Episode Transcript
Speaker 0 00:00:00 I'm here with Lisa Zeak from re Refinitiv Carbon Research Team. Lisa, welcome to the Green Room. Thanks. So Lisa, start by telling us a bit about yourself and your work.
Speaker 1 00:00:11 Well, I'm part of the team doing carbon market research and analysis with definitives wider commodities research branch. Uh, and over a decade ago I actually worked at the predecessor to the current configuration. It was a private company that provided news and information about carbon markets. That's now part of definitive and in between I was a fellow at a European environmental policy think tank called Ecologic. And um, I taught some courses on environmental finance at Johns Hopkins University in Washington DC And I currently also manage our family farm here in northern New York, um, with some Scottish highland cattle and goats and pigs and chickens <laugh>. Wow. Um, and as a contractor, I think my title's been contributing editor or um, senior analyst for this survey.
Speaker 0 00:00:54 Excellent. So, you know, jumping into that great segue, you recently published the findings from Refinitiv annual Carbon Market Survey. So I'd love for you to start by giving us just an overall 30,000 foot view. What are the basics of emissions trading and where is the carbon market at right now in 2022? Great
Speaker 1 00:01:14 Question. First of all, there isn't just a carbon market. Emissions trading systems exist in many places, wherever policy makers have implemented a cap and trade system for greenhouse gases. So that's where they set a limit on the amount of greenhouse gas that a covered entity, which is typically like a power plant or uh, an industrial installation, can put into the atmosphere in a given timeframe, which is typically a year. And that cap decreases over time. So the caps volume, which is usually an amount of tons of CO2, is broken into individual permits or allowances. And those each represent the right to emit one ton of co2. That's the principle of cap and trade. So the European Emissions Trading System, the E U E T S, which is the oldest, and still by volume, the biggest carbon market out there that we analyze those permits there are called EUAs, European Union Allowances.
Speaker 1 00:02:07 And as of today they're trading at about 85 euros a ton, which is much higher than in previous years. And our survey results show that there's big expectations that that price is gonna get much higher. But to come back to the 3000 foot view, there are other etss around the world. There's the Western Climate Initiative in, uh, north America, and that's a program that covers emissions from the state of California and the Canadian province of Quebec. And it includes emissions from the transport sector, which is kind of unusual in the carbon market world. Then there's the Regional Greenhouse Gas Initiative, which covers 11 states in the northeast and mid-Atlantic of the US including New York State where I'm currently, and it only covers power generation, so that's a little different. Um, New Zealand has a national ET t s, South Korea has a national et t s, the allowance units there are called NZ use New Zealand units and Kaus Korean allowance units.
Speaker 1 00:03:01 So CCAs in the Western Climate Initiative cost about $33 per ton at this point. Uh, and the regional greenhouse gas initiative ones cost about $14 per ton at this point. So to come back to where the carbon markets are in 2022 in total we estimate we put out a yearly, um, year-end review report for carbon trading all over the world. And the combined traded value of all these markets was a record <laugh>, um, 760 billion in 2021, which is more than twice as much as the year before. Uh, and that's because market value indicates all transactions. So it's, it's not just like the actual ton of carbon, it's, they can just like an oil markets and everything else be traded, uh, back and forth multiple times. So it's like the amount of oil being traded is only so and so much of the value of the oil market with futures and options and all of that. So the E U E T S is about 90% of that. It's worth about 680 billion.
Speaker 0 00:04:01 So what's interesting is that, you know, 680, 80 billion you're quantifying, um, the markets here, but I know you have a bit of a distinction in terms of not categorizing these markets as part of the broader ecosystem of sustainable finance and investing. Why don't you categorize this as part of that overall sustainable finance and investing? What, what's the key difference here? Yeah,
Speaker 1 00:04:27 It's really, um, because emissions permits or allowances as they're mostly called are tradable commodities. So we provide data about prices and volumes like these four agricultural commodities like wheat futures and pork bellies or metals like golden copper or in this case more directly related energy, commodities like oil prices and gas prices. So they're generally considered part of the energy commodity complex since power companies for instance, need information on future fuel prices to hedge their electricity prices, like what they should charge their power customers and what they'll have to pay for emissions permits for generating that electricity. That's just part of their calculation. So subscribers and clients are power companies or energy intensive industrial facilities that need to pay attention to carbon prices because they have a compliance obligation under the emissions trading system or their traders and brokers that play in this market, even though they aren't direct emitters who need to surrender allowances.
Speaker 1 00:05:25 So just like most of the folks who trade oil futures don't actually take delivery of barrels of oil at their contract expiry. So from an environmental perspective, that's the beauty of this market. It makes emission reduction a fact of life, a necessary part of doing business. You've got Wall Street folks who don't necessarily care about global warming informing themselves about energy efficiency upgrades in the cooling sector or methane reduction at dairy farms because those lower the demand for carbon permits and that in turn affects allowance prices. So by creating a cap and trade system, regulators actually make carbon into a commodity that is its own thing and not like a special environmental thing that only green people are interested in carbon as a commodity. While it's unique in that it's entirely created by a policy measure, but it is now sort of mainstreamed into being a commodity that, uh, people are trading.
Speaker 0 00:06:15 So that's fantastic and very interesting. We see commodities but then separately we see the sustainable finance and maybe this is a bit of an intersection but not all part of the same pot. So thanks for for explaining that. Just jumping back into the report, you've been involved in the team as well as the survey since um, its beginnings. Tell us a bit about the details of the survey we had, the over overall view. Did you see any key findings that were important that you want to share with our audience today around specific areas that we should be thinking about from a forward-looking perspective?
