The price of carbon, key in the fight against climate change

Carbon pricing has become one of the most important keys in the fight of both companies and countries in their fight against climate change. This mechanism, which was born to curb the environmental damage caused by global warming, assigns a price to greenhouse gas emissions to redirect public and private investment towards production models that contribute to decarbonizing the economy.

Since its birth, with the Kyoto Protocol in 1997, the carbon dioxide emissions market where companies and countries acquire and sell emission rights certificates has been acquiring importance and volume, to the point that at the next COP25 the United Nations Conference on Climate Change, which will take place in December in Santiago de Chile will be one of the main objects of review and debate.

In this context, the Economist, with the collaboration of Acciona, held at its headquarters in Madrid the Buy and Sell _CO2 Observatory, where several of the agents and companies involved in this process presented the virtues and difficulties they still encounter in the market. José López-Tafall, Acciona’s Director of Regulation; Alfredo Sánchez Vicente, Head of the Carbon Markets Area of the Spanish Office of Climate Change; Ismael Romeo, director of Sendeco2; Eric Bernard, Head of Trading at Factor Trading; and Alberto Abánades, professor at the Department of Energy Engineering at the Polytechnic University of Madrid; next to the deputy to the director of the Economist, Rubén Esteller.

The experts agreed that companies have already assumed the cost of this market of sale, but pointed out that the problem remains how this reduction in emissions is achieved and the mechanism that manages to internalize them. “We are moving forward, but there is still dispersion,” admitted Jose Lopez-Tafall. “Today, only 15% of emissions are subject to this system.

In China it is said that it will be implemented and would reach up to 20%, but by 2020 it should reach 25% and we are still far away,” he added. For Acciona’s Director of Regulation, one of the difficulties is the price differences of current _CO2 emissions. “The price level imposed is very diverse. There can be from 130 euros per ton from Sweden to countries where it can cost a dollar,” he said. “At Acciona we defend a minimum price of _CO2 worldwide or at least European and a gradual implementation of this system so that it is effective and sustained over time,” said López-Tafall.

These differences, according to experts, mean that companies continue in many cases to depend on governments to make decisions in the fight against emission reductions. That is why the participants opted to strengthen the mechanisms with which the private sector can acquire more responsibilities. “Companies have options to internalize our emissions and we have to say much more. At Acciona we have been emission-neutral since 2016 and we have internalized the price of emissions in the implementation of new investments, but the problems of implementation cannot paralyze the processes that slow down investments because a country has it stopped. If we can decide it in the companies it would be more useful,” said the head of Acciona.

Companies depend on governments to make decisions in the fight against emission reductions

At this point, Alfredo Sánchez Vicente pointed out that the rules of this carbon market were established in the Paris Agreement of 2015 and already two years later in Bonn it was seen that there were different points of view. “The key is to be able to reach agreements at the Chile summit this December,” he said. The head of the Carbon Markets Area of the Spanish Office of Climate Change recalled the magnitude of the problem we face. “The impact of climate change, according to the latest United Nations report, is an increase of 1.5 degrees in 2050 and if all the commitments of the countries were fulfilled it would be an increase of 3 degrees in 2100. This is the magnitude of the problem. To reach 1.5 degrees, emissions need to be zeroed by 2050. And that is a challenge not only for governments, but also for companies,” he said.

The climate change expert said that the intention of his agency is to make the investment of companies in other countries attractive. “The European Union fights for the market to be very closed, so that there are no emission black holes and thus be able to reach that target of 1.5 degrees and limit the impact of climate change,” he added. “It is true that there are still differences between the 195 countries that signed this pact, but everyone is clear about it and we are optimistic to reach an agreement in Chile,” said the spokesman for the Spanish Office of Climate Change.

