In July this year, a group of asset managers with $6 trillion in assets under management called for a global price on carbon emissions. Even earlier, last December, another asset manager group launched the Net Zero Asset Managers initiative, committing to achieving net-zero status. To date, signatories to the initiative control some $43 trillion in assets. And now commodity traders are turning to carbon trading.
With so much focus being put on reducing carbon emissions by governments, regulators, activist investors, and environmentalist groups with growing clout, it was only a matter of time before emissions became business. The European Union Emissions Trading System, ETS, came first. Now, China also has its own carbon emissions market. Other countries, such as Australia, are employing different approaches to trading carbon emissions that basically turn carbon dioxide into a commodity.
The opportunities for profit are considerable. According to the OECD, carbon emissions, currently trading at around $60 per ton on the ETS, which is already a record high, need to rise to $147 per ton to make net-zero targets achievable. It would have been odd if commodity traders did not get in on the carbon game.
The Wall Street Journal reported this week that Shell and BP—which besides being oil supermajors, are also among the largest energy commodity traders in the world—had already built sizeable carbon-trading business divisions. Their business is currently focused on the EU, because of its well-developed carbon emissions market.
The European emissions market, along with smaller, regional markets for emissions in California and New Zealand, had a size of over $280 billion last year, according to data from Refinitiv cited by the WSJ. That was a 23-percent increase on the previous year, and the outlook is bright. Wood Mackenzie analysts have calculated that the global carbon emissions market could reach $22 trillion by 2050.
And that's not all. According to one former oil trader who now leads Trafigura's carbon trading desk, the carbon market could exceed the oil market in size by 2030 and even by 2025 if regulations come fast enough and are tough enough. The European Union is already in the process of expanding the ETS to cover more industries, making more companies buy emission permits and trade them.
Meanwhile, the price of carbon is likely to rise further, especially this winter, when short supplies of natural gas may make Europe more reliant on coal-fired power generation, meaning the companies operating the coal power plants would need to buy more emission permits.
Over the longer term, however, the soaring price of permits to release carbon dioxide should help companies invest more in low-carbon technologies to reduce their footprint. And this is how net-zero will be achieved, according to those that see the carbon market as perhaps the ultimate net-zero driver.
"A carbon price corridor that provides a clear economic signal as well as more pre-visibility will provide the global environment necessary for companies to make sound investments decisions," said Charles Emond, President and CEO of Canadian pension scheme CDPQ, a signatory to the Net Zero Owner Alliance, in July.
"Non-regressive and revenue-neutral carbon-pricing instruments – harmonised across borders – will not only unleash massive investment in renewable power systems globally, but boost sectors from construction to transport, which are in urgent need of transition," added Allianz management board member and Chairman of the Group ESG Board Günther Thallinger.
Carbon emissions are quickly turning into a commodity. All major commodity traders are ramping up their carbon trading desks, per the WSJ report. And how could they not when carbon prices are set for a seemingly uninterrupted rise in the coming years. In such a context, it is not too far-fetched to speculate that at some point in the more distant future, carbon emissions could even experience a shortage.
By Irina Slav for Oilprice.com
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