# Carbon Risk
> Helping investors navigate 'The Currency of Decarbonisation'!
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## Pages
### About this site
URL: https://www.carbonrisk.world/about/
Last updated: 2026-08-24T11:58:16.000Z
Hi,

I’m [Peter Sainsbury](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world), and I’m the founder of *Carbon Risk.*

I am an economist who is passionate about the role environmental markets can have in making the world a better place. Leveraging my experience working for governments and in commodity market analysis I like to share knowledge and insights about carbon markets. On my newsletter you'll find:

- Analysis on recent developments in compliance carbon markets and the implications of recent policy developments.
- How investors can benefit from carbon markets and their impact on broader asset universe.
- What the latest economic, political, and technological trends mean for decarbonisation and meeting climate targets.

If you are fascinated by the role that carbon markets can play in combating climate change please consider subscribing to *Carbon Risk* — helping investors navigate 'The Currency of Decarbonisation'! 🏭

![](https://substackcdn.com/image/fetch/$s_!yPsq!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fec738646-6ca6-49fa-be77-d6fa45275179_624x568.png)

Ok, that was the elevator pitch!

If you’d like to know more then please read on.

On the rest of this page I’m going to give you a quick introduction about myself, why I’m writing a newsletter about carbon markets, the backstory to the *Carbon Risk* tagline, the nice things people have said about my work, and last but not least, how you can join me on this journey and help support *Carbon Risk.*

My earliest encounter with carbon markets was in the early 2000’s.

At the time I worked for an energy trading firm involved with improving access to electricity and power markets, and one of the environmental products we investigated was carbon. It was way too early, but the idea that markets could have a positive impact on the environment left a lasting impression with me.

It was only after working for the ‘dark side’ that I realised my economics skills could change the world for the better. I spent about 5 years working for an energy consultancy focused on oil supply dynamics. It was my first real deep dive into the world of oil and other fossil fuels, and the impact their extraction and consumption were having on the environment.

I joined an environmental NGO called WRAP in their economist team. Being at the intersection of economics, policy, and the environment was exciting. I helped policymakers - particularly those working for the UK Government - design new environmental policies and improve upon existing ones.

Perhaps it was the impact of the pandemic, but whatever it was, in early 2021 I realised that I needed to make a move and be my own boss. It had been on my mind – at the top of my internal to-do-list – for some time. And now I had the motivation and the opportunity to do something about it.

### Carbon markets on the brain 🧠

I spent the next couple of months attempting to write a second edition of my book, ‘*Commodities: 50 Things You Really Need To Know’*. However, one chapter was three times longer than any other, and something about it was getting stuck in my head. The title of that chapter was simply, 'Carbon markets'.

It hit me that the price of carbon underpinned everything I had discussed throughout the rest of the book. It influences the speed with which companies divest from fossil fuels, the investment case for renewables, and the demand for copper to upgrade the power grid. It influences the speed at which commodities are transported around the globe and the investment plans of the ship owners. Carbon also determines the economics of green hydrogen, the environmental trade-offs of landowners in tropical rain forests, and the demand for lithium from the battery industry.

Fundamentally though I could see that the price of carbon would start to have wider, profound changes on the macroeconomic landscape and the incentives for investors. Inflationary pressures would begin to build as the cost of decarbonization would be passed through supply chains. Whole industries would see their business plans disrupted by new competitive pressures. High carbon prices would bring forward innovation and ideas previously thought unviable, opening new opportunities for investors in commodities, technology, and other industries.

Rather than carry on with writing the book, only for readers to see the fruits of my labour several months later, I decided to experiment and launch *Carbon Risk* instead. With a newsletter I would have a platform to tell readers about carbon markets place in the world, how I envisaged it in the future, and how investors and other market participants could benefit. That nugget of insight about carbon markets, developed more than 15 years earlier, had finally started to bloom.

### **The Currency of Decarbonisation 💶**

Shortly after I began writing *Carbon Risk*, I realised that much of the media were lumping carbon prices along with commodities such as oil and natural gas. At the time the price of carbon in the EU emissions trading scheme (ETS) was on a tear and approaching €100 per tonne for the first time. The headlines in the press were along the lines of – “carbon - the best performing commodity in the world.”

That got me thinking. Is ‘commodity’ the right way of thinking about the carbon market? It is certainly governed by demand and supply, but other asset classes do too, and that doesn’t mean they are automatically commodities. Instead, I began to think about what an emission allowance (a permit to emit one tonne of CO2) represents.

It's important to remember that the carbon price embedded in emission trading schemes is a government construct. Without the commitment of the government (or other institution) to a set of emission reduction targets, market participants would not be willing to put a price on carbon. Trust is the bedrock of the carbon market. And so rather than commodities, I realised that currencies were the more appropriate asset class.

A strong carbon price is a signal that investors, businesspeople, and citizens trust their government’s commitment to combat climate change. A weak carbon price delivers the opposite signal; namely that the market has little trust in the government’s commitment. In the same way that trust in individual currencies supports investment, innovation and trade, trust in the carbon market helps to bring about the capital, skills and long-term planning that is required to help meet decarbonization goals.

The tagline to *Carbon Risk* was born - ‘The Currency of Decarbonisation’.

Unsure where to start? No worries. You can view the entire back-catalogue (over 300 articles) on the Table of contents \[[start here](https://www.carbonrisk.world/table-of-contents-start-here/)\].

Carbon Risk contributes 1% of its revenue to [Stripe Climate](https://climate.stripe.com/nufpgl?ref=carbonrisk.world), helping to scale permanent carbon removal technologies.
### My books
URL: https://www.carbonrisk.world/my-books/
Last updated: 2025-09-13T07:20:09.000Z
# Commodities: 50 Things You Need To Know

“Commodity speculators and armchair economists alike will love Peter Sainsbury’s hugely informative book, ‘Commodities’.” – 5 star Amazon review 

“Mine of information from a very well informed writer.” – 5 star Amazon review 

“A really great book – written in a very digestible and clear way” – 5 star Amazon review 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/09/61DwumC6X7L._SY466_.jpg)

Whether you are involved in commodities trading or investing or simply – like the rest of us – consume them on a daily basis, this guide to commodities book should have something for you. Peter Sainsbury, founder of Carbon Risk, introduces and explains **the essential things you really need to know about commodities in a series of 50 accessible and engaging essays.** 

Beginning with the basics, such as the price elasticity of supply and the role of expectations, and concluding with the latest thinking on speculation and commodity markets and commodity trading and investing, he sheds light on all the essential topics needed to understand commodity super-cycles, resource scarcity and security, and the way the world of commodities affects us every day. 

Most books about commodities sell you the dream that you can give up your day job and make a killing by trading soybeans. Some suggest that you should invest your pension in gold and a basket of other commodities and look forward to a prosperous retirement. The others are full of complex statistics that are impenetrable to most people. This book is different. Packed with real-life examples and quotations from key thinkers and market players **Commodities: 50 Things You Really Need To Know** is a lively and relevant exploration of how commodities and commodity markets influences every aspect of our lives

[![CTA Image](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/09/61DwumC6X7L._SL1360_-1.jpg)](https://www.amazon.com/Commodities-Things-You-Need-Know-ebook/dp/B077C6Z9Y9/ref=tmm%5Fkin%5Fswatch%5F0?%5Fencoding=UTF8&sr=1-1&ref=carbonrisk.world) 

****Commodities 50 Things You Need To Know**

[Buy on Amazon ](https://www.amazon.com/Commodities-Things-You-Need-Know-ebook/dp/B077C6Z9Y9/ref=tmm%5Fkin%5Fswatch%5F0?%5Fencoding=UTF8&sr=1-1&ref=carbonrisk.world) 

# Crude Forecasts: Predictions, Pundits and Profits in the Commodity Casino

"A highly practical book that every investor and analyst needs to read several times....shows why investors need to do their own research, and not just follow the pundits" - Samir Madani, #OOTT & Tanker Trackers 

"With technology, geopolitics, and economics colliding to make commodities a challenging place to invest, Peter's timely book on the folly of commodity forecasting serves as a cautionary tale and a guide to preventing us from repeating the mistakes of the past." - Chris Berry, House Mountain Partners 

"Essential reading for investors and executives" - Paul Hodges, International eChem 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/09/71Im2-buClL._SY466_-1.jpg)

This book **will help you make better investment decisions in commodity markets.** Find out which pundits and forecasters really know what they are talking about and track them. Understand the factors you can use to hold the 'experts' to account. Peter Sainsbury tells the story of how dairy farmers in New Zealand, petrochemical companies in the US and miners in Canada have been affected by overly optimistic views on future commodity prices. 

This isn't just a story of investors losing their money, but loss of communities and livelihoods and even whole economies usurped by just the expectation of a commodity boom. Central to this is the power of the forecast in driving decision-making. All too often investors and executives outsource vital thinking to others they perceive have some edge in predicting prices, without really stopping and asking why, how and what if? 

In **Crude Forecasts: Predictions, Pundits and Profits in the Commodity Casino**, Peter Sainsbury, founder of Carbon Risk, shows how you can take back control. In these pages you'll learn: Why incentives tell you everything about financial market pundits; what warning signs to watch out for; forecasting principles and practice; how to be a more sophisticated consumer of financial media; what you can do to avoid your business, industry or country becoming a commodity "white elephant"; what you can do to make better investments in commodities and other financial assets.

[![CTA Image](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/09/71Im2-buClL._SY466_.jpg)](https://www.amazon.com/Crude-Forecasts-Predictions-Pundits-Commodity-ebook/dp/B077BZXG8R/?%5Fencoding=UTF8&ref%5F=aufs%5Fap%5Fsc%5Fdsk&ref=carbonrisk.world) 

****Crude Forecasts: Predictions, Pundits and Profits in the Commodity Casino**

[Buy on Amazon ](https://www.amazon.com/Crude-Forecasts-Predictions-Pundits-Commodity-ebook/dp/B077BZXG8R/?%5Fencoding=UTF8&ref%5F=aufs%5Fap%5Fsc%5Fdsk&ref=carbonrisk.world) 

# Pay Attention: 101 Ways To Tame The Narrative Machine, Be A Smarter Media Consumer And Stop Outsourcing Your Thinking

“Peter brilliantly shows that the key to better thinking and decision making in this day and age is to understand not the content, but the narrative.”- Andrew Stotz, Ph.D., CFA, CEO, A. Stotz Investment Research

"…learn how to weed out fact from fiction with Peter’s book by your side.” - Samir Madani, Tanker Trackers

“…it is imperative for consumers to understand the underlying factors that shape the narrative.”- Nathaniel E. Baker, Contrarian Investor Podcast

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/09/71mei9-lthL._SY425_.jpg)

The disinformation age is drowning us in a deluge of data, ‘facts’ and opinion. It consumes our attention. The result of this deficit of attention is the rise of fake news, media bias and a polarised society. Our capacity to reason what is happening in the world and to make better decisions has become incapacitated amid the cacophony. Instead, we outsource our thinking to others without even realising it. It may feel like we are making our own well informed decisions. More often than not that is an illusion driven by the narrative machine.Economist Peter Sainsbury unravels the truth about the power of media narratives, the breakdown in trust and why our attention has been diverted from what matters. Pay Attention offers 101 ways in which each of us can fight back.

[![CTA Image](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/09/71mei9-lthL._SY425_-1.jpg)](https://www.amazon.com/Pay-Attention-Narrative-Consumer-Outsourcing-ebook/dp/B085NZDKVB/ref=sr%5F1%5F1?sr=8-1&ref=carbonrisk.world) 

****Pay Attention: 101 Ways To Tame The Narrative Machine, Be A Smarter Media Consumer And Stop Outsourcing Your Thinking**

[Buy on Amazon ](https://www.amazon.com/Pay-Attention-Narrative-Consumer-Outsourcing-ebook/dp/B085NZDKVB/ref=sr%5F1%5F1?sr=8-1&ref=carbonrisk.world)
### Table of contents [Start here]
URL: https://www.carbonrisk.world/table-of-contents-start-here-2/
Last updated: 2026-09-07T16:33:12.000Z
Welcome to the **Table of contents** for *Carbon Risk*.

If you’re not sure how to navigate this publication, you’re now in the right place. From A (Asia-Pacific) to V (verified carbon market) this is your jumping-off point. I’ll update this post every month so you can always stay on top of things.

Remember that even though you may only receive my posts in your inbox, there’s a massive back-catalogue waiting for your perusal, most of which is evergreen content **\- 485 articles as of end August 2026**.

### **Asia-Pacific**

- [KAU-pop! Korean carbon price jumps 50% as government gets serious about climate, but AI clean energy conundrum awaits](https://www.carbonrisk.world/kau-pop/)
- [Could transition credits solve Asia's coal dilemma?](https://www.carbonrisk.world/could-transition-credits-solve-asias-coal-dilemma/)
- [Readying for the descent: Proposed reforms to China's emissions trading system suggest the government is preparing for peak emissions](https://www.carbonrisk.world/readying-for-the-descent/)
- [Demystifying Japan's climate policy riddle](https://www.carbonrisk.world/demystifying-japans-climate-policy/)
- [China's carbon credit market takes off](https://www.carbonrisk.world/chinas-carbon-credit-market-takes/)
- [India's catch-22: How to balance adapting to extreme temperatures, slowing the growth in emissions, while also alleviating poverty](https://www.carbonrisk.world/indias-catch-22/)
- [A battle for global carbon pricing supremacy is brewing: Why you need to pay more attention to China's carbon market](https://www.carbonrisk.world/a-battle-for-global-carbon-pricing/)
- [Japan's 'Green Transformation' receives a welcome shot of credibility](https://www.carbonrisk.world/japans-green-transformation-receives/)
- [Inflexion point: The Indian economy is pivotal to the future direction of global carbon emissions](https://www.carbonrisk.world/tipping-point/)
- [Everything you need to know about the Korean Emissions Trading Scheme (KETS)](https://www.carbonrisk.world/everything-you-need-to-know-about-4c1/)
- [Everything you need to know about China's national carbon market](https://carbonrisk.substack.com/p/everything-you-need-to-know-about-4c1https://carbonrisk.substack.com/p/everything-you-need-to-know-about-e31)
- [Why Asia is pivotal to future carbon market growth](https://www.carbonrisk.world/why-asia-is-pivotal-to-future-carbon/)

### **Australia / New Zealand**

- [Australia needs a 'climate competitiveness strategy': Phasing out the Diesel Fuel Tax Credit to mining companies would be a good start](https://www.carbonrisk.world/australia-needs-a-climate-competitiveness-strategy/)
- [Mixed signals: Last years crash in the New Zealand carbon price holds lessons for policymakers everywhere](https://www.carbonrisk.world/mixed-signals/)
- [New Zealand's carbon price slumps as confidence cracks: Government announces it will break link with net zero target](https://www.carbonrisk.world/new-zealands-carbon-price-slumps-as-confidence-cracks/)
- [Taxing times as Australia looks to secure its energy transition: Consensus builds for an expansion in 'target-consistent' carbon pricing](https://www.carbonrisk.world/taxing-times-as-australia-looks-to/)
- [New Zealand needs a market stability reserve: Climate Change Commission's advice fails to achieve "predictable and stable market"](https://www.carbonrisk.world/new-zealand-needs-a-market-stability/)
- [Safeguarding Australia's climate policies: The trifecta of carbon market sensitive elections is almost over](https://www.carbonrisk.world/safeguarding-australias-climate-policies/)
- [New Zealand's carbon market is close to resolving its commitment issues](https://www.carbonrisk.world/new-zealands-carbon-market-is-close/)
- [The other side of the table](https://www.carbonrisk.world/the-other-side-of-the-table/)
- [Everything you need to know about Australian Carbon Credit Units (ACCUs)](https://www.carbonrisk.world/australias-reformed-safeguard-mechanism/)
- [Australia's carbon market reforms get the green light](https://www.carbonrisk.world/australias-carbon-market-reforms/)
- [Australia's carbon price poised for bull market: Reforms look set to restore trust, significantly increasing ambition](https://www.carbonrisk.world/australias-carbon-market-is-about/)
- [Pulling the rug out from 'Down Under': What can investors learn from the collapse of the Australian carbon market?](https://www.carbonrisk.world/pulling-the-rug-out-from-down-under/)
- [New Zealand's carbon market: The carbon trade you've probably never heard of](https://www.carbonrisk.world/the-new-zealand-carbon-market/)

### **Compliance carbon markets - general**

- [Hammer time: Financial institutions are bidding for a role in how permits are allocated](https://www.carbonrisk.world/hammer-time/)
- [No carbon copy: Emissions trading schemes are ploughing their own furrow, and that's a risk to future growth](https://www.carbonrisk.world/no-carbon-copy/)
- [Mind the carbon price gap: A 'Currency of Decarbonisation' crisis could be on the cards](https://www.carbonrisk.world/mind-the-gap-2/)
- [Carbon pricing doesn't have to be taxing](https://www.carbonrisk.world/carbon-pricing-doesnt-have-to-be-taxing/)
- [Long and variable lags](https://www.carbonrisk.world/long-and-variable-lags/)
- [It's all political](https://www.carbonrisk.world/its-all-political/)
- [Emissions trading: past, present, and future](https://www.carbonrisk.world/emissions-trading-past-present-and/)
- [What's in a \[carbon market\] name? Why governments should adopt the 'Cap-and-Invest' nomenclature](https://www.carbonrisk.world/whats-in-a-carbon-market-name/)
- [Brazil's carbon market gets the green light: Policy secures the nation's climate leadership among world's biggest oil producers](https://www.carbonrisk.world/brazils-carbon-market-gets-the-green/)
- [Three carbon markets facing electoral turbulence in 2025: Opposition parties paint carbon pricing as inflations 'pantomime villain'](https://www.carbonrisk.world/three-carbon-markets-facing-electoral/)
- [Pricing carbon at its social cost: Carbon markets will increasingly be influenced by the social cost of carbon](https://www.carbonrisk.world/pricing-carbon-at-its-social-cost/)
- [It's the carbon price, stupid!](https://www.carbonrisk.world/its-the-carbon-price-stupid/)
- [Pegger thy neighbour: Why smaller carbon markets link up with larger cap-and-trade schemes](https://www.carbonrisk.world/pegger-thy-neighbour/)
- [A carbon floor price is a bad idea: Meddling in markets built on trust is rarely successful](https://www.carbonrisk.world/a-carbon-floor-price-is-a-bad-idea/)
- [Second-best climate policy: When political economy trumps economic efficiency](https://www.carbonrisk.world/second-best-climate-policy/)
- [Carbon market convergence does not mean a single global carbon price](https://www.carbonrisk.world/carbon-market-convergence-does-not/)
- [Carbon markets are going global](https://www.carbonrisk.world/carbon-markets-are-going-global/)
- [BP's emissions trading scheme](https://www.carbonrisk.world/bps-emissions-trading-scheme/)
- [The arc of carbon’s curve: What does the carbon futures curve tell us and why is it important?](https://www.carbonrisk.world/the-arc-of-carbons-curve/)
- [Whack-A-Mole: How patchy global carbon markets channel fossil fuel finance](https://www.carbonrisk.world/regulatory-arbitrage/)
- ["Don't touch my carbon revenue!" Focus on incentives to anticipate the next move in the EU carbon market](https://www.carbonrisk.world/dont-touch-my-carbon-revenue/)
- [Does a stable carbon market equilibrium exist?](https://www.carbonrisk.world/does-a-stable-carbon-market-equilibrium/)
- [Hedging carbon risk](https://www.carbonrisk.world/the-big-hedge/)
- [The path to a global carbon price: Why carbon markets will converge and become increasingly correlated](https://www.carbonrisk.world/why-carbon-markets-will-converge/)
- [The great sulphur dioxide allowance bull market: What lessons can we learn from the first cap-and-trade system?](https://www.carbonrisk.world/hero-to-zero/)
- [Carbon is an emerging asset class, but what is it?](https://www.carbonrisk.world/the-carbon-price-is-the-currency/)
- [How to think about political risk in carbon markets](https://www.carbonrisk.world/how-to-think-about-political-risk/)

### **Carbon dioxide removal (CDR)**

- [How to survive CDR's "Death Valley"](https://www.carbonrisk.world/how-to-survive-cdrs-death-valley/)
- [CDR "moonshot" aborted, for now: Reboot needed as Microsoft allegedly suspends carbon removal purchases](https://www.carbonrisk.world/cdr-requires-a-reboot/)
- ['Big Carbon': Is this the next trillion dollar market?](https://www.carbonrisk.world/big-carbon/)
- [Carbon dioxide removal and the buyer of first resort: The window for high cost, novel CDR technologies is closing fast](https://www.carbonrisk.world/carbon-dioxide-removal-and-the-buyer/)
- [The carbon moonshot: Microsoft dominates the market for carbon removal](https://www.carbonrisk.world/the-carbon-moonshot/)
- [Why CDR regulation could deter climate mitigation: The risk of 'moral hazard' tends to increase when governments intervene](https://www.carbonrisk.world/why-cdr-regulation-could-deter-climate/)
- [Backing BECCS: Demand for sustainable bioenergy with CCS set to intensify](https://www.carbonrisk.world/backing-beccs/)
- [Nature's 'black gold' rush](https://www.carbonrisk.world/natures-black-gold-rush/)
- [How modularity will supercharge growth in Direct Air Capture (DAC)](https://www.carbonrisk.world/how-modularity-will-supercharge-growth/)
- [Everything you need to know about enhanced weathering](https://www.carbonrisk.world/everything-you-need-to-know-about-a66/)
- [Scrubbing the skies: Direct Air Capture (DAC) offers a scalable route to net zero](https://www.carbonrisk.world/direct-air-capture-dac-will-determine/)
- [BECCS - the carbon removal chimera](https://www.carbonrisk.world/beccs-the-carbon-removal-chimera/)
- [Char grilled: Why biochar is the most promising carbon removal technology](https://www.carbonrisk.world/char-grilled/)
- [Carbon farming puts a value on dirt: Soil carbon sequestration is the next frontier of the carbon market](https://www.carbonrisk.world/carbon-farming-puts-a-value-on-dirt/)
- [Climate engineering: The case for technology-based carbon removal](https://www.carbonrisk.world/engineering-the-climate-to-hit-net/)
- [The planet's carbon removal scarcity problem](https://www.carbonrisk.world/scaling-up-a-scare-resource/)
- [Technology-based carbon removal credits crucial if net-zero targets are to be met](https://www.carbonrisk.world/technology-based-carbon-removal-credits/)

### **CO2 capture, storage, transportation & end markets**

- [Losing steam: Europe's carbon capture and storage ambitions are starting to flag](https://www.carbonrisk.world/losing-steam/)
- [Northern Lights the way: Europe's CO2 network is being bult in the North Sea, but for now it remains fragile](https://www.carbonrisk.world/northern-lights-the-way/)
- [US 'energy dominance' will depend upon CO2: Billions of barrels of oil could be unlocked, but only if thousands of miles of CO2 pipeline are laid](https://www.carbonrisk.world/us-energy-dominance-will-depend-upon/)
- [Carbon capture and storage (CCS) is misunderstood](https://www.carbonrisk.world/carbon-capture-and-storage-ccs-is/)
- [Following in LNG's wake: First shipment of liquefied CO2 could be a prelude to a global marketplace](https://www.carbonrisk.world/following-in-lngs-wake/)
- [Not in my backyard](https://www.carbonrisk.world/not-in-my-backyard/)
- [Pipe dreams](https://www.carbonrisk.world/pipe-dreams/)
- [The emergence of the carbon economy: Why construction materials are likely to dominate future CO2 demand](https://www.carbonrisk.world/the-emergence-of-the-carbon-economy/)
- [Why Europe's heavy industry needs carbon capture and storage](https://www.carbonrisk.world/why-europe-needs-carbon-capture-and/)
- [The carbon capture superpower: The United States will dominate global CCUS capacity](https://www.carbonrisk.world/the-carbon-capture-superpower/)
- [Mind the decarbonisation gap: Storage capacity needs to scale fast if carbon capture is to reach its potential](https://www.carbonrisk.world/mind-the-decarbonisation-gap/)
- [Everything carbon investors really need to know about carbon capture, use and storage (CCUS)](https://www.carbonrisk.world/everything-carbon-investors-really/)

### **Concepts**

- [The Polluter Pays (in) Principle: Or, one rule for me, another for thee](https://www.carbonrisk.world/the-polluter-pays-in-principle/)
- [Return of the MACC](https://www.carbonrisk.world/return-of-the-macc/)
- [Flattening the curve: Economic development coupled with climate policies is the pathway to lower emissions](https://www.carbonrisk.world/flattening-the-curve/)
- [Repricing the 'Tragedy of the Horizon'](https://www.carbonrisk.world/repricing-the-tragedy-of-the-horizon/)
- [Carbonomics returns: Hydrogen headwinds, a fragmenting world order, and new energy frontiers](https://www.carbonrisk.world/carbonomics-returns/)
- [The Kaya identity](https://www.carbonrisk.world/the-kaya-identity/)
- [The Carbon Laffer Curve](https://www.carbonrisk.world/the-carbon-laffer-curve/)
- [The Time Value of Carbon](https://www.carbonrisk.world/the-time-value-of-carbon/)
- [The carbon footprint fallacy: Why green investors need to get their hands dirty](https://www.carbonrisk.world/the-carbon-footprint-fallacy/)
- [Carbon intensity: The key to an economically sustainable green transition](https://www.carbonrisk.world/carbon-intensity-the-key-to-an-economically/)
- [Energy efficiency is undervalued and misunderstood](https://www.carbonrisk.world/energy-efficiency-is-undervalued/)
- [Harnessing the invisible fuel](https://www.carbonrisk.world/harnessing-the-invisible-fuel-to/)
- [Climate change - A tragedy in three parts](https://www.carbonrisk.world/the-three-tragedies/)
- [Prosperity bends the curve](https://www.carbonrisk.world/the-environmental-kuznets-curve/)
- [The 'sailing ship' effect and the energy transition](https://www.carbonrisk.world/the-sailing-ship-effect-and-the-energy/)
- [Carbonomics returns: The past, present and future cost of decarbonisation](https://www.carbonrisk.world/carbonomics/)
- [Everything you need to know about the Social Cost of Carbon (SCC)](https://www.carbonrisk.world/weighing-the-future/)
- [Money to burn: How investors should think about the 'invisible fuel'](https://www.carbonrisk.world/money-to-burn/)
- [Carbonomics 2023: Chinese EV battery deflation offsets offshore wind cost inflation](https://www.carbonrisk.world/carbonomics-2023/)

### **Climate policy**

- [The decarbonisation bargain](https://www.carbonrisk.world/the-decarbonisation-bargain/)
- [Priming the pump: The price of fossil fuel subsidies is high: carbon emissions, air pollution, and energy insecurity](https://www.carbonrisk.world/priming-the-pump/)
- [Climate policy under a new world order: Retracement, evolution, or revolution?](https://www.carbonrisk.world/clim/)
- [Trading hazes](https://www.carbonrisk.world/trad/)
- [An article of faith](https://www.carbonrisk.world/an-article-of-faith/)
- [A chaotic patchwork of inconsistent incentives: The UK is a carbon pricing pioneer, but it's system of taxes and subsidies makes it more expensive to reach net zero](https://www.carbonrisk.world/a-chaotic-patchwork-of-inconsistent/)
- [Known unknowns: Climate policy uncertainty appears to have peaked](https://www.carbonrisk.world/darkest-before-dawn/)
- [The carbon abatement return on investment: Emerging markets offer the highest rewards, and China knows it](https://www.carbonrisk.world/the-carbon-abatement-return-on-investment/)
- [Blue sky thinking: As climate policy splutters, governments should sell the benefits of clean air](https://www.carbonrisk.world/blue-sky-thinking/)
- [Europe's greener cost of capital under threat as monetary policy eases](https://www.carbonrisk.world/europes-greener-cost-of-capital-under/)
- [A uniform global carbon price is unworkable, and unnecessary](https://www.carbonrisk.world/a-uniform-global-carbon-price-is/)
- [Free rider: Carbon border levies could trump US withdrawal from Paris](https://www.carbonrisk.world/free-rider/)
- [A new political trilemma](https://www.carbonrisk.world/a-new-political-trilemma/)
- [Britain makes coal history: Unique approach to carbon pricing instrumental to securing coal's fate](https://www.carbonrisk.world/britain-makes-coal-history/)
- [Bringing home the bacon, sustainably: Denmark's carbon tax on agriculture allays fears of a European green backlash](https://www.carbonrisk.world/bringing-home-the-bacon-sustainably/)
- [Europe's green backlash was priced in a long time ago](https://www.carbonrisk.world/europes-green-backlash-was-priced/)
- [The knock-on effect: The curious case of California's LCFS program](https://www.carbonrisk.world/the-knock-on-effect-the-curious-case/)
- [Through the looking glass: Country level emissions data are (probably) not what they seem](https://www.carbonrisk.world/through-the-looking-glass/)
- [Climate policy uncertainty is on the rise](https://www.carbonrisk.world/climate-policy-uncertainty-is-on/)
- [The net zero fiscal trilemma](https://www.carbonrisk.world/the-net-zero-fiscal-trilemma/)
- [The Green Swan: Conventional approaches to pricing carbon fail to capture risk of climate catastrophe](https://www.carbonrisk.world/fat-tails/)
- ['Greenflationary' expectations revisited](https://www.carbonrisk.world/greenflationary-expectations-revisited/)
- [Carbon market vigilantes: The case for carbon-linked bonds](https://www.carbonrisk.world/the-carbon-bond-vigilantes/)
- [Thermal coal's Coasian bargain: Paying coal plants to retire early is a viable route to net zero](https://www.carbonrisk.world/coals-coasian-bargain/)
- [Resolving The Green Paradox](https://www.carbonrisk.world/the-green-paradox/)
- [Fuelling controversy: Fossil fuel subsidies act like a negative carbon price](https://www.carbonrisk.world/everything-you-need-to-know-about-232/)
- [Everything you need to know about Low Carbon Fuel Standards (LCFS)](https://www.carbonrisk.world/everything-you-need-to-know-about-792/)
- [Zero carbon supremacy: Why governments are looking to secure their green industrial sovereignty](https://www.carbonrisk.world/zero-carbon-supremacy/)
- [Keeping their powder dry: Investors shy away from powering the emerging market energy transition](https://www.carbonrisk.world/keeping-their-powder-dry/)
- [Commitment issues](https://www.carbonrisk.world/commitment-issues/)
- [A climate-driven "Minsky Moment": Revisiting the impact of a sudden repricing of carbon prices](https://www.carbonrisk.world/a-climate-driven-minsky-moment/)
- ['Greenflationary' expectations](https://www.carbonrisk.world/greenflationary-expectations/)
- [What happens if policymakers are forced to "stamp on the brakes" and force carbon prices higher?](https://www.carbonrisk.world/what-happens-if-policymakers-are/)
- ['Greenflation' fears are a twin threat to the EUs monetary and climate credibility](https://www.carbonrisk.world/greenflation-fears-are-a-twin-threat/)
- [The impossible trinity at the heart of net zero](https://www.carbonrisk.world/the-impossible-trinity-at-the-heart/)

### **Canada**

- [A statement of intent: What Mark Carney's 'variable geometry' approach reveals about the future of carbon pricing in Canada](https://www.carbonrisk.world/a-statement-of-intent/)
- [Canada's industrial carbon pricing system should be protected](https://www.carbonrisk.world/canadas-industrial-carbon-pricing/)
- [A tactical retreat: Mark Carney axes Canada's consumer carbon tax](https://www.carbonrisk.world/a-tactical-retreat/)
- [Striking first: Why Canada could beat Europe to a carbon border levy](https://www.carbonrisk.world/striking-first/)
- [Why Canada should reform its carbon tax](https://www.carbonrisk.world/why-canada-should-reform-its-carbon/)
- [Canada shows how NOT to use Carbon Contracts for Difference](https://www.carbonrisk.world/a-powerful-tool-to-leverage-energy/)
- [Canada's oil and gas cap-and-trade scheme does not go far enough](https://www.carbonrisk.world/canadas-oil-and-gas-cap-and-trade/)
- [Europe must learn from Canada's 'price on pollution' debacle](https://www.carbonrisk.world/a-cautionary-tale/)

### **Commodities**

- [Deciphering nickels green premium](https://www.carbonrisk.world/the-illusory-green-premium/)
- [Big Oil's bigger brothers: The battle to supply the "last barrel" in a carbon constrained future](https://www.carbonrisk.world/big-oils-bigger-brothers/)
- [Commodity markets begin to price carbon risk](https://www.carbonrisk.world/commodity-markets-begin-to-price/)
- [Aluminium's climate paradox](https://www.carbonrisk.world/aluminiums-climate-paradox/)
- ['Carbon neutral' LNG 2.0](https://www.carbonrisk.world/carbon-neutral-lng-20/)
- ['Green' lithium](https://www.carbonrisk.world/green-lithium/)
- [Decarbonising the oil sands](https://www.carbonrisk.world/decarbonising-the-oil-sands/)
- [Carbon risk dulls allure of gold miners](https://www.carbonrisk.world/carbon-risk-dulls-allure-of-gold/)
- [Why metal mining investors should support a global carbon price](https://www.carbonrisk.world/debottlenecking-the-energy-transition/)
- [Carbon neutral LNG faces its toughest test yet](https://www.carbonrisk.world/carbon-neutral-lng-faces-its-toughest/)

### **Europe’s emission trading scheme (ETS)**

- [Carbon price uncertainty is a drag on industrial 'green' investment: High carbon prices matter, but high volatility may matter even more. What to do?](https://www.carbonrisk.world/carbon-price-uncertainty-is-a-drag-on-industrial-green-investment/)
- [Resisting the siren's call: Europe's climate policymakers should continue to offer "forward guidance"](https://www.carbonrisk.world/resisting-the-sirens-call/)
- [Strings attached: The European Commission's proposals fail to counter systemic issues deterring investment in industrial decarbonisation](https://www.carbonrisk.world/strings-attached/)
- [Curb your enthusiasm: Investment funds step back as EU ETS review nears](https://www.carbonrisk.world/curb-your-enthusiasm/)
- [No such thing as a free allowance](https://www.carbonrisk.world/no-such-thing-as-a-free-allowance/)
- [EUAs reaching critical turning point: Despite the noise, EU ETS reform discussions are yet to start in earnest](https://www.carbonrisk.world/euas-reaching-critical-turning-point/)
- [Article 6 and the EU ETS, lessons from Japan](https://www.carbonrisk.world/article-6-and-the-eu-ets-lessons-from-japan/)
- [Europe readies armoury for carbon market endgame: Early reform proposal is not without trust issues](https://www.carbonrisk.world/europe-readies-armoury-for-carbon-market-endgame/)
- [Signals amidst the noise: EUAs consolidate, awaiting direction from policymakers](https://www.carbonrisk.world/signals-amidst-the-noise/)
- [Rule it in: Adjusting the emissions cap according to a fixed formula could be a good idea](https://www.carbonrisk.world/rule-it-in/)
- [Pushing back on EU ETS myopia: For Europe's most influential lobby group, carbon pricing is a delicate balancing act](https://www.carbonrisk.world/for-industry-the-eu-ets-is-a-delicate-balancing-act/)
- [Refund policy: Industry compensation for indirect carbon costs must be conditional](https://www.carbonrisk.world/refund-policy/)
- [Cap-and-Invest: Europe set to leverage its carbon markets to boost investment in decarbonisation](https://www.carbonrisk.world/cap-and-invest/)
- [No tree grows to heaven: EUAs caught in cross-commodity liquidation](https://www.carbonrisk.world/no-tree-grows-to-heaven/)
- [€100 carbon draws near: Europe's cornerstone climate policy shrugs off the gloom](https://www.carbonrisk.world/eu100-co2-draws-near/)
- [#EUAPredict 2026: What's your forecast for the EU carbon price in 2026?](https://www.carbonrisk.world/euapredict-2026/)
- [Committed traders](https://www.carbonrisk.world/committed-traders/)
- [Softening the blow](https://www.carbonrisk.world/softening-the-blow/)
- [All in: Investment funds race to stack EUA futures as price breakout looms](https://www.carbonrisk.world/all-in/)
- [Dawn breaks for Europe's battered manufacturers](https://www.carbonrisk.world/dawn-breaks-for-europes-battered-manufacturers/)
- [Hot and bothered](https://www.carbonrisk.world/hot-and-bothered/)
- [Has Europe learnt from its great carbon price debasement?](https://www.carbonrisk.world/has-europe-learnt-from-its-great/)
- [Straight and narrow: Europe's polluters comply with the EU ETS, despite the low risk of a penalty](https://www.carbonrisk.world/straight-and-narrow/)
- [Forward guidance: EU climate ministers may soon begin to “mumble with great incoherence.”](https://www.carbonrisk.world/forward-guidance/)
- [Hot property: The long-term outlook for the ETS2 carbon price is tethered to heat pumps](https://www.carbonrisk.world/hot-property/)
- [Europe is no longer in control of its destiny: What a ceasefire in Ukraine means for the EU carbon market](https://www.carbonrisk.world/europe-is-no-longer-in-control-of/)
- [The Fear Index](https://www.carbonrisk.world/the-fear-index/)
- [ETS2 carbon price could rapidly breach €100: Europe's second carbon market is expected to be very sensitive to emission allowance scarcity](https://www.carbonrisk.world/ets2-carbon-price-could-rapidly-breach/)
- [Running of the bulls: Investment funds position for higher EUA prices](https://www.carbonrisk.world/running-of-the-bulls/)
- [Resolving the emerging endgame: Charting a path towards net-negative emissions with carbon removal](https://www.carbonrisk.world/resolving-the-emerging-endgame/)
- [Good green derivatives: A peek beneath the hood of the EU carbon market](https://www.carbonrisk.world/good-green-derivatives/)
- [The emerging endgame](https://www.carbonrisk.world/the-emerging-endgame/)
- [Beware false prophets: The EUA forward curve is not a forecast of future carbon prices](https://www.carbonrisk.world/beware-false-prophets/)
- [Germany's manufacturing malaise set to curb demand for EUAs](https://www.carbonrisk.world/germanys-manufacturing-malaise-set/)
- [Know your onions: Concern over the role of speculators in Europe's energy markets is overplayed](https://www.carbonrisk.world/know-your-onions/)
- [A bear market rally, or the start of a new bull run?](https://www.carbonrisk.world/a-bear-market-rally-or-the-start/)
- [Over-hedged: One of Europe's most active players in the carbon market has gone conservative](https://www.carbonrisk.world/over-hedged/)
- [Short covering brings carbon market bulls out of hiding](https://www.carbonrisk.world/short-covering-brings-carbon-market/)
- [Deflationary expectations](https://www.carbonrisk.world/deflationary-expectations/)
- [To catch a falling knife](https://www.carbonrisk.world/to-catch-a-falling-knife/)
- [Smoke signals: Why Europe's policymakers should take heed to its carbon market](https://www.carbonrisk.world/smoke-signals/)
- [Boiling over](https://www.carbonrisk.world/boiling-over/)
- [Breaking the bottleneck](https://www.carbonrisk.world/breaking-the-bottleneck/)
- [Testing long term support: The EU carbon price needs a cold winter and renewed political support to stop prices falling below a critical level](https://www.carbonrisk.world/testing-long-term-support/)
- [Tipping point](https://www.carbonrisk.world/passing-the-batton/)
- [Playing with fire](https://www.carbonrisk.world/playing-with-fire/)
- [Collateral damage revisited](https://www.carbonrisk.world/collateral-damage-revisited/)
- [No room for complacency: Gas supply worries jolt Europe's energy markets](https://www.carbonrisk.world/gas-spike-jolts-european-energy-markets/)
- [Commitment anxiety: EUA investment fund positioning rebounds from record net short](https://www.carbonrisk.world/the-bigger-short/)
- [Reflexivity and the EU ETS 'Endgame'](https://www.carbonrisk.world/reflexivity-and-the-eu-ets-endgame/)
- [Investment funds ditch carbon after failure to decisively breach €100](https://www.carbonrisk.world/investment-funds-ditch-carbon-after/)
- [Squaring up](https://www.carbonrisk.world/squaring-up/)
- [Crash course](https://www.carbonrisk.world/crash-course/)
- [The only number that matters](https://www.carbonrisk.world/the-only-number-that-matters/)
- [Out of ammunition: What can the EU do to stop carbon prices surging over €100](https://www.carbonrisk.world/out-of-ammunition/)
- [Power down: Why the outlook for European electricity consumption will be crucial in determining carbon prices in 2023](https://www.carbonrisk.world/power-down/)
- [On a knife edge](https://www.carbonrisk.world/on-a-knife-edge/)
- [Europe's carbon footprint defies expectations](https://www.carbonrisk.world/carbons-footprint/)
- [Witching hour returns: What chance a repeat of the late 2021 EUA price surge](https://www.carbonrisk.world/witching-hour-returns/)
- [Still betting on black? A deep dive into EUA futures and options activity, physical allowance demand and real time emissions data](https://www.carbonrisk.world/still-betting-on-black/)
- [Seasonal shifts in the EU carbon market? Don't bet on it](https://www.carbonrisk.world/beware-seasonal-shifts-in-the-eu/)
- [Return to the 70's: What's behind the surge in EU carbon prices?](https://www.carbonrisk.world/return-to-the-70s/)
- [What RWE's 2030 coal burn phase out means for carbon prices](https://www.carbonrisk.world/what-rwes-2030-coal-burn-phase-out/)
- [EU member states ditch MSR sale proposal](https://www.carbonrisk.world/eu-member-states-ditch-msr-sale-proposal/)
- [The big short: Record net short position underlines the extreme negative sentiment towards carbon](https://www.carbonrisk.world/the-big-short/)
- [Is the MSR sale really a 'win-win'? Calls grow for sale of emission allowances to fund Europe's energy transition](https://www.carbonrisk.world/raiding-the-piggy-bank/)
- [The zero lower bound: What happens when EU ETS emissions approach zero?](https://www.carbonrisk.world/the-zero-lower-bound/)
- [Watch out for €60](https://www.carbonrisk.world/watch-out-for-60/)
- [Hibernation: How the EU carbon market is adapting to a long geopolitical winter](https://www.carbonrisk.world/hibernation/)
- [The sword of inelastic supply cuts BOTH ways](https://www.carbonrisk.world/the-sword-of-inelastic-supply-cuts/)
- [Beware the algorithms ‘robo-herding’ the EU carbon market](https://www.carbonrisk.world/beware-the-algorithms-robo-herding/)
- [The next domino to fall](https://www.carbonrisk.world/the-next-domino-to-fall/)
- [Carbon's 'diamond hands' about to get tested once more](https://www.carbonrisk.world/carbons-diamond-hands-about-to-get/)
- [Back to black? There's more to Germany's energy security plan than burning more coal](https://www.carbonrisk.world/back-to-black/)
- [Charting carbon's course](https://www.carbonrisk.world/charting-carbons-course/)
- [In search of a new narrative](https://www.carbonrisk.world/in-search-of-a-new-narrative/)
- [Whatever it takes: Why forward guidance in the EU carbon market is here, and is set to stay](https://www.carbonrisk.world/whatever-it-takes/)
- [Funding REPowerEU - What impact would frontloading EUA sales have on carbon prices?](https://www.carbonrisk.world/funding-repowereu-what-impact-would/)
- [A market driven by illiquidity](https://www.carbonrisk.world/a-market-driven-by-illiquidity/)
- [Europe's steel industry yet to feel the full force of the carbon market](https://www.carbonrisk.world/how-have-higher-carbon-prices-affected/)
- [The EU carbon market and its stock-to-flow ratio](https://www.carbonrisk.world/the-eu-carbon-market-through-the/)
- [What is the long-term impact of Ukraine-Russia conflict on European carbon emissions?](https://www.carbonrisk.world/what-is-the-long-term-impact-of-ukraine/)
- [EU vote to extend 24% MSR withdrawal rate signals commitment to carbon market: Attention now focuses on upcoming TNAC estimate](https://www.carbonrisk.world/eu-vote-to-extend-24-msr-withdrawal/)
- [Carbon market tremors](https://www.carbonrisk.world/carbon-market-tremors/)
- [What price King Coal's return to Europe?](https://www.carbonrisk.world/what-price-king-coals-return-to-europe/)
- [Are investment funds buying the rebound in carbon?](https://www.carbonrisk.world/reading-the-tea-leaves/)
- [Carbon market sentiment check](https://www.carbonrisk.world/carbon-market-sentiment-check/)
- [Europe's hydrogen economy and what it means for carbon prices](https://www.carbonrisk.world/europes-hydrogen-economy-and-what/)
- [Everything you need to know about EU emission allowance (EUA) auctions](https://www.carbonrisk.world/everything-you-need-to-know-about-19c/)
- [The unravelling](https://www.carbonrisk.world/the-unravelling/)
- [The Day After: Reflections on the carbon market liquidation](https://www.carbonrisk.world/the-day-after/)
- [Option market headwinds](https://www.carbonrisk.world/option-market-headwinds/)
- [Collateral damage](https://www.carbonrisk.world/collateral-damage/)
- [In the trigger zone: What proposed changes to Article 29a mean for EU carbon prices](https://www.carbonrisk.world/in-the-trigger-zone/)
- [Option market tailwinds: Carbon price near levels where gamma hedging begins](https://www.carbonrisk.world/carbon-option-tailwind-close-at-hand/)
- [What to make of speculation curb fears](https://www.carbonrisk.world/what-to-make-of-speculation-curb/)
- [What happens to carbon prices if Russia turns off the taps?](https://www.carbonrisk.world/what-happens-to-carbon-prices-if/)
- [Romania's coal powered utility receives bailout to buy carbon allowances: How many more distressed buyers are there?](https://www.carbonrisk.world/how-many-more-distressed-buyers-of/)
- [The carbon market is not immune from equity market malaise](https://www.carbonrisk.world/the-carbon-market-is-not-immune-from/)
- [The road to perdition? 100 days to compliance](https://www.carbonrisk.world/the-road-to-perdition-100-days-to/)
- [Back to the 70's](https://www.carbonrisk.world/back-to-the-70s/)
- [The wrecking ball: Margin calls, illiquidity and the race for collateral](https://www.carbonrisk.world/the-wrecking-ball-margin-calls-illiquidity/)
- [Carbon crash: WTF happened?](https://www.carbonrisk.world/carbon-crash-wtf-happened/)
- [To infinity and beyond! What the non-compliance penalty and a shortage of allowances means for the price of carbon](https://www.carbonrisk.world/to-infinity-and-beyond/)
- [The witching hour approaches: The increasing role that options play in the EU carbon market](https://www.carbonrisk.world/the-witching-hour-approaches/)
- [German coalition proposals de-risk the path to higher carbon prices](https://www.carbonrisk.world/german-coalition-proposals-de-risk/)
- [The changing fortunes of the EU carbon market](https://www.carbonrisk.world/the-changing-fortunes-of-the-eu-carbon/)

### **Europe macro**

- [Looking through it: Climate policy trade-offs complicate the outlook for eurozone monetary policy](https://www.carbonrisk.world/looking-through-it/)
- [Cracking under pressure](https://www.carbonrisk.world/cracking-under-pressure/)
- [Vollgas](https://www.carbonrisk.world/vollgas/)
- [Escaping the Euro doom loop: A new steady state, the power of narrative economics, and the mispricing of consensus expectations](https://www.carbonrisk.world/escaping-the-euro-doom-loop/)
- [Is permanent deindustrialisation of Europe still a tail risk?](https://www.carbonrisk.world/is-the-permanent-deindustrialisation/)
- [Chemical reaction](https://www.carbonrisk.world/chemical-reaction/)
- [The battle for Europe's industrial sovereignty](https://www.carbonrisk.world/the-battle-for-europes-industrial/)
- [Demand destruction averted, or simply a matter of time? European industrial emissions (and demand for EUAs) have been supported by state protection against high energy prices](https://www.carbonrisk.world/whats-happening-to-european-industrial/)
- [Demand destruction: Which industries are most exposed to high natural gas prices?](https://www.carbonrisk.world/demand-destruction/)
- [What impact would a recession have on the EU carbon market?](https://www.carbonrisk.world/the-eu-ets-and-its-recession-proof/)
- [Europe's industrial slump: How bad will it get, and what does it mean for carbon?](https://www.carbonrisk.world/what-does-europes-industrial-slump/)
- [Taking off, or coming into land: The outlook for European aviation emissions](https://www.carbonrisk.world/taking-off-or-coming-down-to-land/)
- [Dead cat bounce: European industrial gas demand yet to reach rock bottom](https://www.carbonrisk.world/dead-cat-bounce/)

### **Europe’s low carbon energy**

- [In search of lost revenue: Europe's transition to a low carbon, energy secure economy may succumb to debt-laden paralysis](https://www.carbonrisk.world/in-search-of-lost-revenue/)
- [Electric avenue: Europe set to outline its path to electrification and energy security](https://www.carbonrisk.world/electric-avenue/)
- [Europe's new joule order](https://www.carbonrisk.world/europes-new-joule-order/)
- [Batteries not included](https://www.carbonrisk.world/batteries-not-included/)
- [Power play: Norway is not Europe's battery, and it never will be](https://www.carbonrisk.world/power-play/)
- [How to power up Europe's industrial decarbonisation: Closing the spark spread would be a good start](https://www.carbonrisk.world/how-to-power-up-europes-industrial/)
- [France's focus on 'energy sovereignty' is starting to payoff](https://www.carbonrisk.world/frances-focus-on-energy-sovereignty/)
- [The forgotten giant of clean energy: Why carbon market investors need to keep an eye on Europe's drought](https://www.carbonrisk.world/the-forgotten-giant-of-clean-energy/)
- [France's nuclear risk premium has faded, for now](https://www.carbonrisk.world/frances-nuclear-risk-premium-has/)
- [France's nuclear winter of discontent](https://www.carbonrisk.world/frances-nuclear-winter-of-discontent/)
- [The rate of change](https://www.carbonrisk.world/the-rate-of-change/)
- [High and dry: Drought threatens Germany's plan to burn more coal](https://www.carbonrisk.world/high-and-dry/)
- [Utility player: Climate change threatens hydropower's under-appreciated role in the energy transition](https://www.carbonrisk.world/utility-player/)
- [Split by the atom: Political divisions threaten nuclear powers role in Europe's energy transition](https://www.carbonrisk.world/split-by-the-atom/)
- [In the shade: Europe's solar power does not get the credit it deserves](https://www.carbonrisk.world/under-the-shade/)
- [Long-term drought puts Europe's hydroelectric generation at risk](https://www.carbonrisk.world/megadrought/)
- [Europe's nuclear fallout: What EDF's woes mean for carbon prices](https://www.carbonrisk.world/europes-nuclear-fallout/)

### **Emissions reporting**

- [Full disclosure returns: The $500 billion Scope 3 opportunity](https://www.carbonrisk.world/full-disclosure-2/)
- [Scope 3 forces mining companies into rethink](https://www.carbonrisk.world/scope-3-forces-mining-companies-to/)
- [Scope creep: Mandatory climate disclosures target under-reported carbon risk](https://www.carbonrisk.world/scope-for-improvement/)
- [Full disclosure](https://www.carbonrisk.world/full-disclosure/)
- [How much should we trust the dictator’s CO2 estimates?](https://www.carbonrisk.world/how-much-should-we-trust-the-dictators/)
- [Not just hot air?](https://www.carbonrisk.world/not-just-hot-air/)
- [Owning up to Scope 3: How investors should think about the SEC's proposed disclosure requirements](https://www.carbonrisk.world/owning-up-to-scope-3-emissions/)
- [In the shadows: Everything you need to know about internal carbon pricing](https://www.carbonrisk.world/in-the-shadows/)
- [Owning up to carbon: Why mandatory climate disclosure requirements could drive demand for emission allowances](https://www.carbonrisk.world/owning-up-to-climate-risk/)

### **Emissions monitoring technology**

- [Loss of the methane hunter: MethaneSAT goes dark, imperilling global methane emission accountability](https://www.carbonrisk.world/loss-of-the-methane-hunter/)
- [Picking the ‘low hanging fruit’: Technology key to North Sea methane abatement](https://www.carbonrisk.world/picking-the-low-hanging-fruit-technology/)
- [Interview with Clémentine Serey of emissions tracking firm Kayrros](https://www.carbonrisk.world/interview-with-clementine-serey-of/)
- [The carbon tracking opportunity: Real time tracking of GHG emissions and carbon sinks is a huge growth market](https://www.carbonrisk.world/carbon-footprints/)

### **Fuzzy forecasts**

- [Caution! Net zero scenarios are not forecasts: Why the blurring of the normative and the predictive is leading to a misallocation of capital](https://www.carbonrisk.world/caution-net-zero-scenarios-are-not/)
- [The climate casino](https://www.carbonrisk.world/the-climate-casino/)
- [A margin of safety](https://www.carbonrisk.world/the-margin-of-safety/)
- [Weighing the value of carbon price predictions](https://www.carbonrisk.world/how-accurate-are-commodity-price/)

### **Investment**

- [In search of carbon alpha](https://www.carbonrisk.world/in-search-of-carbon-alpha/)
- [How to hedge long-term carbon risk: Carbon contracts for difference are the instrument of choice](https://www.carbonrisk.world/how-to-hedge-long-term-carbon-risk/)
- [The climate tech emissions-funding mismatch](https://www.carbonrisk.world/the-climate-tech-emissions-funding/)
- [Hedging your portfolio against carbon price risk: 12 exchange traded products (ETPs) with exposure to carbon allowances](https://www.carbonrisk.world/hedging-your-portfolio-against-carbon/)
- [Divining reality from the hype](https://www.carbonrisk.world/divining-reality-from-the-hype/)
- [Mind the behaviour gap: How to avoid losing money investing in the energy transition](https://www.carbonrisk.world/mind-the-behaviour-gap/)
- [Carbon as an impact investment](https://www.carbonrisk.world/carbon-as-an-impact-investment/)
- [Investing in the EU carbon market: 11 ways investors can gain exposure](https://www.carbonrisk.world/how-to-start-investing-in-the-eu/)
- [A 'green' unicorn: What the cleantech boom and bust tells us about the future of climate tech](https://www.carbonrisk.world/a-green-unicorn/)
- [Does the stock market care about the carbon price?](https://www.carbonrisk.world/does-the-stock-market-care-about/)
- [Which industries benefit from a high carbon price?](https://www.carbonrisk.world/which-industries-benefit-from-a-high/)
- [GEO versus N-GEO: Investing in the VCM futures market](https://www.carbonrisk.world/investing-in-vcm-futures-contracts/)
- [The 'green lairds': How carbon and natural capital investors are driving demand for land](https://www.carbonrisk.world/the-green-lairds/)
- [How to invest in North America's carbon markets](https://www.carbonrisk.world/how-to-invest-in-north-americas-carbon/)
- [Buy and hold going physical](https://www.carbonrisk.world/buy-and-hold/)
- [The emerging marginal buyer of carbon](https://www.carbonrisk.world/the-marginal-buyer-of-carbon/)
- [Short selling is a poor hedge against carbon risk](https://www.carbonrisk.world/short-selling-is-a-poor-hedge-against/)
- [Carbon credits ≠ carbon allowances: Probably best not to invest in a fund that doesn't know the difference](https://www.carbonrisk.world/carbon-credits-carbon-allowances/)
- [How to invest in the EU carbon market](https://www.carbonrisk.world/how-to-invest-in-the-eu-carbon-market/)
- [How institutional investment affected the structure of commodity markets, and what it might mean for carbon markets](https://www.carbonrisk.world/how-institutional-investment-affected/)
- [The carbon price is an inflation hedge](https://www.carbonrisk.world/the-carbon-price-is-an-inflation/)
- [Getting off zero: Institutional investment likely to give carbon markets the short squeeze](https://www.carbonrisk.world/getting-off-zero-institutional-investment/)
- [Investors have a new way to help the environment](https://www.carbonrisk.world/investors-have-a-new-way-to-help/)

### **Industrial decarbonisation**

- [Walking the torque](https://www.carbonrisk.world/walking-the-torque/)
- [The Green Premium chimera](https://www.carbonrisk.world/the-green-premium-chimera/)
- [Amping up: Electrification of oil and gas production is controversial, but necessary](https://www.carbonrisk.world/amping-up/)
- [Ukraine's biomethane opportunity: The war torn nation could become a major exporter of 'renewable natural gas' to Europe](https://www.carbonrisk.world/ukraines-biomethane-opportunity/)
- [Ready mixed: How Europe's largest cement producers are rapidly cutting their Scope 1 emissions](https://www.carbonrisk.world/ready-mixed/)
- [An iron will: Sweden's first mover advantage in green steel will be tough to replicate](https://www.carbonrisk.world/an-iron-will/)
- [Europe's bridge to 'green' steel](https://www.carbonrisk.world/the-bridge-to-green-steel/)
- [Stranded asset, or last mover advantage?](https://www.carbonrisk.world/stranded-asset-or-last-mover-advantage/)
- [Biomethane is the killer application Europe needs to decarbonise](https://www.carbonrisk.world/biomethane-is-the-killer-application/)
- [Rotten returns: Biomethane could play a big role in European decarbonisation](https://www.carbonrisk.world/rotten-returns/)
- [Heat pumps on the factory floor](https://www.carbonrisk.world/heat-pumps-on-the-factory-floor/)
- [Carbon's shifting anchor: The growth in electrolyser capacity is pivotal to Europe's decarbonisation ambitions](https://www.carbonrisk.world/carbons-shifting-anchor/)
- [The long term price of emission: Clearing the industrial decarbonisation bottleneck will require significantly higher carbon prices](https://www.carbonrisk.world/the-industrial-decarbonisation-bottleneck/)
- [A volatile gas: Hydrogen's latest hype cycle still suffers from overinflated expectations](https://www.carbonrisk.world/hydrogen-hype-cycle-not-over-yet/)
- [Concrete returns: Laying the foundations for a decarbonised cement industry](https://www.carbonrisk.world/concrete-returns/)

### **Methane and other superpollutants**

- [Putting a price on superpollutants](https://www.carbonrisk.world/putting-a-price-on-superpollutants/)
- [Setting the standard: A market-led approach to pricing methane emissions](https://www.carbonrisk.world/pricing-methanes-low-hanging-plumes/)
- [Low hanging plumes: Methane abatement suffers from opportunity costs and misaligned incentives](https://www.carbonrisk.world/low-hanging-plumes/)
- [Greener growing still in the red: From the Strait of Hormuz to Hauts-de-France, Europe's response to the fertiliser crisis must tackle 'green' profitability](https://www.carbonrisk.world/green-in-the-black/)
- [Gas pains: A super-pollutant gets the cold shoulder](https://www.carbonrisk.world/methane-2/)
- [Step on the gas: Donald Trump may have ditched the methane fee, but energy producers are still under pressure to cut emissions](https://www.carbonrisk.world/step-on-the-gas/)
- [Nitrogen fix: Curbing excess use is key to solving synthetic fertiliser emissions](https://www.carbonrisk.world/solving-fertilisers-nitrogen-fix/)
- [Better in than out: The worlds largest meat and dairy corporations are under pressure to cut greenhouse gas emissions](https://www.carbonrisk.world/turning-sour/)
- [No free lunch: Cutting global methane emissions from oil and gas is more difficult than it seems](https://www.carbonrisk.world/no-quick-win/)
- [Pricing methane emissions out of the atmosphere: America's first nationwide price on a greenhouse gas does not go far enough](https://www.carbonrisk.world/pricing-methane-emissions-out-of/)

### **Miscellaneous**

- [The hidden cost of keeping cool: Everyone should have access to cooling, but its vital we purge this superpollutant](https://www.carbonrisk.world/cold-comfort/)
- [Tackling carbon wealth inequality](https://www.carbonrisk.world/tackling-carbon-wealth-inequality/)
- [Scorchio! The hot take on Europe's extreme heatwaves, why the ECB is worried but knows how to fix it, and why decarbonisation requires deeper Single Market integration](https://www.carbonrisk.world/scorchio/)
- [Wall Street has not turned its back on climate change](https://www.carbonrisk.world/wall-street-has-not-turned-its-back-on-climate-change/)
- [His father's son: Flávio Bolsonaro spells trouble for Brazil's climate policies](https://www.carbonrisk.world/his-fathers-son/)
- [Carbon Risk 2025 year in review: A look back at year four of the Carbon Risk newsletter](https://www.carbonrisk.world/carbon-risk-2025-year-in-review/)
- [The Green Premium chimera](https://www.carbonrisk.world/the-green-premium-chimera/)
- [Climate change is showing its claws - it's time to adapt](https://www.carbonrisk.world/climate-change-is-showing-its-claws-its-time-to-adapt/)
- [Spread bets: Why "energy transition assets" could drive commodity trading returns](https://www.carbonrisk.world/spread-bets/)
- [Energy emergence at the frontier: Jevons Paradox, the Khazzoom-Brookes Postulate, and DeepSeek](https://www.carbonrisk.world/energy-emergence-at-the-frontier/)
- [Five books that made me think differently in 2024](https://www.carbonrisk.world/five-books-that-made-me-think-differently/)
- [Transformers - A supply chain problem in disguise](https://www.carbonrisk.world/transformers-a-supply-chain-problem/)
- [Back to the futures: Three factors will determine whether ASX's new environmental futures contracts are a success](https://www.carbonrisk.world/back-to-the-futures/)
- [The clouds silver lining: Why data centre emissions are the least of our worries](https://www.carbonrisk.world/clouded-judgement/)
- [Scope 4 emissions: Unlocking low-carbon innovation](https://www.carbonrisk.world/scope-4-emissions-unlocking-innovation/)
- [A chilling prospect](https://www.carbonrisk.world/a-chilling-prospect/)
- [Growing the circle to get to net zero: High carbon prices and supportive government policies will reenergise circular economy investment](https://www.carbonrisk.world/the-foundations-of-a-circular-economy/)
- [Book and claim - Part 1: Energy Attribute Certificates play a vital but controversial role in the energy transition](https://www.carbonrisk.world/book-and-claim/)
- [Book and claim - Part 2: How SAF and green H2 are harnessing the power of Energy Attribute Certificates](https://www.carbonrisk.world/book-and-claim-part-2/)
- [What are Carbon Contracts for Difference (CCfD)?](https://www.carbonrisk.world/what-are-carbon-contracts-for-difference/)

### **Maritime / airlines**

- [CORSIA-correction required: UN carbon offset scheme likely to be superseded in Europe by the EU ETS](https://www.carbonrisk.world/corsia-correction-required/)
- [Gunboat climate diplomacy ratchets up a notch: Trump administration seeks to torpedo carbon price on shipping, once and for all](https://www.carbonrisk.world/gunboat-climate-diplomacy-ratchets-up-a-notch/)
- [Up in the air](https://www.carbonrisk.world/up-in-the-air/)
- [A port in the storm: Cruise ships face carbon pricing, fuel intensity targets, and penalties for idling while docked](https://www.carbonrisk.world/a-port-in-the-storm/)
- [Smoke on the water](https://www.carbonrisk.world/smoke-on-the-water/)
- [Full steam ahead, or steady as she goes?](https://www.carbonrisk.world/full-steam-ahead-or-steady-as-she/)
- ['Single European Sky' cleared for take off: More efficient air traffic management should counteract expected growth in emissions](https://www.carbonrisk.world/single-european-sky-cleared-for-take/)
- [Putting a price on contrails: The 'low-hanging fruit of aviation’ emission abatement](https://www.carbonrisk.world/putting-a-price-on-contrails/)
- [Frequent fryer: Demand for biofuels made from used cooking oil is soaring, but could there be a sting in the tail?](https://www.carbonrisk.world/frequent-fryer/)
- [The green methanol economy is emerging in Denmark: Off-take agreements signal an industry ripe for growth](https://www.carbonrisk.world/the-green-methanol-economy/)
- [Run out of steam: Delay in implementing levy on global shipping emissions leaves decarbonisation all at sea](https://www.carbonrisk.world/run-out-of-steam/)
- [Putting a cap on European shipping emissions: The maritime sector is beginning to price in EU carbon prices](https://www.carbonrisk.world/putting-a-cap-on-european-shipping/)
- [What price decarbonised shipping? A carbon price will have powerful knock-on effects on global ship supply](https://www.carbonrisk.world/what-price-decarbonised-shipping/)
- [Blending in: Decarbonising air travel with 'sustainable' fuel](https://www.carbonrisk.world/come-fly-with-me/)
- [The sky's the limit](https://www.carbonrisk.world/the-skys-the-limit/)
- [Clean air turbulence over Europe](https://www.carbonrisk.world/clean-air-turbulence-over-europe/)

### **Natural capital markets**

- [Nature for sale: Biodiversity credits and offsets are a distraction from the real problem](https://www.carbonrisk.world/biodiversity-credits-and-offsets-are-a-distraction/)
- [Down to earth: Putting a value on biodiversity has consequences, and not all good](https://www.carbonrisk.world/down-to-earth/)
- [Protection money: Halting deforestation will come with a hefty price tag](https://www.carbonrisk.world/stopping-deforestation-faces-an-opportunity/)
- [Repricing deforestation risk in the wake of Brazil's presidential election](https://www.carbonrisk.world/repricing-deforestation-risk-in-the/)
- [Putting a price on H₂O: Carbon markets are just the start of a revolution putting a price on natural capital](https://www.carbonrisk.world/putting-a-price-on-ho/)
- [Natural capital markets: Putting a price on nature](https://www.carbonrisk.world/natural-capital-markets-putting-a/)

### **Technology**

- [The battery that lies beneath](https://www.carbonrisk.world/the-battery-that-lies-beneath/)
- [A bump in the road: Network effects suggest that any EV growth slowdown will be brief](https://www.carbonrisk.world/a-bump-in-the-road/)
- [Exponential](https://www.carbonrisk.world/exponential/)
- [Alternative proteins climb the slope of enlightenment](https://www.carbonrisk.world/alternative-proteins-hit-the-slope/)

### **The carbon border levy**

- [What constitutes an “effectively paid” carbon price?](https://www.carbonrisk.world/what-constitutes-an-effectively-paid-carbon-price/)
- [A green and level playing field? The European Commission faces a tortuous task refereeing CBAMs winners and losers](https://www.carbonrisk.world/a-green-and-level-playing-field/)
- [Join the club](https://www.carbonrisk.world/join-the-club/)
- [CBAMs 'domino effect' on global carbon pricing could be about to get even stronger](https://www.carbonrisk.world/cbams-domino-effect-on-global-carbon-pricing-could-be-about-to-get-even-stronger/)
- [Call of duties: Mozambique demonstrates how CBAM could redraw global commodity trade flows](https://www.carbonrisk.world/call-of-duties/)
- [Building blocs: As global carbon pricing grows and becomes more fragmented, regional carbon markets offer a solution](https://www.carbonrisk.world/building-blocs/)
- [No Turkish delight: Cheap Russian coal, macroeconomic disarray, and the EU's carbon border levy](https://www.carbonrisk.world/no-turkish-delight/)
- [Carbon border risk: EUAs offer a tradeable hedge against future CBAM exposure](https://www.carbonrisk.world/carbon-border-risk/)
- [No level playing field: Europe's carbon levy will accelerate adoption of carbon pricing, but not everyone will win](https://www.carbonrisk.world/no-level-playing-field/)
- [Hedging the CBAM: What the EU's carbon border tax might means for carbon investors](https://www.carbonrisk.world/hedging-the-cbam/)

### **UK emissions trading scheme (UK ETS)**

- [Britain's green credibility gap](https://www.carbonrisk.world/will-andy-burnham-close-britains-green-credibility-gap/)
- [Persistent UKA-EUA spread reveals deep political paralysis](https://www.carbonrisk.world/persistent-uka-eua-spread-reveals-deep-political-paralysis/)
- [When Europe sneezes, Britain catches a cold: UK carbon price down \~40% since mid-January](https://www.carbonrisk.world/uk-carbon-price-down-40/)
- [Cleaning up: UK carbon market to incentivise greenhouse gas removal](https://www.carbonrisk.world/cleaning-up/)
- [All-in on Brexit reset: Funds betting on early agreement to link UK and EU carbon markets may be disappointed](https://www.carbonrisk.world/all-in-on-brexit-reset/)
- [Britain's green credibility gap: UK carbon price slumps to record low, 50% below the EU](https://www.carbonrisk.world/britains-green-credibility-gap/)
- [UK-EU ETS linkage trade turns sour: Prime Minister Starmer pledges never to re-join the EU](https://www.carbonrisk.world/not-in-my-lifetime/)
- [UK carbon market nadir has passed](https://www.carbonrisk.world/uk-carbon-market-nadir-has-passed/)
- [Subject to further consultation: The state of play in the UK carbon market](https://www.carbonrisk.world/subject-to-further-consultation/)
- [Recoupling?](https://www.carbonrisk.world/recoupling/)
- [The convergence trade: What's behind the collapse in the UKA-EUA carbon market spread?](https://www.carbonrisk.world/spread-betting/)
- [The UK carbon market continues to dodge political headwinds...but for how long?](https://www.carbonrisk.world/the-uk-carbon-market-continues-to/)
- [Majestic performance: The first anniversary of the UK carbon market](https://www.carbonrisk.world/happy-birthday-uka/)
- [The UK carbon market looks like a smarter 'risk-adjusted' bet for investors](https://www.carbonrisk.world/the-uk-carbon-market-is-a-more-attractive/)
- [Splendid isolation: UK carbon prices have not suffered the same sharp declines as the EU](https://www.carbonrisk.world/splendid-isolation/)
- [To intervene or not to intervene: An update on the UK carbon market](https://www.carbonrisk.world/to-intervene-or-not-to-intervene/)
- [Why carbon investors need to pay attention to the UK carbon market](https://www.carbonrisk.world/why-carbon-investors-need-to-pay/)

### **United States carbon markets - California / RGGI / Washington State**

- [United states of net zero](https://www.carbonrisk.world/united-states-of-net-zero/)
- [The state we're in: How carbon pricing policy has evolved amidst America's "affordability crisis"](https://www.carbonrisk.world/the-state-were-in/)
- [What now for America's state carbon markets?](https://www.carbonrisk.world/what-now-for-americas-state-carbon-markets/)
- ["Affordability" narrative weighs on California's carbon market: A 'Blue Wave' may need a greyer shade of green in the Golden State](https://www.carbonrisk.world/why-affordability-now-trumps-climate-in-california/)
- [California strikes back: Decision to reauthorise Cap-and-Invest Program an inflexion point for carbon markets in North America](https://www.carbonrisk.world/california-strikes-back/)
- [Cap and fade, or golden opportunity? It's crunch time for California's cap-and-trade program](https://www.carbonrisk.world/cap-and-fade-or-golden-opportunity/)
- [California's 'energy transition' will not be linear](https://www.carbonrisk.world/californias-energy-transition-will/)
- [America's carbon border tariff isn't credible](https://www.carbonrisk.world/americas-carbon-border-tariff-isnt/)
- [America's state carbon markets are under siege](https://www.carbonrisk.world/americas-state-carbon-markets-are/)
- [The future of California's cap-and-trade program beyond 2030 is now in doubt: Clean hydrogen production tax credit rules complicate the legislative process](https://www.carbonrisk.world/the-future-of-californias-cap-and/)
- [It's the climate, stupid!](https://www.carbonrisk.world/its-the-climate-stupid/)
- [California's emissionary zeal begins to crack: Carbon market tumbles as climate policies are delayed](https://www.carbonrisk.world/californias-emissionary-zeal-begins/)
- [The burning question: What climate legacy will Trump 2.0 leave in his wake?](https://www.carbonrisk.world/the-burning-question/)
- [The RGGI power grab: The underappreciated beneficiary of surging electricity demand in the US northeast](https://www.carbonrisk.world/the-rggi-power-grab/)
- [The spectre of 'gilets jaunes' returns: Revolt over gasoline price hikes could lead to carbon price rebellion](https://www.carbonrisk.world/revolt-over-gasoline-price-hike-could/)
- [Is a repeat of 2021 on the cards for California's carbon market?](https://www.carbonrisk.world/is-a-repeat-of-2021-on-the-cards/)
- [Participation game: What Pennsylvania’s participation in RGGI means for emission allowance prices](https://www.carbonrisk.world/participation-game/)
- [Washington State's inaugural carbon auction clears near $50: High premium to other North American carbon markets will increase calls to link up with California](https://www.carbonrisk.world/first-washington-state-auction-clears/)
- [California's 'forgotten giant of clean electricity' is set to reawaken in 2023: What it means for power sector emissions and the demand for carbon allowances](https://www.carbonrisk.world/californias-forgotten-giant-of-clean/)
- [Everything you need to know about Washington State's "Cap-and-Invest" carbon market](https://www.carbonrisk.world/everything-you-need-to-know-about-1b9/)
- [California's carbon market left to "fill the gap" in revised climate strategy](https://www.carbonrisk.world/californias-carbon-market-sidelined/)
- [Post summer blues hit the Californian carbon market](https://www.carbonrisk.world/post-summer-blues-hit-the-californian/)
- [Diablo Canyon Resurrected?](https://www.carbonrisk.world/diablo-canyon-resurrected/)
- [The disunited state of American power generation](https://www.carbonrisk.world/the-disunited-states-of-american/)
- [California's carbon rush: How the next wave of speculation in its carbon market could play out](https://www.carbonrisk.world/how-the-next-wave-of-speculation/)
- [MAC curve steepening: What California's mix of carbon policies means for price discovery](https://www.carbonrisk.world/mac-curve-steepening/)
- [California's carbon market: The 6 factors to pay attention to right now](https://www.carbonrisk.world/californias-carbon-market-the-5-factors/)
- [Volatile RGGI carbon prices as Virginia's Governor continues to push to leave the scheme](https://www.carbonrisk.world/volatile-rggi-carbon-prices-as-virginias/)
- [An asymmetric bet on a phase transition](https://www.carbonrisk.world/an-asymmetric-bet-on-carbon/)
- [Parched: How California's drought impacts the carbon market](https://www.carbonrisk.world/what-does-drought-in-california-have/)
- [Tackling carbon offset oversupply in California could be bullish for CCA prices: But only if regulator makes necessary reforms](https://www.carbonrisk.world/tackling-carbon-offset-oversupply/)
- [Everything you need to know about the RGGI carbon market](https://www.carbonrisk.world/everything-you-need-to-know-about/)
- [Great expectations: How legacy issues could snuff out California's carbon market boom](https://www.carbonrisk.world/great-expectations-how-legacy-issues/)
- [The trend is your friend in California but could there be a sting in its tail?](https://www.carbonrisk.world/the-trend-is-your-friend-in-california/)
- [What the demise of BBB means for CCA](https://www.carbonrisk.world/what-the-demise-of-bbb-means-for/)
- [The green light from the Golden State: The California carbon market opportunity](https://www.carbonrisk.world/the-green-light-from-the-golden-state/)

### **Verified carbon market (VCM)**

- [Under-rated: Should we be pricing the compliance carbon risk curve?](https://www.carbonrisk.world/under-rated/)
- [No company is a net zero island](https://www.carbonrisk.world/no-company-is-a-net-zero-island/)
- [Carbon's "lemon" dilemma](https://www.carbonrisk.world/carbons-lemon-dilemma/)
- [Carbon credits 2.0: The verified carbon market climbs the slope of enlightenment](https://www.carbonrisk.world/carbon-credits-2-0/)
- [Eyes on the prize: Revised SBTi standard amplifies role of internal carbon prices, carbon credits, and Environmental Attribute Certificates (EACs)](https://www.carbonrisk.world/eyes-on-the-prize/)
- [Escaping hells kitchen: Advanced cookstove methodologies offer a promising recipe to slash emissions and cut air pollution](https://www.carbonrisk.world/escaping-hells-kitchen/)
- [Coming of age: The evolution of carbon credits fits a pattern of financial innovation](https://www.carbonrisk.world/coming-of-age/)
- [Shifting the narrative: Common sense prevails as SBTi approves credits for Scope 3 abatement](https://www.carbonrisk.world/shifting-the-narrative/)
- [Whose carbon?: Emerging economies struggle to balance climate finance and carbon sovereignty](https://www.carbonrisk.world/whose-carbon/)
- [An underappreciated climate change risk](https://www.carbonrisk.world/an-underappreciated-climate-change/)
- [Is the VCM a trillion dollar business opportunity?](https://www.carbonrisk.world/a-one-trillion-dollar-business/)
- [Fight Fire With Fire: The case for controlled burning carbon credits](https://www.carbonrisk.world/fight-fire-with-fire/)
- [Consumer carbon offset market faces a knowledge gap](https://www.carbonrisk.world/consumer-carbon-offsets-faces-a-knowledge/)
- [Carbon credits - a permission to pollute, or a signal to decarbonise?](https://www.carbonrisk.world/carbon-credits-a-license-to-decarbonise/)
- [Green and black: Guyana's huge bet on a carbon and oil constrained future](https://www.carbonrisk.world/guyanas-carbon-trade/)
- [REDD+ and the common knowledge game](https://www.carbonrisk.world/redd-and-the-common-knowledge-game/)
- [The signal and the noise: Pricing the carbon credit risk curve](https://www.carbonrisk.world/the-signal-and-the-noise/)
- [ESG investment backlash hits nature-based carbon credit prices](https://www.carbonrisk.world/esg-investment-backlash-hits-nature/)
- [Under the hammer: What the auction of 250,000 blue carbon credits tells us about the market](https://www.carbonrisk.world/blue-carbon-under-the-hammer/)
- [How the other half cooks: Carbon credits with co-benefits](https://www.carbonrisk.world/how-the-other-half-cooks/)
- [The big sovereign carbon trade: Africa's "green superpower" expected to issue 90 million carbon credits](https://www.carbonrisk.world/the-big-sovereign-carbon-trade/)
- [VCM futures no refuge from equity market malaise: Strong corporate demand for carbon credits masks declining willingness to pay](https://www.carbonrisk.world/vcm-futures-are-no-refuge-from-market/)
- [Banking on 'blue carbon': Everything you need to know about carbon credits sourced from the ocean](https://www.carbonrisk.world/banking-on-blue-carbon/)
- [Plumbing the depths of the VCM](https://www.carbonrisk.world/plumbing-the-depths-of-the-vcm/)
- [Africa's "green superpower"](https://www.carbonrisk.world/africas-green-superpower/)
- [Nature-based carbon credit prices need to rise: High commodity prices increase the incentive to clear forests and plant crops](https://www.carbonrisk.world/nature-based-carbon-credit-prices/)
- [The first signs of carbon credit nationalism? Why are the Indonesian and Papua New Guinea carbon credit markets on hold?](https://www.carbonrisk.world/the-first-signs-of-carbon-credit/)
- ['Winner takes all' in the VCM](https://www.carbonrisk.world/winner-takes-all-in-the-vcm/)
- [The pros and cons of carbon credit 'streaming'](https://www.carbonrisk.world/the-pros-and-cons-of-carbon-credit/)
- [The voluntary carbon market (VCM): At the edge of the carbon market risk curve](https://www.carbonrisk.world/the-voluntary-carbon-market-vcm-a/)
## Posts
### 2027: Europe's next energy crisis
URL: https://www.carbonrisk.world/2027-europes-next-energy-crisis/
Last updated: 2026-09-14T09:47:42.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭. 

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---

Europe's natural gas market is giving off late 2021 vibes.

That the view of [Anne-Sophie Corbeau, research scholar at the Center on Global Energy Policy](https://www.linkedin.com/feed/update/urn:li:activity:7503329558037889025/?ref=carbonrisk.world). Corbeau believes that four factors are particular relevant to Europe right now: a) the Strait of Hormuz remains essentially closed, with only the occasional LNG cargo getting through, b) Europe is experiencing heightened competition for spot cargoes with Asia, c) low European gas inventories (20% below the 5-year average), and d) Norwegian maintenance and low Algerian LNG deliveries to Italy. 

TTF, the European natural gas price benchmark has responded, surging by more than 50% since the start of August to over €80 per MWh. For the natural gas market, the uncomfortable truth is that unlike in 2022 there are no alternative sources of LNG supply waiting in the wings to bail Europe out this time. Arguably the potential for a crisis across the energy spectrum is even greater going into 2027 than it was in 2022\. 

Back in 2022 geopolitical conflict to the east coincided with an extremely hot and dry summer to the west, curbing nuclear and hydroelectric power generation. That boosted demand for fossil fuels and led to a spike in European power prices. Coming off the back of another very hot summer in 2026, the [UN has warned that a combination of climate change and a further strengthening in the El Niño weather phenomenon means that next year is almost certain to be the hottest year ever recorded](https://wmo.int/news/media-centre/el-nino-set-become-very-strong-raising-risks-of-extreme-weather-2027?ref=carbonrisk.world).

Across the continent, hydropower generation dropped to the lowest level in at least seven years in 2026 (6% below 2022 levels) as reservoirs ran low. In Norway, often termed Europe's battery because of the power cables that stretch from the country's hydroelectric plants into northern Europe, reservoirs levels have fallen to record lows. This year high temperatures and low water levels also led several countries to curb output from their nuclear reactors, or forced them to shutdown entirely. If reservoir levels don't replenish in time this winter then Europe may need to radically increase its demand for fossil fuels.

Most European households are only used to a few night of uncomfortable nights sleep each summer. Not so in 2026\. Several weeks of high temperatures increased demand for cooling. As more people respond by purchasing AC units demand for power during periods of extreme high temperatures could be significantly higher next year. The high cost of installation in older buildings means that many are [turning to less expensive, but more energy inefficient, portable AC units](https://finance.yahoo.com/energy/articles/chinese-made-portable-ac-shipments-143000935.html?ref=carbonrisk.world).

European industry also needs to contend with drought conditions. Record low water levels also constricted the transportation of goods along the Rhine and the Danube, two rivers that act as arteries for much of Europe's heavy industry. In 2018, the last period of extreme low water levels, [German real GDP growth was curbed by 0.3 to 0.4 percentage points](https://www.coface.com/news-economy-and-insights/low-water-levels-on-the-rhine-and-danube-put-the-european-economy-under-pressure?ref=carbonrisk.world) as transport along the Rhine was disrupted.

Finally, diesel looks set join the cast of villains in the next European energy crisis. During the past week, the crack spread - the price premium between the cost of crude and the wholesale price of diesel - jumped to more than $100 per barrel, a record high. Rising diesel prices feed into higher freight and manufacturing costs, slowing economic growth while also driving up inflation. 

Europe responded to the last energy crisis by pivoting away from Russian gas and improving energy efficiency. While that may suggest that Europe is better prepared this time when another energy crisis hits, the options for mitigating the impact are probably much more limited this time around. For example, the relatively low cost opportunities for lowering energy intensity much further may have already been exploited, while governments are not in a position to offer the kind of generous energy subsidies they dolled out to businesses and households back in 2022/23\. 

### A cold front and the political fallout is hotting up 

Another energy crisis could not come at a worse time. Last weekend Europe was rocked by the news that the far-right Alternative for Germany (AfD) party scored its first state election victory, albeit narrowly failing to secure an absolute majority. 

Home to around 2.1 million people, Saxony-Anhalt is the poorest of Germany's 16 states, and the location for several energy intensive manufacturers. [Bloomberg reports that the rising cost of energy was a big issue in the runup to the election ](https://www.bloomberg.com/news/newsletters/2026-09-07/high-energy-costs-helped-a-german-far-right-party-to-victory?ref=carbonrisk.world)with some employers, including operators of the regions petrochemical industry, recently announcing that plants face imminent closure. 

The Euro and climate sceptic AfD campaigned on the promise of pulling support for renewables and lifting the ban on Russian energy imports. Thankfully most of the laws that shape energy and climate policy are decided at the federal level, meaning that the AfD has little power. Nonetheless, they could still shift the narrative and frame climate policies and green investment as bad for energy prices and employment.

It may be one German state election but the signal it sends is being heard loud and clear elsewhere in Europe. None more so than in those member states that have general elections taking place in 2027\. France, Poland, Italy, and Spain are among the largest states where voters will head to the ballot box next year. The outcome of the French and Polish elections are the most relevant to the EU carbon market. 

The next French Presidential election takes place on 18th April 2027\. Two weeks later on 2nd May a runoff takes place between the two leading candidates. Opinion polls indicate that Marine Le Pen, the leader of the far-right National Rally party will defeat all known candidates in the second round. The party have long been hostile to EU climate policy. In early 2025 senior party members called for the EU Green Deal, the 2019 plan which details how Europe will slash emissions by 2050, to be suspended.

Later in the year, the Polish parliamentary election will be held on 11th November. The opposition Law and Justice party (PiS) is blaming the high cost of transport and heating fuels and the price of electricity on EU climate policies, complicating efforts by the incumbent government to stay in power. Nearer term risks include a bill introduced by PiS that would if put to a vote later this autumn see Poland leave withdraw from the EU ETS. While the bill is very unlikely to be passed the negative sentiment surrounding it could still influence Polish attitudes to EU climate policy. 

### Escalating macro and political risks could undermine reforms

The prospect that EU climate policy is very likely to get drawn into domestic election debates means that the timetable for the reforms to be agreed upon is very tight. The European Commission published its EU ETS reform proposal just under two months ago on 17th July. Ireland (who currently holds the European Council presidency) has indicated that environment ministers from member states will need to agree on a joint position at a meeting on 11th December. The so-called "trilogue" negotiations between the Parliament, Council and the Commission will then begin in early 2027 and come to a conclusion by the end of the first quarter.

This is going to be extremely challenging, especially so given the scale and importance of the reforms. Remember, this will dictate the direction for EU climate policy through to 2040 and beyond. By trying to cram so much into barley a few months there's a risk that decisions will be made that are suboptimal given the cold light of day. [A more realistic timetable according to E3G](https://www.e3g.org/publications/eu-ets-revision-what-is-at-stake-for-europe/?ref=carbonrisk.world) given past trilogue negotiations is for it all to come to a conclusion by the end of 2027\. However, the longer the process takes, the higher the chances that events - political, economic or otherwise - intervene and scupper the reforms. 

The market correctly priced the reforms included within the Commission's proposals. Forever forward looking there's a risk now that the market is failing to price in the economic and political factors that could undermine the negotiations. Right now the EU carbon price has broken through the €82-83 level that I've noted before as something of a line in the sand; the level at which political risk erupted in February 2027\. 

But as I noted in [*EUAs reaching critical turning point*](https://www.carbonrisk.world/euas-reaching-critical-turning-point/), if the EU carbon price continues to march higher, it increases the likelihood that there will be a political backlash. And so calls for EU ETS reforms to be loosened will gather pace – particularly so in an environment when energy prices are also high: 

> "Investors should note the EUA market exhibits significant reflexivity. If prices push higher as reform is debated then policymakers may be moved towards more extreme measures that seek to reduce the carbon price, or at least soften the blow to industry. Furthermore, short-term macro pain (for example, should high energy prices return later in the summer) could push those Member States and MEPs that are wavering to come down more forcefully towards relief-leaning."

As I go on to discuss in the earlier article, price moves beyond this level (and approaching €100 specifically), have tended to beat a quick retreat: 

> "More fundamentally, I don't think people are paying the €100 level enough attention. Supply-demand balances and marginal abatement cost curves all point towards the need for much higher carbon prices. However, its been clear for a long time, and early 2026 has been a reminder, that €100 is, and continues to be, a psychologically important level.

> Even the most hardened, must stay-the-course, EU climate policy advocate is aware that if the carbon price rises above that level for too long, then the political backlash risks undermining the entire policy altogether."

As a recent paper concludes, [once carbon prices rise above $84 per tonne CO2 (€72), income inequality tends to worsens since the policy disproportionately affects low income households](https://www.nature.com/articles/s41599-026-08790-9?ref=carbonrisk.world). The solution according to the paper, and one that the EU's climate policymakers and member states might now pursue more vigorously, is to redistribute revenues above this level. That way you keep the carbon price signal intact, but also offset some of the regressive effects (see [*Carbon pricing doesn't have to be taxing*](https://www.carbonrisk.world/carbon-pricing-doesnt-have-to-be-taxing/)).

The German economist, Rudiger Dornbusch famously observed that in economics, "things take longer to happen than you think they will, and then they happen faster than you thought they could." He had financial crises in mind but the observation stands for other perils, whether economic, political, or geopolitical. 

More than six months since the beginning of the conflict between the US and Iran, equity markets, economic activity, and politics have generally appeared sanguine on the surface, to all intents and purposes carrying on regardless. As energy markets resume their upward march the real test is yet to come. As Dornbusch correctly identified, when the winds change it often has a habit of breaking things.

Europe's next energy crisis is brewing, and with that the political backlash to climate policy and the EU ETS could be more severe than ever. Policymakers need to get ahead of the game.

[Tackling carbon wealth inequalityWelcome to Carbon Risk — helping investors navigate ‘The Currency of Decarbonisation’! 🏭. Polluters impose costs on everyone else – a ‘negative externality’ in the economic jargon. The symptoms of climate change are expected to intensify as the Earth continues to warm: extreme heat, wildfires, flooding, etc. The health and economic toll from![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/icon/Green-Nature-Tree-and-Root-Logo-Template--60-x-60-px--9de99648-6fc3-468b-bb49-b87acacf66ba.jpg)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/thumbnail/jakob-rosen-M8zjUiClRvw-unsplash-15dd4167-875d-48ae-8dde-a8a43a83179d.jpg)](https://www.carbonrisk.world/tackling-carbon-wealth-inequality/)
### Distilled distress
URL: https://www.carbonrisk.world/distilled-distress/
Last updated: 2026-09-09T16:43:49.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭. 

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---

In 2000 Europe's refineries had an operating capacity of almost 14 million barrels per day. Today its closer to 11 million barrels. Over the next decade its forecast to shrink by 20% to just over 9 million barrels per day, according to S&P Global Energy as many more refineries see the writing on the wall.

There are several factors behind the decline: [a structural decline in oil demand at least among Europe's largest economies ](https://arjunmurti.substack.com/p/ep224-mini-dives-new-vs-old-europe)(energy efficiency measures, climate policies and electrification, etc.), rising energy prices that have squeezed refining margins, increasing compliance carbon costs, aging infrastructure (assets are typically more than 40 years old), the rising cost of labour, and competition from imported refined oil product from refineries in Africa and Asia.

As one refinery closes down, product margins receive a welcome albeit short-term boost. That gives some breathing space to those facilities still operating. It's not enough to prevent the next most inefficient refinery on the marginal cost curve from going under. The long-term structural forces are too powerful. 

Right now refineries are enjoying high product prices due to the US conflict with Iran, a benefit for Europe's last remaining refineries, but that is also increasing the call on imports. For example, refining margins for diesel in Europe recently spiked above $100 per barrel for the first time. [A 90,000 tonne shipment of diesel from South Korea is reportedly due to travel more than 19,000 kilometres](https://trans.info/en/europe-turns-to-diesel-500508?ref=carbonrisk.world) to take advantage. 

The latest energy crisis is pushing governments towards short-term fixes that alleviate the worst impacts on the cost of living, and (giving the appearing at least) of protecting the country's energy security. Europe's move to curb zero emission vehicle mandate targets for example extends the expected lifespan of a refinery. A [far better option would be to accelerate the electrification of transportation](https://green-alliance.org.uk/briefing/oil-shock-tactics-maintaining-energy-security-through-transport-policy/?ref=carbonrisk.world), slashing Europe's dependence on imports of oil and refined oil products (see [*Electric avenue: Europe set to outline its path to electrification and energy security*](https://www.carbonrisk.world/electric-avenue/)).

In the long-term chopping and changing policy based on the latest populist whim is the last thing we need. Refineries need long-term policy certainty, not constant flux. Aging refineries that cannot be repurposed for a low carbon future (more on that opportunity later) should be left to retire. Bailing out the oldest, most inefficient refineries may seem politically expedient right now, but it will only make them less competitive in the future, and do nothing to allay their fate.

The UK has seen two oil refineries close in the past two years: Grangemouth shut in April 2025, followed by Lindsey four months later. That leaves four refineries (Fawley, Humber, Pembroke and Stanlow) which combined can cover around 85% of the country's domestic consumption of refined products. Although the UK is broadly self sufficient in petrol (gasoline), it is heavily reliant on imports of diesel and kerosene (accounting for \~2.5 to 3 times domestic production).

In October 2026, the chairman of Exxon UK Paul Greenwood (the oil major who owns the Fawley refinery), [warned that all of the UK's refineries will close down](https://www.bloomberg.com/news/articles/2025-10-29/all-uk-oil-refineries-may-close-due-to-carbon-costs-exxon-says?ref=carbonrisk.world) “if you continue to have increasing carbon costs and your competitors don’t.” Overall, the UK's refining industry shelled out £200 million (€233 million) on carbon compliance costs in 2024, according to the lobby group Fuels Industry UK. Greenwood indicated that Fawley's UK carbon compliance costs are set to almost double to £150 million by 2030\. 

As we'll see, refineries sit in an uncomfortable place at a fulcrum of the energy transition. A legacy of the fossil-fuel combustion age, their assets risk being stranded. At the same time, as the economy pivots towards low-carbon hydrogen and sustainable fuels, refineries will become more important than ever. Should every polluter pay, even when so much is expected from them? Is the price of carbon really the culprit its been made out to be in their recent travails? Lets dive in.

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### China and the new carbon order
URL: https://www.carbonrisk.world/china-and-the-new-carbon-order/
Last updated: 2026-09-04T11:00:07.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭. 

*Carbon Risk contributes 1% of its revenue to* [*Stripe Climate*](https://climate.stripe.com/nufpgl?ref=carbonrisk.world)*, helping to scale permanent carbon removal technologies. Thankyou to all the subscribers that support* [*Carbon Risk*](https://www.carbonrisk.world/about/)*.*

---

In mid-August, while everyone else in the carbon markets was heading for the beach, China's vice ecology and environment minister announced that the petrochemical and chemical industries will be covered by the national carbon market from 2027\. 

The country's emissions trading scheme was originally launched in 2021, initially covering only power generation before steel, cement and aluminium were added in 2025\. The inclusion of petrochemicals and chemicals will bring the total share of national CO2 emissions covered to 80%. 

The decision to extend the reach of China's carbon market comes as exporters of carbon intensive products (whether based in China or elsewhere) face increasing trade restrictions tied to carbon intensity. For example, Europe's Carbon Border Adjustment Mechanism (CBAM) was introduced at the start of 2026, while the UK CBAM comes into force on 1st January 2027 (see [*What constitutes an “effectively paid” carbon price?*](https://www.carbonrisk.world/what-constitutes-an-effectively-paid-carbon-price/)).

In public at least, China has framed CBAM as protectionist and harmful to economic growth. In private the government recognises that complying with CBAM is a serious issue and that in order to mitigate the impact it must bolster its institutional credibility. Expanding the impact of carbon pricing to petrochemicals and chemicals - one of the most hard-to-abate industries - is vital if China is to further reduce its carbon intensity and set the stage for a sustained decline in emissions. 

The announcement also represents a much bolder, longer-term strategic response to climate change from China's leaders. Back in July, China released a five-year plan outlining its plans to respond to climate change between 2026 and 2030\. Its the first time that authorities have issued a multi-year plan covering all aspects of climate policy, and shows how it is rising in importance within the country's long-term strategy.

It also comes as the country heads toward its first major carbon commitment - reaching peak CO2 emissions before 2030 ([data shows they have been flat or falling since March 2024](https://www.carbonbrief.org/analysis-clean-energy-just-put-chinas-co2-emissions-into-reverse-for-first-time?ref=carbonrisk.world)), and cutting the carbon intensity of its GDP by more than 65% from 2005 levels. The five-year plan also sets a target of reducing CO2 emissions per unit of product in ETS covered sectors by around 3% by 2030, relative to 2025 levels.

Furthermore, in late 2025, China's President Xi Jinping personally announced that China would cut greenhouse gas emissions by at least 7-10% below peak levels by 2035\. In 2025 authorities declared that China’s ETS will transition from an intensity-based carbon market, to one with an absolute cap on emissions. Industries with a stabilised emissions path will begin to adopt an absolute cap on their emissions from 2027, with the market migration scheduled to be completed on a national basis by 2030 (see [*Readying for the descent: Proposed reforms to China's emissions trading system suggest the government is preparing for peak emissions*](https://www.carbonrisk.world/readying-for-the-descent/#footnote-2)).

Crucially, the five-year plan also signals that China is looking to play a much more active role in shaping global climate action. The plan suggest that China should markedly increase its “influence, guiding power, shaping power and moral appeal” and "build a new narrative on climate governance". As China increasingly asserts itself and sets the rules in other realms, climate policy and carbon markets will be no different. 

### Carbon pricing ultimatum

As in the commodity markets that it dominates, China is likely to be the largest buyer of international carbon credits. Expanding its global influence means that China is going to want to take the lead in setting the rules to Article 6 and establishing the standards. It's with that background that the China Carbon Markets Conference takes place on 15th September in Wuhan. 

It's here where China is likely to move forward on one of its key aims: expanding the international influence of its national carbon market. The [Open Coalition on Compliance Carbon Markets](https://www.gov.br/mre/pt-br/canais%5Fatendimento/imprensa/notas-a-imprensa/declaracao-sobre-a-coalizao-aberta-de-mercados-regulados-de-carbono/OpenCoalitiononComplianceCarbonMarkets.pdf?ref=carbonrisk.world) was launched last November in Brazil at the COP30 summit and aims to strengthen global cooperation and development of carbon pricing. Although Brazil will chair the coalition for the first two years, China and the European Union are co-chairs (see [*Join the club*](https://www.carbonrisk.world/join-the-club/)).

The Coalition's work plan will be formally adopted at the talks in Wuhan. Top of the list of priorities is likely to be enhancing the effectiveness of domestic carbon pricing mechanisms, encourage a race to the top for carbon credit quality, and improving the international compatibility of carbon accounting methods. As well as ensuring a level playing field for China's carbon intensive industries, it also provides a source of sustained demand for the companies delivering its clean energy revolution.

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### Japan's Green Transformation (GX) policy faces first real test
URL: https://www.carbonrisk.world/japans-green-transformation-gx-policy-faces-first-real-test/
Last updated: 2026-09-02T11:00:53.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭. 

*Carbon Risk contributes 1% of its revenue to* [*Stripe Climate*](https://climate.stripe.com/nufpgl?ref=carbonrisk.world)*, helping to scale permanent carbon removal technologies. Thankyou to all the subscribers that support* [*Carbon Risk*](https://www.carbonrisk.world/about/)*.*

---

Policymakers in Europe, California and other jurisdictions with ambitious carbon markets are pivoting towards a 'cap-and-invest' model whereby long-established auction revenues are increasingly being earmarked for industrial decarbonisation. 

Japan has taken the opposite approach: carrot first, stick later.

In February 2024 the Japanese government issued the first tranche of its GX Transition Bonds, valued at ¥1.6 trillion (€15 billion). The bonds, the first of their kind to be issued by a sovereign state, are part of the broader ¥150 trillion (€800 billion) 10-year GX Strategy unveiled in early 2023\. 

So far the program has raised €21.5 billion, accounting for almost two-thirds of global transition bond issuance. Around half of the proceeds from the bond sale are supposed to be invested in transforming industrial structures and energy efficiency measures, one-third spent on expanding clean energy, while the remainder diverted to resource efficiency and carbon capture and storage (CCS) technologies.

In theory at least, a carbon-linked bond should help to bolster trust in the Japanese government’s commitment to net zero. In turn this should give power producers, manufacturers, and transportation companies greater confidence to invest, enabling them to access finance on more favourable terms (see [*Carbon market vigilantes: The case for carbon-linked bonds*](https://www.carbonrisk.world/the-carbon-bond-vigilantes/)).

### Here comes the stick

On 1st April 2026, Phase 2 of Japan's Green Transformation Emissions Trading System (GX-ETS) kicked off. A key milestone in the development of carbon markets in Asia, following in the carbon footprints of South Korea and China.

Firms with Scope 1 emissions of at least 100,000 tonnes are required to record their emissions, submitting their calculations and emission reduction targets by September 2027\. Approximately 300 to 400 companies, covering 60% of Japan's annual 1 Gt CO2 emissions, will be subject to compliance requirements.

_This post is for paying subscribers only._
### Carbon price uncertainty is a drag on industrial 'green' investment
URL: https://www.carbonrisk.world/carbon-price-uncertainty-is-a-drag-on-industrial-green-investment/
Last updated: 2026-08-27T09:19:49.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭. *Carbon Risk contributes 1% of its revenue to* [*Stripe Climate*](https://climate.stripe.com/nufpgl?ref=carbonrisk.world)*, helping to scale permanent carbon removal technologies . Thankyou to all the subscribers that support* [*Carbon Risk*](https://www.carbonrisk.world/about/)*.*

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---

Decarbonising the four most energy intensive sectors in Europe (chemicals, basic metals, non-metallic minerals, and paper) is expected to require €500 billion of investment over the next 15 years, according to [the Draghi Report on the future of European Competitiveness](https://commission.europa.eu/document/download/97e481fd-2dc3-412d-be4c-f152a8232961%5Fen?ref=carbonrisk.world). 

Much of this funding will need to come from the private sector. Across Europe, carbon mitigation investment has doubled as a share of GDP (from 0.4% in 2007 to 0.8% in 2023), but remains well below the levels thought necessary to accelerate Europe's decarbonisation. 

While the EU ETS is the primary policy for leveraging private sector finance, carbon price volatility is a barrier to bringing that investment to fruition. As I explained in [*The Fear Index*](https://www.carbonrisk.world/the-fear-index/), the carbon price is the ‘Currency of Decarbonisation’, and in the same way that excess currency volatility imposes a cost, investors in decarbonisation incur a penalty if there is a high degree of uncertainty over the future carbon price:

> "Volatile exchange rates discourage inward investment and make it more expensive to agree terms with trading partners. High carbon price volatility also imposes a cost. The level of funding required to invest in industrial decarbonisation is enormous, requiring a multi-decade long commitment, and high sunk costs. Exposure to high carbon price volatility makes it much harder for these large-scale projects to be seen as ‘bankable’ by investors." 

For while standard economic logic predicts that higher carbon prices make low carbon investments more attractive, real options theory cautions that when the future carbon price is uncertain, firms may rationally seek to defer projects until uncertainty is quelled. Could this “wait-and-see” behaviour lead to systematic underinvestment, even under the EU ETS, the most ambitious carbon pricing regimes? And if so, what can be done about it?

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### Resisting the siren's call
URL: https://www.carbonrisk.world/resisting-the-sirens-call/
Last updated: 2026-08-24T11:53:15.000Z
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In August 2013 Mark Carney took over the helm at the Bank of England. One of his first actions as governor was to unveil a bold innovation to British central banking: "forward guidance". First employed by the US Federal Reserve the previous December, forward guidance is the practice of communicating likely future actions of the central bank in order to influence present behaviour.

Forward guidance exists on a spectrum. The weaker variety, sometimes called "Delphic" guidance after the oracle of ancient Delphi, involves policymakers signalling their expectations for how monetary policy will evolve over coming months. The stronger form known as "Odyssean" guidance sees policymakers committing to not adjust policy until some specified economic conditions have been met. 

This summer Kevin Walsh became the new governor of the Federal Reserve. Even before being appointed he made it abundantly clear his dislike for forward guidance. “I don’t believe that I should be previewing for you what a future decision might be”, he stated in his confirmation hearing. 

Subsequent policy statements issued after each Fed meeting have become notably sparser, and any language referring to what the central bank might or might not do has been stripped out. The response from market participants has been far from glowing, with many concerned that Walsh's words appear "confusing" and, even worse, "nonsense".

For financial markets always wary of nasty surprises, forward guidance helped reduce the perception of uncertainty. Take that away and investors are left in the dark, and may suddenly have to readjust their expectations if reality turns out radically differently, in turn leading to a surge in market volatility. The upshot is likely to be an increase in the term premium, the extra yield investors demand to hold long-term debt instruments. 

The new governor is quite right to be concerned that central banks are not all-knowing, and that forward guidance can incorrectly anchor market expectations to an outlook that quickly becomes obsolete. However, [as Robert Armstrong cautions in the Financial Times](https://www.ft.com/content/d3c55471-0e3d-4798-8355-2b661880d8b9?syn-25a6b1a6=1&ref=carbonrisk.world), perhaps the biggest part of what a central bank does "is provide a credible anchor for collective beliefs about the price level." 

Will this new practice of saying as little as possible catch on with other central banks? It's too early to say. Andrew Baily, Mark Carney's successor as governor of the Bank of England, as well as their opposite number at the European Central Bank (ECB) have both spoken of the pitfalls of forward guidance. As [the Bank of International Settlements (BSI) remarked recently, the communication style of central bankers ](https://www.bis.org/publ/qtrpdf/r%5Fqt2603b.htm?ref=carbonrisk.world)has already evolved in recent years. Nowadays they typically place a much greater onus on illustrating and explaining the uncertainty they have to deal with. 

What has all this got to do with carbon markets and the EU emissions trading scheme specifically? Well, as I outlined in [*Whatever it takes*](https://www.carbonrisk.world/whatever-it-takes/) and [*Forward guidance*](https://www.carbonrisk.world/forward-guidance/), high profile European climate policymakers have increasingly sought to shape carbon market price expectations, blending both Delphic and Odyssean approaches to forward guidance. The practice has become more common since Europe was rocked by the Russian invasion of Ukraine and the subsequent energy crisis:

> “Much like central bankers, the EU’s politicians want a Goldilocks scenario: not too hot so that the carbon price reaches socially unacceptable levels, nor too cold that decarbonisation technology isn’t incentivised.  
>  
> By providing forward guidance, the EU hope to conjure up the magic of the central banks: suppressing carbon price volatility, lowering the cost of net-zero capital, and spurring the investment required to pivot away from Russia and achieve its climate change ambitions.”

Peter Liese MEP, the lead lawmaker who steered EU ETS reform through the European Parliament, and Jos Delbeke, a key architect of the EU ETS, have both sought to steer market expectations towards a certain price range. Intervention has typically come in the some form of strong words, either to stop the carbon price from rising too high too fast, or to put a floor under the market if it falls too low.

More recently, at the European Council meeting on 19th March, European Commission President von der Leyen announced plans to develop a new "ETS investment booster" with a budget of "about €30 billion, financed by 400 million ETS allowances." A carbon price of €75 (€30 billion / 400 million EUAs) rapidly became an important marker in the sand at a time of immense uncertainty over the future of the scheme.

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What impact has forward guidance in the EU carbon market had on volatility? [The Carbon Volatility Index (VIX)](https://www.carbonvix.org/?ref=carbonrisk.world) is a market-based high-frequency measure of carbon price uncertainty developed by researchers at the Copenhagen Business School and NYU Stern. The VIX exhibited an average annualised expected volatility of 54% between September 2013 and December 2022 (see [*The Fear Index*](https://www.carbonrisk.world/the-fear-index/))[](https://www.carbonrisk.world/author/peter-sainsbury/). 

Since 2023 onwards volatility has fallen consistently, dropping to a record series low of 23% in September 2025\. Although there are likely to be a number of other factors at play, developments in the VIX could indicate that forward guidance has helped to dampen volatility.

This is important since lower carbon price volatility should help drive Europe's progress in decarbonising its economy. The academics behind the Carbon VIX found that a 10% increase in the Carbon VIX has the same detrimental impact on investment in decarbonisation as a €12 per tonne decline in the carbon price. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/08/image-3.png)

Source: carbonvix.org

It's clear that Liese, Delbeke, and von der Leyen have at least been successful in steering price levels in the short to medium term, but what about the long-term? Climate policymakers need to employ realistic assumptions over the future marginal carbon abatement cost, while also being mindful of the risk of political blowback if carbon prices rise too rapidly (see [*The Carbon Laffer Curve*](https://www.carbonrisk.world/the-carbon-laffer-curve/))[](https://www.carbonrisk.world/author/peter-sainsbury/). 

