The webinar I attended was Pricing Carbon – A Climate Conscious Asset Class, held by IHS Markit during the NYC Climate Week. The webinar mainly touched based on the key issues faced by current carbon trading programs and carbon markets around the globe.
At first, speakers from Hartree Partners and IHS Markit pointed out that data transparency is a key issue when pricing carbon in the trading system. It serves as a building block which could build confidence for the players to interpret the value of position for finance inventories and emission projects. Therefore, on the other hand, transparency is the bottleneck of voluntary carbon market because currently many investors don’t know the true value of investments. And given that the downstream buyers don’t know the best price when making investing decisions, there’s no reference to compare the investments in different carbon market products. In turn, there’s no way to conduct basic analysis for the trading decisions because of the lack of benchmark and thus the transparency for carbon trade in general.
Data transparency is important. In the nest steps, we need to incorporate time series data to help players to reduce trading costs, develop pricing reference data to build benchmark, and eventually make better investment decisions on carbon market products, such as future and swaps etc.
Currently, most carbon markets only have single point of measure as investment tools for the equity, fixed income market. They are not standardized. However, with benchmark and transparency, we could help the carbon market increase efficiency, making billions of increases in ETS swaps and futures, increasing liquidity of assets, and having more instruments to track the trading operations.
Later on, expert from IETA talked about current status of market-based approach for global carbon market development:
In the analysis of Pro-market NDCs in 2015: Countries put up their INDCs. To be more specific, over 100 countries suggested they will use international trading and cooperation mechanisms to reduce emissions. Some countries chose to use lower costs abatement options. However, for nations who are lack of low-cost options, they will choose carbon trade to reach their emission targets. Coming to current status in 2020, more countries have shown their interests to use market-based approach to achieve their NDCs. The speaker also talked about Article 6, which allows countries to work together to increase emission reduction ambitions or enrich their NDCs. In fact, negotiators have been making efforts to reach agreement for the rulebook of article 6 which aims at operationalizing article 6. This will still be an important issue to be discussed during COP 26.
If we analyze the carbon pricing programs under World Bank report which delved into different design elements of carbon trade programs, eg. Different instruments such as tax, ETS, output based grants etc. What’s more, there’s an increasing focus on the emission reduction and market-offset approach for aviation industry. CORSIA, the offsetting system, is under more and more concerns in recent years.
Current carbon markets around the globe are pretty fragmented. There are various kinds of compliances which are government-driven programs. They are differ by distinctive alliances with different rules, regulations, tools. For international organizations and firms, the players need to operate across alliances. Therefore, it’s especially hard for them to operate with different rules they need to comply to. Thus, there’s a need to make the carbon markets involve to be more standardized.
What will be the major compliance market? While COVID has brought economic impacts with decrease in commodities for EUETS, there’s still strong confidence in EUETS trading system because of its stringent plan and its resiliency towards the uncertainty. In fact, carbon price fell for a while, but soon came back.
China is also a huge player. Just last week, the nation announced its goal to reach carbon peak by 2030 and net-zero by 2060, set by President Xi. China’s national ETS is planned to get into power in 2021, building on its current provincial programs. Moreover, there are other evolving alliances in Latin America markets on carbon tax and emission trading.
The major trend is led by EUETS, which focuses more on broadening the scale of carbon reduction, such as bringing in ship, aviation, and transportation. Instead of increasing trading schemes, EUETS aims to increase emission reductions in total. There’s also a foreseen trend in hedging carbon market in terms of climate risks, in terms of ESG, suppressing drivers of inflation, and increasing impact investment, which means investors could buy CO2 today because it is cheaper than investing in costly abatement projects, therefore making the hedging work.
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