Speaker 1 00:06:53 Sure. So the questions have changed a bit over the years as more and different countries have created emissions trading systems. So we change our questions accordingly and there's more in different factors that influence carbon prices and the trading dynamics. But one thing the survey has always included is questions specifically for covered entities. So like the actual emitters I was talking about before as opposed to traders and brokers or policy makers and academics and consultants take our survey too cuz anyone who watches carbon markets. But these questions that are too specifically emitters are about whether or to what extent the e t s is actually working. So do companies actually find their emissions are affected by the existence of a carbon market or would they be reducing their emissions anyway for other reasons or other policies? Renewables, quotas really high fuel prices. So this year has revealed that carbon markets are seen as more important than ever to reduce greenhouse gas emissions.
Speaker 1 00:07:49 Respondents were asked to rank the importance of various factors including policies introduced in reaction to Putin's war in Ukraine for instance. And 98% said that the e t s is an important factor. 80% even characterized it as having large importance to emissions reductions. So that in turn correlates with another interesting finding, namely, um, expectations of price increases. So respondents were asked to mark which et t s they're most involved in or they follow like a lot of folks in China getting into the new market, there are um, checked that they were mostly involved in the Chinese market and for each of these questions there were decisions on where prices would go in the near future. A price is gonna go up is an allow, it's gonna cost more next year and nearly all of the respondents in almost all of the markets expect steep price increases. So
Speaker 0 00:08:39 Let's look at this globally cuz you just brought in China and we're talking about the eu. Where do you see the big areas taking place? So we have the eu, we have China, let's discuss those as well as other areas where you see this happening.
Speaker 1 00:08:51 So China formally launched its its e t s way back in 2017 I think, but the actual trading of allowances just started last summer. It took a while to get the logistics of the program up and running because it's a 1.2 billion population with all of these covered entities. So the first compliance deadline for Chinese companies turning in their allowances to cover their emissions was at the end of last year and it was to cover the emissions that they had in 2019 and 2020. So by the end of 2021, they had to surrender allowances for those and given the sheer size of the market because it only covers power generating facilities so far, but that's already about 4 billion tons of co2. So that's as much CO2 as the US emitted in 2020. It looks to be a big growth market. And then, uh, we've got the other emissions trading programs in North America and like I said, New Zealand and South Korea and those are moving forward. New Zealand has just done a, a revamp of its program. So, um, the caps are tighter there, prices are going up, uh, and the Western Climate Initiative is in the middle of, of a similar process. Uh, and of course oil prices and fuel prices in general are getting higher, which means that it pays to not emit so much or not burn those fuels which cause emissions. Um, so we can see that, um, reflected in, uh, some of these survey results as well.
Speaker 0 00:10:14 So let's get into voluntary carbon markets. Now there is a hot debate going on over whether this is just, um, carbon offsetting is greenwashing to be quite frank. Did respondents in the survey have a view on that as it relates to voluntary carbon offsetting? Is it green watching? Is it legit? Yeah,
Speaker 1 00:10:37 We, we had a question on that. We, we have quite a few respondents that are involved in the voluntary market. So, um, we asked a couple questions on that. We had one that was formulated in a way that gave choices about a sort of range of views on what voluntary markets mean because there's a big distinction between the compliance markets that we were just discussing that are created by governments making a cap and trade system and the voluntary markets, which are, um, offsetting by companies to be able to make claims on their, uh, net zero targets for instance. So, uh, when we asked about views on carbon offsetting, most respondents were pretty positive more than 60% of the respondent pool disagrees with a statement like offsetting is pure greenwashing. And about 90% of the respondents agree with the idea that offsetting allows companies that do not actually emit greenhouse gases to contribute to emission reduction in some way because they're purchasing the credits for emissions that were reduced elsewhere.
Speaker 1 00:11:35 And about over 80% agree that offsetting assists developing countries in getting access to climate technology and finance because a lot of these offset projects happen in poorer countries where there's more bang for your buck in terms of reducing emissions for the money that it costs to do that. So less than half of the respondents who responded to that part of the survey agree that having the option to offset emissions reduces firm's incentive to cut their own G H G output. A lot of them think that they still go ahead and do the greenhouse gas cutting in their own company and then additionally go for offsets. So, uh, it seems that, uh, the survey responses were, were more positive on the voluntary market front.
Speaker 0 00:12:15 So Lisa, what is the single most compelling point of this survey that you wanna get across? Alright,
Speaker 1 00:12:21 Uh, at the climate negotiations in November last year, negotiators decided new rules for carbon trading among countries. So one party can pay for emissions reductions to take place in another country and get credit towards its own domestic mitigation target for doing that. And so far the rules on that have been very vague and countries have not declared that they want to, um, engage in that kind of carbon trading, but the rules got hammered out to a, a good extent back in November. So survey participants reflect this because we asked a question about how much they think countries will start trading carbon reductions and about 70% of the 175 respondents who answered that question about carbon trading among countries expect more countries to use the carbon units generated abroad to achieve their national mitigation goals. So that's a really interesting outcome, um, that we've seen directly reflected as a result of the negotiations.
Speaker 0 00:13:18 And you know what? I think that having you back here at, in the years time to let us know how countries have performed against what they wanted to do in 2022, what the actual outcome was in 2023 will be a great goal for us to set <laugh>. Lisa, thank you so much for joining us here on the green room.
Speaker 1 00:13:36 Thanks.