While not a carbon price forecast, the European Commission's communications is also instructive of what policymakers *currently* see as a realistic long-term level. The[ Impact Assessment (IA) underpinning the current ETS reform package](https://climate.ec.europa.eu/document/download/42652813-1d08-4a09-8194-80a35592e816%5Fen?filename=swd%5F2026%5F616%5Fpart%5F4%5Fen.pdf&ref=carbonrisk.world) assumes "an average price of €150 over the period \[2031-2040\]". 

Of course, circumstances change. ETS reviews only happen infrequently, typically occurring towards the end of a particular phase of the scheme (Phase 4 covers the period 2021-2030). The Commission's views on long-term carbon prices may well be very different come the end of the decade. 

It's also worth noting that assumptions within IA's have proved to be a very weak anchor of long-term carbon price expectations in the past. Around the time of the last EU ETS review the Commissions assumptions for the carbon price during the 2020's were much lower: around €20 by 2025, rising to €50 by 2030\. 

The bout of political turmoil in February reopened this can of worms. President Macron of France appearing to reference these levels as where the ETS "should be", less than half of where the carbon price was trading when he made the remarks. 

This brings things full circle.

The Commissions review into the EU ETS was published in mid-July. There will now be several months of negotiation between MEPs and Member States. The target date to secure an agreement is currently thought to be Q1 2027\. As groups come together to thrash out the details Europe's climate policy chiefs may fade into the background. It is the summer holidays of course, but since publication date there has been no indication from officials what range of carbon prices represents a credible anchor.

When conducting monetary policy its important to appear credible; that you understand what's going on, you recognise the uncertainty, and that the market can count on you to deliver against your mandate. The same can be said for climate policy.

If Europe's climate policymakers fall silent and follow the new Fed governor's lead, then what's left is a void, one that could easily be filled by the sounds of sirens unconcerned as to whether they interrupt the carbon market price signal, nor undermine the EU ETS' hard-earned credibility. That could lead to a spike in the Carbon VIX, and present a headwind to Europe's need for further investment in decarbonisation.

[Strings attachedThe European Commission’s proposals fail to counter systemic issues deterring investment in industrial decarbonisation![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/icon/Green-Nature-Tree-and-Root-Logo-Template--60-x-60-px--8f914209-8459-4bc5-a544-51a0fccad8ca.jpg)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/thumbnail/ant-rozetsky-SLIFI67jv5k-unsplash-cda480c9-1036-40eb-9f3f-94f06b373858.jpg)](https://www.carbonrisk.world/strings-attached/)
### The hidden cost of keeping cool
URL: https://www.carbonrisk.world/cold-comfort/
Last updated: 2026-08-12T11:00:36.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

Concern over the emissions from air-conditioning and other cooling equipment tends to focus on the energy used and the manner in which the electricity was generated. Many people are often unaware that there is a second major source of GHG emissions from cooling devices known as hydrofluorocarbons (HFCs).

The global GHG emissions associated with space cooling (i.e., air-conditioning units) and refrigeration are estimated to be 4.1 Gt CO2e per year. Of this approximately two-thirds (2.7 Gt CO2e) relates to the energy used, with the remainder (1.4 Gt CO2e) resulting from the leakage of refrigerants into the atmosphere.

HFCs are gradually replacing chlorofluorocarbons (CFC) as the refrigerant used in new cooling devices. As many readers of a certain age will remember from when they were kids (it was always on the news in the late 1980s), CFCs were responsible for destroying the ozone layer. 

However, as can often happen, solve one problem (parties to the Montreal Protocol agreed to phase out CFCs), and you often create another, hopefully the lesser of two evils. While HFCs do not harm the ozone, they have almost 15,000 times the global warming potential of CO2\. It's one hell of a superpollutant!

[A recent article in The Economist urges Europeans to learn to love the air-conditioner](https://www.economist.com/europe/2026/06/18/europeans-should-learn-to-love-the-air-conditioner?ref=carbonrisk.world), suggesting that the "impressive build-out of renewable energy in Europe’s hottest places means that judiciously dialling down the temperature will not do much to melt the glaciers." The article neglects to mention the potent GHG lurking inside all but the newest AC units currently in use. 

While modern ACs should no longer use these so-called "F-gases", older units most certainly do. And that's a problem with a typical AC lasting up to 20 years before it is replaced, and annual refrigerant leakage rates estimated at 5%. Even if replacing an AC unit with a modern one without HFCs, the dangers don't end there; inappropriately disposed of, the gases will leak even more rapidly into the atmosphere. 

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_This post is for paying subscribers only._
### Tackling carbon wealth inequality
URL: https://www.carbonrisk.world/tackling-carbon-wealth-inequality/
Last updated: 2026-08-10T11:00:39.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

Polluters impose costs on everyone else – a 'negative externality' in the economic jargon. The symptoms of climate change are expected to intensify as the Earth continues to warm: extreme heat, wildfires, flooding, etc. The health and economic toll from rising global greenhouse gas emissions falls especially heavily on those least able to adapt.

Carbon taxes and carbon pricing are a means by which governments can push polluters to internalise the cost of those emissions. This should push them to cut back on emissions intensive activities and seek out cleaner alternatives. In Europe for example, carbon pricing has been a fundamental driver towards lower power emissions, with utilities curbing coal-fired generation, and expanding solar and wind generation capacity.

However, by dint of their historical application to fossil-fuel powered electricity generation, the impact of carbon taxes and carbon pricing often falls heavily on those least able to afford them. Low income households spend a disproportionately large amount of their earnings on energy, and tend not to have the resources to stump the upfront cost related to energy efficiency measures, the cost of an EV or a heat pump installation.

The backlash to Canada's consumer carbon tax ahead of the 2025 general election, coupled with more recent delays to ETS2 (Europe's second emissions trading scheme, focused on transport and heating fuels), has forced governments to recognise that the current approach may not be politically and economically sustainable (see [*Europe must learn from Canada's 'price on pollution' debacle*](https://www.carbonrisk.world/a-cautionary-tale/))

Up until now carbon pricing has been largely divorced from concerns about wealth inequality. So far at least, demands for political reform have been focused on calls to raise taxes on capital and corporate income, and providing a safety net to workers affected by developments in AI. The connection to carbon wealth inequality - that the richest in society are contributing the most to the problem - is yet to be realised. Developments in the science of climate attribution may change that. 

Two-thirds of the 0.61°C increase in global average temperatures observed between 1990 and 2020 is attributable to the wealthiest 10%, according to a recent study [published in the journal *Nature Climate Change*](https://www.nature.com/articles/s41558-025-02325-x?ref=carbonrisk.world#Abs1). It means that the richest 10% of the world's population (defined as those earning at least €43k per year, or \~$50k) were responsible for 6.5 times more warming than the global average. 

While the top 10% was responsible for 6.5 times the global average warming, the top income brackets contributed far more. The study found that the top 1% and 0.1% respectively contributed 20 and 76 times more to climate change over the three decades. The image of private jets perhaps exemplify this ratio best, but clearly the climate impact of consumption stretches much broader than this.

The wealth inequality impact is even more pronounced when it comes to the impact of extreme heat. The same research, led by academics at the International Institute for Applied Systems Analysis (IIASA) based in Vienna assessed that the top 10% richest people in the United States and China, contributed to a 2-3-fold increase in heat extremes across the Amazon, southeast Asia, and other vulnerable regions.

In late July, [the National Academies of Science, America's top scientific advisory body, released a report](https://www.nationalacademies.org/projects/DELS-BASCPR-23-02/publication/28590?ref=carbonrisk.world) confirming that similar studies employing 'extreme event attribution (EEA)' are improving and becoming increasingly mature. The report finds that confidence is highest for events such as extreme temperatures and heavy rainfall, things that are strongly influenced by a warming atmosphere.

Read this article and [more](https://www.carbonrisk.world/table-of-contents-start-here-2/) with a ****30-day free trial**

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How best to address carbon wealth inequality? 

Writing in [the Financial Times, Michael Strain, director of economic policy studies at the American Enterprise Institute](https://www.ft.com/content/78756a27-817e-450d-9bab-33214efbd804?ref=carbonrisk.world) argues that the American government should overhaul its broken tax system, and rather than tax income or AI, the government should tax consumption. The benefit of this approach is that it avoids distorting incentives and would capture additional government revenue from AI's spoils. 

Overly complex tax systems is a problem in most countries. Consumption taxes are one of the most economically efficient and least politically contentious way of raising taxation.

For example, a value added tax or VAT (a fixed percentage tax on the sale price) only distorts incentives to the extent that some goods and services are exempted, experience suggests it is easier to raise than other taxes, and while still regressive, much less so when measured in terms of lifetime taxation. [The standard average VAT rate across OECD countries stood at 19.3% in 2024](https://www.oecd.org/en/publications/2024/11/consumption-tax-trends-2024%5F57c7322a.html?ref=carbonrisk.world), with the tax generating around one fifth of total OECD members tax revenue. 

Almost all countries with a VAT have introduced exemptions for certain types of product and service, such as those related to health or education. More importantly, revenues can be earmarked for certain purposes, increasing the buy-in from citizens. For example, Estonia increased its VAT rate from 22% to 24% in July 2025 to pay for more defence spending, later making the move permanent. It's not a huge leap to suggest that VAT revenues be recycled back into green investments and / or used to reduce the rate of income tax for lower income households.

Although VAT could be used to in this way, one problem is that it doesn't specifically target the carbon intensity of the product or service. Back in the early 2010's [an alternative proposal was put forward: the Carbon Added Tax (CAT)](https://cedelft.eu/wp-content/uploads/sites/2/2021/04/CE%5FDelft%5F7A48%5FCarbon%5FAdded%5FTax%5FFINAL.pdf?ref=carbonrisk.world). Analogous to the present day CBAM, the CAT would introduce an explicit carbon charge based on the embedded production carbon intensity. However, as experience with CBAM tells us, the administrative burden (monitoring and verifying the lifecycle carbon intensity for every product) would simply be too high.

What about the other options? While the opportunity for litigation against the largest emitters, or wealth taxes on the carbon intensive investments of the rich has got climate activists excited, neither approach is likely to work, and may even have unintended consequences. It's always much better to tackle demand, rather than supply.

For example, the dominant practice in sustainable investing has been to curb capital finance from 'brown' firms, and re-direct it towards 'green' firms, those who have already cut their emissions.[ However, this has been shown to provide only weak incentives for 'brown' firms to reduce their emissions](https://www.nber.org/papers/w35519?ref=carbonrisk.world), and at the expense of only minimal improvements in the emissions from 'green' firms (see [*The carbon footprint fallacy: Why green investors need to get their hands dirty*](https://www.carbonrisk.world/the-carbon-footprint-fallacy/)).

Carbon risk comes in many forms, affecting economies, industries, right down to the individual. As the impact of the consumption habits of the rich on the climate become better understood and well known, we can expect greater demands for measures to counteract this imbalance. Just as calls for greater taxes on wealth have become louder and more vocal in recent years as concerns about AI have grown. Raising consumption taxes such as VAT could be a viable way forward to addressing carbon wealth inequality. 

[In search of lost revenueEurope’s transition to a low carbon, energy secure economy may succumb to debt-laden paralysis![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/icon/Green-Nature-Tree-and-Root-Logo-Template--60-x-60-px--aa49ccd9-05e6-43ff-8d55-a0bedc2ffcf1.jpg)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/thumbnail/wolfgang-weiser-48rXHCkcNnA-unsplash-95de2e51-3bd5-4957-8684-bd956d8ae463.jpg)](https://www.carbonrisk.world/in-search-of-lost-revenue/)
### Repost: Blue sky thinking
URL: https://www.carbonrisk.world/repost-blue-sky-thinking/
Last updated: 2026-07-23T11:00:44.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

> "the United States is being unnecessarily invaded by filthy, polluted, and unhealthy air, the quality of which is dangerous, and totally unacceptable!" - President Trump

*Smoke from several hundred wildfires, almost 200 of which located in north-west Ontario, billowed across the southern border into the United States. The smoke triggered air quality warnings from Minnesota to Maryland, blanketing New York in a dense haze just days before the World Cup final.*

*Taking to Truth Social, President Trump accused Canada of "Willful Negligence," adding that the smoke has cost America billions of dollars, for which the bill "must of necessity be added to the TARIFFS Canada is currently paying."* 

*Quite how he calculated the cost remains a mystery. In January the Environmental Protection Agency (EPA) downgraded the value per human life used in cost-benefit analyses of pollution restrictions to...zero!* 

*Trump was of course careful to avoid assigning any of the blame to climate change. Instead, accusing the Canadians of* "not properly maintaining their Forests, and Brush therein."

*Accelerating climate change has meant that wildfires are now larger, hotter and more destructive. Canada is particularly exposed. Home to more than a quarter of the worlds boreal forests, the country is warming twice as fast as the global average. Forest management helps at the margin, but tackling the cause is the only long-term solution.*

*Air pollution is perhaps the most visceral example of a negative environmental externality that knows no borders, one that requires countries to work together rather than assigning blame. Days after Trump issued his demand that Canada face retribution, officials in British Colombia issued an alert warning that smoke emanating from wildfires in Washington and Oregon was heading north and coming their way.*

*As I discuss in the article below (*[*first published in February 2025*](https://www.carbonrisk.world/blue-sky-thinking/)*, but now available without the paywall), with climate policy spluttering, governments should sell the benefits of clean air. It's not just about the environment, or even the climate, clean air has huge health and economic benefits too. What's not to like?*

*🛫 Note that I’m taking a break from carbon markets for a couple of weeks. I will be back at my desk in early August 🛬* 

Read this article and [more](https://www.carbonrisk.world/table-of-contents-start-here-2/) with a ****30-day free trial**

[Grab your free trial now ](#/portal/signup) 

---

The term ‘tragedy of the horizon’ was coined by Mark Carney, former Governor of the Bank of England.

First outlined in a speech to Lloyds of London in September 2015, Carney argues that the “catastrophic impacts \[of climate change\] will be felt beyond the traditional horizons of most actors - imposing a cost on future generations that the current generation has no direct incentive to fix.”

That insight has been brutally thrust into the mainstream during the past few years as citizens focus on more immediate economic concerns (i.e., the inflationary impact of higher energy prices), and political sentiment turns sharply against net zero policies.

Governments under pressure to dump climate policies are missing a trick. They can break the ‘tragedy of the horizon’ by re-targeting their efforts towards clean air. It means switching the narrative away from the multidecadal challenge to decarbonise, and towards the more immediate health and economic benefits of cutting air pollution (see [*Climate change - A tragedy in three parts*](https://carbonrisk.substack.com/p/the-three-tragedies)).

Remember that although burning of fossil fuels is the main source of anthropogenic greenhouse gases (GHG) such as carbon dioxide and methane, those same activities also result in a cocktail of other pollutants being released into the air that are damaging to human health and natural ecosystems. Although there is [a risk that climate and clean air policies counteract each others end goals](https://www.tandfonline.com/doi/full/10.1080/00139157.2025.2434494?ref=carbonrisk.world#abstract), tackling one type of emission does typically help to curb other harmful air pollutants.

Air pollution in particular is much more salient to people than GHG emissions or biodiversity loss. The history of economic development suggests that once air pollution reaches a certain level, calls to the government to do something about it become deafening. In contrast to GHG emissions, air pollution does not suffer from the tragedy of the horizon. [The impact from air pollution is felt today. The benefits to cleaning it up can be seen tomorrow](https://www.nber.org/papers/w24688?ref=carbonrisk.world).

For example, in 1950’s Britain, smoke generated from the excess burning of coal combined with fog, resulting in a thick layer of smog across several major cities. It became known as “The Great Smog of 1952” and resulted in thousands of untimely deaths. The smog prompted Parliament to pass laws forcing urban households to stop burning the most polluting grade of coal, and encouraging nearby factories to switch to smokeless fuels (see [*Prosperity bends the curve*](https://carbonrisk.substack.com/p/the-environmental-kuznets-curve)).

More recently, in 2013 China introduced draconian measures to curb air pollution in Beijing. At the beginning of the year dark sulphurous clouds descended on the capital. Residents who ventured outdoors would find their throat burning as the air filling their lungs had 60 times the recommended healthy level of fine particulate matter (PM2.5). In response authorities imposed a nationwide cap on coal use, divided up among provinces, banned new coal-burning capacity and sped up the use of filters and scrubbers. During the decade following Beijing’s “airpocalypse”, average annual PM2.5 levels in the city declined by 70%.

### A toxic choke hold

The most hazardous forms of air pollution include sulphur dioxide (SO2), nitrogen oxides (NOx), and fine particulate matter (PM2.5). Sulphur dioxide combines with water vapour to form sulphuric acid, the main component of acid rain. Once it falls from the sky it can damage forests, freshwater habitats. Sulphur dioxide can also combine with nitrogen oxides and ammonia to form PM2.5\. Nitrogen oxide can also aggravate respiratory diseases, while also harming ecosystems by increasing the concentration of nitrogen in the soil or water.

PM2.5 is the most dangerous type of air pollution since it increases the risk of health problems like heart disease and asthma. PM2.5 is a type of air pollution made up of “fine particulate matter" measuring 2.5 micrometres across or less – roughly 30 times smaller than the width of a human hair. Burning fossil fuels, especially coal, gasoline and diesel is a major source of PM2.5\. [Wildfires and the dust blown from deserts are also major sources of PM2.5 emissions](https://www.nature.com/articles/s41586-023-06522-6?ref=carbonrisk.world), with the former more dangerous given its unpredictability.

Most studies put the number of deaths associated with air pollution to be between 4 million and 8 million people per year. A recent study found that long-term exposure to PM2.5 alone was responsible for an estimated 4.1 million attributable deaths worldwide (7.3% of the total number) in 2019\. Another study estimated that 8.7 million deaths in 2018 were associated with air pollution resulting from just the burning of fossil fuels. One can always dispute the assumptions underpinning a study, but it’s clear the human cost alone from air pollution is enormous, certainly several million people each year, primarily linked to the increased risk of respiratory and cardiovascular diseases.

### A drag on productivity

Of course the cost isn’t just measured in human lives. There’s a monetary cost too. [The International Monetary Fund (IMF) recently published a study](https://papers.ssrn.com/sol3/papers.cfm?abstract%5Fid=4585306&ref=carbonrisk.world) estimating the annual economic costs of air pollution for more than a hundred countries from 2015 to 2022\. While the economic cost resulting from air pollution in 2022 was equivalent to 1% of GDP in the US, it was much higher in China (6%), and exhibited a wide range across Europe (between 1-5%). The worst effects from air pollution tended to be in low and middle income countries.

A [separate study from the Organisation of Economic Cooperation and Development (OECD)](https://www.oecd.org/en/publications/the-economic-cost-of-air-pollution-evidence-from-europe%5F56119490-en.html?ref=carbonrisk.world) examined the impact of lower air pollution on productivity and GDP in Europe between 2000 and 2015\. The report estimates that a 1 microgram per cubic metre (µg per m3) reduction in the annual concentration of PM2.5 resulted in a 0.8% increase in GDP in Europe during the period 2000-2015\. The authors concluded that the reduction in air pollution explained one sixth of overall EU economic growth during those 15 years.

Part of the problem is that these negative externalities are not adequately priced by the market. Government subsidies make the problem worse, encouraging consumers to use fossil fuels inefficiently. More than $1.1 trillion was spent in 2022 by governments seeking to protect citizens and industry from the impact of higher wholesale energy prices, according to the International Energy Agency (IEA) (see [*Fuelling controversy: Fossil fuel subsidies act like a negative carbon price*](https://carbonrisk.substack.com/p/everything-you-need-to-know-about-232)).

Undercharging for local air pollution and global warming accounted for 42% and 29% respectively of the total monetary value of the negative externalities in 2020\. The IMF calculates that correcting this mispricing would avert 1.6 million premature deaths per year from local air pollution by 2030, and generate economic benefits equivalent to 3.6% of global GDP.

### Cap-and-trade is about more than CO2

In the absence of energy subsidy reform the next best option is to use emissions trading schemes combined with local emission standards. [The IMF thinks that such a combination of policies could reduce CO2 emissions by around 20%](https://papers.ssrn.com/sol3/papers.cfm?abstract%5Fid=4585306&ref=carbonrisk.world) in 2030 relative to what would have occurred, and avert 1.2 million premature deaths per year from air pollution.

The EU ETS is the cornerstone of Europe’s climate policy. Launched in 2005 it was set up to reduce GHG emissions and help Europe meet its ambitious climate targets. [Analysis examining the impact of the EU ETS](https://www.nature.com/articles/s41598-024-70260-6?ref=carbonrisk.world#author-information) shows that CO2 emissions fell 15.4% during the period 2005-2020 more than they would have done in the absence of the EU ETS.

The EU ETS does not currently regulate the emissions of sulphur dioxide (SO2), fine particulate matter (PM2.5), or nitrogen oxides (NOx). However, given the same sectors responsible for the bulk of Europe’s CO2 emissions (utilities and heavy industry), also contribute to air pollution, it’s not unreasonable to think there might be a knock-on effect on these other pollutants too.

[A recent paper from the University of Hamburg investigated the impact that the EU ETS has had on these three other air pollutants](https://www.pnas.org/doi/10.1073/pnas.2319908121?ref=carbonrisk.world), comparing the relative emissions of those sectors covered by the scheme, versus those not covered. It found that the EU ETS was responsible for a decline in emissions between 2005 and 2021 of 15.2 million tonnes of SO2, 0.9 million tonnes of PM2.5, and 4.8 million tonnes of NOx. That’s equivalent to 18.3%, 3.3%, and 2.6% of observed economy-wide emissions during the same period.

As time has gone on by the relative improvement in emissions has tended to increase. For example, [the analysis indicates that in 2021 the EU ETS](https://www.nber.org/papers/w27205?ref=carbonrisk.world) was responsible for a 60% decline in SO2 emissions, and a \~30% drop in PM2.5 and NOx emissions, relative to where they would have been in the absence of the ETS.

![](https://substackcdn.com/image/fetch/$s_!uetm!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F115f9006-912f-4675-8159-b05ebb80fc4f_1495x916.jpeg)

### No time for a breather

The impact of emissions trading on air pollution in Europe is likely to accelerate later this decade, assuming ETS2 is launched on schedule. Recall that ETS2 is a separate emissions trading scheme that will cover buildings, road transport, as well as those manufacturing industries (under 20 MW threshold) that are not yet covered by ETS1 (see [*ETS2 carbon price could rapidly breach €100: Europe's second carbon market is expected to be very sensitive to emission allowance scarcity*](https://carbonrisk.substack.com/p/ets2-carbon-price-could-rapidly-breach)).

The European Environmental Agency (EEA) estimates that buildings and road transport accounted for 36% of EU GHG emissions in 2022\. Monitoring and reporting of emissions began in 2024, while full compliance obligations (i.e., including procuring and surrendering allowances) is expected to begin in 2027.

Road transport (exhaust and non-exhaust emissions) and fossil fuel based heating (coal is commonly used for home heating in Poland) are both major sources of air pollution. If ETS2 encourages commuters to switch to an EV the tailpipe emissions go to zero (assuming there’s no change to the generation mix), while the [non-exhaust emissions (e.g., dust from brake, tyre, and road wear) remain broadly the same](https://www.sustainabilitybynumbers.com/p/electric-vehicles-air-pollution?ref=carbonrisk.world) (assuming EV’s are the same weight as ICE vehicles). Meanwhile, ETS2 could incentivise a switch towards heat pumps that produce zero emissions or air pollution.

ETS2 could have make a big impact on adverse health outcomes and improve productivity and overall economic development. The think tank [Bruegel estimated the cost of air pollution across each European country as a share of GDP](https://www.bruegel.org/system/files/2024-06/WP%2015%202024.pdf?ref=carbonrisk.world) during the period 2014-2020\. The average cost across the EU was 6% of GDP, but this masks huge regional differences.

The Scandinavian countries incurred a cost equivalent to close to 1% of GDP, compared with more than 10% of GDP in Poland, Greece, and Bulgaria. Bruegel does project that these numbers will come down in 2024-2030, but the inequality in terms of impact is expected to remain. The health impact also varies greatly from one region to another. Northern Italy, Poland and Czechia are the hardest hit in terms of PM2.5 mortality, while large cities in western and southern Europe suffer the greatest impact from NOx air pollution.

![](https://substackcdn.com/image/fetch/$s_!FafZ!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fed008d49-0333-4238-ab33-48a0cdfb2d1c_1019x649.png)

Source: The Economist

### A hazy picture

The adverse impact of air pollution from road transport and the heating of building is significant. The potential economic and health benefits associated with ETS2 are compelling. Policymakers in Europe, and particularly in those countries most affected by air pollution really should be making a stronger case with their citizens.

However, the disparity in impact between different parts of Europe also serves to highlight why the politics is more difficult. It’s another tragedy, one that I haven’t mentioned yet, but that’s fundamental to curbing air pollution: the tragedy of the commons. This occurs when a public resource (also called a commons) is over-exploited as individuals, acting in their own interest, ultimately deplete the resource, to the detriment of others.

The solution lies in property rights, supply management and pricing the externality. First off, assigning property rights means that resources should be managed more sustainably, but in order to get to this point we need to know who is producing what air pollution, where, and when, and that calls for much smarter air quality monitoring.

The environmental technology non-profit OpenAQ publishes regular reports detailing the availability of ground monitoring data. Their [2022 report reveals that 39% of countries do not monitor air quality](https://ourcommonair.org/wp-content/uploads/sites/31/2024/09/OCA-Accelerating-Country-led-Air-Quality-Reporting-to-Achieve-Clean-Air-Briefing-PaperAccelerating-Country-led-Air-Quality-Reporting-to-Achieve-Clean-Air-Briefing-Paper-FINAL-05Sep24-WEB-1-1.pdf?ref=carbonrisk.world), while an additional 8% appear to monitor air quality, but do not share the data with the public. Even in Europe the coverage is patchy. There’s clearly a paucity of PM2.5 stations in northern Italy and Poland, both known air pollution hotspots. The hazy picture restricts our ability to make those that emit accountable for their air pollution.

Governments can break the ‘tragedy of the horizon’ by re-targeting their efforts towards clean air. It will require air pollution monitoring to improve and be made available to the public in real time. It will require policymakers to tout the benefits of climate policies such as the EU ETS, that have positive knock-on effects on clean air. Finally, it will need governments to be more open about the immediate health and economic benefits of cutting air pollution, and the trade-offs we make when we tackle one type of pollution versus another.

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### Strings attached
URL: https://www.carbonrisk.world/strings-attached/
Last updated: 2026-07-22T11:00:44.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

For several months now its been clear that policymakers have wanted to reform the EU carbon market such that industrial decarbonisation is accelerated through sharper incentives, and supported with funding from EU ETS auction revenues. 

Prior to the release of [the European Commission's review into the EU ETS last Friday](https://climate.ec.europa.eu/document/download/c0b4ca8e-0e12-4b4e-9976-98c0b4224410%5Fen?ref=carbonrisk.world), the big dark cloud hanging over the market was the design of the so-called 'Investment Booster' and the extent to which free allocations would be extended beyond 2034\. Investors were concerned that the availability of additional allowances would put downward pressure on the EU carbon price.

Here's what's actually been proposed, how it ties in with other policy announcements from the Commission, and the ultimate implications for industrial investment in decarbonisation.\*

\*Before getting into the nitty gritty, remember that this is *only a proposal. There will now be several months of negotiation between MEPs and Member States with Q1 2027 the target date to secure an agreement. The EU ETS is also subject to reflexivity; a move towards higher or lower carbon prices (in response to this proposal, or something else) may cause parties to the talks to adjust their negotiating position.*

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### Curb your enthusiasm
URL: https://www.carbonrisk.world/curb-your-enthusiasm/
Last updated: 2026-07-16T10:14:03.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

The European Commission is due to publish its EU ETS review tomorrow, Friday 17th July. Now seems like an ideal time to take the temperature of the EU carbon market. As I noted in early June, the EUA price has been closing in on the €82 level. It was here that the current bout of political uncertainty first kicked off back in early February. 

Ever since then the price of carbon has been extremely sensitive to headlines, particularly those emanating from Bloomberg. The to-and-fro between rival EU political parties, member states, and corporations shouting for or against the EU ETS, is distilled down to a headline no more than 63 characters. The algos react first, and ask questions later.

As publication date has neared, articles purportedly from "people familiar with the matter...asking not to be named discussing non-public information" have proliferated. Bloomberg published two articles yesterday detailing some of the major reforms: [EU Set to Slow Carbon Cuts to Give Industry Time to Adapt](https://www.bloomberg.com/news/articles/2026-07-15/eu-to-slow-carbon-market-emission-cuts-for-heavy-industry?ref=carbonrisk.world) and [EU to Give Companies 10 Years to Use New €30 Billion Carbon Fund](https://www.bloomberg.com/news/articles/2026-07-15/eu-to-give-companies-10-years-to-use-new-30-billion-carbon-fund?ref=carbonrisk.world).

One of the underlying (but perhaps not stated) intentions behind the reforms will be to curb market volatility, and provide a sustainable albeit implicit pathway towards a higher carbon price. That speaks towards the Commission not wanting to spook market participants, avoiding nasty surprises that could prompt a resurgence in volatility.

The devil may still be in the detail, but the messaging matters even more. It's here where well-timed leaks help to control the narrative. 

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### Scorchio!
URL: https://www.carbonrisk.world/scorchio/
Last updated: 2026-07-15T11:00:28.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

June 2026 was western Europe's hottest June on record according to [Copernicus, Europe’s climate agency](https://climate.copernicus.eu/copernicus-record-heatwave-brings-hottest-june-western-europe-during-second-warmest-june-globally?ref=carbonrisk.world). The average surface air temperature was 3.05°C above the 1991-2020 average, beating the previous record that was only set 12 months ago. The recent heat wave would have been "virtually impossible just 50 years ago", according to [Worldwide Weather Attribution](https://www.worldweatherattribution.org/fossil-fuel-emissions-have-rapidly-worsened-european-heatwaves-in-just-a-few-decades/?ref=carbonrisk.world), reflecting the impact of rising fossil fuel emissions on the climate.

The heatwave is estimated to have resulted in 10,000 excess deaths across western Europe. Aside from the human cost, the region has borne a large economic cost too. [Allianz estimates that the heatwave may have cut Europe’s annual GDP by as much as 0.5%](https://www.allianz.com/content/dam/onemarketing/azcom/Allianz%5Fcom/economic-research/publications/specials/en/2025/july/20250701%5FHeatwaves%5FEconImplications.pdf?ref=carbonrisk.world) due to the hit to labour productivity, supply chain disruption, and higher energy costs. 

However, with Europe Earth’s fastest warming continent (temperatures have been rising by 0.56°C per decade since the mid-1990's, more than double the global average), the current extreme heatwaves could be a mere portent of what Europe will experience in coming years. 

The biggest concern is what [Allianz calls the “non-linear economic transmission of heat stress”](https://www.allianz.com/en/economic%5Fresearch/insights/publications/specials%5Ffmo/260528-heat-economics.html?ref=carbonrisk.world). This is where losses intensify sharply after a “critical threshold around 30C” is breached. The insurer analysed a scenario in which the five hottest years between 2014 and 2024 were repeated sequentially between 2026 and 2030\. The impact? Cumulative GDP losses of some 5-7% across Europe's major economies.

### Macro volatility and financial instability

Climate change and extreme weather events also pose a challenge to Europe's financial policymakers, who must now increasingly deal with the associated macroeconomic uncertainty caused by higher and more volatile inflation. 

In the view of [Frank Elderson, a member of the European Central Bank's (ECB) executive board](https://www.ecb.europa.eu/press/key/date/2026/html/ecb.sp260702~49c4f8e9a6.en.html?ref=carbonrisk.world), institutions such as the ECB must "account for the ongoing climate and nature crises when preparing their inflation forecasts", or risk underestimating the degree of inflationary pressures.

What's more, climate change could disrupt economic activity and increase the risk of financial instability. For example, around three quarters of all corporate loans in the euro area granted to non-financial corporations critically dependent on at least one ecosystem service. Elderson believes that Europe's exposure to climate and nature shocks could in turn "impair the transmission of monetary policy to the real economy."

To bolster Europe's "resilience to these risks and lessen their economic impact," Elderson argues that we should "accelerate the transition to net zero carbon." By accelerating the adoption of renewable energy, batteries, and electric vehicles, Europe could slash its reliance on imported fossil fuels, boosting its energy security and limiting one of the main causes of inflation volatility (see [*Electric avenue: Europe set to outline its path to electrification and energy security*](https://www.carbonrisk.world/electric-avenue/)). 

### Uncertainty the binding constraint on decarbonisation

In his speech, the ECB executive board member highlights four key barriers to the green transition: 1) insufficient pricing of carbon emissions, 2) regulatory uncertainty and complexity, 3) access to finance, and 4) visible upfront costs and invisible benefits.

As noted on Carbon Risk previously, much of the world experiences a significant negative carbon price. Fossil fuel subsidies give carbon intensive firms a competitive advantage. By not paying the cost of the negative externality, polluting firms receive a subsidy relative to those that have invested in cutting their emissions (see [*Fuelling controversy: Fossil fuel subsidies act like a negative carbon price*](https://www.carbonrisk.world/everything-you-need-to-know-about-232/)). 

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### No such thing as a free allowance
URL: https://www.carbonrisk.world/no-such-thing-as-a-free-allowance/
Last updated: 2026-07-10T11:00:37.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

The European Commission is set to publish its EU ETS review on Friday (17th July). While there have been a few notable leaks to the media, the contents of the review remains speculation. Whatever emerges, it's worth remembering that it only marks the start of a long process that will probably carry on well into the latter half of 2027\. Time to buckle up for a long ride!

One topic that has been towards the top of the agenda has been free allowances. Reports began to emerge in early February that the Commission was considering a multi-year extension to reduce the burden on European industry. A subsequent panel discussion revealed a preference for extending the availability of free allowances, but "conditional" on firms investing in decarbonisation.

The free allocation of EU emission allowances helps industries that are exposed to carbon leakage meet compliance while remaining competitive against competitors that are not subject to an equivalent carbon price. In principle all industrial installations are eligible for free allocations, except electricity generators and municipal waste incinerators. That doesn't mean they're simply dished out to anyone who pleads poverty though. 

The EU ETS Directive establishes different levels of exposure to carbon leakage for the industrial sectors and sub-sectors it covers. Furthermore, the percentage of free allocations that an individual installation is entitled to receive is based on how their carbon intensity compares to a benchmark. For example, those within the top 10% most carbon efficient installation within a particular sub-sector are entitled to 100% of their entitlement. 

The EU ETS Directive limits the total amount of allowances that can be distributed free of charge. It requires that 57% of allowances are auctioned. A safeguard mechanism - known as the cross-sectoral correction factor (CSCF) - is triggered when the demand for free allowances exceeds that available. The CSCF subsequently adjusts the number of free allowances distributed to less carbon efficient installations.

Europe's industrial firms have built up a veritable war chest of free allowances. For example, the iron & steel sector has accumulated a surplus of nearly 700 million EU emission allowances (EUAs) during the course of the EU ETS, equivalent to more than 7 years of emissions (based on 2025 levels). [Other sectors have also built up vast multi-annual reserves](https://www.fastmarkets.com/insights/eu-ets-free-allowances-sell-hold-or-surrender/?ref=carbonrisk.world). Many commentators are concerned that this disincentivised companies from making the ground-breaking investments that will really drive down industrial emissions. 

The introduction of CBAM was meant to replace the existing system of free allowances. The levy, which was introduced at the start of 2026, will gradually be phased in at the same rate that free allocations for obligated emitters are withdrawn. By 2034 the plan was that importers will have to pay 100% of the CBAM cost, while at the same time no more free allowances would be distributed. 

Or at least, that *was* the plan.

However, since CBAM came into force on 1st January 2026 its become abundantly clear that ensuring a level playing field is a lot more complex. Meanwhile, high energy prices and geopolitical uncertainty has increased pressure on policymakers not to add to the burden already facing Europe's beleaguered manufacturers. 

The stakes could not be higher.

More than 90% of announced clean industrial projects in Europe have not yet reached final investment decision (FID) according to data analysed by [the Mission Possible Partnership (MPP)](https://missionpossiblepartnership.org/clean-industry-financing-doubles-strengthen-supply-chains/?ref=carbonrisk.world). In comparison, China accounts for more than 60% of projects that have passed FID over the past two years. As the MPP state China "remains the clearest demonstration of what strategically-coordinated industrial strategy can achieve." 

Free allowances are already designed to deliver multiple policy objectives: protecting against carbon leakage, while incentivising individual installations to lower their carbon intensity (the benchmark also becomes increasingly stringent over time, increasing the pressure). 

Will expanding the definition of "conditional" allocation of free allowances have the desired effect and lead to an increase in investment in decarbonisation, or will it damage the integrity of the EU carbon price signal, and result in other unintended (and adverse) consequences? 

While the provision of free allowances is already somewhat conditional upon a company being active in a certain sector (or sub-sector) exposed to carbon leakage, and their carbon intensity relative to the benchmark, the desire going forward is to make a much clearer link with investment in decarbonisation. 

The challenge according to a [recent paper published by the think tank EPICO in-conjunction with Frontier Economics](https://epico.org/uploads/files/EPICO-EU-ETS-Free-allowances-July.pdf?ref=carbonrisk.world) is that the definition of "conditional" is ambiguous. The economic case (and whether this ultimately messes with the price signal or not) depends on how such a scheme is designed. 

EPICO's report points to one factor in particular that people often fail to appreciate when thinking about free allowances. There's no such thing as free, whether its lunch or emission allowances. Everything has an opportunity cost. 

If the cost of decarbonisation is cheaper than the price of emission allowances then a company has an incentive to cut emissions now, and bank the free allowances in preparation for future periods when the carbon price might expected to be higher. The incentive remains the same at the margin whether an emitter gets the allowances for free, or they have to pay for them.

If the conditions for free allowances are too prescriptive, or if they force companies to undertake investments that are not yet commercially viable, the effective level of carbon leakage protection may decline. In the extreme, companies may feel that they are unlikely to receive even baseline level protection against carbon leakage, and so decide to move their production outside of Europe.

On the other hand, make the conditions for free allowances too lenient and it may serve to undermine expectations of a scarcity of allowances, in turn leading to a decline in the EU carbon price. That penalises early movers that have invested in decarbonisation. 

Where conditionality might make sense is where it helps unlock efficient decarbonisation measures that companies would otherwise fail to realise. The EPICO paper points to information gaps, organisational barriers or internal prioritisation constraints as potential blockers that could be unlocked. 

In short, if an extension to free allocations occurs on a conditional basis, any requirements should reward and protect first movers, while remaining technology agnostic.

If free allowances are to be extended beyond 2034 then its crucial that the Commission addresses their largest opportunity cost: the foregone revenue that would have been generated had those allowances been auctioned, and the clean industrial capacity those funds could have helped accelerate.

For example, less than 10% of the €112 billion of ETS revenues that flowed into national budgets between 2021 and 2024 (around €4 billion) supported industrial decarbonisation, according to estimates by [the Jacques Delors Institute](https://media.licdn.com/dms/document/media/v2/D4E1FAQFZ6sZCU%5F1C3A/feedshare-document-url-metadata-scrapper-pdf/B4EZ9K8jdMKQA4-/0/1783668817336?e=1784278800&v=beta&t=S53gW-HAuF1IA-tWiXB-Ey8t3ZD8I6hCFPfH5QjtHkk&ref=carbonrisk.world).

There's no such thing as a free allowance. 

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[In search of lost revenueEurope’s transition to a low carbon, energy secure economy may succumb to debt-laden paralysis![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/icon/Green-Nature-Tree-and-Root-Logo-Template--60-x-60-px--1b18d804-7fd7-4103-85bf-79b61f514d09.jpg)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/thumbnail/wolfgang-weiser-48rXHCkcNnA-unsplash-d4f619ee-b3da-433b-aa7f-8043d723eafe.jpg)](https://www.carbonrisk.world/in-search-of-lost-revenue/)
### Putting a price on superpollutants
URL: https://www.carbonrisk.world/putting-a-price-on-superpollutants/
Last updated: 2026-07-11T05:36:42.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

In contrast to carbon dioxide, governments have been reluctant to enact policies to curb the release of methane into the atmosphere. Only [13% of global methane emissions are covered by any government policy](https://www.sciencedirect.com/science/article/pii/S2590332223001951?ref=carbonrisk.world), and even where they are, their impact is often limited.

In part this may reflect an unwillingness to penalise the main emitters. Agriculture for example, accounts for more than one-third of global anthropogenic methane emissions, but governments are typically very sensitive to concerns about food security and the risk of pushing up prices (see [*Gas pains: A super-pollutant gets the cold shoulder*](https://www.carbonrisk.world/methane-2/)). 

The knock-on impact of limited government policy involvement to date is that climate finance targeted at methane abatement is negligible, accounting for [less than 2% of total climate finance flows](https://www.climatepolicyinitiative.org/publication/the-landscape-of-methane-abatement-finance/?ref=carbonrisk.world).

Methane is one of the so-called "superpollutants" thought to be responsible for between 35% and 50% of net global warming to date. Other examples include nitrous oxide (N2O), F-gases (synthetic chemicals including HFCs and PFCs), ozone-depleting substances (ODS), and black carbon. 

In contrast to CO2, which persists in the atmosphere for centuries, most superpollutants have a much shorter lifespan: from just a few days for black carbon, a decade or so for CH4, and up to 120 years for N2O. It's why they are also sometimes referred to as short-lived-climate-pollutants (SCLPs). 

They may have a short lifespan in the atmosphere, but their impact on the climate, the environment, and human health is anything but sweet. 

N2O for example has almost 300 times the global warming potential (GWP) as CO2, while hydrofluorocarbons (HFC) are almost 15,000 times as powerful. They also harm ecosystems (N2O for example increases the concentration of nitrogen), while also aggravating heart and respiratory diseases (tropospheric ozone and black carbon are the biggest villains in this story) (see [*Blue sky thinking: As climate policy splutters, governments should sell the benefits of clean air*](https://www.carbonrisk.world/blue-sky-thinking/)).

In the absence of government policy tackling superpollutants, there is a clear case for the verified carbon market (VCM) to help fill the gap and start putting a price on CH4, N2O and other superpollutants. As this article will show, significant near-term impacts on the climate can be achieved, and at relatively low cost.

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### The Polluter Pays (in) Principle
URL: https://www.carbonrisk.world/the-polluter-pays-in-principle/
Last updated: 2026-07-06T11:00:51.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

> "In the European Union, if you pollute, you have to pay a price for that. If you want to avoid paying that price, you innovate and invest in clean technologies." - European Commission President, Ursula von der Leyen

The Polluter Pays Principle (PPP) says that those who pollute should bear the cost of managing the negative externality, the damage they have caused to the environment and to human health. By incorporating this cost, carbon pricing acts as a signal, incentivising producers to switch to cleaner, less carbon intensive manufacturing methods, and for individuals to cut back or move to more sustainable alternatives.

Ahead of the publication of the European Commission's review of the EU ETS (now scheduled to be published on Friday 17th July, two days later than planned), a [survey conducted by YouGov on behalf of Beyond Fossil Fuels](https://caneurope.org/news/citizens-challenge-rollback-of-eu-ets/?ref=carbonrisk.world), examined EU citizens attitudes to carbon pricing. YouGov surveyed 6,156 people during the period 6th-18th May across six countries: France, Germany, Spain, Italy, Poland and the Netherlands.

It found that 59% of EU citizens (the average of the 6 countries surveyed) want energy intensive industries to pay for their carbon emissions. Furthermore, 72% believe that the highest emitters, and the "climate laggards" that have failed to reduce their emissions, should face a higher carbon price than other less carbon intensive companies. Across the sample of six countries, Dutch citizens came out most strongly in support (71% and 84% respectively).

Not everyone wants polluters to pay. Almost one-quarter (23%) of EU citizens polled disagreed that with the idea that heavy industries should pay a price for their CO2 emissions. Respondent in Poland and Germany were least supportive with one-third (35%) opposed.

Importantly, carbon pricing finds support across political and ideological lines. Even amongst those that would naturally be opposed to carbon pricing (i.e., supporters of far-right parties), between one-third and a half of respondents are in favour. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/07/image.png)

Source: YouGov

While the results are encouraging the survey doesn't explain why people responded the way they do, nor and perhaps crucially, it isn't entirely clear that people understand the question posed, nor the implications of heavy industries paying a carbon price commensurate with the damage their pollution causes.

It seems reasonable that people think that whoever pollutes should pay a price inline with the damage they have caused. But people may not appreciate that the EU carbon price is set by the market, in theory at least at a level consistent with meeting the declining cap on emissions - what's known as the marginal abatement cost of carbon. However, if the carbon price is going to atone for the damage caused then it will need to be much higher, reflecting the social cost of carbon (see [*Everything you need to know about the Social Cost of Carbon (SCC)*](https://www.carbonrisk.world/weighing-the-future/))[](https://www.carbonrisk.world/author/peter-sainsbury/).

Perhaps they also instinctively feel that its unfair that heavy emitters and "climate laggards" are free-riding on the actions of those companies that have already invested in cutting their emissions. It's only reasonable that companies with the foresight to invest shouldn't be penalised simply for being the ahead of the game.

The bigger question I believe is whether people have thought through the short-term implications of a carbon price. Do people understand that the PPP ultimately means that it is they who will be the ones footing most (or even all) of the bill through higher prices? 

Companies typically pass on as much of the carbon price onto their customers as possible. The main factors determining the degree to which cost-pass-through takes place includes fixed costs as a share of the overall cost base, the price elasticity of demand, and the level of competition in the market. 

An [empirical review by ABN AMRO put EU ETS](https://www.abnamro.com/research/en/our-research/esg-strategist-eu-ets-costs-will-not-eat-into-companys-profits?ref=carbonrisk.world) industrial cost-pass-through at 66%. By comparison, aviation and electricity generation are estimated to be much lower (24% and 42%, respectively), while for fossil fuels and shipping, 100% of the cost is assumed to be passed on to the consumer. 

Public awareness and understanding of carbon pricing is crucial if it is to be effective, while also being robust against attack. Right now everyone is focused on ETS1, but very soon, it will be its sequel, ETS2 that will capture the limelight. 

Europe's second carbon market is designed to put a price on transportation and heating fuels. If the cost-pass-through estimates are broadly correct then nigh on all of the carbon price will be passed onto the end consumer, the commuter trying to get to work, and the family attempting to warm their home.

ETS2 was supposed to launch in 2027, but after a debate last autumn it was delayed by one year, and is now scheduled to come into force in 2028 (see [*Softening the blow*](https://www.carbonrisk.world/softening-the-blow/)). But as Paul Mottram, founder of the Carbon Costs Coalition [warns in a recent article for Reuters](https://www.reuters.com/sustainability/boards-policy-regulation/europe-is-planning-carbon-pricing-revolution-why-does-no-one-know-about-it--ecmii-2026-04-14/?ref=carbonrisk.world), public awareness and understanding is dangerously low:

> "If the EU doesn’t communicate early and clearly – especially on how it will affect costs and how the revenue it generates will be used – ​it risks backlash that could derail not only the rest of Europe’s Green Deal but also the prospects for progressive and pragmatic climate policies worldwide." 

While there is a way out for industrial emitters wishing to avoid paying a price on pollution - namely, innovating and investing in clean technologies - the same cannot be said for individual households. This is especially true since ETS2 will fall most heavily on those least able to switch to cleaner technologies, the lower-income households that spend a disproportionate amount of their income on transportation and heating.

As I wrote in [Europe must learn from Canada's 'price on pollution' debacle](https://www.carbonrisk.world/a-cautionary-tale/) back in January 2024, "Finding the carbon price sweet spot, a level that balances affordability for consumers with the need to advance climate action is essential if ETS2 is, like ETS1 before it, going to become a cornerstone of Europe’s climate policy."

Opposition to ETS2 suggests that when it comes to the PPP, its one rule for me, another for thee. Crucially though, unlike polluting companies that are able to pass on most if not all of the cost, individuals with limited access to capital (to buy an EV or install heat pumps), have little they can do to mitigate their exposure, short of asking their employer for higher wages. 

This is especially important at a time of high energy prices. Prior to the energy crisis, the majority of studies indicated that green spending (i.e. revenues earmarked for climate-friendly projects) was the only complementary policy associated with a statistically significant increase in public support. However, ever since the Russian invasion of Ukraine, and the subsequent 'energy crisis', attitudes have (unsurprisingly) shifted.

[A recent paper examined public attitudes to carbon pricing and revenue use in Germany](https://www.sciencedirect.com/science/article/pii/S0921800926000558?ref=carbonrisk.world) between 2019 and 2022\. In the middle of this period, the German government introduced a carbon price on transport and heating fuels (a prelude to ETS2). Beginning at €25 per tonne CO2 in 2021, the carbon price increased to €30 per tonne CO2 in 2022.

The research shows that while support for carbon pricing in Germany is persistently high (at \~60%), attitudes to how the revenues are spent has switched sharply in favour of "social cushioning", while support for green spending has declined. It's clear that those most affected by high energy prices are least in favour of carbon prices. Indeed, this cohort have a 20 percentage point lower probability of supporting carbon pricing. 

[](https://www.carbonrisk.world/author/peter-sainsbury/)

It's crucial then, as the paper concludes, that from a policy-making perspective, governments must generate support for carbon pricing *before* it is launched, as it then has a greater likelihood of continuing afterwards. Policymakers must be flexible, tailoring how revenues are spent to reflect citizens needs and perception of injustices (whether real or perceived), something that is especially important at a time of high energy prices.

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[Carbon pricing doesn’t have to be taxingCarbon pricing has come under increasing pressure over the past 12 months amid affordability concerns, allegations of state overreach, and opposition parties using the issue to drive a wedge between voters. The outcome has been delays, proposals to slow the rate at which emissions must decline, and in some cases,![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/icon/Green-Nature-Tree-and-Root-Logo-Template--60-x-60-px--c937180f-7bd9-4422-8ec9-1fbc4197e446.jpg)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/thumbnail/Bd_StGermain_5-c6bb9874-48b1-4a0a-a264-a37674d2af17.jpg)](https://www.carbonrisk.world/carbon-pricing-doesnt-have-to-be-taxing/)
### United states of net zero
URL: https://www.carbonrisk.world/united-states-of-net-zero/
Last updated: 2026-07-01T11:00:58.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

It is now almost 16 years since a proposal to limit America's greenhouse gas emissions using a nationwide cap-and-trade scheme was dealt a fatal blow. 

The legislation was supported by most Democrats and a policy that US President Barack Obama campaigned on. Unfortunately, fierce opposition from Republicans concerned that it would raise energy prices, coupled with dwindling approval ratings, eventually forced Obama to abandon the plans. Plan B involved regulating industrial emissions on a plant by plant basis. Compared to carbon pricing, mandates are inefficient, unwieldy, and costly.

Today, just over 10% of America's GHG emissions are covered by a carbon pricing mechanism. Among those states where an emissions trading scheme operates, the average carbon price is currently around $35 per tonne CO2 (\~€30).

Instead of being a patchwork of different programs, states are increasingly looking to link to other more established multi-jurisdiction schemes. Those that do will benefit from a deeper pool of carbon abatement opportunities and reduce the risk of 'carbon leakage', i.e. when companies choose to relocate to jurisdictions with lower environmental standards. It also enables them to tap into a rich vein of revenues, that can be used to unblock decarbonisation barriers, or reduce power prices for lower income households.

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### How to survive CDR's "Death Valley"
URL: https://www.carbonrisk.world/how-to-survive-cdrs-death-valley/
Last updated: 2026-06-29T11:00:36.000Z
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On 17th June Frontier, the advanced market commitment (AMC) designed to accelerate CDR technological development, [announced that it was pledging an additional $915 million (€800 million) to a 10-15 CDR projects](https://frontierclimate.com/writing/growth-amc?ref=carbonrisk.world) nearing commercialisation. 

The funding represents a doubling in Frontier's overall CDR allocation to $1.8 million. Tech companies such as Stripe, Google and Shopify dominate the list of Frontier members, with AI firm Anthropic the most recent company to join the group (see [*CDR "moonshot" aborted, for now: Reboot needed as Microsoft allegedly suspends carbon removal purchases*](https://www.carbonrisk.world/cdr-requires-a-reboot/)).

At the core of this additional commitment is Frontier's acknowledgment that in order to get "to gigaton-scale, companies and governments will need to work in concert." Governments are only likely to want to include CDR within their climate policy regulations once they are reasonably certain that they have been de-risked (scale, cost, deployed responsibly, etc). 

That means focusing on those CDR companies where Frontier has a "high conviction the technology has gigaton-scale potential," while also favouring jurisdictions where "meaningful carbon removal policy has passed or is likely to."

Frontier is focused on five key CDR technological bets. Of those biomass carbon removal and storage (BiCRS) and direct air capture (DAC) are the most mature. At the other end of the scale, surficial mineralisation, ocean alkalinity enhancement (OAE), and enhanced rock weathering (ERW) are the least mature. 

Each individual CDR technology has factors that could prompt concern among policymakers: insufficient or uncertain scalability, cost likely to remain prohibitive, nascent technology with high risks. To some extent these factors are inherent to the underlying CDR technology. 

Frontier will no doubt hope that some of its CDR bets will take on a virtuous circle: increased scale leads to lower costs, this results in a further scale-up in capacity, with every stage ironing out the remaining technological risks. To do that companies need to learn fast, from their own actions, and those of their competitors. 

One way to assess whether that is possible is to determine the learning rate. This is the degree to which costs decline through efficiencies as cumulative production volumes double. It was first described by Theodore Wright in 1939 who observed a 20% decline in manufacturing labour hours for each cumulative doubling in airplane manufacturing output.

Different technologies tend to follow different cost learning curves that determine a potential cost floor. Frontier must reason that the greater the number of shots on goal it makes, the greater the likelihood that at least one CDR technology solution will have a sufficiently high learning rate.

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### Britain's green credibility gap
URL: https://www.carbonrisk.world/will-andy-burnham-close-britains-green-credibility-gap/
Last updated: 2026-06-23T13:17:45.000Z
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UK Prime Minister Sir Keir Starmer has announced his resignation. Although nominations for the next leader are due by 9th July, the absence of any meaningful competition means that former mayor of Greater Manchester Andy Burnham, is almost certain to become the seventh UK leader in the past 10 years. 

The immediate concern for UK carbon market participants was always going to be whether a leadership contest would have any ramifications for the EU-UK summit. It's here where the two sides were expected to confirm a formal link between the two emissions trading systems. ETS linkage is part of a broader package of measures including agreements on food standards, steel tariffs, and a Youth Mobility Scheme.

Only last week the summit was postponed from 13th July to 22nd July. However, in light of yesterdays resignation announcement, Antonio Costa the President of the European Council, has now stated that the event will be postponed (date TBC). The Labour Party's electoral rules has thrown a spanner in the works. The[ most likely outcome is that Burnham will be the only MP with enough nominations (88% implied probability at the time of writing)](https://www.betfair.com/exchange/plus/politics/market/1.259371586?ref=carbonrisk.world). If that's the case then he will probably become Britain's next Prime Minister on around the 16th or 17th July.

On a day when the EUA price jumped 1% to more than €81, the UKA price fell 2% to £58.50 (€67.80) as traders digested the latest bout of political uncertainty. It means that the UKA-EUA discount has widened from 14% (\~€11) on Friday to 17% (€13.70) at the close on Monday evening. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/06/image-7.png)

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### Losing steam
URL: https://www.carbonrisk.world/losing-steam/
Last updated: 2026-06-22T11:00:21.000Z
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Thursday 18th June marked the one year anniversary since the worlds first industrial scale carbon capture and storage (CCS) facility was inaugurated. More than 300 guests attended the opening ceremony at Heidelberg Materials Brevik CCS facility last June, including the Crown Prince of Norway.

The plan was to capture around half of the cement plants emissions, equivalent to 400 kt CO2 per annum. The CO2 would then be shipping in specialised vessels (part of the Northern Lights CO2 transport and storage network) to a location 60 miles off the west coast of Norway. From here it would be permanently sequestered 1.6 miles beneath the North Sea (see [*Northern Lights the way: Europe's CO2 network is being bult in the North Sea, but for now it remains fragile*](https://www.carbonrisk.world/northern-lights-the-way/)).

However, according to [recent media reports](https://www.mediapart.fr/journal/ecologie/100626/climat-le-fiasco-du-megaprojet-de-stockage-du-co2-de-totalenergies?ref=carbonrisk.world), only 105 kt CO2 has been captured and sequestered over the past twelve months. Although it's natural for a new project to experience a gradual ramp up in capacity, the article suggests that the peak occurred in late summer 2025, shortly after operations began. Heidelberg Materials continues to maintain that [400 kt CO2 per year is captured by the facility](https://www.brevikccs.com/en/facts-and-faq?ref=carbonrisk.world).

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### Under-rated
URL: https://www.carbonrisk.world/under-rated/
Last updated: 2026-06-18T11:09:29.000Z
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As governments consider how to relieve the carbon abatement pressure valve, policymakers in Europe are debating how carbon credits linked to international carbon projects and carbon dioxide removal (CDR) can play a role in the blocs climate policies. If they are not careful they risk undermining the integrity of instruments such as the EU ETS. As readers of *Carbon Risk* know, carbon markets are built on trust, and once its gone its very difficult to get back.

In [Carbon's "lemon" dilemma](https://www.carbonrisk.world/carbons-lemon-dilemma/) I show that carbon credits exhibit many of the same characteristics seen in the second-hand car market, just to a much greater degree: imperfect information (neither buyers nor sellers are able to assess the quality of the underlying projects) and asymmetric information (one side has more access to information than the other). The knock-on impact of this is adverse selection, a situation whereby one party may exploit undisclosed information to the detriment of the other party in a transaction.

As a paper from the Oxford Smith School highlights, these extreme 'market-for-lemons' characteristics have three important consequences that compound the adverse selection problem. First, there is no role for reputation mechanisms to help buyers judge quality. Second, contractual enforcement is undermined, since even a "well-resourced regulator or auditor" faces the same set of challenges determining the underlying quality of a carbon credit. Finally, the poor cost-benefit ratio (effort required versus carbon price received) weakens the incentive for any seller of carbon credits to do better. 

Compliance carbon markets whose rules enable carbon credits to meet some level of compliance (such as the Californian Cap-and-Invest Program) have introduced mechanisms to manage the risk that credits don't deliver what they promise. Amongst the risk management armoury, schemes often include buffer pools, reversal insurance, permanence trusts, and digital monitoring, reporting and verification (MRV). However, it all starts with a methodology that establishes a minimum bar for compliance grade eligibility. 

This sounds like a good idea, but a simple pass or fail suppresses price differentiation and weakens the incentive for buyers to verify what they have purchased, and for developers to improve the integrity of their project and invest in risk mitigation. With no mechanism to differentiate between the good, bad, and the ugly, incentives being what they are, the onus is on developers to churn out more and more credits (as long as they meet the minimum standard), rather than high integrity credits. 

The upshot is that compliance carbon credits also often fail to deliver on their promises, undermining the integrity of the compliance scheme. For example, the Californian Cap-and-Invest Program and the Australian Carbon Credit Unit (ACCU) Scheme have been beset by concerns that the over-issuance of credits has dampened the incentive to invest in decarbonisation. 

Even the best methodology in the world can't cover all the eventualities that could befall a carbon credit project. As with any other activity that takes place in the real world (and not a spreadsheet), shit happens. Could carbon ratings - a structured way of estimating the residual risk that a project fails to deliver - help price the compliance carbon risk curve?

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### Wall Street has not turned its back on climate change
URL: https://www.carbonrisk.world/wall-street-has-not-turned-its-back-on-climate-change/
Last updated: 2026-07-13T16:20:23.000Z
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In January 2025 the Net Zero Asset Managers (NZAM) initiative, the flagship coalition setup in 2020 to align the asset management industry with global climate goals, announced that it was suspending its activities. Days earlier, the worlds largest investor group, BlackRock, said that it was leaving the group amid a political backlash in the United States.

Other coalitions of financial institutions, such as the Net Zero Banking Alliance (NZBA), setup to provide guidance to banks on setting climate goals, have also quietly loosened their climate ambitions. In part the move recognises that the world is not now very unlikely to meet the 1.5°C target, but also reflects escalating energy security concerns.

The NZAM, NZBA and other similar initiatives were underpinned by mandates requiring signatories to measure, disclose, and report on climate related information.

However, it's clear now that the assumption that simply by adopting "climate risk" mandates financial institutions would go onto allocate capital in such a way that we would avoid planetary breakdown, was a mistake. 

That's the main conclusion from [a new paper from the Columbia Center on Sustainable Investment (CCSI)](https://ccsi.columbia.edu/from-planetary-hazard-to-financial-stability-disentangling-climate-risk-and-institutional-responsibility/?ref=carbonrisk.world). 

Rather than accelerate action to tackle the climate, the mandates have only served to slow the transition, meanwhile stoking discontent among climate activists, and emboldening climate deniers and delayists.

The key problem identified by the CCSI is that "climate risk" conflates three distinct types of risk: 

1. planetary risk - rising temperatures, sea level rises and the human and ecological harm they cause.
2. economic risk - physical and transition risks that affect incomes, infrastructure, and public budgets.
3. financial risk - impact on credit quality, portfolio values, and risks to financial system stability.

Climate change gives rise "not to a single undifferentiated 'climate risk', the report argues, but to a "cascade of interconnected yet distinct risks." As the image below illustrates, the risk propagates from left to right, from planetary risk to economic risk, before finally manifesting in financial risk. 

However, as the CCSI make clear, mandates have loaded institutions with expectations that are "misaligned with their mandates and tools, and undermines the tools and focus they do need to manage the risks they actually face."

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/06/image.png)

Source: CCSI

Only emission mitigation tackles the underlying hazard posed by climate change.

The other five responses identified by the report - adaptation, risk sharing, fiscal resilience, exposure management, and financial system stability - manage the consequences of climate change downstream. 

As the CCSI conclude, disentangling the three distinct risks is a "precondition for responding effectively". Instead of expecting institutional mandates to be a Swiss Army Knife, far better to match "each objective to the appropriate institutions and tools."

In January this year, twelve months on from the collapse of the NZBA, [the New York Times published an article](https://www.nytimes.com/2026/01/17/climate/how-wall-street-turned-its-back-on-climate-change.html?ref=carbonrisk.world) titled, *"How Wall Street Turned Its Back on Climate Change: Six years after the financial industry pledged to use trillions to fight climate change and reshape finance, its efforts have largely collapsed."*

In contrast to the negative headline, it's clear that financial institutions have adapted how they are responding to climate change. Far from abandoning climate change, institutions are using their influence to help shape public policy, prepare business owners and investors for the breadth of risks they will face, and in light of the current challenges affecting the world, fighting the complacency trap. 

For example, this week 49 investment institutions, representing €13.1 trillion ($15.1) in assets under management, [issued a joint letter urging Europe's Heads of State](https://www.iigcc.org/media-centre/investors-call-for-robust-and-predictable-eu-ets?ref=carbonrisk.world) "to preserve the carbon market as a credible long-term investment signal." The letter says that the EU ETS must remain "the bedrock of Europe’s clean industrial future," adding that "the ETS revision presents an opportunity for evolution – not dilution." 

As ever, what's most important to institutions, especially when allocating long-term capital to low-carbon technologies is stability. "For institutional investors", the letter goes onto say, "regulatory stability and visibility on the likely future carbon price path help manage risk and enable long-term capital deployment into the real economy."

Among the six recommendations the group calls for, the letter cites the need for clear and credible long-term cap trajectory aligned with Europe's long-term climate goals, transparent rules that provide a predictable upward price signal, and increased support to help industrial companies decarbonise while also addressing sectoral structural barriers to competitiveness (see [*EUAs reaching critical turning point: Despite the noise, EU ETS reform discussions are yet to start in earnest*](https://www.carbonrisk.world/euas-reaching-critical-turning-point/)).

The need to accelerate mitigation is more important than ever. Europe is already suffering from climate change - heat stress events have multiplied sevenfold since the 1980's - and this year could be even more extreme as [El Niño has officially begun](https://www.bbc.co.uk/news/articles/c75ylx7g00xo?ref=carbonrisk.world). It's clear that climate change is 

One of the signatories to the European Heads of State letter, [Allianz SE, published a report in May](https://www.allianz.com/en/economic%5Fresearch/insights/publications/specials%5Ffmo/260528-heat-economics.html?ref=carbonrisk.world) arguing that extreme heat has now become a structural economic risk for the continent. They report that Europe is highly exposed to these ill-effects due to a combination of ageing populations, housing designed to retain warmth (rather than keep cool), and finally, low investment in cooling infrastructure such as air-conditioning. 

A crucial insight from the report is that the economic losses from heat stress are non-linear; there is a critical threshold above 30°C beyond which the productivity losses intensify sharply. The losses fall most heavily on France, Germany, Italy and Spain, with one scenario pointing to cumulative implied GDP losses of 5-7% over the next four years.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/06/image-2.png)

Despite the pressing urgent need for investment in mitigation, L&G Asset Management (another of the signatories to EU letter) believe that many investors may have been led into believing the narrative that the energy transition has stalled, and that uncertainty over the climate means "long-term analysis has little merit." The asset manager believes that these two misunderstandings mean investors are now placing "too great a focus on short-term returns over long-term capital allocation to the energy transition."

However, holding back in committing capital to decarbonisation means companies could be exposed to significant risk, and mean missing out on capturing the opportunities from the energy transition. L&G also believe a "potential fear of first mover disadvantage and a hesitation to compete with Chinese dominance in many low-carbon technology markets" may be leading companies to hesitate before investing. 

[Updated scenarios prepared by the asset manager](https://blog.landg.com/categories/responsible-investing-and-long-term-themes/signal-failure/?ref=carbonrisk.world) indicate that global emissions are likely to begin falling later this decade, even without further policy support. However, this alone will not be sufficient to keep global warming below 1.5°C or 2°C. To achieve the required emission reductions L&G estimate that carbon prices will need to rise to $100/$50 per tonne CO2e by 2030, increasing to $550/$200 per tonne CO2e by 2050, respectively. 

Importantly, for investors (and the economy at large), there is the possibility of a disruptive pathway where climate policy suffers a decade of delay and disappointment. In this delayed scenario, carbon prices would only begin to rise from 2035, but would need to reach $700 per tonne CO2e by 2050 to meet the global warming targets. This would clearly involve much higher planetary, economic and financial risks, and do much greater damage. 

As per the footnote there are many ways that an equivalent carbon price could be implemented, and not necessarily best implemented through a blanket carbon price. L&G include subsidies for low-carbon technologies, sales bans for highly polluting products, and cap-and-trade mechanisms on the list of potential policy instruments. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/06/image-1.png)

Source: L&G Asset Management

The term Tragedy of the Horizon was coined by former Governor of the Bank of England, Mark Carney. This is the idea that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors. This imposes a cost on future generations that the current generation has no direct incentive to fix. In a [speech to the finance industry at Lloyds of London in September 2015](https://www.bankofengland.co.uk/speech/2015/breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability?ref=carbonrisk.world), Carney suggested that climate disclosures were the answer: 

> “With better information as a foundation, we can build a virtuous circle of better understanding of tomorrow’s risks, better pricing for investors, better decisions by policymakers, and a smoother transition to a lower-carbon economy.

> By managing what gets measured, we can break the Tragedy of the Horizon.”

Better information is the foundation and while important, it's clear now that simply pursuing climate risk disclosure mandates was an insufficient condition for tackling the underlying issues. To reiterate a sentence from earlier, mandates loaded institutions with expectations that are "misaligned with their mandates and tools, and undermines the tools and focus they do need to manage the risks they actually face." 

Progress would have bene faster if this had been identified sooner, but it's not all bad news. Far from it. It's clear that financial institutions are using their leverage to play a more active and crucially, a more targeted role in tacking underlying climate risks. In a subsequent post I'll explore how financial institutions are now tackling other 'non-mitigation' responses to climate change, including using the power of markets to change incentives.

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[Repricing the ‘Tragedy of the Horizon’Welcome to Carbon Risk — helping investors navigate ‘The Currency of Decarbonisation’! 🏭![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/icon/Green-Nature-Tree-and-Root-Logo-Template--60-x-60-px--16cf8378-c85e-48a7-977e-eeb03b23a5b1.jpg)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/thumbnail/photo-1670879300315-4237f6ec38d8-57b630f4-496d-4a91-9cb2-df1ca210f363)](https://www.carbonrisk.world/repricing-the-tragedy-of-the-horizon/)
### The decarbonisation bargain
URL: https://www.carbonrisk.world/the-decarbonisation-bargain/
Last updated: 2026-06-10T11:00:29.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

A broad spectrum of viewpoints has emerged as EU ETS reform discussions begin to heat up. While some carbon-intensive industries want to continue with the blocs ambitious emission reduction targets, others are pushing for carbon compliance costs to be eased today, and the pace of future emission reductions to be sharply tapered back.

What explains the apparent dichotomy across carbon-intensive industries, and what needs to change to bring about a more aligned consensus? It will be much easier for Europe to meet its climate goals, increase industrial competitiveness, and ensure a more energy secure future, if everyone is pulling in the same direction.

There's certainly an element of protecting first mover advantage. Investing in the capital and equipment required to decarbonise whole industries requires taking a long-term, multi-decade view. Those firms that have taken that bet, reasoning that Europe's climate policy trajectory will not be knocked off course, are clearly going to be aggrieved if the payoff now looks weaker and more uncertain. They are also understandably loath to give the climate laggards a free pass.

But is there more to it than that? According to a [paper from two academics at John Hopkins University and published in Cambridge University's *Perspectives on Politics* journal](https://www.cambridge.org/core/journals/perspectives-on-politics/article/abs/decarbonization-bargain-how-the-decarbonizable-sector-shapes-climate-politics/A96CF0A6C399240BC4414EED53E3EF54?ref=carbonrisk.world), a certain group of industrial company is "receptive to a bargain: agreeing to meet climate goals in exchange for policies that support their decarbonisation, especially fiscal policies that partially fund or de-risk their business transitions."

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### Repost: California's 'energy transition' will not be linear
URL: https://www.carbonrisk.world/repost-californias-energy-transition-will-not-be-linear/
Last updated: 2026-06-03T11:01:00.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

*Gasoline prices in California have surged by around 30% since the start of the US-Israeli conflict with Iran, and* [*now stand at more than $6 per gallon, almost 40% above the US national average*](https://gasprices.aaa.com/?state=CA&ref=carbonrisk.world)*.*

*In recent months California has become increasingly dependent on refined product imports after two of its largest refineries shutdown: the Phillips 66's Los Angeles and Valero's Benicia facilities.*

*What's made things worse is that South Korea, the states main supplier of jet fuel, is heavily dependent on crude supplies from the Middle East. The conflict in the Gulf has forced its government to cap refined product exports.*

*As I discuss in an article first published in May last year (and now available below without the paywall), California is discovering that it's 'energy transition' is anything but linear. Managing the decline in refining capacity is a delicate balancing act, which if handled badly risks a backlash against the states climate policies.* 

*The gasoline price surge, coinciding with a contentious overhaul of the states 'Cap-and-Invest' market, could not have come at a worse time. High prices appear to have handed the states remaining refiners significant political and economic leverage.* 

*But is the reality quite as clear cut?* 

*Last week the California Air Resource Board (CARB) voted 10-3 to adopt revisions to the scheme that seek to balance ambitious emission reduction plans, with concerns over affordability and competitiveness.* 

*At the centre of the controversy lies the Manufacturing Decarbonisation Incentive (MDI).* 

*As* [*outlined in an earlier article*](https://www.carbonrisk.world/the-state-were-in/)*, the MDI will provide additional free allowances (118.3 million) to facilities if they invest in certain emission reduction activities.* *About half of the allowances are available to be used by the states refiners, a sum that could be worth close to $2 billion.* 

*The worry* [*according to a recently published analysis of the MDI*](https://energyathaas.wordpress.com/2026/04/27/a-stress-test-for-california-carbon-pricing/?ref=carbonrisk.world) *is that refineries may end up with more free allowances than they need to cover their emissions. Although CARB has now built in review periods after each compliance period, its still unclear how they will determine whether a refinery has invested in emission reduction activities such that they will be allocated free allowances.*

*Its good news that this present bout of policy uncertainty is now behind us. Hopefully it means that the price of allowances can now begin to lift themselves off the floor. Encouragingly, the CCA futures price closed near $30 on Friday, the first time it has moved away from the auction reserve price since February.* 

*Whether that is a vote of confidence in the amendments or not, it's too early to say. The increase in the carbon price perhaps reflects scepticism that refiners will ever be in a position to qualify for the additional allowances under the MDI anyway.*

---

Two major refineries in California have announced plans to close over the next twelve months. The Phillips 66 refinery in Los Angeles is scheduled to shut-down by the end of 2025, followed by the Valero refinery in Benicia in April 2026.

The shutdowns should curb emissions by around 3 Mt of CO2e. After power generation, the refining sector is California’s second largest emitter — it’s top five individual emitters are all oil refineries.

However, the two facilities slated for closure also produce approximately 20% of California’s in-state gasoline supply, raising fears about whether the state will have enough gasoline to ward off the threat of a price spike. Indeed, [analysis by Professor Michael Mische of University of Southern California (USC) forecasts](https://files.constantcontact.com/6ddc9aab901/d3ac27a3-d4d4-44f3-9a3b-f91f88735d11.pdf?ref=carbonrisk.world) that gasoline prices could rise to above $8 per gallon by the end of 2026, if the refining supply crunch is allowed to manifest.

Mische’s analysis indicates that the price of gasoline could rise from around $4.85 per gallon currently, to between $6.05 and $6.43 per gallon following the closure of the first refinery, increasing yet further to between $7.35 and $8.44 per gallon by the end of 2026 as the second refinery closes.

Even if the exact gasoline price trajectory is someway short of these predictions, sharply higher fuel prices risk provoking a backlash from citizens. Up until now at least they have been somewhat shielded from the supply-side response to California’s environmental policies.

That looks set to change.

### An “energy island”

It’s no secret that Californian’s face the most expensive gasoline prices in America, with drivers typically paying around at least $1 more per gallon than the national average, and often more than $2 per gallon higher. Other western states also see high gasoline prices, but not to the extent to that experienced in California.

In part this is because the region is so geographically isolated. The vast Rocky Mountain range to the east means that there are no pipelines able to deliver gasoline directly from the US Gulf and other refining centres. Instead, California often has to import gasoline across the Pacific, from countries such as India and South Korea, in order to make up any shortfall, which of course adds to the overall cost.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/f34bb711-b4dc-49f3-bab5-a57063fe7e97_955x606.png)

The high price of gasoline also reflects a political choice, one that has been influenced by California’s history as being among the worst states in America for air pollution. The topography of the state means that noxious fumes become trapped, often resulting in a thick smog enveloping the cities below. As the most populous US state, transportation has played a central role in driving air pollution; the sector is responsible for 80% of the states nitrogen oxide and 95% of its particulate matter emissions.

In response, California mandates a special blend of gasoline (known as California Reformulated Gasoline), that burns cleaner than conventional gasoline, reducing air pollution and greenhouse gas emissions. The blend is more expensive to produce than conventional gasoline, and so California tends to rely on its in-state refineries to produce it.

Other factors also mean the state has become progressively less attractive to refiners. For example, the Low Carbon Fuel Standard (LCFS) has increased the incentive to produce renewable biodiesel rather than petroleum diesel. California has also tried to incentivise a switch towards zero emission vehicles (ZEV) via its mandate program (see [*Everything you need to know about Low Carbon Fuel Standards (LCFS)*](https://www.carbonrisk.world/everything-you-need-to-know-about-792/)).

### Blowback

As the state gradually winds down its gasoline consumption, energy companies face the real risk that their refineries may become “stranded assets”. It’s a policy choice and their closure is the natural end result. The problem now is how to best manage the transition away from gasoline to avoid consumers facing a nasty shock that turns public opinion.

One of the main issues facing California is its low level of gasoline storage. The [state typically holds \~20 days of gasoline supply in inventory at any given time](https://www.eia.gov/todayinenergy/detail.php?id=63944&ref=carbonrisk.world), making it vulnerable to adverse supply issues and the knock-on impact on gasoline prices. In the current environment there’s simply no incentive for refineries to invest in the type of storage facilities that could mitigate the impact of any gasoline shortage.

When refineries close down its usually good news for those facilities still operating as they are now able to benefit from higher margins. That might not be the case in the future, at least for California’s remaining refineries. In October 2024 Governor Newsom signed a controversial new law (ABx-21) giving the state sweeping powers to curb refineries ability to profit from shortages.

The mandate empowers the state to implement a profit margin penalty or price control on energy producers, to limit when refineries can conduct maintenance, requires refiners to stockpile large volumes of fuel, and increases state oversight of their operations. Although the law was meant to ensure adequate gasoline supplies, it has inadvertently made things worse. Both refineries due to close appear to have brought forward their announcement following the signing of ABx-21.

### Cap and invest

Although environmental programs such as California’s emissions trading scheme and the LCFS often get the blame, there’s no evidence that they contribute significantly to the overall cost of gasoline, despite their cost typically being passed on in full to the consumer. According to [the California Energy Commission](https://www.eia.gov/todayinenergy/detail.php?id=65184&ref=carbonrisk.world) the programs accounted for $0.54 per gallon (\~12%) of the retail gasoline price in March 2025, roughly split 50/50 between the carbon price and the cost of meeting the LCFS.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/43eaef7a-5946-486d-9cfa-5d3846634eac_994x499.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

Carbon prices are low right now, but what happens if the market rebounds as is likely to happen if the scheme is reauthorised to continue post 2030? If the price rebounds from current levels close to the Auction Reserve Price ($25.87 per tonne of CO2) and returns levels seen last summer (\~$40 per tonne of CO2), it is likely to increase gasoline prices by \~$0.24 per gallon. Although that doesn’t sound very much in the scheme of things, the pain of the increase becomes more acute to California’s drivers if it coincides with a period in which gasoline prices are very high because of other reasons — for example, due to a spate of refinery closures (see [*The future of California's cap-and-trade program beyond 2030 is now in doubt*](https://www.carbonrisk.world/the-future-of-californias-cap-and/)).

Very high gasoline prices should mean lower emissions as drivers scale back the number of miles they travel, and / or switch to more fuel efficient and lower carbon alternatives. In theory this means less demand for emission allowances (CCAs) and a lower carbon price. The problem is that retail demand for gasoline tends to be highly price inelastic – an increase in its price does very little, at least in the short-term, to curb demand. The impact of high gasoline prices also falls most heavily on those least able to adapt. For example, lower income households are less likely to be able to afford an electric vehicle.

What to do? As I note in [*America's state carbon markets are under siege*](https://www.carbonrisk.world/americas-state-carbon-markets-are/), Governor Newsom faces a quandary:

> “On the one hand he knows that California is likely to face huge and ongoing budgetary shortfalls — potentially more than $10 billion per year…On the other hand Newsom knows that if his policies are seen as being responsible for pushing up the price of gasoline and electricity in California, then his chances of becoming the Democratic nominee ahead of the 2028 presidential election are very slim indeed.”

The best response would be to reauthorise the carbon market, extending its remit beyond 2030\. This would lead to higher CCA prices, resulting in higher revenues from the auction of allowances that could then be used to plug the states budget deficit. The state could then direct more funding to make it easier for citizens, especially those on lower incomes, to switch to lower carbon alternatives. Remember, evidence suggests that simply returning carbon revenue back to consumers is difficult to target effectively, it messes with the carbon price signal, it’s challenging to communicate, and most importantly, it fails to address switching barriers (see [*Why Canada should reform its carbon tax*](https://www.carbonrisk.world/why-canada-should-reform-its-carbon/)).

The energy transition was never going to be a straight-forward linear process. You need to factor in the disjointed nature of the supply-side response in a declining market. In the example of California, the strongest refineries will always try and stay in business for as long as they can, benefitting from higher margins as weaker ones leave the market. Eventually, firms decide enough is enough and they need to cut production or close up shop completely. More refineries will inevitably close as the state moves towards achieving its 2045 targets.

In the meantime California needs to do more to prepare its citizens for the non linear path ahead. Focus more on adapting demand, less on constraining supply.

[Love Carbon Risk? Now you can buy a gift membership](https://www.carbonrisk.world/#/portal/gift)
### EUAs reaching critical turning point
URL: https://www.carbonrisk.world/euas-reaching-critical-turning-point/
Last updated: 2026-06-01T11:00:10.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

The European Council meeting on 19th March marked the low point in the recent downturn in the EU carbon price. On that day European Commission President von der Leyen announced plans to develop a new "ETS investment booster" with a budget of "about €30 billion, financed by 400 million ETS allowances." 

In the leadup to the event I wrote about two signals that could potentially mark a bottom in the market. 

First, Europe's industrial base was increasingly vocal, arguing that drastic reforms "would erode investment certainty and damage Europe’s industrial future," thus undermining the narrative that industry was calling for the carbon market to be weakened or even suspended (see [*Signals amidst the noise: EUAs consolidate, awaiting direction from policymakers*](https://www.carbonrisk.world/signals-amidst-the-noise/)). 

Second, the announcement by exchange traded fund operator KraneShares that it had closed its European Carbon Allowance Strategy ETF (KEUA). As with other thematic ETFs that have subsequently gone on to close, it has "often signalled that investors have lost their patience," and that the path of least resistance may be for price to move higher, rather than lower.

The constructive policy discussions marked a huge sigh of relief for a market roiled by concerns that the EU ETS might be delayed ([a reference to Chancellor Merz's 11th February speech](https://www.bloomberg.com/news/articles/2026-02-12/eu-carbon-prices-drop-after-germany-s-merz-urges-market-revamp?ref=carbonrisk.world) to representatives from heavy industry) or watered down such that its credibility would be irreparably damaged. €75 (€30 billion / 400 million EUAs) rapidly became an important marker in the sand at a time of immense uncertainty over the future of the scheme.

Now the market appears to be heading towards the €82-83 level at which the current political ructions really kicked off. On 5th February, [German newspaper Handelsblatt reported](https://www.handelsblatt.com/politik/international/emissionen-eu-will-kostenlose-zertifikate-um-jahre-verlaengern-02/100196582.html?ref=carbonrisk.world) that the Commission was considering a multi-year extension of free allowances for heavy industry, citing 'unnamed EU officials'. The EUA futures price fell more than €6 over the following 24 hours to around €76.

The market has been trading on political headlines ever since. 

But amidst the noise different individuals and groups have begun to signal their intentions and their red lines. All that has been is merely the precursor to the real debate yet to be had. The Commission is undertaking a review of the EU ETS, with the findings expected to be published on 15th July 2026\. 

And so, the next 1-2 months could mark a critical turning point for the EU carbon price. Will the price kick on and move towards the €90-95 level seen towards the start of 2026? Or will it mark a retest of the political narrative, one that ultimately fails, and we see prices retreat back towards lower, more politically comfortable levels?

_This post is for paying subscribers only._
### Article 6 and the EU ETS, lessons from Japan
URL: https://www.carbonrisk.world/article-6-and-the-eu-ets-lessons-from-japan/
Last updated: 2026-05-27T11:00:03.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

Europe's policymakers are now reckoning with how to reform the EU ETS: to ensure that it remains politically viable, economically sustainable, and most importantly, retain its social license to operate. 

The EU ETS imposes a cap on the emissions of obligated sectors within Europe's territorial boundaries. But as emissions from the power sector have fallen sharply over the past 20 years, attention now centres on industry and aviation.

Here though the marginal abatement cost is much higher, the barriers to decarbonisation much more difficult to overcome, and the timeline to realising the gains much longer. While there's much work to be done if its to continue to be a climate leader, Europe clearly cannot carry on as it is and expect the EU ETS to retain its social license. 

One option to relieve the pressure is to enable a greater share of the burden to be taken though Article 6 compliant international carbon credits. 

Remember, it really doesn't matter where the emission abatement takes place, only that it does. A tonne of CO2 emitted has the same consequences for the atmosphere whether it occurs in Amsterdam or Addis Ababa, Zurich or Zanzibar.

It's no use if the EU ETS helps to kill off industrial activity in Europe, only for those same emissions (or perhaps even worse) to resurface somewhere else in the world – that really would be a Pyrrhic victory.

There's an increasing role for Article 6 carbon credits to be at the heart of Europe's climate policy. The move has already started, but it's progressing far too slowly, and Europe is being too cautious in extending its influence to the cornerstone of the blocs climate policy, the EU ETS.

_This post is for paying subscribers only._
### CORSIA-correction required
URL: https://www.carbonrisk.world/corsia-correction-required/
Last updated: 2026-05-21T11:00:40.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

The [December 2025 CORSIA futures price](https://www.ice.com/products/83046673/CORSIA-Eligible-Emissions-Units-2024-2026-Futures/data?marketId=7490946&span=2&ref=carbonrisk.world) has slumped by more than 40% since late 2025 to a 23-month low of $10.10\. 

What's going on?

To recap, CORSIA, the Carbon Offsetting and Reduction Scheme for International Aviation, is a market-based system backed by the UN’s International Civil Aviation Organisation (ICAO) to compensate for international aviation emissions.

Airlines operating under participating jurisdictions ([130 at the last count](https://www.iata.org/en/programs/sustainability/corsia/?ref=carbonrisk.world#:~:text=As%20of%201%20January%202025%2C%20129%20states,from%20the%20beginning%20of%20the%20first%20phase)) must compensate for any emissions above 85% of their 2019 levels. Under the first phase of CORSIA (2024-2026) airlines must purchase sufficient Eligible Emission Units (EEUs) to cover their excess emissions by January 2028\. 

In contrast to the objective underpinning the EU ETS, CORSIA only aims to limit the pace of emissions growth, not actually bring aviation emissions down. Here's where the problems start, and it alludes to why the CORSIA carbon price has nose-dived this year. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/05/image-14.png)

Source: ICE

The EU, ICAO, and the airlines have known for more than a decade now that 2027 was going to be the crunch point. In 2011 the EU expanded the ETSs coverage to also cover all flights leaving and departing the European Economic Area (EEA). However, in the face of international backlash from countries such as the United States, China, India and other major economies, the EU agreed to 'stop the clock', exempting ex-EEA flight emissions on the condition that ICAO acts. 

The EU’s ETS Directive mandates that by 1st July 2026, the European Commission must publish a report assessing CORSIA's environmental integrity and the degree to which countries are participating. Essentially, the report must answer two questions: 1) whether CORSIA is consistent with the goals of the 2015 Paris Agreement, and 2) if countries covered by CORSIA make up more than 70% of international airline emissions.

_This post is for paying subscribers only._
### Setting the standard
URL: https://www.carbonrisk.world/pricing-methanes-low-hanging-plumes/
Last updated: 2026-05-20T14:15:48.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

Environmental markets are typically imposed top-down, designed and consulted on by policymakers over a period of years. European climate policy is an example of this slow but methodical process in action. The EU emissions trading scheme, the cornerstone of Europe's climate policy, is one of the most notable outcomes.

But governments are often too slow, or fail to recognise the market failure. Then it's up to pioneering firms or organisations to pick up the slack and innovate where others can't or won't. The verified carbon market (VCM) exemplifies this ground-up, iterative, experiment-by-doing approach to environmental markets.

For example, the first carbon project dates back to the late 1980s when coal operator Applied Energy Services (AES) agreed to fund the planting of trees and the protection of forest in Guatemala, giving birth to the first avoided emissions carbon credit project (see [*Coming of age: The evolution of carbon credits fits a pattern of financial innovation*](https://www.carbonrisk.world/coming-of-age/)).

Governments do eventually build on these early innovations and develop something akin to an environmental compliance market. The emergence of the Article 6 carbon market from the cauldron of experimentation that is the VCM, is perhaps the best example of this process in action. 

Both approaches have their pros and cons. Neither is full-proof. 

Sometimes regulatory compliance markets can create adverse unintended consequences. For example, a step change in US low-sulphur diesel mandates in the early 2000s, and subsequently, to California's Low-Carbon Fuel Standard (LCFS) in the late 2010s, contributed to a sharp jump in price volatility. 

This may not have happened if the market had been developed by participants themselves, rather than be imposed by policymakers who think they know best. Under a bottom-up, market orientated approach, demand and supply for the physical underlying commodity may well have been better aligned. 

### Slow boil

In this article I'm going to have a look at the EU Methane Regulations (EUMR), exploring the faults in the top-down approach, and how bottom-up innovation could create the foundations for an even stronger environmental compliance market.

To recap, the EUMR, the bloc’s first legislation specifically targeting methane emissions from the energy sector, will set a maximum methane intensity threshold on domestic production and fossil fuel imports; the latter accounting for 60% of the EU's final energy consumption (see [*Electric avenue: Europe set to outline its path to electrification and energy security*](https://www.carbonrisk.world/electric-avenue/)).

The regulation came into force in 2024, and has imposed progressively stronger obligations, starting with monitoring, reporting and verification (MRV). From January 2027 importers must demonstrate that MRV systems applied by exporters are equivalent to those used in the EU.

By August 2028, importers must report the methane intensity of shipments received for any contracts concluded or renewed after August 2024\. Two years later, by August 2030, they must show that all imports meet the threshold (still to be determined, but potentially 0.2%).

At this point, if domestic fossil fuel producers and importers of oil, gas, and coal fail to meet the methane intensity, businesses will be stung with a financial penalty, set at a maximum of 20% of annual turnover. 

The problem with the current penalty structure is that it fails to provide an adequate signal (whether positive or negative) to the part of the supply chain that are able to shift the needle on methane emissions - the upstream oil, gas, and coal producers. 

Remember, more than 75% of the energy sectors methane emissions can be reduced by implementing leak detection and repair programs, installing vapour recovery units, replacing pumps and compressor seals, and replacing existing devices with instrument air or electric motor systems, according to the International Energy Agency (IEA). 

None of these actions are within the purview of energy importers.

### A hazy green light

The main problem with the current EUMR penalty structure, according to [Davide Rubini, Head of Regulatory Affairs at Vitol](https://www.linkedin.com/feed/update/urn:li:activity:7460442602312671232/?ref=carbonrisk.world), is that it fails to provide a usable price signal for upstream producers.

First, penalties are enforced at the Member State level. This fragmentation increases risk for producers, especially given the possibility of a patchwork of different monitoring and enforcement standards across Europe. 

Second, fearing a potential penalty, individual buyers may be able to apply some pressure upstream. The problem though is that they are unlikely to have sufficient contractual leverage to push for operational upgrades.

Third, penalties levied on importers are not paid to producers who meet or go over and above the methane intensity requirements. In short, there is no mechanism in place that rewards improved methane intensity performance towards the upstream.

Fourth, even if an importer receives a penalty there are several ways that this signal could simply get lost. It may be absorbed or hedged away. Importers may simply avoid certain suppliers rather than push for improvements. Finally, the global nature of commodity markets means that penalty risk is just one of several factors that could influence investment in methane mitigation. 

A much better idea, Rubini advises, is to do away with the current proposed system of penalties, and introduce a separately traded methane performance certificate instead. As outlined in his note, this approach transmits a much stronger signal from importer to producer.

By encouraging price discovery, a tradeable certificate reveals the value of verified methane performance, thereby creating a positive incentive for producers to invest. Unlike the current system, a tradeable (and bankable) certificate would reward first movers that have already invested in methane mitigation, encouraging them to go beyond the threshold set by the EU. 

Finally, by separating the physical logistics from the environmental attributes it saves money and hassle. This is especially important in the global trade in LNG where tracing every molecule from well, via pipeline and carrier, to the final entry point in Europe is incredibly complex.

### Beyond book-and-claim

A methane performance certificate is an example of an Energy Attribute Certificates (EACs). 

Each certificate is unique, and its attributes include independently verified claims rights, documents of origin, and audit trails of methane intensity. The holder owns the legally recognised property rights to the underlying environmental attributes, and can be retired (also referred as ‘cancelled’) by, or on behalf of its owner to claim usage of the environmental attributes. 

EACs are based on a book-and-claim chain of custody market mechanism. They enable suppliers of low-carbon solutions to “book” the environmental attributes of a good they have produced and for users to “claim” those same attributes, even if there is no actual physical exchange of energy between producer and importer. Book-and-claim can operate at the national level, or on a basin or regional level.

An alternative approach is known as trace-and-claim. In the case of LNG, trace-and-claim links the attributes of a given batch to a commercial delivery path. It requires demonstrating MRV for the relevant production assets within the basin associated with producing the LNG. It does not imply molecular tracking or real-time tracing of specific molecules.

Although all certificate approaches could help in delivering incentives across the supply chain, trace-and-claim is likely to have the largest impact on methane emissions. [Analysis carried out by the University of Texas Energy Emissions Modeling and Data Lab (EEMDL)](https://table.media/assets/europa/eumr%5Fcomparing-the-emissions-reduction-potential-of-certification-compliance-pathways.pdf?ref=carbonrisk.world) estimated that it could cut annual emissions in the United States by 250,000 Mt CH4\. 

In contrast, the research found that a national book-and-claim methane certificate would have exactly zero impact on emissions. The problem with this approach is that operators with existing low intensity supply will have strong incentives to rapidly increase certificate availability. 

For example, EACs created in any oil and gas producing basin within the US could be reattributed to volume exported to Europe. The additional supply would cap the price of methane performance certificates, reducing the commercial incentive for other producers (those with higher methane emissions) to incur the costs to mitigate.

What about the hybrid model, basin-level book-and-claim? Here certificates must be generated by production assets located in the same basin or region as the originating supply. EEMDL found that this approach could lead to an annual saving of 85,000 Mt CH4 for US producers. Better than book-and-claim, but still well short of the savings offered by the trace-and-claim model.

### From the ground up

MiQ certification has been adopted by a growing number of operators in response to the EUMR, as well as increased scrutiny of regulators elsewhere. The London-based, independent not-for-profit was established by RMI and SYSTEMIQ in 2020\. It runs the largest voluntary methane certification programme, and is thought to certify facilities accounting for about 20% of US, and 7% of global gas production, respectively.

MiQ grades production facilities based on methane intensity, assigning ratings from A to F. More than 100 independent audits have been approved under the MiQ methane emissions standard to date, all carried out by independent third-parties. Operators are evaluated on a site’s methane intensity, the procedures in place to prevent methane leaks, and the monitoring technologies deployed. Certification lasts a year and must be renewed annually. 

In February 2026, [Centrica Energy and Seneca Resources Company announced a 10-year methane emissions certificate agreement](https://www.centrica.com/media-centre/news/2026/centrica-energy-and-seneca-resources-company-sign-first-of-its-kind-long-term-miq-methane-emissions-certificates-agreement/?ref=carbonrisk.world). Under the terms of the deal Centrica will procure 250,000 MMBtu per day of MiQ-certified gas certificates from Seneca, an MiQ grade "A" certified US natural gas producer based in the Appalachian region. 

In the same month, an offshore natural gas installation in the North Sea became the first project in the region to achieve MiQ grade "A" for methane emissions performance. The offshore installation is powered entirely by renewable electricity supplied via subsea cable from the Riffgat offshore wind farm.

Despite the bottom-up progress to date, some analysts are concerned that the MiQ certification scheme may be underestimating methane emissions. In July 2025, [energy publication Gas Outlook joined Oilfield Witness](https://www.theguardian.com/environment/2026/apr/01/invisible-plumes-and-terrible-pollution-the-reality-of-the-us-gas-sites-rated-grade-a?ref=carbonrisk.world), a methane emissions monitoring group, on a visit to 10 MiQ-certified sites across the Permian Basin. Surveillance data from MethaneSat indicates that average emissions intensity in the region is perhaps 12-20 times higher than that implied by the MiQ grades the 10 sites received (grades A to C suggest leakage rates of below 0.2%). 

It's important to remember that methane emissions intensity is but one of several factors that goes towards the overall MiQ rating. What is important that certification puts a price on methane leakage and moves producers to improve their performance. As the EUMR rules illustrate, in the absence of a price signal, producers are unsure whether its worth investing in methane emission mitigation. 

It's notable then that MiQ methane performance certificates have begun trading on the Xpansiv CBL exchange. 

In March it announced that a deal involving 3.5 million MiQ certificates, one of the largest trades to date, was settled between a European energy buyer and a large integrated US-based energy producer. MiQ certificates can also be bought and sold through the CG Hub marketplace (see [*Spread bets: Why "energy transition assets" could drive commodity trading returns*](https://www.carbonrisk.world/repost-spread-bets/)).

Finally, as the previous section showed, the size of the book-and-claim region and the degree to which emissions are traced can influence the incentive to cut emissions. MiQ have introduced a novel approach that maximises the incentive to abate, while avoiding the complexity and cost associated with trace-and-claim. 

[MiQs Certificate Inter-Regional Import System (CIRIS)](https://miq.org/document/miq-program-guide/?ref=carbonrisk.world) is an "inter regional mass balancing system". It means that book-and-claim is only allowed within a defined Certificate Region, but mass-balancing and chain of custody is compulsory between Certificate Regions. For example, US LNG producers would need to prove that shipments from their Certificate Region had been transported to the EU in order to claim a MiQ certificate.

### Plucking the "low hanging plumes"

A methane performance certificate tackles the obstacles that have so far stymied investment in methane mitigation - opportunity costs and misaligned incentives - head on. 

Putting a fee on methane emissions is the only way to level up the opportunity costs, and give methane mitigation a fighting chance against the incentive to simply raise production. The advantage of a market-based approach is that the price rises to the level necessary to meet the methane emissions intensity target.

Import standards are crucial in aligning incentives across supply chains. More than 40% of global oil and 25% of natural gas and coal is traded internationally. For many importers (including the EU, the UK, Japan, Korea, and China), most of the emissions associated with their fossil fuel consumption originate abroad.

However, import standards need to be credible. As I remarked recently, obligated entities may simply decide not to comply, especially if the risk of enforcement is low, the penalties are not sufficiently high, or there is a risk that the government will renege on the policy. Producers might easily re-route their product to jurisdictions with less onerous restrictions.

An import standard supported by a market-based certificate helps to solve this issue. By offering a reward to be banked - not just a penalty to be avoided - a global methane performance certificate helps to bring together disparate regions, directing capital towards the least cost methane abatement opportunities, the "low hanging plumes".

[Want to read more? Start here](https://www.carbonrisk.world/table-of-contents-start-here/)

[Low hanging plumesMethane abatement suffers from opportunity costs and misaligned incentives![](https://static.ghost.org/v5.0.0/images/link-icon.svg)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/thumbnail/mihai-MCoy-g7q7_s-unsplash-305eee832be8cf890dc3ea48da620227d3f3c80fb5d3678079488f19725534ac.jpg)](https://www.carbonrisk.world/low-hanging-plumes/)
### What constitutes an “effectively paid” carbon price?
URL: https://www.carbonrisk.world/what-constitutes-an-effectively-paid-carbon-price/
Last updated: 2026-05-14T11:00:30.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

Since the beginning of 2026, EU importers of carbon intensive products (iron & steel, cement, aluminium, fertilisers, hydrogen, and electricity) must factor in the cost of the embedded emissions. Importers can begin purchasing CBAM certificates (to cover their 2026 imports) from February 2027.

For 2026, CBAM certificate prices will determined on a quarterly basis based on the average EUA price at auction during that three month period. On 7th April the European Commission announced the [Q1 2026 CBAM certificate price as €75.36 per tonne of CO2](https://www.carbonrisk.world/hammer-time/). From next year the CBAM certificate price will be calculated weekly, based on the average auction clearing price. 

However, that is only part of the calculation that importers of CBAM covered goods need to calculate. An authorised CBAM declarant (as they're known under the regulations) can claim a reduction in the number of CBAM certificates it needs to purchase, "if the carbon price has been *effectively paid* in the country of origin.”

This point has been critical in driving global carbon price development, as governments seek to defend their export competitiveness in Europe, while also capturing the CBAM revenue that would have otherwise filled Brussels coffers. As I've noted previously, research from Bruegel shows that the greater the trade exposure to CBAM, the more likely it is that a country will adopt a carbon price (see [*No carbon copy: Emissions trading schemes are ploughing their own furrow, and that's a risk to future growth*](https://www.carbonrisk.world/no-carbon-copy/)).

Clearly the greater the difference between the EU carbon price and that which has been "effectively paid" in the country of origin, the larger the CBAM certificate bill for the importer, and hence the greater the likelihood that existing trading relationships will be disrupted.

Discussing the [potential for carbon prices to rise towards €100 back in December](https://www.carbonrisk.world/carbon-risk-2025-year-in-review/), I cautioned that policymakers are likely to be even more sensitive to high prices, especially given the impact this could have far from Europe's borders:

> "It's worth bearing in mind that until now EU policymakers have only been concerned with their domestic audiences perception of carbon prices. The launch of CBAM means that higher prices will reverberate across the globe, impacting on Europe's relationship with its main trading partners."

Indeed, earlier in 2026, [former top climate official Jos Delbeke, wrote of his increasing concern](https://www.linkedin.com/posts/jos-delbeke%5Feu-ets-review-activity-7425207173200252929-R842/?ref=carbonrisk.world) that if the gap between the EU carbon price and the rest of the world grew too large, then CBAM-induced shuffling of trade flows might start to dominate the political narrative:

> "It will be useful to avoid too wide a gap between carbon prices in the EU and other major economies, as otherwise unhelpful side-effects such as resource-shuffling or trade diversion may start to dominate the political debate."

Less than six months since the start of CBAM we're already seeing evidence that it is having an adverse impact. Two months ago, on 15th March, [one of Africa's largest aluminium smelters, the Mozal facility in ](https://odi.org/en/insights/too-little-too-late-mozambiques-mozal-shutdown-and-the-urgent-case-for-cbam-flexibilities/?ref=carbonrisk.world)[Mozambique](https://odi.org/en/insights/too-little-too-late-mozambiques-mozal-shutdown-and-the-urgent-case-for-cbam-flexibilities/?ref=carbonrisk.world)[ shutdown with its owners citing high power prices](https://odi.org/en/insights/too-little-too-late-mozambiques-mozal-shutdown-and-the-urgent-case-for-cbam-flexibilities/?ref=carbonrisk.world). As *Carbon Risk* has highlighted before, the southern African country is one of, if not the most exposed economies to CBAM (see [*Call of duties: Mozambique demonstrates how CBAM could redraw global commodity trade flows*](https://www.carbonrisk.world/call-of-duties/)) 

There's the context. Now what about the actual rules?

_This post is for paying subscribers only._
### Hammer time
URL: https://www.carbonrisk.world/hammer-time/
Last updated: 2026-05-14T14:42:06.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

In April we [reported on the latest ETS status report from the International Carbon Action Partnership (ICAP)](https://www.carbonrisk.world/no-carbon-copy/). It revealed that almost 26% of global carbon emissions (equivalent to 14 Gt CO2) are now covered by an emissions trading system, an increase of 3 percentage points compared with last years report. 

One of the main conclusions I took from the ICAP report is that while ETSs are covering a greater share of global emissions, they are becoming less uniform in their approach and design: absolute or intensity-based, coverage by industry and share of emissions, revenue allocated to investment or rebate, use of carbon credits, floor and ceiling prices, and so on. 

This fragmented approach increases the risk of carbon leakage, and in the long-term serves to undermine the strength of the carbon market signal. As such, it is increasingly important that countries work together, seek to understand what works, and avoid making the same mistakes that earlier schemes experienced (see [*Join the club*](https://www.carbonrisk.world/join-the-club/)).

Now a new report opens up a new front explaining the differences in ETS structure and the impact it can have on price formation. While we've discussed the impact of other market design characteristics, one we haven't broached to any great degree is the method for allocating emission allowances.

As this article will go on to show, financial intermediaries in the EU ETS at least, are playing an increasingly important role in the auction process. Other jurisdictions with an ETS (including those at an earlier stage of development) are also likely to want to encourage greater financial market participation.

_This post is for paying subscribers only._
### Low hanging plumes
URL: https://www.carbonrisk.world/low-hanging-plumes/
Last updated: 2026-05-07T11:00:32.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

The annual [Global Methane Tracker from the International Energy Agency (IEA)](https://www.iea.org/news/tackling-methane-emissions-would-strengthen-energy-security-amid-crisis?ref=carbonrisk.world) presents the energy watchdog's latest estimates of methane emissions from the energy sector. 

It reveals that oil and gas operations released 45 Mt and 36 Mt of methane respectively in 2025\. A further 43 Mt of methane was emitted from the coal sector, while bioenergy contributed 20 Mt. In total, the IEA estimates that the energy sector released 124 Mt of methane into the atmosphere last year. 

Importantly, the IEA conclude that there is "still no sign that methane emissions from fossil fuel operations are falling, despite well-known and proven mitigation pathways." More than 35 Mt could be avoided at no net cost, the agency estimates, based on average energy prices in 2025.

Energy industry commentators have talked about tackling these so-called "low-hanging fruit" for several years now: implementing leak detection and repair programs, installing vapour recovery units, replacing pumps and compressor seals, replacing existing devices with instrument air or electric motor systems, and so on.

In theory, the price of natural gas should be the most important factor determining whether or not companies are motivated to cut methane emissions. The higher the price of natural gas, the greater the incentive to plug any leaks, since any methane not lost to the atmosphere has a commercial value. 

In reality, it doesn't quite work out that way, and it all comes down to opportunity costs and misaligned incentives. 

Methane abatement might be a net benefit, but if another opportunity affords even greater returns, and for less risk, then that is what fossil fuel companies will prioritise. High energy prices are more likely to result in energy firms expanding production, rather than investing in cutting the methane emissions intensity of their existing production.

Meanwhile, the sectors most exposed to methane abatement pressure are not necessarily those with the most power or inclination to take action. For example, upstream activities account for 80% of oil and gas methane emissions; national oil companies (NOCs) such as Saudi Aramco and ADNOC account for around 50% of global production, yet are under far less pressure to cut methane emissions than the oil and gas majors (see [*No free lunch: Cutting global methane emissions from oil and gas is more difficult than it seems*](https://www.carbonrisk.world/no-quick-win/)).

Add into the mix of potential benefits, the IEA's latest report also frames cutting methane emissions as an opportunity to improve energy security. Alas, this motivation also suffers from both opportunity costs and misaligned incentives.

Plugging leaks does nothing to release the LNG bottled up by Iran's stranglehold on the Strait of Hormuz, even if they could be fixed in swift order, which they can't. The timeline for mitigating the majority of the methane emissions is measured in several years or more, far beyond (we hope, dare I say) any disruption to supply. Lastly, the 80 Mt or so of oil and gas methane emissions are spread across the globe, and most of it will be located among the exporting countries – those least incentivised by importers energy security concerns.

Is there anything that could change the opportunity cost calculation, and put methane abatement on a level playing field with increased production, or at the very least moves it up the agenda? Is there any policy or market mechanism that can align incentives across the energy supply chains, ensuring that those concerned with methane emissions can push those who can make a difference to do so?

_This post is for paying subscribers only._
### His father's son
URL: https://www.carbonrisk.world/his-fathers-son/
Last updated: 2026-05-05T11:00:20.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

Climate and environmental policies work best when all participants believe they will remain strong and be there for the long-run. Chopping and changing between leaders, one pro-environment, the other pro-everything but the environment, weakens the incentive for change. 

In October 2022, Luiz Inácio Lula da Silva was re-elected president. In the months that followed his government quickly enacted stronger environmental policies, applied to host the climate conference COP30, and beefed up enforcement efforts aimed at protecting Brazil's tropical rainforest. 

The most vivid example of the improvement under President da Silva's leadership has been the decline in deforestation. 

