How robust is your carbon trading strategy and risk management response?

by Tom Bullock Senior Manager

Email +44 (0)7701 297359

Already a hot topic in the press as much as the boardroom, COP26 in Glasgow will only increase focus on ESG. The environmental aspect is drawing attention, in particular carbon emission and offset schemes. As investors and traders look to take advantage of this market, we break down the essential information to help you shape your response. 

New Emission Trading Schemes, Net Zero and ESG are creating opportunities in the carbon markets

  • The EU has recently committed to accelerate the roadmap for the EU emissions trading scheme (ETS) by reducing the allowances and extending the coverage to include maritime and road transport, and buildings (European Green Deal), reducing supply of certificates. 
  • New schemes such as the UK ETS, Chinese ETS and CertifHy (developed to support the Green Hydrogen market in the EU) are worth keeping a close eye on as they have the potential to shake up the market dynamics.
  • Where Net Zero ambitions cannot be met by decarbonisation, the balance will likely need to be met by carbon offsetting and engagement in carbon markets, driving up demand.
  • Attention is being paid to the ‘quality’ of carbon certificates, with ESG reporting ensuring companies increasingly consider the wider environmental and social impact of the underlying schemes.

All these factors have driven significant volatility and price growth in the more established carbon markets. For example EU Allowances (EUA) prices have hit historic highs (climbing from 15 €/mt in early 2020 to 57 €/mt in July 2021).

First movers are already taking advantage of the significant carbon price movements and volatility

If you have identified an exposure to carbon markets or want to comprehensively manage your carbon exposures but are still working out what to do, you are not alone. Various options are open to you:

  • Reduce the risks through operational changes
  • Manage the risks through buying offsets or other carbon certificates
  • Monetise and trade around the identified risks 

No matter which of these options matches your underlying strategy and risk appetite, it’s essential, as always, to ask the right questions to understand and identify the new risks and opportunities these activities introduce:

  • Governance - Have you considered the changes to your governance frameworks and controls to help you respond to the complexities of carbon markets?
  • Value chain - How comfortable are you that you can accurately measure your carbon footprint? Is the source of certificates and nature of the underlying abatement projects consistent with your ESG strategy?
  • Systems - Are your contract capture, valuation and reporting systems fit for purpose and do they support your wider ESG reporting?
  • Reporting - Have you considered the reporting implications of the new activities? Whichever of the approaches is taken, accounting for the variety of carbon and emissions schemes as well as for voluntary offsets is complex - there is a lack of specific guidance, and practice varies.

If you’d like to discuss any of the above, please get in touch.

by Tom Bullock Senior Manager

Email +44 (0)7701 297359