WEBVTT - Getting Fit for 55 0:00:00.120 --> 0:00:02.920 Hi, this is Dana Perkins and you're listening to Switch 0:00:02.960 --> 0:00:06.360 It on the B n F podcast. Today we're talking 0:00:06.400 --> 0:00:10.560 about carbon trading, the European Union Emissions Trading System or 0:00:10.640 --> 0:00:13.200 EU e t S for short, and many would say 0:00:13.240 --> 0:00:16.040 that it has been an effective tool in bringing European 0:00:16.079 --> 0:00:19.360 carbon emissions down. Now, recently there were changes to the 0:00:19.400 --> 0:00:22.560 system in response to Fit for fifty five, which is 0:00:22.560 --> 0:00:25.520 the EU Climate and Energy legislation designed to support the 0:00:25.520 --> 0:00:28.560 block's pledge to cut greenhouse gas emissions by at least 0:00:28.560 --> 0:00:34.159 fifty five percent when compared with levels. So if you're 0:00:34.159 --> 0:00:36.680 looking to get up to speed on how compliance markets 0:00:36.680 --> 0:00:38.920 like the EU e t S work and what Fit 0:00:39.000 --> 0:00:42.479 for fifty five is, well, today is for you. We 0:00:42.520 --> 0:00:45.640 speak with Bo Chin and Emma Cocher, who both focus 0:00:45.720 --> 0:00:49.320 on carbon markets at B and F Compliance. Carbon markets 0:00:49.320 --> 0:00:51.440 have come in and out of vogue, if you will, 0:00:51.920 --> 0:00:54.520 and there have been years where the carbon price fluctuated 0:00:54.760 --> 0:00:57.240 very little. As a result, many people thought of it 0:00:57.320 --> 0:01:00.720 as more of a carbon tax. But today not only 0:01:01.040 --> 0:01:03.160 does it really impact the companies that are paying for 0:01:03.200 --> 0:01:06.120 the credits, but there is a growing trader community which 0:01:06.160 --> 0:01:10.520 is closely watching and trading against these fluctuations. So while 0:01:10.640 --> 0:01:14.039 Article six and Cup twenty six last year brought carbon 0:01:14.120 --> 0:01:17.120 markets back into focus for some of the world, those 0:01:17.160 --> 0:01:19.600 of us in Europe, well, we're just continuing with something 0:01:19.640 --> 0:01:22.800 that was started way back in two thousand five. So 0:01:22.920 --> 0:01:24.839 I guess I asked the question, are you a carbon 0:01:24.880 --> 0:01:28.440 nuby or veteran? BENFS Carbon Research can be found for 0:01:28.480 --> 0:01:31.560 subscribers at BENF on the Bloomberg terminal, on BNF dot 0:01:31.560 --> 0:01:35.679 com or on our mobile app. Speaking of subscribers, if 0:01:35.680 --> 0:01:37.600 you'd like to be aware of when we release new 0:01:37.640 --> 0:01:41.480 podcasts on Switched On focused on energy, transport and sustainability, 0:01:41.840 --> 0:01:44.920 just make sure to subscribe on whatever podcast player you're 0:01:44.920 --> 0:01:47.720 listening to us on now. And as a reminder, B 0:01:47.840 --> 0:01:50.600 and EF does not provide investment or strategy advice, and 0:01:50.640 --> 0:01:53.400 we have a complete disclaimer at the end of the show. 0:01:54.160 --> 0:01:56.880 But now let's speak with Bow and Emma about carbon 0:01:56.920 --> 0:02:04.400 markets and fit for fifty five. Thank you both for 0:02:04.440 --> 0:02:07.320 coming on the show today. Boh welcome, Thank you, Dana, 0:02:07.680 --> 0:02:10.280 great to be here, and Emma, thank you, Danna, great 0:02:10.320 --> 0:02:12.760 to be here. Alds. So we are here to talk 0:02:12.840 --> 0:02:15.079 about well, probably the thing that you guys spend most 0:02:15.080 --> 0:02:17.960 of your time talking about, which is the EU Emissions 0:02:17.960 --> 0:02:21.919 Trading System, and we're going to talk today about some 0:02:22.000 --> 0:02:25.600 important reforms that are being discussed and potentially progressed in 0:02:25.639 --> 0:02:29.519 the very near term. But before we go into what's changing, 0:02:30.120 --> 0:02:32.200 let's go back. How long has this been around for 0:02:32.560 --> 0:02:36.239 and when was the last time since its origination there 0:02:36.280 --> 0:02:38.680 was a sizeable change to the EU e T S. 0:02:39.160 --> 0:02:41.880 E t S it's the scheme that has been around 0:02:41.880 --> 0:02:45.200 since two thousand and five. So it's a market based 0:02:45.440 --> 0:02:48.519 carbon market and it's a