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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.
Posted 09 March 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability
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.