Non-fire related forest clearance has declined by 60% since 2022, dropping to the lowest level on record in 2025, according to [the World Resources Institute's (WRI) Global Forest Watch initiative](https://gfr.wri.org/latest-analysis-deforestation-trends?ref=carbonrisk.world). In contrast, former President Jair Bolsonaro oversaw a systematic weakening in environmental protections, exemplified by a doubling in the rate of deforestation during his tenure (see [*Repricing deforestation risk in the wake of Brazil's presidential election*](https://www.carbonrisk.world/repricing-deforestation-risk-in-the/)).

The forthcoming general election, scheduled to take place on 4th October 2026, may see Brazil change course once again, and in doing so, risks undoing the progress made under the leadership of President da Silva. With Jair Bolsonaro serving a 27 year sentence for plotting a military coup, the challenge this time will come from his son Flávio.

President da Silva and Flávio Bolsonaro are locked in a statistical tie according to the latest poll conducted by AtlasIntel for Bloomberg News. The younger Bolsonaro has closed a 12-point lead since he launched his campaign in December. He now [has an implied 44% probability of winning the election according to Polymarket](https://polymarket.com/event/brazil-presidential-election?ref=carbonrisk.world#VhcYkxKX), compared to 37% for the incumbent da Silva.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/05/image.png)

Source: Polymarket

Despite da Silva's progress, agriculture continues to be the most important driver of primary forest loss (73% between 2002-2025), [largely to make way for soy and cattle](https://www.sei.org/features/brazilian-soy-exports-and-deforestation/?ref=carbonrisk.world). This could get much worse under the son of Jair Bolsonaro. In late April, Flávio promised to end the Amazon soy moratorium, the 20-year-old voluntary accord that bars traders from buying soybeans from lands deforested after 2008\. 

The incentive to knock down the forest is driven by the profit that can be gleaned from the materials that lie beneath, what can be grown or grazed on top, plus the value of the felled timber. [High commodity prices, coupled with a weakening in the Brazilian real (a regular feature under Bolsonaro's rule), increases the political pressure to extend into the Amazon](https://blogs.worldbank.org/en/psd/what-economic-models-can-tell-us-about-slowing-deforestation-brazilian-amazon?ref=carbonrisk.world). 

A change in political leadership threatens Brazil's forests, but it could also negatively affect many of Brazil's other signature climate policies. Key climate initiatives at risk of being paused, or worse cancelled, include the Brazilian emissions trading scheme and the Tropical Forest Forever Facility (TFFF); the latter a mechanism meant to pay countries to leave their trees standing.

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### Priming the pump
URL: https://www.carbonrisk.world/priming-the-pump/
Last updated: 2026-04-29T11:00:31.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

As the second energy crisis in five years enters its third month, the number of countries introducing measures to protect consumers is growing rapidly. So far, 39 economies have have implemented at least one measure designed to shield households and firms from the current spike in energy prices according to the International Energy Agency's (IEA) [Energy Crisis Policy Response Tracker](https://www.iea.org/data-and-statistics/data-tools/2026-energy-crisis-policy-response-tracker?ref=carbonrisk.world). 

European governments (19 countries so far) have been quickest to respond to the crisis by attempting to curb the price impact, while nine governments in Asia have implemented similar measures. Most interventions take the form of price support, such as cuts to fuel taxes, deferring tax increases, or introducing subsidies. Alternatively, governments use price interventions to limit price increases (for example, by capping the retail price of fuel), or directing extra support to vulnerable, low-income groups. Fewer than a quarter of interventions are designed to be both temporary and in support of sectors highly exposed to fuel price hikes. 

The problem with many of these measures is that they also increase the fiscal burden on governments, disincentivising consumers from becoming more energy efficient, or investing in alternatives that are cheaper, cleaner, and otherwise more sustainable. The latest energy crisis is fundamentally a supply disruption, not only a price shock. By dampening the market signal - subsidising or otherwise capping energy prices - the market fails to clear, making shortages more likely, not less. In contrast, only three countries in Europe have introduced measures to curb consumption, compared with 19 in Asia.

All the while, government meddling in the markets merely postpones the moment of reckoning until the next energy crisis arrives.

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### The state we're in
URL: https://www.carbonrisk.world/the-state-were-in/
Last updated: 2026-04-27T11:00:03.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

Twelve months ago, at a White House signing event, President Trump sat in front of a group of miners in hard hats, declaring that he would slash “unnecessary regulations that targeted the beautiful, clean coal.” The source of his ire, state laws that curb the consumption of fossil fuels. The executive order signed by Trump that day was never likely to be successful, and indeed, the threat never came to pass.

Today, looking back at the past year, its clear that states with progressive climate policies have become more preoccupied with issues of affordability, irrespective of the threat posed by Trump. We begin by looking at developments in the main carbon markets: starting with California, the Regional Greenhouse Gas Initiative (RGGI), and finishing with Washington State (see [*"Affordability" narrative weighs on California's carbon market: A 'Blue Wave' may need a greyer shade of green in the Golden State*](https://www.carbonrisk.world/why-affordability-now-trumps-climate-in-california/)). 

As this article demonstrates, not everyone has taken the same approach. Previous climate policy leaders have sought to row back on climate commitments, or otherwise seek to manage their carbon price lower. Meanwhile, other states not considered to be as ambitious, have embraced carbon pricing as a means to deal, not just climate change and adaptation, but also as a means by which they can tackle affordability concerns.

Finally, we end with a paradox (or two). For while (and perhaps surprisingly) American concerns about climate change are higher than ever, but their willingness to adopt the polluter-pays-principle is lower than ever, especially when individuals are being asked to cough up. At the core of this is another paradox, a "climate policy paradox", one where voters reject the tools that economists advocate the most, in a mistaken belief that they cost more than the alternatives.

Lets dive in.

### CARB pivots to supporting investment using free allowances, risks nullifying the carbon price

The California Air Resource Board (CARB) has just published a [modified version of its Initial Statement of Reason (ISOR)](https://ww2.arb.ca.gov/sites/default/files/barcu/regact/2026/cap%5Finvest/nc%5F15d%5Fci%5Fnoticeada.pdf?ref=carbonrisk.world), the document which outlines the rationale for amending its Cap-and-Invest regulations. 

The modified ISOR provides further detail as to how the Manufacturing Decarbonisation Incentive (MDI) will work. In line with policymaking discussions in Europe, CARB want the carbon market to act as a more effective vehicle for industrial decarbonisation, while also minimising carbon leakage (see [*Cap-and-Invest: Europe set to leverage its carbon markets to boost investment in decarbonisation*](https://www.carbonrisk.world/cap-and-invest/)).

The MDI is CARBs answer to this challenge, providing additional free allowances to facilities if they invest in certain emission reduction activities. Examples of eligible decarbonisation projects include CCUS, purchasing biomass-derived fuels, investing in electrification, procuring low-carbon hydrogen, and other activities that reduce production emissions. 

The modified ISOR now indicates that 118.3 million allowances (CCAs) will be diverted from the 2027-30 budget years to a "Build Up California Reserve" account - up from an estimated 40 million CCAs [outlined in the original ISOR](https://ww2.arb.ca.gov/sites/default/files/barcu/regact/2026/cap%5Finvest/nc%5Fisor.pdf?ref=carbonrisk.world). About half of the CCAs are available to be used by the states refiners, with the rest eligible for non-refiners (see [*California's 'energy transition' will not be linear*](https://www.carbonrisk.world/californias-energy-transition-will/))[](https://www.carbonrisk.world/author/peter-sainsbury/). 

But perhaps the most important factor from a market perspective is the source of these CCAs. CARB are proposing that the 118.3 million CCA cap adjustment (previously thought to be retired from the market and representing a significant tightening of the market) could now make their way back onto the market. 

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### Persistent UKA-EUA spread reveals deep political paralysis
URL: https://www.carbonrisk.world/persistent-uka-eua-spread-reveals-deep-political-paralysis/
Last updated: 2026-05-14T14:43:14.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

Last week the [UK government announced that the Carbon Pricing Scheme (CPS) is to be abolished](https://questions-statements.parliament.uk/written-statements/detail/2026-04-16/hcws1519?ref=carbonrisk.world) from April 2028\. 

To recap, the CPS is an additional carbon price paid by fossil-fired power generators. Crucially, it's a top up tax, over and above what utilities pay under the UK ETS. It was launched in the early 2010s when carbon prices in the EU were below €10 per tonne CO2, coal accounted for about 40% of the UK's electricity generation, and the UK government (then led by the Conservative Party) were concerned that they would not be able to meet the targets outlined in the 2008 Climate Change Act.

The CPS was instrumental to securing coal's fate, dealing a fatal blow to coal plant economics. Launched in 2013 at £5 per tonne, it rose to £9 per tonne CO2 in 2014\. Since 2015 it has been frozen at £18 per tonne CO2, equivalent to €20.70 today. For a while during the mid-2010s, UK generators paid more than four times the prevailing carbon price facing those located on the continent. Almost two years ago, Britain made coal history and closed its last coal-fired power station. The policy had down its job, and as so often happens (or at least should), its success ultimately brought about its demise.

The CPS hastened the decarbonisation of the UK electricity grid, but it had outstayed its welcome. The CPS accounts for around 8% of the short run marginal cost for gas-fired power generators, according to estimates by the [Centre for British Progress](https://britishprogress.org/briefings/cut-bills-boost-electrification-by-removing-carbon?ref=carbonrisk.world). By driving up the wholesale price of electricity relative to natural gas it is now arguably delaying electrification in the UK. 

Given that power generation is already under the UK ETS emissions cap (the cap is fixed and declines each year), the withdrawal of the CPS will not have any direct impact on covered emissions. As [the Institute for Fiscal Studies (IFS) argues](https://ifs.org.uk/articles/response-scrapping-carbon-price-support?ref=carbonrisk.world), while the lower price of electricity might induce higher demand for power generation, any resulting increase in emissions should be offset by lower emissions elsewhere within UK ETS covered sectors. 

Outside of the realms of the UK ETS cap however, electricity prices should decline relative to natural gas and other fossil fuels, steering both households and businesses towards greater electrification. To the extent that electric transportation, heating, and other applications are significantly more energy efficient than their incumbent fossil-fuel alternatives, the loss of CPS could spur a decline in emissions.

It's always worth asking why are we hearing this now, and the significance of delaying the withdrawal of CPS until April 2028\. With coal now out of the UK generation mix, the CPS brings in less and less each year to the Exchequer. Abolishing the CPS would be a relatively quick way of lowering electricity bills (albeit slightly) ahead of the next general election - which must be called by August 2029.

As Alistair McGirr, Head of Policy at SEE [explains in a recent post](https://www.linkedin.com/feed/update/urn:li:activity:7451734787918295040/?updateEntityUrn=urn%3Ali%3Afs%5FupdateV2%3A%28urn%3Ali%3Aactivity%3A7451734787918295040%2CFEED%5FDETAIL%2CEMPTY%2CDEFAULT%2Cfalse%29&ref=carbonrisk.world), the removal of CPS could signal that the UK has finally reached clarity over its carbon pricing relationship with the EU. If an ETS link isn’t operational by the time CPS goes in 2028, McGirr explains, the UK economy would be exposed to the full effects of the EU's CBAM.

The announcement resulted in the price of UKAs soaring by more than 10% last week, reaching its highest level since mid-February. The market clearly buying into the story that the announcement meant the UK was making good progress in its negotiations with the EU, and that the CPS announcement was a crucial tidying up exercise ahead of establishing a link between the two carbon markets.

The broader geopolitical backdrop has added fuel to the narrative. The US/Israeli conflict with Iran has accelerated efforts to bring about a closer alignment between the UK and the EU. Prime Minister Sir Keir Starmer stated that it is in the "UK's best interest" to seek a stronger relationship with the EU, especially given the economic crisis turmoil unfolding due to the war. 

To expedite the process the government are set to introduce legislation (so-called Henry VIII powers) allowing them to sign up to EU single market rules without having to consult parliament. It means that a new bill covering areas as diverse as food standards, animal welfare, linking the UK and EU emissions trading schemes, and access to the EU's internal power market could be brought forward as early as next month.

UKAs have been relatively cheap way to punt on a structurally higher EU carbon price. Recall that at one point in early 2025 UKAs were trading as low as €37.35, a 53% discount to the prevailing EUA price of €79.26\. Investment funds have maintained a significant net long position (\~20 million UKAs) for several months now, betting that the linkage narrative would slash the UKA discount.

While the UKA-EUA discount narrowed to around 25% in the immediate aftermath of the CPS announcement, it is still someway short of the 10% discount observed at the start of 2026\. It suggests that the market senses something else is up, otherwise it really should be much closer. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/04/image-10.png)

The wide spread probably reflects rising UK political risk. In the short-term the risk is that Labour, the governing party, may have to elect a new leader. Longer-term, there is a strong chance that anti net zero political parties may secure power at the next general election.

Lets take a look at each in turn. 

Prime Minister Starmer has come under fire for his disastrous decision to appoint Peter Mandelson to the position of US ambassador in late 2024; it was later revealed that Mandelson was a close associate of Jeffery Epstein, who he had also leaked sensitive government information to. The omnishambles relating to Mandelson's vetting is only now coming to light. The furore has led many to speculate as to whether Starmer will be forced to resign, triggering a drawn out process to elect a new leader.

Betfair's two prediction markets asking when "Keir Starmer will be replaced as Labour Leader" suggest a change is most likely to occur between [July and September 2026](https://www.betfair.com/exchange/plus/politics/market/1.253645106?ref=carbonrisk.world), and very likely to be this year. At the time of writing there is an implied 70% probability that he will be gone by the end of 2026\. Nevertheless, the longer he stays without being replaced, [the more likely he will remain in position](https://www.betfair.com/exchange/plus/politics/market/1.232677061?ref=carbonrisk.world) by the time of the next general election. 

Unless Starmer resigns (or is otherwise forced out) in the next one or two months, his exit is unlikely to delay negotiations with the EU over the UK-EU ETS linkage. Furthermore, with every potential pretender to the throne likely to be more pro-EU than Starmer, the latter's exit may even accelerate the process of re-developing much closer ties with Europe – we'll come to what that might mean in a bit.

Now about Labour's competition in the polls. Both the Reform Party (currently [leading in the polls](https://www.markpack.org.uk/155623/voting-intention-opinion-poll-scorecard/?ref=carbonrisk.world) and [favourite to win the most seats in parliament](https://www.betfair.com/exchange/plus/politics/market/1.230583324?ref=carbonrisk.world)) and the Conservative Party have promised to do away with net zero policies if they are elected, despite strong support for [net zero remains in the UK](https://www.ippr.org/articles/apathy-and-opposition?ref=carbonrisk.world). The most recent YouGov survey (carried out in December 2025) revealed a +33% net support for net zero across all UK voters. Only those who voted Reform in the 2024 general election were net opposed to net zero (-54%). 

Kemi Badenoch, the leader of the opposition Conservative Party, recently pledged to "axe the carbon tax", mirroring the failed Conservative Party of Canada's campaign promise ahead of the 2025 general election. It's why securing a linkage between the UK and EU ETS is so important. Establishing a link will make it much more difficult for either party - Reform or Conservative - to break with the UK's climate targets, should they gain enough votes at the next general election (see [*A tactical retreat: Mark Carney axes Canada's consumer carbon tax*](https://www.carbonrisk.world/a-tactical-retreat/)).

A [recent article by the UK political journalist Ian Dunt](https://iandunt.substack.com/p/rejoin-is-coming-8aa), argues that Labour's best strategy to outflank its political opponents is to put re-joining the EU at the centre of the next general election campaign. It would be a brave bet but with the economic damage from Brexit now clear to see, and closer ties with Europe now seen as more important than ever, the downsides are limited.

Unfortunately Starmer has squandered his political capital. Up until now the Prime Minister has chosen the path of least resistance; eking out small, politically expedient but important gains on agri-food, carbon pricing, energy trading and youth mobility. However, as Dunt explains, we are close to hitting the limits of what this strategy can achieve. The political paralysis pervading government means it is very unlikely to take this bet, unless of course, a new pro-EU leader takes over the reigns.

The price of carbon in the UK is caught in the crosshairs between two vortexes. On the one hand closer relations with the EU increase the probability that a linkage will be achieved and that UKA-EUA parity will be restored. But market participants must concede that it will come under threat as the next general election approaches.

On the other, cementing a stronger long-term link with the EU might require extreme disruption in the short-term, potentially disrupting the deal to link the two carbon markets. In the long-term though this increases the probability that the UK will remain an advocate for ambitious climate policy, with a strong carbon market at its core.

The UK introduced the CPS at a time when the EU's carbon market was stuck in its own malaise, suffocating under the weight of past policy mistakes and the eurozone debt crisis. Now today, more than a decade later, the decision to abolish CPS is a recognition that its job is done. But it's more than that. It's also a signal that the EU is the centre of gravity when it comes to climate policy, a recognition that the UK cannot achieve its climate policy aims alone, cast adrift from its nearest neighbour.

[Want to read more? Start here](https://www.carbonrisk.world/table-of-contents-start-here/)

[Britain makes coal historyUnique approach to carbon pricing instrumental to securing coal’s fate![](https://static.ghost.org/v5.0.0/images/link-icon.svg)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/thumbnail/https-3a-2f-2fsubstack-post-media-s3-amazonaws-com-2fpublic-2fimages-2f7a6d7d33-528f-49ac-86d7-f1f4d271be42_1280x720-jpeg.jpg)](https://www.carbonrisk.world/britain-makes-coal-history/)
### No carbon copy
URL: https://www.carbonrisk.world/no-carbon-copy/
Last updated: 2026-05-14T14:43:50.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

More than one-quarter (almost 26%) of global carbon emissions (equivalent to 14 Gt CO2), are covered by emissions trading systems in 2026, according to the [latest ETS status report from the International Carbon Action Partnership (ICAP)](https://icapcarbonaction.com/en/publications/emissions-trading-worldwide-icap-status-report-2026?ref=carbonrisk.world). Despite the adverse political environment, the share of emissions covered by an ETS climbed 3 percentage points during the past year, while the number of individual schemes increased by 3 to 41\. 

The share of emissions covered by ETSs has grown 5-fold since the EU ETS was launched in 2005\. The EU carbon markets share of emissions has fallen over time; the decline in the overall cap offsetting the addition of other sectors, such as heavy industry, and more recently aviation and maritime. 

Today, China has by far the largest ETS in terms of covered emissions (\~8 Gt CO2, or 60% of the country's emissions), almost half of which has been added since 2024 as several heavy industries were added. The Chinese ETS is set to grow even further over the next few years with the inclusion of chemicals, petrochemicals, civil aviation, and papermaking. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/04/image-3.png)

Source: 2026 ICAP Status Report

### Impetus to expand hits headwinds

Three new national-level systems (Japan, India, and Vietnam) have either launched or are due to start in 2026\. Seven are currently under development and nearing operational readiness (such as Colombia, Türkiye, and New York State), while nine more are under consideration (including Bolivia, Malaysia, and Taiwan). 

Asia and Latin America are the most important areas for ETS development, but the latter is the most important in terms of rising share of emissions. Just 2% of the region's emissions are currently covered by an ETS, but this is set to expand significantly, once for example, Brazil's ETS begins in the early 2030s (see [*Brazil's carbon market gets the green light: Policy secures the nation's climate leadership among world's biggest oil producers*](https://www.carbonrisk.world/brazils-carbon-market-gets-the-green/)).

As discussed here on *Carbon Risk*, the launch of CBAM at the start of 2026 (the policy was first announced in 2019) has been a powerful incentive for Europe's trading partners to introduce their own carbon pricing mechanism. [Analysis by Bruegel found that a 1 percentage point increase in a country’s CBAM exposure](https://www.bruegel.org/sites/default/files/2026-03/WP%2005%202026.pdf?ref=carbonrisk.world) increased the probability that it would adopt a carbon pricing policy by about 2%.

Of course, these factors could start to reverse if trust in Europe's climate policy starts to ebb. Any suggestion that the EU is looking to exempt certain sectors from CBAM or weaken the compliance requirements could result in governments putting their own ETSs on the backburner. Furthermore, in the short term, current high energy prices could also cause governments to delay or cancel new ETSs, or put off expanding the coverage of existing carbon pricing mechanisms (see [*A green and level playing field? The European Commission faces a tortuous task refereeing CBAMs winners and losers*](https://www.carbonrisk.world/a-green-and-level-playing-field/)).

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### CDR "moonshot" aborted, for now
URL: https://www.carbonrisk.world/cdr-requires-a-reboot/
Last updated: 2026-05-14T14:44:28.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

On the same day that Artemis II returned from its historic 10-day mission to the far side of the Moon, Microsoft appeared to scrub its own "moonshot" as reports emerged that the tech giant has suspended future carbon removal purchases indefinitely.

At the start of the 2020s, tech companies such as Google and [Microsoft were confident that they would be powering their date centres using renewable energy by 2030](https://blogs.microsoft.com/blog/2026/02/18/a-milestone-achievement-in-our-journey-to-carbon-negative/?ref=carbonrisk.world), while employing carbon dioxide removal (CDR) to negate those carbon emissions that couldn't be reduced to zero. [Microsoft went further, announcing a 2050 plan](https://blogs.microsoft.com/blog/2020/01/16/microsoft-will-be-carbon-negative-by-2030/?ref=carbonrisk.world) to “remove from the environment all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975."

The race to mitigate the environmental impact of data centres gathered pace with many following the lead set by the major tech companies and adopting ambitious climate targets. The [‘Greening Digital Companies 2025’ report](https://www.itu.int/en/ITU-D/Environment/Documents/Publications/2025/Greening%20Digital%20Companies%202025%20Final.pdf?ref=carbonrisk.world), tracking emissions and climate commitments of 200 leading tech companies, found that almost half had committed to net zero emissions, with 41 firms aiming for 2050, and 51 targeting earlier deadlines. 

When the major tech companies embarked on their carbon removal "moonshot" they quickly recognised that CDR was in short supply and the cost was prohibitively expensive. Stripe was the first company to recognise the power of becoming the buyer of first resort, employing advanced market commitments to signal demand, hoping to spur innovation and the development of new CDR technologies (see [*Carbon dioxide removal and the buyer of first resort: The window for high cost, novel CDR technologies is closing fast*](https://www.carbonrisk.world/carbon-dioxide-removal-and-the-buyer/)). 

It's here that the tech companies were following in the footsteps of the first manned trips to the Moon. In the early 1960s NASA realised that early computing technology was too unreliable to ever get a man on the Moon. In response, the US government declared that they would buy every single integrated circuit manufactured – after three years the global market for microchips had grown 20-fold.

Microsoft took the role of CDR buyer of first resort to a new level.

In 2025 the tech giant purchased 52 million CDR credits in 2025 (93% of the carbon removal market), according to data published in the [*Sustainable Energy in America 2026 Factbook*](https://bcse.org/market-trends/2026-factbook-download/?ref=carbonrisk.world).Almost all(96%) of the CDR volume was contracted via long-term offtake contracts (typically 10–15 years) whereby the buyer commits to purchasing a specific volume of future CDR credits. 

The tech giant invested in a portfolio of CDR bets, hedging its CDR exposure across a range of different technologies; initially focused on engineered credits (bioenergy with carbon capture and sequestration), but more recently pivoting to nature-based removals (reforestation). In total, [Microsoft is estimated to have contracted more than 80 million CDR credits since 2020](https://www.ccarbon.info/article/when-the-largest-buyer-pauses-what-microsofts-cdr-recalibration-signals-for-the-market/?ref=carbonrisk.world), accounting for almost three-quarters of the CDR market (\~113 million credits, or 73%).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/04/image-2.png)

Source: BloombergNEF, CDR.fyi, Verra, Gold Standard, American Carbon Registry. Note: Data includes both direct retirements and future offtake agreements.

Recent media reports (such as ['Microsoft is the carbon removal market'](https://www.latitudemedia.com/news/microsoft-is-the-carbon-removal-market/?ref=carbonrisk.world) by Latitude Media) are blunt in their assessment of the tech company's dominant position, arguing that "having one buyer dominate the market isn’t a sustainable strategy long-term." In the absence of regulation forcing firms to act (such as that being considered in the UK, EU, and Japan), some analysts fear that a more diverse set of CDR buyers is unlikely to materialise. Note that the revised Corporate Net Zero Standard from the SBTi does little to incentivise CDR (see [*Eyes on the prize: Revised SBTi standard amplifies role of internal carbon prices, carbon credits, and Environmental Attribute Certificates (EACs)*](https://www.carbonrisk.world/eyes-on-the-prize/)).

Microsoft's apparent suspension of future CDR purchases leaves a gaping hole. Whether the rumours are true or not, the industry's dependence on one company does leave it structurally vulnerable. 

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### No company is a net zero island
URL: https://www.carbonrisk.world/no-company-is-a-net-zero-island/
Last updated: 2026-04-13T11:00:42.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

> "A decade after the 2015 Paris Agreement articulated the “stretch goal” of limiting global temperature rise to 1.5°C above preindustrial levels, it has become clear that achieving this goal is no longer plausible." - Resources for the Future, Global Energy Outlook 2026

Last week the independent research institution [Resources for the Future (RFF) published its annual Global Energy Outlook](https://www.rff.org/publications/reports/global-energy-outlook-2026/?ref=carbonrisk.world). The report brings together a range of long-term energy projections from eight organisations, including the IEA, BNEF, BP, ExxonMobil and Equinor. Harmonising 15 projections to "produce as close to apples-to-apples estimates as possible", the report identifies key trends in global energy consumption, emissions (see chart below), and geopolitics. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/04/image-1.png)

It's central conclusion is that while "preventing the worst impacts of climate change remains an essential global task, 1.5°C or net zero by 2050 scenarios now offer little practical guidance." The report begins by stating that the events of 2025 (and in particular, the bellicose rhetoric and subversive actions of the Trump administration) have shaken the global order, calling into question the key pillars of international economic and security systems, and especially those underpinning collective climate action. RFF note that governments have increasingly focused on energy security, affordability, and the cost of living, "relegating climate change to a second-tier priority (or lower) in many cases." 

The same conclusion has prompted some of the worlds largest energy companies to argue that they will not be able to meet their previously stated net zero commitments. TotalEnergies and Shell recently stated that, while they will take action on what is under their control, they must, as Patrick Pouyanne, CEO of [TotalEnergies pointed out in his companies sustainability report](https://totalenergies.com/info/esg?ref=carbonrisk.world), "confront our ambition with reality,” and acknowledge that the energy transition is not proceeding at the pace required (see [*Caution! Net zero scenarios are not forecasts: Why the blurring of the normative and the predictive is leading to a misallocation of capital*](https://www.carbonrisk.world/caution-net-zero-scenarios-are-not/)). 

Pouyanne indicated that the pathways to his company achieving carbon neutrality must be "reassessed and adapted over time in line with the evolution of the global energy system", pointing to developments in "technical innovation, public policies and consumer choices." Shell CEO Wael Sawan was more pointed in his responses, laying the blame at governments for weakening climate policies, "Our objective has been to be a net zero business in a net zero world," he stated at [International Energy Week 2026 in April](https://www.spglobal.com/energy/en/news-research/latest-news/crude-oil/021026-shell-casts-doubt-on-net-zero-2050-commitment?ref=carbonrisk.world), and "Were there a huge focus and ambition in enabling policies, then I think it \[net zero by 2050\] is absolutely possible,"

Indeed, its worth taking a step back and reflecting for a second. Its clear that the philosophy underpinning corporate climate commitments underplays the degree to which corporate emissions are embedded in wider societal systems. As the two energy majors allude to, public policy, transmission grids, transport infrastructure, and national regulatory frameworks all play a part in determining the speed at which companies can decarbonise, whatever their primary business activity. 

While energy companies play a major role in the underlying architecture of the global energy system, they will only respond to the incentives presented in front of them. It's a quandary facing all companies that have publicly stated their commitment to net zero: how to continue pursuing a target that many argue is now very unlikely to be met. This article argues that no company is a net zero island, but there may be a more constructive way forward than the status quo.

As of September 2025 almost two-thirds (63%) of the Forbes Global 2000 (the top 2000 largest publicly traded companies) have net zero targets, [according to Net Zero Tracker](https://zerotracker.net/analysis/net-zero-stocktake-2025?ref=carbonrisk.world), covering $36.6 trillion in revenue (70% of total). While net zero targets signal corporate support, they are not, on their own, a reliable proxy for climate ambition. 

A recent study [scored the corporate net zero strategies of 3,500 companies against seven indicators of greenwashing](https://www.nature.com/articles/s44168-026-00346-6?ref=carbonrisk.world#Sec7), using data from Net Zero Tracker, CDP and InfluenceMap. The most problematic issue uncovered by the research was that 70% of companies excluded Scope 3 emissions from their net zero targets, this despite it typically constituting the largest fraction of corporate carbon footprints (see [*Owning up to Scope 3: How investors should think about the SEC's proposed disclosure requirements*](https://www.carbonrisk.world/owning-up-to-scope-3-emissions/)). 

Perhaps the most important red flags related to the implementation roadmap, specifically, questionable use of carbon credits (40%), missing interim targets (21%) and a lack of meaningful progress toward targets (20%). Of the Forbes Global 2000 companies that set net zero targets, 31% failed to set concrete implementation roadmaps, undermining the credibility of those commitments. 

Although roadmaps coupled with interim milestones (such as a 2030 emission reduction target) add credibility in the eyes of a companies stakeholders, time is marching on, and with companies some way off where they need to be in 3-4 years time, it won't be long before they start having to field some very difficult questions. So what's the best strategy given the strong headwinds facing corporate action on climate change?

Well, instead of obfuscating the issue, diverting attention away from their net zero targets, and the limited progress made towards meeting them, management need to become more open and honest about their spheres of influence. The energy companies, TotalEnergies and Shell, get it. It's time for other industries to adopt the same tone, and realise that reaching net zero will only ever be achieved by explicitly identifying what emissions they have agency over, and that which they do not, the two requiring very different strategies. 

A [recent white paper, a collaboration between Futerra and Oxford Net Zero](https://www.wearefuterra.com/thinks/spheres-of-influence-whitepaper?ref=carbonrisk.world), is explicit about this challenge, introducing its Spheres of Influence Framework. The narrowest of the three key spheres identified is the core products and services a company brings to markets. The second leverages a company's ability to direct financial flows to "accelerate the broader transition". The third involves shaping the external environment, influencing policymaking and educating the broader public. Its only by scaling the "Spheres of Influence", the authors of the paper argue, can we hope to counter the net zero backsliding vicious circle, and finally regain some momentum.

But maybe there is a more concrete way of thinking about this. Perhaps net zero targets need to be explicitly structured in a way that recognises the line between what emissions are within a firms agency, and those emissions that are not, but that require more system-wide change. 

A [recent paper Milkywire, a climate impact firm](https://www.milkywire.com/articles/a-new-lens-on-corporate-net-zero?ref=carbonrisk.world), introduces a new framework by which firms can clarify "responsibility, action, and claims under corporate net zero." Specifically, it says that net zero targets should be understood as two distinct commitments: the first targeting those emissions within a company's control, and the second, a separate conditional target that depends on broader system transformations. 

Earlier I mentioned that 70% of the Forbes Global 2000 companies that had set a net zero target excluded Scope 3 emissions. The research identified that this was a major red flag, potentially signalling that a company's net zero commitment was not to be trusted. Not every company has the same ability to shape its Scope 3 emissions; a large vertically integrated company will have a lot more influence than an individual company in a long, extended supply chain. 

Perhaps the problem is that companies and investors suffered from unrealistic Scope 3 expectations, and were unable to develop relevant strategies that aligned with their overall net zero target. A change in approach, along the lines advocated by Futerra, Oxford Net Zero, and Milywire based on spheres of influence and conditional emissions targets, could help turn things around.

It's now very unlikely that the world will meet net zero by 2050\. An achievement that would have given the world its best chance of limiting the rise in global temperatures to 1.5°C. Corporate net zero commitments were designed for a world where international cooperation between likeminded entities was the default assumption. That world seems increasingly far off in the rear view mirror. 

Corporations are right to commit to climate action, but a change in approach is needed, one that recognises what one can and cannot control. It's one that requires incentives to pursue every sphere of influence, both operational and broader systemic issues.

No company is a net zero island.

[Want to read more? Start here](https://www.carbonrisk.world/table-of-contents-start-here/)
### Greener growing still in the red
URL: https://www.carbonrisk.world/green-in-the-black/
Last updated: 2026-04-09T12:01:03.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

Roughly one-third of global fertiliser trade (primarily ammonia and urea) passes through the Strait of Hormuz, along with 20% of liquified natural gas (LNG) and 45% of sulphur, the latter both key raw materials in the manufacture of synthetic fertiliser.

Europe receives only a negligible amount of its fertiliser needs from the Middle East. Other countries, most notably India, Pakistan, Australia and New Zealand, are much more exposed, receiving 25-30% of the fertiliser they consume from the region. 

Nevertheless, the EU is still one of the most fertiliser-dependent agricultural regions in the world. The bloc imports enough fertiliser to meet more than 60% of its needs; although for some types (such as potash and phosphorus) that dependence is closer to 100%.

As with oil and gas, the price of other commodities, including ammonia and urea, are set on global markets. And here Europe is also a price taker. Iran's chokehold on shipments through the strait has lifted the price of fertiliser, but so far at least, not to the same extent as either 2008 or 2022\. 

For now, countries are content to wait (nervously), and hope volumes normalise, whether a ceasefire holds or not. There's no scramble for product, not yet! 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/04/image.png)

The crisis could not have come at a more difficult time for Europe with farmers already smarting at the additional (albeit negligible) cost of fertiliser due to the introduction of the Carbon Border Adjustment Mechanism (CBAM) at the start of 2026\. The policy means that importers of several carbon intensive products, including fertiliser must now factor in the cost of the embedded emissions in the product they bring into the EU.

Europe imported more than a quarter (28%) of its annual demand for nitrogen-based fertilisers in December alone. What now might be seen as an amazing stroke of luck was actually a quirk of timing, as importers sought to avoid the regulatory burden. Could CBAM or an alternative climate policy offer a way out for Europe from its impending fertiliser crisis? Let's hold our noses and brave the pungent air of what may be the path towards a greener and less insecure dependence on fertiliser. 

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### Europe readies armoury for carbon market endgame
URL: https://www.carbonrisk.world/europe-readies-armoury-for-carbon-market-endgame/
Last updated: 2026-04-07T12:00:26.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

Under persistent pressure from some of Europe's energy intensive industries, Commission President Ursula von der Leyen promised a proposal to "increase the firepower" of the Market Stability Reserve (MSR), the mechanism governing the excess supply of EU emission allowances (EUAs). 

Ahead of the Easter break, von der Leyen delivered on that promise. 

On 1st April the Commission announced that it is proposing to stop the automatic invalidation of any EUAs held in the MSR above 400 million. Instead these so-called "invalidated" EUAs will be held in the reserve and "kept as a buffer that can support market stability." 

Not one for April Fools jokes, the Commission's proposal sheds light on the inherent complexity underpinning the running of the EU's emissions trading scheme: the lifespan of an EUA, governance of the market, the rules of engagement, and ultimately, what it all means in terms of trust.

The proposal still needs to be approved by the EU Council and Parliament. A comprehensive review of the MSR will take place in July where there may be further amendments. Given that the MSR is a directive in its own right, the changes could come into force by the end of the year.

Before we consider the implications of this proposal, lets do a quick recap of why we're discussing this now, starting with the question, what even is an "invalidated" EUA anyway?

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### Repost: Spread bets
URL: https://www.carbonrisk.world/repost-spread-bets/
Last updated: 2026-03-31T12:01:15.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

*I'm travelling this week and so in a break from the normal schedule I thought I'd share an article from the Carbon Risk archive.* 

*I'm lifting the paywall on an article I originally published in March 2025 in which I discuss the outlook for low-carbon commodities and "energy transition assets". It's a topic that I believe will become increasingly relevant as trading firms, governments, and large industrial companies realise the value in market-based mechanisms that can drive decarbonisation.*

*Stuck for something else to read?* [*Check out the rest of the Carbon Risk archive (451 articles).*](https://www.carbonrisk.world/table-of-contents-start-here-2/) *Normal service will resume after Easter.* 

---

> *“The commodity traders are arbitragers par excellence, trying to exploit a series of differences in prices…They are, in the words of one academic, the visible manifestation of Adam Smith’s invisible hand.”*  
>  
> \- Javier Blas, The World for Sale: Money, Power, and the Traders Who Barter the Earth's Resources

Commodity trading profits slumped from $100 billion during 2022 and 2023 to $72 billion in 2024, according to preliminary estimates by McKinsey. A return to a more ‘normal’ trading environment, characterised by lower and less volatile energy prices and fewer geopolitical disruptions, has dampened margins.

The adverse impact was greatest for those traders covering oil & oil products, and power & gas. The total margin generated across these two commodity sectors, which together normally account for two-thirds of the total, declined by almost 40% versus the period 2022/23.

The boom years marked by Russia’s invasion of Ukraine attracted new entrants into the market and incentivised existing firms to expand their operations. As uncertainty and price volatility has subsided, so the increase in competition has also acted to reduce the margins available.

![](https://substackcdn.com/image/fetch/$s_!v-AP!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F5f4c1539-cca3-45c2-b9b0-0818b18204fd_802x751.png)

### The world for sale

Of course, commodity trading firms do sometimes take directional bets on the price of various commodities, but it would be incorrect to suggest that is their primary purpose. Commodity traders play an essential role in the global economy, ensuring that the resources we need on a daily basis - energy, raw materials, and food - are there when we need them.

A small number of huge commodity trading firms dominate the production, transportation and trading of commodities. Virtually all commodities must undergo a variety of processes to transform them into things that we can actually consume. These transformations can be grouped into the following categories: space, time and form.

The first transformation requires the transportation of commodities from where they are produced to the places they are consumed. The areas where commodities can be efficiently produced, such as fertile land or mineral deposits, are usually away from, and often far away from, where those who desire to consume them reside.

The second transformation requires commodities to be stored to correct for mismatches in the timing of production and consumption. Stocks can be accumulated when supply is unusually high or demand is unusually low, and can then be drawn down upon when demand exceeds supply.

Finally, commodities must often undergo transformations in form in order to be suitable for final consumption or for use as an input in a process further down the value chain. For example, crude oil must be refined into gasoline, diesel and other products.

Commodity trading firms seek to identify the most valuable of these transformations, undertake the transactions necessary to make these transformations and engage in the physical and operational actions necessary to carry them out (see [*Know your onions: Concern over the role of speculators in Europe's energy markets is overplayed*](https://carbonrisk.substack.com/p/know-your-onions)).

Right now, the returns from these transformations are under pressure, but that’s not expected to last long. Taking a longer-term view, McKinsey are forecasting a return to a steady margin growth (\~10% per annum) with overall industry profit expected to return to $100 billion before the end of the decade.

Power, gas, and LNG markets are likely to drive much of the increase, supported by market liberalisation, the growth in electricity demand (+3.5% per annum), and weather related volatility as renewable adoption rises. [McKinsey also expects “energy transition assets”,](https://www.mckinsey.com/industries/energy-and-materials/our-insights/how-to-capture-the-next-s-curve-in-commodity-trading?ref=carbonrisk.world#/) such as carbon credits, biofuels, energy attribute certificates (EACs), and green premium certificates (GPCs) to be a major source of growth.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/03/image-17.png)

Let’s take a look at the opportunity for commodity traders across each of the four markets.

**1\. Carbon Credits**

Although McKinsey acknowledges that forecasting carbon credit volumes and prices “remains a highly uncertain exercise,” they point to three factors that are likely to drive growth for commodity trading firms. First, acceptance of carbon credits by compliance markets, driving up the pricing of eligible credits. Second, demand from the aviation industry as CORSIA reaches full implementation. Third, demand for credits from corporations looking to meet 2030 net-zero targets.

As I outlined in [*Coming of age: The evolution of carbon credits fits a pattern of financial innovation*](https://carbonrisk.substack.com/p/coming-of-age), COP29 marked a significant milestone in the advancement of international carbon credit trading. Banks and other financial institutions that had stepped back from the carbon credit market, or had until recently decided not to establish a trading desk are likely to want to get back in. One of the key obstacles that is now on its way to being resolved is the question of trust:

> “Over 35 years ago, carbon credits emerged as a tool for companies to reduce their impact on the climate, in the absence of any regulation requiring them to do so. Almost 20 years ago, the first framework for international trading in carbon credits was developed. But those early pioneers, hoping this would catalyse global carbon markets into action, would be left disappointed.  
>  
> And then, borne out of the ashes of the 2012 carbon panic, the VCM stepped into the void. It too experienced its own boom and bust as the unregulated marketplace came under fire. Now, according to Hannah Hauman, global head of carbon trading at Trafigura, agreement on Article 6 means that carbon credits are set to join the ranks of “investment-grade assets and operations.”  
>  
> The carbon credit market is coming of age.”

**2\. Biofuels**

McKinsey also expects biodiesel to be a major source of margin growth for commodity traders. The opportunity is driven by European regulation (e.g., RED III, EU ETS2, SAF mandates) and uncertainty over the the US governments position, particularly around SAF production support.

In 2023 the EU adopted an amendment to the Renewable Energy Directive (RED III) that raised the collective target for renewables in transportation from 14% to 29% by 2030\. At the same time it introduced a parallel target to reduce the carbon intensity of 14.5% of transport fuels. Meanwhile, the launch of ETS2 in 2027 is expected to see an increase in demand for biofuels to reduce the exposure to carbon pricing by the transportation sector.

The ReFuelEU aviation mandate requires EU airports and fuel suppliers to increase the share of aviation fuel that includes SAF from at least 2% in 2025, to 6% in 2030, with the percentages then ramping up every five years to 32% in 2040, before hitting 70% in 2050\. Meanwhile, the UK Government published its SAF mandate in early 2024, and at least in the near term its more ambitious than the EU. Set at 2% in 2025 the share of aviation fuel from SAF will need to rise to 10% in 2030 and then 22% in 2040.

America’s targets were arguably more ambitious than Europe’s. In contrast to the mandate approach in Europe, the U.S. depended on giving fuel producers tax credits that partially cover the cost difference versus kerosene. SAF producers were eligible for a tax credit of up to $1.25 per gallon under the Inflation Reduction Act (IRA), but that tax credit program expired at the end of 2024.

However, Donald Trumps hostility to climate initiatives has sowed doubt over the future support for SAF after he paused clean energy funding. The process to finalise the SAF regulations is currently on hold, in accordance with the 60 day freeze on all regulatory developments put in place after Trump was inaugurated.

Europe has favoured so-called second generation biofuels including agricultural and forest residues, and waste products such as used cooking oil (UCO) and animal fats to meet its renewable fuel targets. Biofuels derived from these waste products are commonly referred to as Hydro-processed Esters and Fatty Acids, or HEFA. However, doubts have surfaced as to whether the supply of UCO is really sustainable, with concerns that Chinese suppliers have blended virgin palm oil with UCO (see [*Frequent fryer: Demand for biofuels made from used cooking oil is soaring, but could there be a sting in the tail?*](https://carbonrisk.substack.com/p/frequent-fryer)).

**3\. Energy Attribute Certificates (EACs)**

The third major opportunity for margin growth is expected to come from Energy Attribute Certificates (EACs). Known as Guarantees of Origin (GOs) in Europe, or Renewable Energy Certificates (RECs) in North America, EACs document that one MWh of electricity has been generated and supplied (net) to the grid, through a specified renewable energy resource.

EACs are based on a “book and claim” chain of custody market mechanism. They enable suppliers of low-carbon solutions to “book” the environmental attributes of a good they have produced (power generated via renewables, emission savings, etc), and for users to “claim” those same attributes.

EACs can be very volatile due to political and weather related factors. For example, a drop in hydropower output in Europe during 2022 resulted in GO prices spiking 10-fold to around €10 per MWh. A couple years later prices had collapsed due to an increase in renewable energy generation and weaker power demand. The UK’s decision to exit from the EU and the Norwegian governments threat to pull out of the GO market both caused a spike in GO price volatility due to their position in the market - the UK a net importer, Norway a net exporter.

McKinsey notes that “these markets are expected to remain highly valuable, with forward curves suggesting sustained elevated pricing of existing products and new international markets emerging, as evidenced by China’s recent launch of a domestic replacement for RECs”. Indeed, the introduction of mandatory emissions reporting - in Europe and elsewhere - was expected to increase demand, but political decision to delay or soften obligations on businesses could change that (see [*Book and claim - Part 1: Energy Attribute Certificates play a vital but controversial role in the energy transition*](https://carbonrisk.substack.com/p/book-and-claim),

**4\. Green Premium Certificates (GPCs)**

Finally, McKinsey sees the growth of Green Premium Certificates (GPCs) as an opportunity for growth. Although the consultancy refers to demand from the metals sector (given their role in the energy transition), their potential extends well beyond and includes nascent commodities such as Sustainable Aviation Fuel (SAF) and green hydrogen (gH2).

GPCs are instruments that represent the emissions attributes, and emission relate claims, after using a metric tonne of a low carbon fuel or other commodity. They have similar characteristics to the EACs as they unbundle the environmental attributes from the underlying commodity, enabling buyers to pay for the environmental benefits, even if the physical commodity is not yet available for them to use (see [*Book and claim - Part 2: How SAF and green H2 are harnessing the power of Energy Attribute Certificates*](https://carbonrisk.substack.com/p/book-and-claim-part-2)).

A McKinsey survey of shows growing willingness to pay for green premiums across several materials, including lithium and nickel. Commodity research firm CRU defines the green premium as: “An additional price, over and above that paid for the equivalent ‘standard emissions’ substitute, that the consumer or buyer will pay due to the lower CO2e emissions associated with a product.”

![](https://substackcdn.com/image/fetch/$s_!ZTDH!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F8625285f-1f03-449a-83af-5fb1c4b1f44e_791x567.png)

[A separate report by Oliver Wyman suggests that low-carbon commodities could dominate commodity trading returns](https://www.oliverwyman.com/our-expertise/journals/energy-and-natural-resources-journal-volume-7/commodity-traders-thriving-in-a-lower-carbon-world.html?ref=carbonrisk.world). The consulting firm projects that their share of total margins could rise from 16% in 2022 to 26% by 2030, and then surge to 65% in the long-term as we approach 2050\. GPC’s are likely to be an important addition to the global commodity trading framework, enabling buyers and sellers to trade the green premium without taking physical delivery.

As McKinsey notes, one of the most important similarities across carbon credits, biofuels, EACs, and GPCs is that participation “requires adherence to stringent regulatory criteria along with a robust documentation system to ensure traceability of commodities traded.” Given their expertise in trading commodities across various jurisdiction, commodity traders are in a strong position to leverage their capabilities to drive growth in “energy transition assets”.

As commodity traders returns have come under pressure recently, the future looks very promising indeed. The power super-cycle and the knock-on impact on natural gas, LNG trade, and compliance carbon markets is the background to the next decade. Layered on top of that though, the emergence of carbon, biofuel, EACs, and GPCs is likely to offer a host of opportunities for commodity traders.

I’ll leave the last word to Javier Blas, author of the excellent book *‘World for Sale’*, “as long as markets are less than perfectly efficient, there will still be money to be made - even without walking the knife-edge between legal and illegal - by exploiting inefficiencies and moving commodities around the world in response to price signals from the markets.”

[Want to read more? Start here](https://www.carbonrisk.world/table-of-contents-start-here/)
### In search of lost revenue
URL: https://www.carbonrisk.world/in-search-of-lost-revenue/
Last updated: 2026-03-26T12:00:28.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

Pity Europe's tax collectors.

Governments across the continent face yawning budget deficits. A fresh energy crisis means calls are growing for a bailout, which if answered threaten to blow the fiscal shortfall even wider. Everyone knows that diversifying away from fossil fuels is the answer, and subsidising the cost of fuel only prolongs the problem. But bringing about the low-carbon generation and electrification necessary requires a step change in investment, much of which will need to be supported by government spending.

But where to find the money? And if governments can't find it (or bring themselves to raise taxes or borrow it), will that risk an even larger debt reckoning in decades to come as Europe suffers more intense climate damages? Lets dive in, starting with the blocs emissions trading scheme. 

The auction of EU emission allowances (EUAs) has raised \~€40 million per year in revenue since 2021, accounting for almost half that channelled into government coffers globally from carbon pricing over the same period. As the punches rained down on the EU carbon market (ETS1) in recent weeks, one of the arguments put forward in its support is that EU Member States would not want to lose this important source of revenue. 

Taxes levied on energy (including carbon taxes and ETS's), transportation, resources, and pollution are all types of green taxes. Across the EU, direct carbon pricing accounts for around 12.5% of the total levied on negative externalities during 2022\. Its a small but no less valued revenue stream for public budgets. Nevertheless, its important to keep it in context. Total EU wide government revenue stands at almost €8 trillion. Revenues from the auction of EUAs amount to a mere 0.5% of the total tax take.

Despite the popular narrative vis-à-vis net-zero etc., there is no evidence that European governments have shifted the taxation burden towards correcting environment ills. On the contrary, green taxes have declined in importance relative to other sources of tax revenue (consumption, labour, etc), and particularly so since 2015\. As of 2022 this type of tax accounted for about 5% of total EU revenue (or 2% of GDP), a decline of 20% in their share since 2015\. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/03/image-15.png)

Source: SG

There are two main problems with environmental taxes. 

As the activity being taxed declines, revenue raised will naturally erode over time. The decline in the EU's environmental tax take since 2015 reflects the blocs shift away from fossil fuels. The move towards electric vehicles threatens to put a big dent in revenues from fuel duty for instance. 

Governments faced with dwindling budgets either need to crank up the tax rate even further (although this has its limits, and can create nasty side-effects), or seek out alternative sources of tax revenue. To that end they are no different from other forms of sin taxes: the harder the government tightens the screws, the more rapidly behaviour changes, and the less revenue there is to capture (see [*The Carbon Laffer Curve*](https://www.carbonrisk.world/the-carbon-laffer-curve/))[](https://www.carbonrisk.world/author/peter-sainsbury/). 

Furthermore, environmental taxes are regressive in nature meaning that their burden tends to fall on those with the lowest-incomes. For example, poorer households tend to spend more on transportation and heating as a percentage of their income than those who are better off. It's one reason why ETS2 (covering transportation and buildings) has proven so controversial, and contributed to its launch being delayed by one year. 

Despite its declining share of total EU tax take, environmental tax revenues have consistently exceeded expenditures on environmental protection over the past decade or more, typically by a factor of 150%. It highlights the EU’s reliance on environmental and energy tax revenues to support broader fiscal needs, and the limited levels of reinvestment into environmental protection. 

It's not just about the amount of spending either, it's where its focused that matters too. For example, of the revenue raised by ETS1, only around 16% of allocated funds are recycled back into investment in covered sectors (energy and industry), while 44% is directed toward non-covered sectors (such as buildings and transport). Furthermore, 13% of revenues were directed toward "indirect carbon cost compensation" for energy-intensive industries ([*Refund policy: Industry compensation for indirect carbon costs must be conditional*](https://www.carbonrisk.world/refund-policy/)).

As Europe faces its second fossil-fuel energy crisis in less than five years, the pressure on the blocs governments to accelerate the transition to renewable energy and electrify the economy has intensified. However, dramatically cutting Europe's reliance on fossil fuels will require substantial capital, which will need to be supported by public investment. At the same time, governments face a quandary since the shift away from fossil energy sources will substantially erode environmental tax revenues (see [*Electric avenue: Europe set to outline its path to electrification and energy security*](https://www.carbonrisk.world/electric-avenue/)).

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### Carbon's "lemon" dilemma
URL: https://www.carbonrisk.world/carbons-lemon-dilemma/
Last updated: 2026-03-24T12:00:56.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

In early 2023 I published [The signal and the noise: Pricing the carbon credit risk curve](https://www.carbonrisk.world/the-signal-and-the-noise/), one of my first posts about the verified carbon market (VCM). In the article I introduce how carbon projects generate credits, the six main factors underpinning carbon credit methodologies, and delve into media reports alleging that more than 90% of nature-based credits fail to deliver. The crucial insight, which I coined *Carbon’s "lemon" dilemma*, is that the VCM resembles the used car market:

> "Economist George Akerlof markets noted that markets in which buyers possess imperfect information while sellers possess a profit motive are often thin, insubstantial and low quality. [Akerlof used the second hand car market and the imperfect information problem posed by poor quality cars (“lemons”) as an example](https://www.sfu.ca/~wainwrig/Econ400/akerlof.pdf?ref=carbonrisk.world). The VCM is an equally good example of this problem in action.

> For example, suppose buyers in the carbon offset market value good nature-based carbon projects at $20 per tonne, while sellers value them slightly less. A poor quality project is worth only $10 per tonne to buyers. However, buyers of carbon offsets struggle to tell the difference between projects of differing quality. To account for the risk that a project is a lemon, therefore, buyers cut their offers.

> They might be willing to pay, say, $15 per tonne for carbon offsets they perceive as having an even chance of being high or low quality. But sellers who know for sure they have a high quality project will reject such an offer. As a result, the buyers face “adverse selection”: the only sellers who will be prepared to accept $15 per tonne will be those who know they are offloading a poor quality carbon offset.

> Smart buyers can foresee this problem. With the knowledge that they will only ever be sold a poor quality offset, they offer only $10 per tonne. Sellers of poor quality carbon offsets end up with the same price as they would have done were there no ambiguity. However, there are no buyers for the high quality carbon offsets."

Two reports published this month illustrate the challenges facing the carbon credit market, and suggest that it is much larger than I outlined in the article above. This is important since corporate demand for carbon credits has rebounded strongly from its 2021/22 lows and is set to grow even stronger. 

A recent survey of major global companies by Morgan Stanley found that more than 90% of those currently purchasing credits expect volumes to grow over time. The de-risking of credits in the eyes of corporates has taken a further step after the the Science Based Targets initiative (SBTi) moved to a position where credits, at least high quality ones, are much less of a reputational risk (see [*Eyes on the prize: Revised SBTi standard amplifies role of internal carbon prices, carbon credits, and Environmental Attribute Certificates (EACs)*](https://www.carbonrisk.world/eyes-on-the-prize/)).

Furthermore, international carbon credits under Article 6 will soon be employed by governments seeking to meet their climate commitments under the Paris Agreement. For example, last year the European Parliament voted in favour of cutting net emissions by 90% compared to 1990 levels by 2050, while also agreeing to allow up to 5% of the emission reduction to be achieved through the purchase of international carbon credits. 

If carbon credits have as many issues as the reports outline, then there is a high risk of over-crediting, wasted resources, and the environmental integrity of corporate and national climate commitments being undermined.

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### Mind the carbon price gap
URL: https://www.carbonrisk.world/mind-the-gap-2/
Last updated: 2026-03-17T12:00:56.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

One of the hopes behind the introduction of CBAM was that it would catalyse climate policy action across Europe's trading partners, accelerating the adoption of direct carbon pricing mechanisms, including carbon taxes and emissions trading schemes. 

By lifting all boats towards the prevailing carbon price in Europe, policymakers reasoned that it would reduce the risk of carbon leakage, preserve the competitiveness of European industry, and most importantly, bolster the economic case for decarbonisation around the globe.

More than 20 jurisdictions, including Brazil, Indonesia, and India have responded by developing or launching their own emissions trading schemes or carbon taxes. However, many lower income countries have criticised the EU's approach (which requires imports from all nations to pay the same carbon price) as punitive and distortionary (see [*Call of duties: Mozambique demonstrates how CBAM could redraw global commodity trade flows*](https://www.carbonrisk.world/call-of-duties/)).

EU policymakers, such as former top climate official Jos Delbeke, are increasingly concerned about the widening gap between the price of carbon in the EU and that which exists elsewhere in the world. In a [post on LinkedIn in February](https://www.linkedin.com/posts/jos-delbeke%5Feu-ets-review-activity-7425207173200252929-R842/?ref=carbonrisk.world), the Belgian economist indicated that if the gap grew too wide then CBAM's shuffling of trade flows might start to dominate the political narrative: 

> "It will be useful to avoid too wide a gap between carbon prices in the EU and other major economies, as otherwise unhelpful side-effects such as resource-shuffling or trade diversion may start to dominate the political debate."

So far at least, the public to-and-fro ahead of the EU ETS reform process hasn't specifically compared Europe's carbon price to that prevailing elsewhere in the world. It seems only a matter of time before it becomes a bone of contention for those EU member states and industries aggrieved at the EU's flagship climate policy. 

How can we begin to understand the size of this gap, and the potential implications of closing it?

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### Electric avenue
URL: https://www.carbonrisk.world/electric-avenue/
Last updated: 2026-03-16T12:00:41.000Z
After four years of brutal conflict between Russia and Ukraine right on its doorstep, you would think that Europe would be aware of the risks of being too reliant on fossil fuels. 

True the bloc has largely diversified away from Russian natural gas and ramped up its renewable capacity, but fossil fuels still account for almost 60% of Europe's final energy consumption. The vast majority of the oil, gas and coal is consumed outside the power sector: to fuel transportation, used in industrial processes, and to heat buildings.

That dependence is even more acute because of the blocs reliance on energy imports. Almost two-thirds of its primary energy supply arrives from outside the EU. The only other major economies to have a higher fossil fuel import dependency are Japan (84%) and South Korea (80%). 

It appears that many governments became complacent about the potential economic risks, and in particular, the damage that can be caused from energy price shocks.

For example, Italy is one of the countries most exposed to the energy price shock emanating out of the Gulf. Sourcing 36% of its LNG imports from Qatar, and with natural gas setting the price of electricity almost 90% of the time, Italy is particularly vulnerable. 

Instead of tackling the source of its angst, the Italian government has sought to deflect the blame, calling for the EU ETS to be suspended.

### Powering up Europe's energy security

Electrification is central to improving Europe's energy security and competitiveness, enabling it to diversify its energy sources while also improving overall energy productivity - the amount of GDP produced per unit of energy.

As the [Carlyle Group outline in a recent report](https://www.carlyle.com/sites/default/files/2025-03/Carlyle%5FThe%5FNew%5FJoule%5FOrder.pdf?ref=carbonrisk.world), electrification enables different fuels to "compete to supply joules through an increasingly connected grid," with the optimal mix dependent "not just on what is available to a country, but also on what it can provide." 

Carlyle note that nuclear power has high upfront capital costs and long lead times, but it provides stable and inexpensive power. European Commission President Ursula von der Leyen recently admitted that it was a "strategic mistake for Europe to turn its back on a reliable, affordable source of low-emissions power." 

The private equity firm notes that renewables plus battery storage has a high upfront capital cost and is relatively quick to deploy. Once established the marginal cost of renewables is low, but generation suffers from intermittency. [Europe has succeeded in expanding its renewable energy capacity by around two-thirds since 2021](https://think.ing.com/articles/the-7-reasons-why-europe-can-deal-with-a-gas-shock-better-than-in-2022/?ref=carbonrisk.world), to the point that in 2025, solar, wind and hydro generated almost half (48%) of the EU's electricity (see [*Europe's new joule order*](https://www.carbonrisk.world/europes-new-joule-order/)).

Finally, fossil fuels can deliver dispatchable power (ensuring price and grid stability), albeit it with a higher marginal costs and a marked vulnerability to trade disruptions. Despite calls from some quarters to increase domestic production, Europe has never been a significant producer, and even with significant investment it will still be highly dependent on imported fossil fuels, and the price volatility associated with that.

To maximise more of what its got available to it, and what it can provide, Europe must increase its electrification rate.

Unfortunately for Europe, electrification (measured as a share of electricity in final energy consumption) has stagnated at around 23% for the last 15 years. Although its performance is only slightly better than the US, both economies have been overtaken by China. Over the past decade the latter's electrification rate has steadily increased. Overtaking Europe and the US in 2016, it now stands at almost 30%. 

Even within Europe, not all member states are at the same level. For example, Sweden has an electrification rate of around 33%, while Romania is closer to 15%. It also [varies significantly even in the same sector; 18% for Slovakian iron and steel producers compared to 57% for furnaces located in France](https://ember-energy.org/latest-insights/shockproof-how-electrification-can-strengthen-eu-energy-security/?ref=carbonrisk.world). Nevertheless, the wide disparity, whether by household or by sector, shows that gains in electrification can be made.

It's not for want of the right technology, much of which is already commercially available.

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### Climbing the 'Electrification Staircase'

The ['Electrification Staircase' was developed by the Electrification Alliance](https://electrification-alliance.eu/articles/the-electrification-staircase-is-out/?ref=carbonrisk.world), a coalition of industry groups and NGOs calling for electricity to be recognised as "the key energy carrier for an efficient and decarbonised European future." 

Inspired by [the 'Hydrogen Ladder' developed by Michael Liebreich](https://liebreich.com/the-clean-hydrogen-ladder-now-updated-to-v4-1/?ref=carbonrisk.world), the Electrification Staircase illustrates where electrification can deliver the highest impact today, helping policymakers, regulators and industry to make informed choices on the sequencing of electrification.

Steps A, B and C include examples of electrification that are commercial viable now, at least in some places. Most of the examples relate to transportation and heating, but they increasingly include industrial applications such as textile and paper drying machines, steel manufacture using secondary steel, and mining equipment (see [*Heat pumps on the factory floor*](https://www.carbonrisk.world/heat-pumps-on-the-factory-floor/)).

Moving further up the staircase (steps D, E and F) you get to more speculative options that are not at the stage where they are being widely commercialised. For example, coastal and river shipping, short-medium distance aviation, and industrial processes (electrolysis, calcination, etc). 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/03/image-6.png)

If the technology is available then, why has Europe's electrification rate stagnated? 

First, the cost of electricity is between two and five times higher in Europe than in China or the US. While some countries, Spain for example, are now in a position to benefit from renewables low marginal cost, others are much more dependent on higher cost, more volatile natural gas to set power prices. Second, a fragmented energy market means investment and operational decisions are split across member states, leading to delays to investment and higher costs. Finally, there is no clear strategy as to how electrification should be prioritised across the European economy. It leaves individual member states to come up with their own plans, ultimately failing to maximise the benefits from coordination. 

All of these factors are interrelated of course, which is why reform is overdue

### Sparking up a plan of action

To that end [the Commission has been consulting on an Electrification Action Plan (EAP)](https://energy.ec.europa.eu/topics/eus-energy-system/electrification%5Fen?ref=carbonrisk.world) aimed at stimulating electrification in sectors covered by the Renewable Energy Directive (RED III), specifically transport, space heating & cooling, and industrial applications. The EAP is currently scheduled for adoption in the second quarter of 2026\. So what did European industry chiefs think were the priority areas for reform?

[According to energy technology multi-national Schneider Electric](https://perspectives.se.com/latest/the-electrification-staircase-a-strategic-roadmap-for-europe-s-transition-to-electrification?ref=carbonrisk.world), the Commission needs to put in place measures that accelerate upgrading Europe’s electricity grid, so that it can accommodate more renewable power and meet rising demand for electricity. Reform taxation to create a level playing field with fossil fuels (i.e., cutting taxes and levies on electricity, switching them to gas or general taxation instead) and by facilitating access to stable, long-term power price contracts. Lastly, focus on the most mature electrification opportunities and prioritising applications where adoption can lower operational costs and ensure fast reductions in emissions.

Other proposals put forward by energy intensive industries tend to focus on short-term measures that alleviate or otherwise protect heavy industry from being undercut by competition from lower-energy cost jurisdictions. For example, [the Alliance of Energy Intensive Industries has said that the EAP](https://www.cepi.org/alliance-of-energy-intensive-industries-joint-position-paper-on-the-eu-electrification-action-plan/?ref=carbonrisk.world) should enhance indirect carbon price compensation, shield energy intensive companies from total system costs related to grid upgrades, stating that the EAP will ultimately only be judged a success if it brings industrial electricity costs closer to €50 per MWh (see [*Refund policy: Industry compensation for indirect carbon costs must be conditional*](https://www.carbonrisk.world/refund-policy/)). 

Under the Clean Industrial Deal, Europe has an indicative electrification target of 32% by 2030\. It is highly unlikely to be achieved given the lacklustre progress made to date. In the absence of a major policy change, [Strategic Perspectives, a pan-European climate think tank](https://strategicperspectives.eu/boosting-electrification-in-europe/?ref=carbonrisk.world), is projecting that electrification could hit 39% by 2040 under its business-as-usual scenario. 

In order to really brake the stranglehold that fossil fuel import dependency has on Europe the EAP really must move things along much faster. The analysts at Strategic Perspectives argue that "electrifying half of the European economy by 2040 is the best strategy for its international competitiveness and energy security." 

Although the EU would need to invest an additional €55 billion per year in the grid and clean technology versus business-as-usual, it would result in annual savings of €43 billion in fossil fuel imports and €41 billion in carbon costs, leaving Europe a net €29 billion per year better off.

### Chicken and egg 

Fossil fuel shocks will not disappear any time soon, but as their share of final energy consumption declines over time, price volatility will affect the economy to a progressively lesser extent. But as [Peter Garnry of Gasda Capital cautions in a recent article](https://petergarnry.substack.com/p/oil-shocks-power-shocks-and-the-age), as the economy becomes increasingly electrified, power shocks will emerge as a new threat. 

> "Because electricity is not traded globally, power shocks will be more regionally contained, which is a good thing. However, as electrification increases, our electricity intensity (electricity needed for GDP growth) will likely rise, and disruptions will begin to hurt across data centers, transportation, heating, and other critical sectors. So while oil shocks will diminish in impact, the future is likely to hold power shocks instead."

Part of the reason for this is that electrification involves solving a classic chicken-and egg problem. Electricity demand growth, installing additional power generation capacity, and upgrading the grid is highly interdependent. Electrification is a dynamic process in which any element deviating from the ideal risks tripping up the entire system. As the table from Rabobank below illustrates, price volatility is one of the potential knock-on impacts.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/03/image-10.png)

Source: Rabobank

There is no diversification without electrification, but as [Lucy Shaw at the Slow Burn newsletter notes](https://www.slowburn.org.uk/p/electrification-is-security-if-you?ref=carbonrisk.world), electrification by itself is not a sufficient condition for energy security, unless domestic generation is also secure. For example, China has paired fossil fuels with electrification, building thermal coal generation plants and burning its own huge domestic reserves of coal when renewable energy generation isn't able to meet demand and balance the grid. 

Europe now needs to find its way forward to energy security, competitive energy prices, and a decarbonised economy. Solving the chicken and egg problem will probably mean some element of fossil fuel generation is required. Far better to extract those fuels domestically in as low carbon a way possible, free from foreign interference. 

The conversation of how Europe moves forward to an electrified economy is long overdue.

[Want to read more? Start here](https://www.carbonrisk.world/table-of-contents-start-here/)

MUSCIAL CODA

"Rock down to Electric Avenue" by Eddy Grant refers to a market street in Brixton, London, earning its name in 1888 to be the first lit by electricity in the UK. 

[Amping upElectrification of oil and gas production is controversial, but necessary![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/icon/Green-Nature-Tree-and-Root-Logo-Template--60-x-60-px--30.jpg)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/thumbnail/960px-Troll_A_Platform.jpg)](https://www.carbonrisk.world/amping-up/)
### Signals amidst the noise
URL: https://www.carbonrisk.world/signals-amidst-the-noise/
Last updated: 2026-03-12T13:06:57.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

Next week's meeting of EU leaders in Brussels on 19-20 March could provide crucial insights into the future direction of the EU emissions trading scheme. 

As regular readers of Carbon Risk will know all too well, Europe's flagship climate policy has been under the cosh for most of 2026\. Some European governments, most notably Italy have even called for the market to be suspended. Meanwhile, industry leaders, mostly those struggling with high energy prices and international competitiveness, have called for drastic reforms. 

The recent US/Israeli conflict with Iran has added fuel to the political conflagration, with EU policymakers now apparently reopening their 2022 energy crisis playbook, considering all options to alleviate the impact on households and businesses. 

But not everyone is so negative! 

As I discussed previously, [the EU's top business lobby, BusinessEurope](https://www.carbonrisk.world/for-industry-the-eu-ets-is-a-delicate-balancing-act/) has called for reforms to the Europe's carbon market, but it has also offered its support, stating that the "ETS should remain a central part of EU’s climate policy in a post-2030 framework." 

Elsewhere [100 European industrial firms, including EDF, Heidelberg and SSAB have come together to voice their support](https://cdn.prod.website-files.com/626fd2b7495a6f980eab20c8/69b04818427120290b676b6a%5FOpen%20letter%5FEuropean%20Industry%20needs%20the%20predictability%20of%20a%20robust%20ETS%20to%20Compete%20and%20Invest.pdf?ref=carbonrisk.world) for the EU ETS, stating in a letter to EU Heads of State that undermining it "would erode investment certainty and damage Europe’s industrial future."

Indeed, much of the negative industrial feedback following the EU leaders meeting in Antwerp on 11th February appears to have been exaggerated. [An investigation by Politico](https://www.politico.eu/article/big-eu-lobby-groups-exaggerated-industry-support-attack-carbon-price/?ref=carbonrisk.world) found that many of the companies that had appeared as signatories to the letter and were seen to be calling for drastic measures had done no such thing.

Ahead of what could be a pivotal week lets have a look at how the EU carbon market is positioned. 

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### Gunboat climate diplomacy ratchets up a notch
URL: https://www.carbonrisk.world/gunboat-climate-diplomacy-ratchets-up-a-notch/
Last updated: 2026-03-10T12:01:02.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

In April 2025, members of the International Maritime Organisation (IMO) voted overwhelming in favour of the Net-Zero Framework – a global carbon pricing mechanism meant to incentivise the decarbonisation of the shipping industry. 

Rather than introduce a blanket global carbon price, the IMO's proposal employs a dual-target global fuel intensity (GFI), a two-tier carbon price, and a trading mechanism (scroll to the end of this article for a primer on how the mechanism was supposed to work in practice).

I say 'supposed' because it should have been a formality for IMO members to pass a motion last October that would have seen the mechanism come into force by 2027\. 

Although its far from perfect, a uniform global carbon pricing mechanism would have been the most efficient solution to help bring about the decarbonisation of the shipping industry, a sector responsible for emitting 1 Gt CO2 per year (\~3% of global emissions).

Unfortunately, American and Saudi officials managed to strongarm a sufficient number of countries to vote in favour of deferring the decision to adopt for one year. [Analysis by the UCL Energy Institute revealed](https://www.linkedin.com/feed/update/urn:li:activity:7430197817849229312/?updateEntityUrn=urn%3Ali%3Afs%5FupdateV2%3A%28urn%3Ali%3Aactivity%3A7430197817849229312%2CFEED%5FDETAIL%2CEMPTY%2CDEFAULT%2Cfalse%29&ref=carbonrisk.world) that 34 countries significantly switched positions between the April and October IMO meetings.

### Taking up the carbon price mantle 

Not everyone is put off so easily.

A few months after the October debacle Reuters carried out a [survey of maritime industry leaders](https://www.reuters.com/sustainability/climate-energy/global-shipping-industry-sticks-with-green-investments-despite-carbon-price-2026-02-12/?ref=carbonrisk.world). They found that while uncertainty surrounding the future of the IMO proposal might lead some shipping companies to take a more cautious approach to investing in low-carbon propulsion technology, most felt that the overall regulatory trend towards decarbonisation has not been blown off course. 

Despite the hostile geopolitical backdrop, regional carbon pricing initiatives are showing real momentum, 

For example, 2006 marks the first year of compliance for Europe's FuelEU Maritime regulation. As with the IMO's proposal, FuelEU is also targeting a progressive reduction in the greenhouse gas (GHG) intensity of fuels. It covers 100% of voyages between EU ports and 50% of those incoming and outgoing journeys. Furthermore, the emissions from domestic maritime voyages will be included in the UK ETS from 1st July 2026, following in the wake of the EU ETS, which fully phases in maritime emissions this year.

It's not just the wealthy countries of Europe that are implementing a carbon price on maritime emissions. A number of African nations have introduced a levy and using the revenues to help fund climate adaptation.

Gabon and Djibouti have implemented a carbon levy on maritime operators (and air transport) under the Africa Sovereign Carbon Initiative. Since January 2025 the government of Djibouti has levied a tax of $17 per tonne of CO2 (\~€14.70) on 50% of the emissions per voyage, both for ships arriving at or departing Djibouti. Gabon introduced its own levy at the same rate in July 2025\. At least [13 other African countries are considering implementing a carbon price](https://www.independent.co.uk/climate-change/africa-carbon-tax-emissions-climate-djibouti-b2928997.html?ref=carbonrisk.world).

It's not all plane sailing. Liberia was reportedly planning to launch its own levy (at the higher rate of $25 per tonne CO2) from 1st March 2026\. However, the Liberian government has since rowed back on this position, stating that "Liberia does not, and will not, impose a carbon levy" on international maritime emissions. 

The country's position as the operator with the largest shipping registry (\~17% of the global fleet) makes it especially vulnerable to coercion, particularly from governments with a strategic interest in fossil-fuels retaining their predominant role in shipping.

### Maritime might is right

By now its becoming increasingly clear that the US administration isn't just ideologically opposed to carbon pricing. It's anathema to everything it is trying to achieve around dominating the Western Hemisphere. 

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### Rule it in
URL: https://www.carbonrisk.world/rule-it-in/
Last updated: 2026-03-04T12:03:45.000Z
Exchange rate volatility imposes a significant and often unpredictable cost on businesses, directly affecting cash flow and profitability in the short-term, while also subjecting long-term investments to a heightened degree of risk. As the 'Currency of Decarbonisation', carbon price volatility also acts as a brake on companies ability and willingness to invest in large-scale low-carbon projects, ultimately slowing the pace at which the economy decarbonises.

The impact of carbon price volatility on investment can be quantified. In the ten years to December 2022, researchers estimate that a 10% increase in the Carbon VIX (a measure of expected volatility in the EU carbon price) had the same detrimental impact on investment as a €12 per tonne decline in the carbon price (see [*The Fear Index*](https://www.carbonrisk.world/the-fear-index/))[](https://www.carbonrisk.world/author/peter-sainsbury/). 

The price of emission allowances in the EU ETS and other cap-and-trade schemes is inherently volatile. The supply of allowances is highly price inelastic which means that even small changes in demand can result in large swings in the price of carbon. In the short-term, changeable weather conditions, the price of energy, and climate policy risk mean that demand is also subject to large variability. 

Academics led by researchers at the University of Edinburgh attempted to decompose the influence of these factors during Phase 3 of the EU ETS (2013-19). Although each takes centre stage at various points during the seven years, the main driver affecting the EU carbon price over the longer-term is the marginal cost of abatement. Here, unexpected developments in technological innovation, and swings in the relative cost versus existing technologies can have a significant impact.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/03/image.png)

The cost of this volatility was quantified versus a theoretical scenario in which the carbon price is aligned with the social cost of carbon (SCC), i.e. the carbon price tracks the net economic damage resulting from an incremental tonne of carbon dioxide (CO₂) released into the atmosphere. The analysts calculated that EU carbon price volatility is about 100 times greater than what would be expected under an SCC aligned carbon price mechanism. The permanent welfare loss associated with this excess volatility was estimated to be between €158 million and €215 million during the period 2013–2018.

Governments have experimented with a variety of mechanisms designed to temper price volatility in cap-and-trade schemes. 

This includes price corridors (floors, ceilings and trigger points), smoothing the supply of allowances over time (via banking and borrowing), price containment reserves (releasing allowances if the carbon price hits certain criteria, such as when it increases too high, too fast), and also less formulaic types of intervention (verbal intervention or ad-hoc mechanisms to bring forward allowance supply from future auctions). 

The problem with the formal mechanisms used to date is that they typically fail to deliver the required impact, while informal mechanisms are typically open to interpretation and their use can negatively impact market credibility (see [*A carbon floor price is a bad idea: Meddling in markets built on trust is rarely successful*](https://www.carbonrisk.world/a-carbon-floor-price-is-a-bad-idea/)). 

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### Pushing back on EU ETS myopia
URL: https://www.carbonrisk.world/for-industry-the-eu-ets-is-a-delicate-balancing-act/
Last updated: 2026-02-27T12:00:02.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

The EU's top business lobby, [BusinessEurope released a report on Tuesday morning outlining its priorities for the EU ETS review](https://www.businesseurope.eu/wp-content/uploads/2026/02/2026-02-23-Priorities-for-the-EU-ETS-review.pdf?ref=carbonrisk.world). The report begins with the association stating that its members are committed to reaching climate neutrality by 2050, and that furthermore, the "ETS should remain a central part of EU’s climate policy in a post-2030 framework." 

It's worth reiterating how important this stamp of approval is for the EU ETS. Described as "the Death Star of corporate lobbyists in Brussels" by the campaign group [Corporate Europe Observatory](https://corporateeurope.org/en/2023/09/businesseurope-death-star-corporate-lobbying?ref=carbonrisk.world), BusinessEurope represents 42 national business federations across 36 countries in the EU, the European Economic Area (EEA), the UK, and a number of other countries including Turkey and Ukraine. 

In recent weeks there has been a barrage of negative comments from Europe's petrochemical producers, controversial reform ideas from Europe's climate policymakers, and even calls for suspension from some of Europe's member states (Slovakia, Czech Republic, and most recently, Italy). Now, in a welcome change, the most powerful corporate lobby group in Europe (one that can have a significant impact EU policy making) has come out in support of the EU ETS. 

Nevertheless, despite their support for the EU's cornerstone climate policy, the association argues that to "ensure long-term viability", the EU must still address businesses competitiveness concerns through a range of flexibility mechanisms and strong carbon leakage measures. 

[Check out the Carbon Risk archive including 430+ articles](https://www.carbonrisk.world/table-of-contents-start-here/)

### Adjusting the Linear Reduction Factor (LRF) to align with 2040 targets

BusinessEurope first makes the case that the Linear Reduction Factor (LRF) post 2030 needs to be adjusted to align with the EU's 2040 targets. As currently defined, mathematically extrapolating the LRF beyond 2030 gets you to zero EUA issuance by 2039\. If left untouched it would mean that in less than 15 years time a factory or a power plant would not be able to emit a single tonne of CO2 (see [*The zero lower bound: What happens when EU ETS emissions approach zero?*](https://www.carbonrisk.world/the-zero-lower-bound/)). 

They go on to argue that this anomaly is already preventing investment into installations with lifetimes beyond 2039\. As such they call for a discussion to be initiated on how the ETS should operate beyond 2040 and 2050\. Importantly, the report says that companies who have had the foresight to invest heavily in the transition should not be punished, or see their investments devalued.

Coinciding with the adjustment of the LRF, the EU should introduce additional sources of flexibility to a) preserve market liquidity as the cap edges down, b) maintain an effective price signal, recognising the innovation cycle underpinning emerging decarbonisation technologies, and c) help to maintain competitiveness amongst Europe's industries. That's quite the wish list! 

Reforming of the Market Stability Reserve (MSR) to be more responsive to current economic and market conditions (e.g., liquidity issues, high carbon prices, industrial competitiveness, etc.) is one source of flexibility identified. Although they state that the MSR should retain its rules based approach in order to safeguard trust in the EU ETS, they also argue that it must "distinguish between allowances in the MSR invalidation account that are there due to emissions reductions achieved thanks to investments and innovations, from those caused by the reduction of industrial activity." That already opens up a can of worms.

Finally, recognising that industrials will never be able to get down to zero by themselves (not should they if there is a more cost effective route available), other sources of flexibility are required, including integrating technological carbon dioxide removal (CDR) into the EU ETS and international carbon credits into the broader EU climate policy architecture. As the report concludes, both options must be incorporated in such a way that they preserve the integrity of the carbon price signal and the incentive to invest in EU decarbonisation, while also improving market liquidity as we approach 2040 (see my previous articles on that subject [*here, here* ](https://www.carbonrisk.world/has-europe-learnt-from-its-great/)and [*here*](https://www.carbonrisk.world/an-article-of-faith/)). 

### Extend free allowances and indirect cost compensation

The business association argues that *even* current level of free allowances and indirect carbon cost compensation are "insufficient to bridge the structural competitiveness disadvantages facing Europe." 

The report argues that if CBAM does not prove effective in tackling carbon leakage by 2027 (the year an assessment is required under the CBAM regulation), then the phase-out of free allowances for CBAM sectors should be postponed. However, in contrast to calls from climate policymakers it suggests that free allowances should not conditional upon "energy efficiency measures nor preparing site level climate plans". Doing so, they argue, would be inconsistent with the technology agnostic principles underpinning the EU ETS, and "adds complexity and uncertainty without significant emission benefits." (see [*A green and level playing field? The European Commission faces a tortuous task refereeing CBAMs winners and losers*](https://www.carbonrisk.world/a-green-and-level-playing-field/)).

Moving on to indirect carbon cost compensation, BusinessEurope suggests that the framework should be preserved post 2030, "until a fully decarbonised energy system is achieved." It's clear that while on an aggregate level the EU is making great progress, some countries are being left behind. For example, [EU wind and solar generated more electricity than fossil fuels for the first time in 2025](https://ember-energy.org/latest-insights/european-electricity-review-2026/?ref=carbonrisk.world), a situation mirrored across more than half of the EU's member states. However, its clear that many Eastern European countries as well as others Italy and Greece are falling behind.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/02/image-11.png)

Furthermore they argue that the list of industrial sectors eligible for compensation should be extended to "additional, currently non-covered, electro-intensive sectors where the risk of carbon leakage is high" and that more EU member states should make use of compensation. As I outlined last week, only 15 EU member states employed indirect carbon cost compensation in 2024\. Meanwhile, although the Commission extended the list of industrial sectors eligible in late 2025, BusinessEurope clearly thinks this does not go far enough (see [*Refund policy: Industry compensation for indirect carbon costs must be conditional*](https://www.carbonrisk.world/refund-policy/)).

Note that the report does not make any reference to an acceptable level for the EU carbon price – the association quite clearly supports the market based approach, albeit with some safeguards. Importantly, none of their proposals, even if subsequently acted upon and implemented, will affect the market balance over the next couple of years. Nevertheless, the timing of these reports is quite informative in that they often signal when prices have moved too high (or indeed too low) and too fast. 

Politicians, climate policymakers and large industrial companies were quick to point the finger at the need to reform the EU ETS when carbon breached €90 in mid-January. The subsequent publication of this report, and especially BusinessEurope's explicit support for the EU ETS, is perhaps a signal that the EU carbon price may now have fallen too far.
### KAU-pop!
URL: https://www.carbonrisk.world/kau-pop/
Last updated: 2026-02-25T12:00:39.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

The Korean carbon market has surged by almost 50% over the past six months to ₩12,750 (\~€7.50) per tonne CO2\. By contrast, the EU carbon price, which had been trading as high as €93 per tonne CO2 until mid-January, is now a little over €72 per tonne CO2.

Korea's emissions trading scheme covers electricity generators and major industrial emitters such as petrochemical and steel manufacturers. Covering 70% of the country's emissions, the Korean carbon market is the worlds third largest ETS, after China and the EU.

A series of structural factors is set to transform the East Asian carbon market over the next five years. 

The Korean carbon market is now entering its fourth compliance period (2026 to 2030) for which the government has set a total emissions cap of 2.537 Gt CO2, down 17.9% compared with the third compliance period (2021–2025).

Furthermore, the government is committed to gradually withdrawing free allowances. Utilities must purchase 50% of the allowances they require by 2030, up from 15% this year. Meanwhile, industrials which have received 100% of their allocation for free, will have to pay for 15% of their emissions by the end of the decade.

The ambitious cut in the emissions cap between now and 2030, plus the commitment to phase out free allowances has helped to support the bull market in the price of allowances, the Korean Allowance Unit or KAU. It's a marked contrast to the sharp decline in carbon prices observed in Europe, California, and New Zealand.

A rapid increase in prices needs more than just a spark, it requires sufficient energy to fuel the ascent. That fuel began to appear on the horizon late in 2025 after the Korean government announced that it had given approval for financial institutions to begin trading KAU's. 

The move is likely to increase liquidity in the market, help improve price discovery, and enable obligated emitters to more efficiently hedge their carbon risk exposure. In the longer term it is likely to result in the development of futures and options products that may even include exchange traded funds (ETFs) such as those geared to European and North American carbon markets. 

Why are Western nations seeking to talk down their carbon markets, while the Korean government and many others in Asia and elsewhere are moving in the opposite direction? Well, Korean industry in particular faces escalating carbon risks along its supply chains as global climate disclosure rules and border carbon adjustments (BCA's) are introduced.

A strong carbon market is just the tool to help mitigate some of that risk. If the government is serious about tackling the country's fossil fuel dependent power mix the KAU price will need to rise at least 3-fold from current levels. 

However, as we'll see the Korean governments attempt to get serious about carbon emissions is coming up against resistance from another long-term ambition – it's target of becoming a "top-three AI powerhouse" alongside the United States and China.

Lets dive in.

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### Climate policy under a new world order
URL: https://www.carbonrisk.world/clim/
Last updated: 2026-05-14T14:46:14.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

The impact of America's retreat from its global climate commitments, and its decision to dump its domestic environmental regulations, has reverberated far from its borders. The tsunami of negative climate policy announcements has shaken the foundations underpinning support for ambitious climate policy almost everywhere, in turn threatening a much deeper slowdown, or even a broad reversal.

A recent [report from the climate forecasting consortium Inevitable Policy Response (IPR)](https://ipr.transitionmonitor.com/cms/wp-content/uploads/2025/10/IPR-Q3%5F2025-Quarterly-Forecast-Tracker%5F16102025.pdf?ref=carbonrisk.world) shows how the United States withdrawal has driven a record global slowdown in climate policy momentum. IPR's analysis found that while supportive climate policies dropped by 7.5% up until Q3 2025 versus the same period in 2024, decelerating or regressive policies surged by 575%. 

The US accounted for the majority of the climate policy reversal (70%), but other large economies, including India, Brazil, Canada, and the European Union have also softened climate disclosure and reporting rules, cancelled or watered down electric vehicle and renewable energy mandates, or otherwise sought to reduce the burden associated with environmental regulations. 

By contrast, carbon pricing has remained steadfast. Although some countries have cancelled or sought to defer carbon pricing schemes targeted at households (e.g., Canada's consumer carbon tax and Europe's ETS2), other countries including China, Brazil, Turkey, Japan, India and many others, have eagerly adopted carbon pricing mechanisms across vast swathes of their economy.

The gradual build-up in the number of government interventions over the past two decades created a climate policy flywheel, one where additional policies were bolted on only after a careful period of consultation and analysis. The events of the past twelve months or so have shaken governments to the core, but in attempting to back out of their more ambitious climate policy rules and regulations, they risk throwing the baby out with the bathwater. 

The climate policy U-turn may have alleviated the short-term burden on households and businesses, but it risks setting the stage for a long-term net loss as investors lose confidence in climate tech, forgoing future innovation and cost reductions, and forcing society to pay a steep cost in adapting to climate change.

In this article I take a look back at how climate policy has evolved over the past 20-30 years (mandates versus markets), what lessons we can draw from different approaches (policy combinations and sequencing), and what it means going forward in a bifurcated, new world order.

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### Refund policy
URL: https://www.carbonrisk.world/refund-policy/
Last updated: 2026-02-20T12:00:44.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

Europe's industrial companies do not pay the full price of carbon – not even close.

Free allowances are a common feature of emissions trading systems in the early phases to help companies get used to the administrative and compliance burdens, and to protect those sectors thought to be most at risk from carbon leakage. 

In the EU ETS, many heavy industries received far more allowances than they needed. 

It enabled them to bank windfall profits, primarily through cost-pass-through, but later by selling EUAs back into the market. A [study by CE Delft, commissioned by Carbon Market Watch](https://carbonmarketwatch.org/publications/additional-profits-of-sectors-and-firms-from-the-eu-ets-2008-2019/?ref=carbonrisk.world) estimated that the fifteen most carbon intensive sectors generated between €30 and €50 billion in additional profits during 2008-2019.

The allocation of free allowances clearly tampers with the carbon price incentive that would otherwise encourage large industrial emitters to invest in decarbonisation.

Up until the past couple of weeks the assumption was that free allocations would be gradually withdrawn at the same rate that CBAM costs on importers were introduced. In short, it would mean that by 2034 free allocations would drop to zero. However, concerns over the competitiveness of Europe's industries has increased, with policymakers openly debating whether the bloc should taper the rate at which free allowances are withdrawn, and make their their use conditional on industrials investing in decarbonisation (see [*Cap-and-Invest: Europe set to leverage its carbon markets to boost investment in decarbonisation*](https://www.carbonrisk.world/cap-and-invest/)). 

While free allocations affect the direct carbon cost paid by industrials (via their Scope 1 emissions), companies may also face paying for carbon indirectly, via higher power prices.

Three factors mean that Europe's industrial companies pay a high price for electricity. First, Europe's reliance on expensive imported LNG means that natural gas prices are \~3 times higher than the US. Second, natural gas sets the marginal price of electricity almost two-thirds of the time in Europe (despite accounting for 20% of the generation mix), and included within this is the price of carbon borne by gas-fired generators. Finally, non-wholesale costs such as government investment in grid modernisation, as well as other policies such as social funding, are recovered through the electricity tariff.

Indeed, some [reports suggest that the price of carbon accounted for the majority](https://carbon-pulse.com/484313/?site=cpp&ref=carbonrisk.world) of the divergence between European and US power prices in recent years. 

First introduced in 2013, today around half of the EU member states offer compensation to certain trade-exposed energy intensive companies for their indirect carbon costs, typically those industries thought to be at most risk of carbon leakage. To avoid distorting the EU's internal market governments must adhere to strict state aid rules, any scheme must be approved by the European Commission, and they must limit compensation to 25% of their ETS revenues. Overall, [15 member states paid €5.52 billion in indirect carbon cost compensation in 2024](https://climate.ec.europa.eu/document/download/ddc1b1de-652b-49ed-8f15-d9fa8badd39f%5Fen?filename=com%5F2025%5F735%5Fen.pdf&ref=carbonrisk.world), an increase of 40% compared with the amount disbursed in 2023.

In December 2025 [the Commission extended the list of industrial sectors eligible for compensation](https://ieu-monitoring.com/editorial/carbon-leakage-eu-commission-amends-ets-state-aid-guidelines-for-energy-intensive-industries/867696?ref=carbonrisk.world) to include 20 additional sectors as well as two new subsectors. Furthermore, for those sectors already eligible it also raised the maximum share of indirect carbon costs that can be compensated from 75% to 80%. Finally, the guidelines also strengthen the principle that compensation - particularly for major beneficiaries of the schemes - should be linked to measures that reduce exposure to carbon costs.

Despite the scale of the compensation doled out to date, the commitment by many governments to continue with the payments until 2030 at least, and the potential distortionary effect on competitiveness and emissions, there is surprisingly little research into their impact.

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### Australia needs a 'climate competitiveness strategy'
URL: https://www.carbonrisk.world/australia-needs-a-climate-competitiveness-strategy/
Last updated: 2026-02-18T12:00:58.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

The Superpower Institute, the Australian non-profit organisation whose stated mission it is to position the country as "a global leader in the post-carbon economy", has [identified three significant challenges](https://www.superpowerinstitute.com.au/work/the-case-for-pricing-pollution?ref=carbonrisk.world) to Australia's long term economic prosperity and environmental sustainability.

First, the government is not on track to achieve its 2035 emissions target (a 62-70% decline below 2005 levels), nor reach net zero by 2050\. Since 2006 the average annual decline in Australia's emissions has been 9 Mt CO2\. If it is going to hit its 2035 target, the annual rate of emissions decline will need to more than double, to between 19 Mt CO2 and 24 Mt CO2.

Second, Australia has a structural budget deficit and the government needs significantly more revenue to meet rising housing demands and other pressing social needs. Third, and relatedly, the economy's productivity is low, and future prosperity requires increased investment in industries where Australia has a comparative advantage. 

While it is very reliant on the export of commodities (including met and thermal coal, LNG, and iron ore), Australia cannot expect that to continue as other parts of the world decarbonise. The Superpower Institute believes that "Australia’s long-term productivity will depend on it producing and exporting goods that reflect its comparative advantage in a decarbonising world." 

However, as the institute makes clear, Australia's failure to address its own emissions leaves it with "no authority to influence the global rules, standards, and markets that will govern the green trade." The only carbon pricing instrument in use in Australia is the Safeguard Mechanism. It applies a carbon intensity trading mechanism to industry, covering about 30% of national emissions. Unfortunately, it has largely failed to achieve any meaningful reduction in industrial emissions.

There is another form of government policy that often works directly in competition with carbon markets, a ‘negative price of carbon’ that can lead to an increase in emissions – fossil fuel subsidies. The [OECD estimates that the global fiscal cost to governments from fossil fuel subsidies is \~€0.85 trillion per year](https://www.oecd.org/en/about/news/announcements/2025/12/government-support-for-fossil-fuels-remains-high-despite-a-10-decline.html?ref=carbonrisk.world); 90% of the cost relates to the consumption of fossil fuels, whereby governments regulate consumer prices at below market levels or provide direct cash transfers to consumers. The other 10% or so is directed at supporting fossil fuel producers.

Fossil fuel subsidies induce higher levels of consumption than would otherwise be the case while also numbing consumers response to higher energy prices. Meanwhile, production subsidies enable the economic extraction of fossil fuel deposits that companies might otherwise deem uneconomic. In either case, the implication is an increase in greenhouse gas emissions. Once subsidies are in place, they are also extraordinarily difficult to remove. 

One single reform could help move the dial on all three of the challenges Australia currently faces. The solution? Phase out the Diesel Fuel Tax Credit (DFTC). The DFTC provides a rebate on the full federal fuel tax applied to imported liquid refined products such as petrol or diesel (Australia imports more than 90% of its needs). In the 18 years since the DFTC was introduced the government has provided AU$122.7 billion (€73 billion) in tax concessions, almost half of which have been directed to the mining and resources sector. The DFTC is currently applied at a rate of 52.6 cents per litre. 

The climate impact of this one subsidy? [Clean Energy Finance estimates that the DFTC has directly subsidised over 815 Mt CO2e](https://climateenergyfinance.org/wp-content/uploads/2025/08/CEF%5FTransition-Tax-Incentive-Report-FINAL%5F20August2025.pdf?ref=carbonrisk.world) since it came into force, \~370 Mt CO2e from the mining sector alone – at an implied negative carbon price of AU$190 (€113) per tonne CO2e. Australia's Safeguard Mechanism puts a price on the Scope 1 emissions from industry, including the mining and energy sector. The current prevailing carbon price of AU$30-40 per tonne CO2 would need to rise more than five-fold to offset the impact that the DFTC has on emissions.

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### Mixed signals
URL: https://www.carbonrisk.world/mixed-signals/
Last updated: 2026-02-16T12:00:57.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

> “The ability to shape market expectations of future policy through public statements is one of the most powerful tools the Fed has. The downside for policymakers, of course, is that the cost of sending the wrong message can be high.” *\- Ben Bernanke, former chair of the Federal Reserve*

Back in November 2025 I reported that [the price of carbon in New Zealand had slumped by more than NZ$10 to NZ$45 (\~€23)](https://www.carbonrisk.world/new-zealands-carbon-price-slumps-as-confidence-cracks/) after investors lost confidence in the governments climate policy commitments, leaving the market 50% down from the record high set three years earlier. 

A drumbeat of negative policy announcements battered the resolve of market participants, forcing them to question the governments commitment to the New Zealand ETS and the value of the schemes emissions allowances, the NZU. As investors withdrew from the market in fright, liquidity collapsed exacerbating the sharp move lower: 

1. In early October the New Zealand government announced that in order to protect "agricultural competitiveness", it had decided to downgrade its 2050 biogenic methane emissions target from a 24-47 % reduction below 2017 levels to just 14-24 %. It was only a few years ago that the country was considered a leader in strong market-based methane abatement incentives.
2. The government (potentially under the cosh from US officials) then abstained from voting at the International Maritime Organisation's (IMO) October meeting. Their failure to cast a vote - as well as that of several other governments - meant further delays to the planned global maritime carbon pricing mechanism.
3. The minimum threshold for reporting under New Zealand's once world-leading climate disclosure regime would be raised to only cover companies with a market capitalisation of $1 billion or more, halving the number of firms accountable. It follows California and the EU in slashing corporate reporting demands.
4. The knockout blow was a press statement signalling that the link between the cap trajectory and the New Zealand's Nationally Determined Contribution (NDC) would be severed, one of several announced changes to the Climate Change Response Act (2002). New Zealand was already estimated to fall short of its 2030 NDC by an entire years worth of emissions. The de-linking forced market participants to question the credibility of the ETS cap trajectory.
5. Furthermore, the government announced that the Climate Change Commission - the independent body responsible for issuing climate policy advice, monitoring the governments progress, and generally adding much needed credibility - will "no longer be required to provide advice to the Government on emissions reduction plans."

New Zealand's fall from grace has not gone unnoticed abroad.

The latest edition of the [Climate Change Performance Index (CCPI)](https://ccpi.org/?ref=carbonrisk.world), an instrument to enable transparency in national and international climate politics, was published in November. It revealed that New Zealand had dropped 3 places to 44th, judging it to be a 'low performer' overall, and giving it a 'very low' score for climate policy following recent announcements. For context the United States is ranked 65th, only beating Iran and Saudi Arabia at the foot of the table. 

Later in November, at the COP30 summit in Brazil, New Zealand was awarded the ['Fossil of the Day' award](https://climatenetwork.org/resource%5Ftype/fossil-of-the-day/?ref=carbonrisk.world) for its decision to weaken its methane emissions policies. The NGO Climate Action Network International hands out the dud award each day of COP to countries who are “doing the most to achieve the least” and "doing their best to be the worst" in terms of climate action and policy – it's the fourth time in five years that New Zealand has received the ignominious award.

Nevertheless, despite some of the headline grabbing negative climate policy announcements, there's reason to believe that the governments motives were misinterpreted. For example, the decision to sever the link between the ETS cap trajectory and the NDC was made because it really shouldn't been linked in the first place. 

Finding 84 Mt CO2 in emission abatement by 2030 (one year of New Zealand's emissions) would have required buying huge amount of international credits (unlikely to be available in time), or dramatically slashing the availability of NZU's in the market, the latter resulting in an economically and politically harmful increase in the carbon price.

The market's swift reaction to the de-linking announcement is a harsh lesson that sensitive policy changes need to be managed much more effectively. 

The rationale for severing the link was outlined in an accompanying regulatory statement. In it the Commission warns that “Meeting the first NDC with domestic action only would require a scale and pace of economic, social and technological change over the next five years that would be highly disruptive.” 

Unfortunately it was [buried on page 65 of the 242 page regulatory statement](https://environment.govt.nz/assets/publications/Cabinet-papers-briefings-and-minutes/Proactive-Release-Policy-decisions-for-a-Climate-Change-Response-Amendment-Bill.pdf?ref=carbonrisk.world).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/02/image-9.png)

Source: Carbon News NZU Index

The NZ carbon market has rallied by as much as 25% in recent weeks as the government have tried to stem the negative sentiment and draw the markets attention back towards the medium to long-term targets. But at NZ$45 the price of an NZU has only now returned to the levels seen in the aftermath of the November crash. 

Perhaps the most important market signal came from a [recent letter between Climate Change Minister Simon Watts and the Commission](https://www.climatecommission.govt.nz/assets/ETS-advice/2026/23-Jan-2026-Letter-to-CCC-Chair-regarding-options-for-2026-ETS-Settings-advice.pdf?ref=carbonrisk.world) in which the latter reaffirms the governments commitment to emissions reduction targets and the role of the carbon market:

> "The Government is fully committed to meeting its emissions reduction targets, including the 2050 target, emissions budgets, and nationally determined contributions. The ETS plays a central role in achieving these targets, as set out in the Government’s Climate Strategy."

Watts concludes the letter by reiterating that the Commission has an important role to play, belatedly intending to bolster its credibility as an independent body:

> "It would be helpful for the Government’s forthcoming ETS settings decision if the Commission’s advice provides options that explore the above considerations along with their implications and relative merits.

> To avoid doubt: the Government has not made any decision as to the direction of ETS settings in 2026 at this stage. This additional advice will be a valuable input for the Government’s consideration when it forms a decision later this year."

Publishing the letter (alongside two other letters from the Commission) is an important act of market transparency, but it's debatable whether it's enough to re-establish the markets trust. Afterall, it takes time to establish trust, and no time at all for it to be broken. The market will want to see consistent and well thought out climate policies – not back of the envelope proposals leaked to the market without thought for how participants will react.

To that end the governments suggestion that the Commission explicitly consider measures that strengthen the market in a bid to contribute more to the 2030 NDC target (such as lower auction volumes and/or a higher auction floor prices) is an important step in re-establishing credibility. 

The problem here is that there's very little that the ETS can do pre-2030 on volumes, except in an extreme scenario where the auctions are cancelled (very unlikely). Besides, even if the the Commission were to advise such a thing, the key credibility question will only be answered if and how the government acts on that advice.

The New Zealand government, as in many other countries, is being forced to face up to multiple threats: geopolitical and energy insecurity, industrial strategy and supply chain resilience, and the breakdown of global climate governance. Last week the government confirmed that it will seek to establish an LNG import facility by 2027/28.

Explaining the decision, Simon Watts (who also holds the title of Energy Minister) remarked that “New Zealand is experiencing a renewable electricity boom, but a rapidly declining gas supply has left our electricity sector exposed during dry years, when our hydro lakes run low...The result is greater reliance on coal and diesel, and ultimately higher electricity prices, putting more financial pressure on families and making businesses less competitive.”

The [press release indicates that government](https://www.beehive.govt.nz/release/delivering-lng-support-energy-security?ref=carbonrisk.world) will "design an import model that brings LNG in large shipments and only when needed, minimising exposure to international gas prices and keeping the door open for new technologies." However, many are fearful that the decision will lock New Zealand into dependence on imported LNG from America and do nothing to reduce the country's long-term exposure to volatile fossil fuel prices. 

While the carbon market has rebounded to levels seen in mid-November, the prospects of a sustained recovery look mixed.

First, the government will be looking at the climate policy uncertainty over in Europe and questioning whether New Zealand really needs to have a high carbon price if the EU is seen as softening its own market. It's a topic that other countries who have signalled strong carbon market ambitions will no doubt be revisiting too. 

Second, the National Party, the ruling party in the centre-right coalition government, recently announced that the next general election will be held on 7th November. As elsewhere in the world, voters in New Zealand are concerned about the cost of living and slow economic growth. If neither centre-left nor centre-right blocs secure an outright majority, coalition negotiations will add an extra bout of uncertainty and volatility into the carbon market.

Politicians and policymakers must now be Janus-like, amending energy and climate policies and introducing new ones with a view to satisfying multiple audiences and agendas at once. It's rather inevitable that, whether it be adjustments to the carbon market or the decision to build an LNG import facility, effective communication falls through the cracks.

As central bankers everywhere have learnt through experience, the cost of sending the wrong message can be high; a mistimed spike in interest rates deters investment and may cause equity markets to crash, while a slump in carbon prices reduces the incentive to invest in low-carbon technology. 

Furthermore, as New Zealand has found to its cost, in an illiquid market the potential for huge swings in carbon prices is amplified, and this makes the investment case even worse. A 10% increase in carbon price volatility in the EU ETS for example has the same detrimental impact on investment in decarbonisation as a €12 per tonne decline in the carbon price.

The transition to a more 'pragmatic' carbon price mechanism, cognisant of energy security and industrial competitiveness concerns, will not be smooth. Politicians and climate policymakers have a big responsibility to ensure that any change in government priorities are clearly and effectively communicated to carbon market participants everywhere.

The German Chancellor, Friedrich Merz and other leaders will do well to remember that their words have consequences.

[The Fear IndexWelcome to Carbon Risk — helping investors navigate ‘The Currency of Decarbonisation’! 🏭![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/icon/Green-Nature-Tree-and-Root-Logo-Template--60-x-60-px--23.jpg)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/thumbnail/photo-1530738433046-b589e02b0e79)](https://www.carbonrisk.world/the-fear-index/)

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### When Europe sneezes, Britain catches a cold
URL: https://www.carbonrisk.world/uk-carbon-price-down-40/
Last updated: 2026-02-14T10:21:53.000Z
*Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'!* 🏭.

The discount between the UKA and EUA Dec-2026 futures price ballooned to 29% this morning, Thursday 12th February.

But that's not the highest its ever been. 

On 21st September 2023 it widened to more than 50% when then Conservative Prime Minister Sunak first pushed back on many of the UK governments net zero targets. Remember this was the first government to enshrine net zero by 2050 into law. That day marked the low as expectations quickly turned to the potential for a closer relationship between the UK and the EU in the event of a Labour government (see [*Commitment issues*](https://carbonrisk.substack.com/p/repost-commitment-issues)).

A year and four months later, on 17th January 2025, the discount once again grew to more than 50%. At the time the UKA price fell to a record low of £31.54 (\~€37.35) on fading hopes of a reproachment between the UK and the EU. Around 10 days later the Financial Times reported that UK-EU ETS linkage was now high on the agenda for talks between the UK government and the EU scheduled for later in the spring.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/02/image-8.png)

While the latest bout of nerves has not blown the spread up to the same extent, the speed and scale of the recent widening surpasses anything we've seen since the UKA first started to trade at a discount to EUAs in early 2022\. So what's behind the latest widening in the UKA-EUA spread and what's the outlook for the rest of the year?

The UKA price had been consistently trading at a \~10% discount to EUAs since the end of 2025\. Even after the EUA price fell sharply in late January after it was caught up in the cross-commodity liquidation, the spread remained broadly stable. It has only really begun to widen since last Wednesday (4th February), doubling to almost 30% in one week. 

The first potential catalyst was an article suggesting that significant areas of disagreement exist between the UK and the European Commission in their UK-EU ETS linkage negotiations, [notably as Carbon Pulse reports](https://carbon-pulse.com/480157/?ref=carbonrisk.world), "around the UK's willingness to align its regulation with that of the bloc." 

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### Cap-and-Invest
URL: https://www.carbonrisk.world/cap-and-invest/
Last updated: 2026-02-09T12:00:18.000Z
In January 2023, Washington State became the second state-wide emissions trading scheme in the United States after California. Almost two years later, as voters in America went to the polls to decide between Trump and Biden, the people of Washington State were also asked for their views on the state's carbon pricing scheme. They ultimately voted 62/38 in favour of keeping it. 

The vote marked a remarkable change in opinion compared with earlier polls (held in 2016 and then subsequently in 2017) in which carbon pricing was rejected by around 60% of the electorate. What changed, and is there anything that other governments can learn from this shift in sentiment? In [What's in a \[carbon market\] name?](https://www.carbonrisk.world/whats-in-a-carbon-market-name/) I discuss why the name of the scheme, the Washington State ‘Cap-and-Invest’ program, signalled a fundamental pivot in how carbon pricing was perceived and the role it played in catalysing the decarbonisation of the local economy. 

> "Rather than adopt the term used to describe California’s program - ‘Cap-and-Trade’ - policymakers in Washington State chose to name it ‘Cap-and-Invest’. Instead of emphasising the ‘trade’ in allowances by regulated entities and investors (speculation always gets a bad rap), ‘invest’ pivots the narrative towards actual projects that enable households and businesses to cut emissions.

> The term ‘Cap-and-Invest’ was apparently coined by former Washington State Senator. Reuven Carlyle. It’s got the attention of other programs, including the pioneers. “Cap and invest is a much better idea,” acknowledged Mary Nichols, chair of the California Air Resources Board in 2012 when the state launched its ‘Cap-and-Trade’ program, “It’s a better name, and it’s a more accurate name.”

> There is still a cap on emissions of course, and so the onus is still on the market to determine the carbon price necessary to achieve the emission reduction target. Washington Carbon Allowances (WCA’s) and their derivatives (i.e., futures and options) are actively traded, as in any other carbon market, to manage carbon risk exposure and to speculate on the price. Just because the emphasis has changed to ‘invest’ doesn’t mean the principles of the market are any different. It’s just that the focus is more squarely on the ends, rather than the means."

