Carbon markets are growing even more complex and becoming closely intertwined with geopolitics, especially with policies such as the EU’s Emissions Trading System 2 and its Carbon Border Adjustment Mechanism, the president of the International Emissions Trading Association said.
Speaking to S&P Global Commodity Insights, Dirk Forrister said many countries are looking to form new alliances in the quest for carbon neutrality, which is reshaping the politics of energy and climate.
“Getting to net zero can be really expensive unless you work with others, and it is not a smooth easy journey it is going to be one where you need strong reliable partners and that’s what the market architecture can enable, but it takes political agreement to make that happen,” he said in an interview.
Forrister said the introduction of EU’s CBAM, which imposes a tax on imports of carbon-intensive products like iron and steel and fertilizers, was already pushing many industries, companies and countries to innovate and adapt.
While ETS 2, which will cover the building and road transport sectors, and builds on EU’s current cap-and-trade compliance program, is also set to be a “massive undertaking,” he added.
On the sidelines of the European Climate Summit in Florence, Forrister discussed some of the key developments that global carbon markets are currently facing. Below is a transcript of his comments, edited for length and clarity.
S&P GLOBAL: What were some of your key takeaways from the European Climate Summit that took place April 16-18?
FORRISTER: I think there’s a general sense of enthusiasm from market participants that major changes are in the works and that the need for carbon markets is rising with the interest in meeting the goals of the Paris Agreement. With the European focus on it, it is so much more complex now than it was 10 years ago.
All of a sudden, you’re not just thinking about how tight the cap is getting and the linear reduction factor that’s driving emissions down in Europe. But you’re also looking at a whole second ETS covering billings and transport that’s as big as the first ETS, that’s a massive undertaking.
Then you’re talking about CBAM because the reality is with trade exposed industries there aren’t going to be enough allowances to solve the trade exposure problems so you’re going to have to innovate and come up with something.
The impact [from CBAM] is going to be felt long into the future but I think for the market, it is adding complexity, with many more dynamics to consider.
S&P GLOBAL: You have previously said it was inevitable that geopolitics would shape the carbon markets, have there been any developments in your outlook?
FORRISTER: Europe’s acceleration of its energy transition due to the war in Ukraine and the changes in fuel supply to Europe — the imports of LNG and efforts to drive efficiency that are probably the most dramatic examples of where geopolitics has affected the market.
But as we go forward there is a potential for new alliances to form. When I think about who gets serious about getting to net zero, I think about who are going to be your traveling partners on that journey. And that is how geopolitics is starting to come into more focus.
[For example], who will Japan actually team up with, through its Joint Crediting Mechanism to broaden its reach?
Right now, there is tremendous interest in Africa being a supplier [of carbon credits] into the global market — they have lots of mitigation potential, but some areas do not have a lot of money.
China’s Belt and Road Initiative touches a number of those countries and right now there’s not an offer coming from the EU or the UK or Canada on how to get market access to their programs if you’re a developing country, but China might be an interesting partner. I don’t know if that materializes or not, but it is an example of how at some point things are going to start to click.
Getting to net zero can be really expensive unless you work with others, and it is not a smooth easy journey it is going to be one where you need strong reliable partners and that’s what the market architecture can enable, but it takes political agreement to make that happen.
S&P GLOBAL: The IETA guidelines clearly define aligning carbon markets with the Paris Agreement. What was the rationale for this?
FORRISTER: The Paris Agreement is fundamental to how countries are going to deal with climate change. You can’t just take the piece you like. You have to take the agreement as a whole. It is not about getting to the zero alone it is about getting to net zero together. The word ‘net’ is incredibly important because that’s how we work together across borders and sectors.
There are a few jurisdictions that will be able to get to net zero, but most countries are going to need cooperation to get there because they don’t have the financial resources to deliver. In a way it’s a match made in heaven, the opportunities side and the challenge side should come together.
Maria sultana Choudhury | Eklavya Gupte