kind of that cap and 0:02:48.560 --> 0:02:51.640 trade system. So it basically has the absolute cap that 0:02:52.120 --> 0:02:56.520 all installations in the EU market there are around eleven 0:02:56.760 --> 0:02:59.960 southern they have to keep their emissions under that cap. 0:03:00.360 --> 0:03:03.600 So basically installation or a company in new e T 0:03:03.840 --> 0:03:08.000 S they can either reduce their emissions themselves or pay 0:03:08.160 --> 0:03:12.119 for the emissions that they produce, and altogether they need 0:03:12.160 --> 0:03:15.200 to keep under the cap that is regulated by the 0:03:15.280 --> 0:03:19.400 policy makers. So basically, the target by now is to 0:03:19.680 --> 0:03:24.480 achieve forty three percent emission reduction by twenty thirty and 0:03:24.680 --> 0:03:28.000 this is now to be changed or to be reformed, 0:03:28.440 --> 0:03:31.760 and the goal right now is to align the emission 0:03:32.000 --> 0:03:36.080 scheme to the larger European Green Deal and the fit 0:03:36.200 --> 0:03:40.960 for fifty five target, which means fifty emission reduction by 0:03:41.000 --> 0:03:45.160 twenty thirty compared to nine nine levels. And on largest 0:03:45.320 --> 0:03:49.520 change for the market before this new reform has been 0:03:50.080 --> 0:03:55.280 the ms ARE introduction of Market Stability Reserve, which basically 0:03:55.480 --> 0:03:59.920 gave the extra boost to the European carbon price from eighteen. 0:04:00.320 --> 0:04:02.880 I think we'd say this is arguably one of the 0:04:02.920 --> 0:04:06.320 widest reforms the EU e t S has seen, and 0:04:06.440 --> 0:04:09.600 actually globally and et S schemes. If they can pass 0:04:09.640 --> 0:04:12.600 these reforms, this will be a pretty significant change across 0:04:12.640 --> 0:04:16.280 the number of the elements of the overall European Union 0:04:16.279 --> 0:04:19.479 emission Trading scheme and this will apply to every country 0:04:19.520 --> 0:04:22.640 that is in the EU and has companies operating physically 0:04:22.680 --> 0:04:25.200 on their soil or on their soil, and overseas there 0:04:25.200 --> 0:04:28.360 will be those that are physically on this soil. So 0:04:28.440 --> 0:04:32.760 there's also the scope for currently entr EU airlines as well, 0:04:33.000 --> 0:04:36.360 but that's also up to reforms whether this scope would 0:04:36.360 --> 0:04:39.880 be changed. So you referenced the fit for fifty five reforms, 0:04:39.880 --> 0:04:42.480 which is what we really want to delve into today. 0:04:42.600 --> 0:04:48.800 They're looking to bring down emissions by which industries is 0:04:48.880 --> 0:04:53.320 this going to impact because it appears that there are 0:04:53.360 --> 0:04:58.000 actually some new industries that will be impacted by these reforms. Indeed, 0:04:58.040 --> 0:05:00.760 that's right, Dana. Eu E t S a carbon market 0:05:00.920 --> 0:05:04.560 in Europe has always borne bigger emission reduction burden than 0:05:04.600 --> 0:05:08.320 the rest of the sectors. So how fifty five percent 0:05:08.440 --> 0:05:11.640 will translate into EU E t S. It's going to 0:05:11.680 --> 0:05:15.640 be higher. So the proposed figures have been from permission, 0:05:15.720 --> 0:05:18.600 it's been sixty one percent emission reduction for those EU 0:05:18.680 --> 0:05:21.479 E t S sectors and now that we have seen 0:05:21.520 --> 0:05:26.640 from Parliament this suggested number is sixty three percent emission reduction. 0:05:27.080 --> 0:05:31.400 What does this basically mean to the sectors under the 0:05:31.400 --> 0:05:34.080 EU E t S scheme is that they need to 0:05:34.080 --> 0:05:38.560 crank up their emission reduction and also investment into those 0:05:38.600 --> 0:05:43.040 low carbon technologies. For power sector will expect more fiel 0:05:43.080 --> 0:05:48.480 switching from cold to gas, as well as uptake of renewables, 0:05:48.520 --> 0:05:52.359 more wind, more solar and batteries. And then what this 0:05:52.480 --> 0:05:55.400 means for industries is that they need to look into 0:05:55.600 --> 0:05:59.000 the technologies that they can use to reduce their emissions, 0:05:59.040 --> 0:06:04.520 so whether that is hydrogen CCS or bio fields or electrification. 