guessing the U.S. is unlikely to go for emissions cuts suggested by some of its own environmental lobby groups.
See this (I’m not endorsing it as a credible option, but it’s pretty interesting outlier. It’s probably not what Kerry calls “realistic” or “achievable”):
That’s dramatic…because it would mean the U.S. removing as much as the double the volume from the atmosphere in 2030 (ie financing reductions at home and around the world, potentially) than it’s producing domestically today.
Such a scenario might even be possible if global carbon trading is structured with logic, ambition and UN-achieved credibility during the next few months.
At this point, the world can only dream of such a reality. But emissions removal technology and finance are getting a lot of attention from lawmakers and investors right now, and these markets could be set to take off.
Feb. 10, 2021 — US Chamber of Commerce names Suzanne Clark as new CEO, replacing Thomas Donohue, who led the organisation for more than two decades, WSJ reported.
Days before Mr. Biden was sworn into office, the Chamber took its strongest position yet in favor of climate-change legislation: WSJ
Another fascinating two sentences:
In 2019, the Chamber said Mr. Donahue would step down in 2022—an announcement that came moments after The Wall Street Journal published a story reporting that Mr. Donohue regularly used the Chamber’s corporate jet service to travel on business and personal trips, including a weeklong trip to the Greek Islands in 2019 with his girlfriend.
At the time, the Chamber said it would conduct an extensive search for a successor.
–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.
–Carbon-market links come into sharper focus, but first –The world’s biggest market sadly shrinks because of Brexit –U.S., Canada and even China focus on aggressive effort for 2030 –Companies, too, get on board
By Mathew Carr
Dec. 14-21, 2020 — LONDON: Britain is calling for countries to partner with its proposed new carbon market as it leaves the European Union’s program and its touted price aligns with other nations.
It’s a terribly sad state of affairs that the EU market is shrinking as the fractured world seeks to align on its climate effort during the next several years.
While the U.K. has said it might link its new carbon program with the EU emissions market, the world’s biggest by traded volume, it’s also got options with other nations, according to people with knowledge of the matter. On Dec. 9, it signed a trade deal with Canada, which may levy C$170/ton carbon prices by 2030.
The Zero Carbon Commission in Britain said in September the target should be about 75 pounds a ton, or C$130, with analysts estimating similar levels in the EU. But the commission cited a range with a top of as much as 140 pounds, or C$240.
The EU and Canada are both proposing border adjustments where imported goods would face fees that match the internal carbon prices. Programs are also planning to “recycle” the money raised from selling or taxing carbon emissions to protect poorer people in rich and poorer countries hurt by rising costs (and who have faced the brunt of bad pollution policies until now).
In the U.S., the Energy Innovation and Carbon Dividend Act, which puts a price on carbon and rebates the revenue to Americans on an equal basis, was last year sponsored by Democrat Rep. Ted Deutch and co-sponsored by Republican Rep. Francis Rooney, both of Florida. It would have seen prices around $125 (C$160) by 2030, but would need steeper emission cuts to reach net zero. While the congress is looking split, the idea of a carbon fee and dividend has had more Republican support than other policy.
By choosing cap and trade over carbon taxes, North American states and provinces can probably expect a lower climate-transition cost, said Dirk Forrister, president of the International Emissions Trading Association. (Dare we hope for a linked U.S.-Canada-Mexico carbon market?)
“You can probably beat those price levels,” by invoking market forces to cut emissions, Forrister, a former climate advisor to President Bill Clinton, said by phone.
By aligning trade policy and carbon prices, the ability to achieve maximum removal of emissions globally over the next few years is enhanced.
“If you focus only inwardly, you are set up for failure,” Forrister said.
International cooperation under a well-functioning Article 6 of the Paris Agreement could save as much as $250 billion per year by 2030, according to a study last year by IETA that was co-sponsored by the Carbon Pricing Leadership Coalition, with the help of researchers and modellers from the University of Maryland.
The report sets out how financial flows can help right climate injustices, something the Biden-Harris team say they are focussed on. See this chart:
Environmental lobby groups are also pushing global alignment because President Elect Joe Biden will struggle to lead on climate without it. Biden and Vice President Elect Kamala Harris reiterated over the weekend (Dec. 19) they wanted to lead globally and right climate injustice as they appointed a diverse range of climate advisors.