It wasn't long before California followed Washington State. In early September 2025, the governor of California, Gavin Newsom announced that an agreement had been reached extending the state's carbon market by 15 years to 2045\. More fundamentally though Cap-and-Trade is no more. It's the Californian Cap-and-Invest Program from now on (see [*California strikes back: Decision to reauthorise Cap-and-Invest Program an inflexion point for carbon markets in North America*](https://www.carbonrisk.world/california-strikes-back/)). 

Europe is likely to be the next emissions trading scheme to adopt 'Cap-and-Invest' – if not in name, then most certainly in spirit. 

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### Repost: Whose carbon?
URL: https://www.carbonrisk.world/whose-carbon-2/
Last updated: 2026-02-04T12:00:56.000Z
*In June 2024 the Kenyan government signed an investment framework with KOKO Networks, a trail-blazing start-up backed by Vitol and the World Bank. The agreement would have allowed the firm to sell Article 6 compliant credits into CORSIA, the airline carbon compliance scheme.* 

*KOKO had reportedly invested $300 million building a network supplying almost 1.5 million low-income households in Kenya with bioethanol at around half the market price. The company also sold bioethanol cookstoves for about $12, less than one-tenth of the $115 it would normally sell for*. *Bioethanol stoves are significantly more efficient than traditional biomass stoves,* [*avoiding an estimated \~5 tonnes CO2 per device per year*](https://www.unido.org/sites/default/files/unido-publications/2025-07/Carbon%20Credits%20for%20Ethanol%20Cooking.pdf?ref=carbonrisk.world)*.* *The sale of the carbon credits to airlines -* [*CORSIA futures are currently trading at \~$15 per tonne CO2*](https://www.ice.com/products/83046673/CORSIA-Eligible-Emissions-Units-2024-2026-Futures/data?marketId=7490951&span=2&ref=carbonrisk.world) *\- was crucial if the business model was going to be viable.* 

*Clean cooking projects are one of the most cost-effective ways of cutting carbon emissions. The International Energy Agency (IEA) estimates that universal clean cooking by 2030 could reduce GHG emissions by 800 Mt CO2e per year, plus an additional 700 Mt CO2e per year due to avoided deforestation. The more efficient stoves also reduce the indoor air pollution that can be so hazardous to human health. Around four in every ten people in in Africa are exposed to indoor air pollution from solid biomass fuels, with Sub-Saharan Africa most exposed to the risk (see* [*Escaping hells kitchen: Advanced cookstove methodologies offer a promising recipe to slash emissions and cut air pollution*](https://www.carbonrisk.world/escaping-hells-kitchen/)*).* 

*However, on Friday KOKO was forced to lay off its entire workforce of 700 people after the Kenyan government failed to provide the necessary Letters of Authorisation (LoA) enabling KOKO to sell its carbon credits. Although there has been very little in the way of an official statement, it appears that the Kenyan authorities were concerned that by exporting the carbon credits via KOKO, they would be putting achieving their own Nationally Determined Contribution (NDC) under the Paris Agreement at risk.*

*Fortunately for KOKO the World Banks Multilateral Investment Guarantee Agency (MIGA) had provided the start-up with the world's first carbon linked political insurance coverage, albeit only covering 60% ($180 million) of its investment, and bearing in mind the high chance of a dispute as to whether the insurance conditions have been triggered. However, the whole saga is likely to increase concern as to whether compliance schemes such as CORSIA (and individual project investments by corporations) can overcome the carbon sovereignty claims by individual countries.*

*In a world where the worlds carbon short position looks set to widen, governments are understandably reluctant to sell their carbon assets off too soon, and too cheaply. It creates a stand-off where viable carbon projects do not get the funding they need, despite the attractive carbon return on investment present in many emerging economies. That points towards an even larger supply deficit of CORSIA eligible credits over the next few years. In the mean time millions of low-income Kenyan households will go without clean cooking fuels.* 

---

> *“The biggest issue in this market is revenue sharing…If we got 50% we would be very happy, those are the figures we are looking at as well.” - Zambian environment minister*

Resource nationalism is when a government seeks greater control or value from its country’s natural resources at the expense of the private sector. This can range from outright expropriation – when a government takes away a private company’s assets – to more creeping forms of appropriation – such as higher taxation or tougher regulation.

The commodity industry is no stranger to resource nationalism. In 1938, the Mexican oil industry was nationalised. Seen in the context of its people, it was viewed that, at last, a poor country, long buffeted by predatory foreign powers, had exercised its right to own the wealth of its subsoil, seeing off rich countries that treated access to these resources at low cost as their right. Meanwhile, in 1951, the Iranian government nationalised the assets of the Anglo–Iranian Oil Company (now known as BP). The decision was enormously popular within the country and seen as a long overdue staunching of its national wealth that could now be harnessed to fighting poverty in Iran. More recently, in Venezuela, the late Hugo Chávez grasped strategic assets to propagate his Bolivarian revolution. Bolivia and Ecuador followed his cue.

It’s not just a feature of the oil industry. It can also affect those resources that are critical to the energy transition. In April 2023, newly elected president of Chile, Gabriel Boric announced plans to nationalise the country’s lithium industry, with the state taking a majority stake in all new contracts. Chile is the worlds second largest producer of lithium after Australia. Only a year earlier, the Mexican government announced sweeping nationalisation of its bountiful lithium resources, even though it has yet to extract any ‘white gold’.

Governments must tread a fine line between outright resource nationalism on the one hand, and ensuring a fair deal for their country on the other. One of the defining features of resource nationalism is that it’s often prompted by a sense of unfairness, whether perceived or actual. Contracts between governments and foreign private sector operators may have been signed before the government realised the underlying value of the resource - a case of asymmetric information. Deals may have been done when the economy was on its knees and the government was desperate for cash, or secured during the depths of a recession when commodity prices were weak.

High commodity prices have been a significant driver of resource nationalism in the past, with foreign multinationals often accused of pocketing excessive windfalls or not doing enough to extract a valuable and scarce resource. However, a decline in commodity prices doesn’t necessarily signal the end of resource nationalism. If a resource dependent country suffers a slowdown in economic growth, its government may try and get a bigger share of the shrinking pie to help prop up its revenues.

The degree to which resource production is concentrated in a small number of countries also influences resource nationalism risk. This is especially important when the commodity is seen as being of strategic importance. The higher the concentration, the greater leverage a single government can have over private sector operators. In contrast, a diverse geographical distribution reduces the chances that any one government will be able to exercise its power.

Resource nationalism has a cost though. Although a government may appear to be good, transparent and welcoming to foreign producers, years later – once a mine or an oil well has opened – they may change their tune. This time inconsistency and resulting uncertainty may reduce longer term investment in the country’s resource productivity; leading to a loss of skills and capital from the private sector, reducing production, and potentially leading to higher economic volatility.

### Carbon nationalism on the rise

There are signs that a new form of resource nationalism may have begun to rear its head in the global voluntary carbon market. Carbon nationalism as its known is when a government asserts its control over the emissions abatement or carbon storage potential available within its national borders, at the expense of the private sector.

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### No tree grows to heaven
URL: https://www.carbonrisk.world/no-tree-grows-to-heaven/
Last updated: 2026-02-02T14:27:37.000Z
What a week! The EU carbon market had been soldiering on serenely, making steady inroads towards €100, when all of a sudden more than three months of steady gains were wiped out within a few days. A classic up the escalator, and down the lift.

However, it would be wrong to say this was just a story about EUAs. No, the recent bout of volatility has exposed the increasing role that hedge funds play, not just in the EU carbon market, but now across the commodity sphere and how market dislocation in other often unrelated commodities, can unleash of wave of buying and selling pressure in EUAs.

Hedge funds assets under management rose above $5 trillion for the first time in 2025, according to [Hedge Fund Research Inc](https://www.hfr.com/media/market-commentary/global-hedge-fund-industry-capital-surges-past-historic-5-trillion-milestone/?ref=carbonrisk.world) with investors pumping in a net $116 billion last year, the most since 2007\. While equities and fixed income have been the main source of trading activity in recent years, funds have recently sought to diversify their returns by taking a look at commodities. Indeed, last year the industry recorded its best annual performance since the depths of the Great Financial Crisis, in part supported by trend-following strategies tied to the precious metal boom and the spill-over into other metal markets.

Hedge funds have a long tradition of trading commodities dating at least back to the Chinese demand driven commodity super-cycle of the early 2000's. As I've discussed previously on Carbon Risk, speculators are often vilified when prices are perceived to have moved too high, too fast. Nevertheless, without speculators active in the market, liquidity levels would be much lower, resulting in even higher price volatility (see [Know your onions: Concern over the role of speculators in Europe's energy markets is overplayed](https://www.carbonrisk.world/know-your-onions/)). 

Meanwhile, hedge funds have the capital and the foresight to see through current market conditions and identify future bottlenecks. For energy, metals, and agricultural commodities, high prices are a signal that demand and supply need to adjust. For the EU carbon market high prices provides the incentive to bring forward investment in decarbonisation.

But you can always have too much of a good thing. Everything in moderation as they say. If everyone piles into the same strategy then the likelihood of an orderly exit should the narrative change is dramatically reduced. When someone shouts 'Fire' in a crowded theatre, you want to make damn sure you are near the exits. 

In mid-December [the FT reported that hedge funds were piling into physical commodities ](https://www.ft.com/content/598c3bfc-008c-438f-837c-f7ec73a993f6?ref=carbonrisk.world)in search of fresh returns, despite as the paper noted, "lacking the decades of experience and information accumulated by established players such as Trafigura and Vitol." While oil and natural gas price volatility has been low as these markets returned to pre-energy crisis levels, commodity trading houses have looked to other physical commodity markets from which they can develop an informational advantage and utilise their huge balance sheets to eke out extra returns.

Multi-strategy hedge funds without an established presence in commodities have also seen the space as a way to diversify returns, ploughing into calendar spread options as a way to benefit from the volatility associated with the AI datacentre build-out, geopolitical turmoil and trade wars, and the impact of extreme weather on agricultural commodities. In December [Bloomberg reported that Point72 Asset Management was considering following other multi-strategy funds](https://www.bloomberg.com/news/articles/2025-12-17/steve-cohen-mulls-commodities-unit-as-hedge-funds-pile-into-bets?embedded-checkout=true&ref=carbonrisk.world) such as Citadel, Balyasny Asset Management and Millennium Management into commodities.

EUAs have also been caught in the fund driven search for extra returns. As [reported by Carbon Risk, the net long position in EUA futures](https://www.carbonrisk.world/eu100-co2-draws-near/) and the ratio of long to short positions has soared to record highs. Only last week the [FT reported that hedge funds were also piling into the EU carbon market](https://www.ft.com/content/df3a098e-7c59-452d-a9dc-9543ea2dc317?ref=carbonrisk.world), betting that the EUA supply squeeze will push prices higher; the number of hedge funds active in the market has surged in the last few month, rising from a long-term average of \~400 to almost 600 in January. 

In a sign of the increasing correlation across commodity markets, [Global Risk Management (GRM) pondered whether EUAs were now the new gold](https://media.licdn.com/dms/document/media/v2/D4E1FAQFctsdZ%5FyYCdg/feedshare-document-pdf-analyzed/B4EZu86O3uHIAc-/0/1768400942695?e=1770854400&v=beta&t=SjjnH4flswUzBpbmnf3Np96sQt26BP-N%5FtVO%5FUxici4&ref=carbonrisk.world), noting that "it appears that EUAs have increasingly taken on the role of a safe-haven asset that investors buy as a substitute for gold." Sharing some of the characteristics as gold, GRM note that EUAs are characterised by declining annual supply, the lack of a coupon, and finally, strong credit quality as EU guarantees the system, if not the price. Retail investors have followed hedge funds and gradually increased their allocation to EUA-based ETF's as the price of carbon and gold soared. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/02/image.png)

The past couple weeks have seen extreme levels of market positioning and the associated narrative with analysts pondering whether even more extreme price moves are on the cards across a range of commodities.

The price of gold, silver and the PGM's had soared as strong demand hit an illiquid market constrained by tight supply. Geopolitical uncertainty including President Trump's continued threats towards Greenland, his lack of support for a strong dollar, as well as domestic disturbance in Minneapolis, all contributed to the narrative that the world is going to hell in a handbasket. The so-called debasement trade was on full tilt.

Other metals including copper, lithium and others also soared, buoyed by optimism that the data centre build out and rebuilding the electricity grid will push these markets into a deep deficit. The narrative that the rupture in the world order has produced a bifurcated commodity market, one where resource security trumps resource efficiency gripped the market. 

In contrast to the bullish picture in metals, energy markets have been in a deep bear market. Crude oil and natural gas prices were pushed deeper into the red as the crude oil surplus swelled and expectations of a surge in LNG supply emboldened traders to increase their net short positions, betting that energy prices would continue to decline. 

But then some began to get cold feet, while others shouted 'Fire'! Perhaps a good idea had been taken too far, by too many. A nagging feeling that market positioning had got too extended and now the risk reward favoured a switch in the prevailing narrative. 

First, the imminent arrival of sub-zero temperatures forced US natural gas traders to revaluate their short positions, algorithmic trading strategies scrambling to close out, forcing a short squeeze that saw the price of natural gas soar by 140% prior to the contract expiry last week. The price of European natural gas had already started to recover in advance, but events in America then prompted what [Energy Flux describes as the "biggest TTF short squeeze in CoT history,"](https://www.energyflux.news/after-the-big-ttf-squeeze-natural-gas-henry-hub/?ref=energy-flux-newsletter) forcing TTF above €40 per MWh for the first time since the summer.

Meanwhile, metal markets were also facing their nadir. Whether the initial spark was the appointment of a new Fed chair or some nefarious precious metals deal in China gone wrong is irrelevant. A crowded momentum trade thinning on liquidity as prices soared was always going to see some speculators get crushed at the exits. And so it was to be with silver plunging by \~40%, gold \~20%, and other metals didn't escape the carnage. A big clue that this particular trade had gone too far [came from the BBC, which often rings the bell at market extreme](https://polemicpaine.substack.com/p/gold-us-debt-and-todays-bbc-turn)s. 

Commodities and other associated markets became a crowded trade. The problem is that once speculators are getting margin called in one market, the desperation to close out positions in other commodity markets can become overwhelming. In turn this propagates the volatility from one market to another even if there is no fundamental relationship between the two, other than as we've seen with EUAs and gold, market participants have adopted a similar market narrative of price action driven by scarcity.

The first major EUA bull market saw carbon prices jump more than 3-fold in a little over 14 months, from \~€23 in October 2020 to €90 in December 2021\. No tree grows to heaven, at least in a straight line; the period was punctuated by at least three 10%+ corrections along the way. The latest correction in the EU carbon price is a wake up call for asset managers and other speculators expecting the forthcoming deficit in EUAs to be an easy ride to €100 and beyond.

Where do we go from here? Well, hopefully asset managers will have come to their senses and realise that commodities are not all one big trade such as that observed in the early 2000's when Chinese demand turned every commodity into gold. It's more likely that we're in a world where commodity markets swing from one bull market to another, and in-depth knowledge and insights will give funds an edge. 

In short, the latest turmoil may have burned the tourists, and given them pause to develop a more sophisticated, fundamentally driven strategy. It may take a while to unwind the froth, but if and when that happens it will uncover some bargains for the more discerning long-term investor – and one of them will be EUAs.

[Want to read more? Start here](https://www.carbonrisk.world/table-of-contents-start-here/)
### Europe's new joule order
URL: https://www.carbonrisk.world/europes-new-joule-order/
Last updated: 2026-01-29T12:00:44.000Z
Europe imports more than half of the energy it needs, making it vulnerable to geopolitical and economic coercion – whether by friend or foe.

Europe's precarious position could get even worse if it fails to act. If the EU fulfils all of its signed LNG supply deals and fail to tackle demand for gas then according to [the Institute for Energy Economics and Financial Analysis (IEEFA)](https://ieefa.org/resources/eu-risks-new-energy-dependence-us-could-supply-80-its-lng-imports-2030?ref=carbonrisk.world), 80% of the blocs total LNG imports could come from the US by 2030, up from 57% in 2025.

The increased security threat is likely to accelerate Europe's push towards renewable energy. For if trade is under threat, then so is the trade in fossil fuels. In contrast, because renewable energy is non-traded and essentially local, its value increases when security concerns are paramount. 

2025 was an historical turning point for the EU's power system. Wind and solar accounted for 30% of the blocs power generation, [according to data from Ember](https://ember-energy.org/latest-insights/european-electricity-review-2026/?ref=carbonrisk.world), overtaking the 29% generated by burning fossil fuels for the first time. More than half of EU member states (14) saw wind and solar generate more electricity than fossil fuels. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/01/image-29.png)

Europe now has around 285 GW of wind power capacity (248 GW onshore and 37 GW offshore) according to [industry association Wind Europe](https://windeurope.org/data/products/wind-energy-in-europe-2024-statistics-and-the-outlook-for-2025-2030/?ref=carbonrisk.world#:~:text=Overview,reach%20425%20GW%20by%202030.). Offshore wind generation is the focus for future growth given the vast potential to create a North Sea renewable and industrial powerhouse. Nevertheless, despite the ambitious targets the growth in offshore wind capacity has slowed to just 2.4 GW per annum over the past five years, versus 14.2 GW per annum for onshore wind. 

A myriad of problems has contributed to the slow rate of annual offshore wind additions, including: the slow pace of electrification, grid bottlenecks, limited port and vessel capacity, permitting delays, rising costs (supply chain pressures, increased steel prices, and higher interest rates), and poorly designed auctions in several countries.

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### Return of the MACC
URL: https://www.carbonrisk.world/return-of-the-macc/
Last updated: 2026-01-28T12:00:21.000Z
The marginal abatement cost (MAC) curve has been an important tool for climate tech investors, carbon market traders, and policymakers. 

Sloping upwards from left to right, the MAC curve gradually steepens as additional tonnes of emissions get increasingly more difficult, and hence more costly, to abate. The marginal abatement cost, the cost of abating the last tonne of emissions required to meet a target, is one way that we can get a fix on how high the carbon price needs to be.

The original MAC curve dates back to 2007 when [the consultancy McKinsey & Co first released the graphic below](https://www.mckinsey.com/~/media/mckinsey/dotcom/client%5Fservice/sustainability/cost%20curve%20pdfs/pathways%5Flowcarbon%5Feconomy%5Fversion2.ashx?ref=carbonrisk.world) illustrating the most economically rational technical abatement opportunities to reduce global emissions by 2030\. Their focus was on abatement measures with a societal cost estimated to be less than €60 per tonne CO2, equivalent to around €95 per tonne CO2 in todays money.

McKinsey claimed that if all of the opportunities were exploited to their full potential - "clearly an optimistic assumption" they add - global GHG emissions in 2030 could be 70% below a business-as-usual scenario. If these measures were pursued aggressively they say, it should be "sufficient to have a good chance of holding global warming below the 2 degrees Celsius threshold."

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/01/image-23.png)

Source: McKinsey

The "McKinsey curve" as it came to be known as, quickly became the framework through which policymakers could focus their attention on the least cost emission abatement opportunities, but also which technologies were likely to need nurturing and investing in if they were ever to come down in cost. 

Alas, almost two decades on and only a few years shy of 2030, it's clear that global GHG emissions are only now getting to the point where they *might* have plateaued. Keeping the global temperature increase to no more than 2 degrees Celsius (3.6 Fahrenheit) above pre-industrial levels still appears a distant prospect (see [*Readying for the descent: Proposed reforms to China's emissions trading system suggest the government is preparing for peak emissions*](https://www.carbonrisk.world/readying-for-the-descent/)).

Is the MAC curve really all its cracked up to be, or has it led governments down the wrong path, pursuing least cost abatement opportunities as they find them, rather than considering the whole system costs? The implications are important for investors and governments in the West, but they also have implications for emerging economies who are now in a position to consider the sequencing in which abatement technologies are introduced, and not repeat the same mistakes. 

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### Carbon credits 2.0
URL: https://www.carbonrisk.world/carbon-credits-2-0/
Last updated: 2026-01-22T12:00:09.000Z
It's that time of year when ratings agencies and data aggregators voice their opinions on what's been driving the verified carbon market (VCM). At least that's what it feels like based on the plethora of reports published in the past couple of weeks. 

In this article I try and tease out some of the main conclusions from the six major reports, highlighting recent trends in carbon credit demand and supply, and what it might all mean for where the market is now headed. 

Overall, the reports signal that a bifurcated market is developing, one in which high integrity credits are highly valued and in short supply, and where buyers are focusing on developing long-term relationships with project developers. 

Meanwhile, although corporate demand is growing and set to rise further as reputational risks are more actively managed, the real growth driver will come from compliance carbon markets, both domestic emission trading schemes and global mechanisms such as CORSIA.

Let's dive in and see how the carbon market is coming of age. 

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### Northern Lights the way
URL: https://www.carbonrisk.world/northern-lights-the-way/
Last updated: 2026-01-20T16:13:33.000Z
Europe's carbon capture and storage (CCS) is expected to gather momentum in 2026 as the development of the North Sea's CO2 value chain network coincides with increasing pressure on heavy industry to decarbonise. 

This is not an expensive distraction meant to extend the lifespan of fossil fuels. For carbon intensive process industries, such as cement and fertiliser, there really is no alternative path to full-scale decarbonisation than carbon capture. 

The Northern Lights project located in Norway is the worlds first CO2 transport and storage network. Captured CO2 will be shipped in specialised vessels to an onshore receiving terminal in western Norway, before being transported by pipeline to a location 100 kms off the coast. From there it will be permanently sequestered 2.6 kms beneath the Norwegian continental shelf (see [*Following in LNG's wake: First shipment of liquefied CO2 could be a prelude to a global marketplace*](https://www.carbonrisk.world/following-in-lngs-wake/)). 

The [first CO2 volumes were successfully injected](https://norlights.com/news/northern-lights-jv-has-successfully-stored-first-co%E2%82%82/?ref=carbonrisk.world) into the Aurora reservoir in August. 

In Phase 1 of its development, the reservoir will be capable of storing 1.5 Mt CO2 per year. Phase 2 will see the transport and storage capacity increase more than three-fold to a minimum of 5 Mt CO2 per year and is expected to be operational by the second half of 2028.

In August 2025, Heidelberg’s 0.4 Mt CO2 per year CCS plant in Brevik, Norway became the first supplier of CO2 to Northern Lights. The plant is the worlds first large scale carbon capture facility for the cement industry, preventing around half of its annual emissions escaping into the atmosphere.

The second carbon capture project to store CO2 at Northern Lights is expected to be Yara’s ammonia and fertiliser plant in Sluiskil, the Netherlands. In 2026 the facility is set to become Europe’s largest CCS project, capturing \~0.8 Mt CO2 per year. 

The final supplier of CO2 under Phase 1 is the Klemetsrud energy-from-waste (EfW) plant in Oslo, Norway. Although not currently obligated under the EU ETS, a report on the inclusion of waste emissions is expected to be published by the end of July 2026\. The Klemetsrud CCS plant is expected to be operational in late 2029 and capture \~0.35 Mt CO2 per year. 

Other North Sea CO2 storage hubs in development include the Dutch Porthos project (\~2.5 Mt CO2 per year of storage is expected to become operational in 2026), and the Greensand project off the cost of Denmark (expected to store \~0.4 Mt CO2 early in 2026, rising to a potential 8 Mt CO2 per year by 2030). Both of these CO2 storage hubs have been developed to serve heavy industries located in north-west Europe.

Overall, European CO2 injection capacity - European Economic Area (EEA) and the UK - is projected to reach between 18 Mt CO2 and 108 Mt CO₂ per year by 2030, according to [an analysis of 33 current and planned CO₂ storage sites](https://www.sciencedirect.com/science/article/abs/pii/S1750583625002038?ref=carbonrisk.world). Assuming capacity ends up somewhere around the middle of this range then \~60 Mt CO2 per year could be injected by 2030\. It would more than meet the binding target, laid out in the EU's Net-Zero Industry Act (NZIA), that injection capacity should reach 50 Mt CO2 per year by 2030.

The UK is outside of the EEA of course. Norway, the home of the Northern Lights project, is a member. That's important. The EU's CCS Directive allows CO2 emissions to be stored outside of the EU+EEA area, but any emissions stored this way (for example, under the UK Continental Shelf) will still count as being emitted under the EU ETS and so face the cost of EU emission allowances (EUAs). 

In the absence of political earthquake that brings the UK back into Europe’s fold, the only solution for non-EEA countries is to operate storage sites under an ETS linked to the EU ETS. And so, the ongoing discussions between the UK and Europe to establish a link between their respective ETS is more than just about equalising the carbon price. It could make a massive difference to the economics of the North Sea's CO2 network too. The UK and the EU aim to finalise the ETS linkage discussions in time for their next joint summit, due to be held this summer.

### Momentum must accelerate

Although carbon capture capacity is limited at the present time in Europe, the number of operational CCS plants is expected to increase sharply over the next five years. Around 20 projects are currently under construction with more than 100 at the pre-FID stage. By 2030, CCS plants could be able to capture \~60 Mt CO2 of Europe's industrial emissions (assuming all proposed CCS capacity comes online), with the cement industry likely to account for more than one-third of installed capacity (see [*Ready mixed: How Europe's largest cement producers are rapidly cutting their Scope 1 emissions*](https://www.carbonrisk.world/ready-mixed/)).

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### €100 carbon draws near
URL: https://www.carbonrisk.world/eu100-co2-draws-near/
Last updated: 2026-01-16T11:35:12.000Z
Thank you if you entered the #EUAPredict 2026 competition. The results are now in! The median forecast (based on 38 responses) for the Dec-2026 EUA contract final settlement price was **€96.85**. The most bullish respondents to #EUAPredict see EUAs ending 2026 at €125, while at the other end of the spectrum, €63 is the most bearish entry received. At the time of writing carbon is trading near €93\. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/01/image-7.png)

What can we read into this? Well, the mean absolute percentage error across the previous six competitions (based on the median forecast) is 23%. The EU carbon market is inherently volatile and so its no surprise that we get large consensus forecast errors. It's volatility is typically on a par with that of US natural gas; the latter nicknamed the "widow maker" for its ability to hit traders with catastrophic losses (see [#EUAPredict 2026: What's your forecast for the EU carbon price in 2026?](https://www.carbonrisk.world/euapredict-2026/)). 

Nevertheless, the median forecast may indicate that people are growing wary of the prospects for further gains. EUA futures have already jumped by more than €20 since the summer and recently breached the €90 mark – the highest level for more than 30 months. The outlook boils down to whether we return to operate in the 2022/early 23 trading environment (broadly €80-€100), or we are in a structurally tighter market, akin to the one experienced in 2021/22 when prices jumped to a whole new paradigm.

The latest Commitment of Traders (COT) report (w/e 9th January) shows that investment funds have continued to add to their net long position, at 125.6 million EUAs its another record high. As we've seen in recent months, the move higher is the result of new long positions. In contrast, net short positions remain stable at around 28 million EUAs. Funds clearly believe the structural tighter balance story will continue in 2026, and maybe into 2027.

To recap, while the linear reduction factor (LRF) continues to reduce the supply of EUAs, other measures will also tighten the balance, including the end of the RePowerEU frontloading in August, the gradual loss of free allowances to industries covered by CBAM (airlines will no longer receive free allowances altogether), and the maritime sector picking up 100% of their EUA carbon exposure.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/01/2026-01-14_17-31-58.png)

The supply of EUAs is naturally highly price inelastic, but even more so in an environment when the balance is tight. It means that there only needs to be a relatively small change in demand and the EUA price moves sharply. Of course the sword of inelastic supply swings both ways. If funds seek to cash in for whatever reason then the market could see a significant drop. Note that similar supply side constraints are building in other markets too (copper for example), and much like EUAs, the funds are positioned heavily long there too. 

Options market activity for the March 2026 expiry is also hugely bullish. Significant call interest sits above €100 and at 0.52 the put-call ratio is heavily skewed to the bulls. With fund positioning continuing to make fresh records every week calls offer a way of layering in upside optionality without making a direct directional position in the futures market. Overall, the market is signalling that at least in the short-term, EUAs are increasingly likely to push above €100 later this quarter. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/01/2026-01-14_18-57-41.png)

### Watch the spreads

Up until recently the EU carbon price was typically closely linked to the European natural gas price due to the fuel switching relationship between coal and natural gas. However, since the summer the two have diverged, in a sign perhaps that as coal is forced out of the European power stack, the relationship - the 'clean-dark' spread - no longer holds. 

While EUAs have climbed almost 30% to over €90, the last vestiges of the energy crisis have gradually seeped out of the TTF natural gas price. From almost €35 per MWh at the end of July, TTF gradually declined to around €27 per MWh in December, only recovering some losses in early 2026 (but overall its down 17% since the summer). 

Lower natural gas prices should be supportive for Europe's energy intensive industries. On the flipside, any further rebound in gas prices (say if LNG supply disappoints, or if there is disruption in the Middle East) would stop any resumption in Europe's industrial activity in its tracks.

In addition, its clear that solar plays a much larger role in the blocs power generation (output rose 20% in 2025 versus 2024). However, the rate of growth in battery energy storage system (BESS) capacity has failed to keep up, limiting the potential for future growth, especially when saturation (low, or even negative intraday power prices) is a recurring risk to developers. 

As I [note in a recent article](https://www.carbonrisk.world/batteries-not-included/), the rate of growth in German BESS capacity - particularly where it is co-located with renewables - is a crucial indicator to watch. If it starts to fall short then it will become progressively more difficult for Germany to add more and more solar power generation. The upshot being an increased reliance on other forms of flex, most likely gas-fired power generation, and higher emissions. 

As markets reach critical levels, strange things start to happen and previous linear relationships start to break down. If generation switching economics no longer play the same role anymore, what direction should market participants look towards to see carbon's new 'north star'?

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### The MAC curve is steep and opaque

The obvious answer is that the market will transition away from one that solves for the decarbonisation of power generation (fuel switching and incentivising the buildout of renewable energy), to one focused on industrial decarbonisation. In short, that moves us much higher up the marginal abatement cost (MAC) curve.

And so where can we see what that cost curve looks like? Well, again up until quite recently the cost of green hydrogen (H2) was thought to be instrumental, a veritable Swiss Army knife that heavy industries could employ to cut emissions. Back in 2021/22, many analysts thought that green H2 could deliver 20% of the industrial emission reduction required by 2030 under the EU ETS. 

In 2020 BNP Paribas looked at a range of potential production costs for green hydrogen and natural gas prices in 2030 and then derived a theoretical value for the carbon price necessary to make green H2 competitive with grey H2, discounting back to 2020\. Based on €20 per MWh TTF and €2.5 per kg green H2 a fair value for the EU carbon price in 2020 was \~€60 per tonne CO2 (see [*Europe's hydrogen economy and what it means for carbon prices*](https://www.carbonrisk.world/europes-hydrogen-economy-and-what/)).[](https://www.carbonrisk.world/author/peter-sainsbury/) 

The cost of grey H2 is highly sensitive to the price of natural gas, and so the recent return to pre-energy crisis levels (€25-€30 per MWh) swings the economics away from green H2 and back towards grey H2\. Meanwhile, expectations of a dramatic decline in the price of green H2 in Europe (towards €2 per kg) have failed to materialise as advancements in electrolysis technology and economies of scale have disappointed its proponents.

Fast forward a few years from those heady days of green H2 hopium and its clear that a portfolio of approaches will be needed: clean hydrogen (green, blue, and maybe even white), carbon capture and storage (CCS), electrification, and also carbon dioxide removal (CDR). Rather than there being one tool for the job, it will vary from industry to industry depending on their inherent economic and technological constraints. 

### Plucking the goose

Jean-Baptiste Colbert, Louis XIV’s finance minister once quipped that “the art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing.” The EU ETS is no different. A high carbon price increases the incentive to decarbonise, but high carbon prices can have a regressive effect, hampering public support for carbon pricing while also encouraging companies to move to countries with less onerous environmental regulations (see [*The Carbon Laffer Curve*](https://www.carbonrisk.world/the-carbon-laffer-curve/))[](https://www.carbonrisk.world/author/peter-sainsbury/). 

The probability of political interference has typically increased as the carbon price approaches €100 per tonne CO2\. Back in 2022, as the market toyed with breaking through three figures, Jos Delbeke, a key architect of the EU ETS and Peter Liese, the lead lawmaker steering EU ETS reform through the European Parliament, sought to keep a lid on the market. First, though verbal intervention (roughly targeting a range of €60 to €90), and then secondly via RePowerEU, bringing forward additional EUA supply from future auctions.

With prices approaching €100 once more, is it only a matter of weeks before political intervention resurfaces? Well, you could argue that the introduction of CBAM has begun to mitigate the risk of carbon leakage (i.e., large emitters decamping to other jurisdictions). You could also make the case that with natural gas prices dropping below €30 per MWh Europe's lawmakers will be content to see carbon prices increase to much higher levels than they would have done only a few years ago (see [*A green and level playing field? The European Commission faces a tortuous task refereeing CBAMs winners and losers*](https://www.carbonrisk.world/a-green-and-level-playing-field/)). 

On the other hand, bear in mind that CBAM means that higher carbon prices will reverberate across the globe, impacting on Europe's relationship with its main trading partners. Meanwhile, the [cost of carbon accounts for a much larger proportion of the power price](https://ember-energy.org/data/european-electricity-prices-and-costs/?ref=carbonrisk.world) than it did back at the height of the energy crisis, and hence it can have a much larger knock-on impact on inflation. Essentially it means that the EU ETS is a much larger political target now (see [*In search of carbon alpha*](https://www.carbonrisk.world/in-search-of-carbon-alpha/)).

But perhaps political intervention won't come so quickly this time around. In a [statement drawing attention to the price dampening impact of REPowerEU](https://www.carbonrisk.world/out-of-ammunition/), Liese warned three years ago that market participants should use the opportunity to prepare, not rest on their laurels:

> "...we will have to increase our efforts again by the end of the decade. By then, we will be in a position to achieve this because the excuse that there is a shortage of materials and skilled workers will no longer hold true in a few years' time. If you have not invested by then, it's your own fault."

Later, in early 2024, as the carbon price slumped to €60 [Liese was moved to state that the bear market presented European industrials with an opportunity](https://www.carbonrisk.world/deflationary-expectations/), and one that they should make the most of while they still can:

> “There is now a phase in which companies can take a deep breath to plan and tackle their investments. The number of certificates will become significantly more scarce from 2027 onwards. And anyone who has not invested or started to invest by then will pay very dearly in the long term.” 

The pre-emptive restructuring of the mechanisms underpinning ETS2, and the decision to delay the start of the carbon price by one year, means there is an increasing focus on the forthcoming review of the ETS1 Market Stability Reserve (MSR), scheduled for July (see [*Softening the blow*](https://www.carbonrisk.world/softening-the-blow/)).

What if carbon pushes through €100? Well, even if no direct intervention is likely during the first half of the year, expect the noise from policymakers and some Member States to get progressively louder as the review process draws near. Peter Liese and others may have warned that higher carbon prices would arrive sooner or later, but that doesn't mean the European Commission will feign deaf ears.

[Want to read more? Start here](https://www.carbonrisk.world/table-of-contents-start-here/)

[Smoke signalsWhy Europe’s policymakers should take heed to its carbon market![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/icon/Green-Nature-Tree-and-Root-Logo-Template--60-x-60-px--17.jpg)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/thumbnail/photo-1578604665675-9aee692f6ddc)](https://www.carbonrisk.world/smoke-signals/)
### Trading hazes
URL: https://www.carbonrisk.world/trad/
Last updated: 2026-01-13T12:00:29.000Z
Commuters in New Delhi, the capital of India, coughed and spluttered through the worst air pollution in nearly a decade this winter, the smog hanging deeply over the crowded city streets. 

The city's air quality index was more than six times acceptable levels for 53 days during November and December. The illegal burning of crop residue by farmers, combined with fumes from traffic jams, air pollution from factories (many of which are powered by coal), as well as dust from construction activity contributed to the toxic soup. 

The wider State of Delhi has the highest annual pollution levels in India with an annual mean PM2.5 concentration of 101 µg/m³, according to [analysis by the Centre for Research on Energy and Clean Air (CREA)](https://energyandcleanair.org/publication/a-satellite-based-pm2-5-assessment-across-indias-airsheds-states-and-districts/?ref=carbonrisk.world). That's 2.5 times the Indian standard and 20 times the World Health Organisation's (WHO) guideline. Even the 'cleanest' state in India has air pollution levels 5 times the WHO's recommended limit. 

Long-term exposure to PM2.5 (fine particles measuring 2.5 micrometres across or less) increases the risk of health problems such as heart disease and asthma and is linked to an estimated 1.5 million premature deaths in India alone. 

Chronic air pollution illustrate the challenge that India, and many other less developed countries face when trying to rapidly lift people out of poverty by relying on burning coal, while being without the institutional capacity to ensure that pollution regulations are adhered to.

Perhaps there's another way: leveraging environmental markets to achieve improvements in air pollution that strict command-and-control regulations alone can't achieve. One such example comes from the State of Gujarat, located in western India, where the annual mean PM2.5 concentration is 47 µg/m³. Here the state government has pioneered the world’s first emissions trading scheme for airborne particulate matter.

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### A green and level playing field?
URL: https://www.carbonrisk.world/a-green-and-level-playing-field/
Last updated: 2026-01-08T12:00:35.000Z
Since 1st January 2026, EU importers of carbon intensive products including iron & steel, cement, aluminium, fertilisers, hydrogen, and electricity now have to factor in the cost of the embedded emissions.

Almost immediately, [China's Ministry of Commerce issued a statement](https://www.mofcom.gov.cn/xwfb/xwfyrth/art/2026/art%5Fda781146aca04b65a02c7cd358cc737e.html?ref=carbonrisk.world) condemning the EU's Carbon Border Adjustment Mechanism (CBAM) as “unfair” and “discriminatory,” adding that although China was "willing to cooperate with Europe to jointly tackle global climate change," it would "take all necessary measures to counter unfair trade restrictions.”

Two particular areas of concern have got the Chinese authorities bristling. 

First, the Ministry suggests that the EU has assigned excessively high default carbon intensity values on Chinese CBAM-covered products, and together with plans to raise them over the next three years, “constitute unfair and discriminatory treatment”. To recap, default benchmarks determine the carbon cost importers face at the border in the absence of verified emissions data; they are high by design and should act as an incentive for producers to provide real, verified emissions data. 

Second, the statement also signals that authorities are opposed to the [EU's plan to extend CBAM](https://ec.europa.eu/commission/presscorner/detail/en/ip%5F25%5F3088?ref=carbonrisk.world) to cover some 180 steel and aluminium intensive products, arguing that it “goes beyond the legitimate scope” of addressing climate change. The extension would come into force from the start of 2028 and primarily includes downstream industrial supply chain products, such as base metal mountings, cylinders, and industrial radiators. 

While the decision to extend CBAM to certain downstream sectors is couched in the language of preventing carbon leakage, it is an explicit plug to keep internal dissent against CBAM in check. A [recent paper estimated that production losses in CBAM](https://www.sciencedirect.com/science/article/pii/S014098832400848X?via%3Dihub&ref=carbonrisk.world) covered sectors within the EU could exceed 10%, and in some cases, even reaching the 20-30% range, and primarily occur in Eastern Europe. Notably, it adds that production losses extend to several ‘‘inflation-absorbing’’ downstream sectors, especially those involved with aluminium and steel manufacturing (see [*Softening the blow*](https://www.carbonrisk.world/softening-the-blow/)).

The paper discussed above attempts to identify those countries and industries most susceptible to gains or losses under CBAM, both within and outside the EU. Despite concerns to the contrary, the analysis suggests widespread fears among the EU's trading partners are probably overstated. The US, China, and Japan may experience slight net gains according to the analysis, while India, Russia, and Turkey are likely to see minor albeit limited negative impacts. The risk for the EU is that in trying to keep the peace internally, it now opens up a new external front in opposition to CBAM.

****#EUAPredict 2026**

What's your prediction for the EU carbon price in 2026? Entries close at 1700 GMT tomorrow, Friday 9th January.

[Click here to find out how to enter ](https://www.carbonrisk.world/euapredict-2026/) 

### Breaking boundaries

As I note in my [recent article reviewing carbon market developments in 2025](https://www.carbonrisk.world/carbon-risk-2025-year-in-review/), until now EU policymakers have only been concerned with their domestic audiences perception of carbon prices. The launch of CBAM changes all that and means that fluctuations in the EU's carbon price will reverberate across the globe. The EU carbon price is now trading close to €90 per tonne CO2, up from €70 per tonne CO2 just six months ago, but is widely expected to challenge the €100 level once again in the next few months. 

The EU's implementing act outlines how the price of CBAM certificates will be determined by the European Commission. For CBAM-covered goods imported during 2026, the price of CBAM certificates will reflect the average auction price of EUAs during the relevant quarter. However, from 2027 onwards the price of a CBAM certificate will - in line with expectations prior to the launch of CBAM - mirror the weekly average EUA auction price.

As countries trading with the EU begin to realise the extent to which they are exposed to the EU's CBAM - and the toll paid to Brussels coffers begins to ring louder - the pressure on other governments to introduce their own carbon pricing schemes will increase. Furthermore, with [carbon leakage thought to offset 13% of the domestic emissions reductions associated with carbon pricing](https://www.oecd.org/en/publications/carbon-prices-emissions-and-international-trade-in-sectors-at-risk-of-carbon-leakage%5F116248f5-en.html?ref=carbonrisk.world), governments will quickly seek to introduce their own border carbon adjustments or BCAs (see [*Building blocs: As global carbon pricing grows and becomes more fragmented, regional carbon markets offer a solution*](https://www.carbonrisk.world/building-blocs/)). 

What might it mean for the United States? The prospects for a broad based federal carbon price are very slim and the probability of one being voted through is not expected to improve significantly even if the Democrats win the 2028 presidential election (a 55% implied [probability based on betting markets](https://www.betfair.com/exchange/plus/politics/market/1.236263390?loginStatus=SUCCESS&ott=DRLWMRiT0hOXFS8ed5UWaV%2F2l%2BTr1O2HR692yyFCHYvCdIvR46ZWpSD8Wa6q6X2y&ref=carbonrisk.world)). A [recent paper led by researchers at UC Berkeley](https://matildebombardini.github.io/research/BFLNT9aug2025.pdf?ref=carbonrisk.world) suggests that even under the worst case climate projections and current mitigation trajectories, the probability that the House of Representatives pass a carbon-pricing bill is only 9 percentage points higher in 2050 than in 2020\. 

Nevertheless, a BCA is likely to be introduced at some point. The [2025 Clean Competition Act (CCA)](https://www.epw.senate.gov/public/index.cfm/press-releases-democratic?ID=222BFDA2-A45C-4F29-A42B-2700146B8900&ref=carbonrisk.world), introduced by Democratic Senator Whitehouse, makes the case for an intensity-based levy on the emissions from selected imported carbon intensive goods, combined with a domestic intensity-based carbon tax. As proposed the CCA would cover goods across 20 US industries, including petroleum and natural gas extraction, and petrochemical, iron & steel, and aluminium manufacturing.A tax of $60 per tonne of CO2e (€51) would be placed on emissions exceeding a certain carbon intensity threshold, increasing at a real rate of 6% per annum.

The CCA differs significantly from the 2025 Foreign Pollution Fee Act (FPFA) put forward in April 2025 by two Republican senators. As I [explained at the time, the FPFA](https://www.carbonrisk.world/americas-carbon-border-tariff-isnt/) does not have an explicit carbon price, ensuring a level playing field. There are no incentives for both domestic and foreign producers to decarbonise. Furthermore, instead of focusing on carbon emissions, the FPFA proposal is "really a cover for weakening Chinese control over global supply chains deemed to be a threat to the US."

### Concrete returns

Certain European industries are expected to benefit from CBAM due to their relative position on the carbon abatement cost curve, coupled with the diversion of imports from more carbon intensive jurisdictions outside of Europe to other destinations.

One such industry is the cement sector where Europe's largest producers are poised for a substantial boost in profitability. Although [imports of cement from Turkey and North Africa increased sharply in 2025](https://www.argusmedia.com/en/news-and-insights/latest-market-news/2769808-viewpoint-cbam-to-reshape-med-cement-trade-flows?ref=carbonrisk.world) as EU buyers sought to take advantage of lower prices (imports rose 48% and 30% respectively during Jan-Sept compared to year earlier levels), demand from these producers is expected to decline as CBAM comes into force.

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### #EUAPredict 2026
URL: https://www.carbonrisk.world/euapredict-2026/
Last updated: 2026-01-06T12:00:10.000Z
It's competition time! 

Alessandro Vitelli (aka 'The Carbon Reporter') has just launched the seventh edition of his #EUAPredict competition. Before we hear why Alessandro started the forecasting competition and why you should enter #EUAPredict this year, here's a quick run down of the rules.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/01/image-1.png)

Alessandro first launched #EUAPredict in 2020 as a way of building community. The EU carbon price had started to rise quickly and a forecasting competition was a neat way of engaging people who were only just getting into the market. However, it wasn't long before Alessandro realised that the competition had other uses as well: 

> "I quickly understood though that #EUAPredict is also a great way to measure the collective sentiment of the market: the analysts get to have their say, but traders and other stakeholders also have a view and that hasn’t often been taken into account in a similar way." 

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So, how has #EUAPredict performed? 

The mean absolute percentage error across the six competitions (based on the median forecast from respondents) is 23%. The error rate hit a high in 2021 with the end of year carbon price almost double the median forecast. More than 100 people entered the competition that year as expectations of high prices drew in a large crowd. Last year the crowd was especially wise with the median falling just 2% short of the December 2025 contract expiry price. 

It's worth noting that data stretching back to 2010 tells us that 23% is actually rather good and compares well to professional carbon analysts. In 2022 DWS published a piece of research comparing analyst forecasts made at the start of each calendar year between 2010 and 2021 with the outturn at end of the year. They found that the carbon analysts price predictions typically have an average absolute error rate of 35.5%. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2026/01/2026-01-05_14-41-48.png)

Although the likelihood that #EUAPredict will have another banner forecasting year is very slim, there are ways that we can improve our chances. The wisdom of crowds suggests that the collective intelligence of a large group makes superior judgements than any single expert. Hence one motivation for me writing this post is to encourage more people to enter #EUAPredict.

However, more respondents doesn't necessarily equate to improved forecasting precision, in fact, as Friedrich Nietzsche warns, "insanity is rare \[in individuals\]; but in groups, parties, nations, and epochs it is the rule". According to Michael Mauboussin, investment strategist at Morgan Stanley, we are more likely to harness the wisdom (rather than the madness) of crowds if three conditions are in place:

  - Heterogeneity (or less formally, diversity) such that respondents have different points of view, see things from a range of perspectives, and base their forecasts on different information sources and rules.
  - An appropriate aggregation mechanism; markets tend be best except when the herd takes over. Competitions work well (think of guessing the number of sweets in jar, or the weight of a cow) when you are not swayed by other peoples answers.
  - Incentives (i.e. rewards for being right and / or penalties for being wrong) ensure that respondents are motivated to put their thinking caps on.

If you think you have something to add you can enter #EUAPredict by posting your end of year EUA prediction on LinkedIn with the hashtag #EUAPredict, or ideally (given the three conditions outlined above) DM Alessandro on [LinkedIn](https://www.linkedin.com/in/alessandro-vitelli/?ref=carbonrisk.world) with your prediction, or send him an email on alessandro@carbonreporter.com. Remember, entries close at 1700 GMT on Friday 9th January - only three days to go.

Good luck!

ps. Be sure to check back in a week or so to see how your prediction compares with other people and what the median forecast tells us about EU carbon prices in 2026\. 

[Want to read more? Start here](https://www.carbonrisk.world/table-of-contents-start-here/)
### Carbon pricing doesn't have to be taxing
URL: https://www.carbonrisk.world/carbon-pricing-doesnt-have-to-be-taxing/
Last updated: 2026-01-02T12:27:15.000Z
Carbon pricing has come under increasing pressure over the past 12 months amid affordability concerns, allegations of state overreach, and opposition parties using the issue to drive a wedge between voters. The outcome has been [delays](https://www.carbonrisk.world/softening-the-blow/), [proposals to slow the rate ](https://www.carbonrisk.world/why-affordability-now-trumps-climate-in-california/)at which emissions must decline, and in some cases, even outright [cancellation](https://www.carbonrisk.world/a-tactical-retreat/).

It doesn't have to be this way. How should governments respond to growing disquiet among their citizens over the impact of carbon pricing?

First off, lets quickly recap the theory as to why carbon pricing is so effective. The economist Arthur C. Pigou argued that a carbon price should be set at the Social Cost of Carbon (SCC), internalising the net economic damage resulting from CO2 emissions. This would incentivise consumers to switch away from carbon intensive goods and services and firms to increase their supply of low carbon alternatives. 

A Pareto optimal carbon price occurs when it's impossible to make any one person better off without making at least one other person worse off. Pareto’s theory relies on a series of optimal conditions being in place that enables market participants to efficiently converge on the point at which welfare is maximised (see [*The Carbon Laffer Curve*](https://www.carbonrisk.world/the-carbon-laffer-curve/))[](https://www.carbonrisk.world/author/peter-sainsbury/). 

In reality, this is rarely if ever possible.

In response, governments seek to increase the publics acceptance of carbon pricing through various complementary policies, also referred to as revenue recycling. These include compensating the losers directly (uniform or targeted cash rebates), green spending (earmarking revenue for climate aligned projects), or some combination of the above.

### No climate dividend

Economists have tended to favour uniform cash transfers, recognising that it is likely to maximise perceptions of fairness and any associated political benefits, while also not discouraging energy efficiency. Most studies suggest that the majority of households are likely to receive more in rebates than they pay out through higher prices. This should - in theory at least - create a groundswell of support for carbon pricing. 

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### A statement of intent
URL: https://www.carbonrisk.world/a-statement-of-intent/
Last updated: 2025-12-12T09:26:13.000Z
It's been a while since I last discussed the carbon market situation in Canada. My last piece (published on 24th March, shortly after Mark Carney was elected Prime Minister) [focused on the industrial carbon pricing system](https://www.carbonrisk.world/canadas-industrial-carbon-pricing/), making the case that while far from perfect, it is the most effective climate policy Canada currently has, and as such, it should be protected.

To recap, Canada’s industrial carbon pricing systems - often referred to as the large-emitter trading system or LETS - is an emissions intensity based market. This is where emitters only pay for those emissions above a certain threshold, either by paying the headline carbon price, or through purchasing carbon credits.

Provinces are allowed to tailor LETS to their individual needs and priorities, but they must meet the minimum requirements set out in the federal backstop. Alberta was the first province to introduce its own scheme in 2007, while others have either followed suit, or employed the federal backstop. The exception is Quebec which is part of the Western Climate Initiative (WCI) and is linked with California (see [What now for America's state carbon markets?](https://www.carbonrisk.world/what-now-for-americas-state-carbon-markets/)).

Analysis by the Canadian Climate Institute (CCI) projected that the industrial carbon price mechanism could contribute almost half the incremental reduction in emissions required to meet Canada's 2030 target, enshrined in the Net-Zero Emissions Accountability Act. However, that conclusion presupposes that all of the provinces play ball and adhere to at least the standards set out in the federal backstop.

The challenge facing Carney is that many of the provinces, but particularly Alberta are itching to explore separating from Canada. Indeed, shortly after the election Alberta's Premier, Danielle Smith passed legislation that lowered the threshold by which a referendum could be held on whether Albertans wanted to secede from Canada.

This lack of national unity threatens the long-term success of the industrial carbon pricing scheme as it is currently designed, the foundation of which is the backstop. In May, Smith announced that she was freezing the headline industrial carbon price at C$95 per tonne CO2 (€58.80) amid concerns about the economy. It was due to rise to C$110 per tonne CO2 in 2026, and then continue increasing to C$170 per tonne CO2 by 2030.

In late November, Carney and Smith met in Ottawa to announce that they had agreed to a Memorandum of Understanding (MOU) in which the federal government offered several important climate policy concessions to Alberta, but in return the province would take steps to radically improve its industrial carbon pricing system.

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### Repost: A uniform global carbon price is unworkable, and unnecessary
URL: https://www.carbonrisk.world/repost-a-uniform-global-carbon-price-is-unworkable-and-unnecessary/
Last updated: 2025-12-09T12:00:59.000Z
*In a little over three weeks time, on 1st January 2026, the EU's Carbon Border Adjustment Mechanism (CBAM) comes into force. It promises to extend the EU's carbon prices beyond its borders for the first time, ensuring that imports of carbon intensive products covered by the scheme begin to pay for their embedded emissions, wherever in the world they are sourced from.*

*CBAM has an inbuilt incentive mechanism rewarding those jurisdictions that already have, or are planning on introducing, their own system of carbon pricing. Specifically, exporting nations benefit if they have a carbon price broadly applicable to that prevailing in the EU, or otherwise risk losing export competitiveness. More than 20 jurisdictions, such as Brazil, Indonesia, and India have responded by developing or launching their own emissions trading schemes or carbon taxes (see* [*Call of duties: Mozambique demonstrates how CBAM could redraw global commodity trade flows*](https://www.carbonrisk.world/call-of-duties/)*).* 

*The least developed economies face a struggle to be ready. Lower income economies are typically more reliant on the export of commodities, and suffer from weaker implicit carbon pricing due to their small domestic tax base. Less developed countries have criticised the EU's approach - requiring imports from all nations to pay the same carbon price - as punitive and conflicting with the “common but differentiated responsibilities” principle of the Paris Agreement.*

*No exemptions are in place for lower-income countries, nor is there a mechanism in place to channel CBAM revenues towards affected countries. Yet, nearly two-thirds of respondents to the latest* [*IEEP's European Green Barometer survey* ](https://ieep.eu/publications/european-green-deal-barometer-2025/?ref=carbonrisk.world)*believe that CBAM revenues should be recycled towards climate vulnerable countries or the least developed countries.*

*As my article below from 12 months ago concludes, it’s time to ditch the idea that there needs to be a uniform global price on carbon: there are many ways in which countries price carbon, and not all of them are explicit, not every country has the state capacity to introduce carbon pricing, and even if they do, various parts of the world experience vastly difference social and marginal abatement costs of carbon.* 

*If carbon pricing is to expand, less developed countries need to be supported, and mechanisms such as CBAM needs to recognise that they are not at the same point as developed economies. Thankfully, things are starting to move in that direction.*

*The* [*Open Coalition on Compliance Carbon Markets*](https://www.gov.br/mre/pt-br/canais%5Fatendimento/imprensa/notas-a-imprensa/declaracao-sobre-a-coalizao-aberta-de-mercados-regulados-de-carbono/OpenCoalitiononComplianceCarbonMarkets.pdf?ref=carbonrisk.world) *declaration (announced at COP30) outlines a framework in which members would "advance possibilities of coordination on development and enhancement of compliance carbon markets". So far 18 jurisdictions have endorsed the Coalition including the EU, the UK and Germany as well as less developed countries such as Armenia, Zambia, Rwanda, and Guinea.*

*Furthermore,* [*the Emissions Market Accelerator (EMA)*](https://emissionsmarkets.org/?ref=carbonrisk.world)*, a joint effort between the University of Chicago's Energy Policy Institute (EPIC) and the Abdul Latif Jameel Poverty Action Lab, promises to take cap-and-trade schemes to Africa, Asia, South America and other developing regions. By learning from experience in the EU, California, as well as the Gujarat pollution market in India, the EMA will support governments from carbon market design to full implementation.*

---

The economist William Nordhaus suggested that the optimal strategy to combat climate change is a uniform global price on carbon:

> “The most efficient strategy for slowing or preventing climate change is to impose a universal and internationally harmonized carbon tax levied on the carbon content of fossil fuels.”

The argument for a global price centres on its role as a collective commitment tool, incentivising global participation and cooperation. In facing the same carbon price constraint, so the argument goes, countries would also allocate resources more efficiently.

Capital would more easily be directed at the resources and technology required to decarbonise, in turn reducing the overall global cost of meeting net zero. The prospect of carbon leakage would also be reduced in a world where it was more difficult to undercut your rivals.

A recent survey of carbon pricing academics asked them to choose a uniform global carbon price, assuming that a “world government” exists and seeks to “maximise the well-being of all present and future people.” [Their median response was \~$75 per tonne of CO2 in 2030, rising to $100 per tonne of CO2 in 2050](https://www.aeaweb.org/research/charts/pricing-carbon-expert-recommendations?ref=carbonrisk.world). This broadly tallies with the 2017 High-Level Commission on Carbon Prices (HLCCP), which concluded that carbon prices needed to reach $50-100 per tonne CO2e by 2030, in order to limit global temperature rises to well below 2ºC.

![](https://substackcdn.com/image/fetch/$s_!zx6N!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F0499865e-61b8-4bf5-9b81-e65000ac6d32_2206x1766.png)

In reality, a uniform global carbon price is unlikely to be workable. Before we get to some of the reasons why, lets first check in on the status of carbon pricing across the globe to see how far away we are from what the experts suggest.

Note that this isn’t just some academic exercise. It’s going to have real world consequences as exporters of carbon intensive raw materials seek to negate the impact of the EU’s CBAM, or otherwise go to the World Trade Organisation (WTO) arguing their case for a better deal with the EU.

Remember, the CBAM is only payable if the production country-of-origin does not have a comparable carbon price as the EU’s. This effectively pushes countries towards implementing a carbon price at a similar level to Europe. While this helps to coordinate global climate policy and discourage free-riders, it does create inequality (see [*here*](https://carbonrisk.substack.com/p/free-rider)[ ](https://carbonrisk.substack.com/p/free-rider)and [*here*](https://carbonrisk.substack.com/p/no-level-playing-field)).

### Direct carbon pricing

Almost one-quarter (24%) of global carbon emissions are covered by an emissions trading scheme (ETS) or a carbon tax, according to the latest estimates from the World Bank. Approximately 18% of emissions are covered by an ETS, carbon taxes cover 5.5%, while 0.5% is covered by both an ETS and carbon taxes. Although many emerging economies are looking to introduce or expand the role played by carbon taxes and ETS (e.g., Brazil, China, Turkey, and Indonesia), it is very unlikely that carbon pricing will cover more than 40% of global emissions by 2030 (see [*It's the carbon price, stupid!*](https://carbonrisk.substack.com/p/its-the-carbon-price-stupid)).

Only seven carbon pricing instruments, covering less than 1% of global greenhouse gas (GHG) emissions, reached price levels at or above the inflation-adjusted minimum level of $63 (€60) per tonne CO2e in 2024 suggested by the HLCCP. Incidentally, the ETS with the highest price represented in the chart below - the EU ETS - failed to meet even this minimum level, at least in April 2024 when the snapshot of prices for the chart below was taken. Many European countries also have a separate carbon tax - some overlap with the ETS, but most do not - but even these tend to be in the $20-$60 per tonne range.

Emerging economies are at the extreme edges of the carbon price chart. At $167 per tonne of CO2e, Uruguay has the highest carbon tax in the world, albeit it only covers 5-10% of its emissions. With the exception of the South American nation, the next emerging economy on the list is Mexico, where the city of Queretaro has a carbon tax of $37 per tonne of CO2e, 22nd in the rankings of carbon price levels. Of the other emerging economies represented in the chart below, few if any have a carbon price above $10 per tonne of CO2e.

![](https://substackcdn.com/image/fetch/$s_!DGHN!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F5594d24c-ebde-4dde-9667-6d89683fc6ce_1374x761.png)

### **The Effective Carbon Rate (ECR)**

Most analysts stop there and only focus on direct carbon pricing policies such as ETS and carbon taxes. But to end here and just compare countries based on their direct carbon pricing would be a mistake.

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### Committed traders
URL: https://www.carbonrisk.world/committed-traders/
Last updated: 2025-12-04T12:00:53.000Z
> "Calling someone who trades actively in the market an investor 'is like calling someone who repeatedly engages in one-night stands a romantic.'" — Warren Buffett

Committed traders? Surely an oxymoron on a par with 'passive investment' and 'deafening silence'. The resolution to this apparent contradiction is about to be played out in the EU carbon market.

The latest Commitment of Traders (COT) report (w/e 28th November) shows that investment funds now sit on a net long position of 109.8 million EUAs, up more than 40% since I published [All in: Investment funds race to stack EUA futures as price breakout looms](https://www.carbonrisk.world/all-in/) on 2nd October.

After gorging on EUA futures and adding net length in size for three consecutive weeks during September (+10-20 million EUAs per week), the pace slowed in early October (+3 million EUAs per week). However, the latest data shows that funds have regained their appetite, adding an additional 9 million EUAs in w/e 28th November alone to hit yet another record net long position.

The Dec-25 EUA futures contract has risen by about €6 during the past two months to around €82 currently, an increase of about 8%. Not bad considering, but its nowhere near commensurate with the record build-up in net length and is something of an outlier historically. 

What it does indicate is that funds with a large long position on their balance sheet are happy to hold (and even add to their positions at opportune moments), betting that the structural deficit in EUAs (supply is expected to decline by 21% in 2026 alone) will be enough to drive prices even higher into 2026\. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/12/image.png)

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### Carbon Risk 2025 year in review
URL: https://www.carbonrisk.world/carbon-risk-2025-year-in-review/
Last updated: 2025-12-02T12:00:43.000Z
A little over four years ago, on 16th November 2021, I published [my first article ](https://www.carbonrisk.world/investors-have-a-new-way-to-help/)on *Carbon Risk*. 

But over the past two years the date came and went, and by the time I thought about writing an article to mark the occasion, the moment had passed, something more interesting had surfaced, or I was more interested in tucking into some mince pies and sipping mulled wine. 

This year I thought I would do a roundup of the most important themes covered by *Carbon Risk* this past year, as well as some of the things to watch out for as we move into 2026\. 

The links below all refer back to other articles I have written this year, but if you want to get a more comprehensive lowdown on every article I've published since day one of *Carbon Risk* (over 400 of them and counting!), check out the [Table of Contents](https://www.carbonrisk.world/table-of-contents-start-here-2/).

Before I get to it, I'd like to thank everybody for the support they have shown, and particularly during the past few months as I migrated the newsletter away from Substack. The move went much better than I could have imagined with a nice jump in the number of people taking out a [paid subscription to *Carbon Risk*](#/portal/signup). 

Thank you very much :) 

With that out of the way, here are the six main themes that I have covered during 2025, followed by my early thoughts on what could be in store in 2026.

---

### 1\. Carbon credits experiencing a renaissance 

The voluntary carbon market is dead. Long live the verified carbon market. In [an article published in October](https://www.carbonrisk.world/coming-of-age-2/), I highlighted how the term 'voluntary' increasingly feels disconnected from the emerging consensus as to how the VCM is likely to evolve. More and more stakeholders are coming round to the view that 'verified' carbon market makes a lot more sense given the increasingly robust verification systems in place: research, monitoring, reporting, auditing, and engagement.

A broader acceptance of the role that carbon credits have to play also comes courtesy of the Science Based Targets initiative (SBTi). Up until very recently, the go-to arbiter of corporate climate action had been very anti-carbon credits, effectively calling for companies to pursue every route to internal carbon abatement whatever the cost. 

[The release of the latest iteration of its Corporate Net Zero Standard (CNZS) shows a change in approach](https://www.carbonrisk.world/eyes-on-the-prize/), introducing a "recognition program for climate contributions" that encourages and rewards companies for demonstrating "ongoing emissions responsibility". In particular, by directing companies to impose internal carbon prices, SBTi enables signatories to targets to meet them by purchasing high quality carbon credits.

While action by companies outside of regulations is important, emerging compliance carbon pricing mechanisms (including many of the new country-based schemes in Asia, and the [airline emissions scheme, CORSIA](https://www.carbonrisk.world/up-in-the-air/)) are underpinning the revival in the use of carbon credits. The credits, and the projects they are based on, are increasingly seen as a means to get the biggest bang per buck in terms of emissions mitigation, a way to help reduce the cost of compliance, and a mechanism to help fund and direct climate finance. 

Enter the EU's 2040 target proposals. The European Parliament recently voted in favour of cutting net emissions by 90% compared to 1990 levels by 2050, backing an earlier agreement reached by the European Council which also includes allowing up to 5% of the emission reduction to be achieved through the purchase of international carbon credits. [Europe's carbon market is still living with the consequences of allowing international carbon credits](https://www.carbonrisk.world/has-europe-learnt-from-its-great/), so the hope is that it has learnt from the past.

[As I explain in a recent article there are four motivations behind this move](https://www.carbonrisk.world/an-article-of-faith/): containing the cost of meeting targets amid the risk of a backlash, helping to shape the rules by which carbon credits are traded, a channel by which Europe can fund global climate mitigation and adaptation, and finally, a way for the bloc to position itself as the de-facto regulator and enabler of international carbon markets.

### 2\. Plurilateral climate agreements are the way forward 

Following the United States decision to leave the Paris Agreement, any hope that countries would come together in the future in pursuit of multilateral climate agreements was understandably wearing thin. Even more so, the chances of a global carbon pricing mechanism being approved - long the dream for many economists - was a flight of fancy. 

But then in April, something unexpected happened. Shortly before Easter negotiations over a carbon pricing mechanism for the global shipping industry was voted through by an overwhelming majority vote (63-13). Although [the mechanism (known as the Net-Zero Framework) was far from perfect](https://www.carbonrisk.world/smoke-on-the-water/), and was unlikely to deliver the cuts in emissions targeted by the International Maritime Organisation (IMO), the agreement nonetheless represented a major victory for climate policy multilateralism.

All the IMO had to do was get the motion passed at a meeting in October and the carbon pricing mechanism would have come into force in 2027\. Unfortunately things didn't quite go to plan. In the face of intimidation, including threats to impose tariffs, penalties and revoke visas, the US administrations officials managed to strongarm enough countries into voting against the bill, or at least abstaining. The final vote count: 57 in favour of delay, 49 countries against delaying, and 21 abstentions. 

The policy uncertainty pervading the shipping industry will mean that operators either sit on their hands as long as possible, or go for a 'safe' choice in the absence of suitable alternatives. For many that [will mean investing in dual-fuel ships that primarily burn LNG](https://www.carbonrisk.world/methane-2/) or traditional maritime diesel or heavy fuel oils. Good news for the US LNG industry perhaps.

While the wait for a multilateral agreement involving the vast majority of the worlds nations goes on, it doesn't mean that countries can't come together and move things forward. [The "intransigent minority" still have the capacity to drastically shape the future](https://www.carbonrisk.world/full-disclosure-2/). A group of nations just need to provide a suitable enough incentive to join the club, or apply a penalty to those that don't. It's here where [regional-based carbon pricing, coupled with trade agreements ](https://www.carbonrisk.world/join-the-club/)are likely to play a powerful role. Plurilateral agreements are the way forward. 

### 3\. Political uncertainty weighs heavily on carbon markets

Never too far from the surface, political interference re-emerged as a potent risk for carbon markets - both old and embryonic - in 2025\. The election of Donald Trump for a second term sowed climate policy uncertainty far and wide. In late 2024 opposition parties as far afield as Canada and Australia were quick to [paint carbon taxes and carbon pricing mechanisms as the 'pantomime villain'](https://www.carbonrisk.world/three-carbon-markets-facing-electoral/) in the hope that it would lead them to electoral success.

Nevertheless, it was in America that the threat to carbon pricing proved greatest. [High up on the list of potential casualties was California](https://www.carbonrisk.world/the-future-of-californias-cap-and/), one of the oldest carbon pricing mechanisms and due to expire in 2030\. The absence of long-term policy certainty, delays to the programs legislation process, along with other climate policy delays, compounded the sense of unease felt by market participants. 

And then [Trump threw in the grenade](https://www.carbonrisk.world/americas-state-carbon-markets-are/) that was executive order 'PROTECTING AMERICAN ENERGY FROM STATE OVERREACH', singling out California for apparent overreach. The states carbon market eventually got its extension to 2045 signed-off, and a report tabling actions that the federal government could take in response never materialised. That much is good news. However, the uncertainty that the storm brought was felt far and wide, and served to scupper plans to fast-track carbon pricing to New York and other states keen to emulate California's success. 

Cracks started to appear in other jurisdictions that you wouldn't normally expect. First, Canada's new prime minister [Mark Carney carried out an election promise to immediately withdraw the consumer carbon tax](https://www.carbonrisk.world/a-tactical-retreat/). The European Union decided to [delay the introduction of the blocs second emissions trading scheme, ETS2 by one year to 2028](https://www.carbonrisk.world/softening-the-blow/), while also introducing additional measures to curb prices. More recently, [New Zealand announced that it would sever the link between its emissions trading scheme and the governments Paris Agreement targets](https://www.carbonrisk.world/new-zealands-carbon-price-slumps-as-confidence-cracks/). Carbon markets are built on trust, and even if there are sound reasons to make a change, poor communication and unclear decision making can easily damage confidence. 

As I [noted back in the summer](https://www.carbonrisk.world/its-all-political/), one of the first pushbacks I get from investors nervous about allocating to carbon markets is the risk of political interference. Take a step back though and you can see that politics is often the driving force behind many of the biggest moves in global asset markets. The past twelve months exemplifies how politics can shape every corner of our financial markets, even if over the very long run underlying economic fundamentals hold sway. As with carbon markets, the rules for investing in equities, commodities and bond markets, are also frequently rewritten by their political masters. If you understand the game then you can stay one step ahead.

### 4\. Repurposing carbon markets with a broader social license

[Mark Carney's book, *Values: An Economists Guide To Everything That Matters* ](https://www.carbonrisk.world/five-books-that-made-me-think-differently/)makes a strong argument that markets can be fragile if they fail to serve the needs of society, “Markets are not ends in themselves, but powerful means for prosperity and security for all. As such they need to retain the consent of society - a social license - to be allowed to operate, innovate and grow.” 

In January I highlighted why governments should follow Washington State's lead and adopt the term 'Cap-and-Invest', and ditch 'Cap-and-Trade'. As I say in the article, instead of emphasising the ‘trade’ in allowances by regulated entities and investors (speculation always gets a bad rap), ‘invest’ pivots the narrative towards actual projects that enable households and businesses to cut emissions. In September, [California's governor formally announced that the states carbon market had also been renamed 'Cap-and-Invest'](https://www.carbonrisk.world/california-strikes-back/). Other jurisdictions should follow suit.

But a strong name is not enough. It's more important than ever that governments demonstrate that carbon pricing actually serves the needs of its citizens. It means selling the immediate short to medium term benefits, without losing sight of the longer-term goals. 

As an example I suggest that [governments should re-target their efforts towards clean air, switching the narrative away from the multidecadal challenge to decarbonise, and towards the clear and immediate health and economic benefits of cutting air pollution](https://www.carbonrisk.world/blue-sky-thinking/). The latter much more salient to people than any reduction in carbon emissions. Importantly, the same policies that are so effective in cutting carbon emissions (such as carbon pricing mechanisms) have also been shown to cut air pollution too. 

More needs to be done to ward off political risk if carbon markets are going to continue to play a role in cutting emissions. The issue of 'affordability' is key. The decision to delay the start of ETS2 in Europe, and relax the cap trajectory in California should be seen in this light. In Europe, ETS2 could have an especially [negative impact on the rural poor in Eastern Europe](https://www.carbonrisk.world/looking-through-it/). In California, high carbon prices could be a [lightening rod for critics in the next US presidential election](https://www.carbonrisk.world/why-affordability-now-trumps-climate-in-california/).

Push carbon prices too high, and a [political backlash isn't the only risk governments face](https://www.carbonrisk.world/the-carbon-laffer-curve/). Fiscal revenue - either via carbon price taxation, or the revenue raised in the auction of allowances - is increasingly important to governments. Push the [carbon price too high and industries may lose competitiveness](https://www.carbonrisk.world/cracking-under-pressure/), and potentially lead to carbon leakage to other countries with less ambitious climate policies.

### 5\. Tackling this one super-pollutant should be top priority 

Methane is thought to be responsible for nearly half of net global warming to date. Tackling this one super-pollutant is the fastest way to slow down the rate of warming in coming decades. 

In 2021 countries came together, committing to tackle the problem. The Global Methane Pledge (signed by more than 150 countries, including the United States) targeted a 30% reduction by 2030 compared with 2020 levels. However, halfway through the commitment, signatories are well off-track. One major sticking point is the lack of funding with methane abatement financing only representing less than 2% of total climate finance flows.

The presence of remote aerial and satellite monitoring of methane emissions holds fossil fuel companies and other major methane emission sources (e.g., landfills, livestock and agriculture) to account, providing an economical way for energy buyers and government regulators to keep track. Governments would be flying blind if the eyes in the sky weren't there. Numerous research studies have concluded that when asked to report their emissions, [the energy sector typically under-report their methane emissions by 70%](https://www.carbonrisk.world/step-on-the-gas/). 

This summer there was a major setback after [the Environmental Defense Fund (EDF) announced that it had lost contact with MethaneSAT](https://www.carbonrisk.world/loss-of-the-methane-hunter/). Launched in June 2024, the satellite circled the Earth 15 times a day while it’s instruments monitored even the smallest methane leaks. It's loss will make it much more difficult to track methane emissions, especially the largest offenders, the so-called super-emitters who emit vast plumes of methane that exceed 10,000 kg per hour.

But [are governments as watchful as they might have been only a couple of years ago?](https://www.carbonrisk.world/methane-2/) In 2025 the Trump administration announced that the Waste Emissions Charge (part of the Inflation Reduction Act package of 2022) would now be delayed until 2034\. Meanwhile, in New Zealand the government recently announced that it had downgraded its 2050 target, from a 24-47% reduction below 2017 levels, to just 14-24 %. And then in Europe, officials are under pressure to water down the EU Methane Regulation, the blocs first legislation specifically targeting methane emissions from the energy sector.

### 6\. Carbon dioxide removal (CDR) is in a transition phase 

Earlier in the year I highlighted how companies, beginning with Stripe, and then via groups of companies coming together, [acted as a buyer of first resort, employing advanced market commitments to signal demand](https://www.carbonrisk.world/carbon-dioxide-removal-and-the-buyer/), in turn spurring innovation and the development of new CDR technologies. Tech companies and financial institutions especially have been motivated to play this role, betting that although CDR prices are high for them today, the price will be low for everybody tomorrow. 

That model can only get so far. While the cost of removing CO2 is borne privately to whomever pays for it, the benefits accrue to society at large. The upshot is that there isn’t a natural market for CDR. Unless someone is willing to stump up the high costs, technology developers cannot be certain that there will be demand for their CDR service in the future. 

Encouragingly, CDR showed the first hints of a transition in 2025; away from one largely funded by the largesse of the world's biggest tech companies, and towards a compliance based model relying on government policy. The [UK emissions trading scheme could be the first regulated compliance carbon market to include CDR](https://www.carbonrisk.world/cleaning-up/). In the summer, the UK government announced that engineered CDR projects (e.g. DACs and BECCS) taking place in the UK will be eligible to receive UK ETS allowances (UKAs) by the end of the decade. Meanwhile, an independent review commissioned by the government came out strongly in support of CDR playing a key role in meeting UK climate targets. 

The move by governments into the space can't come soon enough if CDR is to reach the scale necessary to keep global warming on a long-term 2°C trajectory. Given that fossil fuel demand is likely to remain strong (especially from industries where emissions are hard to abate), CDR will become even more vital to help to negate a potential overshoot. Lots more needs to be consulted on and tested before the UK's CDR policy is eventually rolled out, but its an encouraging signal for where other governments should direct their efforts. 

Finally, [there are some indications that we're in the early stages of what may become the next trillion dollar market](https://www.carbonrisk.world/big-carbon/). Yes, there is no natural buyer for CDR. Yes, the veneer of altruism displayed by Microsoft et al. can only get us so far. Yes, there is 'no free lunch' with CDR technologies as all have potential side-effects. But overcome all those obstacles, and in a world where several hundred gigatonnes of CO2 need to be removed, CDR could easily be a trillion dollar business. It's no wonder that the largest oil and gas producers spot an opportunity. 

### What is on my radar for 2026?

Europe is likely to be the focus, at least during the first half of 2026\. 

To start with, the EU's Carbon Border Adjustment Mechanism (CBAM) comes into force on 1st January 2026\. It has already served to incentivise Brazil, India, Turkey and several other countries into introducing their own carbon price – [expect other governments to announce similar measures once they see CBAM in action](https://www.carbonrisk.world/cbams-domino-effect-on-global-carbon-pricing-could-be-about-to-get-even-stronger/). CBAM also promises to [redraw global commodity flows](https://www.carbonrisk.world/call-of-duties/), and while some will suffer (e.g. carbon intensive manufacturers based in locations without a carbon price), others (e.g. cement producers, commodity trading firms) will benefit from margin growth and volatility.

While other carbon markets experience political uncertainty and rapid rule changes, the EU ETS stands out as a beacon of strength. The EU's bureaucratic processes may be sclerotic, but that is a strength when it comes to engendering trust in carbon markets. Could there be a flight to quality in 2026? There's certainly [an opportunity for carbon prices to move back towards the €100 per tonne CO2 level ](https://www.carbonrisk.world/all-in/)sometime early in 2026, at least based on the emerging allowance deficit. 

If that does indeed materialise, [expect policymakers to be even more vocal in talking down the market and floating ideas for containing costs](https://www.carbonrisk.world/forward-guidance/). It's worth bearing in mind that until now EU policymakers have only been concerned with their domestic audiences perception of carbon prices. The launch of CBAM means that higher prices will reverberate across the globe, impacting on Europe's relationship with its main trading partners. 

The IMO's carbon pricing mechanism never got the nod, but that doesn't mean there aren't any pricing signals in the maritime sector. Europe's FuelEU Maritime regulation came into force on 1st January 2025\. The initiative is targeting a progressive reduction in the greenhouse gas (GHG) intensity of fuels used by ships: starting at 2% in 2025, increasing to 6% in 2030, and reaching 80% by 2050\. 

2026 marks the first year of compliance, and so by the end of January shipping companies must submit their first report covering their 2025 voyages. What is the cost of compliance? Well, [one pooling company has started publishing a daily price](https://www.gasum.com/en/gas-for-transport/maritime-transport/pooling/?ref=carbonrisk.world). Today its €230 per tonne CO2e. A global agreement is always much more effective in keeping costs down, but in the absence of such a deal, FuelEU could still have a significant bearing on maritime decarbonisation.

The action elsewhere in 2026 could come from China and whether emissions will now start to decline. [As noted in July on *Carbon Risk*, China’s ETS will now transition from an intensity-based carbon market](https://www.carbonrisk.world/readying-for-the-descent/), to one with an absolute cap on emissions. Industries with a stabilised emissions path will begin to adopt an absolute cap on emissions from 2027 with the market migration complete on a national basis by 2030\. It's a clear signal that Chinese authorities believe the top is in, or at least very close by. 

The Chinese carbon price fell by 15 yuan to almost 50 yuan in late October, marking a 40%+ decline during 2025\. However, since November the price has rebounded to almost 70 yuan (€8.50 per tonne CO2) as the regulator tightened emission allocations. Be on the look out for continued robust reinforcement if China's emissions trading scheme is going to align with best practices in Europe. 

Finally, the last (but by no means the only) thing I'm thinking out for 2026 is the impact of a collapse in AI investment, should it arrive. For example, [power demand forecasts have been revised higher pretty much everywhere](https://www.carbonrisk.world/energy-emergence-at-the-frontier/), but particularly North America as demand for data centres grows. Even if there is a slowdown that could take some heat out of demand for renewable energy (much quicker to install than fossil fuel plants or indeed nuclear). Furthermore, given Microsoft's outsized impact on the development of CDR, a retrenchment in investment by tech companies, or indeed a ratcheting down in expectations for power demand, could seriously slow investment in new CDR capacity.

Thanks once again for your support. If you like what you hear and want to join me on this journey check out the link below to subscribe to *Carbon Risk.*

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### What now for America's state carbon markets?
URL: https://www.carbonrisk.world/what-now-for-americas-state-carbon-markets/
Last updated: 2025-11-28T12:00:27.000Z
Carbon pricing mechanisms cover approximately 10% of the United States emissions including California, Washington State, and a group of ten or so states in the northeast – New York, Massachusetts, and New Hampshire among them. 

Although the carbon price across these states varies from around $25 to $70 per tonne CO2, the overall average carbon price in America, taking account of the share of emissions covered by carbon pricing, is closer to $3 per tonne CO2 – far too low to make a real difference to the future trajectory of emissions at the federal level. 

Nevertheless, state carbon pricing mechanisms, many of which have been in place for 10-15 years, provide a credible backstop in support of continued ambitious climate policy. That's crucial at a time when America's federal climate policy has been ripped up over the past twelve months. 

In addition to incentivising investment in decarbonisation, America's carbon markets provide a valuable source of revenue that is used to fund local projects, reducing the barriers to low-carbon technology adoption, while mitigating the impact on consumers. 

State carbon markets have faced their own threats this past year. Not least Donald Trump's executive order blocking the enforcement of, in the president's words, “unnecessary regulations that targeted the beautiful, clean coal.” A report supposed to outline potential actions against carbon markets never arrived. The 7th June deadline came and went (see [*America's state carbon markets are under siege*](https://www.carbonrisk.world/americas-state-carbon-markets-are/)).

America's carbon markets face a new threat – being blamed for high energy prices. As this article will demonstrate, each carbon market is likely to take a different approach to managing this risk, especially as the electoral cycle draws nearer to November 2028.

### California

In a [recent article](https://www.carbonrisk.world/why-affordability-now-trumps-climate-in-california/) I highlighted how political messaging on "affordability" will be an important factor affecting the outlook for the Californian carbon market. As I go onto point out, if California's governor, Gavin Newsom, wants to win the next presidential election (assuming he's nominated), then demonstrating that he can do something about the cost of living is likely to be an important factor in improving his chances.

An example of exactly this came to light at the [latest CARB workshop, held on 29th October](https://ww2.arb.ca.gov/sites/default/files/cap-and-trade/meetings/nc%5FCapInvestWorkshop%5FOctober2925.pdf?ref=carbonrisk.world), in which the agency proposed a drastic slowing in the emissions cap trajectory through to the end of the decade; removing 118 million CCAs between 2027 and 2030, significantly lower than the 180 million CCA reduction outlined in earlier workshop proposals. As my article concludes, the governor may get what he wishes in the short-term, but ultimately it will be to the long-term cost of the markets credibility: 

> While Newsom may feel that the carbon market is a politically convenient way to show voters that he is doing something about affordability, it does comes with risks. 

> Done correctly (not like in Canada) refunding money can support disadvantaged communities hit by high electricity prices. It can also bolster support for climate policy, as long as its also tied in with unblocking barriers to adopting low-carbon alternatives. Unfortunately, the loosening in the interim trajectory to 2030 is misguided, and may ultimately dent long-term confidence in the market for being so overtly politically motivated.

> The renewed focus on affordability is likely to mean that, whatever happens to Newsom and his Democratic nomination, talking about it and seen to be doing something about it means California's carbon price will remain under pressure for the remainder of this presidential term.

A new report provides a technical assessment of the adjustments presented at the 29th October workshop, outlining the potential outlook for the carbon price in California under a number of cap and emissions scenarios.

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### Walking the torque
URL: https://www.carbonrisk.world/walking-the-torque/
Last updated: 2025-11-26T12:00:07.000Z
Earlier this year, European electrical engineering company [ABB, announced ](https://new.abb.com/news/detail/126290/abb-motor-sets-new-world-record-by-achieving-9913-energy-efficiency?ref=carbonrisk.world)that one of its largest industrial electric motors had set a new world record, achieving an incredible 99.13% efficiency during testing. The previous record of 99.05%, also held by ABB had stood for eight years. 

This large synchronous electric motor was designed for a steel plant in India, and once installed it is expected to save almost $6 million in energy costs, and avoid 45,000 tonnes of CO2 emissions over the motors 25 year lifespan.

Industrial electric motors – of which there are thought to be 300 million operating globally – perform essential applications across industry, including pumping liquids, powering fans, and delivering compressed air. Consuming almost 7,000 TWh of power each year, industrial electric motors account for around one-quarter of global electricity use. 

Although ABB's latest innovation is an extraordinary example of technological progress, more mundane improvements in energy efficiency can be achieved by upgrading to newer, slightly more efficient electric motors. Switching all currently installed industrial electric motors to newer, more efficient ones offers immediate energy savings, estimated to be worth around 10% of global electricity consumption according to the International Energy Agency (IEA). 

The change can't come soon enough! Governments are desperately seeking to protect their industries from high energy costs, and relieve taxpayers from the burden of investing in upgraded grid infrastructure. The pressure doesn't stop there. Energy efficiency also has a central role to play in helping governments meet their climate targets.

Unfortunately, firms are often reluctant to upgrade to newer, more energy efficient electric motors. Before we understand why, and what governments can do about it, lets first take a step back and gauge how global energy efficiency is developing, and why industrial electric motors are so important.

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### Join the club
URL: https://www.carbonrisk.world/join-the-club/
Last updated: 2025-11-21T12:00:27.000Z
Every major climate agreement, from the 1997 Kyoto Protocol to the 2015 Paris Agreement, relies on disparate states voluntarily taking action to reduce their emissions to collectively help tackle climate change. Although a significant improvement on the mechanisms setup under Kyoto, the Paris climate accord does not confer any costs on countries that fail to meet their obligations.

As both Trump-led US-administrations have demonstrated, countries can, in extremis, simply withdraw from the agreement altogether without penalty. The outcome doesn't even have to be as stark as outright withdrawal. Once members perceive others as free-riding on the actions of more committed countries, the risk that the agreement unravels increases: lower emission reduction targets beget a rollback in ambition and climate action by others, and so on. In game theory terminology, individual countries have an incentive to defect on agreements involving public goods, resulting in beggar-thy-neighbour policies.

William Nordhaus, the Nobel prize winning economist, has been one of the most vocal critics of the voluntary architecture underpinning international climate agreements, [first making the case in 2015](https://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.15000001?ref=carbonrisk.world) (before the Paris COP) that governments should pivot to an arrangement with much stronger incentives to participate: the Climate Club.

To become a member, Nordhaus explains, governments would agree to implement climate policies that produce a minimum carbon price; whether through a carbon tax, cap-and-trade, or some hybrid model, and that it would gradually increase over time. The second important feature of the Climate Club (and the major departure from existing climate agreements) is that non-members would be penalised in some way, such that it is in the national interest of every country to participate, and it is in no-one's interest to defect and free-ride (see [*Free rider: Carbon border levies could trump US withdrawal from Paris*](https://www.carbonrisk.world/free-rider/)).

Rather than mess about with taxing the carbon content of imports, which Nordhaus argued would be ineffective and complicated, the economist called for a uniform percentage tariff to be placed on all imports into the Climate Club region from non-members. Nordhaus found that a high participation rate can be achieved even with relatively low tariff rates and carbon prices. However, once the carbon price increases above $50 per tonne CO2 (\~$68 in todays money), high penalty rates are required to induce participation, although after a certain point, countries are likely to decide to pay the tariff instead.

I'm sure the World Trade Organisation (WTO) would have something to say about it, but would anyone bother to listen? Anyway, I digress. A decade on from Nordhaus' original paper, could the Climate Club concept finally see the light of day as COP30 enters its final day and concerns over free-riding never far from the minds of negotiators? Let's dive in.

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### An article of faith
URL: https://www.carbonrisk.world/an-article-of-faith/
Last updated: 2025-11-19T12:00:55.000Z
The European Parliament has voted in favour of cutting net emissions by 90% compared to 1990 levels by 2050, backing an earlier agreement reached by the European Council. 

The plan also means that starting in 2036, up to 5% of the emission reduction can be achieved through the purchase of international carbon credits; an increase from the 3% proposed by the Commission in the summer. Essentially it means that the EU's domestic target now involves an 85% reduction in net emissions compared to 1990 levels. Still tough to achieve through domestic emission reductions, but not as bad, nor as costly, as aiming for a 90% reduction. 

### But wait! Wasn't this a disaster for the EU before?

Beginning in 2010, obligated emitters in the EU emissions trading scheme were allowed to use international carbon credits - those generated under the UN’s Clean Development Mechanism (CDM) and Joint Implementation (JI) programme - to offset up to 4.5% of their verified emissions.

There were two big problems.

First, the quantity limit of international credits turned out to be much too generous. The economic impact of the 2008/09 Great Financial Crisis (GFC), coupled with Japan’s retreat from its climate targets following the Fukushima nuclear accident in 2011 resulted in an enormous influx of cheap carbon credits, estimated to be in the region of 1.6 Gt CO2.

Second, the quality of the carbon credits was also found wanting. In 2016, The environmental research [non-profit Öko-Institut published a report](https://climate.ec.europa.eu/system/files/2017-04/clean%5Fdev%5Fmechanism%5Fen.pdf?ref=carbonrisk.world) in which it concluded that the “large majority of the projects registered and CERs \[Certified Emissions Reductions\] issued under the CDM are not providing real, measurable and additional emission reductions”, adding that the CDM has “fundamental flaws in terms of overall environmental integrity”.

The price of CER credits - remember they had monetary equivalence with EU emission allowances (EUAs) - dropped from €25 per tonne CO2 in 2008 to €10 per tonne CO2 in 2011, before then crashing to a low of €0.50 per tonne CO2 in 2012\. 

The knock-on impact on the EU carbon market still lingers to this day, despite policy interventions such as the Market Stability Reserve (MSR) that were introduced to curb the oversupply. Until 30th April 2021 it was still possible to use international carbon credits to meet compliance (for calendar year 2020), but thereafter the EU ETS has been solely based on a domestic emissions reduction target.

### Given that experience why has the EU now agreed to introduce international credits again? 

First, to help contain the cost of meeting Europe's 2040 climate targets. As the decision to delay ETS2 by one year, along with measures to keep a lid on its carbon price demonstrates, EU member states are acutely aware of the risk of a backlash if climate policies result in politically untenable price rises. As emissions abatement moves towards activities higher up the marginal abatement cost curve, the carbon price necessary to incentivise emission reduction will begin to escalate more rapidly (see [*Softening the blow*](https://www.carbonrisk.world/softening-the-blow/)).

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### Eyes on the prize
URL: https://www.carbonrisk.world/eyes-on-the-prize/
Last updated: 2025-11-17T12:00:52.000Z
The Science Based Targets initiative (SBTi) has been the go-to arbiter of corporate climate action for almost a decade. Setup in the aftermath of the 2015 Paris COP, SBTi is the most widely recognised global standard for setting corporate emissions reduction targets in line with the Paris Agreement. By enforcing rigorous criteria, SBTi ensures companies shift from mere carbon reduction ambitions to credible, science-based climate action.

By mid-2025, almost 11,000 companies (representing over 40% of global market capitalisation and 25% of global revenue) had either [set an SBTi approved target, or committed to doing so over the next couple of years](https://sciencebasedtargets.org/news/227-jump-in-companies-setting-comprehensive-climate-targets-as-corporate-climate-planning-accelerates?ref=carbonrisk.world). The number of companies with SBTi targets has almost doubled since the end of 2023 with Asia, and China in particular seeing the highest proportional growth (up 134%). The industrials, consumer goods, and materials sectors are leading the charge, accounting for nearly one-third of the global total. Over 1,400 corporates had set net zero targets, representing 38% of all corporates with SBTi targets, an increase from 17% in 2023 as corporations signal rising ambition despite the negative political backdrop.

[Analysis by MSCI](https://www.msci.com/research-and-insights/paper/smoke-signals-finding-leading-indicators-of-corporate-decarbonization?utm%5Fproduct%5Fline=climate&utm%5Fctype=paper&utm%5Fcorder=standalone&utm%5Fmsgid=100008731132248&ref=carbonrisk.world) found that companies which had set SBTi targets during the period 2018 to 2023, decarbonised faster on average than firms without targets, irrespective of the region in which they were based. The scale of global corporate activity covered by SBTi commitments and the strength of the ambition shown by signatories illustrates its potential for positive change.

In February last year though, SBTi announced it would be revising its Corporate Net Zero Standard (CNZS), the set of criteria that companies have had to follow when setting targets. The aim being to ensure the standard is more accessible to a wider range of companies, to improve the clarity of its value chain emission requirements, and to make it more transparent and accountable. 

SBTi is not without its critics. Many have been concerned that the organisation has not been sufficiently transparent in its decision making process, are worried about potential conflicts of interest, and often exasperated at the time necessary to assess and approve individual companies net zero plans. Whole climate industries can flourish, or flounder, on SBTi's signal, and in the meantime, as it deliberates the next version of its CNZS, there's a risk that corporates take a backseat amid the uncertainty.

Lets take a look at what the latest CNZS draft reveals.

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### "Affordability" narrative weighs on California's carbon market
URL: https://www.carbonrisk.world/why-affordability-now-trumps-climate-in-california/
Last updated: 2025-11-25T10:11:46.000Z
On 10th September California's governor Gavin Newsom and the state's legislative leaders [announced that an agreement had been reached](https://www.gov.ca.gov/2025/09/10/governor-newsom-legislative-leaders-announce-major-deal-to-save-money-on-electric-bills-stabilize-gas-market-cut-pollution/?ref=carbonrisk.world) reauthorising the now renamed Cap-and-Invest Program. Nine days later Newsom signed bill AB 1207 into law, formally extending the carbon pricing mechanism to 2045\. 

Although CCA futures price surged above $30 in the immediate aftermath of the announcement, the market has remained languid ever since. The poor performance foiling those who suggested that reauthorisation would quickly see a rapid upward readjustment in the CCA price. A case of buy the rumour, sell the fact maybe. More likely traders were instantly looking ahead and pricing in the rapidly evolving political narrative, not liking what they saw. 

To see why we have to look at what is happening in electoral battlegrounds elsewhere in America. Last week's victories by Democratic candidates (to be the next mayor of New York City and governors of New Jersey and Virginia) were arguably built on campaign promises to address the cost of living; whether that be housing costs, electricity bills, or something else. One key word captures the concerns of voters and the angst that the victors - Mr Mamdani, Ms Sherrill, and Ms Spanberger respectively - tapped into: "affordability". 

In a recent article, co-writer of the book *Abundance*, [Derek Thompson argues that it's no use just talking about affordability](https://www.derekthompson.org/p/the-democrats-new-formula-the-affordability?ref=carbonrisk.world) between now and November 2028, the Democrats need to demonstrate that where they can at least help control the outcome, their actions have made a difference: 

> "Affordability is good politics, and a Democratic Party that focuses on affordability at the national level, and supports motley approaches to solving the cost-of-living crisis at the local level, is in a strong position going into 2026\. But saying the word *affordability* over and over doesn’t necessarily guarantee good policy outcomes. In fact, it doesn’t guarantee anything. Which is why at some point on the road back to relevance, the Democratic Party needs to become obsessed with not only winning back power but also governing effectively in the places where they have it."

It's here that we come back to California. It's clear that Gavin Newsom, who once insisted that he had “sub-zero interest” in running for the White House, is now finally recognising his presidential ambitions. Newsom is the [current favourite to be the Democratic nominee at the next presidential election in 2028](https://www.betfair.com/exchange/plus/politics/market/1.246060364?ref=carbonrisk.world). Newsom no doubt realises that affordability - and demonstrating he can do something about it - could become a pivotal factor in him achieving his goal of becoming the next president. The price of electricity is likely to be one of the key indicators upon which he will be judged.

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### New Zealand's carbon price slumps as confidence cracks
URL: https://www.carbonrisk.world/new-zealands-carbon-price-slumps-as-confidence-cracks/
Last updated: 2025-11-07T12:00:16.000Z
> “It takes many good deeds to build a good reputation, and only one bad one to lose it.” - Benjamin Franklin

A cap-and-trade scheme aligned with the Paris Agreement climate targets is the most efficient way of getting to net zero. If market participants trust the governments commitment to cut the annual cap in line with the net zero target, the carbon price will move to a level necessary to incentivise the required emission abatement.

New Zealand is one of only a few carbon pricing mechanisms with an absolute cap on emissions, in which its trajectory is aligned with that jurisdictions legally binding net zero target. The others being the EU ETS, the UK ETS, and the California Cap-and-Invest Program. New Zealand's legal commitment to reach net zero by 2050 is enshrined in the Zero Carbon Act (ZCA) of 2019.

In [notice issued](https://environment.govt.nz/news/government-announces-a-series-of-changes-to-nzs-climate-change-law/?ref=carbonrisk.world) late Tuesday evening, the New Zealand government announced a series of changes to the country's climate change law to "ensure it is working well and as intended." However, in a surprise move the government announced that it will remove "the provision within the Act that states the NZ ETS unit volumes and price control regulations must ‘accord with’ our Nationally Determined Contributions \[NDCs\] under the Paris Agreement." 

By loosening the direct link between the regulations underpinning New Zealand's emissions trading system and its NDC the move opens the door for short-term political or economic considerations to outweigh long-term climate considerations. Essentially this could mean that the government might decide to reduce the annual rate at which the emissions cap declines - if the powers that be see fit that its in their interests.

Remember, that a strong carbon price is a signal that investors, businesspeople, and citizens trust their government’s commitment to combat climate change. A weak carbon price delivers the opposite signal; namely that the market has little trust in the government’s commitment. In the same way that trust in individual currencies supports investment, innovation and trade, trust in the carbon market helps to bring about the capital, skills and long-term planning that is required to help meet decarbonisation goals.

The New Zealand Unit (NZU) is the country's 'Currency of Decarbonisation'.

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### Softening the blow
URL: https://www.carbonrisk.world/softening-the-blow/
Last updated: 2025-11-05T12:15:38.000Z
In today's article I discuss the decision by the German government to subsidise the industrial electricity price from early 2026\. Whether it leads to a rejuvenation in the country's battered industrial heartland and increases demand for EUAs is another matter. I fear that something more fundamental is wrong with the German economic model than merely just its historical reliance on cheap Russian natural gas. 

The pressure to limit cost increases is everywhere, and politicians are acutely aware that their re-election prospects will take a nosedive if consumers have to swallow more price hikes. It's in that context that efforts to restructure the EU's second emissions trading scheme, ETS2 should be seen. Nevertheless, the proposed reforms should mean the carbon price on heating and transportation has a much stronger chance of success than other countries (see [*Why Canada should reform its carbon tax*](https://www.carbonrisk.world/why-canada-should-reform-its-carbon/)).

Europe's policymakers have been looking at the longer-term picture out to 2040\. It may seem too distant in the future to make a difference to carbon prices today. However, without a credible and strong 2040 target investors may struggle to commit capital. The EU's 2030 plan, outlined in the 'Fit-for-55' targets was instrumental in establishing confidence in the EU carbon market. Investors will no doubt work back from what's expected in 2040 and price accordingly.

Finally, I return to the short-term, checking in on the latest Commitment of Traders report (w/e Friday 31st October) and try to unpick how speculators are positioned. 

### Power play

On Monday morning the German government announced that it is set to introduce a discounted "industrial electricity price" on 1st January 2026, aimed at stemming the decline in German industrial production and returning the country to economic growth.

The statement resulted in a decisive break through the €80 level on the Dec-25 EUA futures contract, jumping \~€3.50 (4.4%) to a high of €82\. The bet being that lower industrial power prices will invigorate growth in energy intensive manufacturers, leading to an increase in power generation emissions, and in the meantime, sparking fresh EUA hedging demand. Traders also pushed German baseload power prices higher on the news, prompting it to also break out of the consolidation pattern it has been in for the past few months. 

In a way the news isn't really news at all. The previous German government had attempted to push through a similar scheme, but faced pushback from coalition partners. The new government - led by Friedrich Merz’s CDU and the Social Democrats (SPD) - enshrined the industrial electricity price in their coalition agreement, signed back in early May.

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### The Green Premium chimera
URL: https://www.carbonrisk.world/the-green-premium-chimera/
Last updated: 2025-11-03T12:00:34.000Z
[Bill Gates' latest article](https://www.gatesnotes.com/home/home-page-topic/reader/helping-the-worlds-poorest-adapt-to-climate-change?ref=carbonrisk.world) argues that there are three tough truths about climate that everyone at COP30 needs to know: 1) climate change is a serious problem, but it will not be the end of civilisation, 2) temperature is not the best way to measure our progress on climate, and 3) health and prosperity are the best defence against climate change. 

It's clear that you can't reboot the planet if you crash it, [as one riposte to Gates' article put it last week](https://thebulletin.org/2025/10/you-cant-reboot-the-planet-if-you-crash-it/?ref=carbonrisk.world), but tackling climate change using the 'everything, everywhere, all at once' approach misses the point that resources are scarce and subject to competing demands. Whatever your view, what's important in my mind is the recognition that everything, including the options available for climate mitigation, involves trade-offs, and we need to be really clear about what we're actually trying to solve for.

For COP30 and beyond, Gates sees two priorities that he hopes the climate community will embrace if, as he suggests, we put human welfare at the centre of climate strategies: rigorous impact measurement, and driving the Green Premium to zero. It's this second priority that we focus on in this article.

> At each COP, governments take turns announcing commitments to lower their emissions. Unfortunately, this process doesn’t tell us which technologies are needed to meet those commitments, whether we have them yet, or what it will take to get them.

> This is why, in addition to country-by-country commitments, every COP should have high-level discussions and commitments based on the five sectors \[electricity, manufacturing, agriculture, transportation, and buildings\]. Policies and innovations in each sector need to get more visibility. Representatives from each of the five sectors should report on progress toward affordable and practical zero-carbon innovations, using the Green Premium as their yardstick.

[Gates defines the Green Premium](https://www.gatesnotes.com/meet-bill/accelerate-climate-innovation/reader/introducing-the-green-premiums?ref=carbonrisk.world) as the difference in cost between a product that involves emitting carbon, and an alternative that doesn’t. Although Gates recognises that it is an imperfect measure, he believes that understanding the Green Premium is key to making progress on climate change: 

> For one thing, they help us measure our progress toward eliminating carbon emissions. The bigger a Green Premium is—especially for lower-income countries like India and Nigeria whose energy needs are growing—the further we are from a zero-carbon future.

> They also serve as a guide to action. In cases where the Green Premiums are big, we know we need innovations that will close the price gap. In cases where they’re small—or where clean products are actually cheaper than the polluting version—it suggests that something other than the cost is keeping zero-carbon products from being deployed, and we need to understand why.

Carbon prices raise the cost of carbon intensive products, increasing the incentive to invest in decarbonisation and bridge the Green Premium. However, carbon pricing signals alone are often insufficient (and sometimes too volatile) to build the case to invest in new low-carbon production processes. 

Strong lead market measures, including public procurement, demand-side support mechanisms (i.e., subsidies, grants, and tax credits), and product uptake mandates - alongside a strong carbon pricing signal - provide a bankable, long-term revenue stream to investors, increasing their confidence to support supply-side investments.

However, as this article hopes to demonstrate, another trade-off exists, one that wasn't so prominent when renewable energy's Green Premium was first being tackled. 

You can begin to close the Green Premium by simply sourcing the cheapest green material inputs, irrespective of where they are produced. That strategy helped China to develop the manufacturing capability necessary to mass produce solar PV cells and eliminate the renewable energy Green Premium. 

But it also left other nations such as those in Europe, unable to compete in the production of the latest clean technologies, leaving them dependent on Chinese imports. In a change from the past Europe now hopes to achieve both strategic autonomy, building up its domestic green manufacturing capabilities, while also driving down the Green Premium for low-carbon industrial inputs.

Can it achieve two objectives simultaneously? The omens are not good. 

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### Amping up
URL: https://www.carbonrisk.world/amping-up/
Last updated: 2025-10-30T11:00:39.000Z
Tapping renewable energy to make the fossil fuel industry greener is one of the more controversial aspects of the transition to a lower carbon world. Norway has been a pioneer, replacing diesel and gas fired generators onboard its offshore rigs with electricity generated by the country's hydroelectric power plants. 

The first offshore natural gas project to be electrified at start-up was Troll A in 1996, and ever since the early 2000's the Norwegian authorities required operators to consider 'power from shore' as an energy solution. Fully electrified rigs on the Norwegian Continental Shelf (NCS) now emit 1.2 kilograms of CO2 per barrel of oil equivalent (kgs of CO2 per boe), down 86% from the 8.4 kgs of CO2 per boe emitted by the same assets before electrification.

Much of the attention on electrification is focused elsewhere, replacing fossil fuel generation with renewables, electrifying transportation, and installing heat pumps in buildings. However, as emissions from these sectors decline, the share of emissions from other sectors, ones that are more difficult to electrify, will loom larger in the eyes of policymakers and investors.

[Rhodium's latest Climate Outlook](https://cdn.prod.website-files.com/653849ffd0d3cde21bf6059f/670471d31a4fdf3a14800d5f%5FRhodium%20Climate%20Outlook%202024%5FProbabilistic%20Global%20Emissions%20and%20Energy%20Projections.pdf?ref=carbonrisk.world) (published in October 2024) indicates that by 2050, global industrial emissions will equal all emissions from power, transportation, and buildings combined. Oil and gas production is currently the most important industrial sector requiring decarbonisation, accounting for 28% of global industrial emissions in 2022\. Rhodium expects oil and gas production to continue to be the main source of industrial emissions in 2050, and even more so through to 2100\. 

Rhodium's next Climate Outlook (due to be published ahead of the COP30 meeting in Brazil this November) is likely to show that oil and gas production emissions will account for an even larger share, reflecting the change in the US administration, and more broadly, the escalating energy security and affordability concerns observed over the past 12-18 months. A [recent report by McKinsey](https://www.mckinsey.com/industries/energy-and-materials/our-insights/global-energy-perspective?ref=carbonrisk.world#/) gives a clue as to the changing dynamic, projecting that fossil fuels will still account for between 41% and 55% of global energy consumption in 2050\. Although this represents a decline from levels today (\~64%), fossil fuels are expected to play a dominant role until 2050, and perhaps well beyond.

Although critics have a valid point when they say that focusing on emissions from fossil fuel production (Scope 1 and 2) is pointless when the bulk of their emissions arise further down the supply chain (Scope 3), the projections from Rhodium, McKinsey and others suggest that this is a risky strategy. Far better to make fossil fuel production as clean as possible, no matter what actually happens to end demand.

With that context in mind, lets return to the cold, dangerous waters of the Norwegian North Sea to see what lessons we can learn from the pioneer of electrification, and what the future might hold based on developments several thousand miles further south, off the coast of Brazil.

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### Escaping hells kitchen
URL: https://www.carbonrisk.world/escaping-hells-kitchen/
Last updated: 2026-03-27T17:53:03.000Z
Almost 2.5 billion people, approximately one-third of the global population, cook their meals on open fires or basic stoves, burning wood, agricultural wastes, charcoal, or even animal dung. The smouldering biomass releases harmful pollutants such as small particulate matter that accelerates respiratory and cardiovascular disease, and contributes to around 3.7 million premature deaths each year.

Although the situation has improved in recent years, many lower-income parts of the word remain heavily exposed to indoor air pollution from cooking. The region with the highest rate of exposure is Africa, where 40% of people are exposed to indoor air pollution from solid biomass fuels, followed by Asia on 15-20%.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/10/image-27.png)

Traditional biomass stoves are extremely inefficient with only 10-20% of primary energy converted to useful heat. More efficient biomass stoves can increase fuel efficiency to around 50%, with the degree to which they reduce emissions dependent on the sustainability of the biomass harvested to fuel the stove - a factor known as the fraction of non-renewable biomass (fNRB).

The next most efficient means of cooking (converting 40-60% to useful energy) are stoves fuelled by biogas or LPG. The latter has the advantage of being easy to transport and store in pressurised cylinders. It also emits around half as much GHG's as the average traditional biomass stove. Biogas stoves offer the highest potential emission savings, but the fuel supply is often unreliable with stoves an expensive upfront cost. 

