Environmental Thought Leadership

CARBON MARKETS

Carbon price rise expected as US investors turn to carbon permits

What’s happening? Growing numbers of US investors are turning towards carbon permits, prompting speculation that pollution costs may continue to rally, Bloomberg Green has reported. European prices reached a record high this year, breaking through a price of $50. The largest US ETF to track carbon markets, KFA Global Carbon ETF, has tripled its assets to almost $60m, compared to $3m six months ago. Much of the rise has occurred since US President Joe Biden indicated climate change would be a key policy area, following his January inauguration.

Why does this matter? Growing investor interest in carbon markets, on the back of projected increases in the price of carbon permits, could in turn act to boost prices further. On paper this would be good for the climate, but if prices rise too quickly it could be bad for forward-looking businesses that are planning a smooth transition towards decarbonisation.

The KFA Global Carbon ETF, backed by US climate envoy John Kerry, has seen its holdings increase to $60m from $17m at the start of the year. The ETF, which is managed by Krane Funds Advisors, tracks the price of allowances in the EU’s emissions trading system (ETS) and the US’ disparate carbon markets. Most of the recent buying of the ETF has come from US institutional investors and pension funds.

The EU’s carbon price is hitting record levels, with emissions allowances currently trading at around €42. In the US, California Carbon Allowances are around $18, though analysts project they could reach $30 in 2025 and $40 in 2030. Meanwhile, online trading is expected to start in China’s nascent carbon market in June. Krane Funds’ founder said last year China’s ETS would probably be added to IHS Markit’s Global Carbon Index, which the KFA ETF benchmarks and is aiming to outperform.

US investors’ interest in carbon allowances is adding to fears of speculation in Europe’s carbon market. Around 250 investment funds now have positions in the EU ETS, compared with 100 three years ago. Some London-based hedge funds recently said they believe the price of carbon in the EU could reach €100 during 2021, and the Bank of England has warned businesses to prepare for “sky-high” carbon prices.

While a rapid increase in prices is not in the interest of emitters, there is debate on how the EU should handle this situation to avoid price spikes and gently allow the price to rise to support its decarbonisation policies. The EU is reportedly considering limiting the number of allowances investors can hold to reduce the impact of speculative activity on prices. This is something former officials involved in the scheme’s design are against, as it was always intended the ETS should have a higher price for it to function as a market-based mechanism to reduce CO2 emissions.

Shipping could be included in UK carbon market

What’s happening? The UK could follow the EU’s proposal and include the shipping industry in its post-Brexit carbon market, according to the maritime minister, Robert Courts. The move would support the UK’s ambition to eliminate transport pollution by 2050. The Department for Transport recently launched a £20m ($28m) fund for the development of non-polluting vessels. The Climate Change Committee has estimated £160m a year would be required in 2035 to fund zero-carbon shipping.

Why does this matter? The shipping sector accounts for 2.9% of global CO2 emissions. In the face of limited technological progress on solutions to reduce these, various groups are targeting strategies to reduce the sector’s carbon impact.

The International Maritime Organization has set a target of a 50% reduction of shipping emissions on 2008 levels by 2050, and the industry, through the International Chamber of Shipping, has recently proposed a levy on shipping fuel to help fund the technological development needed to reach the target.

If the UK government were to impose additional costs on ships arriving at UK ports, through a price on their carbon emissions via its upcoming emissions trading system (ETS), this would act as an additional incentive to develop lower-carbon vessels. The move would also further align the UK’s ETS with Europe’s, which is including maritime emissions in its ETS from 2022.

The UK’s launch of a £20m technology-agnostic fund for low-carbon shipping development – part of the UK’s 10-point green plan outlined in November last year – also mirrors the EU’s proposed creation of an “Ocean Fund”. This would be partly funded with 50% of EU ETS shipping revenue generated from 2022 to 2030.

As well as providing infrastructure to stop ships idling at European ports and contributing to local air pollution, the Ocean Fund would support the development of cleaner shipping technologies. Commentators have highlighted this could potentially dovetail with the European Commission’s hydrogen strategy, with hydrogen-based synthetic fuels and ammonia being among the options for vessel decarbonisation.

DNV GL has indicated ammonia and methanol are likely to become dominant low-carbon shipping fuels, but firms are also investigating fuel cells, direct electrification and liquefied natural gas to decarbonise.

