Imagine a world in which carbon cap and trade systems actually worked. Regulators would issue a finite and falling number of permits to pollute. Big polluters would be punished by having to buy more at a rising price. At the same time they would be incentivised to innovate to pollute less. And those with surplus permits could sell them at a profit.
It’s happening. Since Cop26, the price of European carbon permits has risen sharply to a record €90+ per tonne. UK permit prices have soared too, to similar levels, although not for the first time this year. The result is that after years of theorising that permits at close to $100 a tonne would make carbon capture and storage (CCS) and green hydrogen commercially feasible, markets may be about to find out if this is true in real life.
Why is it happening? Mainly because of spiking gas prices. As the FT reports, these have forced power generators to switch from gas to coal, the most carbon-intensive fuel, busting their carbon permit allowances and requiring them to buy more permits. Hence the steep uptick in the last quarter of 2021 in the graph below. But there are other factors at work:
- Cop and net zero. National emissions reductions goals updated for Cop26 – and the new requirement to update them again in one year, not five – amount to a strong policy signal: the trend in carbon permit prices is up, and so is the incentive for polluters to buy now rather than wait. Calls two years ago for a “shadow” UK carbon price of £75 per tonne by 2030 have been overtaken by events. UK carbon credits are already trading at that level, and some analysts say European ones will be trading at €200+ per tonne within a few years.
- German nukes. Germany is closing 4 gigawatts of nuclear power this year, meaning more short-term reliance on coal and more demand for permits to pollute.
- Christmas. Permits aren’t auctioned over the holiday, so traders are getting bids in early.
- China. The world’s biggest CO2 emitter introduced its first cap and trade schemes this year but their scope is limited, their permit allowances over-generous and their prices too low – for now – to impact emissions. At an effective price of $6.70 per tonne, the cheapest option for polluters is to go on polluting. Chinese permits at this price might be a buying opportunity for foreign investors, but they’re barred.
- Leakage. As long as carbon prices are only rising in certain regions, banks determined to go on investing in fossil fuels can switch to those – like Asia – where polluters still don’t pay.
- Volatility. As gas prices fall back closer to normal levels in Europe, the lunge to coal will pass and with it the intense demand for permits to pollute. Their price needs to stabilise at current levels for at least a year or two, analysts say, before investors pile in at scale.
- Carbon as currency. “There is no carbon market that’s down,” Randy Lack of Element Markets tells Environmental Finance (EF). “Carbon is a new currency that is being invested in by every energy group.”
- Doing the right thing. Properly-priced carbon should make CCS viable at scale on Teesside in the UK, where an entire regional development plan depends on it; and it could make green H2 competitive for the first time with other fuels and energy stores.
- 1.5 not 2. Carbon markets have been reassured by agreement at Cop26 on completing Article 6 of the Paris rulebook. Success was anticipated and already factored into prices, but it produced a framework for regional markets to work together and that has raised the bar in terms of ambition on global warming: “The focus is very much on 1.5 C now, whereas Paris was about ‘substantially below 2 C’,” Gordon Bennett of ICE (Intercontinental Exchange) tells EF. “No one talks about 2 C any more. This is a positive development.” Indeed.
science and technology
By gathering DNA from the air and using it to detect different species, conservationists have found a new way to map biodiversity decline. Environmental DNA, or eDNA as it’s known, has been used to monitor life underwater for a while now, but a new study from Sweden suggests that airborne sampling of DNA, in everything from algae to hedgehogs, may also be possible. The tool’s huge potential lies in its ability to circumvent the naturalist’s traditional reliance on eyes and ears. Instead, theoretically, even those who never got an A in biology can use the tech to help chart the movements of animals displaced by climate change. But it does have pitfalls: First, not detecting the DNA of a particular species doesn’t mean it’s not around. Second, very few species that exist on the planet have actually had their DNA mapped. That’s a task that could take decades – decades that many species, at the current rate, don’t have.
Next gen hydrogen?
The same companies that made China a solar superpower are getting into hydrogen, and using the same playbook: cut the cost of production and pray the market booms. Longi Green Energy Technology Co., the world’s biggest solar panel maker, wants to triple its electrolyser capacity by the end of next year, allowing it to produce copious amounts of green hydrogen by splitting H2O. At the same time Sinopec, China’s number two oil and gas producer, is building a project that could supply 20,000 tons of green H2 by 2023. It seems China’s energy executives are sending a strong signal to government that they want a subsidy programme for green hydrogen production. But it’s a fuel which is, for the moment, prohibitively expensive. And that’s not the only issue: solar panel owners can plug in and sell directly to the grid. Selling hydrogen to battery makers isn’t so assured. That said, China’s private companies are betting they’ll get some support: “We see hydrogen as an indispensable clean secondary energy,” a Longi employee tells Bloomberg.
Moscow v meddlers
Russia has blocked a UN resolution that for the first time would have defined climate change as a threat to peace. The resolution, forwarded by Ireland and Niger, asked for information “on the security implications of climate change” to be included in the council’s strategies for managing conflicts. Twelve of the 15 security council members backed it. But the Russian ambassador to the UN called the resolution “a pretext by wealthy Western powers to justify meddling in the internal affairs of other countries”, and argued that climate change should be a matter reserved for the UNFCCC. As for the US, earlier this year the American intelligence community produced a report that specifically linked climate change to geopolitical flashpoints, with a notable focus on activities within the Arctic circle. (Latest ice breaker count, Russia: 55, everyone else: 36). Of course, the other context for Russia’s veto is that its geopolitical eye is focused elsewhere right now. Namely, eastern Ukraine.
activism and engagement
The Guardian has an interesting story about bikes and traffic jams in London. It says a press release from a traffic data firm part-owned by Porsche led to an embargoed story by the Press Association that got picked up and spread all over the more suggestible sort of Sunday papers in the UK, even though it was all wrong. The gist of the wrong story was that a) London was the most congested city in the world and b) bike lanes were to blame. In fact it isn’t and they aren’t. The data firm paid no attention at all to African cities (allow three hours minimum to get from downtown Dar es-Salaam to the airport), and – duh – bikes take up a good deal less space than cars. Thanks to the Guardian for performing a public service here. That said, the unanswered question that probably accounts for the wide pick-up of the dodgy story is: how many people have clambered back into their cars because of Covid, even if it means hours in traffic?
Net Zero Sensemaker will be back in the New Year. In the meantime, chill!
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