Conductive electric stoves deliver up to 80% efficiency with inductive stoves maxing out at 90%. Aside from the high cost of electric stoves, the main challenge is access to a reliable supply of electricity, and where it is available, the degree to which the grid is powered by low carbon generation. For example, around 75% of the population of Sub-Saharan Africa lack access to electricity, although this is likely to improve as solar panels combined with batteries come down in price.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/10/image-28.png)

Source: ETC

[The International Energy Agency (IEA) estimates](https://iea.blob.core.windows.net/assets/180b8bee-3d30-4436-abe0-9e93ca56b0bd/AVisionforCleanCookingAccessforAll.pdf?ref=carbonrisk.world) that achieving universal clean cooking by 2030 could reduce GHG emissions by 800 Mt CO2e per year, plus an additional 700 Mt CO2e per year due to avoided deforestation. The IEA's estimate excludes black carbon, a short-lived aerosol emitted when burning biomass with a 20-year warming impact up to 4,500 times greater than CO2\. As such, clean cooking is likely to make a significant difference in slowing near-term global warming as well as longer-term climate change.

How much does this cost? At the moment, annual investment in clean cooking is estimated to be around $2.5 billion, of which a fraction (\~7%) is directed at the region most at need, Sub-Saharan Africa. The IEA thinks that annual investment in clean cooking will need to rise to $8 billion between now and 2030 to achieve universal access. A cumulative investment of around $60 billion, of which almost 80% would be spent on advanced stoves. Working out at \~$40 per tonne CO2, universal clean cooking is one of the most effective carbon abatement opportunities around.

Yet despite the potential climate benefits, cookstove projects only account for a mere 5% of the carbon credits issued during the past 20 years. While large Asian economies such as India and China have paired dedicated public funding with private investment to move towards clean cooking, that option isn't available to parts of Africa with high debt burdens. Since 2024 almost 80 million cookstove carbon credits have been issued, with Sub-Saharan Africa accounting for more than two-thirds of the project supply.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/10/image-25.png)

Source: IEA

Scoring the cookstove carbon credit projects against measures of integrity (i.e., whether they are real, measurable, and additional), it's clear that the risk of additionality is very low. Advanced, efficient cookstoves are often unaffordable for households in rural areas in developing countries. Revenues generated from the sale of cookstove carbon credits allow project developers to subsidise cookstoves or distribute them for free, removing a key barrier to their adoption. [Analysis by Calyx Global](https://calyxglobal.com/research-hub/research/cooking-up-quality-carbon-credits-from-efficient-cookstove-projects-face-integrity-issues-worth-fixing/?ref=carbonrisk.world), a carbon credit ratings agency, indicates that over 80% are likely to be additional. 

Nevertheless, additionality alone isn't sufficient to ensure a high integrity carbon credit. A [study published in 2024 and carried out by the University of California](https://rael.berkeley.edu/wp-content/uploads/2024/07/Gill-Wiehl-Kammen-Haya-Cooking-the-Books-Nature-Sustiainability-2024.pdf?ref=carbonrisk.world) uncovered substantial over-crediting of cookstove credits: \~9 times larger than estimated real emission abatement. The majority of the over-crediting arises due to a lack of rigour in how methodologies determine the fraction of non-renewable biomass (fNRB), firewood-charcoal conversion factors, and tracking fuel consumption and cookstove usage. 

The analysts found projects using [Gold Standard’s Metered methodology (first published in 2021)](https://globalgoals.goldstandard.org/standards/431%5FV1.2%5FEE%5FICS%5FMethodology-for-Metered-and-Measured-Energy-Cooking-Devices-1.pdf?ref=carbonrisk.world), which directly monitor stove use and fuel consumption, to be most aligned with their estimates: \~1.5 times over-credited. The results suggest that if the market stops using outdated methodologies, and instead employs advanced metered stoves then there will be significantly less risk of over-crediting. [The Integrity Council for the Voluntary Carbon Market (ICVCM) has approved](https://icvcm.org/integrity-council-approves-three-cookstove-methodologies/?ref=carbonrisk.world) three new cookstove methodologies this year, hoping to boost confidence among buyers in the credits generated.

The problem is that at present the market is not rewarding cookstove project developers. Buyers are still stuck in the out-dated methodologies mindset where over-crediting was rife and the carbon credit price was commensurately low. [Analysis by UK-based platform Abatable](https://abatable.com/blog/a-new-era-for-high-quality-carbon-avoidance-the-new-floor-price-for-cookstove-carbon-credits/?ref=carbonrisk.world) suggests that won't work any longer if the market is going to continue to have impact. 

The chart below shows the development cost per cookstove carbon credit under different methodologies: from inexpensive legacy approaches using the most basic stove, through to the most expensive and latest metered methodologies using advanced cookstoves. Where available Abatable have charted the median spot price (as of April 2025) to show whether or not developers generate a return. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/10/image-29.png)

It shows that high impact projects involve significantly greater development costs (2-4 times higher), yet the prices at which buyers are currently paying do not reflect the higher costs involved. If as Abatable suggests, developers need to secure a 2X return on investment (double the realistic development costs) in order to break even, then the spot price would need to be at least $15-25 per tonne CO2 for advanced biomass and LPG stoves, and perhaps more than $40 per tonne CO2 for bio-pellet stoves.

What's needed is a change in the narrative, and on that front things are starting to happen. Even the [most vociferous of carbon credit critics](https://www.annualreviews.org/content/journals/10.1146/annurev-environ-112823-064813?ref=carbonrisk.world#right-ref-B10) now acknowledge that some VCM approaches - such as carbon dioxide removal (CDR), landfill gas capture, and advanced cookstove methodologies - "do not suffer from the same fundamental problems that have characterised the rest of the offset market to date." In turn, ratings agencies such as Calyx Global are reporting that although new cookstove credit issuances have dropped, there is a sector-wide shift towards higher GHG integrity.

The share of households in Sub-Saharan Africa exposed to high levels of indoor air pollution from cooking is stubbornly high. In the absence of government or institutional funding, carbon markets are going to be essential if the poorest people in the world are to escape hells kitchen. Combine that with 1.5 Gt CO2 of emission abatement, at a cost of just $40 per tonne CO2, and cookstove carbon credits starts to look like a compelling investment. 

[Want to read more? Start here](https://www.carbonrisk.world/table-of-contents-start-here/)

[Blue sky thinkingAs climate policy splutters, governments should sell the benefits of clean air![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/icon/Green-Nature-Tree-and-Root-Logo-Template--60-x-60-px--7.jpg)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/thumbnail/photo-1580207868427-f019836acf26-1)](https://www.carbonrisk.world/blue-sky-thinking/)
### Nature for sale
URL: https://www.carbonrisk.world/biodiversity-credits-and-offsets-are-a-distraction/
Last updated: 2025-10-23T11:00:44.000Z
> "While the costs cannot be precisely calculated, treating nature’s economic value as zero is tantamount to considering it as a 'free good'. This sustains a huge flaw in the global financial system." - Hank Paulson, founder and chairman of the Paulson Institute

The Global Biodiversity Framework (GBF), adopted at the UN Convention on Biological and Diversity COP15 in 2022, set a target that by 2030, at least 30% of degraded terrestrial, inland water, and marine and coastal ecosystems would become protected areas. Unfortunately, progress has largely stalled with just 17.6% of the land and 8.4% of the ocean estimated to be under effective restoration - well short of the so-called 30x30 target. 

The global biodiversity financing gap is defined as the projected annual funding deficit required by 2030 to sustainably manage biodiversity and maintain the integrity of ecosystems, and in turn help achieve the GBF's target. The gap is estimated to have increased from $711 billion per year in 2020 to $942 billion per year in 2024, according to the [interim 2025 Financing Nature report](https://www.paulsoninstitute.org/conservation/financingnature2025/?ref=carbonrisk.world) published by the Paulson Institute, equivalent to 0.8% of global GDP in 2024.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/10/image-11.png)

Source: Paulson Institute

The [2020 Financing Nature report](https://www.paulsoninstitute.org/conservation/financing-nature-report/?ref=carbonrisk.world) by the Paulson Institute identified the most promising mechanisms to close the biodiversity financing gap, split into two categories: those that reduce harm to biodiversity, and those that generate funding to protect or restore biodiversity. Of the mechanisms that could reduce the overall biodiversity funding gap, the reform of harmful subsidies was identified as the single most important measure. 

Governments often subsidise the production of agriculture, forestry, and fishing (AFF) to reduce reliance on imports, ensure access to export markets, and protect jobs. By artificially lowering the cost of production subsidies tend to promote monoculture, and incentivise the excessive use of fertilisers and pesticides. Although they lead to an increase in production, subsidies tend to result in an increase in deforestation and biodiversity loss. 

The GBF set a goal of reducing harmful subsidies by $500 billion annually by 2030\. Alas, the problem has got bigger, not smaller, adding to the growing biodiversity funding gap. Government subsidies on AFF are estimated to have risen by more than 50% over the past five years to $840 billion in 2024 (see [*Fuelling controversy: Fossil fuel subsidies act like a negative carbon price*](https://www.carbonrisk.world/everything-you-need-to-know-about-232/)). 

On the other side of the financing gap, funding dedicated to protecting or restoring biodiversity has increased by more than half since 2020, but only to $208 billion per year. In order to close the global biodiversity financing gap by 2030, funding will need to rise five-fold in a similar time frame.

The 2020 Financing Nature report singled out biodiversity offsets as potentially the most important mechanism for increasing capital flows into biodiversity conservation. The Paulson Institute projected that funding via this mechanism would increase from $6-9 billion per year in 2019 to \~$165 billion by 2030\. 

Note the term 'biodiversity offsets'. The GBF obliges its 196 state signatories to mobilise and leverage financing through “innovative schemes such as…biodiversity offsets and credits”. I'll come to what offsets means in this context in a minute, but for now lets narrow the term to 'biodiversity credits'.

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### Looking through it
URL: https://www.carbonrisk.world/looking-through-it/
Last updated: 2025-10-20T14:00:44.000Z
> “Central banks, in turn, will have to assess whether the green transition poses risks to price stability and to which extent deviations from their inflation target due to a rise in the contribution from energy to headline inflation are tolerable and consistent with their price stability mandates.” **\-** European Central Bank economist Isabel Schnabel, speaking in 2022

While Europe's politicians argue over scrapping the 2035 ban on new internal combustion engine (ICE) cars and whether to allow international carbon credits to meet the 2040 emission targets, a nearer-term source of potential political risk is a new carbon pricing mechanism called ETS2\. From 2027 onwards it will cover emissions from fuels used in building and transport, responsible for more than one-third of the European Unions emissions.

Earlier this year I published an article warning that the ETS2 price could rapidly breach €100 per tonne CO2\. Although allowances from 2029-2031 are being front-loaded for the period up to May 2028, the low cap level relative to emissions, and the strong linear reduction factor (5.38% per year from 2028) means that a sustained and growing deficit is likely to occur by 2030 (see [*ETS2 carbon price could rapidly breach €100: Europe's second carbon market is expected to be very sensitive to emission allowance scarcity*](https://www.carbonrisk.world/ets2-carbon-price-could-rapidly-breach/)). 

The lack of surplus ETS2 allowances on the market means the carbon price could push higher very quickly, perhaps even well beyond that necessary to abate emissions from heating or transportation. The [latest projections from Veyt](https://veyt.com/eu-ets-2-analyst-update-oct-2025/?submissionGuid=d2e75937-0024-45a5-aab5-3450f8b4d44b&ref=carbonrisk.world) put the ETS2 price at around €85 per tonne CO2 in 2027 (broadly inline with initial trading in the Dec-28 ETS2 futures contract), surging to €147 per tonne CO2 in 2030, and then rising to €211 per tonne CO2 in 2034\. 

Last week, [Carbon Pulse report that a draft letter](https://carbon-pulse.com/445885/?site=cpp&ref=carbonrisk.world) addressed to European Commission President Ursula von der Leyen, and backed by several EU countries, calls for the "targeted postponement" of ETS2, "at least until 2030." It follows an [earlier joint warning](https://carbon-pulse.com/wp-content/uploads/2025/06/Joint-Non-paper-ETS2%5Fupdate.pdf?ref=carbonrisk.world), issued by 16 predominantly eastern European member states in June, warning that ETS2 could impose heavy costs on communities and risk a public backlash, unless improvements are introduced that address concerns about price uncertainty and high prices. 

A recent [study published in the *Energy Policy* journal](https://www.sciencedirect.com/science/article/pii/S0301421525003982?via%3Dihub&ref=carbonrisk.world#abs0010) shines a light on the regional inequality of ETS2 and why their governments have reason to worry. The researchers examined the distributional impacts of a $100 per tonne CO2 price on household heating and transportation spending across 1,160 regions of the EU. The strongest negative impacts are observed in low-GDP regions in central and eastern Europe, especially Poland, Bulgaria, Hungary, and Slovenia. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/10/image-22.png)

Rural households reliant on fossil fuels for heating (such as Poland where burning coal for heating is commonplace), and those with limited low-carbon infrastructure (for example, Bulgaria where there is limited rural public transportation) face a disproportionately high burden; 0.3 to 31 times higher than their urban counterparts (see [*Europe must learn from Canada's 'price on pollution' debacle*](https://www.carbonrisk.world/a-cautionary-tale/))[](https://www.carbonrisk.world/author/peter-sainsbury/). 

It's no wonder the policy has got the attention of governments in eastern Europe, but as we'll see, any attempt to delay or add flexibility to ETS2 has important implications beyond climate policy. The potential impact on energy prices is fast becoming an important factor determining the eurozone's monetary policy too. 

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### Climate change is showing its claws - it's time to adapt
URL: https://www.carbonrisk.world/climate-change-is-showing-its-claws-its-time-to-adapt/
Last updated: 2025-10-16T11:00:36.000Z
> *“Adaptation, by building resilience to climate impacts, avoids damaging decreases in income." - Nicholas Stern*

The Earth has reached its first catastrophic tipping point linked to rising GHG emissions.

[The Global Tipping Points report](https://news.exeter.ac.uk/research/new-reality-as-world-reaches-first-climate-tipping-point/?ref=carbonrisk.world), led by the University of Exeter warns that warm water coral reefs now face long-term decline, risking the livelihoods of hundreds of millions of people. The reports authors caution that unless we return to global mean surface temperatures of 1.2°C (+2.16°F) the reefs will not be retained on any meaningful scale. 

While the loss of warm water reefs and the knock-on impact on fishing, tourism, and coastal protection paints a disturbing picture, it's difficult to ascertain what it means versus the economic incentive to mitigate climate change. It's why the net economic damage resulting from an incremental tonne of carbon dioxide (CO2) released into the atmosphere is often boiled down to one figure - the social cost of carbon (SCC). 

Previous SCC estimates, such as that produced by the economist William Nordhaus, focused on country-level local temperature variations and typically found that a 1°C temperature shock reduces global GDP by at most 1-3% in the medium term. In 2017 Nordhaus estimated that the SCC in 2010 was $31 per tonne, or almost $50 now once you factor in inflation, while suggesting that the optimal level of global warming was just over 4°C.

A [paper published last summer by economists at Harvard and Northwestern University](https://www.nber.org/system/files/working%5Fpapers/w32450/w32450.pdf?amp%3Butm%5Fmedium=PANTHEON%5FSTRIPPED&%3Butm%5Fsource=PANTHEON%5FSTRIPPED&ref=carbonrisk.world) focused instead on global temperature shocks predicting a larger and more persistent rise in the frequency of extreme climatic events. Employing long-term data on global economic growth and average annual temperatures, the researchers estimate the SCC to be more than 20-times larger, at more than $1,000 per tonne of CO2, with each additional 1°C of warming likely to lead to a 12% fall in global GDP.

Were it not for the Earth already having experienced 50 years of warming, the researchers contend, our society would been 37% better off than it is today. Past performance doesn't necessarily equal future performance of course. As the planet warms [the likelihood that further tipping points are breached rises](https://wmo.int/news/media-centre/carbon-dioxide-levels-increase-record-amount-new-highs-2024?ref=carbonrisk.world), increasing the probability of a non-linear relationship developing between temperature changes, climatic conditions, and the resulting impact on economic activity. In other words, the tail risks keep getting fatter.

But what to do? One side of the economic cost of climate change coin is the need to invest in climate mitigation; renewables, electrification, decarbonising heavy industry, etc. The other side of the coin is adaptation and resilience; enabling our societies to weather the impact of more extreme climatic events (both that experienced in the present and projected to occur in the future), ameliorating the potential hit to economic activity. 

The two sides don't necessarily have to be mutually exclusive. A richer, more advanced global economy means more resources can be directed at mitigation as well as adaptation. Focusing just on the former, and neglecting the latter, risks leaving a world unable to do either, with the poorest parts of the world most exposed. And besides, as we'll see, the returns on investment in adaptation can be significant and on a much shorter timescale than mitigation.

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### Gas pains
URL: https://www.carbonrisk.world/methane-2/
Last updated: 2026-07-11T06:38:51.000Z
Methane traps \~30 times as much heat in the atmosphere over a 100 year period than carbon dioxide (CO2). Over 20 years however methane's (CH4) global warming potential is \~80 times greater than that of CO2.

CH4 is one of the climate super-pollutants, a group of atmospheric pollutants that have climate effects far greater than CO2, but which also result in other adverse environmental and health effects. The list of super-pollutants also includes tropospheric ozone, hydrofluorocarbons (HFCs), nitrous oxide (N2O), and black carbon.

In contrast to CO2 (which has an atmospheric lifetime measured in the centuries and where controlling the stock in the atmosphere determines the maximum extent of global warming), the super-pollutants are a flow problem (short-lived, and super powerful, they have an outsized impact on how fast the planet warms over the next few decades). 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/10/image-13.png)

Source: Climate and Clean Air Coalition 

Of these potent greenhouse gases (GHGs), CH4 is thought to be responsible for nearly half of net global warming to date. Tackling this one super-pollutant is the fastest way to slow down the rate of warming in coming decades. Yet [analysis by the Climate Policy Initiative (CPI)](https://www.climatepolicyinitiative.org/publication/the-landscape-of-methane-abatement-finance/?ref=carbonrisk.world) shows that finance for methane abatement measures represented less than 2% of total climate finance flows.

What do recent developments in economics, commodity markets, and climate policy say about the current state of methane abatement, and where we might be heading? Let's dive in.

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### Repost: Coming of age
URL: https://www.carbonrisk.world/coming-of-age-2/
Last updated: 2025-10-10T08:04:27.000Z
*Carbon credits representing 98 Mt of CO2 avoided, reduced, or removed were retired during the first half of 2025,* [*according to MSCI Carbon Markets*](https://www.bloomberg.com/news/articles/2025-09-30/traders-in-co2-credits-are-positioning-for-a-huge-growth-wave?ref=carbonrisk.world)*, up 12 Mt of CO2 (13%) from levels two years ago. It's a remarkable turnaround for an industry that has been in the doldrums ever since a sentiment driven boom turned sour in the early 2020's.* 

*Emerging compliance carbon pricing mechanisms, particularly in Asia, are underpinning the revival in corporate use of carbon credits. A trend that is set to accelerate between now and 2030 according to Hannah Hauman, global head of carbon trading at Trafigura:*

> *“Historically, 80% of the market has been voluntary in nature, but what we see changing now very substantially is that flipping where within the next few years, 80% of the demand is actually regulatory based, not voluntary based.”* 

*Indeed, the term 'voluntary' increasingly feels disconnected from both the current realities facing the carbon credit market, and the emerging consensus as to how its future is likely to evolve. The market is underpinned by verification: research, monitoring, reporting, auditing, and engagement. Rather than using the term 'voluntary', more and more stakeholders are coming round to the view that 'verified' carbon market makes a lot more sense.*

*Not all carbon credits are equal of course, based as they are on individual projects, each with their own unique challenges and risks to delivery. The gradual harmonisation of methodologies, labelling, and ratings towards higher standards should now move the sector towards something that resembles todays physical commodity markets. As participants in the latter know all too well, trust is the bedrock to any well-functioning market - the carbon market is no different*.[](https://www.carbonrisk.world/author/peter-sainsbury/)

*In the article below, first published in December last year, I explain why the evolution of carbon credits fits a pattern of financial innovation mirrored by other asset classes such as the expansion of the commodity futures derivative market. The latter boosted liquidity, led to the securitisation of commodities, and enabled buyers and sellers to better manage their risk. The same could now be on the horizon for carbon.*

---

The first carbon project dates back to the late 1980’s.

Concerned about the climate impact of the coal plants his company was developing, the CEO of Applied Energy Services (AES) Roger Sant, sought the advice of the World Resource Institute (WRI). That conversation gave birth to the first avoided emissions carbon credit project. AES agreed to fund the planting of trees and the protection of forest in Guatemala, in return for offsetting the emissions of its coal plants in the United States.

It wasn’t for another decade that governments first entertained the idea that carbon credits could also be the most economical way of meeting national climate targets. Negotiators working on the Kyoto Protocol developed a scheme known as the Clean Development Mechanism (CDM), aping the early innovation employed by AES and its successors.

Barclays was one of the first financial institutions to secure a foothold with which to benefit from the growth in carbon markets. The bank launched its carbon trading business in 2004, prior to the ratification of the Kyoto Protocol (February 2005), and before the EU ETS began operating (January 2005). Other banks were quick to follow, attracted by the potential opportunities in financing, origination, and market making.

### The first carbon panic

Global financial turbulence, coupled with political uncertainty, punctured the banks enthusiasm for the carbon trading business. First, EU carbon prices began to fall in May 2008, coinciding with the start of the Great Financial Crisis (GFC). After peaking near €30 per tonne, carbon prices declined to below €10 per tonne by mid-January 2009 as the market anticipated a deep recession would cut emissions, resulting in lower demand for EUAs.

The EU carbon price rebounded somewhat during 2010 and into early 2011, but it wasn’t long before it was under pressure once again as the European sovereign debt crisis erupted. From a high of almost €17 per tonne in May 2011, the carbon price fell to less than €5 per tonne by mid-2013 as carbon market participants feared an increase in the allowance surplus as economies suffering under the weight of austerity would inevitably slow.

The pressure wrought by the GFC and the subsequent Euro debt crisis were the main factors behind the collapse in the EU carbon price, but two other factors made the situation worse. First, the break down in negotiations at COP15, held in Copenhagen at the end of 2009, added to the poor sentiment in the carbon market.

Second, there was a enormous influx of cheap carbon credits (amounting to \~1.2 Gt of CO2) from [the CDM and the UN’s Joint Implementation (JI) programme during the period 2008-2014](https://cepr.org/voxeu/columns/collapse-clean-development-mechanism-scheme-under-kyoto-protocol-and-its-spillover?ref=carbonrisk.world). Japan’s retreat from its climate targets following the Fukushima nuclear accident added to the surplus. The price of certified emission reduction credits issued under the CDM gradually fell from €25 per tonne of CO2 in 2008 to €10 per tonne of CO2 in 2011 before crashing to €0.50 per tonne of CO2 in 2012\. Unlike the situation now, EU ETS obligated entities were able to meet their compliance needs through international carbon credits.

Many financial market participants had seen enough and started to scale down their carbon trading operations or merged them with their power and gas trading operations (e.g., JP Morgan and Morgan Stanley), or simply got out of the business altogether (e.g., Barclays, Deutsche Bank and UBS).

In addition to the political and structural risks present in the nascent cap-and-trade market, new banking regulations and compliance requirements, introduced in the wake of the GFC, curbed banks ability to trade. Overall, the number of workers employed on the carbon desks of London’s financial centre fell from close to 1,000 in early 2010 to \~200 by the end of 2013.

### “To da Moon”

It wasn’t until 2023, after a decade-long hiatus, that Barclays sought to rebuild its carbon trading desk. The bank’s outlook for the VCM has been particularly bullish, anticipating the opportunity for exponential growth as net zero targets draw near.

Barclays published a report at the time in which they predicted that the VCM would hit a “tipping point” in the near future, enabling it to grow from $0.5 billion currently, to $250 billion by 2030, before reaching $1.5 trillion by 2050\. Other institutions were also bullish, albeit to a lesser extent, calling for it to be a mere $50-$100 billion market by 2030 (see [*Is the VCM a trillion dollar business opportunity?*](https://www.carbonrisk.world/a-one-trillion-dollar-business/)).

Nevertheless, 2023 was arguably the peak for the VCM.

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### Full disclosure returns
URL: https://www.carbonrisk.world/full-disclosure-2/
Last updated: 2025-10-07T11:00:14.000Z
As governments in many advanced economies push back on introducing mandatory climate reporting, not all jurisdictions are falling into line. There are a few notable exceptions - in North America, Europe, and Asia - seeking to pushback on the narrative that climate disclosures are damaging business competitiveness. 

Indeed, some governments are realising what many companies already understand; disclosing your emissions data and other climate risks is a source of competitive advantage, one that helps to attract investment, and often on more favourable terms.

While climate disclosures start with Scope 1 and 2 emissions, the inclusion of Scope 3 reporting is fundamental - the latter may actually represent the most acute and most expensive source of carbon risk. 

Despite their competitors believing they have dodged a bullet by evading mandatory reporting of supply chain emissions, firms may actually find that there is no escape from the scrutiny of their customers, their suppliers, and financial institutions eager to manage and reduce their exposure.

Lets dive in.

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### All in
URL: https://www.carbonrisk.world/all-in/
Last updated: 2025-10-02T11:00:56.000Z
> “In economics things take longer to happen than you think they will, and then they happen faster than you thought they could.” – Rudiger Dornbusch

The latest Commitment of Traders (COT) report for w/e 26th September shows that investment funds now sit on a net long position of 76.2 million EUAs, down from the record 78 million EUAs seen in the previous week, and the first decline in six weeks. Up until w/e 19th September funds had been feverishly building net length in size for three consecutive weeks; +22.5 million EUAs in w/e 5th September, +14.7 million EUAs in w/e 12th September, and finally +9.2 million EUAs.\*

As funds have positioned towards higher prices, so the EUA price has also jumped out of the €70-€75 range that the market had traded in since May, going on to hit a high of around €78 on 17th September. The last time this run of large consecutive weekly builds occurred was back in the summer of 2021\. Back then the EUA price was trading around €55 and was only a few months away from making its first attempt at €100\. At the time policymakers were busy discussing the Green Deal and the Fit-for-55 package and climate was the top concern among the voting public. A cost of living crisis and the emergence of populist ideology across Europe could barely be imagined.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/10/image-2.png)

The increase in the net position during the past month has coincided with the approaching end of September compliance deadline. This is only the second year when the compliance timetable has concluded in September, rather than the traditional date of 30th April. In September 2024 the EUA price dropped around 7%, belying concerns of a last minute rush for EUAs. The five month extension to the timetable in 2024 apparently giving compliance entities more time to pace their EUA purchases. 

Any evidence of a late scramble for EUAs this year has been mixed. Auctions have tended to clear at a slight premium to the prevailing spot price, suggesting that demand for EUAs is robust. The cover ratio is another indicator of auction demand and measures the amount of bids received (in terms of EUAs), divided by the amount actually sold. In late September auction demand has been notably soft with last Thursday's auction registering the lowest cover ratio of any auction since March 2022\. 

*\*Many subscribers to Carbon Risk will already be very familiar with COT data, but for any of you that are new here and it's not something that you use very week, I've added a brief explainer at the bottom of this article, outlining everything you need to know.*

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### Up in the air
URL: https://www.carbonrisk.world/up-in-the-air/
Last updated: 2025-09-29T11:14:36.000Z
> *"Waiting for a train to go or a bus to come,* 
> *or a plane to go or the mail to come,* 
> *or the rain to go or the phone to ring,* 
> *or the snow to snow or waiting around for a Yes or No* 
> *or waiting for their hair to grow.*

> *Everyone is just waiting."* 

> ***\- The Waiting Place, by Dr Seuss***

When it comes to decarbonising its aircraft, Europe's aviation sector is stuck waiting in the departure lounge. The screens are telling operators that everything is on schedule and now is the time to invest in new aircraft, secure sustainable aviation fuel (SAF), and hedge your carbon price risk. 

But as any weary business traveller knows, you should never discount the possibility that delays or cancellations will hamper the best laid plans. Instead of getting the next flight home you're being bussed to a hotel on the outside of town and next morning face taking a train to another airport, hundred of miles away.

The challenge facing Europe's aviation sector as it looks to decarbonise while remaining competitive is no different. 

The blocs aviation industry have to contend with the rapid phase-out of free allocations under the EU ETS, a severe supply shortage under CORSIA coupled with uncertainty as to whether the EU will just roll EU departure emissions into the EU ETS, and finally, the one main lever the industry is relying on - SAF - is not developing at anywhere near the speed necessary to avoid a big carbon bill later this decade.

Beware the waiting place. 

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### Flattening the curve
URL: https://www.carbonrisk.world/flattening-the-curve/
Last updated: 2025-09-25T11:09:50.000Z
> “we have far greater control over the nature of the economic change than is commonly supposed.” - Daniel Susskind, author of 'Growth: A Reckoning'

The Environmental Kuznets Curve (EKC) suggests that economic growth first leads to an increase in environmental degradation, but after a certain point the relationship between economic growth and environmental degradation changes. Once a country has pushed through this 'turning point' further increases in economic development are associated with an improvement in the environment.

Critics of the EKC suggest that while the relationship might exist for non-carbon pollutants (e.g., nitrogen oxides (NOx), fine particulate matter (PM2.5), etc.) due to their high spatial concentration, it's much less likely to exist for greenhouse gas (GHG) emissions where the negative externalities are far less likely to be contained within the responsible sovereign territory.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/09/image-7.png)

Source: ONS

This isn't some obscure academic concept. It's got significant real world implications. As Arjun Murti of [newsletter Super-Spiked](https://arjunmurti.substack.com/p/pushing-back-on-anti-oil-and-gas) starkly reminds us, the richest one-eighth of the worlds population consumes around 13 barrels of oil per person per year; everyone else, all 7 billion of them, use just 3 barrels per person per year. The unmet energy needs of the other 7 billion people are massive, and its not even remotely clear how their inevitable move up the economic S-curve will be achieved without significant investment in additional energy sources, much of which will likely also include fossil fuels:

> "Given how little energy the other 7 billion people on Earth use in comparison to The Lucky 1 Billion of Us, we expect aggregate energy demand to be multiples of current energy usage over the long run (many, many decades ahead). We will need new technology developments, sensible energy and economic policies, and significant capital employed to build out both traditional and new sources of supply and infrastructure in order to meet energy needs and achieve our aspiration that everyone on Earth is some day energy rich."

If the EKC can be shown to be true, it indicates that pursuing economic development and reducing the adverse impact on the environment and the climate are not necessarily at odds with each other. In short, helping emerging markets (EMs) reach higher income levels means they can become energy rich, adopt more stringent climate change policies (CCPs), and reduce their GHG emissions.

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### 'Big Carbon'
URL: https://www.carbonrisk.world/big-carbon/
Last updated: 2025-09-22T11:00:18.000Z
> "*I need to bring this godless industry under my control*." - John D. Rockefeller

In a [recent LinkedIn post](https://www.linkedin.com/pulse/next-trillion-market-which-dwarf-oil-tobias-munk-dxkff/?ref=carbonrisk.world) (an extract of which is pasted below), Tobias Munk, CEO of B10 Char, the South African biochar producer, outlines why he thinks the carbon dioxide removal (CDR) industry will be the next trillion dollar market - dwarfing even the oil market (bolding his own):

> "On a linear pathway to net zero by 2050, we do not stabilize at 422 ppm. We overshoot to about **455 ppm**. Returning just to where we are today would mean removing **392 gigatonnes of CO₂**. At **$100 per ton**, that is a **$40 trillion market**. Almost a third of the entire history of oil, recreated just to claw back to the present.

> And that is only part of the story. If carbon removal capacity ramps from zero today to **24 gigatonnes per year by 2050**, that ramp-up itself would generate about **300 gigatonnes of removals by mid-century**. But the problem does not stop in 2050\. To actually reach net zero, we still need to offset **10 gigatonnes per year of residual emissions**. Over the 25 years from 2050 to 2075, that is another **250 gigatonnes**.

> Put the pieces together: **300 + 392 + 250 = 942 gigatonnes of carbon removal required by 2075**. At $100 per ton, this equates to a **$94 trillion industry**.

> Think about that scale. Oil’s century-long revenue was $122 trillion. Carbon removal gets three quarters of the way there in just 50 years — and unlike oil, it is not optional. It is the price of cleaning up the very system that oil, coal, and gas built.

> Meanwhile, today’s CDR industry is worth only **$3.4 billion**. That is less than the annual budget of a mid-sized tech company. To meet this challenge, the market must expand by a factor of **1,000× within a single generation**.

> This is not a niche. It is not a sideline. It is the next great industrial build-out, one that will rival oil, steel, and electricity in size. Oil was the biggest market in history. Carbon removal will be bigger. Much bigger.

> When was the last time you saw an opportunity like this? I have put my money where my mouth is and invested substantially in this market. You should too."

Let's take a look at the calculation in detail before then considering the market dynamics, and importantly, who is likely to be in a position to benefit. Hint: you may not like the answer.

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### CBAMs 'domino effect' on global carbon pricing could be about to get even stronger
URL: https://www.carbonrisk.world/cbams-domino-effect-on-global-carbon-pricing-could-be-about-to-get-even-stronger/
Last updated: 2025-09-18T10:59:59.000Z
### 

With a little over three months until the EU's Carbon Border Adjustment Mechanism (CBAM) comes into force on 1st January 2026, commodity traders are still battling to navigate their way through the regulation's last remaining ambiguities. 

In an attempt to address these concerns the European Commission [launched three public consultations](https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives%5Fen?text=cbam&feedbackOpenDateClosedBy=25-09-2025&ref=carbonrisk.world) at the end of August intending to address three questions: how to adjust for carbon prices already paid in non-EU countries, the methodology for reporting emissions, and how to account for free allowances from the EU ETS. The closing date for responses to the consultations is Thursday 25th September.

Lets start with the last question. This refers to the desire for industrial goods produced both inside or outside the EU to be treated equally vis-à-vis free allowances. The key values industry are waiting on here is the CBAM benchmark values, and which are derived from the existing EU ETS benchmarks used to determine free allowances. Although the price of an individual CBAM certificate is linked to the prevailing EU allowance price, analysts believe that importers will be on the hook for 25-30% of this cost as soon as next year (payable from February 2027). Unfortunately the Commission has yet to publish the benchmark values, and isn't likely to until early 2026, making any assessment of import exposure challenging.

Up until recently we understood that importers needed to purchase CBAM certificates based on the tonnage of CBAM covered products they bring into the EU, and their actual embedded emissions - rather than just based on a country default value. However, in a huge change [rumours have emerged](https://www.linkedin.com/feed/update/urn:li:activity:7373363938824003584/?ref=carbonrisk.world#?lipi=urn%3Ali%3Apage%3Ad%5Fflagship3%5Fdetail%5Fbase%3BuoTsAH4CTB%2BR6dn8ZCUG2A%3D%3D) that Europe may now only accept data reporting to be actual emissions *if* the country of origin has an emissions trading scheme, and one with an absolute cap on emissions. For everyone else, Europe will only accept default values, which are by design punitive.

The change in emphasis - away from a preference for actual emissions data - appears to have already been reflected in the regulations. As Richard Wu of the Research Institute for Environmental Innovation (RIET) at Tsinghua University [pointed out in a comment on LinkedIn](https://lnkd.in/p/e9jgCifG?ref=carbonrisk.world), paragraph 2 of Article 7 of the CBAM Regulation has been quietly amended. It now says embedded emissions in goods other than electricity shall be determined based on actual emissions *or* by reference to default values. Previously it said that where actual emissions cannot be adequately determined they shall be determined by reference to default values. 

If this turns out to be correct, the move would appear to be driven by the need to lighten the administrative burden importers are about to bear, but also an acknowledgement perhaps by the Commission that, 'actual emissions cannot be adequately determined' in as much detail as they would like. 

Indeed, the Danish government, which holds the presidency of the EU Council until the end of 2025, has repeated claims that new EU rules could add up to €124.2 billion in additional compliance costs per year for businesses and public administration, in addition to one-off costs of up to €71.1 billion. The move would lighten the load on importers, pushing the onus for providing accurate emissions measurement back on exporting countries.

A last-minute change such as this will naturally create winners and loses. Importers that have diligently sought out emissions data from their non-EU suppliers for the last few years will feel particularly aggrieved, especially if the country of origin does not have an ETS with an absolute cap. In contrast those importers that already source CBAM covered commodities directly from jurisdictions with such a carbon pricing mechanism (or whose government have indicated their intention to do so) will feel relieved. 

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### California strikes back
URL: https://www.carbonrisk.world/california-strikes-back/
Last updated: 2025-11-06T16:24:10.000Z
> “In the face of devastating attacks from Donald Trump, escalating threats from wildfire and national economic turmoil, California is standing strong to grow jobs and our economy, make life more affordable and protect our leading climate policies.” - Mike McGuire, California's *Senate* Majority Leader

In January I penned an article warning investors that they should be concerned about more than just regulatory delays: [the future of California's cap-and-trade program beyond 2030 was in doubt](https://www.carbonrisk.world/the-future-of-californias-cap-and/).

> "One of the most important, yet hitherto unappreciated risks investors face going into 2025 is that the states cap-and-trade program is currently set to expire in 2030, and it’s future beyond 2030 is far from guaranteed."

Specifically, the risk was that the bar for approval could also be high, if as Danny Cullenward, Policy Director at CarbonPlan, spelt out, “policymakers determine that new statutory authority would be necessary or otherwise useful to resolve potential legal uncertainty — as they did before, with the passage of Assembly Bill 398 in 2017”. If this is the case then “they will need to determine whether such authority requires a simple majority or two-thirds supermajority vote.”

On Wednesday evening Governor Newsom and California's legislative leaders [announced that an agreement had been reached](https://www.gov.ca.gov/2025/09/10/governor-newsom-legislative-leaders-announce-major-deal-to-save-money-on-electric-bills-stabilize-gas-market-cut-pollution/?ref=carbonrisk.world) reauthorising the Cap-and-Invest Program (previously known as Cap-and-Trade), and so extending its role in helping to decarbonise the state all the way through to 2045 (see [*What's in a \[carbon market\] name? Why governments should adopt the 'Cap-and-Invest' nomenclature*](https://www.carbonrisk.world/whats-in-a-carbon-market-name/)).

In the final hours of the legislative session on Saturday the state Senate passed AB 1207 (29-6, 5 abstentions), before the state Assembly also voted in favour (55-10, 15 abstentions). AB 1207 (along with a separate bill, SB 840, that spells out how auction revenues will be spent) will now advance to Governor Newsom, who now has until 12th October to sign or veto the bill. 

Futures prices had already rebounded from the $26 floor price in recent weeks as traders anticipated the bill being signed, surging above $30 following the announcement on Wednesday evening. Further upside to the California Carbon Allowance (CCA) price is now expected as the final hurdles to reauthorisation have been overcome.

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### Could transition credits solve Asia's coal dilemma?
URL: https://www.carbonrisk.world/could-transition-credits-solve-asias-coal-dilemma/
Last updated: 2025-09-12T11:00:20.000Z
Coal-fired power generation capacity accounts for around 40% of Asia's energy mix, well above the global average of 25%. Although the share has dropped by 10 percentage points since 2010 (in part due to the rapid growth of solar generation capacity), continued investment in new coal-fired power plants (CFPPs) means that coal is likely to remain an important source of electricity in Asia for decades to come.

However, Asia's continued reliance on coal means higher emissions. The regions current and planned CFPPs are projected to emit more than 1,600 Gt CO2 cumulatively between now and 2064, according to analysis by [The Economist](https://www.economist.com/interactive/the-economist-explains/2024/11/15/what-would-it-cost-to-kill-coal?ref=carbonrisk.world). Their workings takes account of the number of years each CFPP is likely to have left before decommissioning, the share of its generation capacity currently in use, and the emissions expected if it continues to operate at that capacity. The earlier that the CFPPs can be shutdown, the more cumulative emissions can be avoided.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/09/image-4.png)

Source: The Economist

The age composition of a country’s coal fleet determines the financing needed to decommission the assets. In general, it becomes cheaper to retire a coal plant once the initial investment has been recouped (typically up to 20 years). After this point the cost of retiring the asset depends on factors such as system reliability, power supply and demand dynamics, and any power purchase agreements (PPAs) that are in place.

At present almost 80% of Asia's CFPPs are less than 20 years old, according to an analysis of [Global Energy Monitor data compiled by Zero Carbon Analytics](https://zerocarbon-analytics.org/archives/energy/opportunities-for-asias-coal-phase-out?ref=carbonrisk.world). If only those CFPPs currently in the pipeline come online then almost one-third (30%) of Asia's plants will be less than 20 years old by 2040\. However, if no new plants are built then the share falls to 10% by 2040\. Curbing the permitting and construction of new plants is crucial to reducing the cumulative environmental impact. The next best option is to accelerate the decommissioning of those CFPPs currently operating.

But therein lies the catch.

Closing a profitable CFPP before its time typically results in a substantial commercial hit. Its owners are only likely to agree to close it early, if they are ate least compensated for the foregone net present value (NPV) of future cash flows. The cost associated with closing a particular CFPP is likely to vary considerably on a project by project basis, and will depend on factors such as plant age, its thermal efficiency, historical emissions, the operators financial structure, cost of capital, and PPA flexibility, etc.

Governments and financial institutions such as the Asian Development Bank (ADB) have introduced mechanisms that have tried to accelerate the closure of CFPPs, For example, in 2021 the ADB launched the Energy Transition Mechanism (ETM) in partnership with the governments of Indonesia and the Philippines. The ETM pools funds from public and private sources, helping operators of CFPPs to lower their cost of capital, enabling them to pay down equity and debt faster, and hence incentivise the early retirement of CFPPs, while accelerating the deployment of renewable energy. 

However, its heavy reliance on concessional capital (i.e., loans and other forms of financing offered on more favourable terms than what is commercially available) has proven insufficient to mobilise the necessary private capital. Only two pilot projects are in the works. Earlier this year Indonesia’s government announced that it would retire the 660MW Cirebon-1 CFPP by 2035, seven years earlier than initially planned. The second project, the 1050MW Pelabuhan Ratu CFPP, is expected to close in 2037.

In its place, an alternative method is starting to gain traction. Transition credits aim to monetise the emissions avoided through the early closure of a coal-fired power plant (CFPP) and its replacement with renewable energy generation. The concept was first proposed in 2023 by GenZero, a climate investment platform founded by the Temasek, the Singapore-based investment fund. 

They are not without controversy. As I outlined in [Thermal coal's Coasian bargain: Paying coal plants to retire early is a viable route to net zero](https://www.carbonrisk.world/coals-coasian-bargain/), compensating owners of CFPP's runs counter to the prevailing narrative that polluters should pay the cost of the negative externality, and that in turn they will be incentivised to stop production, or clean up their act. 

> "Instead of making the polluter pay the cost of the negative externality, economist Ronald Coase argued that the entities affected by the externality should pay the polluter to stop. For his counterintuitive insight that paying the polluter to stop polluting can actually make everyone better off, Coase received the Nobel Prize in Economics in 1991.

> In the example of coal, Coase’s approach involves considering the total net benefit from the early retirement of thermal coal, while at the same time replacing it with renewable energy sources such as wind and solar, and then seeing how this net benefit is split among the various parties involved (e.g. investors, workers, citizens). Coase’s bargain as he termed it suggests that it’s economically optimal for owners of coal mines and coal generation facilities to be compensated to retire their assets early."

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### In search of carbon alpha
URL: https://www.carbonrisk.world/in-search-of-carbon-alpha/
Last updated: 2025-09-08T11:00:10.000Z
We are used to thinking about how movements in oil or natural gas prices can affect the fortunes of our biggest companies. Very few investors and analysts contemplate the impact that a significant change in carbon prices could have on the share price of individual firms.

But as carbon prices rise and compliance costs become a more significant burden, the likelihood that the compliance carbon market will have a material impact on corporate valuations is expected to increase. In this article I delve into some of the latest research into the impact that carbon markets are having on UK and European equity markets and macroeconomic variables, uncovering where investors might be missing out on carbon alpha.

Most studies analyse the relationship between carbon prices and the share price returns from carbon intensive versus non-carbon intensive firms, or base their analysis on a relatively small time period, perhaps focusing on an important unexpected market event, and often missing out on the most recent period of high carbon prices.

For example, in [*Does the stock market care about the carbon price?*](https://www.carbonrisk.world/does-the-stock-market-care-about/)I highlight research published by the International Monetary Fund (IMF). They analysed stock returns (covering 338 European-listed companies) relative to the percentage of their revenue spent on EU emission allowances (EUAs). The IMF’s analysis shows that since 2018, a 1% carbon price increase since 2018 is associated with a stock price drop of up to 0.21% for the most polluting companies. It’s a useful study, but we really need much deeper insights to be useful for investors.

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### Batteries not included
URL: https://www.carbonrisk.world/batteries-not-included/
Last updated: 2025-09-04T11:00:35.000Z
The outlook for European carbon prices will increasingly depend on the rollout of batteries that can store surplus electricity generated by solar power.

Solar was the largest source of electricity in the EU for the first time in June 2025 according to a [report by Ember](https://ember-energy.org/latest-insights/solar-is-eus-biggest-power-source-for-the-first-time-ever/?ref=carbonrisk.world), accounting for 22.5% of the blocs power generation. At least 13 of the 27 EU member countries also set a new monthly solar record in June.

The recent surge has helped the EU power system handle high levels of demand as heatwaves gripped the continent this summer. In previous years, fossil fuel-fired power generators might have played a much more dominate role in meeting mid-summer cooling demand, and in turn resulting in higher EU power generation emissions (see [*In the shade: Europe's solar power does not get the credit it deserves*](https://www.carbonrisk.world/under-the-shade/)). 

Nevertheless, when the bulk of solar power generation meets or exceeds demand it can drive power prices to very low levels, or even negative. During 2024 day-ahead power prices in Germany went negative for more than 1 in every 20 hours (5.2%). In the year up to 24th August, Germany had already surpassed the previous years cumulative number of hours with negative power prices (457 hours versus 453 during the same period in 2024).

'Saturation' as its known has a knock-on impact on the prospects for future solar power growth. Low or negative power prices lead to lower returns for solar plant operators, reducing the incentive to invest in additional generation capacity. Meanwhile, excessive solar power generation can also contribute to grid instability issues, further undermining the incentive to expand capacity.

Persistent low or negative power prices are a clear signal that there is insufficient energy storage available. However, while EU renewables output has boomed in recent years, investments in battery energy storage system (BESS) capacity have struggled to keep up, and are far behind what is thought necessary to avoid saturation.

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### Dawn breaks for Europe's beleaguered manufacturers
URL: https://www.carbonrisk.world/dawn-breaks-for-europes-battered-manufacturers/
Last updated: 2025-09-03T06:38:58.000Z
Eurozone manufacturing activity expanded in August, the first month-on-month increase in output since June 2022, according to the latest survey of purchasing managers compiled by S&P Global. 

The [HCOB Eurozone Manufacturing PMI](https://www.pmi.spglobal.com/Public/Home/PressRelease/f66d276dcbcb4d799c953d56237f23ed?ref=carbonrisk.world) increased from 49.8 in July to 50.7 in August. A reading above 50 indicates an expansion in activity versus the previous month. 

Back in June 2022 Gazprom announced that it had cut the flow of gas to Germany by more than half, prompting a surge in European energy prices, and the onset of a brutal recession for the continents energy intensive industries. 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/09/image-2.png)

The EUA futures price jumped on the data release (published Monday 1st September), and continues the bullish path set after the [preliminary 'flash' PMI estimate](https://www.spglobal.com/marketintelligence/en/mi/research-analysis/eurozone-flash-pmi-hits-15month-high-in-august-as-manufacturing-conditions-improve-for-first-time-since-mid2022-Aug25.html?ref=carbonrisk.world) was released on 21st August (the PMI survey data was collected during the previous 10 days). 

The EU carbon price is now up over €3 to around €74 per tonne CO2 since the flash PMI data was first released. Notably, the price has broken out of the bearish trendline that has been in place since the beginning of the year, and which until now at least has served to cap any attempt to push the market higher. 

The data may indicate the start of a period of renewed optimism for European industry, one that could see renewed appetite for EUAs from firms seeking to hedge their carbon risk exposure.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/09/Carbon-Emissions_20250902_10.53.png)

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### Call of duties
URL: https://www.carbonrisk.world/call-of-duties/
Last updated: 2025-08-28T12:27:27.000Z
On 1st January 2026, just over 120 days from now, the EU's Carbon Border Adjustment Mechanism (CBAM) will come into force. 

In earlier, less protectionist times this event would have drawn more attention...and probably a great deal more criticism. First unveiled in summer 2021, and signed into law by Europe's legislators in spring 2023, CBAM has had plenty of time for debate and its imminent arrival has been well-signalled to industry, including an extensive transition period.

To recap, CBAM requires importers in Europe to purchase certificates based on the volume of certain carbon intensive products brought into the EU and their independently-verified production based emissions. Imports of iron and steel, cement, fertiliser, aluminium, electricity, and hydrogen will initially be affected, although the scope of products covered by CBAM is expected to expand significantly later this decade (a paper outlining options is expected by the end of 2025). 

In 2026 the financial obligation on importers is likely to be 25-30% of the CBAM cost as free allowances begin to be phased out and benchmarking affects exposure (the purchase of CBAM certificates won't begin until February 2027). By 2030 this will have increased to almost half (48.5%), with importers only feeling the full hit in 2034 when they face having to pay 100%. The price of an individual CBAM certificate is linked to the prevailing price of an EU emission allowance.

The governments of many developing countries are rightly concerned that CBAM will raise the cost of exporting their goods to the EU market, adversely affecting the competitiveness of their exporters, and leading to a material impact on their economic growth prospects. Many developing economies rely on commodity exports for a significant share of their foreign currency earnings and government tax revenue.

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### Cracking under pressure
URL: https://www.carbonrisk.world/cracking-under-pressure/
Last updated: 2025-08-26T06:31:04.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

[Subscribe now](#/portal/signup)

*🛫 Note that I’m taking a break from carbon markets for a couple of weeks. I will be back at my desk in late August 🛬*

---

A devastating picture is starting to emerge of Europe’s petrochemical industry as several firms announce that their production facilities are due to close. High input costs, more competitive imports, and lacklustre demand have forced a rationalisation of assets and the closure of several crackers so far, with more on the horizon.

In the past few weeks, Saudi petrochemical giant, SABIC announced that it is shutting down its 865 kt Olefins 6 ethylene cracker at Wilton in northeast England. Meanwhile, Dow Chemical has confirmed that its 560 kt Böhlen ethylene cracker in Germany will shutdown by the end of 2027\. In total, almost 4 Mt of ethylene closures have been announced since late 2024, along with 1.7 Mt of propylene capacity (see [*Hot and bothered*](https://www.carbonrisk.world/hot-and-bothered/)).

Primary petrochemical materials such as ethylene and propylene are the building blocks for plastics, pharmaceuticals, and countless other industrial goods, many of which are strategically important. If Europe is unable to manufacture these materials economically then it will increasingly become dependent on imports to satisfy demand. Other European petrochemical plants, including those manufacturing intermediate and finished products, have also been served their last rites, or are under increasing threat of closure.

European crackers tend to be old (many began operating in the 1970’s), typically use more expensive naphtha as a raw material, and are often energy inefficient. It’s a big problem given that industrial gas prices in Europe are around 5-times higher than in America, and European industry is beginning to feel the full impact of EU carbon prices.

Many of Europe’s chemical plants are small and mid-sized facilities, and with utilisation rate having dropped below 80% since early 2022, a level widely considered to be uneconomical, further closures are inevitable. Wood Mackenzie estimates that an additional 20 Mt (\~one-third) of the EU’s ethylene capacity is at high or medium risk of closure.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/0fd52b3b-21d7-4853-bbaa-3295f6864f22_1243x703.png)

The precarious short-term financial position is making it much more difficult to focus on the longer-term challenges facing the industry, such as investing in the low-carbon economy. The European petrochemical industry faces a €365 billion decarbonisation funding gap between 2021 and 2050, according to Accenture. It means that if producers are going to move towards net zero, they will need to increase their capital expenditure by €12 billion, and maintain this level of investment every year until 2050.[1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/3151481f-54d9-4b6e-bccc-29e02d625ec7_981x662.png)

Retrofitting the EU’s fossil fuel-based steam cracker furnaces with electric furnaces is one approach to closing this gap. Accenture estimates that it will cost €200 billion (plus €100 billion in foregone profits), and result in additional energy demand of 200 TWh, roughly one-fifth of Europe’s renewable electricity generation. In reality, we’re not even at the stage where the concept is proven, yet alone ready to be rolled out across Europe. For example, it was only last year that BASF, SABIC and Linde inaugurated the world’s first large-scale demonstration plant to use electricity in its cracker furnace. There are no plans to electrify an existing fossil-fuel based cracker in Europe.

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### Taxing times as Australia looks to secure its energy transition
URL: https://www.carbonrisk.world/taxing-times-as-australia-looks-to/
Last updated: 2025-08-26T06:30:48.000Z
Consensus builds for an expansion in 'target-consistent' carbon pricing

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### A chaotic patchwork of inconsistent incentives
URL: https://www.carbonrisk.world/a-chaotic-patchwork-of-inconsistent/
Last updated: 2025-08-26T06:31:23.000Z
The UK is a carbon pricing pioneer, but it's system of taxes and subsidies makes it more expensive to reach net zero

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### Repost: Copper-bottomed
URL: https://www.carbonrisk.world/repost-copper-bottomed/
Last updated: 2025-08-26T06:31:35.000Z
Efforts to cut the carbon intensity of copper are at risk from climate change

_This post is for paying subscribers only._
### Cleaning up
URL: https://www.carbonrisk.world/cleaning-up/
Last updated: 2025-08-26T06:31:47.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

[Upgrade to paid](#/portal/signup)

---

![A view of a large factory in the distance](https://images.unsplash.com/photo-1723929100016-2081b9215d2b?fm=jpg&q=60&w=3000&ixlib=rb-4.1.0&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Sue Winston](https://unsplash.com/@winniepix?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-view-of-a-large-factory-in-the-distance-U9Wkl%5Fn0pqU?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

The UK ETS could be the first regulated compliance carbon market to include greenhouse gas removals (GGRs) after the UK government announced that they will be eligible to receive UK ETS allowances (UKAs) by the end of the decade. Here are my 16 observations on the consultation response, where UK-based GGR is right now, the market reaction on the UK ETS, and the international context:[1](#footnote-1)[2](#footnote-2)

1. The gross cap (i.e., the total number of allowances that can are available each year) as well as the cap trajectory will be maintained for initial integration of GGRs. Emission allowances (UKAs) will be replaced with GGR allowances on a one-for-one basis, maintaining the incentive to decarbonise. However, given that the cap is declining the incentive to build GGR capacity will also fall over time, and so in the longer-term the Authority recognises that there will need to be a new ‘net cap’, enabling “an economically efficient approach to net zero.”
2. Standards for monitoring, reporting and verification (MRV) for GGR operators under the UK ETS will be aligned with the UK GGR Standard currently being developed. The British Standards Institute have now launched two new standards - covering BECCS and DACCS - for public consultation.[3](#footnote-3)
3. Only GGRs that have taken place in the UK will be eligible to receive UK ETS allowances during the initial integration. It’s unclear when this ‘initial integration’ period will last for, nor what the considerations will be for expanding the scope of GGRs to include non-UK based removal.
4. GGR projects must demonstrate a carbon storage period of at least 200 years before they are eligible for entry into the UK ETS. This is consistent with the requirement under the EU Carbon Removal and Carbon Farming regulations (CRCF).
5. GGR allowances will only be awarded ex-post, i.e. only once carbon sequestration has taken place and been verified. It’s unclear whether operators must demonstrate that the carbon has been removed and remained in-situ for a certain time period before receiving a GGR allowance, nor what the process is for verifying that this has taken place.
6. Initially at least, only engineered GGRs will be eligible to be included in the UK ETS. The consultation response only refers to two examples of engineered GGRs: direct air carbon capture and storage (DACCS) and bioenergy with carbon capture and storage (BECCS).
7. It’s unclear whether other methods such as enhanced weathering and biochar will be eligible. For that we may have to wait until later in the autumn. In March the government launched an independent review into how GHG removals can help the UK meet its net zero targets, including technologies not reliant on CCS infrastructure. It is expected to be published in October.

The Authority states that there is a strong case for nature-based (woodland) carbon removals to be included in the UK ETS, but a final decision will only be made only after an additional round of evidence gathering takes place. Given the problems that the New Zealand ETS has had with forestry (over-supply of credits, mono-culture planting, etc.) it’s quite right to be cautious. The report proposes strict limits on the amount of GGR allowances that can be generated this way.

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### Cap and fade, or golden opportunity?
URL: https://www.carbonrisk.world/cap-and-fade-or-golden-opportunity/
Last updated: 2025-08-26T06:33:29.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

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---

*Estimated reading time \~ 5 mins*

It has been a tumultuous 12-18 months for California’s cap-and-trade program.

To recap, the Californian Carbon Allowance (CCA) price hit an all-time high of $41.91 per tonne CO2 in early 2024 as the market anticipated that reforms would result in substantial cuts to future supply. However, delayed rulemaking and uncertainty over the schemes future beyond 2030 sent the CCA price down to $26 per tonne, close to the auction floor price (see [here ](https://www.carbonrisk.world/californias-emissionary-zeal-begins/)and [here](https://www.carbonrisk.world/the-future-of-californias-cap-and/)).

More recently, California’s carbon market has been under siege from President Trump. In early April 2025 he issued an executive order blocking the enforcement of state laws that reduce the consumption of fossil fuels. Other cap-and-trade programs not beset by regulatory uncertainty, such as RGGI and Washington State, have seen the price of their emission allowances rise, suggesting that delayed reforms and the debate surrounding the reauthorisation are the main price drivers in California (see [*America's state carbon markets are under siege*](https://www.carbonrisk.world/americas-state-carbon-markets-are/)).

The regulatory befuddlement has not been without cost. The state of California has missed out on nearly $3 billion in revenue from its carbon market due to the tumbling carbon price since February 2024, according to a new report by non-profit Clean & Prosperous California. The missing revenue could have been used to lower household energy bills, help local communities adapt to climate change, reduce the barriers people face switching to lower carbon technologies, or indeed plug some of the states ballooning budget gap.[1](#footnote-1)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/36d4dec6-7adf-426a-b6b0-13dfa8bc267f_790x692-1.png)

Source: Clean & Prosperous California

In early April, Governor Newsom signalled his intention to extend authorisation for the cap-and-trade program through to 2045\. However, it was his proposal for how future revenue will be spent, published one month later in mid-May, that got the attention of lawmakers. The decision to reauthorise the program beyond 2030 is now on hold pending a debate on how future revenues should be spent.[2](#footnote-2)

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### Known unknowns
URL: https://www.carbonrisk.world/darkest-before-dawn/
Last updated: 2025-08-26T06:33:50.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

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---

*Estimated reading time \~ 5 mins*

> *“Uncertainty, actually, is the friend of the buyer of long-term values.”*  
>  
> \- Warren Buffett

Climate policy uncertainty in the United States, as measured by the Climate Policy Uncertainty (CPU) index, jumped to a record high of almost 600 in April. Although the index has since dropped to 370 in June (the latest monthly data available), it remains very high compared to the past 10 years.[1](#footnote-1) 

The previous highest recorded spikes in uncertainty occurred in November 2021 (coinciding with the COP26 climate summit in Glasgow, UK), and then three years later in November 2024 (following Donald Trump’s re-election and his subsequent announcement that America would be leaving the 2015 Paris Agreement for a second time).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/34c65a35-6264-4342-b38a-4abae23e2bef_800x480-1.png)

Source: Gavriilidis, K. (2021)

Other prominent spikes in the CPU index over the past decade include in early 2017 when Volkswagen pleaded guilty to for fixing diesel emissions tests, during 2019 when the first Trump administration revoked states rights to set emission standards, early 2020 after Trump approved the environmentally sensitive Keystone XL pipeline, and in the summer of 2022 as the Democrats worked towards the signing of the Inflation Reduction Act (IRA).

Notable as they are, the most important drivers of climate policy uncertainty in America is the election cycle. To determine how significant, analysts at the Geneva Graduate Institute (IHEID) in Switzerland constructed a similar, albeit slightly more sophisticated index of climate policy uncertainty and then cross-matched it with the 6-month period leading up to and following the previous nine US presidential elections.

They discovered that US climate policy uncertainty tends to decline around two months prior to the election as both parties announce relatively favourable environmental policies. Uncertainty then spikes and reaches a peak about four months after the election. It’s typically during those first few months of a new administration when specific policies are announced, and then go through various stages of debate, pushback, and then finally, approval.[2](#footnote-2)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/85554e41-01c7-4bdb-9b0a-2dbec5a58bab_688x599.png)

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Over the past eight months (or six if you count the months since Trump was sworn in) the president has presaged over a brutal rollback in US environmental policies, culminating in the signing of his “One Big Beautiful Bill” earlier this month. The OBBB Act sounds the death knell for many of the incentives to clean up America’s economy, created and expanded by the 2022 Inflation Reduction Act (see [*The burning question: What climate legacy will Trump 2.0 leave in his wake?*](https://www.carbonrisk.world/the-burning-question/)).

Analysis by  suggests that the vast majority of the 2,332 solar and wind projects expected to come online in 2027 or later (amounting to 547 GW of generation capacity) are likely to be at risk of cancellation. Other measures, including a new tax on solar and wind farms for projects in place after 2027 will lead to higher costs, up 10-20% according to estimates by Rhodium.[3](#footnote-3) 

It’s no surprise that climate policy uncertainty tends to spike around the US presidential election cycle, but has this time been any different? Despite everything the CPU index shows that US climate policy uncertainty has broadly followed the same path as previous elections, albeit with a more pronounced spike in uncertainty post election, and peaking one month later, in April 2025.[4](#footnote-4)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/cecbdc4d-fd9c-4587-a13e-e15864c64cdb_762x395.png)

Heightened levels of climate policy uncertainty will weigh on firms at the forefront of the energy transition, increasing the likelihood that they will delay or cancel planned investments in clean energy or decarbonisation. A one standard deviation increase in the CPU index typically results in a 3.8% decline in investment accounting to the OECD, rising to 5.4% for the most carbon intensive firms.

While the CPU index is backward looking, equity markets are (at least in theory) forward looking as participants try to discount the future. And the best returns to investors often occur when the outlook shifts from horrendous, to merely very bad. If the peak in climate policy uncertainty has passed then companies at the forefront of the energy transition have weathered the storm could be in a strong position.

The past four years have been brutal for renewable energy equities as higher interest rates and cost pressures took their toll while the sector fell out of favour with investors. However, unbeknownst to many quick to dismiss the sector as un-investable, the chart below from shows a market that has been building a large technical pattern, one that was primed to break-out in 2025\. Despite all the climate policy uncertainty headwinds the market has broken out of this pattern to the upside over the past few months, and is now up some 20% since April. Perhaps, to paraphrase Buffett’s words, investors have looked upon the upsurge in uncertainty as a friend offering the gift of long-term value.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/75bbc10d-e08b-46fa-baab-b163a4f5c1e5_1232x817.png)

---

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[Mind the behaviour gapWelcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-13.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7c974c4a-94ee-4ab0-b3ac-8cde00d51de7_912x629.png)](https://www.carbonrisk.world/mind-the-behaviour-gap/)

---

1. The Climate Policy Uncertainty (CPU) index was developed by Konstantinos Gavriilidis from the University of Stirling and is based on the same methodology used by Scott R. Baker et al. to produce the Economic Policy Uncertainty index. It measures the frequency of specific climate policy related words (e.g. uncertainty, climate, emissions, regulation, policy, plus several others) published in eight US newspapers, including the New York Times and the Wall Street Journal.  
https://www.policyuncertainty.com/climate\_uncertainty.html [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. The sample period covers 1981 to 2019, and includes nine election cycles, starting with the 1984 presidential election between Reagan and Mondale and up to the 2016 presidential election between Trump and Clinton.  
https://www.nber.org/system/files/working\_papers/w30361/w30361.pdf [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://www.politico.com/live-updates/2025/06/28/congress/new-tax-on-solar-wind-power-00431388 [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. [The Latest Senate Bill Is Worse Than Climate Advocates Thought PossibleThis is a special joint edition of Distilled and HEATED, a newsletter written by journalist Emily Atkin. HEATED is a must-read for anyone who cares about holding polluters accountable for the climate crisis. Sign up HERE.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/bce46cfe-e455-46fa-9b8f-e075ae2b7c30_250x250.png)Distilled](https://www.distilled.earth/p/urgent-the-latest-senate-bill-is?ref=carbonrisk.world)
### Long and variable lags
URL: https://www.carbonrisk.world/long-and-variable-lags/
Last updated: 2025-08-26T06:34:07.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

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---

*Estimated reading time \~ 7 mins*

![silhouette of houses during golden hour](https://images.unsplash.com/photo-1574530688836-c434c89ba352?fm=jpg&q=60&w=3000&ixlib=rb-4.1.0&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Arseny Togulev](https://unsplash.com/@tetrakiss?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/silhouette-of-houses-during-golden-hour-FGZrwWKkJhE?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Understanding the relationship between the price of carbon and investment in decarbonisation is important for anyone with a stake in climate policy: from policymakers keen to understand what level the carbon price needs to be, to obligated emitters and the companies developing low-carbon technologies, and of course, anyone wanting to take a long-term punt on the carbon price.

As I’ve discussed previously, I believe that a strong carbon price is a signal that investors, businesspeople, and citizens trust their government’s commitment to combat climate change. In the same way that trust in individual currencies supports investment, innovation and trade, trust in the carbon market helps to bring about the capital, skills and long-term planning that is required to help meet long-term climate targets. A weak carbon price delivers the opposite signal.

A recent report by the UK’s National Audit Office (NAO), an independent public-spending watchdog, casts doubt on whether there is sufficient evidence to support this theory, and openly questions whether the UK carbon market is really delivering on its promise to curb emissions, more than four years after it launched in early 2021.

The NAO conclude that while emissions for those sectors covered by the UK emissions trading scheme dropped by 11 Mt CO2 during the first few years of the scheme, it is “difficult to conclude whether this reduction can be attributed” to the UK carbon market, and furthermore, that incentives for future decarbonisation by the more than 1,000 organisations covered by the UK ETS are uncertain.[1](#footnote-1) 

Two key factors need special attention according to the watchdog: the low UK carbon price relative to the cost of decarbonisation measures in the traded sectors (e.g. steel, petrochemicals, etc.) as well as compared to the EU ETS, and uncertainty around the availability and take-up of low-carbon technologies (e.g., carbon capture and storage, and sustainable aviation fuel) given that it could take several years before they start having a significant impact on emissions (see [*Britain's green credibility gap: UK carbon price slumps to record low, 50% below the EU*](https://www.carbonrisk.world/britains-green-credibility-gap/)).

_This post is for paying subscribers only._
### Readying for the descent
URL: https://www.carbonrisk.world/readying-for-the-descent/
Last updated: 2025-08-26T06:34:22.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

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---

*Estimated reading time \~ 6 mins*

![mountains covered with snow](https://images.unsplash.com/photo-1530738433046-b589e02b0e79?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Jonathan Gallegos](https://unsplash.com/@jonathangallegos?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/mountains-covered-with-snow-3MwArYh-7yU?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

China’s CO2 emissions have probably peaked, or are very close to doing so.

Analysis published by Carbon Brief and prepared by the Centre for Research on Energy and Clean Air (CREA) suggests that China’s emissions from fossil fuels and cement declined by 1.6% year-on-year in Q1 2025, and by 1% over the past year. While emissions from the power sector fell by 5.8% versus 12 months ago, elsewhere in the economy they rose by 3.5%, with the coal-to-chemical sector the largest driver of emissions growth (more on that later).[1](#footnote-1)

Whether this turns out to be a structural break in the upward trajectory in emissions from the second largest economy remains to be seen. China has experienced false dawns before. In 2015/16 authorities attempted to rebalance the economy away from investment and towards consumption causing a shallow drop in emissions. More recently, in 2022, draconian pandemic lockdowns and a sluggish property sector weighed more heavily on emissions.

![China's CO2 emissions drop due to clean energy for first time](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/4816b210-9dbf-46d3-8792-237b2958ffda_1560x930.png)

Intrigued by the prospect of an imminent reversal in Chinese emissions, Ben McNeil of Emmi and  developed a regression model based on the past quarter of a century of data to test whether China (and the world at large) is close to a historic turning point in emissions. Projecting through to 2030, his forecast suggests that Chinese emissions have essentially plateaued at around 12 Gt CO2 per year. Check out his latest article where he outlines his projections for other regions - Europe, America, India, the rest of the world - and what it all means for global emissions (see *[The Kaya identity](https://www.carbonrisk.world/the-kaya-identity/)*).[2](#footnote-2)

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### Hot and bothered
URL: https://www.carbonrisk.world/hot-and-bothered/
Last updated: 2025-08-26T06:34:41.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

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---

*Estimated reading time \~ 9 mins*

![blue and purple sky with clouds](https://images.unsplash.com/photo-1603757009306-e9566ae376da?fm=jpg&q=60&w=3000&ixlib=rb-4.1.0&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Taylor Wright](https://unsplash.com/@taylorwright22?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/blue-and-purple-sky-with-clouds-IuhPJfjl-GU?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Over the past 18 months the EU carbon price has been anchored close to the €70 mark. Whenever the EUA price has dropped towards €60, buyers have quickly stepped in and bid the market back up. Barring the odd natural gas fuelled price spike, few are willing to push the price beyond the late €70 mark, with investment funds quick to reposition for lower prices.

If the carbon price reflects Europe’s citizens concern over climate change, and trust in their governments commitment to do something about it, then it’s lukewarm at best at the moment. That’s very different from the continents weather right now, where many are about to swelter through the third heatwave of the summer.

In this post I highlight why a late summer return to recent highs may not be on the cards this year, how rising solar power generation capacity is affecting market dynamics, the potential for an exchange traded product supply squeeze, the disgruntled chemical industry bosses that could scupper it, and finally, whether we’re all really just frogs boiling away.

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### Loss of the methane hunter
URL: https://www.carbonrisk.world/loss-of-the-methane-hunter/
Last updated: 2025-08-26T06:35:01.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

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---

*Estimated reading time \~ 7 mins*

The Global Methane Pledge (GMP) was launched by the United States and the European Union in November 2021 at COP26\. GMP signatories, of which there are now 159 countries plus the European Commission, have committed to cutting global anthropogenic methane emissions by 30% by 2030, compared to 2020 levels. Earth observation technologies, and satellites in particular, have been foundational to the GMP due to the spotlight they have cast on the problem — quantifying overall methane emissions while also tracing them back to the source.

Earlier this week the Environmental Defense Fund (EDF) revealed that it lost contact with its MethaneSAT satellite, widely considered to be the gold standard in methane emission tracking technology, able to produce high precision, high resolution data over wide areas that are largely invisible to other satellites. Despite persistent attempts to restore communications with MethaneSAT, EDF now believe that it has lost power and is unlikely to be recoverable.[1](#footnote-1)

Launched in June 2024, MethaneSAT circled the Earth 15 times a day at an altitude of 590 kilometres, collecting data in a 200 kilometre swathe. It’s mission was to monitor at least 80% of global oil and gas production, detecting both distinct point sources and dispersed area emissions. With a resolution of around 140 metres, it’s instruments were able to monitor even the smallest methane leaks (i.e. those that emit less than 500 kg of methane per hour), revealing that when combined they make up a large portion of the overall methane released in major oil and gas producing basins.

![MethaneSAT quantifies methane emissions from multiple sectors](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/2d323ae7-bced-4a54-b20d-fa22c2f52461_1440x810-jpeg-1.jpg)

Source: MethaneSAT

A few months prior to the launch, EDF’s senior vice-president, Mark Brownstein, outlined how he saw MethaneSAT’s role in the cutting global methane emissions: “MethaneSAT is a tool for accountability. I’m sure many people think this could be used to name and shame companies who are poor emissions performers, and that’s true. But \[it\] can \[also\] help document progress that leading companies are making in reducing their emissions.”

MethaneSAT isn’t the only satellite that can provide insights on methane emissions. There are more than 25 in orbit tracking both distinct point sources and dispersed emissions. Other recently launched satellites include Tanager-1, EMIT, and EnMap and are also fitted with sensitive detection thresholds and provide high resolution data on methane emissions. They join the Sentinel 5P satellite which can map methane across hundreds of kilometres, and has identified huge plumes of methane from oil and gas facilities in places such as Turkmenistan, and the GHGSat constellation of 14 satellites dedicated to tracking GHG emissions including methane from individual industrial facilities (see [*The carbon tracking opportunity: Real time tracking of GHG emissions and carbon sinks is a huge growth market*](https://www.carbonrisk.world/carbon-footprints/)).

MethaneSAT’s unique capabilities mean that its loss is a significant setback towards achieving the GMP. It will make it much more difficult to track methane emissions from the oil and gas sector and other major methane emission sources (e.g., coal mining, landfills, livestock and agriculture), while also making it more challenging to identify and implement measures that curb methane releases from emitters — whether large or small, infrequent or repeat offenders. That’s a problem for the individual industries, but it’s becoming an issue for the banks and other financial institutions that fund them, and are now looking at how they can curb their financed emissions.

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### Has Europe learnt from its great carbon price debasement?
URL: https://www.carbonrisk.world/has-europe-learnt-from-its-great/
Last updated: 2025-08-26T06:35:18.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

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---

*Estimated reading time \~ 8 mins*

![A close up of a coin on a table](https://images.unsplash.com/photo-1734981265438-26191c9b65aa?fm=jpg&q=60&w=3000&ixlib=rb-4.1.0&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Velan](https://unsplash.com/@velan%5F?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-close-up-of-a-coin-on-a-table-0e8igRS49QQ?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

> “Money, whether issued publicly or privately, is a public good. Those who create, manage and store it; and those who facilitate and record its transactions all bear special responsibilities to maintain trust in the system, for loss of confidence in one part of the system can undermine trust in the whole.”  
>  
> \- Mark Carney

In the early 16th century, the Spanish conquistador Francisco Pizarro ended the Inca Empire, killing Emperor Atahualpa.

After looting silver and other treasures, and destroying the Incan capital Cusco, Pizarro founded Lima, the present day capital of Peru. A convoys of ships – up to a hundred at a time – transported 170 tonnes of silver per year back across the Atlantic. The hoard of precious metals used by Spain to help finance its wars in Europe.

For Charles V and Philip II, the Spanish monarchs sitting on the throne during the 16th century, the realisation quickly dawned that an abundance of precious metal could be as much a curse as a blessing. Their navy had extracted so much silver from Latin America that the metal itself dramatically declined in value.

Currency debasement isn’t always accidental. Across history, governments have often betrayed their citizens long-term trust in exchange for short-term gains. The motivation to do so typically centres on the need to fund some ego-driven war overseas, or to pay off the debts built up by the rulers lavish lifestyle.

As in Spain, a sequence of currency crises across Europe during the 16th Century transformed economic life, resulting in a prolonged period of inflation that was to later become known as the ‘Spanish price revolution’, or more simply the price revolution.[1](#footnote-1) 

The track record for private money is no better. Banks began issuing their own money during the Renaissance, with private notes becoming increasingly prevalent during the 18th and 19th centuries. Institutions committed to maintain binding issuance rules and pledged assets as collateral. Over time the temptation to relax these structures and increase supply proved overwhelming. Trust in these private currencies, along with any credibility that was built up, quickly dissolved.

There are many parallels between the contrasting fortunes of currencies, and the far more recent emergence of carbon markets, their rise and fall, and rise again. Trust is the bedrock of both markets, currencies and carbon.

In the same way that trust in individual currencies supports investment, innovation and trade, trust in the carbon market helps to bring about the capital, skills and long-term planning that is required to help meet decarbonisation goals.

The carbon price is the ‘Currency of Decarbonisation’.

Two approaches to maintaining public trust in money and guarding against debasement include backing it with commodities including gold and silver, and backing by central banks, such as the Federal Reserve or the Bank of England. However, no approach is full-proof. Trust is hard won, but easily lost.

For the voluntary carbon credit market, asymmetric information means it’s very difficult for buyers to trust the veracity of the environmental claims made by a carbon project. A situation known as adverse selection. Various parties have come together (standards, measurement, and verification) to give buyers confidence that each carbon credit is backed by a tonne of CO2 abated or removed. But still, the incentive to debase remains.

Meanwhile, for compliance carbon pricing instruments such as emissions trading schemes, a commitment by the government (or some other institution) to a set of emission reduction targets, gives market participants the confidence to put a price on a carbon allowance.

Beginning in 2010, obligated emitters in the EU ETS were allowed to use international carbon credits - those generated under the UN’s Clean Development Mechanism (CDM) and Joint Implementation (JI) programme - to offset up to 4.5% of their verified emissions.

The measure was introduced with cost-containment in mind; rather than cutting their own emissions it allowed companies the flexibility to meet some of their compliance obligation by buying credits from carbon projects delivered elsewhere in the world.

There were two big problems.

First, the quantity limit of international credits turned out to be much too generous. The economic impact of the 2008/09 Great Financial Crisis (GFC), coupled with Japan’s retreat from its climate targets following the Fukushima nuclear accident in 2011 resulted in an enormous influx of cheap carbon credits, estimated to be in the region of 1.6 Gt CO2.

Second, the quality of the carbon credits was also found wanting. In 2016, Öko-Institut, the environmental research non-profit, estimated that only 7% of the potential 2013-2020 Certified Emissions Reduction (CER) supply was very likely to be additional; adding that the “large majority of the projects registered and CERs issued under the CDM are not providing real, measurable and additional emission reductions”. Their verdict: the CDM has “fundamental flaws in terms of overall environmental integrity”.[2](#footnote-2) 

The price of CER credits - remember they had monetary equivalence with EU emission allowances (EUAs) - dropped from €25 per tonne CO2 in 2008 to €10 per tonne CO2 in 2011, before then crashing to a low of €0.50 per tonne CO2 in 2012.

Until 30th April 2021 it was still possible to use international carbon credits to meet compliance (for calendar year 2020), but thereafter the EU ETS has been solely based on a domestic emissions reduction target. Nevertheless, the knock-on impact on the EU carbon market still lingers to this day, despite policy interventions such as the Market Stability Reserve (MSR) that have sought to curb the oversupply.

### It’s different this time, or is it?

EU member states are legally committed to reach a 55% reduction in emissions by 2030, and net zero by 2050\. However, the interim target for 2040 has yet to be determined and has proved contentious amid concerns about the competitiveness of European industry, and a broader political pushback against the blocs environmental rules. More details are expected to be published tomorrow - Wednesday 2nd July.

It’s clear that the European Commission wants to keep an emission reduction target of 90%, although there appears to be some wiggle room as to the trajectory, perhaps deferring the requirement for steeper cuts to late in the 2030’s. Governments are rightly concerned whether it's unrealistic to expect the industrial sector to shoulder so much of the burden, particularly given the steepness of their marginal abatement cost (MAC) curve.

The EC has indicated that member states may be able to allowed to use international carbon credits to meet the proposed 90% reduction in emissions by 2040 against 1990 levels. Only carbon credits generated under Article 6 are expected to be allowed. Early drafts of the EU's 2040 proposal reveal that member states may only be able to meet 3% of their target, but only phased in from 2036, and crucially, will not be allowed within the EU ETS.[3](#footnote-3)

Nevertheless, the risk that poor quality carbon credits are used to meet Europe's climate targets remains. Remember, whether in the voluntary carbon market (VCM) or in the confines of a compliance scheme, there are several factors that determine whether a carbon credit will deliver on its claims. These include additionality (the reduction would have happened anyway), over-crediting (more credits are issued than warranted), and non-permanence (carbon avoided or removed is only temporary), among other factors.

A recent meta study evaluating the performance of 20% of all credits issued (representing almost 1 billion tons of CO2e), found that less than 16% constituted real emission reductions. Carbon credits generated under Article 6 may still suffer from the same problems that have plagued the VCM, even with (or perhaps despite) it being a regulated market and not just a voluntary market.[4](#footnote-4)

Furthermore, there is a fundamental flaw in the Article 6 mechanism. Individual countries face a perverse incentive, that when multiplied across countries, will most likely fail to deliver the expected global emission reductions, and may even make things worse.

It’s rational for an individual country to deliberately set a weak nationally determined contribution (NDC), and then sell Internationally Transferrable Mitigation Outcome (ITMO) with corresponding adjustments to others when they overachieve it. This generates climate finance for themselves, but at the expense of weaker domestic and global emission reductions.

Outside of Europe many of the new and emerging ETS allow some degree of compliance need to be met by carbon credits. Out of the 38 ETS currently operational, 25 allow domestic carbon credits to meet compliance. While most ETS limit carbon credits to \~5% of compliance, others such as Australia’s Safeguard Mechanism and Vietnam’s proposed ETS allow much higher levels, of up to 30%. Only South Korea’s ETS currently accepts international carbon credits.

Allowing EU member States to meet future targets with carbon credits could open up Pandora’s Box, even if they're not directly allowed within the EU ETS. If Europe's politicians are prepared to signal a weakening in the need for domestic carbon abatement now, what might happen if things get really tough in 5-10 years time? It could lead to a situation where market participants anticipate that Europe will rely on carbon credits to an even greater extent in the future.

In this scenario the price of carbon will go down today, reducing the incentive for decarbonisation tomorrow. The delay in investment will bring about the very thing Europe would like to avoid in the future - the need for much higher carbon prices.

As Europe found to its cost before, loss of confidence in one part of the EU carbon market system undermined trust in the whole. The outcome was the debasement of its ‘Currency of Decarbonisation’. It cannot afford for that to happen again.

---

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---

1. England, also experienced a currency debasement in response to Henry VIII’s war expenses. There the episode was known as the Great Debasement. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://climate.ec.europa.eu/system/files/2017-04/clean\_dev\_mechanism\_en.pdf [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. Article 6 provides assurance to prospective buyers of carbon credits meeting the correct standard that their purchase and retirement can be counted under the framework of the Paris Agreement. A COP29 countries endorsed new standards, paving the way for a UN backed market under Article 6.4 of the Paris Agreement, now known as the Paris Agreement Crediting Mechanism (PACM). Countries also clarified the rules for bilateral carbon trading under Article 6.2, enabling the transfer of a type of carbon credit known as an Internationally Transferrable Mitigation Outcome (ITMO) between countries. [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://www.nature.com/articles/s41467-024-53645-z [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### The carbon abatement return on investment
URL: https://www.carbonrisk.world/the-carbon-abatement-return-on-investment/
Last updated: 2025-08-26T06:35:40.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

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*🛫 Note that I’m taking a break from carbon markets next week 🏎️. I will be back at my desk in early July 🛬*

---

*Estimated reading time \~ 8 mins*

Uncertainty over the future demands from AI and datacentres notwithstanding, energy consumption per person tends to flatten out once incomes reach $25-30k. For many advanced economies reaching this stage, including those in Western Europe and the United States, carbon emissions are also likely to have decoupled from economic growth, or at least begun to do so.

In contrast, as the chart below illustrates, emerging markets (EMs) are on the precipice of entering the ‘energy growth zone’, the steepest part of the S-curve in which rising incomes coincide with a large increase in energy consumption. If these same countries rely on fossil fuels to support the growth in energy demand its clear that carbon emissions will rise sharply. To avoid the risk that fossil fuels become locked in for decades to come, it’s imperative that renewable energy is the foundation upon which future EM energy growth is built.

![No alternative text description for this image](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8e89453c-f539-4251-a46b-762607be477f_1200x1200-jpeg-1.jpg)

Source: ASR Ltd

### Low hanging fruit

For climate-orientated investors looking to achieve the biggest cut in carbon emissions per dollar invested, EMs and other developing economies could offer the best return on investment.

The opportunity for additional emission cuts in advanced economies tends to focus on the so-called ‘hard-to-abate’ sectors, all towards the higher end of the marginal abatement cost (MAC) curve. The picture in EMs is very different given the huge low-cost carbon abatement opportunity from renewables and energy efficiency.

$1 dollar invested in clean energy in EMs could lead to almost 10 tonnes of emission reduction in 2035, according to estimates by the International Energy Agency (IEA) and the International Finance Corporation (IFC), 30% more than the carbon abatement return on investment in advanced economies.[1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/d0f7dbf5-1843-47e5-92be-5f20024367d8_744x469.png)

The opportunity for climate finance is huge. Annual clean energy investments in EMs (excluding China) will need to rise almost 7-fold to $1.4-1.9 trillion by the early 2030s to meet rising energy needs and align with the climate goals set out in the Paris Agreement. The IEA/IFC estimate that around one-third of this investment will need to go into low-carbon generation, another one-third towards energy efficiency and electrification, electricity grids and storage require about a quarter, with clean fuels accounting for less than one-tenth.

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### Leveraging capital to the EMs

Although EM capital markets are growing, they do not have the depth necessary to meet the widening clean energy investment gap. A substantial mobilisation of global capital flows, primarily from the advanced economies, but also leveraging both public and private sector capital, will be necessary. EM’s dependence on external financing means investors are crucially aware that exchange rate volatility, and political and bureaucratic instability could have an adverse impact on their investments.

In addition to these factors, the cost and availability of finance is a major obstacle to capital investment in EMs. Energy transition investments in particular are typically very capital intensive, requiring significant sunk costs. This means that the absolute and relative cost of capital can make or break the commercial viability of a project. High interest rates could serve to delay the energy transition, especially for EMs and other less developed economies unable to borrow at competitive rates.

The problem of higher capital costs is very real. For example, in developed economies, the benchmark weighted average cost of capital for solar PV projects in 1H 2022 ranged from 1.7-5.8% according to BNEF. In EMs the benchmark ranged from 4.7-14.4%. The broad range tallies with recent estimates from the International Energy Agency (IEA) which estimates that financing renewables costs at least 2-3 times more in EMs than it does in advanced economies.

### Carbon credits won’t help, but compliance carbon markets might

For all the talk about carbon credit markets helping to drive investment in the EM energy transition, the data tells a different story. Overall carbon credit value directed at energy projects in EM has increased more than 8-fold over the past decade to almost $300 million in 2024 with Africa the primary beneficiary of these capital flows. However, as the IEA state in the chart below, carbon credit markets have supported less than 0.02% of global clean energy investment, and only around 0.1% of the funds directed at EMs.[2](#footnote-2) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/53c96ce2-7fc7-4a2d-be3e-2671dd52416c_1006x623.png)

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Compliance carbon markets could provide a more bountiful source of capital. Just over half (56%) of the $100 billion in revenue raised from carbon pricing instruments (emissions trading schemes and carbon taxes) was earmarked for energy transition and development projects, the vast majority resulting from funds generated through the sale of EU emission allowances, and all invested in domestic projects in Europe.

Unfortunately compliance carbon markets in EMs are at a much earlier stage of development. Turkey, Indonesia, India, and Brazil, among others are still at an early stage in the development of their own emissions trading schemes. Although these carbon pricing instruments present EM governments with the opportunity to redirect capital towards domestic energy transition projects, the desire to ensure that schemes aren’t too big a burden suggests that the funds invested are unlikely to be a major driver (see [*Why Asia is pivotal to future carbon market growth*](https://www.carbonrisk.world/why-asia-is-pivotal-to-future-carbon/)).

### Advanced nation myopia

EMs are unlikely to get too much help from advanced economies either. EMs are increasingly marginalised as advanced economies focus on the nation-state and their own domestic climate policies. It means that EMs share of future low-carbon investment is only likely to get squeezed even further.

Hopefully it’s not too late before governments recognise that financing clean energy investments in EMs is a positive-sum game. As discussed in [*A new political trilemma*](https://www.carbonrisk.world/a-new-political-trilemma/), with EM energy consumption and emissions set to increase sharply, all the hard work being carried out to cut emissions in advanced economies risks being undone:

> “Advanced nations should look to invest in less developed countries energy transition and industrial decarbonisation, finance the infrastructure necessary to clean up their environment, incentivise the introduction of policies such as carbon pricing and other regulations, and most importantly, boost trade and investment to help support their economic growth.  
>  
> This will accelerate their progress through and beyond the tipping point described in the Environmental Kuznets Curve (EKC). This is the point at which economic development reaches a certain level and where further incremental growth results in a decline in environmental degradation, not more.”

### China has it’s eye on the prize

The move towards protectionism across many advanced economies, but particularly the United States, has meant that EMs are receiving a greater share of China’s exports of clean technology; 43% in 2024 compared to 24% in 2022, according to recent estimates by BNEF. China has a competitive advantage in solar, wind, and battery technology, and is also eager to find a dependable market for surplus domestic production capacity, one that could be supported through climate finance.

As I discuss in [*Carbonomics returns: Hydrogen headwinds, a fragmenting world order, and new energy frontiers*](https://www.carbonrisk.world/carbonomics-returns/), China is rapidly developing a competitive advantage across a much broader swath of the technologies necessary for decarbonisation - advanced heating systems to electrify heavy industry, CCUS and industrial carbon recycling, as well as long-duration energy storage systems.

Shutting these technologies out of advanced economies adds to their overall future cost of decarbonisation, but perhaps allows EMs to benefit. Indeed, that already appears to be happening with EMs securing a significant amount of global investment focused on industrial decarbonisation.

A total of 826 commercial scale, clean industrial projects are either operational, at final investment decision (FID) stage, or have been announced, according to the Global Project Tracker from the Mission Impossible Partnership (MIP). If all the projects become operations they are projected to cut emissions by around 1Gt of CO2 per year across the hard-to-abate sectors.[3](#footnote-3)

### The 'new industrial sunbelt'

Although China, Europe, and the United States lead the way in terms of investment, one-third of the announced projects are now located in EMs. These new clean industrialisation opportunities are emerging in what MIP calls, “the 'new industrial sunbelt' — regions rich in solar resources, stretching from the Middle East and Africa to Latin America and Asia.[4](#footnote-4)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/899bba5a-2d54-49c8-a0ea-91f17dca961d_557x742.png)

The best opportunities for carbon abatement are in the EMs; preventing fossil fuels from being locked-in as these economies undergo a dramatic transformation in their fortunes. That will require significant investment in renewable energy, grid modernisation, and clean fuels. Nevertheless, EMs face a challenging funding environment as advanced nations worry about economic and political volatility, and have their attention on domestic issues.

For a country such as China who leads the clean technological race this smells like opportunity. As the West seeks to disengage with China, EMs are also positioning themselves to leverage its industrial decarbonisation technologies, in turn potentially leapfrogging those advanced nations too myopic to recognise the EM carbon abatement opportunity.

---

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---

1. https://www.ifc.org/content/dam/ifc/doc/2023-delta/scaling-up-private-finance-for-clean-energy-in-edmes-en.pdf [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://iea.blob.core.windows.net/assets/1c136349-1c31-4201-9ed7-1a7d532e4306/WorldEnergyInvestment2025.pdf [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://www.missionpossiblepartnership.org/tracker [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://www.missionpossiblepartnership.org/tracker-insights/jun-25/ [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### Building blocs
URL: https://www.carbonrisk.world/building-blocs/
Last updated: 2025-08-26T06:35:59.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

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---

*Estimated reading time \~ 9 mins*

Launched 20 years ago, the EU emissions trading system is the worlds most advanced compliance carbon market. As so often happens, regulation first introduced in the European Union tends to influence global standards and policies - known as ‘the Brussels effect’. The EU ETS is one of the most successful examples of that phenomenon in action.

The latest World Bank *State and Trends of Carbon Pricing* report reveals an increasing share of global GHG emissions are now subject to direct carbon pricing. That’s good news — carbon pricing enables scarce resources to be allocated more efficiently, reducing the cost of cutting emissions (see [*It's the carbon price, stupid!*](https://www.carbonrisk.world/its-the-carbon-price-stupid/))

The issue now is that carbon pricing is becoming ever more fragmented, and that poses a problem as countries seek to prevent competitors, who might not have a comparable carbon price, from undercutting them.[1](#footnote-1)

Here’s some of the key facts from the World Bank report.

Direct carbon pricing covers approximately 28% of global GHG emissions, up from 24% in 2024\. There are now 80 direct carbon pricing instruments in operation around the world; 37 emissions trading systems and 43 carbon taxes.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/41463bae-6708-4225-a034-eb45b4b9aaf2_1317x813-1.png)

Two sectors have the highest level of direct carbon pricing coverage: the power sector (51% of emissions covered) and industry (43%). Most other sectors languish at around 5-15%, with waste, agriculture, and land-use, land-use change, and forestry (LULUCF) at or near zero.

Rate-based ETSs (also known as intensity-based ETS) are becoming increasingly popular due to the low cost and the flexibility they give obligated emitters. This type of approach is used in Australia, China, Indonesia, and several provinces in Canada. Other jurisdictions such as Turkey are considering introducing a rate-based ETS.[2](#footnote-2) 

Almost two-thirds of ETSs and almost one-fifth of carbon taxes allow eligible carbon credits as a compliance option according to the World Bank. While most instruments limit carbon credits to \~5% of compliance, others such as Australia’s Safeguard Mechanism and Vietnam’s proposed ETS allow much higher levels, of up to 30% (see [*Everything you need to know about Australian Carbon Credit Units (ACCUs)*](https://www.carbonrisk.world/australias-reformed-safeguard-mechanism/)).

The global average price for carbon pricing instruments was $19 per tonne CO2 in 2025, a doubling in real terms since 2015\. However, given that over 70% of global GHG emissions are without a direct carbon price, the global emissions-weighted average carbon price is a mere $5 per tonne CO2.

The report also shines a light on the disparity in implied carbon pricing; the fuel excise duties, fossil fuel subsidies, and other incentives that alter consumption behaviour. The World Bank focus on Latin America to make their point. The total carbon price in 2024 had strengthened to $37.50 per tonne CO2, as governments in the region introduced fiscal reform. In contrast, over the past five years direct carbon pricing only accounts for 13% of the total carbon price (see [*A uniform global carbon price is unworkable, and unnecessary*](https://www.carbonrisk.world/a-uniform-global-carbon-price-is/)).

As I remarked at the beginning of this article, it’s encouraging news, but there’s very little in the way of a standard template being applied from one country to another. A recent report by Oxford Economics suggests that the fragmented nature of global carbon pricing instruments increases the risk of carbon leakage.[3](#footnote-3)

The average global carbon leakage rate is estimated to be between 5% and 30%, with small open economies typically more exposed to the phenomenon than larger ones. Emissions-intensive trade-exposed (EITE) industries such as chemicals, cement, steel, and aluminium face high carbon leakage rates of between 47% and 55% if high income countries introduce a carbon price consistent with their nationally determined contributions (NDCs). In comparison, localised industries such as aggregates face much lower carbon leakage rates (12%).[4](#footnote-4) 

### The other Brussels effect

Carbon border levies such as Europe’s Carbon Border Adjustment Mechanism (CBAM) seek to mitigate the risk of carbon leakage, ensuring that direct carbon pricing isn’t undermined. Indeed, one of the key motivating factors for countries seeking to introduce a carbon price recently has been to reduce their exposure to the CBAMs emerging in Europe and elsewhere.

_This post is for paying subscribers only._
### Straight and narrow
URL: https://www.carbonrisk.world/straight-and-narrow/
Last updated: 2025-08-26T06:36:14.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

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---

*Estimated reading time \~ 8 mins*

![blue bmw car in a dark room](https://images.unsplash.com/photo-1608095476825-d4e0f916372f?fm=jpg&q=60&w=3000&ixlib=rb-4.1.0&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Scott Rodgerson](https://unsplash.com/@scottrodgerson?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/blue-bmw-car-in-a-dark-room-ffH%5FGkINfyY?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

According to Gary Becker’s theory of rational crime, a profit-maximising firm will comply with an environmental regulation, but only as long as the expected penalty of violating it exceeds the compliance cost.

Economists have long been puzzled by evidence that seems to contradict Becker’s theory. The economist Winston Harrington first documented this in a paper published in 1988 based on research into compliance with environmental regulations in the United States, during the late 1970’s and into the 1980’s. The upshot is that firms appear to comply with environmental regulations to a much higher degree than that predicted by ‘rational crime’.

Harrington’s Paradox is the notion that firms in general comply with environmental regulations, in spite of the fact that they tend to be subject to infrequent environmental monitoring, discretions are rarely punished, and the expected fine is minimal compared to the cost of meeting compliance.

Subsequent researchers have questioned Harrington’s findings, often struggling to uncover data that supports the existence of a paradox. However, a recently published paper by researchers at Georgetown University and the Grantham Research Institute, examined historical trends in compliance with the EU ETS with the data appearing to support the existence of Harrington’s Paradox.

_This post is for paying subscribers only._
### It's all political
URL: https://www.carbonrisk.world/its-all-political/
Last updated: 2025-12-01T09:02:47.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

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---

*Estimated reading time \~ 7 mins*

![person holding change the politics not the climate printed board](https://images.unsplash.com/photo-1554418651-70309daf95f5?fm=jpg&q=60&w=3000&ixlib=rb-4.1.0&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Tania Malréchauffé](https://unsplash.com/@okta?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/person-holding-change-the-politics-not-the-climate-printed-board-Tq7lbAeF9BQ?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

> *“I had always tried to focus on macro, and that had been good for me - but when I look back, I realise how much everything was politically driven.”*  
>  
> \- Russell Clark

One of the first pushbacks I get from investors nervous about allocating to carbon markets is the risk of political interference.

Environmental markets such as compliance carbon pricing are a political construction in which scarcity is created through regulation. An emissions trading scheme typically involves the government or another institution imposing a cap on emissions, and then issuing allowances denominated in tonnes of carbon. The emissions cap is then reduced by a fixed percentage each year to move those covered by the scheme towards a long-term target, i.e., net-zero emissions.

Alas, the response from many prospective investors is that well, the rules of the game were set by politicians, and so the rules can also be changed, if and when the whim takes them. A quick step back and you can see that politics is often the driving force behind many of the biggest moves in global asset markets, whether that be commodities, equities, or bonds. The rules of these games are also often rewritten to serve their political masters.

The inspiration to write this post was sparked by a recent article by Russell Clark, in which the hedge fund manager ~~laments~~ articulates how everything is a “political trade”:

> “I like having a strategy to attack markets with. When you have a strategy, you can makes adjustments to improve it as you get new information. In my career as an analyst and fund manager from 2004 to 2021, I was very heavily macro focused, because that was what worked. But from 2016 onwards, it stopped working. Currency moves, and asset moves that I expected rarely followed through….  
>  
> ...For me, I had always tried to focus on macro, and that had been good for me - but when I look back, I realise how much everything was politically driven.”

In his post, Clark highlights shorting Chinese tech (political impetus to prevent firms getting too powerful), buying Irish bonds at 10% (political will not to see a fellow EU Member State default), as two of his most notable trades where politics was the underlying factor. He goes on to explain what might be behind recent market moves in oil (political pressure to keep prices low in the event of a US or Israeli strike on Iran), and gold (political pressure for higher wages which could fuel inflation, noting the comparisons with the 1970’s) as evidence that politics drives markets.[1](#footnote-1) 

You just need to know where to look.

Politics is the driving force in both short-term and long-term moves in asset markets. Trump’s tantrums with Europe or Elon and the risk-off sentiment across asset classes on the one hand. Globalisation, de-unionisation, and the decade long bull market in bonds on the other. Politicians also have their tools of market manipulation. From the US government selling crude from the Strategic Petroleum Reserve (SPR) to keep oil prices low, to the Chinese plunge protection team, buying equites to push share prices higher.

Carbon markets are no different.

As the cornerstone to achieving Europe’s climate targets, a strong EU carbon market was essential. However, in the early 2010’s Europe faced a problem. Launched in 2005, an influx of cheap international credits had weakened the EU ETS; the price of carbon plunged to below €5 per tonne CO2\. The politics of nuclear power generation contributed to the selloff. Japan’s retreat from its climate targets following the Fukushima nuclear accident of 2011 added to the surplus as the government stopped buying credits.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/af11d027-29fd-4815-8c9c-b6fb9e81c742_908x540.png)

Spurred on against the backdrop of the 2015 Paris Agreement, Europe’s climate policymakers were about to get serious about reform.

_This post is for paying subscribers only._
### Repricing the 'Tragedy of the Horizon'
URL: https://www.carbonrisk.world/repricing-the-tragedy-of-the-horizon/
Last updated: 2025-08-26T06:36:49.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

[Subscribe now](#/portal/signup)

---

*Estimated reading time \~ 11 mins*

![a snow covered field with a body of water in the background](https://images.unsplash.com/photo-1670879300315-4237f6ec38d8?q=80&w=1000&auto=format&fit=crop&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Joakim Honkasalo](https://unsplash.com/@jhonkasalo?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-snow-covered-field-with-a-body-of-water-in-the-background-0swKgzBAPvM?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

> “Climate change is the tragedy of the horizon. It’s catastrophic impacts will be felt beyond the traditional horizons of most actors - imposing a cost on future generations that the current generation has no direct incentive to fix. That means beyond the business cycle, the political cycle and potentially the horizons of technocratic authorities, like central banks, which are bound by their mandates.”  
>  
> \- Mark Carney.

The term ‘Tragedy of the Horizon’ was coined by Canadian Prime Minister Mark Carney, and was first outlined in a speech to the insurance market Lloyds of London in September 2015 when he was the Governor of the Bank of England.[1](#footnote-1) 

In his speech, Carney warns that once climate change becomes a defining issue for financial stability it may already be too late to do anything about it. He outlines three broad channels through which climate change is likely to affect financial stability, and while the speed at which such re-pricing occurs is uncertain, it will ultimately be decisive for financial stability:[2](#footnote-2) 

> “First, physical risks: the impacts today on insurance liabilities and the value of financial assets that arise from climate- and weather-related events, such as floods and storms that damage property or disrupt trade;  
>  
> Second, liability risks: the impacts that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible. Such claims could come decades in the future, but have the potential to hit carbon extractors and emitters – and, if they have liability cover, their insurers – the hardest;  
>  
> Finally, transition risks: the financial risks which could result from the process of adjustment towards a lower-carbon economy. Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.”

Carney suggests that only through better information, specifically climate disclosures that detail factors such as corporate carbon footprints and how management intends to manage climate related risks, will the Tragedy of the Horizon ultimately be broken:

> “With better information as a foundation, we can build a virtuous circle of better understanding of tomorrow’s risks, better pricing for investors, better decisions by policymakers, and a smoother transition to a lower-carbon economy.  
>  
> By managing what gets measured, we can break the Tragedy of the Horizon.”

Carney’s speech to Lloyds of London in 2015 was well received by the audience. The insurance industry was always going to be the canary in the coalmine when it came to managing the physical risk arising from climate change. Fast forward to early 2025 and Munich Re released a report entitled, ‘*Climate change is showing its claws’.*

Their analysis revealed that worldwide natural disasters caused losses of $320bn in 2024 (of which around $140bn were insured), considerably higher than the inflation-adjusted average observed over the past 10 years ($236bn). Losses from floods, wildfires, and severe thunderstorms accounted for $136bn of overall global losses in 2024, again well above the 10 year average ($110bn).[3](#footnote-3) 

In response, insurers are pulling back from offering cover to homeowners in areas deemed to be at high risk of climate related disasters. Even where insurance is available, homeowners are being forced to pay significantly higher premiums to cover the increased risk of being affected by extreme weather.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/6eb00177-d3f4-41cd-832b-ae72914bb16c_1327x742.png)

Liability risk is also beginning to become more acute, as governments in particular take the lead on pursuing climate compensation. For example, last week a German court rejected a lawsuit brought against RWE by a Peruvian farmer. The farmer alleged that the German utility’s emissions had contributed to higher temperatures, causing the snow caps of the local mountain range to melt, resulting in the farmland below to flood. The case was rejected but the court confirmed for the first time that major emitters can be held liable under German civil law for risks resulting from climate change.

Other jurisdictions are seeking to hold fossil fuel companies accountable for their historical emissions. In the US, lawmakers in New York State passed the Climate Change Superfund Act in late December. It will require companies responsible for the bulk of historic greenhouse gas emissions to pay a combined $3 bn each year for 25 years. The proceeds will then be invested in infrastructure that helps New York recover from and adapt to climate change. The state of Vermont passed a similar law in 2023.

Meanwhile, the European Union has introduced an obligation on fossil fuels firms to establish geological storage sites for CO2 sequestration. The Net Zero Industry Act (NZIA) aims to achieve a CO2 injection capacity of at least 50 Mt CO2 by 2030\. In late May lawmakers announced that 44 oil and gas companies such as OMV Petrom and Eni will be required to contribute; their share will be equivalent to the individual company’s EU oil and gas production during the period 2020 to 2023.[4](#footnote-4)

Finally, some forward thinking investors are beginning to price up the physical, liability, and transition risks associated with the Tragedy of the Horizon. Norway’s $1.8 trillion sovereign wealth fund, Norges Bank Investment Management (NBIM), has broken new ground for climate, nature, and biodiversity reporting — remember how Carney said that information would be the key to breaking the Tragedy of the Horizon.

In late February the fund published a report entitled ‘*Climate and nature disclosures 2024’* outlining how their portfolio interacts with critical environmental risk factors, what they are measuring to quantify these factors across the globe, and how they are repositioning their portfolio to benefit from a repricing of climate risk.[5](#footnote-5) 

The report highlights how NBIM use multiple data sources and techniques to analyse climate and nature risks and opportunities. These include relying on AI to extract tailored climate disclosure data directly from corporate reporting, using geospatial analysis to understand their portfolio’s impacts and dependencies on ecosystem services, and finally, developed a tool that quantifies the cost to society as a result of companies direct impact on the environment (see [*Down to earth: Putting a value on biodiversity has consequences, and not all good*](https://www.carbonrisk.world/down-to-earth/)).

Last year NBIM started to develop a top-down approach to stress test their equity portfolio against an extreme physical climate risk scenario. The modelling estimated the present value of average expected losses from physical climate risk on their US equity investments was 19%, compared to 2% with the MSCI’s bottom-up approach. As the footnote to the table below shows, systemic impacts or parallel economic shocks that could result from negative feedback loops are not included in the estimate of climate risk, so their analysis probably underestimates the downside risks.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/ad88d088-cc35-4b97-8d7c-d42aca9682b1_1083x451.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

It’s worth noting that NBIM is a sovereign wealth fund and doesn’t operate in the same way as other large investment funds. Ultimately it’s beholden to the Norwegian government and the Norwegian citizens.

NBIM’s management mandate is set by the Norwegian Ministry of Finance and states that its activities shall be “based on the long-term goal that the companies in the investment portfolio organise their activities in such a way as to make these compatible with global net zero emissions in accordance with the Paris Agreement.”

The fund does own approximately 1.5% of all shares in the worlds listed companies, making it the largest single owner. With that NBIM are in a position to pressure other investors to follow its lead, and set the standard by which companies within its portfolio will be judged.

What then of the supposed guardians of the financial system: the central banks? Many economic commentators, most notably former US Treasury Secretary, Larry Summers have criticised central bankers who stray too far from their day jobs and opine on issues including climate change. In 2020, in an interview with Bloomberg, Summers issued this rebuke to central bankers: “They do not have the capacity to fight climate change. They need to acknowledge the limitations of their influence.”