0:06:05.160 --> 0:06:08.440 What do the changes in FIT for fifty five mean 0:06:08.760 --> 0:06:13.800 for some new entrance to this space, so specifically maritime 0:06:14.000 --> 0:06:16.960 and shipping. I think the shipping space in particular has 0:06:16.960 --> 0:06:20.320 been something that people have really been focused on as 0:06:20.320 --> 0:06:23.279 a just a critical part of the economy as we 0:06:23.320 --> 0:06:28.279 are looking at supply chains and how completely international and 0:06:28.320 --> 0:06:30.640 global a lot of those are as we're dealing with, 0:06:30.880 --> 0:06:35.320 you know, inflation. As EO targets deep decarbonization and NEST zero, 0:06:35.720 --> 0:06:39.720 they have to include shipping emissions into the scope as well. 0:06:40.240 --> 0:06:43.600 That's one reason. Another reason has been why we need 0:06:43.640 --> 0:06:48.000 to include shipping is that aviation, especially entre u aviation, 0:06:48.360 --> 0:06:52.000 has already been susceptible or they have been already been 0:06:52.080 --> 0:06:54.800 included to EU e t s and they have been 0:06:55.000 --> 0:06:58.480 mandated to pay for their emissions. So it would be 0:06:58.560 --> 0:07:02.800 fair to have owth shipping and aviation in the same 0:07:02.920 --> 0:07:07.080 scheme as well as for buildings and transport. There is 0:07:07.160 --> 0:07:11.440 a separate market now proposed for them. The reason to 0:07:11.720 --> 0:07:16.160 have them separate is mainly that one, they're more consumer facing, 0:07:16.400 --> 0:07:20.680 so separating them would allow setting up mechanisms to protect 0:07:20.800 --> 0:07:25.520 those more vulnerable groups, especially those who are more vulnerable 0:07:25.520 --> 0:07:29.200 in terms of higher energy costs like consumers and small 0:07:29.240 --> 0:07:33.080 and medium sized companies. Another reason is that the cost 0:07:33.280 --> 0:07:38.240 for decarbonizing buildings and transport are very high. By including 0:07:38.320 --> 0:07:42.600 them into the carbon market, we may not see significant 0:07:42.800 --> 0:07:47.720 emission reductions in these sectors immediately, so the incentive to 0:07:48.080 --> 0:07:51.880 reduce emissions in these sectors wouldn't be instant. By having 0:07:51.920 --> 0:07:57.360 a separate market, we could also introduce other supporting mechanisms 0:07:57.480 --> 0:08:01.840 to make this happen. For example, what Spending suggested a 0:08:01.840 --> 0:08:07.040 format to kind of accelerate decrbinization is contract for a 0:08:07.040 --> 0:08:10.880 difference carbon contract for a difference to be exact, and 0:08:10.960 --> 0:08:14.960 what this means, it's basically to use the curbon market 0:08:15.200 --> 0:08:17.280 and the carbon price as much as we can, but 0:08:17.400 --> 0:08:21.880 then top up with additional amount of kind of subsidy 0:08:22.040 --> 0:08:24.880 so that we can reach the price needed to drive 0:08:24.960 --> 0:08:28.400 this emission reduction. I think, just on the fairness point, 0:08:28.480 --> 0:08:33.079 so Bo just raised it, it's fair to include shipping 0:08:33.200 --> 0:08:38.280 alongside aviation, which has already included with buildings. If your 0:08:38.320 --> 0:08:41.200 building is current electrified, so you're using a heat pump 0:08:41.200 --> 0:08:45.040 in your home that actually has a carbon price associated 0:08:45.080 --> 0:08:48.440 with it, Whereas if your home is currently using gas, 0:08:48.480 --> 0:08:51.720 there is no carbon price associated with it, So this 0:08:51.800 --> 0:08:54.280 is in order to level the playing field for buildings 0:08:54.320 --> 0:08:57.520 alongside sectors such as the power sector, which is already 0:08:57.559 --> 0:08:59.839 included in the EU e t S. So let's go 0:09:00.080 --> 0:09:02.520 another part of this which is meant to level the 0:09:02.559 --> 0:09:06.480 playing field and also quite contentious within the proposed changes, 0:09:06.559 --> 0:09:10.720 which is the carbon border adjustment mechanism. What is this 0:09:10.880 --> 0:09:13.720 and why is it so contentious? So the Carbon border 0:09:13.720 --> 0:09:17.440 adjustment mechanism, as we've just been discussing, the majority of 0:09:17.559 --> 0:09:21.040 