“Some may argue that it would be better for the U.S. Paris commitment to focus on a later target year such as 2035 because an additional five years may allow for a bigger initial U.S. commitment. However, adopting a different time frame than others are committed to under the Paris Agreement may well undermine our ability to exert pressure on other countries to enhance their commitments. Further, the U.S. can’t articulate the urgency of needed transformations and drive near-term action and accountability if it only signals a 2035 target timeframe,” according to this plan by climate experts, including Jake Schmidt of the Natural Resources Defense Council: https://carrzeeorg.files.wordpress.com/2020/12/8d3a7-summaryofinternationalclimateagendaforthenextadministration.pdf
The ultimate goal globally for carbon-pricing enthusiasts and economists is aligned greenhouse gas markets and prices, which can eventually form the basis of a new global commodity that does not hinder other trade flows too much.
“A global price and linking is one of the things we want,” said Andrei Marcu, founder & director of the European Roundtable on Climate Change and Sustainable Transition, speaking last week at the European Climate Summit.
Carbon market linkages don’t need to be struck between nations in close geographical proximity, because trading is done electronically. However, rules and the ambition of emission-reduction targets would probably need to be similar for linkages to be effective, according to analysts, officials and lawyers.
Linking won’t be easy and Brexit shows delinking remains a risk.
“Some of the biggest challenges are political,” said Constanze Haug, senior advisor at the International Carbon Action Partnership, a research group. “By combining your market with another one, you’re giving up a partial sovereignty over your own market, its design and its robustness.”
Emerging countries, less to blame for climate damage, could face lower price levels initially, according to Xiliang Zhang of the Institute of Energy, Environment & Economy at Tsinghua University. China is seeking net zero by 2060. See this slide, presented at the summit last week:
NDC=Nationally Determined Contribution (pledge) to the Paris climate agreement
Tighter emission-reduction targets boost carbon prices because they result in scarcity of allowances, which grant the right to pollute.
For Britain, its proposed carbon pricing system “gives industry the certainty it needs to invest in low carbon technologies. The government is open to linking the U.K. emissions trading system internationally in principle and we are considering a range of options, but no decision on our preferred linking partners has yet been made.”
The U.K has already legislated to establish its ETS, and the technical system underpinning it is in “final stages of development and on track to be ready on time,” it said in a statement.
“We recognise the importance of international co-operation on carbon pricing and the important role international carbon markets can play,” the U.K. Department for Business, Energy and Industrial Strategy said in an e-mailed response to questions.
The U.K. is leaving the EU carbon market at the end of this month, shrinking it and probably reducing trading liquidity. Negotiations on a possible trade deal continue, with “environment” and market incentives as among the sticking points, according to press reports.
“I personally think that it would be so much easier for the U.K. to join the EU emissions trading system, which they know,” said Silke Karcher, head of division, EU Climate and Energy Policy, European Climate Initiative, carbon markets, at the German Ministry for the Environment. “I find it hard to imagine they would try anything else, but who knows?”
Other forces driving acceptance of higher carbon prices are companies adopting net zero targets and the related embracing of climate-risk disclosure rules. Governments around the world are pushing to recover from the coronavirus pandemic in a cleaner, greener way.
The global voluntary carbon market is also linking in with the wider Paris system. Companies are already simultaneously setting net-zero targets and factoring carbon prices into their business plans and investment decisions. They are also buying carbon credits, another factor favoring markets over taxes.
“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 last week on the Energy Regulation Quarterly website. The firm specialises in climate law.
“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.“
The proposed British system starting the end of the month is “more ambitious than the EU system it replaces – from day one the cap on emissions allowed within the system will be reduced by 5%,” and the nation said it will consult in due course on how to align with net zero.
• The U.K. ETS has been designed by the UK Government jointly with the Scottish Government, Welsh Government and Northern Ireland Executive, so it’s already international – sort of.
• The U.K. ETS will promote cost-effective decarbonisation, allowing businesses to cut carbon where it is cheapest to do so. In doing so it will promote innovation and growth for U.K. businesses.
• Implementing a U.K. ETS is a crucial step towards achieving the U.K.’s target for net zero carbon emissions by 2050.
NOTES The U.K. is seeking “environment & clean growth” with Australia under a new trade deal, it said earlier this month in a statement. BEIS: Australia does not currently have an Emissions Trading Scheme (ETS). In 2011 the Australian Government were preparing to put in place an emissions trading scheme and initiated discussions with the EU on how the systems could be linked, however the scheme was later repealed in 2013/14.
(Updates Tuesday afternoon with Germany official, BEIS comments, Wednesday with additional comments, context, corrects title of the BEIS department, updated Thursday with DeMarco, recast Monday Dec. 21, added Forrister)