Tensions in the market

Ismael Romeo, director of the company Sendeco2, specialized in transactions with rights, highlighted the “chiaroscuros” that in his opinion there are currently in the _CO2 sales market. “From the beginning things were done quickly and running and now it is impossible to homogenize prices,” he said. To do this, he made a tour of the evolution of the price in recent months. “In January 2018, the price of _CO2 was 8 euros. Forecasts said that the price would move between 20 and 25 euros in 2021. And in July 2018 we were already at that level. Prices were multiplied by three. And that does not respond to something natural or happen in other markets, so something fails,” he said. “Companies have long-term forecasts but five months later no one can withstand these changes. It is clear that from the public administrations in Europe there has been a lot of emphasis on being an attractive market, that there are incentives, but that this happens suddenly does not make sense. There are companies that find it difficult to cover their emissions and many facilities that have not been able to comply and that was residual before,” he said. For the director of Sendeco2, the problem lies in the fact that there are currently “dominant and surely speculative positions that see the CO market as attractive.₂ and they keep prices up,” he said.

For his part, the Head of Trading of Factor Trading, Eric Bernard, saw more benefits to the current market. “It works like an incentive market. The company that makes efforts can make money. That encourages and accelerates the energy transition and the electricity companies lead to a more accelerated decarbonization,” he said. Bernard also analyzed the behavior of prices. “It is true that prices are important, but the oscillations have come from the different phases that the process has. We were already at 30 euros in the first phase and then it went down and was accumulating on allocation. In 2017 it was 5 and 6 euros and mechanisms were put in place that made the price rise. And now in 2019 mechanisms have been put in place that limit rights. In my opinion, with very low prices, large companies are not encouraged to participate in the process.” For the representative of Factor Trading, the _CO2 sales market is developed “so that companies are making efforts and that electricity generators have incentives to abandon coal for gas, which is now the transition energy towards renewables”. According to Bernard, the European _CO2 market “serves as a mirror to other countries and encourages their companies to make the necessary transition with the aim that by 2050 we will have a _CO2-neutral emissions economy,” he said.

With very low prices, large companies are not encouraged to participate in the process

The professor of the Department of Energy Engineering of the Polytechnic University of Madrid Alberto Abánades advocated understanding that as in any productive change, the _CO2 market also needs a period of acclimatization. “There has to be a process of adaptation. The market is an imperfect entity and we must try to adapt it, because it is true that it is not logical that suddenly the price rises three times, “he said.

“But what it achieves is to encourage the development of new disruptive technologies and only then will the decarbonization we need be possible,” said the professor. Alberto Abánades did opt to include measures that reinforce these stimuli. “In the U.S., instead of establishing taxes, they bet on a premium, there are those who reduce emissions,” he said.

The professor pointed out that there are currently systems for capturing and using _CO2 with new technologies, “but the problem is that they are still taxed and penalized when in fact they are removing _CO2 and this is what needs to be changed.” “There are technologies that can make _CO2 becomes a traditional market, so that there are interested in buying it and being able to make products of interest, for example for carbonated water,” he said. “The important thing would be a unification of markets, because if it is the case that you have a factory in Spain that can be taxed for producing CO₂ and it turns out that in Morocco you do not have that tax, any company changes it and we will have relocation problems,” he warned.

Participants agreed on the need for a global system for this market, but until that time, companies must drive this journey forward.

Incentives to decarbonize

To achieve that momentum among companies, experts called for some kind of incentive. “One of the problems we have is that the market does not recognize the effort of companies to decarbonize,” López-Tafall said. “In the law of contracts there is no commitment to green public procurement. And it would be interesting if the administration valued you for your green commitment or for your carbon footprint,” said the Acciona executive. The participants stressed that there are already examples to follow in this regard, such as in the Basque Country or in the Balearic Islands.

Eric Bernard opted to include sustainability indices for companies as is the case in the US. And Alfredo Sánchez pointed out that carbon price markets in the end are a small tool within everything that can be done. “There is room for improvement with other laws that make the public administration and any company can offset their emissions,” he admitted.

Source: The Economist