Canada’s Supreme Court rules carbon tax is legal

What’s happening? The Canadian government’s national carbon tax has been ruled legal by the country’s Supreme Court, in a split decision. The tax is a key pillar of Prime Minister Justin Trudeau’s 2050 net-zero goal. The legislation enables the federal government to impose levies, known as a backstop, on regions with no system in place or which fall short of federally set minimum pricing standards. The Alberta, Ontario and Saskatchewan provinces opposed the measure and claimed it was an overreach by Ottawa. Conservative Party leader Erin O’Toole said he would repeal the carbon tax on consumers but is expected to keep industrial levies.

Why does this matter? Canada is currently formalising its target to get to net-zero emissions by 2050 via its Canadian Net-Zero Emissions Accountability Act, under which the country will set a series of interim five-year emissions reductions milestones towards the end goal. The country’s carbon tax is designed to account for up to 40% of the emissions reductions needed to reach the net-zero goal, but it has been one of the more contentious parts of its climate action plan.

Alberta’s Court of Appeal ruled early last year the carbon tax was unconstitutional. Saskatchewan and Ontario also oppose the tax, and took legal action against it, but courts in these provinces ruled in support. Following these legal challenges, Canada’s Supreme Court in September failed to reach a conclusion on whether the tax – which the federal government argues is in the national interest – steps on provincial jurisdiction.

The Supreme Court’s final ruling now allows Canada’s federal government to set the minimum price for provinces’ carbon emissions. Last year the federal government increased the minimum level from CAD20 to CAD30 per tonne of CO2 despite calls to postpone amid the Covid-19 pandemic. The tax is due to increase CAD10 per year to reach CAD50 in 2022, after which it will increase CAD15 per year. Canada’s Prime Minister Justin Trudeau has committed to increasing the tax to CAD170 by 2030 to support the country’s target of reducing emissions 40% by the same year.

Separately, Canada is looking to create a framework for a domestic carbon trading market to support its carbon tax initiatives. It also recently revealed its strategy for hydrogen – a sector the government says could eventually be worth CAD50bn.

Until the Covid-19 pandemic, however, Alberta had been increasing its carbon-intensive oil sands production. Canada’s natural resources minister said last year for the country to continue to receive oil and gas investment, it needed to reduce its carbon intensity per barrel of oil produced.

CLIMATE GOALS

One-fifth of world’s largest firms have outlined net-zero roadmap

What’s happening? Over 20% of the world’s biggest companies (417 out of 2,000) have pledged to eliminate emissions and reach net zero, according to a report by the Energy and Climate Intelligence Unit (ECIU) and Oxford Net Zero. However, many need to improve their climate commitments and credibility or they may be at risk of being called out for “greenwashing”, the report warns. For example, just 27% of the firms that promised to reduce emissions include targets for Scope 3 emissions. The report also highlights that many companies depend on offsetting through carbon credits, rather than curbing the emissions they produce directly.

Why does this matter? In order for the goals of the Paris Agreement on climate change to be met, global emissions need to reach net zero by around mid-century. Companies are increasingly setting targets to align themselves with this pathway, but in many instances the devil is in the detail.

ECIU and Oxford Net Zero’s report surveys 4,000 entities – all nations, cities with a population above 500,000, states and regions in the 25 highest-emitting countries, and all firms in the Forbes Global 2000 list – and finds 769 of these (19%) have net-zero targets. These targets cover 61% of global emissions and 56% of the world’s population.

The quality of targets varies significantly, however, with only 20% of those with net-zero pledges meeting a collective set of basic criteria as defined by the UN’s Race To Zero campaign. While countries are ahead, with 61% of nations setting net-zero goals, large public companies are lagging behind, with only 21% doing the same.

Separate findings from Climate Action 100+ also indicate large, carbon-heavy firms have some way to go to align with net zero. The organisation’s recent Net-Zero Company Benchmark found none of the companies under investigation performed at a high level over all nine metrics Climate Action 100+ used to assess their plans. Despite 83 of the firms having net-zero targets, none of them had outlined how they would get there, and half of the net-zero commitments did not cover all emissions scopes. Interim targets were also found to be lacking.

Asset owner and investor groups have recently set out guidance for setting net-zero targets, and a common theme – that mirrors the messages from ECIU and Climate Action 100+ – is limiting the use of offsets. The Science Based Targets initiative also states offsets cannot form part of a credible science-based net-zero strategy.

Problems with offsetting include the fact there is not enough land space available for all companies to rely on nature-based carbon credits, and that the market is currently flooded with poor-quality credits that will not lead to verified emissions reductions.

In the face of both these issues, firms may come under increasing pressure to reduce their use of offsets. They may also look to alternative sources for offsetting such as carbon capture technology.