industrials in the EU are within the EU Emissions Trading Scheme, 0:09:21.120 --> 0:09:25.160 so this means any ton of emissions produced they must 0:09:25.160 --> 0:09:28.800 pay then the respect of carbon price. If goods are 0:09:28.840 --> 0:09:33.120 imported from an outside country, that country may not have 0:09:33.320 --> 0:09:37.160 an equivalent scheme to the EU Emissions Trading scheme, which 0:09:37.200 --> 0:09:39.640 means that those goods are produced without having to pay 0:09:39.720 --> 0:09:43.160 a carbon price. So what the carbon border adjustment mechanism 0:09:43.200 --> 0:09:48.560 tries to do is effectively equate those two products. So 0:09:48.720 --> 0:09:51.559 a ton of steel produced in the EU paying an 0:09:51.720 --> 0:09:54.280 X amount of carbon price is going to be the 0:09:54.360 --> 0:09:57.680 same as a ton of steel produced outside of the EU, 0:09:57.840 --> 0:10:00.760 where they will pay effectively and input X that will 0:10:00.800 --> 0:10:03.280 be equal to the carbon price the ton of steel 0:10:03.280 --> 0:10:07.240 and the EU has had to pay. Now it's controversial, 0:10:07.320 --> 0:10:11.640 of course, because this would require the EU effectively regulating 0:10:12.000 --> 0:10:15.920 production from outside of the European Union. Also, there's the 0:10:15.960 --> 0:10:18.600 second part of it, which is we haven't seen significant 0:10:18.679 --> 0:10:24.439 industrial decarbonization in the EU emissions trading scheme because industrials 0:10:24.440 --> 0:10:27.640 have received free allocation and so what that was is 0:10:27.679 --> 0:10:31.400 effectively free permits in order for them to produce that 0:10:31.520 --> 0:10:34.640 ton of steel but not pay the effective carbon price. 0:10:35.200 --> 0:10:37.520 And so in order for it to be fair if 0:10:37.520 --> 0:10:41.000 outside the EU is paying a carbon price, those free 0:10:41.000 --> 0:10:44.520 allowances have to be removed, which means current production within 0:10:44.559 --> 0:10:47.040 the EU will then have to pay the full carbon price. 0:10:47.360 --> 0:10:51.520 So what about the countries that do have their own 0:10:51.679 --> 0:10:55.240 trading mechanism and how will this impact and interact with them? 0:10:55.280 --> 0:10:58.280 So I'm thinking actually specifically the country that we're sitting in, 0:10:58.480 --> 0:11:00.640 m Au and I bow is spose in the States, 0:11:00.679 --> 0:11:04.520 but the United Kingdom, since Brexit took place, they've set 0:11:04.600 --> 0:11:08.560 up their own e t s. How does that interact 0:11:08.840 --> 0:11:12.839 with these new potential rules. Will there will be a 0:11:13.559 --> 0:11:15.839 bit of a change you expect on this side? How 0:11:15.880 --> 0:11:18.200 long will that take and how does it interact with 0:11:18.200 --> 0:11:21.360 a carbon border adjustment mechanism. So actually the u K 0:11:21.600 --> 0:11:24.400 e T S has or emissions trading scheme has traded 0:11:24.440 --> 0:11:27.520 actually at a bit of a premium compared to the 0:11:27.559 --> 0:11:31.120 EU emissions trading schemes to actually permits are slightly higher 0:11:31.120 --> 0:11:33.720 in cost than we're seeing in the EU. That means 0:11:33.800 --> 0:11:36.959 is effectively, if you are paying more under your local 0:11:37.040 --> 0:11:40.720 scheme then the EU emissions trading scheme, you wouldn't have 0:11:40.800 --> 0:11:44.000 to pay that carbon border adjustment mechanism. So this is 0:11:44.000 --> 0:11:46.920 going to hit countries who either don't have a carbon 0:11:46.960 --> 0:11:50.200 price at all or have a much lower carbon price 0:11:50.360 --> 0:11:54.440 than the current price of European Union allowances. It also 0:11:54.520 --> 0:11:59.600 depends on your imports emission intensity, so if your imports 0:12:00.000 --> 0:12:04.160 mission intensity is lower than the existing benchmark in Europe, 0:12:04.200 --> 0:12:08.640 you can also avoid paying that carbon levy at the border. Basically, 0:12:08.679 --> 0:12:12.440 if we kind of summarize, the main point for this 0:12:12.679 --> 0:12:17.000 carbon border adjustment mechanism is really three. One is to 0:12:17.160 --> 0:12:21.839 ensure the fairness of competition for different