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Interview: Mercuria returns to carbon trading with a vengeance
With more governments raising their climate ambitions and businesses committing to net-zero targets, carbon markets have expanded rapidly in recent quarters.
Industry estimates from the International Emissions Trading Association—a trade body representing market participants—have suggested the voluntary carbon market reached $1 billion in value last year, while the combined size of compliance markets totaled $1 trillion.
The buoyant mood has promoted renewed interest from some major trading houses. Mercuria Energy Trading, which has been involved in emissions trading for over a decade, had a long period of subdued activity in the 2010s. But last July the Geneva-based trader rebooted its carbon trading desk by launching an environmental products team.
Led by Enric Arderiu Serra, formerly vice president for low-carbon trading at BP, the team has 15 staffers based in Singapore, Switzerland, the UK, and the US. They are involved in low-carbon fuel standards, voluntary carbon trading, and the compliance carbon markets in California, China, Europe, and New Zealand.
S&P Global Commodity Insights' Net-Zero Business Daily spoke with Arderiu Serra, Mercuria's global head of environmental products, on market outlook, regulatory development and the company's activity.
Net-Zero Business Daily: Why has Mercuria been expanding its environmental trading team?
Arderiu Serra: One is that, strategically, the company's entire management is focused on the energy transition. And carbon pricing is a key element to support the energy transition.
Second, we have many customers coming to us with inquiries on how to navigate carbon trading and the wider energy transition space. So our expansion is both strategic and led by customers interested in working with us in this space. Further, more than 50% of our new investments are focused on the transition, which provides our counterparties with a significant amount of knowledge and access.
Net-Zero Business Daily: From what I know, your traditional customer base is more composed of oil, gas and metals companies. Are they getting more interested in buying carbon offsets these days?
Arderiu Serra: We see the customers are interested in the voluntary carbon market because it's a component of their climate strategies. On the non-voluntary side [compliance trading], there are also more and more regulations covering emissions from companies. For both markets, customers need emission trading products that both help their hedging and support their commercial strategies.
Net-Zero Business Daily: Since its inauguration in the 1990s, the global carbon market has experienced periods of boom and bust. Before the recent expansion, the market size was actually shrinking for some years in the mid-2010s. What's different this time?
Arderiu Serra: Back then, it was much more driven by a top-down approach. You had the market enabled by the Kyoto Protocol under the UN framework, which created the Clean Development Mechanism. It was then supported by national policies that created demand such as the EU ETS [Emissions Trading System].
This time it's very different. There are a lot more corporates pushing for actions on climate change ahead of policy implementation, especially in geographies and sectors without a wide carbon pricing coverage. This makes it [market growth], I think, much more solid and sustainable for the long run. Because it's a more bottom-up approach.
We still need policy support to bring carbon pricing across a wide range of geographies and sectors—but I think it's a very good sign that we see that kind of endorsement across the private sector of climate change action.
Net-Zero Business Daily: Carbon markets enjoyed record prices and liquidity last year. What does your crystal ball show for the outlook for this year?
Arderiu Serra: I think the Russia-Ukraine war is impacting everything including carbon … No one knew we would be in the current situation. Given what we are experiencing in the wider [energy] markets, it's impossible to predict right now.
In the EU's Emissions Trading System, the EU Allowance price dropped from €95 ($103)/metric ton (mt) per CO2e to €55/mt in the days [since Russia's invasion]. So it's already having an impact.
The [long-term] trend is supportive because of the bottom-up endorsement of climate action I mentioned and the need for new technologies to be deployed at scale. There are a lot more net-zero strategies that have been adopted in the last 18 months than before. And carbon pricing is the thing you need to justify the [decarbonization] investments towards net-zero.
Net-Zero Business Daily: With the ongoing Russia-Ukraine war, there has been renewed focus on energy security among policymakers. How will the development affect carbon markets?
Arderiu Serra: We're in unpredictable times. It's difficult to understand how this is going to develop over the next few weeks.
There are two sides of the argument. One, we have seen very high gas and coal prices. From a European perspective, policymakers can control carbon policy.
At the same time, a climate policy like the EU ETS is in place because it can help achieve the EU's long-term climate goal. Corporates need to have that price visibility to drive [decarbonization] investments over the long run.
Net-Zero Business Daily: During the climate summit last November (COP26), UN members agreed on the implementation guideline for Paris Agreement's Article 6, which focuses on international carbon market mechanisms. How do you see the development affecting carbon trading?
Arderiu Serra: This is an important development in terms of policy framework that should be supportive of future investment [in carbon offset projects] at scale. While you don't necessarily need the UN's endorsement to invest in this space as we have seen with recent voluntary driven action, it is essential to get to the scale required to have a framework at the UN level for countries to meet the Paris Agreement's climate targets.
Countries can actually accelerate their [climate] ambitions, because those ambitions are integrated within the overall Paris framework. Effectively, a country can allow the import [of UN-approved] credits into its regulatory program so entities covered can use them to help meet their compliance requirements, or just buy them as a government, but both approaches would help it meet its Nationally Determined Contribution. Investment in offset projects would thus become much more scalable.
Net-Zero Business Daily: When would international carbon trading start to be influenced by Article 6?
Arderiu Serra: There is a UN-led process to move Article 6 into actual implementation. That process takes time. Over the next couple of years, countries are going to define the exact implementation framework which will provide visibility into a wide range of aspects of the program including for example what projects will be eligible to generate credits. Separately, there is a government-to-government implementation [of Article 6.2] that is already operational where the private sector can also participate through government engagement.
Net-Zero Business Daily: What is the regulator's role in ensuring the quality of offsets in the context of Article 6?
Arderiu Serra: The last UN-led crediting program was the Clean Development Mechanism and learnings from that program will be taken into consideration. At the same time, there has been lots of progress over the last 10 years on the different non-UN carbon standards that the UN program could also take into consideration. In addition, there is a chance to bring technology improvements such as remote sensing into reducing costs for monitoring as long as those happen within strong and transparent accounting frameworks. Integrity is essential for these markets to grow.
Net-Zero Business Daily: How can market participants ensure the quality of carbon credits?
Arderiu Serra: There are different ways of doing this. Buyers should only buy credits from credible standards such as the ones endorsed by the CORSIA [Carbon Offsetting and Reduction Scheme for International Aviation] program by ICAO [International Civil Aviation Organization]. We are not by any means starting from zero. Standards have been evolving over the last 15 years and are continuously improving.
This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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