Just 1% of major firms adopt deforestation “best practice”: CDP

What’s happening? Just 1% of 553 of the world’s biggest companies are taking “best practice” action on deforestation, according to research by CDP. The companies taking such action include Essity, Tetra Pak, L’Oreal and Mars. The analysis examines the work of corporates currently disclosing information about forestry on the non-profit’s environmental disclosure platform. Of these firms, 93% are taking at least one of the 15 industry-backed forest protection measures. Companies reporting to CDP flagged in the last reporting period that deforestation posed a $53.1bn risk to them collectively. Addressing such risks would cost just $6.6bn, CDP estimates.

Why does this matter? Despite the multi-billion-dollar costs that could potentially arise from inaction, corporate action to tackle deforestation is falling short. Failure to safeguard the world’s forests will carry significant environmental implications, including the exacerbation of climate change and biodiversity loss.

CDP’s analysis reported a 27% increase in firms that disclosed data on deforestation in 2020 compared to 2019. Despite this improvement, deforestation is still lagging significantly behind the other sustainability risks disclosed by the private sector, such as water security and climate change. Progress on reducing deforestation from some sectors is slow compared to others, particularly in the food and drinks industry. The report noted that over 72 million hectares of forests were lost between 2001 and 2015 to facilitate the growth of seven food-related commodities, including palm oil, cattle products and soy.

Aside from the obvious consequences to biodiversity and ecosystems, rapidly increasing deforestation is worsening climate change. Forests play an essential role in regulating the global climate and absorb significant amounts of carbon. As the CO2 absorption capacity of tropical primary forests such as the Amazon are declining, however, research has suggested they may be beginning to release more carbon than they store. Meanwhile, as forest loss has been linked to increased outbreaks of infectious diseases, curbing deforestation is one means of reducing the risk of future pandemics.

Stakeholders including investors stepping up pressure can be one approach to boost corporate action on deforestation. A survey found the likelihood of firms reporting data on forestry impacts and climate change increased significantly following investors requesting information. In this area, BlackRock recently outlined plans to press firms it holds stakes in for disclosure on a number of policies including deforestation, biodiversity, water and human rights. Elsewhere, BNP Paribas has set a 2025 zero-deforestation target for its agricultural business clients’ supply chains.

On a broader level, governments are also looking to implement regulation requiring firms to disclose sustainability risks. The UK has launched a consultation on a proposal that would force large companies to disclose the risks they face from climate change by next year. If adopted, the UK would become the first major economy to mandate climate-related disclosures from the private sector in this way.

Banks have provided $3.8tn for fossil fuels since Paris Agreement

What’s happening? Banks’ lending to the fossil fuel sector has increased following the signing of the Paris Agreement, with the top 60 institutions providing $3.8tn since 2015, according to a report by six NGOs including the Rainforest Action Network. JPMorgan lent the most overall, with Barclays and BNP Paribas lending the most in Europe and the EU, respectively. The report also dubs the net-zero pledges made by 17 of the 60 banks as “dangerously weak”. A recent study by the International Energy Agency and Imperial College London revealed that, since 2010, renewable energy investments saw a 367% greater return than fossil fuels.

Why does this matter? Despite a slew of net-zero pledges in recent times, it is not uncommon for banks to come under fire for recent lending activity to fossil fuel projects and companies.

In December, a report from 18 climate groups suggested $1.6tn of financing had been provided to such initiatives since 2016. Among the biggest culprits was Bank of China, which had reportedly lent more than $14bn to coal projects. Major US banks JPMorgan, Bank of America and Citigroup were accused of providing $295bn to fossil fuel companies during the period.

The world’s largest financial institutions have seemingly acknowledged the need to both finance greener projects and reduce the carbon footprints of their loan books. In the US, for example, the country’s biggest lenders have all ruled out providing support to oil and gas exploration projects in the Arctic.

There does, however, seem to also be a suggestion that striving for net-zero emissions from lending activity will take time. Morgan Stanley and Citigroup have both set targets of net-zero by 2050.

Other institutions have looked to set more immediate targets focused on climate goals outside of net-zero commitments. BNP Paribas, for example, has set a 2025 zero-deforestation target for its Brazilian clients. The firm will also not provide financing to customers producing or buying the products from Amazon land that was cleared or converted after 2008.

There are also new banks establishing themselves that are free from carbon-intensive historical lending activity. US-based Climate First Bank is due to launch in Q2 2021 with a female-headed leadership bolstered by US Department of Agriculture and Bank of America alum.