industries, especially those 0:12:21.920 --> 0:12:25.480 under the EU E T scope. Then second is to 0:12:25.720 --> 0:12:29.440 reduce emissions ensure that you can achieve that the net 0:12:29.679 --> 0:12:33.600 zero goals and the set mid term emission goals as well. 0:12:33.960 --> 0:12:37.319 And then the third is to encourage also other countries 0:12:37.559 --> 0:12:40.640 to take up emission reduction pulses. So what will take 0:12:40.640 --> 0:12:44.280 the fit for fifty proposals from more than a proposal 0:12:44.280 --> 0:12:46.679 and something that is actually going to come to pass 0:12:46.720 --> 0:12:49.880 and actually impact the way that the e ETS functions. 0:12:49.880 --> 0:12:54.080 So how this works in the European Union is effectively 0:12:54.320 --> 0:12:57.360 European lawmakers have to agree amongst themselves. So there's are 0:12:57.559 --> 0:13:01.120 three key parties that need to agree. So the European 0:13:01.160 --> 0:13:05.520 Commission is the body who proposed for fort. The next 0:13:05.559 --> 0:13:08.679 stage as it goes to the European Parliament to either 0:13:08.880 --> 0:13:11.640 agree or disagree on all of the elements that have 0:13:11.720 --> 0:13:14.760 been proposed by the Commission. So the Parliament must agree 0:13:14.760 --> 0:13:17.839 amongst themselves whether they're happy on each of the proposals 0:13:17.960 --> 0:13:22.400 or they propose amendments. Once Parliament has agreed, this thing 0:13:22.480 --> 0:13:25.640 goes to the European Council and the European Council does 0:13:25.679 --> 0:13:28.400 the same. Are they happy with the proposal, would they 0:13:28.440 --> 0:13:32.199 prefer to amend as both said, the European Parliament has 0:13:32.200 --> 0:13:35.959 suggested a higher emissions reduction, so sixty three percent decline 0:13:35.960 --> 0:13:39.559 and emissions compared to sixty one from the European Commission. 0:13:39.600 --> 0:13:42.359 And so the European Council either agrees with the Commission 0:13:42.440 --> 0:13:45.600 or agrees with the Parliament. It's all of its circular 0:13:45.679 --> 0:13:48.760 and then once all three have agreed their position, it 0:13:48.840 --> 0:13:53.160 goes into trialogue negotiations they agree amongst themselves, and once 0:13:53.240 --> 0:13:56.920 that's occurred, which we were hoping to see at the 0:13:57.040 --> 0:13:59.520 end of this year early next, it will be introduced 0:13:59.559 --> 0:14:03.040 into legislative process. How long is that going to take, 0:14:03.400 --> 0:14:07.120 That's the question everyone's asking. Because of the significance of 0:14:07.160 --> 0:14:10.920 these reforms, these negotiations are set to take a bit 0:14:10.960 --> 0:14:15.520 of time. Just recently, the European Parliament Plenary actually voted 0:14:15.559 --> 0:14:19.280 down the proposed amendments for a significant part of the 0:14:19.280 --> 0:14:22.800 EU e t S or Emissions Trading Scheme reforms. And 0:14:22.880 --> 0:14:25.360 so what that does is it sends it back to 0:14:25.720 --> 0:14:28.560 the sub committees of Parliament to renegotiate, and then it 0:14:28.560 --> 0:14:31.160 will come back up to Parliament plenary to vote. So 0:14:31.240 --> 0:14:34.200 any setbacks like this adds at least a few weeks. 0:14:34.240 --> 0:14:38.280 This entire process usually takes around one to two years. Okay, 0:14:38.280 --> 0:14:40.920 so one to two years we're sitting here at These 0:14:40.920 --> 0:14:43.480 are supposed to impact the market for well, for goals 0:14:43.520 --> 0:14:47.640 that are actually focused on. Is there any concern that 0:14:47.720 --> 0:14:50.000 it will take too long to actually come to pass 0:14:50.040 --> 0:14:53.000 in order for these rules to have a meaningful impact 0:14:53.120 --> 0:14:56.560 on emissions reduction. The longer we wait, the shorter time 0:14:56.600 --> 0:15:00.120 frame in which participants within the market will have to 0:15:00.160 --> 0:15:04.120 reduce your emissions. And so we're expecting in terms of 0:15:04.120 --> 0:15:06.360 those emissions productions that there will be a one off 0:15:06.360 --> 0:15:10.520 free base, effectively a one off adjustment where we reduce 0:15:10.640 --> 0:15:13.600 the number of allowances in the market and then it 0:15:13.640 --> 0:15:17.000 continues to decrease per year as it does currently. What 0:15:17.160 --> 0:15:19.680 that means is you squeeze it into a few years, 0:15:19.800 --> 0:15:22.640 and it's likely the scarcity will drive the price of 0:15:22.720 --> 0:15:27.640 the allowances even higher. Actually, the risk of postponing is increasing. 