Carbon markets grow despite lingering complications

Carbon markets in Europe and North America have shown resilience in the face of a changing political and regulatory landscape. The winners of Environmental Finance's Market Rankings commented on the year that was and what promises to be a dynamic twelve months ahead.

The politics of carbon was again a key talking point for the year, with Britain's impending departure from the European Union, the Western Climate Initiative (WCI) and the state of California facing legal action by the Trump administration, and wrangling over Article 6 of the Paris Agreement at COP25 in Madrid.

According to Peter Zaman, partner at Reed Smith, winners of Best Law Firm for the EU's ETS: "Carbon is a product that has gone up dramatically within a relatively short period of time, primarily due to the market stability reserve mechanism that the European Commission has put in place to address the surplus in the market. It could be argued that EU allowances were the best performing commodity in 2018, with no reason to believe that that isn't going to continue into 2020 given the state of play."

The Commission launched the revision process for Phase IV of the EU ETS in 2015, when the carbon price generated by the system was at a relative low. This phase will begin in 2021 and is expected to run to 2030, and signals a significant escalation in the project, coupled with the European Commission's intention of cutting greenhouse gas emissions by at least 40% compared to 1990 levels.

"2020 will still be bullish. Brexit will hopefully be solved and then as we go past 2020 it will be a new phase in the EU ETS and a new phase in the WCI. Things are going to get tighter and tighter", says Nicolas Girod, founding partner and managing director of ClearBlue Markets, winners of Best Advisory/Consultancy in the EU ETS, California and overall North American Markets.

Article 6 of the Paris Climate Agreement is intended to assist governments in implementing nationally determined contributions (NDCs), and resolve issues such as two nations claiming to the same emissions reduction or 'double counting'. At COP 24 in Katowice countries failed to agree on a defined rulebook on Article 6.4, in part due to Brazil's desire to exempt developing countries from this double counting legislation, leaving much to do at COP 25 in Madrid.

According to the International Emissions Trading Association (IETA), Article 6 has the potential to reduce the total cost of implementing nationally determined contributions by more than half (equating to savings of $250 billion a year in 2030), and facilitate the removal of 50% more emissions, at no additional cost.

"We want to see the rules, we want to understand how Article 6 will be implemented so that we have the certainty to then develop our own activities under Article 6. Without this rulebook it will be very hard for us to make these investments because we will have uncertainty", says Jeff Swartz, formerly of IETA and now director of climate policy at South Pole, which was winner of Best Broker, Secondary Market and Best Advisory/Consultancy for the Kyoto Project Credits and was highly involved in the initial drafting of Article 6.

One early success from COP 25 was the Partnership for Market Implementation, unveiled on the side-lines of the event by the World Bank and country partners including Canada, Chile, Germany, Japan, Norway, Spain and the UK. The partnership will provide technical assistance to countries to design, pilot and implement carbon pricing and market instruments. It will support the direct implementation of carbon pricing in at least 10 developing countries and help a further 20 countries to do so.