There is some evidence that certain central banks have retreated from taking a lead on climate change risk. Mark Carney’s previous employer, the Bank of England (BoE), appears to have downgraded climate change as a risk to financial stability since he left the post. In a recent article in the Financial Times, several people who left the Bank since 2020 report that climate change has been deprioritised under Andrew Bailey, Carney’s successor as Governor:[6](#footnote-6)

> “A senior official said it was now “in the middle of the pack”, with the European Central Bank “in the lead” and the US Federal Reserve “behind”. But the former employees said they feared the change in priorities had caused the BoE’s technical risk-modelling capacity to fall behind that of the private sector, even as the effects of climate change on the UK have intensified.”

Nevertheless, fears that the Bank might be neglecting Carney’s climate risk legacy entirely appear to be wide of the mark. In late April, the Prudential Regulation Authority (PRA), the UK's financial regulatory body and part of the BoE, published a new consultation paper proposing a change in climate risk governance for the UK financial system. In addition to proposals for greater governance accountability, regular scenario analysis and stress testing, the PRA also calls for tighter data quality and disclosure standards.[7](#footnote-7) 

Furthermore, central banks are being encouraged to think through the consequences of near-term climate risks. The Network for Greening the Financial System (NGFS) has just released its first short-term climate scenarios covering the period 2025 to 2030\. The aim of the report is to help central banks analyse the potential near-term impacts of climate policies and climate change on financial stability and economic resilience.[8](#footnote-8) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8488836-f135-4f38-bf91-c2868d22b585_1171x785.png)

The contribution by the NGFS is a step forward, bringing the Tragedy of the Horizon fully into view of central bankers. However, as Mark Cliffe, former Chief Economist of ING Group outlines in a recent article, although there’s much to be applauded in the report, the simulations bear little resemblance to the real world, and that’s a problem if climate risk is going to be correctly priced:[9](#footnote-9)

> The ongoing failure to consider realistic narratives means that their models are not being asked the right questions. By ignoring crucial risks and interactions, these scenarios barely scratch the surface of the potential range of possibilities we face over the next few years.  
>  
> The new set of four short-term scenario narratives suffer from two essential problems. The first is that they treat physical and transition risks as strangely separable. Only one of the four scenarios involves both physical and transition risk while the remaining scenarios only examine one or the other, despite the near-inevitability that both types of risk will increase over the next five years.

Where does that leave us? The Tragedy of the Horizon has meant that we have been systematically undervaluing climate risks, leaving a tragic legacy for future generations. Despite some missteps, there is also reason for optimism. Markets are beginning to sniff out both the risks and the opportunities that climate change represents. I will leave the final word to an extract from Mark Carney’s book, *Values: An Economists Guide to Everything That Matters*:

> “A market in transition to 1.5 C is being built. It will reveal how the valuations of companies will change as climate policies adapt and carbon intensity declines. It will allow feedback between the market and policymaking, with policymakers learning from markets’ reactions, and markets internalising policymakers objectives, strategies and instruments. It will expose the likely future cost of doing business, of paying for emissions and of tighter regulation. It will help smooth price adjustments as opinions change, rather than concentrating them in a climate Minsky moment. And it will open up the greatest commercial opportunity of our time.”

---

**👋 If you have your own newsletter on Substack and enjoy my writing, please consider recommending** [**Carbon Risk**](https://carbonrisk.substack.com/) **to help grow this amazing community of readers! Thank You!👍**

---

[Climate change - A tragedy in three partsWelcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full acce…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-19.png)Carbon RiskPeter Sainsbury![](https://images.unsplash.com/photo-1598287634985-f68494938d5d?q=80&w=1000&auto=format&fit=crop&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)](https://www.carbonrisk.world/the-three-tragedies/)

---

1. https://www.bankofengland.co.uk/speech/2015/breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. A 2024 independent study conducted by European universities found that financial institutions could be underestimating investor losses from physical climate risk by as much as 70% https://www.nature.com/articles/s41467-024-48820-1 [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://www.munichre.com/en/company/media-relations/media-information-and-corporate-news/media-information/2025/natural-disaster-figures-2024.html#-1537950557 [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://climate.ec.europa.eu/news-your-voice/news/commission-identifies-eu-oil-and-gas-producers-provide-new-co2-storage-solutions-hard-abate-2025-05-22\_en [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
5. https://www.nbim.no/contentassets/6fdfd333e6bf460f8e538b9b55a95bb7/gpfg-climate-and-nature-disclosures-2024.pdf [↩](#footnote-anchor-5 "Jump back to footnote 5 in the text.")
6. https://www.ngfs.net/en/publications-and-statistics/publications/ngfs-short-term-climate-scenarios-central-banks-and-supervisors [↩](#footnote-anchor-6 "Jump back to footnote 6 in the text.")
7. https://www.ft.com/content/c9919c02-8328-4fa0-af4d-a108770a9f73 [↩](#footnote-anchor-7 "Jump back to footnote 7 in the text.")
8. https://www.bankofengland.co.uk/prudential-regulation/publication/2025/april/enhancing-banks-and-insurers-approaches-to-managing-climate-related-risks-consultation-paper [↩](#footnote-anchor-8 "Jump back to footnote 8 in the text.")
9. https://markcliffe.wordpress.com/ [↩](#footnote-anchor-9 "Jump back to footnote 9 in the text.")
### A port in the storm
URL: https://www.carbonrisk.world/a-port-in-the-storm/
Last updated: 2025-08-26T06:37:07.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

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---

*Estimated reading time \~ 9 mins*

![A large cruise ship in the middle of the ocean](https://images.unsplash.com/photo-1719007129627-780ab16f588c?fm=jpg&q=60&w=3000&ixlib=rb-4.1.0&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Zoshua Colah](https://unsplash.com/@zoshuacolah?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-large-cruise-ship-in-the-middle-of-the-ocean-ZUDRodxxKSI?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Almost 38 million people are expected to go on an ocean-going cruise in 2025, according to the Cruise Lines International Association (CLIA). That’s up 7 million (almost 20%) from 2023, the first year to see passenger numbers surpass pre-pandemic levels.

Today there are around 515 cruise ships dotted around the globe, more than double the number that traversed the oceans in 2000\. There are more ships now, but they are also much larger than ever before. The biggest cruise ships are typically twice as big as those that sailed 25 years ago. The largest cruise ship, the Icon of the Seas, weighs in at 248,700 gross tonnes and carries 7,600 people.

More passengers, and more big ships, means more emissions. Analysis by Transport & Environment (T&E) found that cruise ships operating within European sovereign waters emitted 8.1 Mt CO2 in 2022, an increase of 17% from 2019\. It’s not just CO2 though. Harmful pollutants such as sulphur oxides (SOX), nitrogen oxides (NOX), and fine particles (PM2.5) have also increased sharply, up 9%, 18%, and 25%, respectively (see *[Blue sky thinking: As climate policy splutters, governments should sell the benefits of clean air](https://www.carbonrisk.world/blue-sky-thinking/)*).[1](#footnote-1)

Up until recently the cruise liners have operated without fear of paying a price for their pollution.

Indeed, they barely pay any tax at all, utilising old-loopholes that shelter them as foreign entities. They are exempt from paying tax on marine fuel and avoid paying anything more than a notional amount of corporation tax. Operating out of the purview of any one nation, the cruise liners are masters at minimising their tax burden.

Nevertheless, things may now start to change as both European and international climate regulations begin to bite.

For example, the maritime sector has been included in the EU emissions trading scheme since 2024\. Ships travelling within the EU are required to pay for all of their emissions, while for voyages to or from a non-EU destination, half of the emissions are covered. Vessel operators including owners of cruise ships need to purchase EUAs amounting to 70% of their emissions in 2025 (up from 40% in 2024), and then cover 100% of their emissions in 2026 (see *[Putting a cap on European shipping emissions: The maritime sector is beginning to price in EU carbon prices](https://www.carbonrisk.world/putting-a-cap-on-european-shipping/)*).[2](#footnote-2)

The EU ETS only covers emissions from the last port of call with passenger movement before entering European waters. So for long-haul cruises such as those crossing the Atlantic from the Caribbean to Europe, liners will try and minimise their emissions reporting exposure by including intermediate stops at nearby ports such as Southampton in the UK, or Casablanca in Morocco.

_This post is for paying subscribers only._
### Emissions trading: past, present, and future
URL: https://www.carbonrisk.world/emissions-trading-past-present-and/
Last updated: 2025-08-26T06:37:24.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

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---

*Estimated reading time \~ 12 mins*

Almost one-fifth (19%) of global carbon emissions, accounting for just over 10 Gt CO2, are covered by emissions trading systems, according to the latest analysis from the International Carbon Action Partnership (ICAP). In total, there are 38 systems currently in operation across the globe, spanning jurisdictions that collectively account for around one-third of the global population and 58% of global GDP.[1](#footnote-1)

The overall share of global emissions has remained stubbornly close to the 20% mark since 2021 when China launched its carbon market. In part this has been due to declining emissions in older, more established systems, such as Europe’s and California’s, countered by the inclusion of other jurisdictions emissions under an ETS.

A step change does appear to be on the horizon, with ETS likely to play an even more important role over the course of the next decade. Some 20 countries are at various stages of considering or in the process of developing an ETS according to ICAP.

The list includes many of the largest emerging economies, including Brazil, India, Turkey, and Argentina. The introduction of Europe’s Carbon Border Adjustment Mechanism (CBAM) appears to be one of the main drivers, with governments seeking to mitigate the impact it might have on the competitiveness of their carbon intensive exports.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/ef02f688-48ba-47f9-a562-55e6a15d8078_1181x733-1.png)

Despite encouraging signs that a greater share of global emissions will be covered by an ETS, the existing 38 systems and the 10 Gt CO2 of emissions they cover exhibit a wide range of carbon prices. Less than three-quarters of the emissions are subject to a carbon price of $30 per tonne of CO2 or less. In contrast, only around one-sixth of the emissions are subject to a carbon price above $70 per tonne of CO2, and that list only includes the EU ETS.

This is much lower than the carbon price widely thought to be necessary in order to limit global temperature rises to well below 2ºC; $50-100 per tonne CO2e by 2030, cited by the 2017 High-Level Commission on Carbon Prices (HLCCP) and supported by a recent survey of carbon pricing academics (see *[A uniform global carbon price is unworkable, and unnecessary](https://www.carbonrisk.world/a-uniform-global-carbon-price-is/)*).[2](#footnote-2)

### Better off together

Countries that have adopted ETS are starting to realise that they are stronger together.

Last week, the UK government and the European Union announced that they are “working towards” linking their ETS. It follows an announcement by Quebec that the government are committed to maintaining their link with the Californian carbon market. In April, Washington State relaunched the rulemaking process that could pave the way for linking their ETS with California and Quebec — hopefully sometime in 2026\. Meanwhile, legislators in Oregon are thought to be seeking to establish an ETS with an eye on linking up to these same markets.

_This post is for paying subscribers only._
### Down to earth
URL: https://www.carbonrisk.world/down-to-earth/
Last updated: 2025-08-26T06:37:42.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

[Subscribe now](#/portal/signup)

---

*Estimated reading time \~ 9 mins*

![a bee sitting on top of a purple flower](https://images.unsplash.com/photo-1631643830562-527d8d967dbf?fm=jpg&q=60&w=3000&ixlib=rb-4.1.0&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Scotty Turner](https://unsplash.com/@thinkscotty?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-bee-sitting-on-top-of-a-purple-flower-dVLq8y3NgY4?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Today is International Biodiversity Day.

The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), the inter-governmental body of the United Nations, set up in 2012 to serve a similar role as the IPCC, defines biodiversity as follows:

> “The variability among living organisms from all sources including terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are a part; this includes diversity within species, between species and of ecosystems.”

It finds that biodiversity has been declining at a rate of 2-6% per decade over the past 30-50 years, with half of the global population living in areas experiencing the steepest declines in biodiversity. If these trends are allowed to continue, the IPBES conclude, then it will result in “substantial negative outcomes for biodiversity, water availability and quality, food security and human health, while exacerbating climate change.”

In late 2024, the IPBES published a report described as the “most ambitious scientific assessment ever undertaken” to understand the links between five separate crises or “nexus elements” – biodiversity, water, food, health and climate change. The report estimates that the unaccounted-for costs reflecting impacts on the five nexus elements, are at least $10-25 trillion per year.[1](#footnote-1) 

State subsidies such as those that support unsustainable food production practices, have a negative impact on biodiversity estimated to be in the region of $1.7 trillion per year. Private sector financial flows that are directly damaging to biodiversity are estimated to be $5.3 trillion per year (see [*Fuelling controversy: Fossil fuel subsidies act like a negative carbon price*](https://www.carbonrisk.world/everything-you-need-to-know-about-232/)).

Analysts at IPBES estimate that public and private investment aimed at improving the status of biodiversity amounts to significantly less than $200 billion per year (\~1% of global GDP). An additional $0.3-1 trillion per year is required to fill the biodiversity funding gap, while the other nexus elements are thought to face a funding gap of least $4 trillion per year.

The report calls for urgent action to “transform values and structures and address the dominance of a narrow set of interests within economic and financial systems”, without which it will be very difficult to “enable increased investments for biodiversity and the other nexus elements.”

[Get 30% off a group subscription](#/portal/signup)

### Biodiversity as an asset class

Up until recently, biodiversity has been something of an afterthought for sustainability orientated investors. The ‘E’ in ESG more salient (*read* quantifiable) to those seeking to invest in efforts to mitigate the impact. That is slowly starting to change, but a recent announcement by a major financial institution suggests that biodiversity could become an asset class in its own right.

In late January, BlackRock, the world’s largest asset manager ($11.5 trillion in assets under management as of Q1 2025), released a report titled *Our approach to engagement on natural capital*, officially recognising nature as a factor in its investment approach:[2](#footnote-2)

> “We prioritize land use, water and biodiversity for engagement, as appropriate, as they are most likely to be, or become, material to companies in the near future. The interconnectedness of these components contributes to the availability of natural capital on which companies and economies globally depend in order to operate effectively.”

Citing research published by PwC that found 55% of GDP (\~$58 trillion) is moderately or highly dependent on nature, the asset manager indicates that financial markets have barely begun pricing this risk into asset prices:

> “BlackRock research shows that only a portion of natural capital’s value to the economy is priced into markets today. This analysis suggests asset prices could adjust to better reflect both the risks and opportunities linked to natural capital, driven in large part by increasing physical risks.”

Markets are relatively efficient at attributing a price to natural resources that can be defined as rival goods. Agricultural land is a rival good because only one farmer can cultivate the same field for the same purpose at any one time. In contrast, markets are much less adept at pricing non-rival natural resources, such as wild bees and other pollinators, where one person’s use doesn’t stop another from benefitting.

BlackRock argues that ecosystem services “whose value is not fully priced into markets” are under increasing strain, and that by putting a value on these ecosystem services we will help to rebalance human activity towards their regeneration. If the asset manager is good on its word then increasing amounts of capital will be re-directed towards undervalued biodiversity assets.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/12f13aeb-b99a-436e-8c70-fee84a20510c_492x534.png)

### The price of everything and the value of nothing

But as Professor Bill Adams of the University of Cambridge writes in the journal *Science*, simply because you put a value on nature doesn’t necessarily result in a beneficial outcome for biodiversity, and it can actually make things worse. In a world where everything has a value, the services provided by an ecosystem might be enough to save it today, but perhaps not tomorrow. If biodiversity has a price then it can just as easily be traded for something else.[3](#footnote-3) 

It’s important to understand that the relationship between biodiversity, biophysical processes, and the delivery of ecosystem services is intricate and poorly understood. An over-confident focus on those aspects that deliver particular services is likely to have an impact (potentially adversely) on other components of the ecosystem, such as those rare species that are much less understood. Furthermore, managing an ecosystem for particular outcomes (e.g., carbon sequestration, flood protection, fire protection) could end up promoting ecosystems that retain little of their original biodiversity.

Meanwhile, in the same way that the long-term price of agricultural commodities changes over time due to innovation, the value ascribed to ecosystem services will now also be subject to technological change. Adams uses the example of how Mexican free-tailed bats helped to control pests from ravaging America’s cotton fields. The value of this particular ecosystem service to the country’s cotton production fell by 79% between 1990 and 2008 as many farmers began to plant a genetically modified cotton that is toxic to insect pests.

The notion of ecosystem services implies that different components can be separated and individually priced. Yet, as Adams makes clear, different ecosystem services are often co-produced. In some cases more of one service might mean more of another, or there may be a trade-off, such that more of one ecosystem service means less of another. Changing preferences towards alternative ecosystem services could mean that the value ascribed to the underlying components is volatile, putting their sustainability at risk.

Finally, Adam’s makes the case that estimating the net benefit of an ecosystem is not enough. Many ecosystems are owned by somebody, whether privately or by the state - although there are exceptions, for example, the deep ocean, the atmosphere, and Antarctica. Decisions as to how ‘owned’ ecosystems are managed “tend to reflect the interests of the owners,” and as Adams goes onto highlight, ecosystem services often require other forms of capital (physical, human, and financial), that in turn depends upon their availability to the owner.

### Trade-offs across the nexus

BlackRock expects asset prices will adjust to better reflect the risks and opportunities with the primary driver of this trend likely to be increasing physical risks. The asset manager believes that natural resources are increasingly strained, pushing up costs for companies that rely on them. In turn, biodiversity loss is reducing nature’s resilience and productivity in many regions, further driving physical risks, and so on.

The policy response to biodiversity risks is growing too, albeit with some headwinds. For example, the EU’s Deforestation Regulation requires that certain agricultural commodities sold into the EU market are not sourced from deforested areas. However, even here there is push back due to concerns that it is overly burdensome for business. The law will now come into effect on 30th December 2025, one-year later than planned (see [*Repricing deforestation risk in the wake of Brazil's presidential election*](https://www.carbonrisk.world/repricing-deforestation-risk-in-the/)).

Tradeable biodiversity credits issued by governments and tied to various compliance schemes are being developed. The corporate sector is also trying to develop schemes along the lines of those present in the voluntary carbon market (VCM). While the former has a value of around $10 billion, the latter is only thought to be around $2 million! [4](#footnote-4)

The voluntary biodiversity market is unlikely to get much attention from BlackRock. No, the asset manager has its sight set on 1) circular economy solutions, water solutions and other natural capital themes, 2) green bonds focused on natural capital solutions (\~$350 billion of outstanding debt), 3) companies poised to gain from avoiding nature-related risks or leaning into opportunities, and 4) technological innovation related to growing food demand and mitigating the impact.

Biodiversity is intrinsically linked to the other four nexus elements referred to by the IPBES. We all need to be aware of the trade-offs, and especially so as capital starts to put a price on biodiversity. For example, biofuels might help reduce emissions, but their production also competes with the needs of other land-uses such as agricultural production and forests (see [*Frequent fryer: Demand for biofuels made from used cooking oil is soaring, but could there be a sting in the tail?*](https://www.carbonrisk.world/frequent-fryer/)).

Indeed, the most important conclusion from the recent IPBES report is that prioritising objectives for a “single element of the nexus without regard to other elements (i.e., solely for biodiversity, water, food, human health or climate change) will result in trade-offs across the nexus,” making separate efforts to address them “ineffective and counterproductive.” In short, we need to stop considering them as separate issues, and start tackling them together.

---

**👋 If you have your own newsletter on Substack and enjoy my writing, please consider recommending** [**Carbon Risk**](https://carbonrisk.substack.com/) **to help grow this amazing community of readers! Thank You!👍**

---

[Natural capital markets: Putting a price on natureCarbon markets are just the start of a revolution putting a price on nature.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-21.png)Carbon RiskPeter Sainsbury](https://www.carbonrisk.world/natural-capital-markets-putting-a/)

---

1. https://www.ipbes.net/nexus/media-release [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.blackrock.com/corporate/literature/publication/blk-commentary-engagement-on-natural-capital.pdf [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://www.science.org/doi/10.1126/science.1255997?sid=d245e8c5-438d-419d-9c1a-139cd617f38d [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. [Biodiversity markets: reviewing 2024 and looking into 2025Hi friends 👋 Happy New Year!![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/2148c039-a269-45dd-8d9c-c8e118bb9639_842x842.png)Bloom Labs](https://sgradeckas.substack.com/p/biodiversity-markets-reviewing-2024)
### Carbonomics returns
URL: https://www.carbonrisk.world/carbonomics-returns/
Last updated: 2025-08-26T06:37:59.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

[Subscribe now](#/portal/signup)

---

*Estimated reading time \~ 7 mins*

In late 2019, Goldman Sachs (GS) published their first estimate of the marginal abatement cost (MAC) curve for carbon. The Carbonomics cost curve as the bank calls it, shows the reduction potential for anthropogenic greenhouse gas emissions based on over 100 different technologies.

The Carbonomics cost curve takes account of the cost of technologies available at commercial scale, and assumes economies of scale for technologies currently in the pilot phase. The cost curve is applied globally, across power generation, industry and industrial waste, transport, buildings, and agriculture. GS update their estimate each year, taking account of changes in the cost of carbon abatement technologies (e.g., solar, green hydrogen, etc.), and the relative cost of energy.

The most recent update, published in March 2025, a couple of weeks before ‘Liberation Day’, is shown in the chart below. With one eye on the potential for tariffs to disrupt trade, the analysts at GS also examined what a retreat from globalisation might mean for the cost of decarbonisation.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/db339663-7ffe-40d1-bd32-872850284cc6_811x600.png)

Before we get to that, lets look at how things have evolved over the past few years. The cost of decarbonising the first 50% of the Carbonomics cost curve has declined by 7% between 2023 and 2025 to $0.88 trillion, according to GS. The drop in cost has been driven by advances in utility scale batteries, and ongoing deflation in the cost of solar power panels.

At the other end of the curve, EV battery cost deflation, EV economies of scale, and the increased use of biofuels in transportation (i.e., renewable diesel and Sustainable Aviation Fuel, or SAF) has led a decrease in the implied cost of switching away from internal combustion engine vehicles.

It’s not all good news. The middle of the curve, including the majority of the hard-to-abate industrial sectors, has become more costly to abate since 2023\. For example, decarbonisation pathways dependent on green hydrogen (gH2) are facing much higher costs as earlier production forecasts prove too optimistic, and the rate of adoption turns out to be much slower than anticipated.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c4fff4aa-8c13-4f11-802c-a4851a7829af_808x568-1.png)

_This post is for paying subscribers only._
### California's 'energy transition' will not be linear
URL: https://www.carbonrisk.world/californias-energy-transition-will/
Last updated: 2025-08-26T06:38:33.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

[Subscribe now](#/portal/signup)

---

*Estimated reading time \~ 8 mins*

![A couple of signs that are in the dirt](https://images.unsplash.com/photo-1725958171072-808f8b8bd313?fm=jpg&q=60&w=3000&ixlib=rb-4.1.0&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Radek Skrzypczak](https://unsplash.com/@radosky?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-couple-of-signs-that-are-in-the-dirt-S4jenPe2-m0?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Two major refineries in California have announced plans to close over the next twelve months. The Phillips 66 refinery in Los Angeles is scheduled to shut-down by the end of 2025, followed by the Valero refinery in Benicia in April 2026.

The shutdowns should curb emissions by around 3 Mt of CO2e. After power generation, the refining sector is California’s second largest emitter — it’s top five individual emitters are all oil refineries.

However, the two facilities slated for closure also produce approximately 20% of California’s in-state gasoline supply, raising fears about whether the state will have enough gasoline to ward off the threat of a price spike. Indeed, analysis by Professor Michael Mische of University of Southern California (USC) forecasts that gasoline prices could rise to above $8 per gallon by the end of 2026, if the refining supply crunch is allowed to manifest.[1](#footnote-1)

Mische’s analysis indicates that the price of gasoline could rise from around $4.85 per gallon currently, to between $6.05 and $6.43 per gallon following the closure of the first refinery, increasing yet further to between $7.35 and $8.44 per gallon by the end of 2026 as the second refinery closes.

Even if the exact gasoline price trajectory is someway short of these predictions, sharply higher fuel prices risk provoking a backlash from citizens. Up until now at least they have been somewhat shielded from the supply-side response to California’s environmental policies.

That looks set to change.

_This post is for paying subscribers only._
### Repost: Biomethane is the killer application Europe needs to decarbonise
URL: https://www.carbonrisk.world/repost-biomethane-is-the-killer-application/
Last updated: 2025-08-26T06:38:50.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

[Subscribe now](#/portal/signup)

---

*Estimated reading time \~ 12 mins*

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/6c57c5df-4a82-41f1-9de1-f3276b9d8339_1034x504-1.png)

*In May 2024 I published an article introducing biomethane, it’s potential role in European decarbonisation, and why the launch of ETS2 in 2027 is likely to be important if biomethane is going to be commercially viable.*

*Last week we got the first indication of where the ETS2 carbon price might be. The market for EUA 2 futures launched on Tuesday 6th May. After trade in the Dec-2028 contract opened at €73.57 per tonne of CO2, the market settled at €77.71 per tonne of CO2 at the close on Friday. Trading remained thin during the first week with wide bid-ask spreads. Sellers are wary of taking on too much exposure this far ahead of the physical issuance of emission allowances.*

*As discussed previously, the design of the ETS2 scheme (i.e., no free allowances and a more rapid decline in the emissions cap versus ETS1) could result in the carbon price surging well above €100 per tonne as market participants start to weigh the prospect of an impending emission allowance deficit.*

*One of the key price switching dynamics to watch out for will be the cost of producing biomethane (and biodiesel for transportation) versus the price of conventional carbon intensive fuels. According to ClearBlue Markets the carbon price needs to be in the €50-€200 per tonne CO2 range, and preferably towards the top end to incentivise the switch necessary to decarbonise the building and transportation sectors.*

---

Almost two years ago, shortly after the Russian invasion of Ukraine, the European Commission presented its REPowerEU plan, a framework for how Europe was going to “rapidly reduce \[its\] dependence on Russian fossil fuels and fast forward the green transition.”

The plan focused on three core objectives: reducing energy consumption, diversifying sources of supply, and accelerating the rollout of renewable energy. Largely forgotten about amid the excitement of solar power, heat pumps, and renewable hydrogen, the EU’s plan also pushed for an ambitious scaling up of biomethane production.

To recap, biomethane is typically produced by upgrading the biogas that is released through the anaerobic digestion (AD) of organic waste (municipal waste, agricultural residues, food waste, etc.). It is defined as carbon neutral since only the CO2 absorbed by the organic matter during its growth can be released during its use.[1](#footnote-1) 

Also known as ‘renewable natural gas’, biomethane is extremely versatile. Indistinguishable from natural gas, biomethane can displace it without the need for retrofitting existing infrastructure - pipelines, tankers, appliances etc. Current consumption is evenly split across heating for buildings, industrial feedstock, transportation fuels, and power generation. As it is zero carbon, increasing consumption of biomethane enables emitters to claim they have avoided the emissions associated with natural gas.

### More investment required if biomethane is to hit 2030 target

REPowerEU set a non-binding target of at least 35 bcm of biomethane production per year by 2030, a 10-fold increase on 2022 levels. The latest data indicates that EU production increased to 3.4 bcm in 2023 (equivalent to 1.5% of EU gas consumption), and pretty much in line with recent historical growth rates of around 15%. If Europe is serious about meeting the 2030 REPowerEU target of 35 bcm, the annual growth rate will need to more than double to 33.8%.[2](#footnote-2)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7017f1ec-a79c-4c8c-b520-7966d4981ece_457x417.png)

Source: Gas for Climate: A path to 2050, Guidehouse; Rest of Europe includes Iceland, Norway, Serbia, Switzerland, Ukraine and the United Kingdom

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In short, investment in the sector will need to increase sharply. Around £18 billion has been earmarked for European biomethane investment, according to the European Biogas Association (EBA), with two-thirds of this capital scheduled to be spent between 2026 and 2030\. However, the EBA estimates that €83 billion of investment is required to fully unlock biomethane potential based on the construction of an additional 5,000 medium and large-scale AD plants (see [*Rotten returns: Biomethane could play a big role in European decarbonisation*](https://www.carbonrisk.world/rotten-returns/)).

### Current policy support fails to make economics stack-up

The economics of biomethane production have not been favourable. The International Energy Agency (IEA) estimates that it costs European biomethane producers around $17-28 per MBtu (€55-90 per MWh) with injection and liquefaction adding \~$5 per MBtu. Europe’s producers were in a strong position during the height of the energy crisis as natural gas prices surged towards $70 per MBtu. However, it wasn’t to last. Natural gas prices have dropped below the biomethane cost base since spring 2023\. And although prices have rallied on geopolitical concerns over the past month or so, this hasn’t been sufficient to move the economics in favour of biomethane.

Biomethane is a relatively mature industry that up until now has been focused on serving narrow geographical markets, supported by national government policies. Economies of scale have been possible, but it only really becomes apparent among the largest of biomethane plants, i.e., those that are 14 MW or more in size. The other main components of the overall cost includes the feedstock (lowest cost is typically municipal waste, forestry is the most expensive), and other operational expenditures.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a2d84d17-f9aa-4feb-81f2-d3e447e99b77_790x422.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

It’s clear that something has to change if biomethane is going to meet its promise. Lets dive in.

_This post is for paying subscribers only._
### All-in on Brexit reset
URL: https://www.carbonrisk.world/all-in-on-brexit-reset/
Last updated: 2025-08-26T06:39:08.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

[Subscribe now](#/portal/signup)

---

*Estimated reading time \~ 6 mins*

![two flags flying next to each other on a pole](https://images.unsplash.com/photo-1579018229420-db0d7bd40490?fm=jpg&q=60&w=3000&ixlib=rb-4.1.0&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Rocco Dipoppa](https://unsplash.com/@rhox?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/two-flags-flying-next-to-each-other-on-a-pole-yxDhneWz3vk?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

UK Prime Minister Keir Starmer will hold a joint UK-EU summit on Monday 19th May, in what officials hope will reset Britain's relationship with the bloc five years on from Brexit.

Defence and security are expected to be top of the agenda as the UK and Europe look to fill the void left by America. More pertinently to readers of *Carbon Risk* there’s an expectation that the UK and the EU will agree to link their respective emissions trading schemes, the two sides hopefully committing to specific timeframe for the negotiations to be completed.[1](#footnote-1) 

As I discuss in [*Pegger thy neighbour: Why smaller carbon markets link up with larger cap-and-trade schemes*](https://www.carbonrisk.world/pegger-thy-neighbour/), a linkage between the UK and EU ETS’ will improve liquidity, reduce costs, and lower carbon leakage risk. As in other arenas where countries agree to join forces, a linkage can also help to bolster investor sentiment. In this case the UK should benefit as investors perceive an increased commitment to ambitious climate policy:

> “The act of linking your carbon market to a larger, more established market can be thought of as a country pegging its currency to the US dollar or a basket of currencies. By tying their hands, governments pursuing this strategy bolster their economic credibility with the market, often enabling domestic industry to benefit from lower capital costs than would be present otherwise.”

Industrial emitters in the UK have been lobbying the government to link up with the EU ETS for some time. Exporters are especially concerned that the relatively low carbon price in the UK will negatively affect their ability to remain competitive in Europe once the CBAM is gradually phased in from 2026\. Many are worried that low carbon prices could have a detrimental impact on investment in technologies such as carbon capture and storage (CCS) that could help decarbonise UK industry.

At the beginning of the year the UK-EU discount stood at 50%. The perception that the chances of a reproachment between the UK and the EU were fading, coupled with delays to the UK ETS reform process, sent the UKA price down to a record low of £31.54 (€37.35) per tonne (see [*Britain's green credibility gap: UK carbon price slumps to record low, 50% below the EU*](https://www.carbonrisk.world/britains-green-credibility-gap/)).

In late January the Financial Times published an article titled ‘Keir Starmer looks to link UK and EU emission trading schemes’. One senior UK government official is quoted as saying, “British business wants to avoid any kind of cliff edge or extra costs. We are looking for win-win solutions to build confidence and relinking our carbon markets falls into that category.”[2](#footnote-2)

The UKA-EUA discount has narrowed sharply on the positive noises apparently coming out of Whitehall with the spread dropping to as low as 15% (\~€10 per tonne) in recent weeks. However, more recent coverage from the FT on the UK-EU summit fails to mention the prospect of a carbon market linkage, perhaps indicating that the UK government are going cold on the idea, or at least are reigning in their public statements on the issue as negotiations draw near.[3](#footnote-3)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a67fdeed-ad5c-4f65-8075-e567cd042dbc_569x482.png)

Source: Vertis

Not everyone is in favour of carbon prices, whether that be the UK’s or the EU’s. Sir Jim Ratcliffe, founder of chemical giant INEOS, recently claimed that his Grangemouth petrochemical site faces a UK ETS charges totalling £15 million for its emissions during 2024\. The Brexit supporter has slammed the UK’s net-zero policies as unaffordable and claimed that the carbon price is “killing manufacturing”.

Uppermost in the minds of the Labour Party is the strong performance of the Reform Party in the local elections in early May. The Reform Party is currently the joint favourite to become the largest political party after the next general election (scheduled to be held no later than 15th August 2029). It’s an astonishing feat for a political party that was only founded four years ago.[4](#footnote-4)[5](#footnote-5)

Reform’s leader Nigel Farage has described net-zero as “lunacy”, suggested that “We should scrap the net-zero targets”, and in a sign that Farage already knows that climate scepticism is his next crusade recently said, “This could be the next Brexit, where parliament is so hopelessly out of touch with the country.”

Back in June 2019 the UK became the first major economy to commit to meeting net-zero by law by 2050\. It prompted barely a murmur of opposition among the country’s politicians. Not so now. While the incumbent Labour government know that linking the UK and EU ETS’ together is in the country’s national interest, the potential for Reform — the likely opposition party — to make political capital from it is high.

The government face another delicate balancing act - between President Trump and America on the one hand, and Europe its closest neighbour and biggest trading partner on the other. The UK risks being caught in the middle as it seeks to tread the narrow path towards a securing a strong trade deal with the former, and a closer relationship with the latter. The risk is that the UK comes out with a bad deal on both accounts, with a linkage between the two carbon markets a potential casualty of a trade deal with America.

Investment funds are laser focused on the 19th May, hoping that both parties will signal their commitment to a linkage with a firm and preferably short timeline to complete the negotiations. Since the positive FT article was published in late January, investment funds have more than doubled their net long position to almost 20 million UKAs.

No one wants to see a repeat of Switzerland’s ETS linkage travails. Beginning in 2011, it took 6 years to finalise negotiations on linking the two schemes, but it wasn’t until 2020 that the linkage actually became operational. There’s no reason that a UK-EU linkage should take anywhere near that long, but with a Euro and net-zero sceptic party breathing down the neck of the establishment, and only four years to the next election, both sides really need to get a move on.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e39eba88-4352-4512-ba46-195345ccee5c_569x498.png)

Source: Vertis

---

**👋 If you have your own newsletter on Substack and enjoy my writing, please consider recommending** [**Carbon Risk**](https://carbonrisk.substack.com/) **to help grow this amazing community of readers! Thank You!👍**

---

[Repost: Commitment issuesAlmost twelve months to the day since I published this article, the price of UK emission allowances (UKA’s) has fallen by over 50% to a mere €35 per tonne. The malaise is even more striking when you consider that just across the English Channel, the EU carbon market continues to trade at around €80-85 per tonne.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-23.png)Carbon Risk![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/3fb47b7c-b190-48cc-aa00-09e69ed223e2_926x550.png)](https://www.carbonrisk.world/repost-commitment-issues/)

---

1. https://www.ft.com/content/f03d0e82-4527-4a2e-8df8-e744f6238952 [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.ft.com/content/f893a566-fd17-4915-ad0b-bdd2bd622987, https://www.ft.com/content/4fde34d6-3894-463e-aefe-bc415cadffbb [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. Other potential talking points include an EU youth mobility scheme and fishing rights. [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://www.betfair.com/exchange/plus/politics/market/1.230583324 [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
5. The party started in 2018 under the guise of the Brexit Party, but changed their name in 2021\. [↩](#footnote-anchor-5 "Jump back to footnote 5 in the text.")
### New Zealand needs a market stability reserve
URL: https://www.carbonrisk.world/new-zealand-needs-a-market-stability/
Last updated: 2025-08-26T06:39:25.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

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---

*Estimated reading time \~ 7 mins*

![grayscale landscape photography of a foggy forest](https://images.unsplash.com/photo-1519375949920-4abac1c29cc4?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Bulb Creative](https://unsplash.com/@bulbcreative?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/grayscale-landscape-photography-of-a-foggy-forest-z1E4knAkLas?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

The price of emission allowances in New Zealand’s carbon market has dropped by a quarter since mid-March as concerns over the advice given by the Climate Change Commission, an independent advisory body tasked with advising the government on climate change policy, weighs on sentiment. The New Zealand Unit (NZU) price has dropped by around NZ$15 per tonne over the past few months to NZ$50 per tonne (\~€25) in early May.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/453cbfd0-8c8b-4fbf-b831-e07c10b5d0db_828x560.png)

The Commission was founded in 2019 under the Zero Carbon Act (ZCA). In addition to issuing climate policy advice, it also monitors the governments progress towards meeting New Zealand’s emission reduction goals. To that end, New Zealand has followed the example set by the UK. In 2008 the UK government established the Climate Change Committee (CCC), considered to be a trailblazer in institutional climate restraint, bolstering the country’s climate policy credibility in the eyes of investors (see [*New Zealand's carbon market is close to resolving its commitment issues*](https://www.carbonrisk.world/new-zealands-carbon-market-is-close/)).

Since mid-2022 the Commission has also published an annual report to the Minister of Climate Change outlining its advice on updating the NZ ETS unit limits and price control settings. By adjusting the availability of units over the subsequent five year period, the Commission’s recommendations are meant to ensure that the number of units decline in a manner consistent with New Zealand’s climate targets.

_This post is for paying subscribers only._
### The battery that lies beneath
URL: https://www.carbonrisk.world/the-battery-that-lies-beneath/
Last updated: 2025-08-26T06:39:45.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

[Subscribe now](#/portal/signup)

---

*Estimated reading time \~ 7 mins*

![silhouette of factory during sunset](https://images.unsplash.com/photo-1514371229-a867362eb0f0?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Sam Bark](https://unsplash.com/@samuelbarkos?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/silhouette-of-factory-during-sunset-R1GWSOJ9cng?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

In the early 2000’s many analysts were sceptical that a country would be able to generate more than a few percent of its electricity from renewable energy.

Fast forward to the end of 2024 and Europe was generating close to 50% of its electricity from renewables, with solar and wind accounting for around 30%. Its lower in the United States and China, but at 25-30% it has still reached levels unimaginable only a couple of decades ago.

Nevertheless, despite strong progress it is still someway short of where the world needs to be if its to be on course for net zero. The IEA’s Net Zero Emissions scenario sets out a global target of 60% renewable electricity generation by 2030, double the current global share.[1](#footnote-1)[2](#footnote-2) 

Although the cost of renewable energy is coming down, the inherent intermittency of solar and wind power and the need for constant grid balancing, means that once renewables penetration increases beyond a certain point, the total system cost experiences a dramatic non-linear spike.

Researchers at the United States Department of Energy’s (DOE’s) National Renewable Energy Laboratory (NREL) simulated 154 different scenarios to get to 100% renewable energy in the US. They found that once you get past 80% renewable penetration the total system cost - measured in terms of CO2 abatement cost - starts to go parabolic, rising towards $1,000 per tonne as you approach 100%.[3](#footnote-3) 

Geothermal could provide the answer. No, not your old school conventional geothermal. We’re talking next-generation geothermal.\*

*\* Note that this is the first in a series of articles on next-generation geothermal. This article spells out the optimistic case.*

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_This post is for paying subscribers only._
### America's carbon border tariff isn't credible
URL: https://www.carbonrisk.world/americas-carbon-border-tariff-isnt/
Last updated: 2025-08-26T06:40:09.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

[Subscribe now](#/portal/signup)

---

*Estimated reading time \~ 8 mins*

![white and red tower under blue sky](https://images.unsplash.com/photo-1585252155261-cff31944d781?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Andreas Felske](https://unsplash.com/@andreasfelske?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/white-and-red-tower-under-blue-sky-oQEdDIMEIlc?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

> *"I always say 'tariffs' is the most beautiful word to me in the dictionary."*  
>  
> \- President Donald Trump

True to his work, Donald Trump has unleashed a bevy of tariffs on the world, declaring the 2nd of April to be “Liberation Day.”

Off-the-radar of the mainstream press, another set of tariffs has been proposed, but this time the focus is on the environmental impact of foreign producers who export carbon intensive materials to the US. The focus is naturally a surprise, especially given the anti-climate policy rhetoric and the administrations systematic dismantling of America’s environmental regulations (see [*America's state carbon markets are under siege*](https://www.carbonrisk.world/americas-state-carbon-markets-are/)).

Is the Trump administration having a change of heart and suddenly turning green, or is there something else going on amidst all the hot air?

In early April, two Republican senator’s, Bill Cassidy and Lindsey Graham, reintroduced the 2025 Foreign Pollution Fee Act (FPFA). If passed the fee would introduce tiered and escalating tariffs on selected imported goods, designed to “discourage the import of more pollution-intensive, foreign-produced goods.” The legislation was originally introduced in November 2023, and then subsequently updated in a short discussion draft released late last year. In the two-page summary the senators describe the FPFA as: [1](#footnote-1)

> “an American plan designed to address environmental, economic, and national security concerns by imposing fees on imported goods based on their pollution intensity. It leverages America’s comparative advantage in environmental performance to rein in state-owned enterprises and weaken their control of global supply chains in key industrial sectors.”

The party in charge may have changed, but the propensity for grossly misnamed pieces of legislation remains. Just as Biden’s Inflation Reduction Act (IRA) had little to do with tackling inflation, the FPFA arguably has very little to do with combating climate change. Instead, it’s really a cover for weakening Chinese control over global supply chains deemed to be a threat to the US.

_This post is for paying subscribers only._
### Smoke on the water
URL: https://www.carbonrisk.world/smoke-on-the-water/
Last updated: 2025-08-26T06:40:25.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

[Subscribe now](#/portal/signup)

---

*Estimated reading time \~ 10 mins*

![a large body of water filled with lots of boats](https://images.unsplash.com/photo-1717362759860-ba6720c1ad4c?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Chris Johnson](https://unsplash.com/@cj580?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-large-body-of-water-filled-with-lots-of-boats-cY-hgrTdov0?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Shortly before Easter negotiations over a greenhouse gas emission “pricing mechanism” for the global shipping industry reached a conclusion. By majority vote (63-13), members of the International Maritime Organisation (IMO) agreed to a proposal employing a dual-target global fuel intensity (GFI), a two-tier carbon price, and a trading mechanism.[1](#footnote-1) 

Although the talks fell short of voting through a global carbon price — deemed by many, including this author, as an essential driver of shipping decarbonisation — the proposal still represents a victory for climate policy multilateralism, in what is quite clearly a very hostile environment (see [*Full steam ahead, or steady as she goes?)*](https://www.carbonrisk.world/full-steam-ahead-or-steady-as-she/)*.*

The GFI compels ships to gradually switch away from burning carbon intensive bunker fuel, and towards low carbon intensive alternatives. It starts with a ‘Base Target’ which is the minimum compliance carbon intensity threshold that all ships must achieve on an annual basis. The IMO have introduced a second, more ambitious GFI, known as the ‘Direct Compliance Target’ that is meant to incentivise early adopters of low carbon marine fuel technology.

The GFI targets are set against a 2008 global reference point of 93.3g of CO2e per MJ on a well-to-wake basis. Under the base target, ships must initially reduce their GFI by 4% in 2028 against the 2008 reference point. It then gradually tightens to 30% below 2008 levels by 2035\. Meanwhile, the direct compliance target starts at 17% below 2008 levels by 2028, increasing every year to 43% by 2035\. Under both targets the percentage reduction in the GFI required gets steeper and steeper, forcing ships to continually increase their GFI performance.[2](#footnote-2) 

However, even if all ships achieved the direct compliance target it would still fall far short of the IMO’s earlier emission reduction commitment. Recall that back in 2023 IMO member nations agreed to cut shipping emissions by at least 20% compared to 2008 levels by 2030 (striving for 30%), at least 70% by 2040 (striving for 80%), and to reach net zero emissions around 2050\. By contrast, the adopted framework focuses on a reduction of at least 8% (base target) and 21% (direct compliance target) by 2030 respectively.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8bfe7ba0-c8c6-4744-8b35-c0ff50ee8919_839x552.png)

### A two-tier system

Here’s how it works.

If a ship’s annual GFI falls below the direct compliance target it can earn surplus units (SU) proportional to how much it outperforms the target. The owner of the ship can choose to sell the SU to ships that are underperforming, bank the SU for up to 2 years to cover future use, or alternatively, the owner could decide to voluntarily cancel the SU as a mitigation contribution.

However, if a ship achieves partial compliance (i.e., it cuts its GFI below the base target, but not sufficiently to meet the direct compliance target), then it is deemed to be in Tier 1 compliance deficit. The owner must purchase Remedial Units (RU) equivalent to the deficit multiplied by the price of a Tier 1 RU (starting at $100 per tonne of CO2e). The funds raised from this levy go into the IMO Net Zero Fund, of which more on that later.[3](#footnote-3) 

Finally, if a ship fails to cut its GFI with the base target then the ship incurs both a Tier 1 and a Tier 2 compliance deficit. As before the ship owner must cover the Tier 1 compliance deficit with Tier 1 RU. There are a number of ways that the Tier 2 compliance deficit can be met including, purchasing Tier 2 RU (starting at $380 per tonne of CO2e), buying SU from ships that have achieved Tier 2 compliance, or using surplus SU it may have banked from a previous compliance period.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/217e2e8d-9a22-4323-9476-c019bf77ba6a_775x531.png)

Source: UCL Energy Institute

### Narrow gap creates volatile market

Analysis by Transport & Environment finds that the pricing mechanism could generate around $10 billion per year from 2028 for the Net Zero Fund (NZF). The majority of this funding is expected to come from the sale of Tier 1 RU. At least in the short term, Tier 2 compliance costs are likely to be met through the purchase of SU from ships outperforming the direct compliance target. $10 billion is a drop in the water. It’s nowhere near enough to make a big dent in the $300 billion in investment required over the next five years to be on course to meet the IMO’s targets, or indeed to help offset the impact on those less developed countries hit hardest by the mechanism.[4](#footnote-4)

However, the narrow gap between the base target and the direct compliance target (13 percentage points) could lead to volatile SU prices, NZF revenue instability, and hinder the adoption of zero/near-zero GHG emission (ZNZ) fuels such as green methanol, ammonia and hydrogen.

_This post is for paying subscribers only._
### The Kaya identity
URL: https://www.carbonrisk.world/the-kaya-identity/
Last updated: 2025-08-26T06:40:44.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

[Subscribe now](#/portal/signup)

---

*Estimated reading time \~ 9 mins*

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/66dfd4e0-d201-4787-9a9a-b9ac278cc11e_1920x1280-jpeg-1.jpg)

Photo by [Tim van der Kuip](https://unsplash.com/@timmykp?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-factory-with-smoke-billowing-out-of-its-stacks-ELbnYDoxido?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

The Kaya identity suggests that we have four levers - and only four levers - to influence CO2 emissions.

The formula below was developed by Yoichi Kaya, a Japanese energy economist. He argued that emissions are the product of population, GDP per head, energy intensity (energy per unit of GDP), and carbon intensity (carbon emissions per unit of energy).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7f74346f-7253-483a-9b37-8a2cffc0ffaf_1424x203-jpeg.jpg)

The chart below from *Our World in Data* shows what the Kaya identity looks like in practice, drawing on data looking back over the past 60 years. Between 1965 and 2022 the global population ⬆️140%, GDP per capita ⬆️179%, energy intensity ⬇️50%, and carbon intensity ⬇️15%. The net result is that global CO2 emissions from fossil fuels and industry ⬆️230%. Individual countries are of course at different stages of development and show vastly different trajectories for each of the four levers. If you click on the link in the footnote you can check out the Kaya identity for your country or any region in the world.[1](#footnote-1)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/f36372a4-a9c7-4c1e-9ac9-3044e1648c16_3400x3035.png)

Is it realistic that we can simply tweak one or more of the factors in the Kaia identity and put the Earth on a sustainable path? Let’s take a look at each of the factors in turn and see what the options are.

### Population

We’ll start with population growth, a topic that has long drawn the ire of those predicting impending catastrophe.

In the late 18th Century one academic in particular warned of impending doom. Thomas Robert Malthus, a British cleric and scholar, remarked that with population rising exponentially, and agricultural output only increase arithmetically, misery was the inevitable result.

Malthus suggested that “positive checks” (famine, disease and war) were necessary to bring the number of people back in line with the capacity to feed them. A few years later Malthus softened his message, perhaps stung by the lack of enthusiasm, and introduced the idea of a “preventive check”, operating through the birth rather than the death rate. Needless to say that this idea wasn’t very popular either.

More recently fears resurfaced in the late 1960’s and into the 1970’s. Paul Ehrlich, ecologist, doomsayer and author of the 1968 book “*The Population Bomb”,* believed that overpopulation would cause disaster and widespread scarcity. In a similar vein to Malthus, the 1972 book *“The Limits to Growth”*, argued that if the world’s consumption patterns and population growth continued at the high rates observed at the time then the Earth would hit its limit within a century.

The worlds population is projected to continue to grow over the next 60 years according to the UN, from 8.2 billion people in 2024 to around 10.3 billion people in the mid-2080’s. The UN believe that the global population will drop slightly to 10.2 billion by the year 2100, 0.7 billion less than what was projected a decade ago. The reason for the downgrade is partly due to the trend towards lower levels of fertility in countries such as China, South Korea, Spain and Italy.

Apart from tinkering around the edges (e.g., family planning and incentives), there is very little governments can do to directly influence population growth. Besides, the global fertility rate has already been slowing dramatically over the past few decades. It now stands at 2.25 births per woman, down from 3.31 in 1990\. Meanwhile, more than half of all countries have a fertility rate below the 2.1 replacement level.[2](#footnote-2) 

The phrase “Demography is destiny” is commonly attributed to the French philosopher Auguste Comte. He argued that the size and composition of a country’s population will ultimately determine its future. Population is the single most important factor in the Kaia identity, and it’s arguably the one where we have the most insight into its future development.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/cec8fe14-a42f-43c9-9f0f-63915169bbb7_900x619.png)

### **Economy**

GDP per capita is a function of the size of the economy divided by the population. Although the media tend to focus on the overall growth in the economy, GDP per capita more closely aligns with how individuals appreciate any improvement (or worsening) in their standard of living. The average annual growth in global GDP per capita between 1961 and 2023 was 1.9%.

The average masks wide variations between countries at different stages of economic development. Advanced economies have experienced a slowdown in growth of GDP per capita over the past few decades. A phenomenon commonly referred to as secular stagnation. A function of the 3 D’s: debt, demography, and deflation. Emerging economies tend to have more opportunity for growth than advanced nations, but if their population is also growing fast, then GDP per capita will fail to grow.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/fb18330d-14ba-4dbd-ac70-f322b0558cc3_3400x2400.png)

The ‘de-growth’ movement suggests that we should simply focus on slowing or even contract the economy if we are to cut CO2 emissions and stop the other environmental impacts associated with growth. The book *Growth: A Reckoning,* by Daniel Susskind dispels this narrative pointing to a misunderstanding about the real driver behind economic growth:

> “Economic growth is not driven by using more and more resources, as many tend to assume, but by discovering better and better ways to use finite resources available to us. And the universe of those intangible ideas is unimaginably vast - for all practical purposes, as good as infinite.”

Critics argue that the green growth is impossible. They point to empirical analysis which shows that the economy has never grown while at the same time reducing environmental damage. But as Daniel Susskind points out in his book, just because it hasn’t been a policy priority in the past, doesn’t mean that it can’t be in the future. It’s really up to us to determine what we want out of economic growth, not simply growth for the sake of it.

Even if an advanced economy or group of similar nations agreed to implement a policy that slows or indeed halts economic growth, it’s impossible to strongarm less developed countries into pursuing the same policy objective. Ensuring that all nations face the same incentives, and can help develop (and benefit from) the latest technologies, is the surest way to make progress.

### **Energy efficiency**

We don’t demand energy for its own sake, but for what it enables us to do. If energy is life, then we should be careful how we use it. Energy efficiency simply means using less energy to perform the same activity, eliminating waste. The “invisible fuel” as energy efficiency is sometimes known as, provides some of the quickest and most cost-effective options to reduce energy consumption and cut carbon emissions.

Critics have argued that energy efficiency is pointless as it reduces the effective price of energy, causing consumers to use more of it, what’s known as the rebound effect. Another variation of this is where energy efficiency allows firms to reconfigure their operations, enabling them to use more energy profitably. The original theory was put forward by William Stanley Jevons in 1865 who argued that “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth.”

Research does support the theory that energy efficiency does result in a rebound effect, but not one so large that it leads to the backfire effect, i.e. the energy savings are more than wiped out. Most studies suggest direct rebound effects erode 10-30% of projected energy savings, while the macroeconomic rebound effect is estimated to be in the 30-50% range, both on the national and global scale.

It’s important to note that energy efficiency is an enabler of economic growth. Energy efficiency leads to lower energy prices improving the availability of energy. This then leads to new products and services being developed, which in turn results in greater demand for energy. As Michael Cembalest of JP Morgan reminds us in a recent piece on the state of the energy transition, “prosperity itself is energy-intensive: among the tightest relationships in economics is the connection between a country’s per capita GDP and its per capita energy consumption.”[3](#footnote-3)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/d51a4e4f-07ef-4dc0-96ec-6d14d85fbceb_1008x713.png)

How are we doing when it comes to energy efficiency on a global basis? The annual average improvement in global energy intensity - the amount of primary energy used to produce a given amount of GDP - more than doubled between the period 2001-10 and 2011-20 to \~2%, according to estimates from the International Energy Agency (IEA). Despite the incentive of high energy prices the annual average improvement has slowed during 2021-24 to \~1.3%.[4](#footnote-4)

However, to be consistent with the IEA’s Net Zero Emissions by 2050 Scenario, the annual improvement in energy intensity will need to accelerate to almost 4% across the period 2022-30\. The IEA calculates that global annual investment in energy efficiency will need to rise from $0.7 trillion today to $1.9 trillion by 2030.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/0aab98f3-816e-4237-94f1-70d0800c4335_805x484.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

### **Carbon intensity**

Improvements in carbon intensity predate concerns about climate change and the role of greenhouse gases (GHG) such as carbon dioxide. Analysis of 200 years of global emissions and GDP data reveals that global carbon intensity follows a bell-curve (indicated by the dashed line). Global carbon intensity peaked around 1920 and has gradually dropped to levels consistent with that last seen in the early Industrial Revolution (see [*Carbon intensity: The key to an economically sustainable green transition*](https://www.carbonrisk.world/carbon-intensity-the-key-to-an-economically/)).

Advanced economies (such as the US, Japan, and Germany) saw their carbon intensity peak in the 1910’s, while it wasn’t until the 1980’s that large emerging economies (including China, India, and Russia) witnessed peak carbon intensity. Different parts of the world are of course at different stages of development, yet the evidence indicates that carbon intensity in both advanced and emerging economies does typically follow a similar bell-curve formation.[4](https://www.carbonrisk.world/carbon-intensity-the-key-to-an-economically/)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/2e81e6da-6215-40ec-9015-92f924f97117_796x615.png)

Governments have typically put all their eggs into reducing the carbon intensity of the economy. In the main this has involved policies that aim to cut emissions from power generation (e.g., subsidising renewable energy, phasing-out thermal coal-fired generation), but also curbing emissions from industrial production (e.g., emission mandates, incentives to invest in low-carbon technology).

State support has been crucial at the early stage of development for many low carbon technologies. As the cost of solar, other renewable energy and batteries inexorably declines, the share of zero-carbon energy generation will continue to rise. In turn traditional hard-to-abate industries will be able to leverage cheap zero-carbon power and electrification to accelerate their own decarbonisation.

The diagram below shows relationship between global GDP growth and the trend in CO2 emissions for the period 1995-2021\. From a global perspective, a weak decoupling of GDP growth and growth in CO2 emissions is apparent in the data. Global GDP growth is accompanied by an increase in CO2 emissions, but GDP growth still exceeds CO2 emissions growth. At least on a global basis that is. Many countries in Europe including the UK, France, and Germany, as well as the United States have succeeded in decoupling GDP growth from CO2 emissions outright.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/1d7f850d-3d6e-4c5f-b523-b9788fd76ff8_1063x644-jpeg.jpg)

---

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---

1. https://ourworldindata.org/grapher/kaya-identity-co2?time=1979..latest [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.un.org/en/UN-projects-world-population-to-peak-within-this-century [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://am.jpmorgan.com/us/en/asset-management/institutional/insights/market-insights/eye-on-the-market/energy-paper-2025/ [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://www.iea.org/reports/energy-efficiency-2024 [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### America's state carbon markets are under siege
URL: https://www.carbonrisk.world/americas-state-carbon-markets-are/
Last updated: 2025-08-26T06:41:03.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

[Subscribe now](#/portal/signup)

---

*Estimated reading time \~ 8 mins*

> “In the midst of chaos, there is also opportunity”  
> ― Sun-Tzu

President Trump issued four executive orders on Tuesday exploiting the declaration that America is experiencing an “energy emergency”.

The first allows older, less efficient coal-fired power plants, previously scheduled for retirement, to remain open. The second imposes a moratorium on policies introduced under the Biden Administration curbing the profitability of coal plants. The third focused on promoting grid security and reliability, and ensuring a continued role for coal-fired generation.

The fourth - PROTECTING AMERICAN ENERGY FROM STATE OVERREACH - aims to block the enforcement of state laws that reduce the consumption of fossil fuels while also curbing their emissions. At the White House signing event, sat in front of a group of miners in hard hats, Trump declared that he would slash “unnecessary regulations that targeted the beautiful, clean coal.”[1](#footnote-1)

If successful the order would be catastrophic for America’s carbon markets: California’s Cap-and-Trade Program, Washington State’s Cap-and-Invest Program, and the Regional Greenhouse Gas Initiative (RGGI) covering eleven US states in the north east. It would also sign the death knell for other states contemplating their own emission trading schemes such as New York, Vermont, Pennsylvania, and Maryland (see [*What's in a \[carbon market\] name? Why governments should adopt the 'Cap-and-Invest' nomenclature*](https://www.carbonrisk.world/whats-in-a-carbon-market-name/)).

Thankfully, the executive order is very unlikely to achieve it’s aims. The US Constitution’s 10th Amendment grants states the authority to set their own rules in areas where the federal government has not acted, according to Amy Turner at the Sabin Center for Climate Change Law at Columbia Law School, and neither “the president nor Congress can amend the Constitution nor change the legal doctrines that help courts interpret it.”[2](#footnote-2) 

But it doesn’t mean that America’s carbon markets will come out of this episode unscathed. The executive order indicates that a report is due within 60 days outlining what executive or legislative actions will be taken, and although it gives little away, Turner believes that “it is likely a forerunner to litigation, law-making, or the withholding of federal funds.” If it’s the former, she expects a “significant chilling effect on local climate policy innovation.”

Although the share of the global economy covered by national level commitments to net zero has shrunk from 93% to 78% following Trumps decision that the US will exit the Paris Agreement, Net Zero Tracker calculates that once you account for state policies that only falls to 84%. Nineteen states, accounting for 50% of US GDP, are independently committed to net zero, while a further eight states have emission reduction targets of 80% or more (see *[It's the climate, stupid!](https://www.carbonrisk.world/its-the-climate-stupid/)*).[3](#footnote-3)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/089c4a3e-4f18-4958-bc86-c71f6bd97657_1646x1536-jpeg-1.jpg)

To their credit, states that consider themselves among those with ambitious climate policies have not kept silent amid the vitriol thrown their way. The US Climate Alliance - a bipartisan coalition of 24 governors including those representing state-led climate action by California, Washington, and New York - issued a joint statement in response to the executive order, affirming that they would not be deterred by the executive order:[4](#footnote-4)

> “The federal government cannot unilaterally strip states’ independent constitutional authority. We are a nation of states — and laws — and we will not be deterred. We will keep advancing solutions to the climate crisis that safeguard Americans’ fundamental right to clean air and water, create good-paying jobs, grow the clean energy economy, and make our future healthier and safer.”

However, it was California in particular that was singled out by Trump’s ire, for in the words of the executive order, punishing fossil fuels by “adopting impossible caps on the amount of carbon businesses may use, all but forcing businesses to pay large sums to “trade” carbon credits to meet California’s radical requirements.”

_This post is for paying subscribers only._
### Safeguarding Australia's climate policies
URL: https://www.carbonrisk.world/safeguarding-australias-climate-policies/
Last updated: 2025-08-26T06:41:19.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

[Subscribe now](#/portal/signup)

---

*Estimated reading time \~ 8 mins*

![brown rock formation on sea shore during daytime](https://images.unsplash.com/photo-1583336711761-a1eaa3287ea4?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Alina Ganova](https://unsplash.com/@alinaganova?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/brown-rock-formation-on-sea-shore-during-daytime-OEDY2ZxAQI8?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

In November I published an [article ](https://www.carbonrisk.world/three-carbon-markets-facing-electoral/)highlighting the three carbon markets set to encounter electoral turbulence in 2025: Germany (its general election was held on 23rd February), Canada (voting takes place on 28th April), and finally, Australia (polls open on 3rd May).

In the aftermath of his election victory, Freidrich Merz, the next chancellor of Germany set a target of forming a new coalition government within eight weeks. It’s yet to be seen what policy chips have been traded by those hoping to form a government, as well as those left on the outside, such as the Greens, who may still be required to lend their support. Although any coalition is expected to include the CDU/CSU and the SPD, the implications for reform to Europe’s ETS1 and ETS2 are still uncertain. Germany’s response to the need for rearmament after America’s withdrawal from its defence role will be key (see *[Vollgas](https://www.carbonrisk.world/vollgas/)*).[1](#footnote-1)

The likelihood that Canadian Prime Minister Mark Carney will lead his party to victory in the forthcoming general election keeps on increasing. The leader of the opposition, Pierre Poilievre has vowed to drop the federal backstop to Canada’s industrial carbon pricing system. Prime Minister Mark Carney has signalled that he will protect it. The Liberal Party’s chances have swung from a less than 5% at the beginning of the year to 66% in the past week as opposition to Trump’s rhetoric and trade war north of the border has intensified (see *[Canada's industrial carbon pricing system should be protected](https://www.carbonrisk.world/canadas-industrial-carbon-pricing/)*).[2](#footnote-2)

The third and final carbon sensitive election to take place in 2025 is scheduled for 3rd May when Australia heads to the polls. As in Canada the likely outcome of the election has switched 180 degrees in the space of a few weeks. In late February the opposition Liberal-National Coalition, led by Peter Dutton was the favourite to win the most seats. Dutton, much as Poilievre has in Canada, has been quick to mimic Donald Trump, even acquiring the nickname “Temu Trump”![3](#footnote-3) 

It doesn’t seem to have done him any favours. The most recent MRV model published by YouGov indicates that the incumbent Labor Party are likely to win the most seats, but fall one seat short of forming a majority. The polls are still very tight and either party could yet eke out a win and lead at least a minority government.[4](#footnote-4)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c0bc1a79-8ef6-497f-8a50-4cd2e86095a4_628x486.png)

Before we take a look at Labor and Coalition climate policies, lets start off by looking at recent developments in Australia’s carbon market, the Safeguard Mechanism. The generic ACCU price jumped by almost 25% during the second half of 2024 to over A$42 per tonne. The carbon price had been bid up during 2024 as the first compliance period under the revised Safeguard Mechanism drew near. However, as the end of March deadline approached on the horizon, it was clear that obligated entities had sufficient cover to meet their compliance requirements.

The introduction of higher than expected volumes of Safeguard Mechanism Credits (SMCs) onto the market in late February added to the bearish sentiment. Remember that SMCs can be generated by obligated entities when they reduce emissions below their baseline, and can then be traded for example with entities who are above their own baseline (see [*The other side of the table*](https://www.carbonrisk.world/the-other-side-of-the-table/)).

Also contributing to the bearish market was a federal government decision to implement an amendment to the National Greenhouse and Energy Reporting Scheme (NGER) Act requiring operators of Australia’s open-pit coal mines to move from outdated state-based emissions factors, and towards site-specific methane sampling. Although the move is designed to capture under-reported methane emissions, weaknesses in the site-specific protocols means that emissions are likely to go down, rather than up according to RepuTex, reducing compliance demand for ACCU’s.[5](#footnote-5) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b99531f2-db02-4a28-aedb-5c25319881ef_1115x543.png)

Last years surge in the ACCU price has now completely unwound. However, end of year compliance trading and methane reporting protocols only tells us part of the picture. Political uncertainty has of course also had a major impact on the market. So how do the two parties compare, and what are the implications for the Safeguard Mechanism and the outlook for the ACCU price?

_This post is for paying subscribers only._
### Forward guidance
URL: https://www.carbonrisk.world/forward-guidance/
Last updated: 2025-08-26T06:41:38.000Z
Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

If you want to know more about how carbon markets combat climate change, what this burgeoning market means for investors, and the latest trends affecting decarbonisation then please consider upgrading your subscription.

[Subscribe now](#/portal/signup)

---

*Estimated reading time \~ 8 mins*

![One Way street sign beside road far at the mountain during daytime](https://images.unsplash.com/photo-1468091730376-d3b5558b71ab?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Nick Tiemeyer](https://unsplash.com/@nickeedoo?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/one-way-street-sign-beside-road-far-at-the-mountain-during-daytime-tNGcZlycLtQ?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

> “monetary policy is 98 percent talk and only two percent action.”  
>  
> \-Ben S. Bernanke, former chair of the Federal Reserve

At a meeting of EU environment ministers last week, the French government proposed amending the rules underpinning ETS1 to ensure a more predictable carbon price outlook.

“We must act swiftly to improve price predictability and the visibility offered to players,” French Climate Minister Agnes Pannier-Runacher, Bloomberg reports her as saying after the meeting, the minister making the case for “an ETS price corridor, defined in line with the EU’s emissions reduction target.”[1](#footnote-1)

As I explain in [*The Fear Index*](https://www.carbonrisk.world/the-fear-index/), high carbon price volatility imposes a significant cost on firms seeking to cut their emissions, and for companies wishing to invest in new climate technologies:

> “The level of funding required to invest in industrial decarbonisation is enormous, requiring a multi-decade long commitment, and high sunk costs. Exposure to high carbon price volatility makes it much harder for these large-scale projects to be seen as ‘bankable’ by investors.”

Analysts at Copenhagen Business School and NYU Stern have been able to quantify this relationship, examining the link between EU carbon price volatility and the share price of ‘carbon solution providers’, including companies involved in installing carbon capture units, manufacturers of wind turbines and solar panels, etc:

> “a one standard deviation increase in the Carbon VIX is associated with a 15.7 basis points relative decrease in the stock returns of carbon solution providers. Put another way, a 10% increase in the Carbon VIX has the same detrimental impact on investment in decarbonisation as a €12 per tonne decline in the carbon price.”

Volatile exchange rates discourage inward investment, making it more expensive to agree terms with trading partners. In response, governments often seek to manage their exchange rate, moderating the pace and extent of currency appreciation or depreciation. The carbon price is the ‘Currency of Decarbonisation’. As such there is a case for authorities to also moderate carbon price volatility, especially if doing otherwise threatens the EU’s ability to meet its climate targets, or otherwise imposes too high a cost in term of competitiveness.

Although details of how France proposes to improve predictability for investors in ETS1 are scant, the Bloomberg article makes reference to two potential mechanisms: the introduction of an ETS1 floor price, and a requirement on the European Commission to publish reference price trajectories. While the former would appear to require a formal, binding change to the rules underpinning ETS1, the latter suggests a more informal approach, instead guiding market participants towards a politically desirable carbon price outcome.

I’ve discussed the potential pitfalls involved with introducing a EU carbon floor price before (see [*A carbon floor price is a bad idea: Meddling in markets built on trust is rarely successful*](https://www.carbonrisk.world/a-carbon-floor-price-is-a-bad-idea/)). First off there‘s the challenge involved with identifying a suitable price floor - not just one that suits today’s conditions, but tomorrow’s too:

> “It needs to be sufficiently high to incentivise decarbonisation, but not so high that it proves unsustainable, whether that is in suffocating the markets ability to find the right equilibrium price or provoking a backlash from industry and politicians having to renege on their commitments…The government can never be sure that the floor price is the correct one, nor that the floor price escalator is set appropriately to account for market conditions tomorrow that could be very different from the assumptions made today.”

Second, the experience of central bankers trying to defend their currencies does not bode well, illustrating the scale of the challenge for the EU’s climate ministers:

> “Rather than the market finding its own level, intervention by a central bank tends to have the opposite effect of that which is intended…Whether explicitly or not the market begins to understand where the pain point exists for the central bank. Rather than representing the boundary of where the market is allowed to go, the exchange rate that is defended often acts as a magnet, even inviting attack by speculators, especially if its not seen as sustainable.

In contrast to a hard-and-fast rule underpinning a future ETS1 floor price, the publication of reference price trajectories by the EC harks back to an earlier innovation by central bankers - forward guidance.

> “Forward guidance attempts to influence the decisions of investors, businesses and households by providing a series of guideposts for the expected future path of monetary policy. For example, instead of simply cutting interest rates to stimulate economic activity, central bankers would communicate their policy intentions, suggesting that they expected rates to remain low in the future.  
>  
> Central bankers resorted to forward guidance when they found their existing monetary tool box to be inadequate at influencing medium and long term interest rates. Stable long term expectations of low interest rates give people the confidence to bring forward major purchases or investments, such property.”

It’s a situation the EU’s climate ministers have been in before. In the aftermath of Russia’s invasion of Ukraine in spring 2022, Peter Liese MEP, the lead lawmaker who steered EU ETS reform through the European Parliament, and Jos Delbeke, a key architect of the EU ETS both sought to shape carbon market price expectations through verbal intervention (see [*Whatever it takes: Why forward guidance in the EU carbon market is here, and is set to stay*](https://www.carbonrisk.world/whatever-it-takes/)).

> “Much like central bankers, the EU’s politicians want a Goldilocks scenario: not too hot so that the carbon price reaches socially unacceptable levels, nor too cold that decarbonisation technology isn’t incentivised.  
>  
> By providing forward guidance, the EU hope to conjure up the magic of the central banks: suppressing carbon price volatility, lowering the cost of net-zero capital, and spurring the investment required to pivot away from Russia and achieve its climate change ambitions.”

Despite my stab at a prophetic subtitle, forward guidance has taken a backseat during the past two years. The EU carbon price fell from €100 per tonne in early 2023 to below €60 per tonne in spring 2024, and although the carbon price has recently rebounded in a natural gas-infused rally, it remains broadly in the €60-$90 per tonne range advocated by Liese and Delbeke. EU’s climate ministers have not felt the need to verbally intervene in the market.

The question now is what prompted the French government to propose introducing measures to stem price volatility and provide a better framework for countries wanting to invest in decarbonisation? Was it the degree to which price volatility has affected investment recently, or are they making an implicit suggestion that carbon prices could soon turn too high, and too volatile? Are they pre-empting the need for another dose of verbal intervention?

If the next 12-24 months does see a return to verbal intervention by EU climate ministers then they need to be careful what they wish for. The publication of reference price trajectories is not a free lunch. It can easily switch from a Goldilocks scenario - not to hot, not to cold - to one where Goldilocks get eaten.

Investors with long-only, long-term exposure to the EU carbon market could be the first casualty. A narrow price band, that builds in slow and gradual price appreciation could snuff out investor interest. Furthermore, although a smooth trajectory could help those companies where government has a stake in its success - political, commercial or otherwise - smothering the carbon price signal might prevent innovative new firms from benefitting from sharply rising prices.

In short, where one person sees carbon price volatility as a risk to avoid, another sees it as an opportunity to lean into. The challenge in seeking to manage the carbon price too tight is that it snuffs out both.

An informal reference price trajectory would need to be flexible enough to cater for all manner of economic, political, and social factors. As central bankers have learnt using forward guidance in their approach to monetary policy, its important to give advanced signals to the market as to how their price expectations could change given developments in these underlying factors.

Words matter.

Former chair of the Federal Reserve, Ben Bernanke was acutely aware of his responsibility to be careful with his choice of words:[2](#footnote-2)

> “The ability to shape market expectations of future policy through public statements is one of the most powerful tools the Fed has. The downside for policymakers, of course, is that the cost of sending the wrong message can be high. Presumably, that’s why my predecessor Alan Greenspan once told a Senate committee that, as a central banker, he had “learned to mumble with great incoherence.”

The EU’s climate ministers could now face the same delicate balancing act.

---

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---

1. https://www.bloomberg.com/news/articles/2025-03-27/france-proposes-eu-carbon-market-changes-to-improve-stability [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.brookings.edu/articles/inaugurating-a-new-blog/ [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
### Full steam ahead, or steady as she goes?
URL: https://www.carbonrisk.world/full-steam-ahead-or-steady-as-she/
Last updated: 2025-08-21T10:35:34.000Z
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---

*Estimated reading time \~ 8 mins*

![a large boat with smoke coming out of it](https://images.unsplash.com/photo-1652543484201-e1fb43fd7d0a?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Sunil GC](https://unsplash.com/@sgc908?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-large-boat-with-smoke-coming-out-of-it-U9ONPjg2QpY?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Negotiations on a global carbon levy for shipping are expected to come to a head over the next fortnight.

The idea for a global carbon levy first surfaced in 2021, but discussions really gained momentum two years later. In July 2023 the International Maritime Organisation (IMO) adopted a revised strategy to drastically cut greenhouse gas emissions from shipping.

Governments representing the 176 IMO member nations agreed to cut shipping emissions by at least 20% compared to 2008 levels by 2030, at least 70% by 2040, and to reach net zero emissions around 2050\. Nations agreed that shipping needed a “GHG emission pricing mechanism” to meet the IMO’s climate targets, committing in principle to finalising negotiations in April 2025.[1](#footnote-1) 

The Marine Environmental Protection Committee (MEPC) will be held on 7th-11th April. If everything goes to plan, whatever “pricing mechanism” they agree on will be formally adopted by the IMO in October, before coming into force in 2027\. Earlier meetings revealed a majority in favour of a carbon levy. In February, over 50 countries, accounting for \~70% of the worlds fleet and including shipping reliant nations such as Panama and Liberia, voiced their support for a global carbon levy, in combination with a global fuel standard.

### Seas apart

It’s worth noting that although the IMO is a branch of the United Nations, global shipping emissions are excluded from the 2015 Paris Agreement. The reason relates to shipping’s notoriously complex ownership structures: ships are often registered in one of a handful of small countries, owned in another country, but commissioned by another country or unrelated entity entirely.

In contrast to other global climate policies the immediate threat that Trumps disrupts the IMO process is thought to be limited; even under the Biden administration the US had fallen into a camp of countries deemed unhelpful to progressing maritime climate policies. Nevertheless, the path to a global carbon levy is not going to be plain sailing, and the threat lies not with the US, but elsewhere.

_This post is for paying subscribers only._
### Step on the gas
URL: https://www.carbonrisk.world/step-on-the-gas/
Last updated: 2025-08-21T10:35:35.000Z
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---

*Estimated reading time \~ 9 mins*

![project updates](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/aad09a7d-b657-4226-8e2a-b58280adc7ae_1280x720-1.png)

Source: Carbon Mapper

> *"Regardless of regulations, there are still eyes in the sky - satellites that are tracking emissions to the source level."*  
>  
> \- Dan Byers, United States Chamber of Commerce's Global Energy Institute

The methane fee, formally known as the Waste Emissions Charge (WEC), was introduced under the Biden Administration in August 2022, part of the Inflation Reduction Act (IRA).

The policy introduced a charge on the excess methane emitted by US fossil fuel producers, estimated to account for a little over one-third America’s methane emissions. The levy was a pioneering first step, marking the first time that the federal government has imposed a nationwide charge on the emissions of a greenhouse gas.

Excess methane emissions occurring during calendar year 2024 would have incurred a charge of $900 per tonne of methane ($36 per tonne of CO2e), rising to $1,200 in 2025, and $1,500 from 2026\. Fossil fuel facilities emitting less than 25,000 tonnes of CO2e per year - responsible for around 60% of industry emissions - were exempt from the charge (see *[Pricing methane emissions out of the atmosphere: America's first nationwide price on a greenhouse gas does not go far enough](https://www.carbonrisk.world/pricing-methane-emissions-out-of/)*).[1](#footnote-1)

In November 2024, the Environmental Protection Agency (EPA) finalised the ruling, charging the agency with enforcing the fee. Alas it wasn’t to be. Donald Trump’s return to the White House meant the methane fee never saw the light of day. In March, Trump signed into law the Congressional Review Act, effectively blocking the implementation of the methane fee.

The US is the dominant LNG exporter, however data reveals that its energy producers are woefully underestimating their methane emissions, and that's a big concern for energy buyers in Europe and Asia (see [*'Carbon neutral' LNG 2.0*](https://www.carbonrisk.world/carbon-neutral-lng-20/)).

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### Canada's industrial carbon pricing system should be protected
URL: https://www.carbonrisk.world/canadas-industrial-carbon-pricing/
Last updated: 2025-08-21T10:35:37.000Z
**Welcome to** [**Carbon Risk**](https://carbonrisk.substack.com/about) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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---

*Estimated reading time \~ 8 mins*

![green trees near lake and mountain during daytime](https://images.unsplash.com/photo-1593444475666-737fdded1b47?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Johny Goerend](https://unsplash.com/@johnygoerend?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/green-trees-near-lake-and-mountain-during-daytime-F0JPJWuOb7U?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

On the campaign trail, Mark Carney, promised to bin the consumer carbon tax. Now Prime Minister of Canada, Carney has cut the tax rate to zero, a prelude to it being cancelled entirely once a change in legislation allows. In one stroke the move eliminated the key battleground issue upon which Conservative Leader Pierre Poilievre had been waging the election battle: ‘Axe the tax!’ (see [*A tactical retreat: Mark Carney axes Canada's consumer carbon tax*](https://www.carbonrisk.world/a-tactical-retreat/)).

In response, Poilievre has now announced that if re-elected, he would also scrap the federal carbon pricing system for industrial emitters. The federal Output-Based Pricing System (OBPS) applies to large industrial producers that emit more than 50,000 tonnes of CO2e per year. Provinces would be free to continue to price carbon emissions from industry should they wish, but there would be no more federal backstop as its known.

The incumbent Liberal Party is now the favourite to win the election according to . The incumbent party’s chances have swung sharply over the past few months, from a low of only 5% at the start of 2025 to 52.6% currently. At the weekend Prime Minister Mark Carney dissolved Parliament and called an election for 28th April (see *[Three carbon markets facing electoral turbulence in 2025: Opposition parties paint carbon pricing as inflations 'pantomime villain'](https://www.carbonrisk.world/three-carbon-markets-facing-electoral/)*).[1](#footnote-1)

Rather than focusing on a policy that will move the needle with the electorate, Poilievre’s attempt to kill off industrial carbon pricing smacks of desperation. Before we get into some of the implications should Poilievre get his way (short answer: none of it good), it’s worth recapping how Canada’s industrial carbon price system actually works.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a18618db-b5b0-4187-a491-d8b6522db4f4_824x447.png)

_This post is for paying subscribers only._
### Spread bets
URL: https://www.carbonrisk.world/spread-bets/
Last updated: 2025-08-21T10:35:37.000Z
**Welcome to** [**Carbon Risk**](https://carbonrisk.substack.com/about) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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---

*Estimated reading time \~11 mins*

> *“The commodity traders are arbitragers par excellence, trying to exploit a series of differences in prices…They are, in the words of one academic, the visible manifestation of Adam Smith’s invisible hand.”*  
>  
> \- Javier Blas, The World for Sale: Money, Power, and the Traders Who Barter the Earth's Resources

Commodity trading profits slumped from $100 billion during 2022 and 2023 to $72 billion in 2024, according to preliminary estimates by McKinsey. A return to a more ‘normal’ trading environment, characterised by lower and less volatile energy prices and fewer geopolitical disruptions, has dampened margins.

The adverse impact was greatest for those traders covering oil & oil products, and power & gas. The total margin generated across these two commodity sectors, which together normally account for two-thirds of the total, declined by almost 40% versus the period 2022/23.

The boom years marked by Russia’s invasion of Ukraine attracted new entrants into the market and incentivised existing firms to expand their operations. As uncertainty and price volatility has subsided, so the increase in competition has also acted to reduce the margins available.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/5f4c1539-cca3-45c2-b9b0-0818b18204fd_802x751-1.png)

### The world for sale

Of course, commodity trading firms do sometimes take directional bets on the price of various commodities, but it would be incorrect to suggest that is their primary purpose. Commodity traders play an essential role in the global economy, ensuring that the resources we need on a daily basis - energy, raw materials, and food - are there when we need them.

A small number of huge commodity trading firms dominate the production, transportation and trading of commodities. Virtually all commodities must undergo a variety of processes to transform them into things that we can actually consume. These transformations can be grouped into the following categories: space, time and form.

The first transformation requires the transportation of commodities from where they are produced to the places they are consumed. The areas where commodities can be efficiently produced, such as fertile land or mineral deposits, are usually away from, and often far away from, where those who desire to consume them reside.

The second transformation requires commodities to be stored to correct for mismatches in the timing of production and consumption. Stocks can be accumulated when supply is unusually high or demand is unusually low, and can then be drawn down upon when demand exceeds supply.

Finally, commodities must often undergo transformations in form in order to be suitable for final consumption or for use as an input in a process further down the value chain. For example, crude oil must be refined into gasoline, diesel and other products.

Commodity trading firms seek to identify the most valuable of these transformations, undertake the transactions necessary to make these transformations and engage in the physical and operational actions necessary to carry them out (see [*Know your onions: Concern over the role of speculators in Europe's energy markets is overplayed*](https://www.carbonrisk.world/know-your-onions/)).

Right now, the returns from these transformations are under pressure, but that’s not expected to last long. Taking a longer-term view, McKinsey are forecasting a return to a steady margin growth (\~10% per annum) with overall industry profit expected to return to $100 billion before the end of the decade.

Power, gas, and LNG markets are likely to drive much of the increase, supported by market liberalisation, the growth in electricity demand (+3.5% per annum), and weather related volatility as renewable adoption rises. McKinsey also expects “energy transition assets”, such as carbon credits, biofuels, energy attribute certificates (EACs), and green premium certificates (GPCs) to be a major source of growth.[1](#footnote-1)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7eb6cdd4-accd-445c-8131-6dd57636ebec_821x601.png)

Let’s take a look at the opportunity for commodity traders across each of the four markets.

_This post is for paying subscribers only._
### A tactical retreat
URL: https://www.carbonrisk.world/a-tactical-retreat/
Last updated: 2025-08-21T10:35:38.000Z
**Welcome to** [**Carbon Risk**](https://carbonrisk.substack.com/about) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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---

*Estimated reading time \~ 8 mins*

> *“credibility and trust cannot be maintained without political support. This in turn requires public understanding, which is built through transparency and accountability, and it requires consent which is grounded in solidarity.”*  
>  
> \-Mark Carney, *Values: An Economists Guide To Everything That Matters*

Over the weekend Mark Carney, the newly elected Prime Minister of Canada, signed an executive order reducing the consumer carbon tax rate to zero, effective immediately.

The consumer carbon tax was C$80 per tonne (€51) and set to rise to C$95 per tonne in April, increasing each year thereafter until 2030 when it was scheduled to hit C$170 per tonne. The tax was levied on fuel distributors, based on the carbon content in a given fuel, who would then typically pass on the cost to households and motorists through higher fuel prices.

Federal law required that 90% of the proceeds from the carbon tax be returned to households in the province or territory where they were collected; about 80% received more from the quarterly rebate than they paid out in tax. Carney also announced that the last rebate would be paid in April, just ahead of when the general election is expected to be held.

![A photo of the document signed by Prime Minister Mark Carney providing a directive to eliminate the consumer carbon price.
 
Une photo du document signé par le premier ministre Mark Carney donnant la directive d’abolir la taxe carbone pour les consommateurs. ](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b61e43fd-1f43-47d0-8d2a-5cb1649c84c7_2048x1365-jpeg-1.jpg)

### Impact on Canada’s emission pathway

The consumer carbon tax, also known as the fuel charge, was estimated to contribute 14% of incremental emission reductions between 2025 and 2030, according to analysis published by the Canadian Climate Institute (CCI). In producing this estimate they sought to account for the interactions between the fuel charge, the large-emitter trading system (LETS), the oil and gas emissions cap, and other climate policies.

Overall, CCI’s analysis indicated that Canada was on track to meet up to 90% of the emission reduction necessary to hit 400 Mt CO2 or less by 2030\. If it did hit the target set out in the Emissions Reduction Plan (ERP) it would represent a 40% reduction compared with 2005 levels. However, that was before Canada axed the consumer carbon tax.

CCI’s analysis indicates that its loss is not a big one in terms of Canada’s ability to hit its emission targets. However, it does now place more of the burden on the other policies, and indeed may increase pressure on the government to introduce other measures to replace the consumer carbon tax.

For example, the LETS was expected to contribute almost half the incremental impact on emissions (almost 3.5 times as much as the fuel charge), in part by virtue of the much larger share of Canadian emissions covered. In response, Carney proposed to “improve and tighten” LETS, while also extending it until 2035, to “help foster Canada’s clean industrial competitive advantage.” [1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/f29243e6-c33b-49f5-ac87-c02b53323c51_1273x744.png)

CCI’s analysis estimated that the oil and gas emissions cap would deliver approximately one-third (34%) of the emission reduction required between 2025 and 2030\. However, the proposal was never finalised under Prime Minister Trudeau’s leadership and it is unclear whether the emissions cap will be resurrected or not. Instead Carney has indicated that he would explore strengthening existing standards, such as those imposed on the energy industry in order to slash methane emissions (see [*Canada's oil and gas cap-and-trade scheme does not go far enough*](https://www.carbonrisk.world/canadas-oil-and-gas-cap-and-trade/)).

Another option not considered by CCI in their analysis is the introduction of a carbon border levy. As I outlined in a recent article, when Carney announced that he would axe the consumer carbon tax, he also pledged to “develop a carbon border-adjustment mechanism," making the case that it “promotes jobs here at home, it prevents carbon leakage abroad.” Canada could easily beat Europe and become the first country to introduce a carbon border levy (see [*Striking first: Why Canada could beat Europe to a carbon border levy*](https://www.carbonrisk.world/striking-first/)).

### Addressing ‘carbonflation’ concerns

Up until last weekend the consumer carbon tax was adding almost 18 cents per litre of gasoline, 15 cents per cubic metre of natural gas, and 21 cents per litre of heating oil consumed. Of the three fuels, consumers are probably most sensitive to changes in gasoline prices. Afterall, it’s perhaps the only price that is advertised on large, eye-catching LED displays everywhere you drive, immediately visible to drivers even if you have no immediate need to fill up.

Analysis by the International Institute for Sustainable Development (IISD) shows the carbon tax only had a negligible impact on gasoline price inflation. The tax was responsible for a 3 cents per litre increase in the year to June 2022, while changes in the underlying price of crude oil and gasoline accounted for 70.5 cents per litre. This tallies with analysis from the Bank of Canada who estimate that the carbon tax contributed only 0.15 percentage points to energy price inflation. The bank estimates the overall impact on inflation in goods and services to be minimal - less than 0.3%.[2](#footnote-2)[3](#footnote-3)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/6d567987-3236-470d-b9ba-80e6cda1fc57_838x453.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

The perception that the carbon tax had a big impact on inflation was weaponised by the opposition Conservative Party during the recent energy crisis - despite evidence indicating the impact was negligible. However, the perception that the carbon tax was impoverishing Canadians was enough for it to become politically toxic. You can already see the impact of inflation concerns across other jurisdictions with carbon pricing.

For example, fear of a political backlash to high gasoline prices in California is one reason why the state keeps delaying reforms to its Cap-and-Trade scheme. The state already has one of the highest gasoline prices in America and Governor Newsom knows that it will do his chances of leading the Democrats no good if his policies are perceived as being behind high gasoline prices (see [*The future of California's cap-and-trade program beyond 2030 is now in doubt: Clean hydrogen production tax credit rules complicate the legislative process*](https://www.carbonrisk.world/the-future-of-californias-cap-and/)).

### Ultimate transparency required

Back in July 2024 I argued that the Canadian government should at least reform the consumer carbon tax, if not dump it. In the article I outlined four reasons why the implementation of the tax was far from optimal: a) poor communication by the government meant few knew about, far less understood the scheme, b) revenue recycling failed to address barriers to switching,c) the perception of political machination, real or otherwise, and d) that revenue recycling meant the economy failed to benefit from the multiplier effect (see [*Why Canada should reform its carbon tax*](https://www.carbonrisk.world/why-canada-should-reform-its-carbon/)).

As in Canada, slapping a carbon tax on very visible, consumer facing, politically sensitive products is fraught with difficulty. Europe’s leaders will be acutely aware of the political risks, even more so after recent developments in Canada. It is vital that European governments are completely transparent on how the funds are allocated, or they are likely to face the wrath of their voters. This is especially pertinent given that Europe’s second emissions trading scheme - covering buildings, road transport, as well as those manufacturing industries not included in ETS1 - is set to begin in less than two years.

The ETS2 price should, in theory at least, jump to the level at which emission abatement is incentivised. As I’ve discussed in previous posts, that could be very high - >€200 per tonne - given the position that buildings and transportation have on the marginal abatement cost (MAC) curve. According to Veyt that might add at least €0.50 per litre of diesel by 2031\. However, given the inherent deficit of allowances built into the system, the ETS2 price could spike much earlier than this, and to much higher levels, perhaps as high as €340 per tonne with knock-on implications for European diesel and other fuel prices (see *[ETS2 carbon price could rapidly breach €100: Europe's second carbon market is expected to be very sensitive to emission allowance scarcity](https://www.carbonrisk.world/ets2-carbon-price-could-rapidly-breach/)*).[4](#footnote-4) 

![4Ed4795999F5132930E8664E72D8F74F0Ab7Bfd7 1168X674 1](https://substack-post-media.s3.amazonaws.com/public/images/0e0df847-a0ac-4d00-be17-2b22efd44648_876x506.bin)

Source: Veyt

[Get 30% off a group subscription](#/portal/signup)

Each Member State is expected to channel revenue from the sale of ETS2 allowances to measures to cut emissions from buildings (e.g. insulation) and transport (e.g. public transport), while also allocating funds to support lower income households. Furthermore, the EU are also launching the Social Climate Fund (SCF) to direct income payments, support the renovation of social housing, help with integrating renewable energy, and enable communities to roll out low carbon transport (e.g. EV infrastructure and public transport).

The experience from ETS1 is not encouraging. A report by WWF found that EU Member States raised €88.5 billion from the sale of EUAs during the period 2013-22\. However, €25 billion of this income was not spent on climate action, while another €12 billion was spent on projects that could have resulted in increased emissions. More importantly from the perspective of transparency, they claim their analysis was made more difficult due to the “considerable gaps and inconsistencies in Member States’ reporting,” while information on how ETS revenues were spent was often “riddled with inconsistencies and mistakes - if it’s available at all.”[5](#footnote-5)

Mark Carney’s decision to can the consumer carbon tax was a savvy tactical political move, eliminating the key battleground issue upon which opposition leader, Pierre Poilievre was waging the election battle: ‘Axe the tax! Some supporters of carbon pricing will no doubt argue that Carney’s move goes against everything the former head of the Taskforce for Scaling Voluntary Carbon Markets use to stand for. I disagree, and as the quote at the beginning of this article makes clear, Carney has always been clear that markets require the tacit approval of society at large for them to be effective - the consumer carbon tax is no different. By beating a tactical retreat, Carney can now seek to reengineer Canada’s carbon markets, bigger and better than ever before.

---

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---

1. https://440megatonnes.ca/insight/industrial-carbon-pricing-systems-driver-emissions-reductions/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.iisd.org/system/files/2024-07/fossil-fuels-drive-inflation-canada.pdf [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://www.cbc.ca/news/canada/calgary/carbon-tax-inflation-tiff-macklem-calgary-1.6960189 [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://veyt.com/press-releases/starting-in-2027-europes-second-big-emission-trading-scheme-will-increase-fossil-fuel-prices/ [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
5. https://www.wwf.eu/?8399416/Where-did-all-the-money-go-How-Member-States-spent-their-ETS-revenues [↩](#footnote-anchor-5 "Jump back to footnote 5 in the text.")
### US 'energy dominance' will depend upon CO2
URL: https://www.carbonrisk.world/us-energy-dominance-will-depend-upon/
Last updated: 2025-08-21T10:35:39.000Z
**Welcome to** [**Carbon Risk**](https://carbonrisk.substack.com/about) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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---

*Estimated reading time \~ 11 mins*

> *“…CO2 is going to be much needed for the US for our extended energy independence.”*

\- Vicki Hollub, CEO of Occidental Petroleum

Enhanced oil recovery (EOR) involves injecting high-pressure CO2, sometimes alternated with pulses of water, into an oil reservoir, scrubbing the existing pathways within the rock, enabling a more efficient flow of oil. By pushing more crude to the surface, EOR can recover up to 60% of the oil remaining in a reservoir.

Incremental oil recovery from EOR was estimated to be around 250,000 barrels per day in 2022/23, according to the U.S. CO2 EOR Survey. This is the additional amount of oil extracted from oil reservoirs using EOR techniques, beyond what could be recovered through primary and secondary recovery methods.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/2caedd3c-c4a4-4860-87bd-b1f52ef54026_985x594-1.png)

About 35 Mt of CO2 is currently used for EOR in the US, with more than three-quarters sourced from natural underground CO2 deposits located nearby, with the remainder derived from industrial emitters such as ethanol plants. Overall, this works out at an average utilisation rate of 0.4 tonnes of CO2 per barrel of oil extracted.[1](#footnote-1) [2](#footnote-2)

US EOR oil production has dropped by about 20% since it peaked in 2017 at just over 300,000 barrels per day. The main factors behind the decline were the drop in the price of oil, a shortage of industrial sourced CO2, and a move towards maximising the use of horizontal drilling by oil producers.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/386beb96-2dd2-4ef8-bc5c-551a92aeb8b8_932x591.png)

### EOR lowers the carbon intensity of US crude production

Analysis by the Clean Air Task Force, drawing on lifecycle analysis (LCA) by the International Energy Agency (IEA) compared the “well-to-wheel” emissions of EOR produced oil versus conventional oil and found that EOR results in a significant reduction in emissions per barrel.[3](#footnote-3)

To start, the CATF estimates that one barrel of conventional oil emits 0.51 tonne of CO2 per barrel. EOR involves injecting CO2 helps to release crude oil trapped in the pores of the source rock, in the process permanently trapping the CO2\. Recovery of every barrel of oil produced through EOR typically involves injecting and utilising 0.3-0.4 tonnes of CO2 per barrel. Hence, relative to conventional oil production, EOR lowers the well-to-wheel emissions to 0.21 tonnes of CO2 per barrel.

However, EOR operations have higher process emissions compared to conventional oil. The separation and recycling of CO2 involves an additional 0.03 tonnes of CO2 emissions per barrel of oil produced. The CATF estimates that EOR produced oil displaces around 84% of the emissions from conventional oil production, leaving emissions higher by 0.04 tonnes of CO2 per barrel. Finally, the increase in oil production due to EOR - and the associated drop in the price of oil - results in an increase in consumption, and a corresponding rise in emissions (0.04 tonnes of CO2 per barrel).

Overall, the CATF estimates that EOR results in a 37% reduction in emissions per barrel, compared to conventional oil production. Another study, this time employing a dynamic LCA, measured the net CO2 released over time. It found that EOR oil projects are typically net carbon-negative at first (up to anywhere between 6 and 18 years depending on the processes used), but then as oil production declines, the EOR project moves towards becoming net carbon-positive. [4](#footnote-4)[5](#footnote-5) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/2ec4176f-2d0d-4d82-a168-9e0ecc6e006a_1045x538.png)

Source: CATF, IEA

During the course of EOR some CO2 does come back to the surface, but given the expense, operators typically recycle it and then reinject it underground. Oil producers need to balance the cost of paying to separate the CO2 from the production stream and inject it back into the oil reservoir, versus sourcing CO2 from natural or industrial sources, switching from one source to another when a certain price is reached. For example, the cost of sourcing CO2 from industrial sources is estimated to be in the range of $20-$45 per tonne.

Over the lifetime of a project around 90-95% of the CO2 injected into the ground is permanently trapped in the geological formation. However, about three-quarters of the CO2 sequestered underground is from naturally occurring CO2, casting doubt on the low-carbon intensity of EOR produced oil. One way that oil producers can alleviate these concerns is by ramping up the proportion of CO2 that they use captured from industrial sources, or by using CO2 removed directly from the atmosphere using direct air capture (DAC).

### Industrial carbon capture could unlock billions of barrels

The potential for EOR to unlock billions of barrels of oil is immense. In 2020, the US Geological Survey (USGS) estimated that 29 billion barrels of oil might be produced using EOR technologies in amenable US conventional oil reservoirs. The USGS estimated that 8.4 Gt CO2 could be stored (retained) in the assessed oil reservoirs following the application of EOR.

_This post is for paying subscribers only._
### Vollgas
URL: https://www.carbonrisk.world/vollgas/
Last updated: 2025-08-21T10:35:41.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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---

*Estimated reading time \~ 10 mins*

There’s nothing like a crisis to focus minds on what matters!

The transatlantic rift over Ukraine’s future and the realisation that it no longer has the global policeman by its side has forced Europe to re-evaluate its place in the world. Yes, the signs were there months ago - perhaps long before 5th November - that the world is taking a different shape. However, it wasn’t until this past couple of weeks that the penny finally dropped that the end of *Pax Americana* was nigh.

European leaders have come together, not simply in a show of unity, but to plan a way forward that isn’t reliant on America. A bit like an understudy that comes out of the shadow of its mentor, Europe is rapidly asserting itself.  captures it well as he describes the “no-bullshit Europe” taking shape:[1](#footnote-1)

> “The important thing is there has been a fundamental psychological change. US/Russian alignment has fixed European minds. This was an opening gambit involving national and EU budgets and EU borrowing mechanisms. In future, if things continue to deteriorate, it is likely to involve €200 billion in frozen Russian funds and a new €800 billion EU funding facility. They are not fucking about here. They are talking about seriously big measures. There is a sense of seriousness and clear-sightedness about Europe that has previously been completely absent.”

Defence spending by European Union member states is set to increase significantly in the next two years. Goldman Sachs baseline assumption is that the EU will gradually increase its annual defence spending by \~€80 billion by 2027 - equivalent to roughly 0.5% of GDP. Defence expenditures in the euro area accounted for 1.8% of GDP in 2024 and GS expects it to rise to 2.4% by 2027.[2](#footnote-2)

The economic impact of defence spending depends on the type of expenditure and whether it is imported or produced domestically in Europe. GS estimates that additional spending will have a fiscal multiplier of 0.5 over two years, i.e. €80 billion will boost GDP by €40 billion. In response to the extra spending, GS have doubled their forecasts for German GDP growth: from 0.7% to 1.5% in 2026, and from 1% to 2% in 2027\. If the rollout of defence spending can be fast-tracked then GS GDP growth could see an extra 0.3-0.5% boost per annum. In a recent column, John Authers of Bloomberg discusses the dramatic change in sentiment in Germany:

> “Nobody doubts that this is the biggest turning point for German economic policy at least since reunification, and possibly much longer. The country’s frugal monetary and fiscal policies are born of folk memories of the Weimar Republic’s hyperinflation a century ago, and this is a decisive turn away from that.  
>  
> Plenty of people predicted that Germany would have to start spending more; nobody I spoke to pretended to have had any idea of the scale of what is underway. Only a week ago, the talk was of €200 billion, which seemed extraordinary. Now we’re talking about €900 billion, closing in on the psychological threshold of $1 trillion.”

However, any deal that amends the constitution requires a two-thirds majority. It will be very difficult to achieve once the new Bundestag takes shape on 25th March and the far-right (who increased its share of the vote during the recent election), together with the far-left parties will be able to block the vote. It means the CDU-SPD coalition will need the support of the Greens to get their proposal through, but that will come at a price, and as  explains, it will probably mean the two largest parties have to devote much more funding in support of climate policies:[3](#footnote-3)

> “The very least that would be required, therefore, is a fundamental reorientation of the CDU-SPD package in the order of hundreds of billions of euros, towards the priorities of the climate crisis. The CDU/CSU should be required to abandon their aim to rollback climate legislation and be forced to lay out a social safety net for the eventual introduction of the ETS2\. De facto this would amount to a Kenya coalition agreement. If this cannot be done on the hair raising timeline apparently envisioned by the CDU-SPD negotiators, so be it. Nothing less should be the price that the Greens exact.”

As  outlines, Germany’s epochal change in approach to defence and security has opened the door to similarly big developments at the European level, while also enabling other EU member states to press for further growth. Denmark's Prime Minister for example has called on Europe to "spend, spend, spend" on defence:[4](#footnote-4)

> “The European Commission last week proposed to change the EU’s fiscal rules to exempt defence spending, as Germany has done, which could unlock up to €650 billion of extra defence spending. At the same time, it proposes to establish a new fund that will allow member states to borrow up to €150 billion to spend on defence investment.”

Eurozone manufacturing activity remained in contraction during February according to the latest HCOB PMI survey but at 47.6 it is now at it’s highest level in two years. Expectations over future manufacturing growth also perhaps signal that a turning point could be on the horizon with manufacturers among their “most optimistic since Russia’s full-scale invasion of Ukraine at the start of 2022.”[5](#footnote-5) 

More recent data hints at the dramatic change in sentiment that has infected Europe’s business community. Expectations among eurozone firms experienced their second biggest ever month-on-month improvement according to Sentix. It was only the early pandemic rebound in expectations (the period following the initial lockdown) that prevents this latest rebound in expectations from being a record.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a3f3bddc-8eef-4f8c-abf2-2cde14f7ec31_707x572-1.png)

Back in September I warned that [*Germany’s manufacturing malaise was set to curb demand for EUAs*](https://www.carbonrisk.world/germanys-manufacturing-malaise-set/). At the time everything was pointing towards an acceleration in the manufacturing downturn, while some of the largest industrial companies in Germany - Volkswagen, Intel, and others - were signalling that extreme measures would be required if their ongoing business in the country was to have a viable future.

Europe is now on the precipice of renewed economic growth, just not the growth it expected, or indeed wanted, but it is the one its got. Could the improvement in sentiment shake Europe’s industrial firms out of their myopia and force them to hedge against an impending deficit in EUAs? This could be the start, but there may be more, and this time from a more conventional source of demand for EUAs.

_This post is for paying subscribers only._
### Repost: A battle for global carbon pricing supremacy is brewing
URL: https://www.carbonrisk.world/repost-a-battle-for-global-carbon/
Last updated: 2025-08-21T10:35:42.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 5,000 people who already read Carbon Risk. Check out the** [**Carbon Risk backstory**](https://carbonrisk.substack.com/about) **and find out what other subscribers are saying.**

[Subscribe now](#/portal/signup)

**You can also follow on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**,** [**Bluesky**](https://bsky.app/profile/petersainsbury.bsky.social?ref=carbonrisk.world)**, and** [**Notes**](https://carbonrisk.substack.com/notes)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 9 mins*

![city buildings photo during daytime](https://images.unsplash.com/photo-1517140660730-555d93ca5f60?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Ralf Leineweber](https://unsplash.com/@rleine?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/city-buildings-photo-during-daytime-qfrLn9hDKfo?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

*China’s leaders have publicly pledged to expand their emissions trading scheme in a concerted push to reduce the carbon intensity of the economy.*

*In a report on the governments progress to the National People’s Congress, Premier Li Qiang outlined how China “will speed up the establishment of a framework for controlling the total amount and intensity of carbon emissions and expand the coverage of the China Carbon Emission Trade Exchange to more sectors.”[1](#footnote-1)*

*China’s carbon market is far from perfect, targeting carbon intensity rather than absolute emissions. However, it’s telling that as the worlds advanced economies either retreat from global climate policy, or consider postponing their own carbon market ambitions, China is looking to press home its advantage (see* [*Free rider: Carbon border levies could trump US withdrawal from Paris*](https://www.carbonrisk.world/free-rider/))*.*

*As I discuss in the article below (first published in May 2024 behind the paywall), control over the global pricing of carbon is a strategic benefit, one that China seeks to capture.*

---

The price of carbon on China’s national emissions trading scheme (ETS) has traded at around €6 per tonne (CNY45) since the market launched in 2021\. However, since mid-2023 the China Emission Allowance (CEA) price has doubled as market participants have anticipated a gradual tightening in the market. In spring 2024 CEAs have traded close to €13 ($11, or CNY93.75) per tonne.

It’s good to see the strong performance, but much more needs to be done for China’s carbon price to become a significant driver of decarbonisation. The CEA price would need to rise 4-6 fold to be on a par with more established carbon markets such as the California or EU ETS for example.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/82c90368-a6d0-4c35-b37f-c7989b3f1012_792x477.png)

Source: Lombard Odier Asset Management

### Tighter supply and broader industry coverage

As other compliance carbon markets have also found themselves in at a similar stage of development, the Chinese ETS is currently plagued by an oversupply of emission allowances. The London Stock Exchange Group (LSEG) estimates total oversupply at 360 Mt CO2 due to generous carbon intensity benchmarks and dodgy emissions data reporting. In response, China’s Ministry of Ecology and Environment plans to significantly tighten the supply of CEAs.

First, power generation utilities are expected to see the CEAs allocated to them in 2023 subject to a larger than expected retroactive cut. Second, CEAs that have been hoarded and not used for compliance will lose their value after 2025\. The latter is thought to account for around 180 Mt, or half of the oversupply in the market. It means that from 2025 onwards only 2025 vintage CEAs can be used for compliance.

China’s ETS currently only covers the power generation sector, mirroring the early development stages taken by other compliance carbon markets. In total some 2,200 utilities, responsible for 4.5 billion tonnes of GHG per year, or 40% of overall emissions are covered by the scheme. Measured in terms of emissions, China’s ETS is already more than 3 times larger than the EU ETS.

Seven other carbon intensive industries (petrochemicals, chemicals, building materials, iron and steel, nonferrous metals, paper, and aviation), are expected to be included over the next few years. Aluminium (both direct and indirect emissions) and cement producers the most likely short-term candidates. If all of these industries join it would mean that around 70% of China’s emissions are covered by its carbon market. At 7.8 Mt CO2, China’s ETS would balloon to 5 times the emissions covered by the EU ETS.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7ebb0df7-da38-4486-a992-baca5038a7dc_793x301.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

The regulatory framework for China’s ETS allows obligated emitters to cover up to 5% of their compliance obligation with China Certified Emission Reduction certificates (CCERs). CCERs refers to emissions reduction activities conducted by companies on a voluntary basis that are then certified by the Chinese government. Offset projects can include renewable power generation, waste-to-energy as well as forestry (see [*Everything you need to know about China's national carbon market*](https://www.carbonrisk.world/everything-you-need-to-know-about-e31/)).

Based on the markets current industry coverage (and assuming participants used the offset option in full) it would equate to 225 Mt CO2 per annum , or 390 Mt CO2 per annum under an expanded industry scheme. It means that China’s ETS has the potential to become by far the largest compliance-based carbon credit market. As Article 6 develops it could put China in pole position to benefit from global demand for credits.