0:15:27.840 --> 0:15:31.600 Maybe we will still be able to reach the timeline 0:15:31.600 --> 0:15:35.040 targets that we have in mind, or at least what 0:15:35.240 --> 0:15:38.400 the consensus of the market have in mind. This consensus 0:15:38.480 --> 0:15:42.040 right now is to start the reforms, our implementation of 0:15:42.080 --> 0:15:45.560 the reforms in twenty four What this risk of postponing 0:15:45.680 --> 0:15:49.640 would mean right now if short term is just more uncertainty, 0:15:49.920 --> 0:15:53.600 and this uncertainty of policy is on top of the 0:15:53.680 --> 0:15:57.160 market on centinety is that we have been experiencing as well. 0:15:57.640 --> 0:16:04.160 Amidst inflation risks, commodity risks and also bigger economic risks. 0:16:04.160 --> 0:16:09.080 Carbon has basically been seen as the commodity that has 0:16:09.160 --> 0:16:14.280 more stability. Having this amount of policy delays and changes, 0:16:14.520 --> 0:16:17.440 are not convinced in the market at the time when 0:16:17.920 --> 0:16:21.120 the market really needs quite a lot of market confidence. 0:16:21.320 --> 0:16:23.600 In the long term, though, what this means is that 0:16:23.800 --> 0:16:28.520 we could see drastic actually market movement because we need 0:16:28.760 --> 0:16:32.240 faster emission reductions in the later years, we may see 0:16:32.560 --> 0:16:36.440 more market volatility actually than less market molaticity, which is 0:16:36.480 --> 0:16:40.800 also maybe not what the policymakers in Europe would like. 0:16:41.120 --> 0:16:47.680 Now for a very short break, stay with us. How 0:16:47.800 --> 0:16:51.080 are carbon traders and those who are actually looking to 0:16:51.280 --> 0:16:54.440 I guess profit off of the volatility within the market. 0:16:54.480 --> 0:16:56.960 How are they looking at this? And then also how 0:16:56.960 --> 0:16:59.200 are the businesses that are going to be directly impacted 0:16:59.240 --> 0:17:02.040 looking at it? Is there a lot of resistance and 0:17:02.160 --> 0:17:05.359 are there areas of support? Carbon market has been a 0:17:05.520 --> 0:17:08.800 keep place for traders in the last few years, and 0:17:09.200 --> 0:17:13.400 we have also seen an influx of financial intermediaries coming 0:17:13.480 --> 0:17:17.240 to this market mainly for several reasons. Maybe the most 0:17:17.280 --> 0:17:21.159 obvious one is that this is a commodity where there's 0:17:21.240 --> 0:17:25.680 a declining supply and the demand is rather in a 0:17:25.800 --> 0:17:31.320 lastic as we said, to reduce those industrial emissions, it's 0:17:31.400 --> 0:17:35.800 really expensive. So in that way the trajectory for carbon 0:17:35.840 --> 0:17:39.960 price is well the required carbon price to reduce emissions 0:17:40.240 --> 0:17:43.720 in line with what the policymakers are saying is upwards. 0:17:43.760 --> 0:17:47.159 There are attraction for this commodity in other ways as well. 0:17:47.320 --> 0:17:52.600 One is that it's an environmental sustainable asset, so people 0:17:52.680 --> 0:17:56.560 who want to expand their investment for photios to more 0:17:57.160 --> 0:18:01.280 sustainable products, greener products, carbon could be seen as a 0:18:01.320 --> 0:18:04.119 good option. It can be also used as a hedge 0:18:04.119 --> 0:18:08.800 in tool or like carbon intensive investment, but also for 0:18:09.119 --> 0:18:14.480 interest risks because carbon in general track the technology that 0:18:14.720 --> 0:18:17.960 would be out the margin to abate the required amount 0:18:18.040 --> 0:18:22.480 of emissions, and that technology is usually aligned with an 0:18:22.560 --> 0:18:25.919 increase in interest risks in the market as well, so 0:18:26.040 --> 0:18:29.200 that it will be investing in carbon would naturally also 0:18:29.440 --> 0:18:32.880 head you from interest risks. So