On Tuesday 5 July, Glennmont Partners from Nuveen held a webinar on Carbon Market Outlook: Impact on the Energy Transition. The event was chaired by Glennmont CFO, Francesco Cacciabue. Speaking were Pascal Siegwart, Vice President of Carbon Markets at TotalEnergies and Linus Beer, Associate, European Carbon Markets at Aurora Energy Research Ltd. They discussed the origins of the European and global carbon markets.
Francesco Cacciabue, CFO at Glennmont, began by introducing Glennmont Partners from Nuveen. He looked back to the Kyoto protocol of 1997 and the birth of the carbon market, then the subsequent EU emissions trading system established in 2005. He set out how both have the objective of taxing polluters for their emissions. He introduced discussions about how the current energy crisis is affecting the carbon market, and how we can encourage the energy transition without prices spiralling out of control. Francesco then welcomed the webinar’s speakers: Pascal Siegwart, Vice President of Carbon Markets at TotalEnergies and Linus Beer, Associate, European Carbon Markets at Aurora Energy Research Ltd.
Pascal Siegwart, Vice President of Carbon Markets at TotalEnergies, introduced TotalEnergies as one of the first energy companies to commit itself to net zero by 2050. He took attendees through the Paris Agreement – the legally binding international treaty on climate change aiming to limit global warming to below 2 degrees. In particular, he pointed to Article 6, which is still unresolved but trying to create a global international market mechanism for carbon trading.
In terms of carbon mechanisms to deliver net zero, Pascal spoke of carbon prices and carbon credits. The former, he said, comes in the form of either emissions trading schemes (ETS) or carbon taxes, and aims to put a cost on carbon for society. Carbon credits meanwhile are designed to reward emissions reductions or removal on a project activity level. Going into further depth on carbon pricing, he said initiatives are currently highly fragmented, with 68 separate schemes worldwide covering 24% of global emissions, and more coming. He said carbon taxes are often unpopular politically as they lead to higher prices.
He noted it was important to recognise not all ETSs have a cap and trade. Current price of the EU ETS has more than doubled, and most other main ETSs have increased too. He also highlighted the new Carbon Border Adjustment Mechanism – a new EU reform to compete with ETS, putting a price on carbon-intensive imports that is likely to be voted in and take effect in 2026. On top of these government initiatives, he called attention to a shadow carbon price tool for corporates.
Linus Beer, Associate, European Carbon Markets at Aurora Energy Research Ltd, introduced Aurora as a global power market intelligence firm, and said his own focus is on the EU’s ETS. This he said is especially important now as the EU has raised climate targets from 40 to 55% relative to 1990 – something that requires a 633Mt emission reduction by 2030.
Setting out how the role of the EU’s ETS, he described it as covering 38% of the bloc’s emissions in 2019, and is a key instrument to reach the new target. Currently, it covers the power, industry and aviation sectors. and is likely to be expanded to the maritime transport sector. Some forecasts also predict that in the late 2020s it will be expanded to cover transport and buildings.
In terms of pricing, Linus set out how recently EUAs have seen an unprecedented rally since the tightening of EU climate regulations. There was a downturn due to COVID-19 but a quick recovery, however prices then dropped significantly again when Russia invaded Ukraine. Whereas the ETS here used to be the primary driver for the coal-to-gas transition, Russia’s invasion has reversed this relationship as the cost of gas has more than quadrupled. This has led to substantially higher power sector emissions, however the net effect has been muted due to inflation also leading to a decrease in demand.
Next, Linus looked at some of the most important parameters of the EU’s transition plan. This included the overall reduction target of -55%; sector coverage of power, industry, aviation, shipping; new ETS reduction targets relative to 2005 emissions level (predicted to be between 61-67%); and the Market Stability Reserve – acting as the guarantor to EUA pricing.
The session closed with a discussion between panellists and questions from the audience, on topics including whether the EU ETS is a unique commodity market, if there is any ambition to link international trading schemes together and create a worldwide carbon pricing signal, and what happens if carbon credits are given but then a project is found to have no savings.
October 4, 2022