### **Time to press its advantage**

The next twelve months are significant. By early next year countries must submit their next round of Nationally Determined Contributions (NDC), including their 2035 emission reduction targets. One of the key events will be whether Trump returns to the White House in 2025\. If he does it could mark another retrenchment in US climate policy momentum. Although that takes the pressure off the Chinese government in some respects, it could be the opportunity for China to press its advantage, and perhaps establish an unassailable lead in global climate policy and delivery (see [*Climate policy uncertainty is on the rise*](https://www.carbonrisk.world/climate-policy-uncertainty-is-on/)).

Under an even stronger climate commitment the CEA price is likely to be well supported in the market. DNV has assessed what carbon price is required for China to reach net zero in the late 2040’s. It estimates that China must frontload its ambition and so the CEA price would need to average $100 per tonne by 2030, rising to $200 per tonne by 2040.

China is the worlds largest exporting country and is the biggest trading partner to the EU and the United States. China might recognise that it has an opportunity, in the absence of US resolve to pursue carbon pricing, to become the largest and most important carbon market. China’s ETS could be a counterweight to the EU ETS and eventually supplant the EU ETS as a carbon pricing benchmark used in global trade (see [*Why Asia is pivotal to future carbon market growth*](https://www.carbonrisk.world/why-asia-is-pivotal-to-future-carbon/)).

### **A global carbon price benchmark**

Although China is currently the largest emissions trading scheme (ETS) based on tonnes of emissions covered, the European carbon market dominates other global compliance markets on a value basis. In 2023 the market traded €770 billion of emission allowances, accounting for around 87% of the global total. The EU carbon price is likely to remain the global benchmark for carbon, especially as other countries move to establish their own ETS’ in response to CBAM.

Nevertheless, there are reasons to suggest that the EU might not have it all its own way. The EU ETS is likely to become much smaller and illiquid over time, particularly towards the latter half of the 2030’s as the EU ETS emissions cap moves towards zero . This could be ameliorated to a certain extent if EU ETS I merges with EU ETS II (the latter due to start in 2027), if carbon removals are integrated into the market, or if the EU ETS expands to include other countries (see [*Pegger thy neighbour: Why smaller carbon markets link up with larger cap-and-trade schemes*](https://www.carbonrisk.world/pegger-thy-neighbour/)).

One factor that it does have in its favour is that emissions are still expected to remain high for decades to come. China is responsible for one-third of global CO2 emissions and although this share is expected to drop to 22% by 2050, according to projections by DNV, China will still exert a significant influence, both with its global climate impact and policies to help tackle it.

### Control over pricing

China’s leadership has long recognised the importance of having more control over the pricing of raw materials. As commodity futures prices are used as reference points for physical trading, gaining sufficient market share to achieve benchmark status means that Chinese companies can have a bigger say in the global pricing of commodities.

It’s most recent push has focused on establishing a commodity trading hub for clean energy metals. In July last year the Guangzhou Futures Exchange launched a lithium carbonate futures contract. Meanwhile, the Shanghai Futures Exchange is reportedly working on listing several energy metals including aluminium, recycled lead, magnesium, and tungsten.

China has also began to make it easier for foreign institutional investors to access China's commodity futures markets. This is important since it increases the likelihood that the contract will be widely used as a pricing benchmark. The first commodity futures contract to be ‘internationalised’ was a yuan-denominated crude oil contract, launched in March 2018.

Other commodity futures contracts that have opened up to foreign financial institutions include iron ore, rubber, low-sulphur fuel oil, PTA (purified terephthalic acid), palm oil, and copper. The Chinese carbon market is not open to international investors, but that is likely to change if the experience of other Chinese commodity markets is anything to go on.

### Size isn’t the only thing that matters

Worries about declining liquidity have a parallel in commodity markets. The Dated Brent crude oil benchmark index is four decades old but has arguably been one of the most important numbers in the global economy; two-thirds of the 100 million barrels of oil traded each day derive their value from the benchmark.

Originally based on the UK’s Brent field, three Norwegian oil fields plus one other UK field were added to the index in 2002 to counter liquidity worries based on the long-term decline in Brent production. UK and Norwegian oil production is in long-term decline, and so in 2023 the decision was taken to add WTI Midland to the Dated Brent basket of crudes. So far at least it appears the latest iteration of Dated Brent is working well. It shows that benchmarks must evolve if they are to remain useful.

As the experience of Dated Brent and other commodity benchmarks shows, to gain credibility a benchmark must tick many boxes, and having sufficient production of the underlying commodity is only one of them. In the example of crude benchmarks some are dominated by a single or a limited number of buyers or sellers, others are impaired by distorting tax regimes, while many pretenders to the throne are vulnerable to weak legal protection and political interference.

A battle for global carbon pricing supremacy is brewing.

---

**👋 If you have your own newsletter on Substack and enjoy my writing, please consider recommending** [**Carbon Risk**](https://carbonrisk.substack.com/) **to help grow this amazing community of readers! Thank You!👍**

---

1. http://www.npc.gov.cn/jzzqw/jzzq/c34155/202503/W020250305326603076336.pdf [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
### How to hedge long-term carbon risk
URL: https://www.carbonrisk.world/how-to-hedge-long-term-carbon-risk/
Last updated: 2026-05-07T16:13:11.000Z
A high carbon price increases the incentive for companies to invest in decarbonisation, but if the carbon price is too volatile it can actually cancel out the incentive to invest. As I discuss in [*The Fear Index*](https://www.carbonrisk.world/the-fear-index/)*,* a 10% increase in carbon price volatility (as measured by the Carbon VIX) has the same detrimental impact on investment as a €12 per tonne decline in the carbon price.

The level of funding required to invest in decarbonising a cement plant, a petrochemical facility, or a blast furnace is enormous, requiring a multi-decade long commitment, and high sunk costs. Exposure to high carbon price volatility makes it much harder for large-scale projects to be seen as ‘bankable’ by investors

Last week the European Commission (EC) announced plans to create an Industrial Decarbonisation Bank (IDB), tasked with mobilising €100 billion over 10 years to support clean manufacturing in Europe. The main instrument the IDB will use to accelerate industrial decarbonisation is an EU-wide carbon contracts for difference (CCfD) scheme.

A CCfD works by setting a fixed strike price for CO2\. The strike price is normally set at a level that covers the incremental capital and operating cost of the technology. It works something like this. Assume a project developer agrees on a CCfD with the EC at a strike price of €70 per tonne. If at the end of the year the average annual EUA price is €60 per tonne, the EC would pay the developer the difference (i.e. €10 per tonne).

Under a two-sided CCfD, the developer would need to compensate the government if the EUA price rises above €70 per tonne. The alternative is a one-sided CCfD whereby the developer receives a payment if the EUA price falls below the strike price, and gets to keep any excess revenues if it rises above the strike price.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/88d2156b-9020-420c-bfdf-aedde473e40f_748x556.png)

At present futures contracts can only be used to hedge the EUA price up to two or maybe three years ahead. Longer-dated futures contract typically exhibit much lower levels of liquidity, hampering the ability to hedge in size. Without the ability to hedge over a longer period than this, it’s very difficult for project developers to leverage the finance necessary to fund large-scale investments in decarbonisation. CCfDs help correct for this market failure, enabling developers to put a very long-term carbon hedges in place, of around 15 years.

What factors should investors look out for in the design of the CCfD scheme?

Let’s dive in.

First, it’s important that the CCfD scheme is technology neutral. Canada’s CCfD scheme shows the danger in straying too far from this philosophy. When the Canadian government announced an initial CCfD deal in early 2024 it included an agreement on both price and volume, and involved the government taking a stake in the company concerned. In an article at the time I concluded that the Canadian CCfD scheme “fails by trying being too complex and trying to meet too many conflicting agendas.” (see [*Canada shows how NOT to use Carbon Contracts for Difference*](https://www.carbonrisk.world/a-powerful-tool-to-leverage-energy/)).

Encouragingly, the EC state that they will nurture “competitive manufacturers who drive decarbonisation through innovation, create quality jobs and contribute to our open strategic autonomy, fully respecting and applying the principle of technological neutrality for Member States as appropriate.”

Second, information asymmetries mean that it is difficult for governments to gauge the true cost of technologies necessary for decarbonisation, and the associated strike price required. For example, a new technology may come down in cost quite rapidly as industries ‘learn by doing’. A competitive bidding process such as an auction should reveal this information, making it easier for governments to set a realistic strike price.

Third, there is an argument that CCfDs could interfere in the functioning of the EU ETS. For example, it could result in less trading in the longer dated carbon futures market, damaging price discovery, and making it more costly for other market participants to hedge their risks. The risk of that occurring is probably overstated. CCfDs exist to enable hedging over periods of several years or more. The private sector does not currently offer the ability to do that, apart from isolated deals by large utilities looking to hedge the future carbon exposure of their power generation.

Furthermore, the CCfD scheme can also act as a type of commitment device, incentivising the EC to keep the price of carbon high and stable. If the EUA price were to fall significantly versus the strike price then this would represent a cost as the EC would need to recompense the project developer as part of the CCfD contract. Equally, the EC have an incentive to ensure carbon prices are broadly stable, since estimating the potential future cost that they have to bear is easier to predict and budget for.

Fourth, although a small number of EU member states have tentatively introduced CCfDs, this would be the first time that they have been employed on an EU-wide basis. In March 2024, Germany was the first country to employ CCfDs as an instrument to accelerate decarbonisation of heavy industries. In October the German government announced that 15 companies, including chemical company BASF, had been awarded support guarantees under the *Klimaschutzverträge* (‘climate contracts’) scheme.[1](#footnote-1) 

An EU-wide scheme could introduce new problems. As Deloitte outline in a recent report, while an EU-wide scheme could “enhance financial support, market integrity, cost efficiency, and foster cross-border innovation,” it may also “lack the ability to cater to country-specific needs,” while the challenge in reaching consensus among member states “could lead to prolonged implementation times.” Despite these reservations the collapse of the German government in November illustrates why an EU-wide scheme should be a net benefit. Out of the hands of individual member states, a scheme run by the EC adds to the overall credibility, increasing the likelihood that hard-to-abate industries will invest the time and resources necessary to maximise the opportunity.[2](#footnote-2)

Last but not least, investors need to consider how the CCfD scheme will be funded. The EC plan to launch a €1 billion CCfD pilot scheme in 2025, with the rest of the money presumably coming into play from 2026 onwards. The EC state that it will be “based on funds in the Innovation Fund, additional revenues resulting from parts of the ETS as well as the revision of InvestEU.” LSEG are reporting that the EU ETS will account for around one-third of the total €100 billion fund and will represent “approximately 10% of the allowances auctioned from 2028 to 2037.”

There’s no suggestion that the EC will need to front-load the auction of EUAs. Recall that under REPowerEU the target was to raise €20 billion, of which less than half had been generated by the end of 2024\. Even the merest hint that the EC could be looking to tap future auctions once again could prompt a sell-off in the EUA price. To do so again would only make things more difficult for the EC as they are ultimately on the hook to pay the difference versus the strike price.[3](#footnote-3) 

---

1. Denmark launched a CCfD scheme in 2020 in support of green hydrogen and CCS.  
Almost €3 billion was earmarked for the first round of the German CCfD scheme, with the actual exposure dependant on the future price of carbon over the 15 year contract. At its launch in March 2024, Roger Habeck, Germany’s Minister for Economic Affairs and Climate Action indicated that the programme could avoid 350 Mt CO2 by 2045, with the first round of the scheme expected save 17 Mt CO2 over 15 years. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.deloitte.com/be/en/issues/working-together-towards-a-sustainable-future/carbon-contracts-for-difference-as-an-instrument-of-choice.html [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://commission.europa.eu/document/download/9db1c5c8-9e82-467b-ab6a-905feeb4b6b0\_en [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
### Blue sky thinking
URL: https://www.carbonrisk.world/blue-sky-thinking/
Last updated: 2025-12-05T10:03:40.000Z
The term ‘tragedy of the horizon’ was coined by Mark Carney, former Governor of the Bank of England.

First outlined in a speech to Lloyds of London in September 2015, Carney argues that the “catastrophic impacts \[of climate change\] will be felt beyond the traditional horizons of most actors - imposing a cost on future generations that the current generation has no direct incentive to fix.”

That insight has been brutally thrust into the mainstream during the past few years as citizens focus on more immediate economic concerns (i.e., the inflationary impact of higher energy prices), and political sentiment turns sharply against net zero policies.

Governments under pressure to dump climate policies are missing a trick. They can break the ‘tragedy of the horizon’ by re-targeting their efforts towards clean air. It means switching the narrative away from the multidecadal challenge to decarbonise, and towards the more immediate health and economic benefits of cutting air pollution (see [*Climate change - A tragedy in three parts*](https://www.carbonrisk.world/the-three-tragedies/)).

Remember that although burning of fossil fuels is the main source of anthropogenic greenhouse gases (GHG) such as carbon dioxide and methane, those same activities also result in a cocktail of other pollutants being released into the air that are damaging to human health and natural ecosystems. Although there is a risk that climate and clean air policies counteract each others end goals, tackling one type of emission does typically help to curb other harmful air pollutants.[1](#footnote-1) 

Air pollution in particular is much more salient to people than GHG emissions or biodiversity loss. The history of economic development suggests that once air pollution reaches a certain level, calls to the government to do something about it become deafening. In contrast to GHG emissions, air pollution does not suffer from the tragedy of the horizon. The impact from air pollution is felt today. The benefits to cleaning it up can be seen tomorrow.[2](#footnote-2)

For example, in 1950’s Britain, smoke generated from the excess burning of coal combined with fog, resulting in a thick layer of smog across several major cities. It became known as “The Great Smog of 1952” and resulted in thousands of untimely deaths. The smog prompted Parliament to pass laws forcing urban households to stop burning the most polluting grade of coal, and encouraging nearby factories to switch to smokeless fuels (see [*Prosperity bends the curve*](https://www.carbonrisk.world/the-environmental-kuznets-curve/)).

More recently, in 2013 China introduced draconian measures to curb air pollution in Beijing. At the beginning of the year dark sulphurous clouds descended on the capital. Residents who ventured outdoors would find their throat burning as the air filling their lungs had 60 times the recommended healthy level of fine particulate matter (PM2.5). In response authorities imposed a nationwide cap on coal use, divided up among provinces, banned new coal-burning capacity and sped up the use of filters and scrubbers. During the decade following Beijing’s “airpocalypse”, average annual PM2.5 levels in the city declined by 70%.

### A toxic choke hold

The most hazardous forms of air pollution include sulphur dioxide (SO2), nitrogen oxides (NOx), and fine particulate matter (PM2.5). Sulphur dioxide combines with water vapour to form sulphuric acid, the main component of acid rain. Once it falls from the sky it can damage forests, freshwater habitats. Sulphur dioxide can also combine with nitrogen oxides and ammonia to form PM2.5\. Nitrogen oxide can also aggravate respiratory diseases, while also harming ecosystems by increasing the concentration of nitrogen in the soil or water.

PM2.5 is the most dangerous type of air pollution since it increases the risk of health problems like heart disease and asthma. PM2.5 is a type of air pollution made up of “fine particulate matter" measuring 2.5 micrometres across or less – roughly 30 times smaller than the width of a human hair. Burning fossil fuels, especially coal, gasoline and diesel is a major source of PM2.5\. Wildfires and the dust blown from deserts are also major sources of PM2.5 emissions, with the former more dangerous given its unpredictability.[3](#footnote-3)

Most studies put the number of deaths associated with air pollution to be between 4 million and 8 million people per year. A recent study found that long-term exposure to PM2.5 alone was responsible for an estimated 4.1 million attributable deaths worldwide (7.3% of the total number) in 2019\. Another study estimated that 8.7 million deaths in 2018 were associated with air pollution resulting from just the burning of fossil fuels. One can always dispute the assumptions underpinning a study, but it’s clear the human cost alone from air pollution is enormous, certainly several million people each year, primarily linked to the increased risk of respiratory and cardiovascular diseases.

### A drag on productivity

Of course the cost isn’t just measured in human lives. There’s a monetary cost too. The International Monetary Fund (IMF) recently published a study estimating the annual economic costs of air pollution for more than a hundred countries from 2015 to 2022\. While the economic cost resulting from air pollution in 2022 was equivalent to 1% of GDP in the US, it was much higher in China (6%), and exhibited a wide range across Europe (between 1-5%). The worst effects from air pollution tended to be in low and middle income countries.[4](#footnote-4) 

A separate study from the Organisation of Economic Cooperation and Development (OECD) examined the impact of lower air pollution on productivity and GDP in Europe between 2000 and 2015\. The report estimates that a 1 microgram per cubic metre (µg per m3) reduction in the annual concentration of PM2.5 resulted in a 0.8% increase in GDP in Europe during the period 2000-2015\. The authors concluded that the reduction in air pollution explained one sixth of overall EU economic growth during those 15 years.[5](#footnote-5)

Part of the problem is that these negative externalities are not adequately priced by the market. Government subsidies make the problem worse, encouraging consumers to use fossil fuels inefficiently. More than $1.1 trillion was spent in 2022 by governments seeking to protect citizens and industry from the impact of higher wholesale energy prices, according to the International Energy Agency (IEA) (see [*Fuelling controversy: Fossil fuel subsidies act like a negative carbon price*](https://www.carbonrisk.world/everything-you-need-to-know-about-232/)).

Undercharging for local air pollution and global warming accounted for 42% and 29% respectively of the total monetary value of the negative externalities in 2020\. The IMF calculates that correcting this mispricing would avert 1.6 million premature deaths per year from local air pollution by 2030, and generate economic benefits equivalent to 3.6% of global GDP.

### Cap-and-trade is about more than CO2

In the absence of energy subsidy reform the next best option is to use emissions trading schemes combined with local emission standards. The IMF thinks that such a combination of policies could reduce CO2 emissions by around 20% in 2030 relative to what would have occurred, and avert 1.2 million premature deaths per year from air pollution.[6](#footnote-6)

The EU ETS is the cornerstone of Europe’s climate policy. Launched in 2005 it was set up to reduce GHG emissions and help Europe meet its ambitious climate targets. Analysis examining the impact of the EU ETS shows that CO2 emissions fell 15.4% during the period 2005-2020 more than they would have done in the absence of the EU ETS.[7](#footnote-7)

The EU ETS does not currently regulate the emissions of sulphur dioxide (SO2), fine particulate matter (PM2.5), or nitrogen oxides (NOx). However, given the same sectors responsible for the bulk of Europe’s CO2 emissions (utilities and heavy industry), also contribute to air pollution, it’s not unreasonable to think there might be a knock-on effect on these other pollutants too.[8](#footnote-8)

A recent paper from the University of Hamburg investigated the impact that the EU ETS has had on these three other air pollutants, comparing the relative emissions of those sectors covered by the scheme, versus those not covered. It found that the EU ETS was responsible for a decline in emissions between 2005 and 2021 of 15.2 million tonnes of SO2, 0.9 million tonnes of PM2.5, and 4.8 million tonnes of NOx. That’s equivalent to 18.3%, 3.3%, and 2.6% of observed economy-wide emissions during the same period.[9](#footnote-9) 

As time has gone on by the relative improvement in emissions has tended to increase. For example, the analysis indicates that in 2021 the EU ETS was responsible for a 60% decline in SO2 emissions, and a \~30% drop in PM2.5 and NOx emissions, relative to where they would have been in the absence of the ETS.[10](#footnote-10)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/115f9006-912f-4675-8159-b05ebb80fc4f_1495x916-jpeg.jpg)

### No time for a breather

The impact of emissions trading on air pollution in Europe is likely to accelerate later this decade, assuming ETS2 is launched on schedule. Recall that ETS2 is a separate emissions trading scheme that will cover buildings, road transport, as well as those manufacturing industries (under 20 MW threshold) that are not yet covered by ETS1 (see [*ETS2 carbon price could rapidly breach €100: Europe's second carbon market is expected to be very sensitive to emission allowance scarcity*](https://www.carbonrisk.world/ets2-carbon-price-could-rapidly-breach/)).

The European Environmental Agency (EEA) estimates that buildings and road transport accounted for 36% of EU GHG emissions in 2022\. Monitoring and reporting of emissions began in 2024, while full compliance obligations (i.e., including procuring and surrendering allowances) is expected to begin in 2027.

Road transport (exhaust and non-exhaust emissions) and fossil fuel based heating (coal is commonly used for home heating in Poland) are both major sources of air pollution. If ETS2 encourages commuters to switch to an EV the tailpipe emissions go to zero (assuming there’s no change to the generation mix), while the non-exhaust emissions (e.g., dust from brake, tyre, and road wear) remain broadly the same (assuming EV’s are the same weight as ICE vehicles). Meanwhile, ETS2 could incentivise a switch towards heat pumps that produce zero emissions or air pollution.[11](#footnote-11)

ETS2 could have make a big impact on adverse health outcomes and improve productivity and overall economic development. The think tank Bruegel estimated the cost of air pollution across each European country as a share of GDP during the period 2014-2020\. The average cost across the EU was 6% of GDP, but this masks huge regional differences.[12](#footnote-12) 

The Scandinavian countries incurred a cost equivalent to close to 1% of GDP, compared with more than 10% of GDP in Poland, Greece, and Bulgaria. Bruegel does project that these numbers will come down in 2024-2030, but the inequality in terms of impact is expected to remain. The health impact also varies greatly from one region to another. Northern Italy, Poland and Czechia are the hardest hit in terms of PM2.5 mortality, while large cities in western and southern Europe suffer the greatest impact from NOx air pollution.[13](#footnote-13) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/ed008d49-0333-4238-ab33-48a0cdfb2d1c_1019x649.png)

Source: The Economist

### A hazy picture

The adverse impact of air pollution from road transport and the heating of building is significant. The potential economic and health benefits associated with ETS2 are compelling. Policymakers in Europe, and particularly in those countries most affected by air pollution really should be making a stronger case with their citizens.

However, the disparity in impact between different parts of Europe also serves to highlight why the politics is more difficult. It’s another tragedy, one that I haven’t mentioned yet, but that’s fundamental to curbing air pollution: the tragedy of the commons. This occurs when a public resource (also called a commons) is over-exploited as individuals, acting in their own interest, ultimately deplete the resource, to the detriment of others.

The solution lies in property rights, supply management and pricing the externality. First off, assigning property rights means that resources should be managed more sustainably, but in order to get to this point we need to know who is producing what air pollution, where, and when, and that calls for much smarter air quality monitoring.

The environmental technology non-profit OpenAQ publishes regular reports detailing the availability of ground monitoring data. Their 2022 report reveals that 39% of countries do not monitor air quality, while an additional 8% appear to monitor air quality, but do not share the data with the public. Even in Europe the coverage is patchy. There’s clearly a paucity of PM2.5 stations in northern Italy and Poland, both known air pollution hotspots. The hazy picture restricts our ability to make those that emit accountable for their air pollution.[14](#footnote-14)[15](#footnote-15) 

Governments can break the ‘tragedy of the horizon’ by re-targeting their efforts towards clean air. It will require air pollution monitoring to improve and be made available to the public in real time. It will require policymakers to tout the benefits of climate policies such as the EU ETS, that have positive knock-on effects on clean air. Finally, it will need governments to be more open about the immediate health and economic benefits of cutting air pollution, and the trade-offs we make when we tackle one type of pollution versus another.

---

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---

1. For example, a recent paper published by James Hansen indicates that aerosol emissions from shipping (SO2) had a much larger cooling effect on the planet than previously understood. New rules introduced by the IMO in 2020 cut the maximum sulphur content of marine fuels from 3.5% to 0.5%. The paper suggests that the dramatic decrease in this form of air pollution, has been responsible for the acceleration in global warming over the past few years as aerosols are no longer there to reflect sunlight and counteract some of the effects of climate change. https://www.tandfonline.com/doi/full/10.1080/00139157.2025.2434494#abstract [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. For anyone doubting that last sentence consider this. A group of economists at Cornell University analysed the relationship between air pollution and health-care spending across 367 Chinese cities during the period 2013-15\. The paper, published in 2018, found that a temporary 10 microgram per cubic metre (µg/m3) jump in PM2.5 is associated with an 0.65% surge in health-care transactions, while also causing spending at supermarkets to fall as shoppers opt to stay indoors. https://www.nber.org/papers/w24688 [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. Research by Stanford University, published in a 2023 paper in *Nature* found that over just six years, wildfire smoke eroded decades of air quality improvements throughout the US, with Western states affected more than elsewhere in the country. https://www.nature.com/articles/s41586-023-06522-6 [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=4585306 [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
5. https://www.oecd.org/en/publications/the-economic-cost-of-air-pollution-evidence-from-europe\_56119490-en.html [↩](#footnote-anchor-5 "Jump back to footnote 5 in the text.")
6. https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=4585306 [↩](#footnote-anchor-6 "Jump back to footnote 6 in the text.")
7. https://www.nature.com/articles/s41598-024-70260-6#author-information [↩](#footnote-anchor-7 "Jump back to footnote 7 in the text.")
8. Note that from 2026 the EU ETS will also incorporate methane and nitrous oxide (a type of NOx), based on the CO2 equivalence principle. [↩](#footnote-anchor-8 "Jump back to footnote 8 in the text.")
9. https://www.pnas.org/doi/10.1073/pnas.2319908121 [↩](#footnote-anchor-9 "Jump back to footnote 9 in the text.")
10. A similar relationship has been found in California’s ETS https://www.nber.org/papers/w27205 [↩](#footnote-anchor-10 "Jump back to footnote 10 in the text.")
11. [Do electric vehicles reduce air pollution?One of the touted benefits of electric vehicles is that they reduce local air pollution. They’re not just better for the climate, they clean up our air too.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/0b3f5948-e0e4-4164-975a-d4b800dedf19_1080x1080-1.png)Sustainability by numbers](https://www.sustainabilitybynumbers.com/p/electric-vehicles-air-pollution?ref=carbonrisk.world)
12. https://www.bruegel.org/system/files/2024-06/WP%2015%202024.pdf [↩](#footnote-anchor-12 "Jump back to footnote 12 in the text.")
13. Northern Italy is particularly prone to PM2.5 pollution because of its large manufacturing base, large amounts of traffic, and waste from agriculture, coupled with topographic features (the wind starved Po Valley) that prevent air pollution from escaping. [↩](#footnote-anchor-13 "Jump back to footnote 13 in the text.")
14. https://ourcommonair.org/wp-content/uploads/sites/31/2024/09/OCA-Accelerating-Country-led-Air-Quality-Reporting-to-Achieve-Clean-Air-Briefing-PaperAccelerating-Country-led-Air-Quality-Reporting-to-Achieve-Clean-Air-Briefing-Paper-FINAL-05Sep24-WEB-1-1.pdf [↩](#footnote-anchor-14 "Jump back to footnote 14 in the text.")
15. https://explore.openaq.org/?parameter=pm25#4.06/48.22/9.08 [↩](#footnote-anchor-15 "Jump back to footnote 15 in the text.")
### Carbon dioxide removal and the buyer of first resort
URL: https://www.carbonrisk.world/carbon-dioxide-removal-and-the-buyer/
Last updated: 2025-08-21T10:35:44.000Z
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*Estimated reading time \~ 9 mins*

Carbon dioxide removal (CDR) purchases hit 8 Mt CO2 in 2024, according to the latest data from CDR.fyi, an increase of 3.5 Mt CO2 or 78% from 2023 levels. Despite the strong growth, 2024 represents a significant deceleration compared with previous years. In both 2022 and 2023 CDR purchases grew more than 7-fold year-on-year, albeit off a much smaller base.[1](#footnote-1) 

The market for CDR purchases is still highly concentrated among tech companies and financial institutions. Their willingness to pay for CDR partly reflects their very high profits per tonne of emissions compared to other industries. Microsoft is by far the largest single purchaser, accounting for 5.1 Mt CO2 or 63% of purchased CDR volume (down from 70% in 2023). In contrast, the share of the market accounted for by new CDR buyers, such as Equinor, the Norwegian state-owned energy company, remains very low at just 9% of purchased volume.

The largest CDR deal of the year was the 10-year 3.3 Mt CO2 offtake agreement between Microsoft and Stockholm Exergi. The energy company runs a biomass plant in the Swedish capital that also supplies heat for district heating systems. Stockholm Exergi will begin construction of a BECCS unit at the plant in 2025, and when its finished it should be able to capture 0.8 Mt of CO2 emissions per year (see [*The carbon moonshot: Microsoft dominates the market for carbon removal*](https://www.carbonrisk.world/the-carbon-moonshot/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/2e664678-8014-431a-b1bb-f4f7b476f4e7_1220x978-2.png)

As the above example illustrates, the time period between CDR purchases and tonnes delivered (i.e., captured from the atmosphere) is not linear and will vary depending on the technology and where it is in the development process. Nevertheless, it is promising news that CDR removal has been consistently doubling roughly every year since 2020\. In 2024, 318.6 kt of CO2 was removed from the atmosphere using technology based CDR (4.4% of CDR purchase volumes), an increase from 145.1 kt of CO2 in 2023\. It will need to keep to a punishing growth rate if its to get anywhere near the 10 Gt of annual CDR thought to be required by 2050.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/fcc185e6-7ec3-4c05-b0b3-5d6745fdd2e7_1220x484.png)

The two lowest cost CDR technologies dominate on both sides of the ledger: tonnes purchased and tonnes delivered. For example, almost 6 in every 10 tonnes of CDR purchased in 2024 went to just two BECCS companies: 41.7% (3.3 Mt CO2) to Stockholm Exergi and 16.7% (1.3 Mt CO2) to Ørsted. Meanwhile, 9 out of every 10 tonnes delivered in 2024 were from companies employing biochar. Note that biochar has accounted for a similar proportion of deliveries throughout the period 2020-2024 (see [*Nature's 'black gold' rush*](https://www.carbonrisk.world/natures-black-gold-rush/)).

Despite the overall improvement, CDR.fyi believe that “demand is currently insufficient to accommodate the number of CDR suppliers seeking to scale their offerings,” noting that only one-third (36%) of the suppliers listed on CDR.fyi have a registered sale. The problem is that without sales, many CDR start-ups (of which there are now thought to be more than 900), could struggle to raise investment, potentially putting them out of business.[2](#footnote-2) 

Many of these start-ups are also developing novel CDR methods, that while typically more expensive than other conventional forms of CDR, could make a huge difference to removing carbon from the atmosphere, if only they were able to achieve economies of scale. For example, while biochar and BECCS CDR credits typically cost $100-$350 per tonne of CO2, other CDR technologies such as DACCS, enhanced weathering, and mineralisation can cost up to $1400-$2,000 per tonne of CO2.

Time may not be on their side. The pool of new CDR buyers isn’t growing fast enough. But perhaps even more concerningly, other research also carried out by CDR-fyi (and in conjunction with OPIS) found that the next wave of CDR buyers is likely to be a lot more price sensitive. This points towards an unwillingness to back relatively costly, novel forms of CDR. Recent announcements by AI heavyweights Microsoft and Meta committing to purchase more nature-based CDR credits, rather than more expensive technology-based CDR, lends credence to the argument that minimising costs is taking centre stage.[3](#footnote-3)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/9449a721-00a4-4c81-99f3-641a9576efa5_836x416.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

### The buyer of first resort

Removing CO2 from the atmosphere is an example of market failure commonly known as the ‘tragedy of the commons’. It occurs when a public resource (also called a commons) is over-exploited as individuals, acting in their own interest, ultimately deplete the resource to the detriment of others. While the cost of removing CO2 is borne privately to whomever pays for it, the benefits accrue to society at large. The upshot is that there isn’t a natural market for CDR. But unless someone is willing to stump up the high costs, technology developers cannot be certain that there will be demand for their CDR service in the future.

Thankfully not everyone thinks that way. There are some companies with the commitment and foresight to make a change.

Back in 2020, executives at Stripe sought to find a way to net out the company’s carbon emissions since it launched one decade earlier. But when they scoured the market, carbon removal companies were few and far between. Stripe’s insight was that rather than invest in supply-side measures (such as giving research grants), it would be far more effective if they could signal that there was demand for CDR, whatever the cost. This demand-side measure is a type of procurement strategy and is a classic way to spur innovation, providing developers with the confidence that a market is guaranteed to exist.

Stripe was the ‘buyer of first resort’.

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### Hot property
URL: https://www.carbonrisk.world/hot-property/
Last updated: 2025-08-21T10:35:45.000Z
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---

*Estimated reading time \~ 10 mins*

![a air conditioner sitting on the side of a building](https://images.unsplash.com/photo-1700124113583-81aa99ea2aa2?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [alpha innotec](https://unsplash.com/@alpha%5Finnotec?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-air-conditioner-sitting-on-the-side-of-a-building--nbWCvUiFJA?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Europe’s second emissions trading scheme (ETS2) is set to begin in less than two years. ETS2 covers buildings, road transport, as well as those manufacturing industries not included in ETS1\. The launch of the cap-and-trade scheme will mean that an additional 1Gt CO2e of emissions across Europe will be subject to direct carbon pricing.

Market participants - primarily fuel suppliers, distributers, and resellers - don’t have long to wait until they can start managing their carbon risk. ETS2 futures contracts are expected to launch in early May on ICE Endex, the energy and commodities exchange. It will give us the first indication of where the price of physical EUA 2’s will trade when the scheme comes into force at the start of 2027.[1](#footnote-1)

The marginal abatement cost (MAC) - the cost of abating the last tonne of emissions - is one way that investors (and policymakers) can get a fix on where carbon prices need to be in the future. Sloping upwards from left to right, the MAC curve gradually steepens as additional tonnes of carbon emissions get increasingly more difficult, and hence more costly to abate.

The MAC facing buildings and transportation sectors is typically much higher than industrials and power generation, and sits at the steepest part of the MAC curve. This suggests that the ETS2 price should be significantly higher than the ETS1 price (the EU’s current carbon market covering power generation and industrial emissions).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/9c30bd57-43fe-44d5-9f0c-f3448c22a2cd_803x517.png)

The challenge in correctly determining the ETS2 MAC reflects the potential impact of complementary policies. For example, while most countries have directives as to the energy performance of buildings, some have specific policies tackling the barriers to more carbon efficient buildings. The Canada Greener Homes Affordability Program (CGHAP) for example helps fund insulation and heat pumps for lower income households. Policies such as these act to push down the MAC curve, and in turn dampen the carbon price required to incentivise behaviour change. (see [*ETS2 carbon price could rapidly breach €100: Europe's second carbon market is expected to be very sensitive to emission allowance scarcity*](https://www.carbonrisk.world/ets2-carbon-price-could-rapidly-breach/)).

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

### More than just hot air

Heat pumps are one of the most important decarbonisation technologies. They can slash the energy required to heat buildings and dramatically cut their carbon intensity. Unlike conventional electrical space heating systems that convert one form of energy (electricity) to another (heat), heat pumps work by transferring heat from one place (a “source”) to another (the “sink”). Under ideal conditions heat pumps can transfer 300% more heat than they consume. In comparison a high efficiency gas furnace might achieve 95%.

In contrast to ETS1, which places the compliance burden at the point of consumption, the obligated entity under ETS2 are the fuel suppliers, distributers, and resellers. The European Commission (EC) estimates that 11,400 of these companies will count as regulated entities under ETS2\. These companies are likely to pass on the full cost of carbon to their customers - Europe’s households and small businesses - increasing the incentive to install a heat pump.

Fossil-fuel boilers continue to dominate the sale of heating of appliances, accounting for 78% of units sold in the EU during 2024\. Meanwhile, heat pumps account for 17% of new appliances sold. Although heat pump installations surged during the height of the energy crisis, sales have since slowed to 2021 levels. Heat pump’s share of the market differs markedly across EU member states, from less than 10% in Italy to almost 30% in France.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/45257fc9-aabc-4453-8093-a08ffea4b347_909x497.png)

The rollout of heat pumps is going to be vital if Europe stands any chance of meeting its climate targets, and time is of the essence. The average lifetime for a fossil fuel-fired boiler is 15-20 years. The longer it takes to phase out sales of new boilers, the larger the carbon lock-in across Europe’s building stock. How much carbon lock-in? The delivery gap in 2040 - the aggregate of each Member States building sector emission projections, minus the European Commissions 2040 target impact assessment - is estimated to be around 165 Mt CO2 according to Agora.[2](#footnote-2)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/6a615348-b5cf-48f0-a679-c8ac0993b61f_1142x574.png)

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_This post is for paying subscribers only._
### Europe is no longer in control of its destiny
URL: https://www.carbonrisk.world/europe-is-no-longer-in-control-of/
Last updated: 2025-08-21T10:35:46.000Z
**Welcome to** [**Carbon Risk**](https://carbonrisk.substack.com/about) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 10 mins*

![blue and yellow striped country flag](https://images.unsplash.com/photo-1565711561500-49678a10a63f?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Max Kukurudziak](https://unsplash.com/@maxkuk?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/blue-and-yellow-striped-country-flag-qbc3Zmxw0G8?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Almost three years ago, on 24th February 2022, Russia invaded Ukraine.

The immediate period after the attack was one of the most tumultuous in the history of the EU carbon market. The EU carbon price fell by over 40% within days to below €60 per tonne CO2 as market participants digested the immediate financial and economic impact, and questioned the longer-term political and social implications of the invasion.

Not one to shy away from volatility, the carbon market has continued to whipsaw over the subsequent three years as Europe’s policymakers, its industrial base, and its citizens responded to the conflict, and in particular, to surging energy price-induced inflation. Rather than weaken in the face of these threats, EU climate policy and its carbon market have emerged stronger, yet at the same time, increasingly fragile as political and social divergences have taken hold across Europe (see [*Collateral damage revisited*](https://www.carbonrisk.world/collateral-damage-revisited/)).

As the outbreak of war sparked fear and uncertainty, peace is also likely to have a cross to bear. The details of any future deal that ultimately ends the war in Ukraine - whether between Trump and Putin, or involving Ukraine and Europe - are clouded by a thick veil of uncertainty. In the absence of any special insight, lets start by assigning a probability to the outcome, and then ask what the knock-on impact is likely to be.

To do that we look to prediction markets. The  contract for *‘Trump ends Ukraine war in first 90 days?’* is currently trading at 39%. For this to settle at 100% “An armistice, ceasefire, or negotiated settlement” involving an “official announcement from both Ukraine and Russia”, would have to be made by 19th April 2025\. If that seems too soon, two other Polymarket contracts suggest the implied probability of a ceasefire before July is 64%, rising to 74% by the end of 2025.[1](#footnote-1)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/ebd3930b-58c9-4b8a-9fdb-7d7f8f5c3954_818x506.png)

### Europe’s economic response to peace is blunted by the scars of war

Goldman Sachs has scoped out the potential economic implications of the peace based on two scenarios: the first being a more limited truce followed by slow resolution towards lasting peace, and the second, based on a “comprehensive and credible” agreement to end the conflict.

Their analysis focuses on five main factors: lower energy prices, a bounce in consumer confidence, increased construction activity, loss of labour as refugees move back home, and looser financial conditions. Overall, GS analysis indicates a “potential Euro area GDP increase of 0.2% in a limited ceasefire scenario and a 0.5% boost in an upside scenario.” Given that the IMF is only pencilling in 1% GDP growth for 2025, even a mere 0.2% would be a welcome boost.[2](#footnote-2)

_This post is for paying subscribers only._
### Striking first
URL: https://www.carbonrisk.world/striking-first/
Last updated: 2025-08-21T10:35:46.000Z
**Welcome to** [**Carbon Risk**](https://carbonrisk.substack.com/about) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 8 mins*

![blue and brown desk globe](https://images.unsplash.com/photo-1604549944235-3e5579b15cc2?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Greg Rosenke](https://unsplash.com/@greg%5Frosenke?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/blue-and-brown-desk-globe-3ULMRQZ5APA?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

The decision by Justin Trudeau to fall on his sword and not seek another term as Canadian Prime Minister, coupled with Donald Trump’s belligerence to America’s northern neighbour is likely to result in a smarter application of carbon markets, and an acceleration in the use of carbon border levies.

Let’s start off with carbon markets. All three leading candidates for the Liberal Party leadership have backed away from the fuel charge, the so-called ‘price on pollution’ that puts a carbon tax on 21 different fuels; either pledging to cancel it altogether (the position of Mark Carney and Chrystia Freeland), or at least freeze it (Karina Gould). In one stroke this has eliminated the key battleground issue upon which opposition leader, Pierre Poilievre was waging the election battle: ‘Axe the tax!’ (see [*Why Canada should reform its carbon tax*](https://www.carbonrisk.world/why-canada-should-reform-its-carbon/)).

The second component in Canada’s current carbon pricing legislation, the large emitter trading system (LETS), does not have the same political risk attached. It applies to large industrial producers on their non-fuel based production emissions. As with the fuel charge, the carbon price applicable to LETS now rises by C$15 per tonne (€10) each year, from C$80 per tonne currently (€53), until it reaches C$170 per tonne (€115) in 2030\. Neither of the main parties have said they want to reform the policy, and that’s a good thing because LETS is by far the most effective policy instrument Canada has in place to cut its emissions.[1](#footnote-1)

The latest opinion polls also show a big narrowing in the Conservative lead over the Liberals, from 25 points in late 2024, to just 10 points in mid-February. No date has been set for the general election, but it will need to take place by 20th October 2025\. Another poll suggests that if Carney does win the leadership contest the lead would be wiped out. A Leger survey suggests a Carney-led party would boost Liberal support and put them in a dead heat with the Conservatives.

_This post is for paying subscribers only._
### The Carbon Laffer Curve
URL: https://www.carbonrisk.world/the-carbon-laffer-curve/
Last updated: 2026-05-14T14:40:51.000Z
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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 8 mins*

![grascale photo of people standing on ground\](https://images.unsplash.com/photo-1506755594592-349d12a7c52a?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Rob Curran](https://unsplash.com/@curranrob?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/grascale-photo-of-people-standing-on-ground-sUXXO3xPBYo?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

> *“the art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing.”*  
>  
> \-Jean-Baptiste Colbert, Louis XIV’s finance minister

It’s easy to forget amid the day to day noise around carbon markets, but at their heart, emissions trading schemes are an important, albeit still a relatively small, source of revenue for governments.

Emission allowances are initially distributed into the market via auctions before they are then traded on the secondary market. The revenues generated from auctions are either used to fund investment in carbon abatement, recycled in some way back to households and businesses, or used for general taxation, or some combination of the above.

Total carbon pricing revenues exceeded $100 billion for the first time in 2023, according to data compiled by the World Bank. Emission trading schemes (ETS) accounted for over 70% of the revenue generated (of which the EU ETS dominates), supported by the large share of emissions covered by cap-and-trade schemes, and the relatively high carbon prices achieved (see [*It's the carbon price, stupid!*](https://www.carbonrisk.world/its-the-carbon-price-stupid/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/78645d1f-4627-414c-a363-759ac3e7e6f1_739x623.png)

Source: World Bank

Overall, carbon price revenue (including ETS and taxes) is likely to have declined in 2024, as carbon prices typically fell between 2023 and 2024\. Any decline is likely to be short-lived however. The phase-out of free allowances in the EU ETS between 2026 and 2034, the inclusion of other sectors of the economy (e.g., maritime), the launch of other ETS’ (e.g., ETS2, Indonesia, Brazil, etc.), and the expansion of other carbon markets (e.g., China’s ETS), looks set to increase global carbon pricing revenues.

Carbon pricing is an alternative source of tax revenue, one that is especially attractive for governments with yawning budget deficits. Once reliable sources of tax revenue - fuel excise and tobacco duties - are in decline as motorists shift to electric vehicles and people give up smoking. Taxing gambling and marijuana (where they are legal) are new sin taxes that have helped plug the gap. The launch of the EU’s CBAM is likely to focus many governments attention (as it has for Indonesia and Brazil, among others), on the potential tax revenue foregone to Brussel’s coffers if they don’t start pricing carbon.

Finally, while Donald Trump’s return to the White House is widely expected to have a negative impact on climate policy ambition at a macro level, it could have a positive knock-on impacts on individual US states. It will be incumbent upon those states considered to be ‘Climate Leaders’ and for which there is positive climate policy momentum, to step up and deliver an ambitious climate policies that can also generate revenue. Carbon pricing, and more specifically so-called “Cap-and-Invest” programs, fit the bill (see *[What's in a \[carbon market\] name? Why governments should adopt the 'Cap-and-Invest' nomenclature](https://www.carbonrisk.world/whats-in-a-carbon-market-name/)*).[1](#footnote-1)

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### Government directed carbon prices

Although an ETS should involve setting an emissions cap and then just letting the market decide the price, the reality is that governments and other institutions have several levers by which they can, and often do use, to influence the carbon price.

These include formal mechanised processes such as auction floor and ceiling prices and price containment trigger levels. It also includes informal, ad-hoc market interference involving policymakers commenting on ‘politically acceptable’ price levels or front-loading future auction supplies.

Either way, the idea of the right carbon price - ‘not too hot, not too cold’ - is never too far removed from the minds of politicians worried whether they will still be in office after the next election.

_This post is for paying subscribers only._
### Power play
URL: https://www.carbonrisk.world/power-play/
Last updated: 2025-08-21T10:35:47.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 12 mins*

![body of water surrounded by snowy mountain](https://images.unsplash.com/photo-1516898263-bc9e1a4e7e8d?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Callum Stewart](https://unsplash.com/@callumstewartni?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/body-of-water-surrounded-by-snowy-mountain-loTNrJY7TP0?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

> *“It’s an absolutely shit situation.”*  
>  
> \-Terje Aasland, Norway’s energy minister

In early October 2021 the North Sea Link, a 1.4 GW interconnector between Britain and Norway, was switched on for the first time. Spanning 730 kms it is the worlds longest undersea power cable. First proposed in 2003, construction eventually began in March 2015\. Commenting on the opening, Cordi O’Hara, president of National Grid Ventures, said “North Sea Link is a truly remarkable feat of engineering. We had to go through mountains, fjords and across the North Sea to make this happen.”

The interconnector enables electrons generated from Norway’s zero-carbon hydropower plants to flow across the North Sea to the UK. But it also allows the UK to export power back to Norway, for example when there is a surplus of wind generation in the North Sea. According to UK grid operator National Grid, North Sea Link will help the UK avoid 23 Mt of CO2 by 2030.

A few months earlier another power cable traversing the seabed under the North Sea was being energised. The 1.4 GW 623 km NordLink interconnector linking Norway with Germany was first proposed in 2013 and initially scheduled to be completed by 2018, but as with as with North Sea Link construction didn’t begin until 2015.

The strategic importance of interconnectors to Europe’s energy security has long been recognised. In 2014/15 EU member states set a 2030 target calling for a minimum of 15% interconnectedness, applicable to all EU countries.

In theory cross border power trading means utilities can avoid building costly and largely redundant spare generation capacity. Furthermore, it can help countries decarbonise by managing periods of surplus and deficit caused by renewable intermittency.

That’s especially valuable when countries at either end of an interconnector rely on different types of renewable energy, and are able to counterbalance each other. It’s what made interconnectors between northern Europe (the UK, Denmark, and Germany) and Norway so valuable, or at least on the surface.

Norwegian hydropower generation (more than 90% of the power mix) should exhibit a low degree of correlation with renewable generation (wind, solar) based in north west continental Europe. Given Norway’s position as the biggest hydropower generator in Europe and the sixth largest in the world, it’s unsurprising that many considered Norway to be Europe’s battery. It made sense for Europe to seek a power connection with it’s most northernmost neighbour.[1](#footnote-1) 

### High and dry

Just days after the North Sea interconnector opened and zero-carbon electrons flowed south towards the UK, Norway was hit by fears that a drought might mean there wouldn't be enough power domestically. Reserves dropped to around 70% during October, far below the 5-year average for the time of year of almost 90%.

It came at a time when Europe was just beginning to feel the effect of the energy crisis, and the pressure was on to ensure secure, affordable energy supplies. It was another four and half months until Russia invaded Ukraine and those illusions were shattered (see [*Utility player: Climate change threatens hydropower's under-appreciated role in the energy transition*](https://www.carbonrisk.world/utility-player/)).

Twelve months later and the drought wasn’t getting much better. At the beginning of August, the reservoirs upstream of the dams were only 68.4% full, versus 78.9% normally. Concerned that rationing could be around the corner the government announced that they might need to consider export controls to allow the reservoirs to refill and to prevent Norwegian electricity prices from spiking too high. Norwegian Directorate for Water Resources and Energy (NVE) Director Kjetil Lund reminded utilities of their "responsibility to manage not just a commodity, but an essential resource for society.”

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/4bc182c7-b292-4a50-9d87-3af332de9c6f_762x513.png)

Source: [@magnuspedia](https://substack.com/@magnuspedia?ref=carbonrisk.world)

In December 2024, the two-party coalition pledged to cut the two interconnectors linking it with Denmark when they come up for renewal in 2026\. The Skagerrak 1 and 2 interconnectors (commissioned in 1976 and 1977 respectively), are part of a trio of cables, including the Skagerrak 3 interconnector (connected in 1993), linking the Norwegian and Danish power grids. The coalition also campaigned to renegotiate terms with the UK and Germany regarding the interconnectors linking their countries energy systems.[2](#footnote-2) 

And then, in January 2025, the Norwegian government collapsed after the Eurosceptic Centre Party left the two-party coalition in dispute over the adoption of EU energy policies. Labour, the other party in the coalition, could now govern alone until the general election in September. However, it lacks a majority in parliament and trails right-wing parties in opinion polls, making any move towards re-energising Norway’s energy relationship with the EU politically toxic.[3](#footnote-3)

### Going with the flow

It was a mistake to think that Norway would be Europe’s battery - just turn it on whenever you need, and watch the electrons flow south to continental Europe. For one, abundant hydroelectric generation capacity, and cheap power has electrified the Norwegian economy. In 2024 89.3% of cars sold were electric, almost 7-times the EU average, and up from 82.4% in 2023\. Oslo, the country’s capital, can feel like a Tesla showroom during rush hour.

Access to cheap, abundant power isn’t just a boost to Norway’s EV aspirations, it’s a vital component of its industrial success. For example, hydropower generates around 650 TWh of electricity in Europe per year, but around 15% of this is consumed by the continents aluminium smelters, many of which are located in Norway, the largest supplier of the metal to the EU (see [*Aluminium's climate paradox*](https://www.carbonrisk.world/aluminiums-climate-paradox/)).

_This post is for paying subscribers only._
### Energy emergence at the frontier
URL: https://www.carbonrisk.world/energy-emergence-at-the-frontier/
Last updated: 2025-08-21T10:35:47.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 10 mins*

![cable network](https://images.unsplash.com/photo-1558494949-ef010cbdcc31?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Taylor Vick](https://unsplash.com/@tvick?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/cable-network-M5tzZtFCOfs?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

The ‘rebound effect’ is experiencing something of a renaissance.

Last week Microsoft CEO Satya Nadella took to X to argue that the emergence of Chinese artificial intelligence model DeepSeek - thought to be 95% more energy efficient than other AI models - would help AI use to “skyrocket, turning it into a commodity we just can’t get enough of.”

Beginning his post, “Jevons paradox strikes again!,” Nadella makes reference to an obscure economic theory from 19th Century Britain.[1](#footnote-1) 

In 1865 William Stanley Jevons, an English economist and mathematician, warned that Britain’s economic prosperity was at risk because it would soon run out of coal. The late 19th Century was a period of profound change where electricity, railroads, and other technological advancements dramatically altered the economy. Coking coal was in high demand to manufacture the enormous amounts of steel required by industry.

Jevons suggested that technological advances would make it possible for a blast furnace to produce iron with less coal. The resulting rise in profits would attract new investment in iron production, leading to a fall in the price of iron that would stimulate additional demand for coal. As an example Jevons observed that Britain’s consumption of coal soared after James Watt first introduced the Watt steam engine in 1712.

As Jevons concludes in his essay *The Coal Question*, “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth.” The essay a rebuttal to critics who suggested that as steam engines and steel production became more efficient, demand for coal would fall.

The Jevons Paradox argues that rather than leading to lower energy consumption, an improvement in energy efficiency (perhaps due to a new technology or way of doing things) will lead to an increase in energy consumption. The paradox is also known as the ‘rebound effect’ when it merely erodes some of the savings, or the ‘backfire effect’ when the increase in energy consumption overwhelms the initial saving (see [*Energy efficiency is undervalued and misunderstood*](https://www.carbonrisk.world/energy-efficiency-is-undervalued/)).

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### **The micro reverberations**

- Direct effect (consumer): An energy efficiency gain reduces the effective price of energy, causing consumers to use more of it. For example, the installation of more efficient household heating causes the household to heat more rooms or turn the temperature up.
- Direct effect (producer): Energy efficiency gains reduce the effective price of energy, meaning producers are potentially able to increase their output. It may also allow firms to reconfigure the inputs of new capacity to use more energy profitably. The greater the flexibility to reconfigure new productive capacity the greater the direct rebound effect.
- Indirect effect (consumer): Households that saved money off their heating bills after installing a more efficient boiler, then spending it to purchase other goods and services that require energy to provide.
- Indirect effect (producer): Energy efficiency gains reduce the output price of products causing consumers to shift toward them (and away from more energy intensive products), but the shift in demand places higher energy demands on the more efficient producer.

### The macro implications

While the Jevons Paradox was born out of Britain’s Industrial Revolution, the Kazzoom-Brookes Postulate emerged in response to developments following the 1970’s oil crisis.

In the 1980s, economists Daniel Khazzoom and Leonard Brookes independently put forward a theory that increased energy efficiency paradoxically tends to result in increased energy consumption. It was only later, in 1992, that US economist Harry Saunders dubbed this hypothesis the Khazzoom-Brookes Postulate.

If the Jevons Paradox can be thought of as what happens to energy consumption on a micro level, the Khazzoom-Brookes Postulate takes it one big step further and shows what could happen to energy consumption at a macro level. In short, the postulate states that "energy efficiency improvements that, on the broadest considerations, are economically justified at the microlevel, lead to higher levels of energy consumption at the macrolevel."

The dramatic spike in the price of oil in 1973 and then again in 1979 spawned huge improvements in energy efficiency, in particular more fuel efficient vehicles. The knock-on impact of the improvement in energy efficiency was an increase in demand for road transport (in terms of miles travelled), and higher oil consumption.

The Khazzoom-Brookes Postulate goes further and argues that energy efficiency is what enables economic growth to take place. Energy efficiency leads to lower energy prices and enhances energy availability. This then leads to new products and services being developed, which in turn results in greater demand for energy.

### Going deep

One of the largest assessments of peer-reviewed journal literature was published in 2011 by the Breakthrough Institute in which they reviewed almost 100 published journal articles assessing evidence of a rebound effect. The report finds that direct rebound effects “can erode 10-30% of projected technical energy savings”, even before considering the potential indirect or macroeconomic impacts.[2](#footnote-2) 

Direct rebound effects also appear to be more significant in energy intensive sectors of the economy (20-60%), where energy services are more easily substituted for other factors of production. The degree to which demand for a particular energy service has been fulfilled is also important, according to the Breakthrough Institute. The evidence suggests that larger rebounds (\~40-80%) are more likely when there is pent-up demand for energy, e.g., demand for electricity and steel in less developed economies.

In contrast to the direct rebound effects, very little research has been undertaken trying to quantify the magnitude of the indirect effects - either in terms of spending by consumers, or investment by firms. The struggle to quantify it stems in part from the inability to observe it in action, and the potential for long-lead times. Overall the message from the Breakthrough Institute report is that these indirect effects are likely to be very small.

Complex analysis involving computable general equilibrium (CGE) and integrative modelling have been used to explore the evidence of a rebound at the macroeconomic scale. Whatever the model used, the majority of the research published tends to indicate a macroeconomic rebound effect in the 30-50% range, both on the national and global scale.

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

### The frontier effect

But could the estimated level of rebound effect be too conservative? The Breakthrough Institute believes that modelling is “likely to have underestimated the potential for economy-wide rebound, given that they are currently restricted by exogenous assumptions about the scale of direct rebound”, and are limited to modelling “energy productivity improvements without considering the potential for multi-factor productivity improvements from energy-saving technologies.”

There’s reason to heed their warnings, especially when it comes to technologies for which efficiency improvements may unlock unforeseen new energy-consuming applications and products, or even spawn whole new industries - the ‘frontier effect’ dynamic. Sorrel, one of the academics cited in the report, notes that this is most likely to arise for ‘general-purpose technologies’ that have “a wide scope for improvement and elaboration, have potential for use in a wide variety of products and processes, and have strong complementarities with existing or potential new technologies.”

Historical examples of this ‘frontier effect’ dynamic include the widespread new applications of Watt’s improved steam engine, which was at the heart of Jevons’ original treatise. The introduction of more fuel efficient internal combustion engines (ICE) in the aftermath of the 1970’s oil crisis is another. Other examples put forward by the report (remember that it was published in 2011), include “gas turbines, semiconductors and computing technologies, lasers, robotics, radio transmitters.” Clearly these emergent ‘frontier effect’ dynamics are particularly difficult to model and to predict the effect they could have on energy demand.

### Seeking the next frontier

The world has recently undergone another energy crisis, this time driven by higher natural gas prices following the Russian invasion of Ukraine. We’re only beginning to see the impact that this latest energy crisis will have on energy efficiency. The frontier technology today is arguably semiconductor chips and AI.

The former fits Sorrell’s classification of ‘general-purpose technology’, and one that has “a wide scope for improvement and elaboration”, while the latter has “potential for use in a wide variety of products and processes, and have strong complementarities with existing or potential new technologies.”

The extent to which we can observe this particular frontier technology is really up to our imagination, and that’s what makes it so difficult to understand the potential impact on energy demand. Microsoft’s Nadella is right that as AI comes down in price and becomes more commoditised, the rate at which it reaches broad adoption will accelerate, until it hits the steepest part of the S-curve and we can’t get enough of it.

For investors, the kneejerk reaction to DeepSeek was to question the aggressive power demand forecasts. If more energy efficient, open source AI models could be developed then the power crunching demands of data centres would most probably go down. That’s the first order knock-on effect. However, history tells us that the direct rebound effect means consumers will use more, and businesses will up their investment - especially so with frontier technologies.

Lets consider the indirect rebound effects. The evidence indicates these are negligible and difficult to quantify. For AI and data centres the second-order effect probably means more of what is now business-as-usual will be outsourced to the cloud. Although that means we are likely to consume more, the migration towards hyperscale, hyper efficient datacentres is likely to counter the increase in energy demand.

The really big knock-on impact is likely to be macro. This third order knock-on effect will pivot on the degree to which chips and AI result in a reconfiguration of the global economy, the birth of unimaginable new business models, and potentially, the dawn of a new period of burgeoning demand for energy.

Nevertheless, history tells us that we should err on the side of caution. We’ve been here before. In 1999, an article was published in Forbes Magazine called 'Dig more coal -- the PCs are coming'. The opening paragraph begins, "Somewhere in America, a lump of coal is burned every time a book is ordered on-line." At the time internet traffic was doubling every three months.[3](#footnote-3) 

The authors of the article make the astounding prediction: “It’s now reasonable to project that half of the electric grid will be powering the digital-Internet economy within the next decade.” But a decade later data centres powering the internet consumed only a couple percent of America's electricity, nowhere near the 50% prediction made in the article. And so, whether it’s steam, gasoline, or electricity, the history of frontier technologies suggests that it may take longer than we expect for them to have a transformational impact on energy demand.

Unlike previous periods in history, this latest frontier need not result in higher greenhouse gas emissions. The opposite may be true. The boom in data centre capacity amplifies both the need and the opportunity for sustainable power sources.

Rather than simply being seen as hogging power, data centres are a valuable customer for renewable energy developers. Huge concentrated energy demands, coupled with the willingness and ability of data centres to pay top dollar is likely to continue to drive investment in renewable energy.

Finally, for Daniel Khazzoom and Leonard Brookes, long cast under the shadow of William Stanley Jevons, the idea that energy efficiency ultimately drives progress is what it’s always been about. For that the latest frontier technology should be something to celebrate, not feared.

---

**👋 If you have your own newsletter on Substack and enjoy my writing, please consider recommending** [**Carbon Risk**](https://carbonrisk.substack.com/) **to help grow this amazing community of readers! Thank You!👍**

---

[The clouds silver lining One hundred zettabytes of data was created and consumed in 2022, according to the International Data Group. By 2024 that figure is projected to rise by 50%. Every picture, email, Zoom meeting, ChatGPT request, and Substack article has to be stored somewhere. Our reliance on data storage is only likely to grow as AI’s tentacles proliferate into other parts of our everyday life.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-33.png)Carbon RiskPeter Sainsbury![](https://images.unsplash.com/photo-1484557052118-f32bd25b45b5?q=80&w=1000&auto=format&fit=crop&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)](https://www.carbonrisk.world/clouded-judgement/)

---

1. https://x.com/satyanadella/status/1883753899255046301 [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://thebreakthrough.org/articles/new-report-how-efficiency-can [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://www.forbes.com/forbes/1999/0531/6311070a.html?sh=768327272580 [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
### The Fear Index
URL: https://www.carbonrisk.world/the-fear-index/
Last updated: 2025-08-21T10:35:48.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 8 mins*

![mountains covered with snow](https://images.unsplash.com/photo-1530738433046-b589e02b0e79?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Jonathan Gallegos](https://unsplash.com/@jonathangallegos?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/mountains-covered-with-snow-3MwArYh-7yU?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

More commonly known as the VIX, the Chicago Board Options Exchange (CBOE) Volatility Index is a measure of expected volatility in the S&P 500 index. The ‘Fear Index’ moniker only really emerges when the stock-market convulses, traders screens turn a deep shade of red, and the media need a way to make it sound more dramatic.

Now, analysts at Copenhagen Business School and NYU Stern have sought to copy the VIX and create an index which measures uncertainty in the EU carbon market. The Carbon Volatility Index (VIX) builds a “portfolio of options” whose final payoff “approximate the realized variance of EUA futures until option expiry.”

In short, an increase in the price of this portfolio of options reflects higher expected EUA price volatility. The Carbon VIX measures the expected carbon price return volatility over the next 120 days, capturing uncertainty about any information that could impact the EU carbon price within that time frame.[1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/cf41bdf1-8df1-4ac3-a5c9-29337c30e2dc_884x631.png)

The Carbon VIX exhibited an average annualised expected volatility of 54% between September 2013 and December 2022\. It also varies significantly over time, ranging between 30% and 83% over the same period, with a weekly standard deviation of around 10 percentage points. Climate policy announcements (e.g., the Market Stability Reserve), and macroeconomic events (e.g., the pandemic) typically coincide with a spike in the Carbon VIX.

Heightened carbon price uncertainty also tends to take a long time to resolve. For example, the spike in the Carbon VIX in 2018 took almost two years to settle down. The Carbon VIX also has a very low correlation with other measures of financial uncertainty such as the EU equity VIX (correlation of 0.11), or the oil VIX (0.14). While the latter two tend to fade quickly after a spike, carbon price uncertainty persists. This could indicate that shocks to the Carbon VIX are more likely to have real world consequences.

### Nothing to fear but fear itself

Lets turn to those potential knock-on effects now. Could carbon price volatility have an impact on companies incentive to invest in decarbonisation? The first port of call for the Copenhagen Business School and NYU Stern analysts was to see whether there was impact on annual investment patterns.

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### Eco-Friendly or Eco-Shady?
URL: https://www.carbonrisk.world/eco-friendly-or-eco-shady/
Last updated: 2025-01-27T12:03:06.000Z
_No content available._
### Britain's green credibility gap
URL: https://www.carbonrisk.world/britains-green-credibility-gap/
Last updated: 2025-08-21T10:35:48.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 8 mins*

![Big Ben, London](https://images.unsplash.com/photo-1531561452248-84db55b6d9a2?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Deniz Fuchidzhiev](https://unsplash.com/@dfuchidzhiev?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/big-ben-london-HNfZAnl3RM4?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

The UK carbon price fell to a record low of £31.54 (€37.35) this week. Even more importantly, the UKA discount versus the EUA price has once again ballooned to around 50%. The last time the spread was this stretched was back in September 2023 when then Conservative Prime Minister Sunak canned, or at least pushed back on, many of the governments net zero targets.

Labour’s landslide victory in the 4th July general election promised so much, but has up until now, failed to deliver. For any Carbon Risk readers not familiar with the tragic comedy of errors that is UK politics I’d urge you to check out . Suffice to say that the last six months or so could perhaps best be characterised (putting it kindly) as ‘muddling through’.

Uppermost in the minds of market participants in the UK carbon market was that the country would be electing a party supportive of ambitious climate policies, and one keen to establish much closer links with the European Union; the relationship between the two having been severely damaged by the divorce that was Brexit.

In theory a party more focused on climate policy would move quicker to reform it’s carbon market, bringing it into line with ambitious 2030 and 2050 climate targets. In theory a party keen on building bridges with the EU would rapidly seek to establish a link between the UK and EU ETS, piggybacking on the EU’s climate credibility.

Unfortunately, none of those things have happened. Instead, there’s been more muddling through. While EUAs have jumped by 10% since July to over €80 per tonne in early 2025, the UKA price has slumped by one-third to below €40 per tonne, opening up a chasm between the two markets.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/250cb3a7-f35c-4e2c-ace5-d70350fc96f0_922x787.png)

Source: Vertis

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### What's in a [carbon market] name?
URL: https://www.carbonrisk.world/whats-in-a-carbon-market-name/
Last updated: 2025-01-21T12:02:40.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 8 mins*

![aerial view of buildings](https://images.unsplash.com/photo-1535581652167-3a26c90bbf86?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Luca Micheli](https://unsplash.com/@lucamicheli?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/aerial-view-of-buildings-RpvC77-exG0?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Two years ago, at the start of 2023, Washington State launched the second state-wide emissions trading scheme in the United States.

California was the first state-wide carbon trading scheme, and a pioneer in covering multiple sectors of the economy under one carbon price. Launched in 2013, the program covers power generation, heavy industry, transportation as well as other sectors accounting for \~85% of the states emissions. Four years earlier the Regional Greenhouse Gas Initiative (RGGI) was introduced. It was the first emissions trading scheme in the US, and while it only covers the power sector, its reach extends across ten states in the Northeast and Mid-Atlantic.

First mover advantage can be vital in many enterprises, but it’s arguably less important when it comes to establishing a carbon price. The good thing about going later is that you can learn from the experience of those that went before you, and hopefully avoid making the same mistakes (see [*The great sulphur dioxide allowance bull market: What lessons can we learn from the first cap-and-trade system?*](https://www.carbonrisk.world/hero-to-zero/)).

Back in 2016 Washington State voted 59.3/40.7 against carbon pricing in a referendum. The state’s proposal (I-732) called for the introduction of a revenue neutral carbon “tax” in 2017\. It was to start at $15 per tonne, rise to $25 per tonne in 2018, and then increase every year thereafter at 3.5% plus inflation, topping out at $100 per tonne (in 2016 dollars).

A subsequent vote in 2018 was also rejected, 56.6/43.4\. This time the state proposed a $15 “fee” (no one likes taxes!) on every tonne of CO2 emitted in the state, but with much of the revenue invested in emission reduction projects. The plan outlined on the ballot (I-1631) was for the fee to escalate by $2 per tonne each year until the 2035 emission reduction target was met.

Fast forward to 2021 and Washington State adopted a package of proposals to “combat climate change and prepare the state for the future low-carbon economy”. One of the bills, the Climate Commitment Act (CCA), sought to establish a market-based program to meet the emission reduction targets set out in state law (see [*Everything you need to know about Washington State's "Cap-and-Invest" carbon market*](https://www.carbonrisk.world/everything-you-need-to-know-about-1b9/)).

One crucial factor that Washington State learned from earlier carbon markets is the importance of the name. Rather than adopt the term used to describe California’s program - ‘Cap-and-Trade’ - policymakers in Washington State chose to name it ‘Cap-and-Invest’. Instead of emphasising the ‘trade’ in allowances by regulated entities and investors (speculation always gets a bad rap), ‘invest’ pivots the narrative towards actual projects that enable households and businesses to cut emissions (see [*Know your onions: Concern over the role of speculators in Europe's energy markets is overplayed*](https://www.carbonrisk.world/know-your-onions/)).

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### ETS2 carbon price could rapidly breach €100
URL: https://www.carbonrisk.world/ets2-carbon-price-could-rapidly-breach/
Last updated: 2025-08-21T10:35:49.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world) **and** [**Bluesky**](https://bsky.app/profile/petersainsbury.bsky.social?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 14 mins*

![time lapse photography of city buildings during night time](https://images.unsplash.com/photo-1580424807188-4022cf7b807f?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Cezar Sampaio](https://unsplash.com/@cezarsmpio?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/time-lapse-photography-of-city-buildings-during-night-time-1rBSZUOosFk?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

In May 2025, futures trading will begin, in what promises to be, the worlds largest emissions trading scheme by value.

No, we’re not talking about the Chinese carbon market, which will continue to be the biggest ETS based on emissions covered. We’re talking about Europe’s second emissions trading scheme, known as ETS2\. To recap, ETS2 is a separate emissions trading scheme that will cover buildings, road transport, as well as those manufacturing industries (under 20 MW threshold) that are not yet covered by ETS1.

The buildings sector accounted for 15% and road transport 21% of EU greenhouse gas (GHG) emissions in 2022, according to the European Environmental Agency (EEA). Following full implementation of ETS2, three-quarters of the EU’s carbon emissions will be subject to direct carbon pricing. In 2024 around 13 Gt CO2e of emissions faced a direct carbon price, accounting for 24% of global emissions. ETS2 adds the equivalent of 1Gt CO2e in covered emissions, or almost 2 percentage points to the global share (see [*It's the carbon price, stupid!*](https://www.carbonrisk.world/its-the-carbon-price-stupid/)).

Monitoring and reporting of emissions began in 2024\. Full compliance obligations (i.e., including procuring and surrendering allowances) are expected to begin in 2027, but as we’ll see, there is a small chance of a delay. In contrast to ETS1, which places the compliance burden at the point of consumption, the obligated entity under ETS2 are the fuel suppliers, distributers, and resellers. The European Commission (EC) estimates that 11,400 of these companies will count as regulated entities under ETS2.

ETS2 will contribute to the EU’s goal of reducing emissions by 55% from 1990 levels by 2030\. If Europe is to achieve that target then the road transport and heating sectors must reduce their emissions by at least 40% compared to 2005 levels. Emissions will then need to continue to drop sharply, even after 2030, to meet the proposed 90% emission reduction target set for 2040\. Overall, ETS2 emissions will need to drop from around 1.1 Gt CO2 in 2027 to 0.2 Gt CO2 in 2040.

ICE Endex, Europe’s energy futures and options exchange, announced in December that it will launch a series of EUA 2 futures contracts on 6th May. The move will allow obligated companies to hedge their carbon risk exposure. The financial impact for parts of the fuel supply chain that fail to plan ahead could be brutal. At the same time it could also be a big opportunity for speculators, but one that does come with risks - namely, a political backlash.[1](#footnote-1)

_This post is for paying subscribers only._
### Repost: Fight Fire With Fire
URL: https://www.carbonrisk.world/repost-fight-fire-with-fire/
Last updated: 2025-08-21T10:35:50.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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---

*Estimated reading time \~ 9 mins*

![A city with a lot of smoke coming out of it](https://images.unsplash.com/photo-1736472073980-094e333ef417?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Jessica Christian](https://unsplash.com/@lovesquish?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-city-with-a-lot-of-smoke-coming-out-of-it-iX1UVhJi1Jw?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

> *“Small forest fires periodically cleanse the system of the most flammable material, so this does not have the opportunity to accumulate. Systematically preventing forest fires from taking place ‘to be safe’ makes the big one much worse.”*  
>  
> \-Nassim Nicholas Taleb, Antifragile: Things That Gain From Disorder

*As wildfire continues to ravage much of Los Angeles Country and the surrounding areas, attention has inevitably turned to who or what was to blame, and what could be done to prevent a similar tragedy happening in the future.*

*Every wildfire is different, but it would be remiss not to learn from the experience of other countries also affected. With that in mind please check out the article below. It was originally published in September 2023 behind the paywall but is now free to view.*

*Controlled (also known as prescribed) burning which cleanses the area of the most flammable material, and preventing it from accumulating, takes place in several countries prone to wildfires, for example Australia.*

*California has ramped up controlled burns from 135,000 acres in 2021 to 260,000 acres in 2023, and currently plans to burn around 400,000 acres in 2025\. Patrick Brown from the  estimates that California should be doing almost 8 times as much as it currently does to achieve the maximum economic benefit from wildfire suppression.[1](#footnote-1)*

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/fe15a689-f499-467d-99d7-3d4c59557730_922x877-jpeg.jpg)

*Of course, what works in one environment may not work in another. The physical environment, climatic conditions, population density, and politics all have a bearing on what’s possible. But in California, and the US more broadly, it’s often America’s own environmental regulations that get in the way. For example, analysis by the Property and Environment Research Center (PERC) estimates that is takes between 4.7 and 7.2 years just to get approval to carry out a controlled burn.*

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/f303e7a2-5d0f-4a5f-b8e3-3b9f070d182f_1406x938-jpeg.jpg)

---

When we look back at what made the headlines in 2023, wildfires are likely to feature as one of the most important news stories of the year. From the Canadian forest fires that belched orange smoke over New York, to Greece which experienced the largest ever recorded wildfire in the EU, and to the deadly blaze on the Hawaiian island of Maui.

Climate scientists believe that a warmer world coupled with land-use changes mean that extreme wildfires are likely to become more intense, increasingly frequent, and afflict areas of the world not currently use to dealing with fire risk. According to the UN Environment Programme (UNEP), the global incidence of extreme fires is projected to increase by up to 14% by 2030, 30% by the end of 2050 and 50% by the end of the century.[2](#footnote-2) 

In addition to the risk to human life and livelihoods, wildfires result in massive plumes of carbon emissions and a loss of biodiversity.

When wildfire intensity rises to extreme levels, dead organic material that would otherwise decompose is burnt under the high temperatures. Instead of carbon being sequestered into the soil, it is released into the air. Intense wildfires also destabilise the soil, breaking off carbon-based organic matter from minerals and killing soil bacteria and fungi.

Global emissions from wildfires in 2023 are estimated to be the third-worst on record, according to Copernicus, the European earth observation agency, covering data for the first eight months of the year. The Canadian wildfires accounted for more than one-quarter of the global total.

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

### **Where there’s smoke, there’s fire**

Governments typically start trying to mitigate fire risk in the wrong places. The initial step is better predictions. A better fire-forecasting system would of course have enormous benefits. It would enable firefighters to put fire breaks in place, position expensive fire planes in the right locations, all the while minimising the risk to life and property.

However, if you thought weather forecasting was complex, predicting the path that wildfires take is on another level. To stay one step ahead of the fanning flames you need to simulate the wind direction, temperatures, humidity, soil temperatures and dryness, the amount and type of flammable material, as well as the potential reflexive impact that the wildfire, in turn, could have on the weather. And that ignores predicting the most important variable - the source and location of the ignition. Lightning is one of the main causes of wildfires.

The next step governments take is investing in the equipment to douse the fire with water and fire retardants. For example, in the aftermath of the Greek wildfires this year the European Commission announced it will purchase 12 new ‘Canadair’ aircraft to increase the capacity of its aerial firefighting fleet. There’s very little evidence of a correlation between airdrops and fire-fighting success. Aerial firefighting could be more about being seen to do something, rather than nothing at all.

The chances of success are much greater if authorities invest in prevention. Unfortunately no one won an election for preventing a raging wildfire from happening. That being said, we can learn from experiences elsewhere in the world where small fires have long been allowed to burn out in a bid to prevent huge wildfires from occurring.

The tropical savannahs of northern Australia are among the world’s most fire prone regions. The savannas tend to burn in the late dry season, ignited by high temperatures, fanned by strong winds, and fuelled by the build-up of dry tinder. Indigenous communities in Australia had long used fire to manage natural resources. But as indigenous people were forced from or left their traditional lands, the practice stopped, allowing large and intense bushfires to develop.

Controlled burning cleanses the area of the most flammable material, preventing it from accumulating. This form of active fire management means that the savannah is subject to frequent shocks, but one never big enough to be catastrophic. Controlled burning, primarily in the early dry season, helps to protect communities from catastrophic fires and means that significantly less carbon is emitted since there is less biomass available to burn.

It can even play a role in sequestering carbon. A recent study published in the journal Nature Geoscience found that controlled burning can actually lock in, or even increase the amount of carbon sequestered in the soils of temperate forests, savannahs and grasslands. There are two key ways that cooler fires stabilises the carbon within the soil. First off, they create charcoal which is very resistant to decomposition. Secondly, cooler fires encourage the formation of 'aggregates' that increase the amount of carbon bound tightly to minerals in the soil.[3](#footnote-3)

In Australia’s carbon market, Savanna Fire Management (SFM) projects reward planned burning that occurs primarily in the early dry season. Savanna burning programs were reintroduced at scale in the mid-2000’s before being integrated into the carbon market in 2014\. Land managers such as traditional owners, park rangers and pastoralists, are offered financial incentives to burn savanna between April and June each year.

SFM Australian Carbon Credit Units (ACCU’s) currently trade around A$40-50 (equivalent to €25-30), \~A$10-20 more than generic ACCU’s (i.e., Avoided Deforestation and Landfill Gas projects). Those SFM projects that involve indigenous communities typically trade towards the high end of the range given their perceived co-benefits and higher quality (see [*Everything you need to know about Australian Carbon Credit Units (ACCUs)*](https://www.carbonrisk.world/australias-reformed-safeguard-mechanism/)).

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### **Burning issues**

Savannah fires account for almost two-thirds of gross global emissions resulting from fires. A recent study estimated that controlled burning could cut emissions by 89.3 MtCO2e per year across 37 countries that are covered by savannah. This included 29 in Africa (potentially abating 69.1 MtCO2e per year), 6 in South America (13.3 MtCO2e per year), in addition to Australia and Papua New Guinea (6.9 MtCO2e per year).[4](#footnote-4)

Despite it’s potential to reduce emissions, there is currently no mention of controlled burning as a primary mitigation strategy in any country’s Nationally Determined Contribution (NDC). Australia is the only country that currently includes savanna burning emissions in its national accounts, despite savanna burning being an accountable activity under the provisions of the Kyoto Protocol.

What are the barriers to expanding the practice? As I alluded to earlier, it’s very difficult to persuade people who have grown accustomed to using fire suppression, that fire prevention techniques such as controlled burning are likely to be much more effective. Funding for suppression tends to crowd out money that could be spent on prevention, creating a vicious circle. Bigger and more intense wildfires increase the incentive to spend even more on suppression. For example, controlled burning in British Columbia, Canada has declined significantly since the 1980s as wildfire activity has increased.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/1e4a916f-6cb1-47dd-9bef-c70f6832bd2d_1022x542.png)

But there are other challenges to wider adoption of controlled burning. Funding is required to develop the capacity and infrastructure necessary for controlled burning to take place, such as awareness raising, training, monitoring. There also needs to be suitable governance and other safeguards in place. For example, it’s no use if there are disputes about property rights and no way to settle them.

The appropriate incentives need to be in place. As I outline earlier, Australia uses a regulatory carbon market to enable capital to flow to controlled burning projects. If there are competing land-use demands then it becomes more difficult to introduce, perhaps requiring significantly higher carbon prices to incentivise a change.

The practice of controlled burning may also be unpopular. For example, in parts of Australia such as the north-eastern city of Darwin there have been concerns that the practice is leading to increased air pollution. There is also the chance that a controlled fire might get out of control, although in practice there is little evidence of this occurring.[5](#footnote-5) [6](#footnote-6)

Carbon credits linked to controlled burning could become increasingly important in the future. Not simply because of how effective they are in reducing emissions and aiding carbon sequestration, but also as a means to reduce the symptoms of a warming world. They are part of a burgeoning type of carbon credit project that includes ‘blue carbon’ projects such as mangrove forests, tidal marshes and seagrass meadows. The latter sequester carbon but also protect vulnerable coastal communities from the vagaries of extreme weather.

---

**👋 If you have your own newsletter on Substack and enjoy my writing, please consider recommending** [**Carbon Risk**](https://carbonrisk.substack.com/) **to help grow this amazing community of readers! Thank You!👍**

---

1. https://jabberwocking.com/elon-musk-is-the-new-emperor-of-misinformation/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.unep.org/news-and-stories/press-release/number-wildfires-rise-50-2100-and-governments-are-not-prepared [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://phys.org/news/2021-12-natural-environments-offset-carbon-emissions.html [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://www.nature.com/articles/s41467-018-04687-7#Sec7 [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
5. https://theconversation.com/unacceptable-costs-savanna-burning-under-australias-carbon-credit-scheme-is-harming-human-health-186778 [↩](#footnote-anchor-5 "Jump back to footnote 5 in the text.")
6. https://www.researchgate.net/publication/274910041\_Prescribed\_fire\_in\_North\_American\_forests\_and\_woodlands\_History\_current\_practice\_and\_challenges [↩](#footnote-anchor-6 "Jump back to footnote 6 in the text.")
### The future of California's cap-and-trade program beyond 2030 is now in doubt
URL: https://www.carbonrisk.world/the-future-of-californias-cap-and/
Last updated: 2025-08-21T10:35:51.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

✍️🏭 It’s your last chance to respond to the [CDR.fyi/Sylvera carbon dioxide removal (CDR) survey](https://www.cdr.fyi/blog/2025-cdr-market-survey?ref=carbonrisk.world) founded by . The survey closes at the end of this week and gauges current market sentiment and expectations for durable CDR solutions, builds on the inaugural 2024 survey ✍️🏭

---

*Estimated reading time \~ 7 mins*

![aerial photography of city at night](https://images.unsplash.com/flagged/photo-1577912504896-abc46b500434?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

In July 2024 I highlighted how a series of delays to California’s climate legislation, including rules that would have significantly tightened the carbon market, had caused carbon prices in the state to tumble by more than one-third (see [*California's emissionary zeal begins to crack: Carbon market tumbles as climate policies are delayed*](https://www.carbonrisk.world/californias-emissionary-zeal-begins/)*):*

In addition to delays in the implementation of a more ambitious emissions cap trajectory, Governor Newsom announced that two landmark pieces of climate legislation related to climate disclosures had also been delayed. Acknowledging that the timetable was now impossible (the rules would have needed to have been finalised by early 2025), Newsom indicated that the delay would give California’s Air Resources Board (CARB) more flexibility to ensure the rules meet the state’s climate goals.

Investors never take kindly to political indecision and delay, especially in markets built on trust in government commitments:

> “While a strong carbon price is a signal of trust, a weak carbon price delivers the opposite signal; namely that the market has little trust in the government’s commitment to climate targets. Unfortunately, the ongoing weak sentiment in CCA prices may also reflects the broader malaise that’s hit the state’s climate legislative process.”

Nevertheless, the risks could be much more significant than mere delay. One of the most important, yet hitherto unappreciated risks investors face going into 2025 is that the states cap-and-trade program is currently set to expire in 2030, and it’s future beyond 2030 is far from guaranteed.

_This post is for paying subscribers only._
### Europe's greener cost of capital under threat as monetary policy eases
URL: https://www.carbonrisk.world/europes-greener-cost-of-capital-under/
Last updated: 2025-08-21T10:35:51.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world) **and** [**Bluesky**](https://bsky.app/profile/petersainsbury.bsky.social?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

🏆🏭 The deadline for entries to #EUAPredict 2025 is 5PM GMT Friday 10th January. Message [Alessandro Vitelli](https://www.linkedin.com/feed/update/urn:li:activity:7275827705290317825/?ref=carbonrisk.world) or add a comment to his LinkedIn post with your prediction for the final Dec 2025 EUA contract settlement price 🏆🏭

---

*Estimated reading time \~ 6 mins*

![gray concrete building with star](https://images.unsplash.com/photo-1607269910784-aafe40882991?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Mika Baumeister](https://unsplash.com/@kommumikation?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/gray-concrete-building-with-star-bGZZBDvh8s4?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

The rapid and unexpected increase in interest rates during 2022 was widely thought to be negative for Europe’s energy transition. Isabel Schnabel, member of the European Central Bank (ECB) expressed concern that monetary policy tightening would “discourage efforts to decarbonise our economies rapidly.”

Contrary to conventional wisdom, evidence is coming to light that recent monetary tightening actually helped Europe to decarbonise. According to the European Central Bank (ECB), monetary policy is increasingly transmitted through the economy via a ‘climate-risk-taking-channel’. This acts as a break on the activities of carbon intensive firms, relative to other, less carbon emitting, and emissions intensive parts of the economy (see [*'Greenflation' fears are a twin threat to the EUs monetary and climate credibility*](https://www.carbonrisk.world/greenflation-fears-are-a-twin-threat/)).

Europe’s most carbon intensive companies pay a premium to borrow compared to firms with lower emissions, according to a report by the Dutch central bank, De Nederlandsche Bank (DNB). The divergence in European corporate bond yields, between high and low carbon intensive firms, has been especially noticeable since 2020 (around the time of the Green Deal and the Fit-for-55 package), with the spread ballooning to over 40 basis points in 2022.[1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/87045df8-a1b5-405d-b304-b5b035734fc6_840x493.png)

Importantly, DNB found that the spread in bond yields is evident across both short and long term maturities. The findings imply that companies with lower emissions can finance their operations and invest for the future, at a lower cost than firms responsible for a greater share of Europe's emissions.

_This post is for paying subscribers only._
### Five books that made me think differently in 2024
URL: https://www.carbonrisk.world/five-books-that-made-me-think-differently/
Last updated: 2025-08-21T10:35:53.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world) **and** [**Bluesky**](https://bsky.app/profile/petersainsbury.bsky.social?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 12 mins*

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/edf8edbf-1500-4f9e-8360-d193422e8bb4_1412x439-1.png)

One of the challenges involved with writing a newsletter is the need to consume a rich variety of insights from multiple sources, both within my own subject area, but also those on the edge, or in other realms completely. It’s often that the most useful and important nuggets of insight can be gleaned from splicing together data and narratives from disparate subject areas.

The five non-fiction titles listed below are just some of the books I’ve read during 2024, but by far and away, they are the ones that have left a lasting impression on me. Primarily its because, as a collection of books, they have changed the way I think about economic growth, the role of markets, and what it means for the climate and nature.

You can skip to the end for my summary, but I recommend you read the individual book summaries (and preferably the books themselves) before you do. I’d be interested to hear your thoughts.

---

## Growth: A reckoning, by Daniel Susskind

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8ccabac4-6bff-48ea-a927-a352c66f6e93_272x435.png)

*Growth: A Reckoning* begins by outlining just how lucky we are to be alive today. Up until the late 18th Century ones standard of living changed little from one year to the next. Life was harsh. A struggle to survive. A period known as the ‘Great Stagnation’. But things started to change around the year 1800\. The economy began to grow.

The need to measure the size of the economy was '“forged in the heat of the Second World War, a way to know what resources could sensibly be diverted towards the conflict at any moment in time.” The need for growth was forged in it’s aftermath. As Susskind explains, the “pain and uncertainty” of the Great Depression still haunted people, and so anxiety over widespread unemployment soared as discharged soldiers flooded back home.

It wasn’t long before the pursuit of growth for its own sake became the answer for politicians of all stripes, trying to have their cake, and eat it too. However, there was a cost to pay and it was only later that the true price became apparent, not just in environmental terms according to Susskind, but also “the emergence of vast inequalities…the creation of technologies whose disruptive consequences for work and politics it is not clear we can control, the desolation of local cultures and thriving communities.”

The book also dispels the narrative, held in some quarters, that we should simply redefine Gross Domestic Product (GDP), or focus on slowing or even contracting the economy, if we are to avoid the costs associated with growth. At it’s heart it stems from a misunderstanding about what the real driver behind economic growth. Hint: It’s not finite resources.

But how to chart a path between growth - and all the benefits it has given us - while also minimising the costs. As Susskind outlines in the concluding chapters of the book “we have far greater control over the nature of the economic change than is commonly supposed.”

### The Twilight Before The Storm: How to Avoid a World on Fire, by Viktor Shvets

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c74f3dec-0826-4e35-bf04-6d8f050de6a9_287x435.png)

*The Twilight Before The Storm* looks back over the past century examining the closest parallels to today, what can we learn from that time, and how can we prepare for might come next? Shvets makes a compelling case that “our current environment resembles the 1930’s more than any other period in modern history. The same pressures that shaped the 1930’s and led to the ‘world on fire’ of the 1940’s are evident in abundance today.”

If you’ve read *Growth: A Reckoning* then you will no doubt recognise many of the same pressures that Shvets outlines in his book, “from financial crises and ‘secular stagnation’ to low productivity and extreme inequalities, from the rise of new powers to demographics. But a lack of global consensus on what constitutes the ‘right’ economic, social, and political models is arguably the most important commonality.”

The key concept Shvets applies to the modern world is the ‘Fujiwara effect’ - when one hurricane merges with another. In today’s world the Fujiwara effect results from the intersection between financialisation and technology, “with excess capital fuelling technological innovation, which in turn, creates even more surplus capital, reinforcing an ever-faster evolution of the Information Age.”

This comes at a cost however, the “toxic intersection between these two powerful forces is today compounded by environmental degradation, a consequence of neo-liberal policies that for more than three decades prioritised growth and wealth creation, irrespective of externalities.”

Shvets believes that the state will ultimately integrate itself into more facets of daily life, somewhat akin to the period after the Second World War, in order to alleviate these externalities, “The debate is no longer about ideological objections to state involvement but rather about more optimum ways of encouraging, persuading, and incentivising private sector participation…while ensuring upstream and downstream benefits.”

Shvets first book, *The Great Rupture: Three Empires, Four Turning Points, and the Future of Humanity* is also very much worth your time. As the title suggests it takes a much longer term view of history, and while it touches on some of the same themes and concepts that arise in his latest book, it is just as insightful.

### Values: An Economists Guide To Everything That Matters, by Mark Carney

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/33792239-1e5f-406b-a68c-a834e36650ee_324x495.png)

Mark Carney’s book examines “how our society came to embody Wilde’s aphorism - knowing the price of everything but the value of nothing. How by elevating belief in the market to an inviolable truth we moved from a market economy to a market society. And how we can turn this around.”

The book first takes us on a tour of how money has evolved over time through to the present day, including the gold standard and the development of fiat money. Carney’s sentiments will be familiar to readers of Carbon Risk, that credibility and trust are vital to the functioning of money, but that this “cannot be maintained without political support. This in turn requires public understanding, which is built through transparency and accountability, and it requires consent which is grounded in solidarity.”

Carney goes onto to discuss the way the market has skewed our sense of what matters, “Market value is taken to represent intrinsic value. And if a good or activity is not in the market, it is not valued.” This is something Susskind picks up in *Growth: A Reckoning* where, he jokes, “Marry your house cleaner and the country’s GDP will fall, for example, but send your parents to a care home and GDP will rise.”

As *Values* highlights, although “\[Adam\] Smith emphasised that effective market functioning requires particular sentiments - trust, fairness and integrity - he didn’t recognise the paradox of how the act of valuing can change those sentiments.” As Carney argues “Economics has generally avoided this question in part because it purports to be a value-neutral subject. This position is untenable…market\[s\] can change the character of the goods and the social practices they govern.”

*The Twilight Before The Storm* shows how the financialisation of markets has been taken to an extreme. *Values* shows how they are also fragile, but that doesn’t need to be so if they also serve the needs of society, “Markets are not ends in themselves, but powerful means for prosperity and security for all. As such they need to retain the consent of society - a social license - to be allowed to operate, innovate and grow.”

One of the examples Carney gives to demonstrate why markets are both part of the problem, and the solution is the climate crisis, “Climate change is the tragedy of the horizon. It’s catastrophic impacts will be felt beyond the traditional horizons of most actors - imposing a cost on future generations that the current generation has no direct incentive to fix.”

Carney suggests that the tragedy of the horizon can be broken “if the transition to a low-carbon economy begins early and follows a predictable path.” However, markets can only anticipate and smooth the adjustment to net zero if they have “the right information, proper risk management, and coherent, credible public policy frameworks.”

### Climate Capitalism: Winning the Global Race to Zero Emissions, by Akshat Rathi

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/39169284-7520-4838-b189-351e007873cf_289x446.png)

“*Climate Capitalism* is an antidote to the dominant narrative that because we’ve ignored the climate crisis for so long, it will soon be too late.” Instead, author Akshat Rathi argues that smart policies can harness capitalism to cut carbon emissions without killing markets or competition, “It is now cheaper to save the world than destroy it.”

*Climate Capitalism* takes you for a tour around the globe, focusing on the biggest emitters (China, India, and the United States) to show how capitalism is being used in very different ways to incentivise a decrease in carbon emissions. The important point is that each country is making best use of its competitive advantages to decarbonise its economy.

In one chapter the book focuses on the role that institutions have played in enabling climate solutions to flourish. Rathi singles out the International Energy Agency (IEA) for its role as a beacon for the energy industry, signalling where it needs to be, and how much capital needs to be invested if the world is to reach net-zero. Not everyone agrees with Rathi’s view here, arguing that the IEA have neglected their mandate for energy security, and maybe contributing to a misallocation of resources.

Rathi rightly explains that “One of the core tenets of capitalism is the creation of a marketplace ideas…The most passionate capitalists fear that climate action will bring in government intervention that would kill the market, as it tries to redirect the economy.” But as argued in both *Growth: A Reckoning* and *The Twilight Before The Storm*, governments have the power to utilise market incentives in order to direct innovation and investment in those areas most likely to correct the externalities that have built up.

For example, *Climate Capitalism* looks first at California, a jurisdiction that has long stood out for its environmental leadership, and how climate policies such as the Low Carbon Fuel Standard (LCFS) have helped incentivise the construction of Direct Air Capture (DAC) facilities. We then move to Denmark where Rathi highlights the direction played by the government there in the aftermath of the 1970’s oil crisis. In particular how Denmark looked to generate electricity from the wind, developing a whole new industry from scratch, to improve its energy security.

### The Case for Nature: Pioneering Solutions for A Planetary Crisis, by Siddarth Shrikanth

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/cb90cf79-3d81-4325-8e12-248d0dde8f80_290x450.png)

Siddarth Shrikanth makes a compelling case that there is more to climate action than just greenhouse gases, “The case for tackling climate change on its own is the case for ensuring human survival; the case for nature is, ultimately, the complementary case for securing a living planet worth living for.”

As the previous books in my selection also make clear, *The Case for Nature* argues that, “we can no longer treat nature as a distant wonder to be enjoyed on occasion before we retreat once again to modernity: natural capital fundamentally underpins our wellbeing and deserves a central place in our economic framework.”

Shrikanth goes onto make the case that “With time running out…we need to make a serious effort to fold nature’s value into the system we already have: one that has, to its credit, brought remarkable progress and improved living standards for many, but has clearly gone too far in the direction of environmental destruction.”

Some jurisdictions, such as certain Chinese provinces are adopting alternative metrics such as Gross Environmental Product (GEP), “Relying solely on GDP for national accounts is clearly incomplete; GEP helps correct that myopia by measuring the total value of ecosystem goods and services supplied to human wellbeing annually.”

Governments are yet to “truly integrate natural capital into their economic planning, and GEP is nowhere close to replacing GDP measurements.” The author of *Growth: A Reckoning* would suggest that this would be a mistake anyway; it’s impossible to boil everything we value down to one number, and even if we could, it deflects from what’s important.

Businesses are already well ahead of governments in putting a price on nature. For example, *The Case for Nature* takes a deep dive into eco-tourism. For many countries “eco-tourism remains the most tangible business case for nature there is,” and is estimated to be worth “roughly 180 times the dollar-value of the voluntary carbon market in 2021.”

Despite many false starts in the voluntary carbon market, Shrikanth offers some hope that we may be able to finally develop a proper market-based system. Technology makes this possible, since “we are \[now\] able to monitor ecosystems with incredible precision, creating the trust and transparency that all good markets are built on.”

### How these 5 books have made me think differently

Economic growth has brought vast benefits, but it has also comes at significant cost, one that has gone unpaid; not only damage to the environment, but also rising inequality and broader social disruption. We need to be clear about what we want in the future, and seek to engineer a market economy that can deliver it, rather than merely growth just being an end itself. Unfortunately we’re more divided than ever as to what the best course of action is, a division that may take decades to revolve.

Markets can do tremendous damage if they are left unfettered, yet markets remain the best system we have for delivering incentives for change. As we’ve skewed too far towards neo-liberal policies in the past, governments are now likely to swing in the other direction and install guardrails to ensure that markets have broad societal buy-in.

If we are to meet our environmental ambitions - keeping the climate within 2°C, while also protecting and restoring the natural environment - then governments must use markets to change the incentive. History shows that the relative price of labour and energy was a key factor in kicking off the Industrial Revolution, and prices can be used tomorrow to encourage investment in industrial electrification, carbon removal, regrowing forests, or whatever else.

\*\*\* This is the last Carbon Risk article for 2024\. I will be back in the first week in January. If none of the books listed above work as a gift idea, then consider giving someone a gift subscription to Carbon Risk :) Thanks again for your support and I wish you all a merry Christmas and a happy New Year \*\*\*

---

**👋 If you have your own newsletter on Substack and enjoy my writing, please consider recommending** [**Carbon Risk**](https://carbonrisk.substack.com/) **to help grow this amazing community of readers! Thank You!👍**
### Repost: Weighing the value of carbon price predictions
URL: https://www.carbonrisk.world/repost-weighing-the-value-of-carbon/
Last updated: 2025-08-21T10:35:54.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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---

*Estimated reading time \~ 16 mins*

![A close up of a clock on a wall](https://images.unsplash.com/photo-1730829807423-83b045bd6cfd?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Kelly Sikkema](https://unsplash.com/@kellysikkema?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-close-up-of-a-clock-on-a-wall-Jr2vJlYz1sM?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

*‘Tis the season to prophesy.*

*By now many of you will have received at least one report from an investment bank or other institution, proffering their outlook for* asset prices over the next 12 months.

*One year ago Bloomberg estimated that banks published 650 reports giving their view on what was in store for investors in 2024\. Instinctively it feels like that number has gone up sharply as we head towards the end of 2024\. The signal to noise ratio gets worse every year.*

*As  writes in a recent article, “Wall Street analysts love writing tomes for their outlook pieces with lots of verbose language to illustrate how they are intellectuals and not salespeople.” Remember though that the only reason banks produce these kinds of reports is marketing.[1](#footnote-1)*

*As with any important financial decision, the end of December is just an arbitrary line in the sands of time. There’s no reason why it should have any special bearing on your asset allocation decision, any different from some other date in the calendar.*

*One of the staple ingredients to these reports of course is the end-of-year forecast for the S&P500\. Pay attention to them at your peril. There’s no evidence that they should guide your investment decisions.*

*As carbon markets become increasingly important to both investors and companies exposed to them, financial institutions are also asked what the next twelve months will bring.*

*How should we weight the value of these carbon price predictions?*

---

Power generators and major industrial emitters rely on carbon price forecasts to understand whether it is worth pursuing investments that could decarbonise their businesses.

If carbon forecasts prove to be too high then investors may pay too high a price, bringing forward investments when other opportunities could have made better returns on capital. On the flipside if carbon forecasts prove to be too low then investments may be delayed, and obligated emitters may find themselves paying a high price to meet future compliance needs.

Carbon price forecasts also influence the actions of individual investors. Bullish predictions may encourage investors to buy carbon futures in anticipation of higher prices. For example, in late 2021 a number of analysts were making very bullish calls as to how high carbon prices could go.

That begs the question: How accurate are carbon price forecasts?

Asset management group DWS sought to provide an answer by comparing analyst forecasts made at the start of each calendar year between 2010 and 2021 and comparing their predictions with the outturn at end of the year. According to DWS carbon price predictions looking out 12 months typically have an average absolute error rate of 35.5%.[2](#footnote-2)

DWS then compared carbon analyst prediction performance against gold, copper, corn, Brent crude and US natural gas forecasts. No surprise that high price volatility tends to increase the likelihood that the forecasting error rate is also high. That being said, carbon prices exhibit similar levels of volatility to US natural gas prices, yet carbon’s forecast error rate is almost double that of US natural gas.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/5884bd1f-0abe-441f-ab71-b43c98293ba0_1018x520.png)

In 2017 I published my second book *Crude Forecasts: Predictions, Pundits & Profits in the Commodity Casino*. After reviewing forecasts between mid-2007 and 2016 I found that the average 6-month consensus forecast for WTI crude oil had an error rate of 27%. Oil price forecasts looking twelve months out were only slightly worse, off by an average of 30%.[3](#footnote-3)

[Get 20% off a group subscription](#/portal/signup)

Incentive structures, operating at both the firm and the individual analyst level are often dismissed and discounted by ‘consumers’ of forecasts. In my book I argue that incentives are the true driver of forecasting performance. As Warren Buffetsays,“Forecasts usually tell us more of the forecaster than the future.”

### **Incentive #1: Safety in numbers**

As commodity prices soared late in the first decade of the 21st Century the investment plans of major commodity companies were increasingly based on the assumption that high prices would be sustained indefinitely. When prices have been high and rising for some time, it becomes an entrenched assumption that these high prices will persist for the foreseeable future.

In market conditions such as these there is an institutional inertia among forecasters. Analyst’s update their view of the world slowly and iteratively, not wanting to appear too far from the pack or consensus.

The exception to this appears to be when markets reach a peak or a trough. Then investment banks and commentators, etc, all want to come up with an even more extreme prediction of where prices could go - they seek safety in bullish or bearish sentiment. For example, towards the peak in the early 2000’s commodity super-cycle, forecasters came up with ever more bullish projections of how high prices could go. This was mirrored in early 2016 as forecasters sought safety in ever more bearish projections for crude oil prices.

Diversity of opinion often breaks down when beliefs (often also reflected in commodity prices) become too stretched. Seasoned investors might take a back seat while novices push prices to more extreme levels. When this happens, there is no countervailing force to cancel out the irrationality of one individual or group.

### **Incentive #2: Anti-herding**

Researchers at the European University Viadrina Frankfurt (EUVF) analysed over 20,000 forecasts of nine different metal prices over different forecasting horizons, during the fifteen years between 1995 and 2011\. Instead of finding the institutional inertia and forecasting herding that we might expect, they found strong evidence of “anti-herding”.

_This post is for paying subscribers only._
### The climate tech emissions-funding mismatch
URL: https://www.carbonrisk.world/the-climate-tech-emissions-funding/
Last updated: 2025-08-21T10:35:55.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 8 mins*

![green grass field near body of water during daytime](https://images.unsplash.com/photo-1601045774958-305ae15032c8?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Paul Teysen](https://unsplash.com/@hooverpaul55?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/green-grass-field-near-body-of-water-during-daytime-JhwiPk9PON4?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Climate tech start-ups have had a torrid time over the past few years.

Global investment has fallen 60% according to the latest State of Climate Tech report from PwC, from $150 billion in 2021 to $60 billion in 2024.[1](#footnote-1)

The majority of investors are ultimately only in the game to generate a satisfactory risk-adjusted return, but for those investors who also want to have an impact on global emissions, the latest funding data suggests there’s a misallocation problem. Some sectors receive disproportionate amounts of funding relative to their overall share of emissions, while other sectors are starved of capital.

Over the past decade, climate tech start-ups focused on energy and mobility have received 2-3 times their share of global emissions. In contrast, food, agriculture and land use, industrials, and the built environment have been starved of investment relative to their contribution to overall emissions. The trend appears to have become even more acute in the past year or so as investment has increasingly gravitated towards energy and mobility start-ups.

In short, there is an emissions-funding mismatch.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/72872a5c-8a2a-4030-a756-63b81a4baae1_905x708.png)

### The biggest CO2 abatement opportunity lies elsewhere

While venture capitalists, the media, and individuals focus their attention on the switch to renewable energy and electric vehicles, the real action, and the sector that is in most need of correcting the emissions-funding mismatch is industry.

The global industrial sector (which includes sub-sectors such as oil and gas production, cement, iron and steel, and petrochemical processing, etc.) emitted 15.5 Gt CO2e during 2022\. The industrial sector is the single largest source of emissions, accounting for almost one in every three tonnes of CO2e released into the atmosphere. And the impact that industrial production will have on the climate is likely to grow over the next 20-30 years.

_This post is for paying subscribers only._
### Coming of age
URL: https://www.carbonrisk.world/coming-of-age/
Last updated: 2025-10-06T10:30:52.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world) **and** [**Bluesky**](https://bsky.app/profile/petersainsbury.bsky.social?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 11 mins*

![a view of a body of water with mountains in the background](https://images.unsplash.com/photo-1677182117470-ffb159b72d3b?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Ferrando Elias](https://unsplash.com/@ferjeancarlo?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-view-of-a-body-of-water-with-mountains-in-the-background-tpM36Pp5ozY?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

The first carbon project dates back to the late 1980’s.

Concerned about the climate impact of the coal plants his company was developing, the CEO of Applied Energy Services (AES) Roger Sant, sought the advice of the World Resource Institute (WRI). That conversation gave birth to the first avoided emissions carbon credit project. AES agreed to fund the planting of trees and the protection of forest in Guatemala, in return for offsetting the emissions of its coal plants in the United States.

It wasn’t for another decade that governments first entertained the idea that carbon credits could also be the most economical way of meeting national climate targets. Negotiators working on the Kyoto Protocol developed a scheme known as the Clean Development Mechanism (CDM), aping the early innovation employed by AES and its successors.

Barclays was one of the first financial institutions to secure a foothold with which to benefit from the growth in carbon markets. The bank launched its carbon trading business in 2004, prior to the ratification of the Kyoto Protocol (February 2005), and before the EU ETS began operating (January 2005). Other banks were quick to follow, attracted by the potential opportunities in financing, origination, and market making.

### The first carbon panic

Global financial turbulence, coupled with political uncertainty, punctured the banks enthusiasm for the carbon trading business. First, EU carbon prices began to fall in May 2008, coinciding with the start of the Great Financial Crisis (GFC). After peaking near €30 per tonne, carbon prices declined to below €10 per tonne by mid-January 2009 as the market anticipated a deep recession would cut emissions, resulting in lower demand for EUAs.

The EU carbon price rebounded somewhat during 2010 and into early 2011, but it wasn’t long before it was under pressure once again as the European sovereign debt crisis erupted. From a high of almost €17 per tonne in May 2011, the carbon price fell to less than €5 per tonne by mid-2013 as carbon market participants feared an increase in the allowance surplus as economies suffering under the weight of austerity would inevitably slow.

The pressure wrought by the GFC and the subsequent Euro debt crisis were the main factors behind the collapse in the EU carbon price, but two other factors made the situation worse. First, the break down in negotiations at COP15, held in Copenhagen at the end of 2009, added to the poor sentiment in the carbon market.

Second, there was a enormous influx of cheap carbon credits (amounting to \~1.2 Gt of CO2) from the CDM and the UN’s Joint Implementation (JI) programme during the period 2008-2014\. Japan’s retreat from its climate targets following the Fukushima nuclear accident added to the surplus. The price of certified emission reduction credits issued under the CDM gradually fell from €25 per tonne of CO2 in 2008 to €10 per tonne of CO2 in 2011 before crashing to €0.50 per tonne of CO2 in 2012\. Unlike the situation now, EU ETS obligated entities were able to meet their compliance needs through international carbon credits.[1](#footnote-1) 

Many financial market participants had seen enough and started to scale down their carbon trading operations or merged them with their power and gas trading operations (e.g., JP Morgan and Morgan Stanley), or simply got out of the business altogether (e.g., Barclays, Deutsche Bank and UBS).

In addition to the political and structural risks present in the nascent cap-and-trade market, new banking regulations and compliance requirements, introduced in the wake of the GFC, curbed banks ability to trade. Overall, the number of workers employed on the carbon desks of London’s financial centre fell from close to 1,000 in early 2010 to \~200 by the end of 2013.