being ear f expects 0:18:33.000 --> 0:18:36.560 the price of European Union allowances to hit one thirty 0:18:36.640 --> 0:18:40.480 six years put down nominal by So that high price 0:18:40.640 --> 0:18:44.159 presents an opportunity for traders with increased folatilely as Bo 0:18:44.320 --> 0:18:47.720 was just mentioning, But it also presents an opportunity for 0:18:47.840 --> 0:18:51.240 companies who are producing low carbon solutions. So we're starting 0:18:51.240 --> 0:18:56.080 to see low carbon industrial solutions for example c c 0:18:56.240 --> 0:19:00.119 U s start to become competitive when we're seeing prices 0:19:00.160 --> 0:19:04.040 this high. So it's it's no longer where carbon is 0:19:04.119 --> 0:19:07.240 not heading balance sheets, so emitters it's just quite happy 0:19:07.280 --> 0:19:10.360 to just continue to burn. Fossil carbon is now becoming 0:19:10.640 --> 0:19:13.440 quite a big consideration in terms of the power sector, 0:19:13.480 --> 0:19:17.439 in particular when they're coming to retire assets or invest 0:19:17.480 --> 0:19:21.080 in new assets. Now, as we know, everything within the 0:19:21.200 --> 0:19:26.480 energy transition is interrelated, so with high gas prices and 0:19:26.760 --> 0:19:30.480 sanctions on Russian gas and oil at the moment, and 0:19:30.520 --> 0:19:33.120 then also what was already going to be a very 0:19:33.720 --> 0:19:37.280 expensive year when it came to power prices, how has 0:19:37.400 --> 0:19:43.600 this impacted how the European Commissioned, European Union, European Parliament 0:19:43.600 --> 0:19:48.040 are all looking at these proposed changes. In part there's 0:19:48.080 --> 0:19:51.320 a couple of interesting dynamics that are playing out. So 0:19:52.200 --> 0:19:55.880 moving away from gas in the short term has seen 0:19:56.040 --> 0:19:59.959 significant colburn, but actually it has also led to europe 0:20:00.000 --> 0:20:04.000 In countries looking at increased renewables for instance, and any 0:20:04.040 --> 0:20:07.720 investment in renewables that come on board will eventually decrease 0:20:07.800 --> 0:20:10.480 the carbon price because effectively they don't have to pay 0:20:10.560 --> 0:20:12.720 for as many permits if those come online. In the 0:20:12.720 --> 0:20:15.840 near term, however, the European Union is looking to fund 0:20:16.080 --> 0:20:18.920 the transition away from gas, and what they have done 0:20:19.000 --> 0:20:23.120 is proposed selling the spare allowances from the market stability 0:20:23.160 --> 0:20:26.880 reserve from the European Union Emissions trading scheme to raise 0:20:26.920 --> 0:20:30.680 a figure of twenty billion out to six in order 0:20:30.720 --> 0:20:34.720 to facilitate this move away from gas. This has some 0:20:34.760 --> 0:20:38.560 pretty significant risks. As both said, we're already seeing increased 0:20:38.600 --> 0:20:42.440 volatility in the carbon market from the reforms, and so 0:20:42.560 --> 0:20:47.399 any additional quite sporadic policy announcements like this moves the 0:20:47.480 --> 0:20:50.400 price significantly. The other part of it is that they 0:20:50.440 --> 0:20:53.600 haven't specified the number of allowances. They've only specified the 0:20:53.640 --> 0:20:56.440 monetary amount, so as you can imagine, if you start 0:20:56.520 --> 0:21:00.200 selling allowances into the market and adding additional supply, this 0:21:00.400 --> 0:21:02.360 is likely to be bearish for the price. A low 0:21:02.640 --> 0:21:05.359 low of the price so become quite circular. You didn't 0:21:05.400 --> 0:21:07.960 have to release more allowances in order to raise the 0:21:08.000 --> 0:21:10.919 amount of funding that you need, which again carries on 0:21:10.960 --> 0:21:15.160 the spiral downwards. Yeah, exactly, and it adds to the 0:21:15.200 --> 0:21:18.920 amount of uncertainty in the market right now because if 0:21:18.920 --> 0:21:21.480 we look at this plan what the magist described, it 0:21:21.600 --> 0:21:25.040 is called repower EU. So a part of this plan 0:21:25.200 --> 0:21:28.040 is to increase the supply to the market through ms 0:21:28.200 --> 0:21:32.399 Market Stability Reserve. Another is to double the Innovation Fund 0:21:32.560 --> 