China’s central bank urges financial sector to back climate goals

What’s happening? The People’s Bank of China has urged the country’s financial institutions to support President Xi Jinping’s 2060 carbon neutrality pledge by spearheading funding efforts, according to governor Yi Gang. He told the recent China Development Forum that “sound public policy incentives” would be required to bridge the funding gap needed for green investments. Yi estimated the 2060 target would need hundreds of trillions of yuan in backing, which must be led by financial markets. Wood Mackenzie has estimated China will need to spend $6.4tn on power generation alone to meet the goal.

Why does this matter? Ever since China announced its goal of carbon neutrality, commentators have noted a number of hurdles the country will need to overcome in order to meet the target.

In addition to the enormous fiscal outlay needed, researchers have also stated China will need to hit peak carbon emissions by 2030 for the 2060 goal to be in with a chance of being met. Efforts, however, may be sabotaged if the country can’t kick its reliance on coal. One recent report suggested China’s plans to construct new plants could undermine the carbon neutrality pledge while also potentially creating stranded assets worth CNY2tn ($304.6bn).

Against this backdrop, it is easy to see why China’s central bank is keen to encourage the financial sector to step up involvement in supporting green investments. It also recently announced an initiative of its own, stating it will provide financial support for wind and solar companies – even those under fiscal strain.

The People’s Bank of China has also, even before the country’s carbon-neutral target was made public, hinted it will assess domestic financial institutions on green finance efforts. While exact details have been hard to come by, the central bank did say in summer 2020 that it would address institutions’ efforts on a quarterly basis, rewarding those making progress and punishing those lagging.

The bank has also signalled its intent to improve green finance standards systems and develop sustainable financial products. Success here may depend on international cooperation from nations with more developed sustainability standards. While China has been a leader in green bonds for some time, doubt has been cast on the standards under which some of these have been issued. The Climate Bonds Initiative, for example, notes that of $53bn worth of green bonds issued in China during 2019, only $30.1bn aligned with international reporting rules for such securities. Furthermore, the Climate Policy Initiative has previously noted difficulties in assessing the impact of China’s green issuance due to a paucity of data.

There is evidence of Beijing looking abroad for guidance. In October last year, South Korean conglomerate SK Group said it would partner with China’s State-owned Assets Supervision and Administration Commission to establish a co-owned Beijing-based lab to develop rating methods for Chinese companies’ ESG initiatives

WATER

Lack of value placed on water causes waste: report

What’s happening? Worldwide water waste and shortages, and high prices for poor and vulnerable people, are the result of governments’ failure to sufficiently value the resource, according to a United Nations report. Universal access to safe drinking water and sanitation in low and middle-income countries would cost $114bn annually, but the significant economic, health and social benefits of such provision are not considered in public spending allocations, the report claims. Issues raised in the report have been highlighted by the Covid-19 pandemic, with three billion people lacking access to handwashing facilities, and a similar number experiencing water shortages, the Guardian reported.

Why does this matter? Water is a vital resource that sees shortages in many areas worldwide, which will likely be worsened significantly if climate change is not limited. Globally, twice as many people than today could be affected by water stress by 2050 – around 380 million more people – if temperatures are not kept below 2C above pre-industrial levels and population growth rates continue. As such, failures to accurately value this “blue gold” is exacerbating water waste and misuse, according to UNESCO.

The organisation’s report states that, currently, water is often viewed exclusively in relation to its cost price without taking into consideration a more holistic view of its value, which is near impossible to put a price on. Encompassing wider social and cultural dimensions, the value of water should expand to include factors such as the human right to water, religious or customary views to water, and the importance of maintaining natural water flows for biodiversity and ecosystem services, says UNESCO.

In terms of hydraulic infrastructure, water valuation is not standardised and the indirect societal benefits delivered can often be viewed as external costs. Against this backdrop, specific stakeholders’ interests are amplified, which could lead to others receiving less, often with negative consequences.

Mitigating water shortages will require integrated approaches and improved governance to provide water to regions that may see demand surpass available supplies by up to 40% by 2030. In the private sector, firms are being encouraged to adopt water stewardship plans, which could include measures such as quantifying water usage, mapping public water management and setting targets influenced by local risks and priorities.

Recently, the UK’s Prince of Wales has unveiled the Resilient Water Accelerator programme, which is designed to accelerate finance to boost water services in regions experiencing water stress such as Africa and South East Asia. Backed by governments and public and private partners, the initiative aims to reach 50 million people by 2030.

 

 

 

 

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