ESG Series: Putting global carbon markets to work

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Executive summary│Putting global carbon markets to work

Scaling up to meet net zero ambitions

Carbon markets are critical to net zero but scaling remains challenging

 

 

 

 

 

Energy trilemma considerations as recalibrated the dynamics carbon markets across regions

 

 

 

 

 

 

 

 

 

 

 

Carbon markets will gain in critical importance as we move forward to net zero

• Global carbon markets are fast becoming one of the most effective instruments in the journey to net zero. ESG-centric investors are rapidly buying into the narrative of just how critical they are – trading on these markets has meteorically risen by nearly 400% since 2018 hovering close to USD1 trillion.
• Yet, many countries are reluctant to use this policy lever as introducing or scaling up carbon pricing faces multiple decisions when selecting among, and within, policy tools. The ease of implementation, price levels, competitiveness concerns, alignment with other mitigation mechanisms and coordination across countries are all considerations that ultimately will be based on idiosyncratic country circumstances and objectives.

 

• Despite carbon markets’ increased attention, the energy trilemma (see here) – affordability, security and sustainability – will remain the defining theme for the rest of this year and into 2024 as governments recalibrate their carbon markets against the backdrop of the war in Ukraine, elevated energy prices, rampant inflation and higher-for-longer interest rates:

• • Europe. Near-term, price signals from the EU — the biggest market in terms of traded value — will be muted, as lawmakers see carbon as a piggy bank for funding the bloc’s transition away from Russian gas, and power sector emissions are set to fall.
  • US. US markets are under a thick fog of regulatory uncertainty – the Regional Greenhouse Gas Initiative (RGGI) – the biggest carbon market in the US’s Northeast, needs to untangle legal issues over certain states entering and leaving the programme.
  • China. In China – the biggest market in terms of emissions – has renewed its emphasis on coal consumption out of a similar concern for energy security.
  • APAC. In Asia ex. China, the region’s nascent compliance markets still lacks critical mass, although policymakers are working on refreshing their carbon market policies.
  • Global. Globally, many key issues in Article 6, which covers international carbon offset trading, are still unresolved.

 

• Looking ahead, global carbon markets are proliferating. The urgency of balancing the energy trilemma underscores the imperative for an accelerated net zero transition, and carbon pricing is widely accepted as a critical incentive for decarbonisation. Yet, carbon markets are too cheap to make a significant difference today.
• Not only are swathes of the economy excluded with existing compliance markets covering less than 20% of global emissions, but consumers are often shielded from high carbon prices. Yes, mass adoption for carbon markets are still a long way off, but the fastest and most practical way to keep alive the goal of restricting global warming to below 2oC is scaling up global carbon markets.