0:21:36.199 auctions this year and also another the third part is 0:21:36.240 --> 0:21:39.639 to also increase the contract for a difference budget for 0:21:39.800 --> 0:21:43.919 the EU Innovation Fund. How this would impact the market 0:21:44.040 --> 0:21:47.800 is that if we the the technologies to reduce emasines 0:21:47.840 --> 0:21:51.320 would get funding from elsewhere then the carbon market. That's 0:21:51.359 --> 0:21:54.760 also bearish for the market. But we have to also 0:21:54.800 --> 0:21:58.000 look at the market outside of this only reform, but 0:21:58.080 --> 0:22:00.919 all of the reform packages. So now we have four 0:22:01.160 --> 0:22:03.639 before we are we had three packages, so fifth for 0:22:03.760 --> 0:22:07.600 fifty five carbon Border Adjustment Mechanism and MSR reform. So 0:22:07.680 --> 0:22:11.119 this add one layer of additional answer attempting. So we 0:22:11.200 --> 0:22:13.760 would have now fit for fifty five RA power you 0:22:14.080 --> 0:22:18.720 see them an MSR. So the collected impact on the 0:22:18.760 --> 0:22:22.919 market is becoming more and more unknown. Meanwhile, for like 0:22:23.320 --> 0:22:27.760 for carbon investors more from the financial financial markets, they 0:22:27.760 --> 0:22:30.880 are also in a difficult situation because one is all 0:22:30.880 --> 0:22:34.760 this uncertainties and another is that part of this reforms 0:22:34.880 --> 0:22:39.520 also proposed that they may be exempt from this market 0:22:39.680 --> 0:22:42.840 if reforms get moved forward. So all in all, a 0:22:42.880 --> 0:22:46.320 lot of uncertainties in the market. Well within the uncertainties 0:22:46.320 --> 0:22:48.400 and within some of the industries that are actually going 0:22:48.440 --> 0:22:51.280 to be impacted. Let's talk a little bit about the 0:22:51.320 --> 0:22:53.920 hard to abate space. So we already discussed maritime and 0:22:53.960 --> 0:22:57.840 shipping and buildings, which are new entrants to this, but 0:22:57.920 --> 0:22:59.840 how about some of the spaces that have had pre 0:23:00.000 --> 0:23:04.600 easily had very generous allowances. So let's talk about cement, fertilizer, 0:23:05.160 --> 0:23:08.640 aluminium or aluminum depending upon you who you are. What 0:23:08.680 --> 0:23:10.320 are we seeing there and is that where a lot 0:23:10.359 --> 0:23:13.320 of the uncertainty really lies and how they will be impacted. 0:23:13.720 --> 0:23:17.639 For hard to abate sectors, they know that EU has 0:23:17.760 --> 0:23:21.880 emission reduction requirements from them and they can now see 0:23:22.000 --> 0:23:25.200 more or less the trajectory because the sixty one sixty 0:23:25.320 --> 0:23:30.119 three is different but still quite similar in terms of 0:23:30.119 --> 0:23:33.600 where we're going. But for them, the answertainty is how 0:23:33.680 --> 0:23:37.359 much the air free allowances will be actually reduced. The 0:23:37.800 --> 0:23:41.080 rate has been suggesting rate has been quite different. There's 0:23:41.760 --> 0:23:46.160 the Commission hosts at ten percent annual free allowance reduction 0:23:46.240 --> 0:23:52.399 from and now at the Parliament suggested also another figure, 0:23:52.600 --> 0:23:58.200 more easier one, so they would have more free allowances towards. 0:23:58.240 --> 0:24:02.600 So for industrials in the European Union emissions trading scheme, 0:24:02.600 --> 0:24:05.800 it's an interesting question. They've been included for a number 0:24:05.840 --> 0:24:10.600 of years, but the free allowances have effectively insulated these industries. 0:24:11.080 --> 0:24:15.120 That's currently proposed that these free allowances would be phased 0:24:15.160 --> 0:24:18.520 out as you know, a carbon border adjustment mechanism is 0:24:18.600 --> 0:24:21.440 faced in What this means is their industrials are now 0:24:21.480 --> 0:24:25.480 looking at what their decombanization options are, So for instance, 0:24:25.680 --> 0:24:30.200 in aluminium or steal, they're looking for electrification, they're looking 0:24:30.200 --> 0:24:33.280 for hydrogen, they're looking for ccus. The question is a 0:24:33.280 --> 0:24:36.680 lot harder than the power sector, where wind and solar 0:24:36.720 --> 0:24:39.919