### “To da Moon”

It wasn’t until 2023, after a decade-long hiatus, that Barclays sought to rebuild its carbon trading desk. The bank’s outlook for the voluntary carbon market (VCM) has been particularly bullish, anticipating the opportunity for exponential growth as net zero targets draw near.

Barclays published a report at the time in which they predicted that the VCM would hit a “tipping point” in the near future, enabling it to grow from $0.5 billion currently, to $250 billion by 2030, before reaching $1.5 trillion by 2050\. Other institutions were also bullish, albeit to a lesser extent, calling for it to be a mere $50-$100 billion market by 2030 (see [*Is the VCM a trillion dollar business opportunity?*](https://www.carbonrisk.world/a-one-trillion-dollar-business/)).

Nevertheless, 2023 was arguably the peak for the VCM.

_This post is for paying subscribers only._
### Demystifying Japan's climate policy riddle
URL: https://www.carbonrisk.world/demystifying-japans-climate-policy/
Last updated: 2025-08-21T10:35:57.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 9 mins*

![photo of mountain peak](https://images.unsplash.com/photo-1520312501384-dbdb83a1cb11?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [takahiro taguchi](https://unsplash.com/@tak%5Ftag?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/photo-of-mountain-peak-ryUr3SC6Lpo?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

A recent survey of citizens in Southeast Asia revealed some surprising responses as to the role played by countries in global climate policy. The ISEAS - Yusof Ishak Institute asked people which country demonstrated the most leadership in helping the world meet the Paris Agreement.[1](#footnote-1) 

Perhaps surprisingly, the country that ranked first was Japan (22.4%). The United States was in second place (20.4%), followed by the EU (20.3%), with China lagging much further behind (11.2%). The results are a remarkable turnaround from 2021 when the EU was seen as the clear leader.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/1337138c-9838-4df5-9aa3-73b67bb76e5f_1854x590.png)

Source: The ISEAS - Yusof Ishak Institute

More detailed questions show that Japan holds an even larger lead when it comes to perception of the most trusted country in global climate innovation (holding a 10pp lead over the US), and knowledge sharing (5pp lead, also over the US). In a recent post,  explains that one reason why Japan is held in such high esteem is it’s recognition of alternate pathways to achieving net zero:[2](#footnote-2) 

> “Melinda Martinus, one of the report's authors, explained that while "Japan is arguably less ambitious in advancing progressive climate strategies" than the US or EU, it is more accommodating toward the different circumstances that Southeast Asian countries face. This suggests that Japan is succeeding in promulgating the principle of "common goal, diverse pathways" -- the common goal of carbon neutrality and the diverse paths in getting there -- in the Asia-Pacific region.”

The article also argues that US and EU climate and environmental policies tend to disadvantage Southeast Asian industries relative to Western business interests:

> “Policies like some provisions of the US Inflation Reduction Act and the EU's Carbon Border Adjustment Mechanism (CBAM) and ban on palm oil have been criticized as protectionist and undermining multilateralism by incentivizing domestic industries. This contrasts sharply with the approach that Japan has taken, which is to aggressively export and finance Japanese technologies -- yes, including ones heavily criticized by climate groups -- and to develop local human resources and share technical know-how on how to build, operate and maintain those technologies.”

Nonetheless, the perception that Japan is a climate leader does appear contradictory, at least to an outsiders perspective. As explains, Japan has been criticised for its investment in the region, and in particular in those technologies such as ammonia co-firing, carbon capture and storage (CCS), blue hydrogen, and LNG carriers, that could prolong the use of fossil fuels.

### Too high a hurdle

In contrast to many other advanced economies Japan remains heavily reliant on fossil fuels including coal to generate electricity (69% in 2023). Thermal coal’s share of generation increased from 22% in 2000 to a high of 33.2% in 2021, and even though that has dropped back slightly, at 32.2% it continues to be a significant factor in Japan’s overall emissions. Power sector emissions have dropped over the past decade, but that’s mainly been due to an overall decline in electricity generation.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e018f472-f892-4eb7-a527-a9f9a7e00fea_1959x1536-jpeg.jpg)

BNEF estimates that Japan would need a carbon price of at least ¥10,000 (€62) per tonne of CO2 to incentivise a shift away from thermal coal and towards natural gas. The high price of gas in Japan, coupled with the relative high efficiency of its coal-fired generation units, means that a high carbon price is required.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/fc9b0340-e8d0-4004-98c3-68c334a95d02_711x459.png)

Japan was an early carbon pricing pioneer, becoming the first Asian country to introduce a carbon tax back in 2012\. The national carbon tax was set at ¥289 (\~€2) per tonne CO2\. Unfortunately successive governments have been reluctant to hike the carbon tax to a level that makes any meaningful difference to fuel switching.

_This post is for paying subscribers only._
### A uniform global carbon price is unworkable, and unnecessary
URL: https://www.carbonrisk.world/a-uniform-global-carbon-price-is/
Last updated: 2025-12-05T11:13:28.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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---

*Estimated reading time \~ 12 mins*

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/dad4ad20-3cda-4de0-b0ca-132f3a3df235_640x640-jpeg-1.jpg)

The economist William Nordhaus suggested that the optimal strategy to combat climate change is a uniform global price on carbon:

> “The most efficient strategy for slowing or preventing climate change is to impose a universal and internationally harmonized carbon tax levied on the carbon content of fossil fuels.”

The argument for a global price centres on its role as a collective commitment tool, incentivising global participation and cooperation. In facing the same carbon price constraint, so the argument goes, countries would also allocate resources more efficiently.

Capital would more easily be directed at the resources and technology required to decarbonise, in turn reducing the overall global cost of meeting net zero. The prospect of carbon leakage would also be reduced in a world where it was more difficult to undercut your rivals.

A recent survey of carbon pricing academics asked them to choose a uniform global carbon price, assuming that a “world government” exists and seeks to “maximise the well-being of all present and future people.” Their median response was \~$75 per tonne of CO2 in 2030, rising to $100 per tonne of CO2 in 2050\. This broadly tallies with the 2017 High-Level Commission on Carbon Prices (HLCCP), which concluded that carbon prices needed to reach $50-100 per tonne CO2e by 2030, in order to limit global temperature rises to well below 2ºC.[1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/0499865e-61b8-4bf5-9b81-e65000ac6d32_2206x1766.png)

In reality, a uniform global carbon price is unlikely to be workable. Before we get to some of the reasons why, lets first check in on the status of carbon pricing across the globe to see how far away we are from what the experts suggest.

Note that this isn’t just some academic exercise. It’s going to have real world consequences as exporters of carbon intensive raw materials seek to negate the impact of the EU’s CBAM, or otherwise go to the World Trade Organisation (WTO) arguing their case for a better deal with the EU.

Remember, the CBAM is only payable if the production country-of-origin does not have a comparable carbon price as the EU’s. This effectively pushes countries towards implementing a carbon price at a similar level to Europe. While this helps to coordinate global climate policy and discourage free-riders, it does create inequality (see [*here*](https://www.carbonrisk.world/free-rider/)[ ](https://www.carbonrisk.world/free-rider/)and [*here*](https://www.carbonrisk.world/no-level-playing-field/)).

### Direct carbon pricing

Almost one-quarter (24%) of global carbon emissions are covered by an emissions trading scheme (ETS) or a carbon tax, according to the latest estimates from the World Bank. Approximately 18% of emissions are covered by an ETS, carbon taxes cover 5.5%, while 0.5% is covered by both an ETS and carbon taxes. Although many emerging economies are looking to introduce or expand the role played by carbon taxes and ETS (e.g., Brazil, China, Turkey, and Indonesia), it is very unlikely that carbon pricing will cover more than 40% of global emissions by 2030 (see [*It's the carbon price, stupid!*](https://www.carbonrisk.world/its-the-carbon-price-stupid/)).

Only seven carbon pricing instruments, covering less than 1% of global greenhouse gas (GHG) emissions, reached price levels at or above the inflation-adjusted minimum level of $63 (€60) per tonne CO2e in 2024 suggested by the HLCCP. Incidentally, the ETS with the highest price represented in the chart below - the EU ETS - failed to meet even this minimum level, at least in April 2024 when the snapshot of prices for the chart below was taken. Many European countries also have a separate carbon tax - some overlap with the ETS, but most do not - but even these tend to be in the $20-$60 per tonne range.

Emerging economies are at the extreme edges of the carbon price chart. At $167 per tonne of CO2e, Uruguay has the highest carbon tax in the world, albeit it only covers 5-10% of its emissions. With the exception of the South American nation, the next emerging economy on the list is Mexico, where the city of Queretaro has a carbon tax of $37 per tonne of CO2e, 22nd in the rankings of carbon price levels. Of the other emerging economies represented in the chart below, few if any have a carbon price above $10 per tonne of CO2e.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/5594d24c-ebde-4dde-9667-6d89683fc6ce_1374x761.png)

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### **The Effective Carbon Rate (ECR)**

Most analysts stop there and only focus on direct carbon pricing policies such as ETS and carbon taxes. But to end here and just compare countries based on their direct carbon pricing would be a mistake.

_This post is for paying subscribers only._
### Running of the bulls
URL: https://www.carbonrisk.world/running-of-the-bulls/
Last updated: 2025-08-21T10:36:00.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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---

*Estimated reading time \~ 4 mins*

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/53438efd-0503-4eef-8e07-82456013f075_1312x833-1.png)

Photo by [San Fermin Pamplona - Navarra](https://unsplash.com/@sanfermin?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/black-buffalo-on-street-LJrszMj1RJc?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Investment funds active in the EU carbon futures market returned to being net long in w/e 15th November; the first time this has occurred since July 2023\. The latest Commitment of Traders (COT) report for w/e 22nd November shows that funds have continued to build net length, and now sit on a net position of +9 million EUAs.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b2c2e6b8-e147-4a21-b7fd-83d5b7e2bb5f_1479x664.png)

The previous net short position reached a peak of 39 million EUAs during late February, around the time that the EUA price hit a low of €50\. The most recent contraction in the net short began in mid-October with funds primarily closing out their short positions. However, since the start of November funds have been building up their long positions, perhaps signalling optimism that the EUA price might increase through the rest of the year and into 2025 (see [*Good green derivatives: A peek beneath the hood of the EU carbon market*](https://www.carbonrisk.world/good-green-derivatives/)).

The caveat to this is that it’s unclear whether these are short-term tactical positions, or more longer term bets on a resumption in the EU carbon bull market. If it’s the latter then it’s clear from the chart below that there’s more room for shorts to close out and funds to continue adding to their long positions. For example, in the weeks preceding the Russian invasion of Ukraine, funds held a net position of 43 million EUAs, with a long position of 66 million EUAs.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/290d4661-57b2-4459-9a84-97d0a0be5561_1536x625.png)

Another factor indicating the potential for upside is the long/short ratio. It’s only in the past week or so that the ratio moved above 1 (i.e., indicating more longs than shorts). The left hand-side of the chart shows there is significant more scope for upside if optimism of a return to the €80-€100 level builds.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/d7e57a9c-c512-422c-a50d-4709a7243496_1495x611.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

Options market activity exhibits a split in opinion as to where carbon prices might finish the year. The main area activity for December is around the €50 and €90 strike price. However, the overall put-call ratio is 0.81 which tends to point towards a bullish outlook for the EUA price into the year end, coupled with significant call activity at the €70 and €75 level which could offer support (see [*Escaping the Euro doom loop: A new steady state, the power of narrative economics, and the mispricing of consensus expectations*](https://www.carbonrisk.world/escaping-the-euro-doom-loop/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/be86fb2a-9283-49cd-ac33-7c120917b795_927x501.png)

A key test could be upon us, one that could signal if investment funds are going to be on the long side for longer.

After breaking out of the upper channel (one that’s been in place since early 2023), it looks like the market might be retesting the top of the channel again, checking for support. The 100 and 200 day moving averages (as well as the 23 and 30 day exponential moving averages) are converging on the €67 level and this could also offer strong support at this level. On the other hand, a move below this level might presage a deeper pullback in the carbon price.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e9be4120-383f-4b5f-ae6a-8f94be5b5cd4_1270x799.png)

Happy Thanksgiving to all my readers from the United States 🦃

---

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[Hedging your portfolio against carbon price riskWelcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-35.png)Carbon RiskPeter Sainsbury![](https://images.unsplash.com/photo-1663918909911-dc49790551c0?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)](https://www.carbonrisk.world/hedging-your-portfolio-against-carbon/)
### Brazil's carbon market gets the green light
URL: https://www.carbonrisk.world/brazils-carbon-market-gets-the-green/
Last updated: 2025-08-21T10:36:00.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 10 mins*

![aerial photography of green forest](https://images.unsplash.com/photo-1515784199474-93bb3a23692d?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Willian Justen de Vasconcellos](https://unsplash.com/@willianjusten?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/aerial-photography-of-green-forest-S8fNXJimqdU?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

On 13th November, Brazil’s Senate approved a bill to regulate the country’s mandatory and voluntary carbon markets. Less than a week later Congress, the legislative body of Brazil’s federal government, also approved the proposals. It now only requires the signature of President Lula da Silva to become law.

The debate over the shape Brazil’s regulated carbon market has been going on since 2009\. The policies have received renewed impetus as other large countries have either launched their own carbon markets, or have announced plans to do so. For example, emerging economies such as Turkey, India, and Indonesia have begun to implement emissions trading schemes (ETS), partly in response to the EU’s carbon border adjustment mechanism (CBAM).

Another factor is Brazil’s return to the world stage following four years of climate policy retreat under the leadership of Jair Bolsonaro. Next year it will be Brazil’s turn to host COP. The 30th edition of the climate conference will be held in the Amazonian city of Belém. Brazil is of course no stranger to holding climate conferences. The first UN conference on environment and development, known as the Earth Summit, was held in Rio de Janeiro in 1992.

The Brazilian government published its latest Nationally Determined Contribution (NDC) during COP29\. The updated climate plan aims to cut emissions by between 59% and 67% from 2005 levels by 2035, (equivalent to an absolute reduction of 850 million to 1.05 billion tonnes of CO2e), achieved mostly by relying on its carbon-storing forests. As a mark of its ambition it has also been pushing other countries to submit their NDCs by February, the UN’s deadline, while also encouraging governments to bring forward their net-zero target dates from 2050.[1](#footnote-1) [2](#footnote-2) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8768f200-625e-4e9f-ba57-5442447a0dcb_835x813.png)

After returning to power in November 2022, President Lula da Silva succeeded in halving the rate of deforestation in 2023, bringing the rate of land clearance in the Amazon down to a five-year low. Land use change is Brazil's largest source of emissions, accounting for almost half (49%) of the country’s greenhouse gas (GHG) emissions, according to Climate Observatory. Forest is often cleared to make way for agriculture, but this is also a major source of emissions, especially methane released by livestock. Overall, agriculture accounts for 25% of Brazil’s emissions (see *[Repricing deforestation risk in the wake of Brazil's presidential election](https://www.carbonrisk.world/repricing-deforestation-risk-in-the/)*).[3](#footnote-3) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c097b83b-bfd7-4571-96d4-c7b5c1b2efdb_960x609-jpeg.jpg)

Nevertheless, beyond cutting deforestation, Brazil will also need to rein in emissions from oil & gas production and heavy industry if it is going to meet its climate targets. A carbon market is the missing link that will help Brazil achieve its carbon ambitions, while also increasing the country’s economic development, and alleviating poverty.

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### Pricing carbon from oil & gas producers and heavy industry

The ETS will impose reporting obligations on all entities emitting more than 10,000 tonnes of CO2e per year, with those emitting more than 25,000 tonnes of CO2e per year required to meet compliance. These obligated entities will have to surrender allowances for all their covered emissions. Overall, an estimated 5,000 companies are thought to be subject to compliance obligations.

Only around a quarter of the emissions produced in Brazil will be covered by the carbon market, primarily from the oil & gas sector, but also other carbon intensive industries such as cement, iron and steel, and aluminium. In contrast to the EU ETS and other compliance schemes, Brazil has little need to rely on carbon markets to price out fossil fuel power generation. It already has the highest share of renewable energy in the G20 (89%) by virtue of its hydroelectric resources and more recent investments in solar and wind capacity.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/745e3280-7d76-4e17-9646-89a9c3443d21_914x623.png)

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### Three carbon markets facing electoral turbulence in 2025
URL: https://www.carbonrisk.world/three-carbon-markets-facing-electoral/
Last updated: 2025-08-21T10:36:01.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 10 mins*

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/bf3bbd36-1e16-4df2-9188-6d11d33773f1_1377x801-1.png)

2024 has been the biggest year ever for democracy. Across 76 countries, home to more than half the worlds population, citizens have headed to the polls in their droves.

Apart from a few outliers, the trend has been the same - voters have called time on the incumbent party. It’s not the only factor behind the anti-incumbency vote, but the inflationary period over the past few years has been significant. Voters hate inflation, especially when there is a perception - rightly or wrongly - of unfairness.

Three of the largest economies within the G20 also face elections in 2025 that at least based on current polling, look set to follow the anti-incumbency trend exhibited in 2024\. Carbon prices are being weaponised by all of the opposition parties, eager to direct the ire of voters worried about the squeeze on their living standards.

The outcome of the elections could have major implications for climate policy and the speed at which emissions are reduced. But it could also have an adverse knock-on impact on the climate policies of their neighbours, including delaying the introduction of more ambitious carbon pricing for another electoral cycle (see [*It's the carbon price, stupid!*](https://www.carbonrisk.world/its-the-carbon-price-stupid/)).

The recent experience in Washington State should prompt opposition parties to rethink their calls to abandon carbon pricing. On 5th November voters rejected Ballot Initiative No. 2117, which had called for the state to abandon its “Cap-and-Invest” scheme. The vote, 62/38 in favour of keeping carbon pricing, was a landslide. It marks a remarkable change in public attitudes since the beginning of the first Trump presidency. Back in 2016 Washington State voted 59.3/40.7 against carbon pricing.

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_This post is for paying subscribers only._
### Ukraine's biomethane opportunity
URL: https://www.carbonrisk.world/ukraines-biomethane-opportunity/
Last updated: 2025-08-21T10:36:02.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 7 mins*

> “We have a very good relationship, and I also have a very good relationship, as you know, with President Putin…and I think if we win, I think we’re going to get it resolved very quickly … I really think we’re going to get it … but, you know, it takes two to tango.”  
>  
> \- Donald Trump

Trump’s landslide victory has focused the minds of investors on a potential swift end to the Russia-Ukraine conflict. If you believe Trump then the war will be over very soon, perhaps even before inauguration day (20th January), despite him having no presidential powers bestowed upon him prior to being sworn in.

One sector that has the potential to benefit from an end to hostilities is Ukraine’s biomethane industry. It currently has 77 operational biogas plants with a combined capacity of 0.26 bcm. A further 7 facilities (with a combined capacity of 0.11 bcm) are due to start production by the end of the year.

Biomethane supply from Ukraine has the potential to grow significantly, especially given it’s cost competitiveness versus other European producers. With 33 million hectares of agricultural land it is able to source feedstock at lower cost than many other nations in Europe. The Bioenergy Association of Ukraine (UABIO) projects that Ukrainian production could reach 5 bcm by 2040 (requiring 900 plants), and rise to 20 bcm by 2050 (based on a total of 4,000 plants).[1](#footnote-1) 

Even if Ukraine has to give up Russian controlled areas as part of a future settlement it would not make a material difference to Ukraine’s biomethane potential. The map below shows UABIO’s estimates of potential biomethane production across Ukraine’s territory. As of mid-November 2024, Russia controls most of the four eastern Ukrainian oblasts, plus Chechnya. The majority of the country’s biomethane potential lies in the centre, close to Kyiv.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/3d05fbad-1211-4bfb-8d59-4a5fc60bd2f9_1257x661-1.png)

Guidehouse estimates that European biomethane supply (excl. Ukraine) could rise to over 110 bcm by 2040, and hit 175 bcm by 2050\. If Ukrainian biomethane production does reach 20 bcm by 2050 it is likely to rank among Germany, France and Spain as the largest European producers. UABIO estimates that the industry will require €2 billion in investment to reach its 2030 production target, and close to €40 billion if Ukraine is to reach its full potential and hit 20 bcm by 2050.[2](#footnote-2) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/4b3a633c-9653-4a70-8a4e-0c884ab1e11f_907x399.png)

Source: Guidehouse

### Biomethane exports could help fund post-war construction

The government recently passed a law allowing biomethane to be exported to the EU via the Ukrainian gas transmission system. The reason why this is important is that biomethane could make a significant dent in Europe’s reliance on natural gas. If European biomethane production hits 110 bcm by 2040 and 175 bcm by 2050, it could displace 37% and 60% of the EU’s current annual gas consumption, respectively. Meanwhile, because its also carbon neutral, biomethane can help to decarbonise both Europe’s domestic heating systems, and much of it’s industrial base.[3](#footnote-3)

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_This post is for paying subscribers only._
### Hedging your portfolio against carbon price risk
URL: https://www.carbonrisk.world/hedging-your-portfolio-against-carbon/
Last updated: 2025-08-21T10:36:02.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world) **and** [**Bluesky**](https://bsky.app/profile/petersainsbury.bsky.social?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 7 mins*

![a body of water with ice and snow on the sides](https://images.unsplash.com/photo-1663918909911-dc49790551c0?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Florian Delée](https://unsplash.com/@florian%5Fdelee?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-body-of-water-with-ice-and-snow-on-the-sides-tLdOtBmlRcg?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

One of the most frequent questions I get from subscribers to *Carbon Risk* is how to allocate a proportion of your pension (or tax-free investment wrapper) to compliance carbon markets such as the EU ETS.

Listed below are the 12 exchange traded products (ETPs) I’ve been able to identify. There may be more that I haven’t come across, and if you do know more, please let me know in the comments. Before you consider making an investment in any of the ETPs here’s just some of the things you need to think about:

\> As you’ll see, some of the products can only be accessed in specific parts of the world. Although the geographical coverage is improving, most of the funds listed below are targeted at investors based in the US, Canada, the EU, and the UK.

\> Assets under management (AUM) is an important factor. The higher the AUM the lower the costs that are typically borne by the investor, while large fund sizes tend to have longevity, reducing the risk that the fund is closed. Note that both the Carbon Strategy ETF (KARB) and the Global Carbon ETF Synthetic (GCO2) closed due to poor growth in AUM and low levels of liquidity.

\> Some of the funds were launched as far back as 2019 or 2020\. It means they have experienced both the bull and the bear market in carbon prices, and are still going today, often with significant assets under management (AUM). It’s no guarantee that the fund won’t close, but it’s less likely, especially if it’s part of a strong issuer. Other funds launched towards the top of the market and have struggled to build AUM.

\> The ETPs use very different financial instruments to track the price of EU carbon allowances - futures, physical, swaps and so on - which in some cases introduce other risks, e.g. counterparty risk, tracking error, etc. There may also be upfront and annual management fees that will eat into the potential returns. Investors should also be aware of the bid-offer spread if they think they are likely to trade the ETP.

\> EU targeted funds are typically marked as being UCITS eligible and are designed to offer investors a high level of protection. They must adhere to strict rules regarding the diversification of their portfolio, liquidity of assets, and the use of leverage.

\> Be aware of what you are investing in. Of those twelve ETPs identified, only two invest in a basket of carbon markets, seven invest in the EU ETS only, while two are allocated solely to the California market. There are no ETPs that invest solely in the UK ETS or the Regional Greenhouse Gas Initiative (RGGI). The last ETP in the list only allocates a small proportion to carbon.

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---

### Multi-carbon markets

**1) KraneShares Global Carbon Allowance ETF (KRBN)**[1](#footnote-1)

Launched in July 2020, the KraneShares KFA Global Carbon ETF (KRBN) was the first carbon futures fund to track the performance of carbon allowances across several emissions trading schemes. Benchmarked against the IHS Markit Global Carbon Index, KRBN is exposed to EU ETS (57.8%), Californian carbon market (32.6%), RGGI (5.4%), and the UK ETS (4.4%). The fund is rebalanced every November.

*Asset structure (futures), exchanges (NYMEX, Borsa Italiana, Deutsche Börse Xetra, and soon to be launched on the LSE), annual management fee (0.85%), UCITS eligible (No), AUM $275 million*

**2) Ninepoint Carbon Credit ETF (CBON)**[2](#footnote-2)

The fund holds a broadly equal weighting across four carbon allowance markets: the EU ETS, California, RGGI, and the UK ETS. CBON floated on the Canadian NEO exchange in early February 2022.

*Asset structure (futures), exchanges (NEO), annual management fee (0.55% - 1.74%), UCITS eligible (No), AUM $0.7 million*

---

### European emissions trading scheme (EU ETS)

**3) SparkChange Physical Carbon EUA ETC (CO2)**[3](#footnote-3)

The SparkChange Physical Carbon EUA ETC (CO2) launched in early November 2021\. The fund enables investors to gain direct exposure to the physical EU carbon allowance via a physical EUA backed note.

*Asset structure (ETC backed by physical EUAs), exchanges (LSE, Borsa Italiana, Deutsche Börse Xetra, Mexican Bolsa), annual fees (0.89%), UCITS eligible (Yes), AUM $152 million*

**4) Wisdom Tree Carbon ETC (CARB/CARP/WCO2)**[4](#footnote-4)

The Wisdom Tree Carbon ETCfund differs from those listed above in that it is an exchange traded commodity (ETC) fund backed by swaps. The fund aims to track the Solactive Carbon Emission Allowances Rolling Futures Total Return Index. The index measures total return performance based on the futures price performance, the roll return, and the return of cash collateral such as Euro Short-term Rate (ESTR).

*Asset structure (swaps), exchanges (LSE, Borsa Italiana, Deutsche Börse Xetra, Euronext, Mexican Bolsa), annual management fee (0.35%), UCITS eligible (Yes), AUM $90 million*

**5) Xtrackers Physical Carbon EUA ETC Security (XEAL)**[5](#footnote-5) 

The ETP is based on the spot price for EUAs, as determined by the European Energy Exchange (EEX) with each note physically secured by physical EUAs held by the issuer. The product was launched in November 2023, and is the second ETP to target physical EUAs following the SparkChange Physical Carbon EUA ETC.

*Asset structure (swaps), exchange (Deutsche Börse Xetra), annual management fee (0.74%), UCITS eligible (Yes), AUM $28 million*

**6) iPath Series B Carbon ETN (GRN)**[6](#footnote-6)

Launched in September 2019, the iPathA Series B Carbon ETN tracks the Barclays Global Carbon II TR USD Index.

*Asset structure (swaps), exchange (NYMEX), annual management fee (0.75%), UCITS eligible (No), AUM $21 million*

**7) KraneShares European Carbon Allowance ETF (KEUA)**[7](#footnote-7)

KraneShares launched an EU ETS specific ETF in May 2021 under the symbol KEUA. The KEUA fund was the first ETF to only invest in the EU ETS and is benchmarked to the S&P Carbon Credit EUA Index.

*Asset structure (futures), exchanges (NYMEX), annual management fee (0.82%), UCITS eligible (No), AUM $9 million*

**8) CICC Carbon Futures ETF (3060)**[8](#footnote-8)

The CICC Carbon Futures ETF launched in spring 2021 and seeks to track the daily performance of the ICE EUA Carbon Futures Index.

*Asset structure (futures), exchanges (HKEX), annual management fee (0.99%), UCITS eligible (No), AUM $8 million*

**9) Global X Carbon Credits ETF (CARB)**[9](#footnote-9)

Launched February 2022, the fund aims to track the Solactive Carbon Emission Allowances Rolling Futures Total Return Index. The index measures total return performance based on the futures price performance, the roll return, and the return on cash collateral.

*Asset structure (swaps), exchanges (TSX), annual management fee (0.75%), UCITS eligible (No), AUM $2.4 million*

---

### California Cap-And-Trade Program

**10) The KraneShares California Carbon Allowance Strategy ETF (KCCA)**[10](#footnote-10)

KCCA provides direct exposure to California’s Cap-And-Trade Program (CTP). The fund was launched on the NYSE in May 2021 and aims to track the S&P Carbon Credit CCA Index.

*Asset structure (futures), exchanges (NYMEX), annual management fee (0.87%), UCITS eligible (No), AUM $244 million*

**11) WisdomTree California Carbon ETC (WCCA / WCCP)**[11](#footnote-11)

Launched in April 2023 the fund tracks the Solactive California Carbon Rolling Futures Excess Return Index. The index measures total return performance based on the futures price performance, the roll return, and the return on cash collateral.

*Asset structure (swaps), exchanges (LSE, Borsa Italiana, Deutsche Börse Xetra), annual management fee (0.49%), UCITS eligible (Yes), AUM \~$1 million*

---

### Energy transition commodities

**12) L&G Energy Transition Commodities UCITS ETF (ETRA / ENTR)**[12](#footnote-12)

The fund provides exposure to the prices of energy transition metals (nickel, aluminium, copper, lithium, and silver), transition energy commodities (ethanol and natural gas), and carbon (EUAs). Only 5.4% of the fund is allocated to the EU carbon market. The fund was launched in April 2024.

*Asset structure (swaps), exchanges (LSE, Borsa Italiana, Deutsche Börse, SIX Swiss Exchange), annual management fee (0.65%), UCITS eligible (Yes), AUM $34 million*

---

**👋 If you have your own newsletter on Substack and enjoy my writing, please consider recommending** [**Carbon Risk**](https://carbonrisk.substack.com/) **to help grow this amazing community of readers! Thank You!👍**

---

[Mind the behaviour gapWelcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-36.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7c974c4a-94ee-4ab0-b3ac-8cde00d51de7_912x629-1.png)](https://www.carbonrisk.world/mind-the-behaviour-gap/)

---

1. https://kraneshares.com/krbn/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.ninepoint.com/funds/ninepoint-carbon-credit-etf/?nav-toggle=15486 [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://hanetf.com/fund/co2-sparkchange-physical-carbon-eua-etc/#tab-id-13 [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://www.wisdomtree.eu/en-gb/products/ucits-etfs-unleveraged-etps/commodities/wisdomtree-carbon [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
5. https://etf.dws.com/en-gb/etc/XS2595366340-xtrackers-physical-carbon-eua-etc-security/ [↩](#footnote-anchor-5 "Jump back to footnote 5 in the text.")
6. https://ipathetn.cib.barclays/details.app;instrumentId=369782 [↩](#footnote-anchor-6 "Jump back to footnote 6 in the text.")
7. https://kraneshares.com/keua/ [↩](#footnote-anchor-7 "Jump back to footnote 7 in the text.")
8. https://www.hkex.com.hk/Market-Data/Securities-Prices/Exchange-Traded-Products/Exchange-Traded-Products-Quote?sym=3060&sc\_lang=en [↩](#footnote-anchor-8 "Jump back to footnote 8 in the text.")
9. https://www.globalx.ca/product/carb#holdings [↩](#footnote-anchor-9 "Jump back to footnote 9 in the text.")
10. https://kraneshares.com/kcca/ [↩](#footnote-anchor-10 "Jump back to footnote 10 in the text.")
11. https://www.wisdomtree.eu/en-gb/products/ucits-etfs-unleveraged-etps/commodities/wisdomtree-california-carbon [↩](#footnote-anchor-11 "Jump back to footnote 11 in the text.")
12. https://fundcentres.lgim.com/en/uk/institutional/fund-centre/ETF/Energy-Transition-Commodities/ [↩](#footnote-anchor-12 "Jump back to footnote 12 in the text.")
### Free rider
URL: https://www.carbonrisk.world/free-rider/
Last updated: 2025-08-21T10:36:03.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 11 mins*

![a red hat that says make america great again](https://images.unsplash.com/photo-1610428028105-8438c01c9569?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Natilyn Photography](https://unsplash.com/@maga%5Fgirl?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-red-hat-that-says-make-america-great-again-YKDqYXhKV%5FQ?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Ten years ago today, on 12th November 2014, President Obama of the United States and President Xi Jinping of China surprised the world with a joint announcement in which they acknowledged that their two countries “have a critical role to play in combating global climate change, one of the greatest threats facing humanity,” and that the “seriousness of the challenge calls upon the two sides to work constructively together for the common good.”[1](#footnote-1) 

The statement went further and announced that the US “intends to achieve an economy-wide target of reducing its emissions by 26%-28% below its 2005 level in 2025 and to make best efforts to reduce its emissions by 28%,” while China “intends to achieve the peaking of CO2 emissions around 2030 and to make best efforts to peak early and intends to increase the share of non-fossil fuels in primary energy consumption to around 20% by 2030.”

The presidents, leaders of the two largest economies and greenhouse gas (GHG) emitters, argued that, “by announcing these targets now, they can inject momentum into the global climate negotiations and inspire other countries to join in coming forward with ambitious actions as soon as possible.”

A joint statement signed by an American and Chinese president! It really was a different world back in 2014\. But their statement zeros in on one of the most important factors determining whether global climate policy succeeds or fails. Climate change is a collective action problem.

The impact of emission reductions on the climate is the same, irrespective of where it takes place. In contrast, the costs are borne where the climate action takes place. It means that each country would prefer to free-ride on other countries climate actions, letting them bear the costs, while they enjoy the benefits.

The UN and other organisations tried to solve the collective action problem through multilateral agreements where countries agreed in principle to cut emissions more than they would do in isolation. It was this tool that meant the 2015 Paris Agreement, signed by 196 countries at COP21, was a sharp departure from previous commitments to tackle climate change.

Nationally Determined Contributions (NDCs) lay out how each country will contribute to the global temperature goals outlined under the Paris Agreement. They detail how countries will cut emissions, build resilience to adverse climate impacts, and outline the finance required. A conditional NDC requires international support to achieve, as opposed to an unconditional NDC that can be implemented using domestic resources.

Two years before Paris, countries agreed to develop NDCs and communicate them such that other countries would have time to determine whether they could reciprocate with their own emission reduction commitments. On 12th November 2014, the US and China made their joint announcement in which they communicated their NDCs to the world. By the time the Paris conference began, just over twelve months later, 151 countries had announced NDCs.

To estimate the reductions in emissions pledged by the Paris Agreement, Rhodium compared projected emissions based on countries’ Nationally Determined Contributions (NDCs) against the IEA’s World Energy Outlook (WEO) report’s projections for emissions. Published on 12th November 2014 the IEA’s WEO emissions forecast came out the same day that the US and China announced their NDCs. As such, the IEA’s “Stated Policies Scenario” forms a useful counterfactual from which to compare the global aggregated NDC.[2](#footnote-2)

Rhodium’s analysis shows that the Paris Agreement was very successful in yielding committed emissions reductions when compared to the outlook for emissions trajectories prior to those commitments being made. The analysis suggests that countries NDCs, if successfully achieved, would reduce global net GHG emissions by 12 – 24% in 2030 and by 38 – 54% in 2050 versus the IEAs baseline scenario.

But what impact did the commitment from the US have on other countries climate ambitions? It’s position as the largest and most powerful economy, the world’s biggest emitter, and the country with the largest share of historical GHG emissions means the US plays a pivotal role in determining the ambition and adoption of climate policies. If the US makes a commitment, other countries are also more likely to pledge to take action.

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_This post is for paying subscribers only._
### Escaping the Euro doom loop
URL: https://www.carbonrisk.world/escaping-the-euro-doom-loop/
Last updated: 2025-08-21T10:36:03.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 9 mins*

![time-lapse photography of vehicle at the road in between the building at nighttime aerial photography](https://images.unsplash.com/photo-1528728329032-2972f65dfb3f?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Stephan Widua](https://unsplash.com/@stewi?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/time-lapse-photography-of-vehicle-at-the-road-in-between-the-building-at-nighttime-aerial-photography-iPOZf3tQfHA?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

As regular readers of *Carbon Risk* will know, industrial hedging demand is expected to be a powerful driver of European carbon prices towards the latter part of this decade. The carbon price exposure experienced by cement manufacturers, chemical producers, and other heavy industries is set to become more acute as free allocations are withdrawn. Meanwhile, the role played by utility hedging in determining carbon prices is set to diminish as renewable generation increases, and thermal coal and increasingly natural gas, become marginalised.

Evidence suggests that previous periods in which the EU’s carbon markets fundamentals have veered towards a deficit began to be priced in 1-2 years prior. For that to happen again though market participants need to have the foresight and the means to respond. However, as I noted in [Germany's manufacturing malaise set to curb demand for EUAs](https://www.carbonrisk.world/germanys-manufacturing-malaise-set/), “uncertainty over their future competitiveness, exemplified by further weakness in manufacturing activity, a rebound in European natural gas prices, and rising competition from Chinese imports, is likely to discourage industrial firms from starting to hedge their long-term carbon risk.”

The narrative that Europe is on its knees, that the old continent is dying, and that anyone wanting a better life had better emigrate, ideally to the USA, pervades social media and one that is frequently used to stick the boot in by mainstream media commentators too. I should say here that some of the most popular articles on Carbon Risk reference the terms ‘Europe’, ‘deindustrialisation’, and ‘dead cat bounce’. Doom-mongering sells it seems (see [here](https://www.carbonrisk.world/the-battle-for-europes-industrial/), [here](https://www.carbonrisk.world/is-the-permanent-deindustrialisation/), and [here](https://www.carbonrisk.world/dead-cat-bounce/))!

### A new steady state

The negative story extends to longer-term Eurozone growth forecasts made by financial institutions and economic research firms. For example,  published an article last month in which he shares, in his words, “one of the most depressing chart\[s\] you'll see.” The chart shows how longer-term expectations for Eurozone GDP growth have deteriorated over the past 25 years. The European Central Bank’s (ECB) Survey of Professional Forecasters (SPF) suggests that growth may only muster a mere 1.3% per annum in five years time, i.e., referring to the year 2029.[1](#footnote-1)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a684b427-f848-4e12-94e7-7db04186d40a_721x588.png)

The reason the 5-year forecast is important, according to the ECB, is that it provides a perspective on the steady state of the Eurozone economy. Once the effects of both past and current shocks have died out, the economy should then revert to GDP growth in line with structural trends in the economy.

The ECB released its first quarterly SPF in 1999, the same year that the Euro was launched. A report published in 2019, marking 20 years since the survey started, found that GDP growth expectations show a remarkable record of reverting to trend over time. The ECB concluded, “In general, the further the data were from their perceived trend, as proxied by the longer-term expectation, the stronger was the movement expected back towards that trend.”

It remains to be seen whether GDP growth will bounce back from the energy crisis in the same way that the Eurozone recovered from past shocks, but if past performance is a guide then 1.3% could be as good as it gets.[2](#footnote-2) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/00dd471f-f9dc-4c8a-a928-465c16f9c4ce_783x567.png)

### Narrative economics

Economists, market pundits and the financial media often think they are just observers of the facts. Most, I presume, would regard the assumption that the way they think about the world can also change it as being fanciful. Yet it only takes a bit of reflection to see that a lot of economics concerns self-fulfilling (or self-averting) phenomena.

_This post is for paying subscribers only._
### 'Single European Sky' cleared for take off
URL: https://www.carbonrisk.world/single-european-sky-cleared-for-take/
Last updated: 2025-08-21T10:36:04.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 5 mins*

![yellow text](https://images.unsplash.com/photo-1563458359986-f96667b565b2?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Daniel Schludi](https://unsplash.com/@schluditsch?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/yellow-text-x9PmhEkG8fc?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

> *“Today’s European airspace is like a big jigsaw puzzle in which each country has its own piece, but unfortunately, not all the pieces fit together. This leads to detours, waiting times, and unnecessary costs.”*  
>  
> \-Johan Danielsson, MEP

Fly within Europe and you will encounter an invisible patchwork of sovereign skies, each controlled by 43 individual air traffic control agencies. In contrast, the US, Canada, and Australia, each with a land mass around double that of Europe, rely on just the one agency to direct flights over their airspace.

You may not be able to see it, but that tangled mess results in delays, longer journeys, higher fares, more fuel burn, and higher emissions.

Reforming Europe’s patchwork airspace was first proposed in 1999\. The Single European Sky (SES) initiative was launched by the European Commission in response to severe flight delays in the late 1990’s with the goal of modernising air traffic management across Europe.

However, reluctance among individual member states to give up sovereignty of their national airspace to a European body stalled progress in implementing SES. Attempts to reform the SES framework in 2005 and then again in 2013 failed to make any progress. The political impetus to finally sign off the SES received renewed support from politicians looking to keep Europe’s Green Deal alive.

The SES framework was finally approved by the European Parliament in late October. Although some provisions will be implemented in law almost immediately, others such as independence of the national supervisory authority are expected to take a couple of years. Either way it will take a few years yet before aircraft operators are able to take a more direct path from A to B across Europe’s airspace.[1](#footnote-1)

The agreement is important for Europe’s airlines who will have to bear an increasing share of the cost of their carbon emissions over the next few years. Free allowances for airline operators will be phased out completely by 2026; starting with 25% in 2024, 50% in 2025 and 100% from 2026.

_This post is for paying subscribers only._
### Repost: Protection money
URL: https://www.carbonrisk.world/repost-protection-money/
Last updated: 2025-08-21T10:36:04.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 9 mins*

![an aerial view of a dirt road in the middle of a forest](https://images.unsplash.com/photo-1632789124528-07b43ba96460?ixlib=rb-4.0.3&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)

Photo by [Renaldo Matamoro](https://unsplash.com/@rmvisuals?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/photos/%5FMG2TCW6wJo?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

In 2021, world leaders from countries that contain close to 85% of the world’s forests agreed to end net deforestation by 2030\. Halting deforestation is critical to meeting the 2050 net zero targets because when forests are cut down, vast quantities of carbon are released, while the carbon sequestration potential is lost.

There is no pathway to limit global warming to 1.5°C without immediate action to halt deforestation. However, to be on course for 2030, deforestation rates needs to decline by 10% per year, every year.

Unfortunately, the value we currently place on tropical forests in particular, is far too low if we want to protect them from deforestation.

A recent report by the Energy Transitions Commission (ETC) suggests that payments to protect the frontier of tropical forests from being cleared and releasing carbon into the atmosphere, will need to rise by at least 50-fold per year compared with current funding arrangements. However, once you take full account of the opportunity cost of the land to those who would look to exploit it for commodities and other uses, payments will need to rise at least 400-fold per year.[1](#footnote-1)

Commodities are the primary driver of deforestation in the tropical rainforests of Latin America and South East Asia. It typically involves the permanent conversion of forests to graze cattle or to grow oilseeds such as soy and palm oil. In contrast, shifting agriculture is the main cause of deforestation in West African tropical forests. This latter process involves the clearing of forest for agriculture, often by smallholder farming, before it is then temporarily abandoned.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/45c2d7de-2066-4df6-bcff-5046f6ce1fef_885x811-1.png)

Although some governments have succeeded in implementing measures protecting vulnerable parts of their tropical forest from economic development, via effective monitoring and enforcement of anti-deforestation laws, for the most part this has only been achieved to a very limited degree.

In the absence of adequate protection by the state, another way to deal with deforestation is to tackle the underlying incentives, enabling landowners and other agents to put a value on the forest and the embedded carbon. This means they can then make an informed decision as to the economic value of cutting down the forest to grow crops and graze cattle, versus the value of maintaining the forests in-situ.

The opportunity cost of not deforesting will vary significantly depending on the attractiveness of the local soil and climatic conditions, the input and supply chain costs required to extract the commodities and access to the end market (e.g. labour, transport, storage, regulatory enforcement), and finally, the type of commodities produced and the price they can be sold at.

The marginal cost of avoiding deforestation is \~$35 per tonne of CO2, according to estimates by Vertree. Their analysis is based on the cost of producing and selling deforestation linked commodities in over 50 tropical forest countries, including Brazil, Indonesia, Malaysia, and the Democratic Republic of Congo. This tallies with other research published in 2019 that calculated the average opportunity cost of avoided oil palm expansion in Indonesia at $27.74 per tonne of CO2.

Compensation to landowners to avoid deforestation is significantly less than $5 per tonne CO2 based on the Nature-Based Global Emissions Offset (N-GEO) futures contract price. Meanwhile, price assessments by Trove Research analysing both exchange and OTC trades suggest the weighted average REDD+ price was around $8 per tonne CO2 in late Q1 2023, down from $14 per tonne CO2 in early 2022.

Whichever way you price it, the economic case for deforestation is well in the money.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/4bf3dbe2-6459-4a0d-aede-89c5d8cdd477_1230x666-1.png)

In theory at least, if the carbon price equals the marginal cost of avoiding deforestation then the landowner would be indifferent between deforesting to produce commodities, and keeping the forest standing and generating carbon credit payments. However, merely being indifferent to cutting down the forest or not is unlikely to be a sufficient condition to persuade farmers and ranchers to refrain from doing so.

_This post is for paying subscribers only._
### Pricing carbon at its social cost
URL: https://www.carbonrisk.world/pricing-carbon-at-its-social-cost/
Last updated: 2024-10-29T12:02:23.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 7 mins*

![Barber Shop located in Ninth Ward, New Orleans, Louisiana, damaged by Hurricane Katrina in 2005. ](https://images.unsplash.com/photo-1662372597168-09d57440a9e5?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Library of Congress](https://unsplash.com/@libraryofcongress?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/barber-shop-located-in-ninth-ward-new-orleans-louisiana-damaged-by-hurricane-katrina-in-2005-ha3hueRV3xM?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

$1,065 per tonne of CO2!

This summer, Adrien Bilal and Diego Känzig, economists at Harvard and Northwestern University respectively, published a new estimate of the global macroeconomic impact of climate change.

The Social Cost of Carbon (SCC) as it’s known is an estimate of the net economic damage resulting from an incremental tonne of carbon dioxide (CO2) released into the atmosphere. This was the first time that the global SCC has been estimated to be over $1,000 per tonne. Bilal and Känzig’s work naturally caught many peoples attention.[1](#footnote-1)

Employing long-term data on global economic growth and average annual temperature, they find that an additional 1°C of warming will lead to a 12% fall in global GDP. The main divergence in this latest measure of SCC versus previous estimates (by Nordhaus, Burke, Nath, and so on) is its use of global mean temperatures variations.

Global temperature shocks predict a larger and more persistent rise in the frequency of extreme climatic events compared with local temperature shocks. Previous work focused on country-level local temperature variation and typically found that a 1°C temperature shock reduces global GDP by at most 1-3% in the medium term. By contrast, Bilal and Känzig estimate the GDP impact to be around six times larger.

One of the most contentious issues with estimating the SCC is the discount factor. There are a number of different approaches including the time preference that society places on the future benefit of climate mitigation, and the opportunity cost of investing in mitigating climate change, with the discount rate reflecting the long-term risk free real interest rate. For their analysis Bilal and Känzig assume a 2% discount rate, consistent with the secular decline in interest rates.

Another approach to discounting is centred on ethics and assumes that the value placed on people alive today is broadly equivalent to future generations. Calls for a low or even negative discount rate reflect the fact that the worst impacts of climate change are likely to borne by future generations. If they had chosen to take a more ethical approach, perhaps plugging in a discount rate of less than 1%, then by their own estimations the SCC would balloon to over $3,000 per tonne!

[Get 20% off a group subscription](#/portal/signup)

The SCC is one of many inputs policymakers use to determine whether a given investment to reduce climate change is worthwhile. The United States government first introduced a consistent SCC to inform its decision making under the Obama administration, estimating it to be $43 per tonne.

The Trump administration estimated the SCC to be between $3 and $5 per tonne, although they only considered the domestic impact of climate change, ignoring any spill-over effects. Most recently, the Biden administration used $51 per tonne in its policy modelling. However, in 2022 the Environmental Protection Agency (EPA) proposed hiking the SCC almost fourfold to $190 per tonne (see [*The burning question: What climate legacy will Trump 2.0 leave in his wake?*](https://www.carbonrisk.world/the-burning-question/)).

So what about the $1,065 per tonne? What does that mean for investment in climate mitigation by the US government? Well, first the global SCC needs to be converted to a domestic cost of carbon (DCC), and here the two economists estimate the US DCC to be much lower, albeit still higher than that used by the government in the past:

> “The DCC is always lower than the SCC because damages to a single country are lower than at a global scale. Under conventional estimates, the DCC of the United States is $45 per ton, making unilateral emissions reduction prohibitively expensive. Under our new estimates, the DCC of the United States becomes $213 per ton.”

The SCC is, at its heart, a political decision. As we’ve seen, the discount rate is particularly contentious, and one that should in theory reflect the time preference views of the electorate of the day. But it’s clear that the calculation can be sliced and diced in all manner of ways, whether that is accounting for local or global temperature trends to determine future damages, or more surreptitiously, only considering the domestic impact of climate change, and ignoring broader interactions beyond the immediate borders (see [*It's the climate, stupid!*](https://www.carbonrisk.world/its-the-climate-stupid/)).

The economist Arthur C. Pigou argued that a carbon price should be set at the SCC as it internalises the net economic damage resulting from CO2 emissions. In reality that’s not what happens with the carbon price determined by the marginal abatement cost (MAC) of decarbonisation, and the demand and supply of emission allowances.

The MAC refers to the cost of abating the last tonne of CO2 required to meet an emission reduction target. Sloping upwards from left to right, the MAC curve gradually steepens as additional tonnes of carbon emissions get increasingly more difficult, and hence more costly, to abate. The marginal cost is dynamic, and one of the main factors that influences it is technological progress. However, innovation does not simply occur, by itself, in a vacuum. It needs the right incentives and economic conditions such that the innovation can exploited.

The price of emission allowances, e.g., EUAs in Europe or CCAs in California, are determined by the relative cost of abating emissions (e.g., fuel switching from coal-fired generation to gas and renewables), the relative scarcity of allowances (or at least its perception), hedging behaviour among market participants, and trust in the governments (or other institutions) commitment to its climate targets (see [*The Currency of Decarbonization: An in-depth convo with Peter Sainsbury (Carbon Risk) about commodity markets, carbon pricing, and the power of incentives*](https://delphizero.substack.com/p/carbon-risk)).

Each of them - the SCC, the MAC, and the price of emission allowances - are influenced by separate but inter-related factors, while at the same time they each exert a gravitational pull on the other.

Developments in the MAC and the price of emission allowances will play a major role in determining the future economic damage from climate change. The ongoing deployment of renewable energy and other low carbon power generation, and accelerating the decarbonisation of industry both rely on the right economic incentives being in place. Any delays will mean more emissions, higher temperatures, and increased economic damages resulting from climate change.

It’s clear that the SCC is very sensitive to the assumptions used, and these are in turn highly dependent on political decisions. Despite Pigou’s best intentions, and what many investors believe, the SCC should not be taken as *the correct price* for an emission allowance. There are clearly other more important factors at work.

However, it’s reasonable to conclude that the SCC could become a more powerful driver in the future, especially as the economic damage inflicted by climate change become clearer and more acute. As different regions are hit by extreme weather - hurricanes in Florida, flooding in the Sahara, or heatwaves in southeast Europe - voters may begin to pressure their governments into bringing forward action to mitigate climate change. That means a lowering in the discount rate and hence an increase in the SCC. By extension it is also likely to result in pressure for governments to place more of the cost burden squarely on those responsible for emissions.

There are already some signs that the SCC could start to influence the price of emission allowances. A recent notice by the California Air Resources Board (CARB) informs market participants in the Californian cap-and-trade market of several amendments to the regulations.

One of the amendments refers to a “one-time increase in the prices of the cost-containment provisions to better align with the most-recent federal assessment of the social cost of carbon.” The APCR as its known is currently set at $56.21 and $72.21 per tonne and rises by 5% plus CPI each year, but even in 2030 or 2035 this would still be significantly below the EPA’s SCC of $190 per tonne.[2](#footnote-2)

---

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---

1. https://www.nber.org/system/files/working\_papers/w32450/w32450.pdf [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://ww2.arb.ca.gov/sites/default/files/cap-and-trade/nc-CT\_Notice\_Oct\_2024.pdf [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
### Resolving the emerging endgame
URL: https://www.carbonrisk.world/resolving-the-emerging-endgame/
Last updated: 2025-08-21T10:36:04.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 10 mins*

![grayscale photo of cityscape](https://images.unsplash.com/photo-1571985716526-adb8e16633da?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Yaroslav Boshnakov](https://unsplash.com/@yarkozelen?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/grayscale-photo-of-cityscape-maWs7-67Xsc?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

In part one of this two-part series I introduced [the emerging endgame](https://www.carbonrisk.world/the-emerging-endgame/). To recap, this refers to the period up the late 2030’s when the EU ETS emissions cap will approach zero. The anticipation of this event could have a big impact on the behaviour of market participants and the ability of the scheme to continue to deliver on its policy objectives.

There are a number of measures that could be used to ameliorate the impact of the emerging endgame, however none of these really deals with the underlying issues. More fundamentally the EU ETS will need to move towards a structure that incentivises net-negative emissions, something that will usher in a major role for carbon removal. It’s to the question as to how that could happen to which we now turn.

_This post is for paying subscribers only._
### It's the climate, stupid!
URL: https://www.carbonrisk.world/its-the-climate-stupid/
Last updated: 2025-08-21T10:36:06.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 10 mins*

![text](https://images.unsplash.com/photo-1624877733293-3ff07fcbb5c3?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Jon Tyson](https://unsplash.com/@jontyson?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/text-FgewqOVtwbY?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Global attention is naturally focused on the risks posed by Trump 2.0, what the Republican Party’s return to power might mean for US participation in global climate accords, and the potential knock-on impact on climate policy ambition elsewhere in the world.

Betting markets imply that Donald Trump has a greater than 60% probability of becoming the next president, and that there is an 80% probability of a Republican controlled Senate. The confluence of both of these outcomes would give Trump the mandate and the means to rollback Biden era policy and refocus it on other things besides the climate.[1](#footnote-1)

In [*The burning question: What climate legacy will Trump 2.0 leave in his wake?*](https://www.carbonrisk.world/the-burning-question/) I consider some of the key areas of uncertainty. First, whether Trump might abandon the Paris Agreement, and then proceed to remove the US entirely from the United Nations Framework Convention on Climate Change (UNFCCC). Second, the likelihood that Trump would rip up the Inflation Reduction Act (IRA) and the impact that would have on US emissions. Third, the knock-on impact of the loss of climate tech investment on the rest of the world.

> “Blowing hot and cold. From climate leader to climate pariah. The climate legacy of Trump’s second term is likely to live on far longer than his first.”

However, there is a more nuanced battle happening at the state level that could also have significant climate policy implications. It’s one that goes beyond simply whether individual states can continue to rely on IRA subsidies after the election. The knock-on impact of state elections could affect support for the introduction of carbon pricing in the US, the likelihood that EV mandates will be introduced or banned, and the investment case for renewable energy and other climate technologies.

_This post is for paying subscribers only._
### Good green derivatives
URL: https://www.carbonrisk.world/good-green-derivatives/
Last updated: 2025-08-21T10:36:07.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 9 mins*

![green grasses](https://images.unsplash.com/photo-1568832359672-e36cf5d74f54?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Johannes Plenio](https://unsplash.com/@jplenio?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/green-grasses-6XUA5KQ9-1k?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

> *“Good derivatives, those that are regulated and transparent, should be encouraged and will flourish for generations if properly nurtured.”*  
>  
> \- Richard L. Sandor, recognised by TIME Magazine as the "Father of Carbon Trading"

In October 2021, European energy prices had only begun to build up a head of steam. The worst was yet to come of course. Nevertheless, the European Commission (EC) thought it necessary to task the European Securities and Markets Authority (ESMA) with examining trading behaviour in the EU carbon market, and in particular, whether the market needed to be reformed to help respond to rising energy prices.

ESMA’s interim report was published in November 2021 and highlighted how EU ETS participant activity had not “significantly changed since 2018 and is broadly in line with the expected functioning of the market.” The agency’s final report, published in March 2022, was similarly sanguine, concluding that they had “not unearthed any major abnormality or fundamental issue in the functioning of the EU carbon market from a financial supervisory perspective.”[1](#footnote-1)

Concern that nefarious speculators were partly responsible for the surge in EU carbon prices reached a peak in February 2022\. One day after the EUA price breached €98 for the first time, an article in Bloomberg suggested that Peter Liese (the lead lawmaker steering EU ETS reform at the time) was now looking into how speculation could be curbed (see [*In the trigger zone: What proposed changes to Article 29a mean for EU carbon prices*](https://www.carbonrisk.world/in-the-trigger-zone/)).

Much has changed in the intervening 30 months since ESMA’s final report was released. The worst of the energy crisis has passed with European energy prices returning to near pre-crisis levels - the recent rebound an exception to that trend. However, as I outlined in [*Know your onions: Concern over the role of speculators in Europe's energy markets is overplayed*](https://www.carbonrisk.world/know-your-onions/), there is still a case for greater transparency over the role played by different market participants in the EU carbon market:

> “ESMAs analysis was always going to be backward looking. Arguably the composition of the players in the market and the strategies that they employ has changed considerably since then. There could be a case for re-opening a new investigation into speculative activity in the EU carbon market, one that focuses more on the broader energy complex given the issues identified in the European gas market.  
>  
> All financial markets can be thought of as levers of government policy, but arguably none more so than the carbon market. The over-riding issue for the EU should be increasing the level of transparency in the market. It’s only through greater levels of monitoring and disclosure that all market participants - whether financial or non-financial - can trust the markets signal.”

Fortunately, we do now have a more up-to-date view of what’s happening beneath the hood of the EU ETS. Earlier this month ESMA published its first annual report on EU carbon markets, providing some insight into how the functioning of the EU ETS has evolved, with a particular focus on 2023.

_This post is for paying subscribers only._
### The emerging endgame
URL: https://www.carbonrisk.world/the-emerging-endgame/
Last updated: 2025-08-21T10:36:07.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 9 mins*

![white and black dice on green table](https://images.unsplash.com/photo-1626775238053-4315516eedc9?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Michał Parzuchowski](https://unsplash.com/@mparzuchowski?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/white-and-black-dice-on-green-table-U8n%5FO7rEq7o?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

> *“No tree grows to heaven.”*  
>  
> \- old Wall St adage

In early 2023, the Potsdam Institute for Climate Impact Research (PIK) published a report discussing the implications of the EU ETS emissions cap approaching zero, the “emerging endgame” as they call it. The authors opine on the potential implications on the EU ETS market structure, and crucially, the ability of the scheme to continue to deliver on its policy objectives.[1](#footnote-1) 

The foundational question is what happens when the EU ETS emissions cap - without which the cap-and-trade-scheme could not exist - approaches zero. Recall that the Linear Reduction Factor (LRF), the annual rate at which the cap declines, will accelerate from 4.3% currently to 4.4% from 2028 onwards.

If the cap continues to decline at 4.4% post 2030 then by 2040 the cap will hit zero. It will mean that not a single tonne of carbon dioxide can be emitted by those sectors of the economy covered by the EU ETS. It seems like a nice problem to have, after all the EU ETS has been instrumental in cutting emissions, but there is still a long way to go.

How EU policymakers react will have a huge implications for the future of the EU carbon market. It has undergone profound changes during its almost 20 year history. Over the next few years, beginning in early 2025, we will begin to see the next stage in this market start to take shape.

The PIK report outlines three broad knock-on effects of the emerging endgame, namely financial, informational, and societal.

**Banking constraints, market thinness, and trading frictions:** In theory, the prospect of ever an scarcer supply of EU emission allowances (EUAs) should prompt some market participants to hold EUAs for the long-term, anticipating the impending shortage and associated high carbon prices. The ability for participants in the EU carbon market to bank EUAs normally helps smooth out imbalances in the market, and in this case could prolong the availability of EUAs, i.e., banked EUAs will eventually return to the market once the buyer wishes to sell.

The PIK report suggests two reasons why holding EUAs for the long-term might be less than optimal. Some market participants such as heavy industry have yet to really become active in the market, and this lack of risk management experience could result in less than optimal long-term banking of EUAs. PIK also highlight financial constraints, including credit risks associated with the energy transition, as potentially impacting industrial sectors ability to hold EUAs long-term.

However, in the long-term, as the cap approaches zero, the size of the market (banked EUAs plus auctioned volumes) will inevitably approach zero. The urge to hoard allowances in anticipation of higher prices could negatively affect the functioning of the market. In this scenario EUAs might lose their ability to function as a ‘Currency of Decarbonisation’.

> “As allowances become scarcer, market participants may become reluctant to trade and may instead tend to cling on to their allowance holdings, so that trading costs and illiquidity may increase.”

**Information frictions, regulatory uncertainty, and coordination failures:** Fuel switching between coal and gas has historically been a pivotal driver of EUA prices. However, this will become less relevant as first coal, and then gas is phased out. Market fundamentals will become increasingly dominated by the marginal costs of industrial decarbonisation.

> “This has implications for allowance price formation, because information about industrial abatement is more fine-grained and dispersed (technologies differ considerably by firm and facility) and associated fundamentals are less readily observable (their underlying’s are less transparently traded) than for fuel switch. In other words, information about costs will increasingly become private.”

The authors of the paper then correctly identify the potential for carbon dioxide removal (CDR) to be included in the EU ETS. They recognise that the market will need to guesstimate as to how the cost of DACCS, BECSS and any other CDR methods might evolve, the degree to which they are included in the EU ETS, and how that could change over time. As with industrial decarbonisation, the cost of CDR is bounded by a large price range, whose development involves a high degree of uncertainty, with this information also likely to be private.

> “In the longer term, price formation may undergo a more fundamental change dictated by the need to offset or even exceed residual emissions with removals, possibly to a greater extent than in our numerical analysis where a relatively small amount of BECSS is considered. To the extent that allowance prices reflect long-term expectations, they may in part be driven the anticipation of the still uncertain costs of removal technologies.”

**Trade-offs between efficiency and equity:** PIK’s quantitative analysis indicates that carbon prices could hit very high levels, potentially over €200 per tonne by 2040, and even in excess of €300 per tonne sometime in the late 2040’s. Depending on how the carbon price is passed through to consumers, it is likely to raise concerns about the adverse impact on society and perceptions of fairness. The European Commission will not be able to pull on the same levers in the future if they are concerned by carbon prices hitting politically unpalatable levels.

> “These issues have historically been addressed through free allocation and auction revenue use (e.g., to finance other decarbonization or targeted fiscal relief policies). But these levers will become less and less actionable as both allowance supply volumes and auction revenues decrease over time.”

As we approach the emerging endgame, the right to participate in the market may have to change. This could for example mean that participants in the market without an obligation are limited to the extent that they can hold EUAs. It may mean that price caps, or other mechanisms need to be introduced to ensure prices do not increase too far, too fast.

> “Yet as allowances become scarcer and more expensive, both the pre– and post-trading distribution of allowances across market actors and sectors may still become increasingly more relevant for the regulator—e.g., because some sectoral or firm-level emissions are harder to abate than others, or because firms’ ability to respond to higher allowance prices also depends on their financial leverage. In other words, various criteria other than market forces may become increasingly relevant in determining who may ‘rightfully’ hold and use increasingly scarcer allowances.”

### The net present value of zero

In [The zero lower bound: What happens when EU ETS emissions approach zero?](https://www.carbonrisk.world/the-zero-lower-bound/) I highlight how strange things begin to occur as you approach zero, whether that is in nature (e.g., as water turns to ice), or in economics (e.g., as interest rates approach zero). I argue that the same is true in cap-and-trade schemes such as the EU ETS, and it will inevitably result in profound changes to the way the system currently operates.

What are the options available to Europe’s policymakers if they seek to address the emerging endgame?

*\* The second part of this two part series can be found here* [*Resolving the emerging endgame: Charting a path towards net-negative emissions with carbon removal*](https://www.carbonrisk.world/resolving-the-emerging-endgame/)

_This post is for paying subscribers only._
### Book and claim - Part 2
URL: https://www.carbonrisk.world/book-and-claim-part-2/
Last updated: 2025-08-21T10:36:07.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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---

*Estimated reading time \~ 12 mins*

![a large airplane flying in the sky](https://images.unsplash.com/photo-1660968601173-e89d602c6df6?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Sven Piper](https://unsplash.com/@svenpiper?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-large-airplane-flying-in-the-sky-xzvOQtvJc5c?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

> *“God didn’t invent blockchain for crypto grifters to do their thing, he did it to enable book-and-claim systems to enable the green energy transition.”*  
>  
> John Podesta, Senior Advisor to the President for International Climate Policy

New and innovative market mechanisms are being launched to spur market development in low carbon commodities.

Up until recently Energy Attribute Certificates (EACs) had only been used to support the development of renewable energy generation. They are more commonly known as Guarantees of Origin (GOs) in Europe, or Renewable Energy Certificates (RECs) in North America.

To recap, EACs are based on a “book and claim” chain of custody market mechanism. They enable suppliers of low-carbon solutions to “book” the environmental attributes of a good they have produced (i.e., power generated via renewables, emission savings, etc), and for users to “claim” those same attributes (see [*Book and claim - Part 1: Energy Attribute Certificates play a vital but controversial role in the energy transition*](https://www.carbonrisk.world/book-and-claim/)).

The trade can happen even if there is no actual physical exchange of renewable electricity between the buyer and seller. The custody model assumes that one unit of environmental attribute is equal to another, wherever it is produced or consumed. One electron equals another electron, one tonne of CO2 avoided equals another tonne of CO2, and so on.

Each certificate is unique, and its attributes include independently verified claims rights, documents of origin, and audit trails. The holder owns the legally recognised property rights to the underlying environmental attributes. The certificate can be traded between parties, but then finally retired by, or on behalf of its owner to claim usage of the environmental attributes.

EACs have been a key enabler of the energy transition. Now various industries are using the same tools to kick-start the growth in Sustainable Aviation Fuel (SAF) and green hydrogen (gH2).

### The challenge facing low carbon fuels

Sustainable Aviation Fuel (SAF) is expensive to produce due to the high cost of feedstocks (e.g., Hydro-processed Esters and Fatty Acids, HEFA) and the high capex requirements, preventing it from rapidly achieving economies of scale. SAF production may have reached 600 million litres in 2023 (double the output of the previous year), but this still only represented 0.2% of global jet fuel use. In [*Blending in: Decarbonising air travel with 'sustainable' fuel*](https://www.carbonrisk.world/come-fly-with-me/), I highlight how a combination of strict government mandates and high carbon prices are likely to be required if the SAF price premium versus conventional jet fuel is to narrow:

> “Airline industry targets are helpful, but stringent penalties (in the form of carbon pricing) coupled with minimum blending mandates may be required to embed the expectation of having to use SAF. That will help to speed up investment in the infrastructure required to ensure that supply can more adequately meet expected demand growth. Note that building new SAF production plants, in addition to related infrastructure, usually takes 5-6 years to become fully operational.  
>  
> At the moment, carbon prices are nowhere near high enough to incentivise the shift from jet fuel to SAF. According to BNEF the minimum carbon price necessary for gasification and Fischer-Tropsch of non-vegetable oils is close to $250 per tonne. Other SAF feedstocks processes may require carbon prices up to and in excess of $1,000 per tonne.”

gH2 is also struggling to scale. Globally some 840 GW of clean H2 projects have been announced, but only 15 GW (1.8%) have reached Final Investment Decision (FID), according to PwC. Only 2.6% (representing 13% of the contracted volume) of the gH2 projects planned to come onstream by 2030, has a binding offtake agreement, according to BNEF (see *[A volatile gas: Hydrogen's latest hype cycle still suffers from overinflated expectations](https://www.carbonrisk.world/hydrogen-hype-cycle-not-over-yet/)*).[1](#footnote-1) 

Research carried out by the Organisation of Economic Cooperation & Development (OECD) and the World Bank identified several offtake risks that influence whether a gH2 project proceeds to FID. They include inadequate demand signals, unavailability of credible off takers, gH2 price uncertainty, the lack of gH2 trading markets, and the potential for offtake defaults.[2](#footnote-2)

### Tackling the green premium

In the absence of policies that solve these challenges, industries involved with the SAF and gH2 supply chains are turning to market mechanisms that monetise individual firms willingness to pay a green premium for low carbon commodities (see [*Deciphering nickels green premium*](https://www.carbonrisk.world/the-illusory-green-premium/)).

Commodity research firm CRU defines the green premium as: “An additional price, over and above that paid for the equivalent ‘standard emissions’ substitute, that the consumer or buyer will pay due to the lower CO2e emissions associated with a product.”

Green Premium Certificates (GPC) are instruments that represent the emissions attributes, and emission relate claims, after using a metric tonne of low carbon fuel. GPCs have similar characteristics to the EACs:

- They unbundle the environmental attributes from the physical fuel, enabling buyers to pay for the environmental benefits, even if the physical fuel is not yet available for them to use.
- They serve as a means to aggregate and catalyse additional demand for the low carbon commodity, in turn generating new funding that can be used to cover its price premium.
- Finally, in a nascent market such as SAF or gH2, they must also be interoperable between regions, enabling trade to take place, even when comparable standards between regions are yet to be developed.

For example, Sustainable Aviation Fuel certificates (SAFc) are linked to the creation of one tonne of neat (unblended) SAF. Exhibiting the characteristics outlined above, the SAFc buyer is able to claim even higher sustainability benefits (since the fuel doesn’t need to transported to the SAFc buyer), at a more economical cost, and via a globally recognised accounting and reporting system. By tapping into buyers willingness to pay a premium versus jet fuel, the SAFc market catalyses a SAF supply response.

RMI and the Mission Possible Partnership (MPP) conducted a survey of 23 companies (including airlines and logistics service providers, and corporate customers), and examined their willingness to pay for SAF and SAFc. The average price the airline industry was willing to pay for SAF was $6 per gallon, three times the current jet fuel price. Meanwhile, analysis of corporate demand for SAFc indicates a green premium in the range of $2.34 - $3.93 per gallon.[3](#footnote-3)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/f8e9a83d-4562-472a-8924-0de0743d1d99_714x481.png)

Source: RMI

### Aggregating demand for SAF

The Sustainable Aviation Buyers Alliance (SABA) was co-founded by RMI and the Environmental Defense Fund (EDF). Launched in April 2021, SABA worked with aviation customers, airlines, and fuel producers to develop a rigorous, transparent SAF certificate system. It now harnesses the collective buying power of major corporations to aggregate demand for SAFc and in turn send a clear signal to SAF producers.

_This post is for paying subscribers only._
### A new political trilemma
URL: https://www.carbonrisk.world/a-new-political-trilemma/
Last updated: 2024-10-08T11:03:26.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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---

*Estimated reading time \~ 7 mins*

![smoke comes out from industrial factory chimney](https://images.unsplash.com/photo-1521111756787-d2f69136cedf?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Weichao Deng](https://unsplash.com/@juniperphoton?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/smoke-comes-out-from-industrial-factory-chimney-KKFKrOu3BVc?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

A new trilemma is preoccupying the economist Dani Rodrik:

> “This one is the disturbing possibility that it may be impossible simultaneously to combat climate change, boost the middle class in advanced economies, and reduce global poverty. Under current policy trajectories, any combination of two goals appears to come at the expense of the third.”

Rodrik, who is the Ford Foundation Professor of International Political Economy at Harvard Kennedy School, is no stranger to drawing attention to trilemma’s that have proved prescient over subsequent decades.

In 2000 he penned an essay called “the political trilemma of the world economy,” in which he claimed that globalisation, the nation-state, and mass politics could not coexist. According to Rodrik, societies would eventually settle on (at most) two out of three, and governments would most probably start by pulling up the draw bridge to protect the nation-state.

As Rokrik explains in his latest article, in the aftermath of the Second World War policymakers naturally focused on growth and social stability, at the expense of climate change; assuming it even entered their calculus at all.[1](#footnote-1) 

> “During the early postwar decades, policies in the developed and developing world alike emphasized economic growth and domestic social stability. The advanced economies built extensive welfare states but also progressively opened their markets to poorer countries’ exports, so long as the distributional and social consequences were manageable. The result was inclusive growth in the rich countries, as well as significant poverty reduction in those developing countries that were pursuing the right policies.  
>  
> Successful as this strategy was, it sidestepped the risks of climate change. Over time, the consequences of economic growth powered by fossil fuels have become increasingly difficult to ignore.”

Thereafter domestic social stability began to crumble as hyper-globalisation undermined wages and employment prospects. The security that many felt rapidly disintegrated. This set the backdrop for the political trilemma identified by Rodrik almost a quarter of a century ago.

Over the past three or four years policymakers have responded by pivoting; focusing on giving back confidence to the middle classes while also tackling climate change.

American policymakers have employed subsidies and tax credits to wrestle back control of critical supply chains such as batteries and semi-conductor chips, and incentivise the buildout of renewable energy, and carbon capture, etc. All the while they have explicitly incentivised the use of domestic inputs, over those imported from overseas (see [*Second-best climate policy: When political economy trumps economic efficiency*](https://www.carbonrisk.world/second-best-climate-policy/)).

> “In the United States, President Joe Biden’s administration has tackled these new realities head-on. It has broken new ground by promoting substantial investment in renewables and green industries to combat climate change.”

European policymakers have used a different type of incentives to protect its industries while also incentivising industrial decarbonisation. For example, the EU’s Carbon Border Adjustment Mechanism (CBAM), which takes effect in 2026, is a pioneering use of trade policy to help the bloc meet its climate goals (see [*Carbon markets are going global*](https://www.carbonrisk.world/carbon-markets-are-going-global/)).

> “The EU’s carbon-pricing mechanism will soon require “dirty” exporters from developing countries to pay additional tariffs.”

Rodrik believes that policymakers pivot to protect the nation state and tackle climate change - as evidenced in the US and Europe - must now come at the expense of reducing global poverty.

> “This new focus on climate and the middle class is long overdue. But what US and European policymakers see as a necessary response to neoliberalism’s failures looks, to poor countries, like an assault on their development prospects. The recent crop of industrial policies and other regulations are often discriminatory and threaten to keep out manufactured goods from developing countries.”

I’ve highlighted the potential for CBAM to adversely affect less developed economies before. The carbon border levy will accelerate the adoption of carbon pricing as an instrument of decarbonisation. We can see this in places like Indonesia, Turkey, and Brazil that are looking to introduce these carbon pricing policies, but can also support the necessary capital investment to decarbonise.

But for many countries, especially those less able or willing to expend the political capital to impose carbon pricing, carbon intensive industries face being priced out of European markets, forcing them to seek alternative markets for their higher carbon intensive commodities (see [*No level playing field: Europe's carbon levy will accelerate adoption of carbon pricing, but not everyone will win*](https://www.carbonrisk.world/no-level-playing-field/)).

Western governments have unsurprisingly behaved distinctly myopic in their pivot to protecting the nation state and the environment above all else. All the hard work being carried out to cut emissions in advanced economies risks being undone if governments fail to support the development of emerging economies. Climate change is an existential global issue, and one that will not be solved if climate policy is part of a zero-sum game.

> “…it will be virtually impossible to address climate change without significant cooperation from developing countries. While emissions from the US and Europe have been declining, developing-country emissions are still rising, in some cases rapidly, and their contribution to global emissions (excluding China) will soon exceed 50%. Hence it is in rich countries’ self-interest to promote green-transition policies that poor countries regard as part of their own growth strategies, not just as pure cost.”

Advanced nations should look to invest in less developed countries energy transition and industrial decarbonisation, finance the infrastructure necessary to clean up their environment, incentivise the introduction of policies such as carbon pricing and other regulations, and most importantly, boost trade and investment to help support their economic growth.

> “We can imagine an alternative combination of policies that focus on poor countries and the climate. This would entail a large transfer of resources – financial and technological – from the North to the South, to ensure the requisite investments in climate adaptation and mitigation in the latter.  
>  
> It would also require significantly greater access in the North’s markets to goods, services, and workers from the poor countries of the South, to enhance these workers’ economic opportunities.”

This will accelerate their progress through and beyond the tipping point described in the Environmental Kuznets Curve (EKC). This is the point at which economic development reaches a certain level and where further incremental growth results in a decline in environmental degradation, not more (see [*Prosperity bends the curve*](https://www.carbonrisk.world/the-environmental-kuznets-curve/)).

Recent trends in the amount of finance directed at the energy transition in emerging markets and developing economies (EMDE) delivers a sobering view. Low-carbon investment reached a record high in 2022 of $85 billion, but it only represents 14% of the global total, and its the lowest share since 2016\. The research, carried out by BloombergNEF, found that outside of the advanced economies, investment remains highly concentrated, primarily in a small number of upper-middle income countries such as Brazil and India.[2](#footnote-2) 

Investment falls woefully short of what is required to be on course to reach 1.5C. To meet the IEA’s Net Zero Emissions by 2050 Scenario (NZE), annual investment in EMDE countries will need to hit $2 trillion by 2030, a 24-fold increase on current levels. With poorer countries increasingly marginalised as the West focuses on the nation-state and it’s own domestic climate policies, their share of future low-carbon investment is likely to get squeezed even further.

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---

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---

1. www.project-syndicate.org/commentary/new-trilemma-of-climate-change-global-poverty-rich-countries-middle-classes-by-dani-rodrik-2024-09 [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://about.bnef.com/blog/mobilizing-capital-in-and-to-emerging-markets/ [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
### China's carbon credit market takes off
URL: https://www.carbonrisk.world/chinas-carbon-credit-market-takes/
Last updated: 2025-08-21T10:36:08.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 8 mins*

![gray concrete building near green trees and mountain during daytime](https://images.unsplash.com/photo-1612535114069-68fc6ed7ca6d?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Max Chen](https://unsplash.com/@maxchen2k?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/gray-concrete-building-near-green-trees-and-mountain-during-daytime-ZQxxar2ovS0?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

A wide swathe of global companies are seeking to establish a foothold in China's domestic carbon market according to a recent article from S&P Global.

The report suggests that mining and minerals producers, commodity trading houses and oil and gas majors are “not only looking to safeguard their extensive domestic supply chains but are also hedging against tightening global emissions regulations.” Investing in carbon credit projects under China’s domestic carbon credit market, known as the China Certified Emission Reduction (CCER) program, is emerging as an attractive opportunity for many companies with carbon intensive operations in China:

> “Several international businesses with Chinese subsidiaries that have previously dabbled in the local carbon market have shown interest in expanding their presence, while others have been making inquiries to understand China's carbon markets to hedge risks or participate when needed.  
>  
> Mining companies and commodity trading houses with offices in Singapore said that their Chinese customers were also seeking guidance on trading and managing carbon assets, as these global companies possess more experience in carbon trading and reducing supply chain emissions than their Chinese counterparts.  
>  
> Energy companies like Shell and BP, along with commodity traders like Vitol, have already set up local carbon desks to invest in CCER projects and credits, with others following suit. This contrasts with the shrinking carbon trading teams in other parts of the world.”

### Carbon credit market gets a reboot

The CCER program was re-launched on 22nd January 2024\. The previous scheme was originally launched in 2012 but was suspended in March 2017 due to a lack of trading activity and to give time for the authorities to develop the regulations further.

CCER certificates are generated through emission reduction activities that are certified by the Chinese government. CCER projects will initially focus on afforestation, solar thermal power, offshore wind power, and mangrove creation. The Ministry of Ecology and Environment (MEE), which oversees the CCER program, is consulting on a further two methodologies: coal mine methane and energy-efficient streetlights in road tunnels. Further methodologies are expected to cover carbon capture, utilisation and storage (CCUS) and hydrogen projects.

The CCER market permits any enterprise to voluntarily buy CCERs to demonstrate that they have helped fund a particular carbon project. The very first CCER transaction involved the China National Offshore Oil Corporation, the country’s largest offshore oil and gas producer. In late January it purchased 0.25 Mt CO2e of CCER afforestation credits, mainly around the area known as the Great Green Wall of China.[1](#footnote-1)

The majority of the demand for CCERs is expected to be for domestic compliance purposes. Emitters under China’s domestic emissions trading scheme (ETS) are allowed to cover up to 5% of their obligation with carbon credits generated under the CCER program. Although the ETS currently covers around 40% of Chinese emissions (the power generation sector), that share is expected to rise sharply, increasing the potential size of CCER compliance demand (see [*A battle for global carbon pricing supremacy is brewing: Why you need to pay more attention to China's carbon market*](https://www.carbonrisk.world/a-battle-for-global-carbon-pricing/)).

Earlier in September it was announced that China’s ETS will expand to cover steel, cement, and aluminium by the end of 2024\. Together with power generation the three carbon intensive sectors will account for \~60% of the country’s emissions. Assuming participants used CCERs to their fullest extent it would equate to a carbon credit market of close to 340 Mt CO2 per annum, and that’s excluding demand from other sources.

_This post is for paying subscribers only._
### Copper-bottomed
URL: https://www.carbonrisk.world/copper-bottomed/
Last updated: 2025-08-21T10:36:09.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 6 mins*

![gold and silver accessory on white surface](https://images.unsplash.com/photo-1596213812143-ff89bd9ddecd?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Mika Baumeister](https://unsplash.com/@kommumikation?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/gold-and-silver-accessory-on-white-surface-SkUkZ2auN4E?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

> *“We have said it before – there will absolutely be no energy transition to ‘net-zero’ without a transformational increase in the amount of primary copper produced by the mining industry. However, the inhabitants of our planet are also demanding that mining companies work to limit greenhouse gas emissions and safeguard the environment.”*  
>  
> Robert Friedland, Ivanhoe Mines

Copper demand is set to jump by 72% to 52.5 Mt per annum in 2050, according to projections by BHP, the worlds largest mining group. Outside of traditional sources of growth in emerging economies (i.e., demand for air-conditioning and other appliances), the miner sees decarbonisation and data centres as the key sources of demand growth.[1](#footnote-1) 

Transport’s share of copper demand is forecast to double; EV’s are three times as copper intensive as ICE vehicles. Meanwhile, data centre’s share of global copper demand could grow six-fold according to BHP. The burgeoning need for power cables and cooling to support AI development will all mean lots more copper demand.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/92b4cebc-b606-4c10-b664-227a4c3f4c7f_1034x440-1.png)

However, as the second chart from BHP illustrates, copper discoveries are far less common, and when they are found, deposits tend to be much deeper than earlier mines. This means more energy is required to extract the ore, increasing the emissions intensity of the mine, and raising the cost of production. As Robert Friedland, founder of Ivanhoe Mines notes, copper miners are under increasing pressure to cut the emissions intensity of their mines, in turn forcing miners to devote more resources to their existing productive assets.

Copper miners, burnt by previous periods of overexpansion, are also reluctant to invest in new productive assets, fearing the anticipated surge in copper demand might be a one-off. And so rather than invest in additional mining capacity (which can take well over a decade to develop), they seek to gain greater market share. BHP’s recent failed bid to buy Anglo American can be seen in this context. Instead of developing additional copper assets of its own, BHP saw an opportune moment to capture those of one of its competitors instead.

If these dynamics continue to play out over the next decade then the copper market could be set for a severe supply shortfall. Higher copper prices will benefit miners, but if it ultimately hampers the speed of decarbonisation and data centre rollout then manufacturers may then look towards substitute materials.

### Copper leading the pack

The copper supply chain (including mining and processing) has reduced its emissions intensity every year since 2020\. In contrast, the emissions intensity associated with extracting and refining other energy transition commodities - i.e., nickel, lithium and cobalt - have tended to trend higher, albeit fluctuating significantly on a year-by-year basis (see *['Green' lithium](https://www.carbonrisk.world/green-lithium/)*).[2](#footnote-2)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/260b42cb-8240-4fed-82f4-3c064cb5d0b4_985x570-1.png)

Global mined copper output increased by 378kt between 2022 and 2023, while total mine-site emissions are estimated to have declined by 1.8 Mt CO2e (down 5.3%). Scope 1 emissions (on-site activities) have remained broadly unchanged due to the cost and timescale involved with switching from diesel powered equipment to other technologies. With many copper mines approaching the end of their productive life, miners are reluctant to invest when the opportunity for a return is more limited. In contrast, there has been a significant effort on the part of miners to cut their Scope 2 emissions, i.e., power purchased from the grid.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/2fe437b3-4099-4d2e-b8ac-d04019a5b685_780x604-1.png)

_This post is for paying subscribers only._
### Repost: 'Green' lithium
URL: https://www.carbonrisk.world/repost-green-lithium/
Last updated: 2025-08-21T10:36:11.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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---

*Estimated reading time \~ 11 mins*

*Every month or so I repost an article from the Carbon Risk archives. The subscriber base for Carbon Risk has grown significantly over the last few years and so many of my current readers probably haven’t seen some of the earlier articles. Many of the posts are arguably even more relevant now than the day they were first published. Following that theme, this repost focuses on the carbon intensity of lithium.*

*Lithium miners are failing to live up to their climate pledges.*

*Instead of acting as a beacon for the responsible mining of energy transition commodities, and cutting their emissions, the carbon intensity of global lithium supply is increasing. Lithium carbonate production jumped by over 30% between 2022 and 2023 to 917 thousand tonnes. Expansions at existing mines, particularly carbon intensive conventional mining involving spodumene, accounted for 84% of the increase.*

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/82765a4e-ddf6-486a-bd09-3a99b2606e4f_1906x980-1.png)

*New conventional lithium mines are expected to open between now and the end of the decade. These will typically be some 30% less carbon intensive than older mines as they make use of power grids with a greater share of renewable energy. Nevertheless, the rate of progress is not sufficient to prevent overall lithium supply from becoming even more carbon intensive by the end of the decade.*

*A richer, less carbon intensive stream of lithium may be close at hand.* *Later this decade* *the first wave of electric vehicles will reach the end of their life. Recent breakthroughs in recycling technology mean that old batteries may become an even more important source of lithium than extracting it from rock and beneath the salt lakes.*

---

Demand for commodities essential to the green energy transition are expected to rise fourfold by 2040 if we are to reach the goals of the Paris Agreement, i.e., climate stabilisation at “well below 2°C global temperature rise”. In order to achieve net-zero globally by 2050, six times more commodity inputs will be required by clean energy technology in 2040, according to the International Energy Agency (IEA).

However, the average growth in commodity demand does a disservice to the growth requirements of certain niche metals essential to the energy transition. For example, demand for nickel, cobalt and graphite are all projected to grow 20-25 times under the IEA’s Sustainable Development Scenario (SDS) by 2040.[1](#footnote-1) 

Lithium demand is projected to grow almost twice as fast, with the IEA estimating that the requirement for lithium from clean energy technology will need to rise 42 times by 2040, primarily reflecting the expected growth in demand for electric vehicles (see [*Carbonomics returns*](https://www.carbonrisk.world/carbonomics/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/02266386-5a56-4086-96ca-fc5655ab6150_1001x473-1.png)

[Get 20% off a group subscription](#/portal/signup)

Despite serving an overwhelming positive environmental outcome, lithium cannot escape its own carbon footprint being scrutinised by battery producers, automobile manufacturers and investors.

The environmental performance of lithium miners and refiners is likely to become a key differentiator in the lithium industry, with strong leadership on emissions reduction rewarded by institutions allocating capital to the sector.

So, how is lithium extracted and processed, what are the main sources of emissions, and what can be done to minimise them?

_This post is for paying subscribers only._
### How to power up Europe's industrial decarbonisation
URL: https://www.carbonrisk.world/how-to-power-up-europes-industrial/
Last updated: 2025-08-21T10:36:12.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 9 mins*

![man in brown shirt holding stick](https://images.unsplash.com/photo-1630691625890-6cf7c4f30c04?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Antoine Pouligny](https://unsplash.com/@gimmick?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/man-in-brown-shirt-holding-stick-Csx32JZ8A9A?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Once seen as the ‘Swiss Army Knife’ in the industrial decarbonisation toolbox, green hydrogen (H2) is failing to take-off at the speed many expected.

Only a few years ago green H2 was projected to deliver one-fifth of the industrial emission reduction required under the EU emissions trading scheme by the end of the decade. This optimistic take was based on a ramping up in green H2 supply, and a rapid decline in the cost of production, encouraging uptake among hard-to-abate industrial sectors.

The European Union had hoped to be producing 10 Mt of green H2 by 2030, while also targeting 10 Mt of green H2 imports. Achieving the domestic target alone will require a breakneck increase in electrolyser capacity, requiring 120 GW by 2030\. Alas, between 2021 and the end of 2023 only 1 GW per year reached Final Investment Decision (FID) according to PWC, taking the total capacity to 3 GW.

Carbon intensive industries have also found it challenging to reconfigure their production processes to integrate green H2\. It’s not a simple switch, and even less appealing given the high cost and uncertain outlook for green H2 supply. In a damning verdict the European Court of Auditors recently called the EU’s green H2 targets ‘unrealistic’ and ‘overly ambitious’[1](#footnote-1) [2](#footnote-2)

In the absence of a turnaround in the outlook for green H2 industrial adoption, what’s the alternative? Direct electrification of process heat is a potential pathway to industrial decarbonisation, and one that has largely been neglected by policymakers in the headlong rush into supporting green H2.

Process heat refers to the application of heat during an industrial processes.For example, cooking, pasteurising and drying food, melting glass and steel, or firing ceramics***.*** As we’ll see direct electrification faces some significant barriers of its own, potentially making it just as challenging to scale as green H2.

Process heating is the single largest energy use in Europe’s industrial sector, accounting for almost half (47%) of industrial energy demand and three-quarters of industrial CO2 emissions. Fossil fuels account for about 75% of the energy consumed by process heating (primarily natural gas and coal), biomass contributes 15%, while electricity provides a mere 4%!

If it could be electrified it would make a significant dent in overall European emissions - somewhere in the region of 20%![3](#footnote-3)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/1c80d5af-cdd1-4b33-9d58-11b1d78c620e_970x573.png)

_This post is for paying subscribers only._
### Britain makes coal history
URL: https://www.carbonrisk.world/britain-makes-coal-history/
Last updated: 2026-05-14T14:39:27.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 7 mins*

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7a6d7d33-528f-49ac-86d7-f1f4d271be42_1280x720-jpeg-1.jpg)

Source: The Economist

At the end of this month, Britain’s last coal-fired power station will close.

The 2 GW Ratcliffe-on-Soar power station in Nottinghamshire opened in 1968\. The plant emitted around 2.7 Mt CO2 per year, making it the country’s fifth largest emitter. The largest single source of CO2 emissions is the Drax biomass power station (11.5 Mt CO2, more than 4x larger than Ratcliffe).[1](#footnote-1)

The end of coal burning has been a long time coming. The Industrial Revolution kicked off in the late 18th Century with the invention of James Watts coal-powered steam engine. Over a century later in 1882, the Holburn Viaduct power station in London became the worlds first coal-fired power station.

Fossil fuels including coal have transformed the standard of life for Britain’s citizens, as they have for people elsewhere around the world. However, the cost in terms of air pollution eventually became too high a cost to bear.

The Great Smog of 1952 resulted in thousands of deaths. It prompted Parliament to pass The Clean Air Act four years later, encouraging households and nearby factories to switch to smokeless fuels. It marked a turning point as demand for coal peaked at 244 Mt in 1956 (see [*Prosperity bends the curve*](https://www.carbonrisk.world/the-environmental-kuznets-curve/)).

Demand for thermal coal for electricity generation continued to grow for at least another two decades, but here too, coal’s place in the energy system would eventually reach an inflexion point. In 1980, the UK’s power generators, including Ratcliffe-on-Soar, burned through close to 100 Mt. Competition from more efficient and less carbon intensive gas-fired generators, more onerous environmental policies, and the rise of wind and solar generation would eventually seal coal’s demise…at least in the UK.

![UK coal consumption, as explained in the article text](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/4ba8cb16-98ca-421a-8448-ce8b68a2eb5b_575x288.png)

But in the early 2010s the EU carbon price was nowhere near the level it needed to be to begin pricing out coal. Financial uncertainty due to the European debt crisis, coupled with global climate policy disunity in the aftermath of COP17, hit carbon prices hard. From a high of near €17 per tonne in May 2011, the EU carbon price fell to less than €5 per tonne by mid-2013.

The over-riding conclusion was that the carbon price was too low and too unstable if the UK was ever to meet the requirements of the 2008 Climate Change Act. In response, the government announced in 2011 that a top-up carbon tax levied on power generators would be introduced, payable in addition to the prevailing EU ETS carbon price. The Carbon Price Support (CPS) as its known was launched in 2013 at £5 per tonne, it rose to £9 per tonne CO2 in 2014, and then finally to £18 per tonne in April 2015\. In response to concerns over UK industry competitiveness the CPS was frozen at £18 per tonne.

Nevertheless, the year-on-year doubling in the CPS to £18 per tonne had a dramatic impact on coal plant economics. In addition to the EU ETS price it meant that UK generators were paying £23.50 per tonne of CO2, over four times the prevailing price payable by utilities on the continent. For the first time since 2010 the cost of generating power in the UK using thermal coal had risen above that of natural gas. The recent energy crisis and consequent high coal prices switched the generation incentives away from natural gas and back towards thermal coal. The reprieve was to be brief, and was but a minor detour on the road towards coals complete phaseout.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/78575952-c7a8-4cfa-967e-1af68fc53325_920x636.png)

_This post is for paying subscribers only._
### Carbon capture and storage (CCS) is misunderstood
URL: https://www.carbonrisk.world/carbon-capture-and-storage-ccs-is/
Last updated: 2025-08-21T10:36:15.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 8 mins*

There are 41 commercial carbon capture and storage (CCS) projects currently operating, according to the Global CCS Institute. Perhaps surprisingly, very few of these CCS projects were developed with the climate in mind.

The majority take the CO2 produced as a by-product from natural gas processing, and if oil field operators are located close by, simply supply it to them for Enhanced Oil Recovery (EOR). Other sectors where CCS has been applied on a commercial basis, albeit in smaller numbers, include bioethanol, fertiliser, power generation, and oil refining.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/5147c430-f6ec-4561-b1d6-4884d484d431_1557x763-1.png)

Source: Global CCS Institute

The historical motivation to capture CO2 for non-climate reasons underpins almost every misunderstanding there is about CCS. As we’ll see, commentators have been quick to criticise the cost of capture, the lower than advertised capture rate, and the challenge in scaling up CCS capacity.

The move towards regulated carbon markets for CCS represents a structural break from the commercial origins of the CCS industry. And while there is much to learn from the historical experience, we need to be careful not to taint the need for future CCS capacity based on the experience of a relatively small number of unrepresentative CCS plants.

Remember, keeping global temperature increases within 1.5°C will depend on a massive expansion in CCS. Looking across 95 IPCC scenarios compatible with this climate target reveals a significant variation in the call on CCS by 2050, ranging from zero (one scenario) to almost 25 Gt per annum. The average is close to 10 Gt per annum.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/261ebcd5-affe-492f-a98e-88cacc552afe_833x493.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

Past performance is no guarantee of future performance. A slogan often used to warn investors that financial returns might be lower than those advertised or experienced recently. It should also refer to situations where the future can be dramatically better than the past. The CCS industry is one such example.

Lets dive in.

_This post is for paying subscribers only._
### Beware false prophets
URL: https://www.carbonrisk.world/beware-false-prophets/
Last updated: 2025-08-21T10:36:16.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 4 mins*

![king of diamonds playing card](https://images.unsplash.com/photo-1627764575220-d7fc469f4d03?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [petr sidorov](https://unsplash.com/@m%5Fmalkovich?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/king-of-diamonds-playing-card-GESOWH4YLRI?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

The forward curve for oil, natural gas, or other commodities is frequently referenced in the media, by investment funds, and by other commentators as “the markets view” of what the future holds.

It’s very tempting to view the forward curve as a price forecast, but it couldn’t be further from the truth. The forward curve shows the price at which it is possible to buy or sell contracts for a date in the future at a price agreed on today. It is not a forecast of future spot prices.

There are several factors that affect the forward curve. First, the physical characteristic of the commodity – whether it is easy to store and whether there are ample inventories, etc. Second, longer dated contracts are often illiquid, raising doubts of whether they are an effective aggregator of information. Third, the forward curve fails to account for real interest rates, i.e. taking account of inflation. Finally, the forward price will always be discounted to the market’s expected future spot price in order to give speculators a “risk premium” to take on the risk associated with hedging.

In the EU emissions trading scheme (ETS), the right to emit one tonne of carbon can be bought or sold for immediate delivery (i.e., the spot market via the regular daily auctions) or for future delivery; next quarter, end of the year, or in the quarters thereafter. The chained prices of sequential EUA futures contracts form a curve known as the EAU forward curve.

In contrast to physical commodities, EUA storage costs are negligible. As of 2022, the German Emissions Trading Authority (DEHST) charged €393 to open an account and €649 as an account administration fee for the trading period 2021-2030\. Transport costs are also negligible, a mere entry in an account. Physical EUAs can be banked for future compliance needs, creating a strong link between the spot price and the futures price. Finally, EUAs can only be used by the purchaser for compliance purposes so don’t face a security risk, which means there are no insurance costs to contend with.

The EUA futures market has, except for a brief period after it launched in 2005, consistently been in contango. A forward curve is described as “in contango” when it is upward sloping and so prices in six months’ time are higher than the spot price. In the case of physical commodities, traders are typically willing to pay a premium to avoid the costs associated with transporting, storing and insuring it, and therefore the furthest-out contracts are typically higher in price.

In the case of the EUA, the contango should equal the cost of borrowing since the storage, transport and insurance costs are nil or negligible. It means that the higher the interest rate the steeper the EUA forward curve, since the opportunity cost of holding physical EUAs also rises. At the time of writing the Dec-24 EUA contract is trading at €65.70, while the Dec-25 contract is trading €2 higher at €67.70 - a negative roll yield of \~3%. If the contango is higher than this then buyers would be incentivised to buy physical and sell forward, moving the market to a position where no arbitrage exists.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b9c706c4-587b-47e5-b104-37d004272855_1002x518-1.png)

Asset management firm DWS compared the benchmark December EUA contract at the start of the year with the outturn at the end of year based on the period 2010-2021\. Overall, the EUA forward curve had an average error of 32.9%. They also analysed the performance of analyst forecasts made at the start of each calendar year. DWS found that carbon price predictions had an average absolute error rate of 35.5%. The forward curve is - on average - a better predictor across all commodity markets (just), but hardly evidence of a seer.

Beware false prophets!

---

**👋 If you have your own newsletter on Substack and enjoy my writing, please consider recommending** [**Carbon Risk**](https://carbonrisk.substack.com/) **to help grow this amazing community of readers! Thank You!👍**
### Germany's manufacturing malaise set to curb demand for EUAs
URL: https://www.carbonrisk.world/germanys-manufacturing-malaise-set/
Last updated: 2025-08-21T10:36:16.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 6 mins*

![assorted tool grayscale photography](https://images.unsplash.com/photo-1469389335181-2198b4caa734?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Leo Fosdal](https://unsplash.com/@fozzie?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/assorted-tool-grayscale-photography-TgWWeaTAXCM?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

The downturn in Germany’s manufacturing sector has entered its third year.

The HCOB Germany Manufacturing PMI fell to 42.4 in August (a reading below 50 indicates a decline in activity), down from 43.2 in July, and the lowest level of activity since March. The main factor driving the sharper fall in activity during August was an acceleration in the decline in new orders, in particular from the construction industry and the export market.[1](#footnote-1)

Overall European manufacturing activity also continues to weaken; the HCOB Eurozone PMI was stuck at 45.8 in August, unchanged from July. Weak manufacturing activity in Europe is mirrored in assessments of global manufacturing. The S&P Global Manufacturing PMI fell to 49.5 in August, down from 49.7 in July, and while modest, the drop in activity was the steepest witnessed since December 2023.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/151db48f-0709-47c3-aa7b-478eb34f90f4_839x554.png)

### Compliance deadline nears

Recent developments in German manufacturing activity are a crucial indicator of European industrial demand for EU emission allowances (EUAs). The rebound in the EUA price since late February was, at least in part, built on the premise that industrial activity and emissions had rebounded. The renewed slowdown in German manufacturing activity strikes at the heart of that source of fundamental demand.

The weakness is especially pertinent as we approach the deadline for obligated emitters to submit EUAs to cover their 2023 compliance demands. Remember that the EU ETS deadline is 30th September this year. In early 2023 the European Commission (EC) announced its intention to push back the deadline five months from its usual spot of 30th April. The intention being to give governments more time to calculate and deliver industrial emitters their free allocation of EUAs, avoiding the situation whereby they have to borrow EUAs from their current-year issuance to pay off the prior year’s compliance.

The shift has given obligated emitters a 17-month window in which to ensure they have met compliance. It appears to have resulted in industrial firms pacing their EUA buying activity across the compliance window, enabling them to benefit from lower prices when they occur (as witnessed during the first quarter of 2024), and avoiding a last minute rush for EUAs ahead of the end of September. Many industrials have also stuck to the traditional timetable, ensuring that their compliance requirements were satisfied before the end of April.

### Second order deindustrialisation

Germany’s industrial model, previously reliant on Russian energy and Chinese export markets, has been brought to the brink by high energy prices, a slowdown in demand from it’s main export market, and increased competition from Chinese exports such as cheaper EVs.

The petrochemical sector was always going to be particularly vulnerable to deindustrialisation. The high energy intensity of chemical production and its reliance on a dense network of pipelines built up over decades meant that remaining competitive was fraught with difficulty.

_This post is for paying subscribers only._
### New Zealand's carbon market is close to resolving its commitment issues
URL: https://www.carbonrisk.world/new-zealands-carbon-market-is-close/
Last updated: 2025-08-21T10:36:16.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

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---

*Estimated reading time \~ 8 mins*

New Zealand carbon prices jumped by NZ$10 per tonne in late August to over NZ$60 per tonne (\~€33). The price of New Zealand emission allowances (NZU’s) is now up almost 40% from its late May nadir.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7d116b7a-063c-4d75-b321-822a5148615c_460x284.png)

The announcement by the New Zealand Government that it was overhauling the country’s emissions trading scheme, and crucially, slashing the number of NZUs available to the market though to the end of the decade, was the key to the price surge. In addition, the final settings for the period 2025-29 maintains and extends the existing price corridor for the auction reserve price (ARP) and cost containment reserve (CCR), with volumes held in the latter left unchanged.[1](#footnote-1) 

Even more important than the details of the overhaul is that the New Zealand Government followed the advice of its independent advisory body, the Climate Change Commission (CCC). In February, the CCC concluded that the “unique design of the NZ ETS means that if its current structure persists, it will create challenges for meeting our emissions reduction targets in an equitable, stable and predictable way.” In response to these concerns, the CCC issued a series of recommendations to the government aimed at bolstering the ETS’ credibility, ensuring that going forward it delivers the incentives necessary to decarbonise.[2](#footnote-2) 

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

### Delegation signals commitment to legally binding targets…

The UK was the first major economy to set legally binding carbon budgets. The UK Climate Change Act (CCA) of 2008 stipulates ‘legally binding’ interim and long-term (2050) targets for emission reductions. In 2019 the UK went one step further and became the first major economy to commit to net zero greenhouse gas (GHG) emissions by 2050.

Enshrining it into law, even if subsequent administrations could realistically alter it, is the most important driver of climate policy credibility. Legally binding obligations force obligated emitters to respond. Also, by making carbon policy part of the legislative process means that it is open to public scrutiny. That makes it much more difficult for policymakers to quietly drop the policy.

Perhaps less well known, the CCA also enabled the formation of an independent monitoring entity with the authority to advise and monitor the governments performance on a regular basis. The Climate Change Committee (CCC) was also formed in 2008, and importantly, the government has a legal obligation to regularly obtain and respond to its advice.

The CCC is considered to be a trailblazer in institutional climate restraint, bolstering the credibility of the UK in the eyes of investors. A recent paper by Grantham Research Institute found that the CCC helped to justify more ambitious climate action and achieve greater political accountability in the UK.[3](#footnote-3) 

Even if it is enshrined in law, market participants know that subsequent governments may revoke or at best dilute the policy. Delegating at least some authority to an institution insulated from short term political whims, and with a timeline beyond the electoral cycle adds an extra layer of commitment. The introduction of an independent advisory body coupled with the requirement that the government must respond is an example of a strong commitment device.

Dozens of other countries around the world have followed the UK’s lead and introduced their own version of an independent climate change committee. Nearly 60 countries around the world have introduced climate change framework laws, of which 26 contain explicit net zero targets. The laws gives 18 of these governments the power to establish an expert advisory body (i.e., a CCC), with just under half specifying the degree to which the government must respond to the advice of the CCC.

One of the country’s to follow the UK’s lead was New Zealand. It’s Climate Change Commission (CCC) was founded in 2019 under the Zero Carbon Act (ZCA). As in the UK, New Zealand’s CCC was set up as an independent advisory body, tasked with advising the government on climate change policy and monitoring progress towards New Zealand's emission reduction goals. The move to reduce the influence of political whims on the NZ ETS helped support the market; the price of NZUs surged to an all-time high of almost NZ$90 per tonne in November 2022 (see [*New Zealand's carbon market: The carbon trade you've probably never heard of*](https://www.carbonrisk.world/the-new-zealand-carbon-market/)).

_This post is for paying subscribers only._
### Book and claim - Part 1
URL: https://www.carbonrisk.world/book-and-claim/
Last updated: 2025-08-21T10:36:17.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 13 mins*

![green trees and white concrete building during daytime](https://images.unsplash.com/photo-1591030094831-940197bb27ae?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Mark König](https://unsplash.com/@markkoenig?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/green-trees-and-white-concrete-building-during-daytime-eZuXKn1lULM?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Known as Guarantees of Origin (GOs) in Europe, or Renewable Energy Certificates (RECs) in North America, Energy Attribute Certificates (EACs) document that one MWh of electricity has been generated and supplied (net) to the grid, through a specified renewable energy resource.[1](#footnote-1)

EACs are based on a “book and claim” chain of custody market mechanism. They enable suppliers of low-carbon solutions to “book” the environmental attributes of a good they have produced (power generated via renewables, emission savings, etc), and for users to “claim” those same attributes.

Importantly, the trade can happen even if there is no actual physical exchange of renewable electricity between the buyer and seller. EACs are useful because they enable a trade to occur that, in their absence, would be very difficult to achieve. Once an electron joins the grid it is impossible to distinguish power generated using renewables from any other electrons. The custody model assumes that one unit of environmental attribute is equal to another, wherever it is produced or consumed. One electron equals another electron, one tonne of CO2 avoided equals another tonne of CO2, and so on.

Each certificate is unique, and its attributes include independently verified claims rights, documents of origin, and audit trails of renewable energy generation. These certificates can also be traded discreetly from the underlying power (i.e., unbundled), or can be sold together with the physical electricity (i.e., bundled, typically as part of a Power Purchase Agreement). The holder owns the legally recognised property rights to the underlying environmental attributes. The certificate can be retired (also referred as ‘cancelled’) by, or on behalf of its owner to claim usage of the environmental attributes.

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### **GO prices whipsawed by weather and political sentiment**

The Guarantees of Origin (GO) market was introduced in 2001 as part of the EU’s first Renewable Energy Directive (RED I). The GO market began life as a traceability mechanism, existing to provide proof that electricity consumed was generated using renewable energy. The GO market operates without borders within the EU and European Economic Area (EEA) and currently covers around one-third of total European power demand.

Historically oversupplied, the price of GO certificates has typically traded below €1 per MWh. A drop in hydropower output in 2022, coupled with an increase in demand for GOs resulted in GO prices spiking towards €10 per MWh. The price spike was violent, albeit brief. By early 2024 an increase in renewable energy generation, more favourable weather conditions, and weaker power demand marked a return to over-supplied conditions and significantly lower GO prices.

Hydropower accounts for the majority (60%) of GOs issued in Europe, with Norway delivering around half of the hydro GO supply. The share of hydro-based GOs is expected to drop to 35% by 2030, as more non-hydro renewables come onstream elsewhere in Europe and begin issuing GOs. Warmer and increasingly volatile weather patterns have contributed to GO price volatility, but this should dampen as the share of non-hydro generation increases.

Political factors can also contribute to market volatility. For example, the UK’s exit from the EU meant that it ceased to recognise EU GOs. The UK had been a net importer of GOs, and so the ban contributed to the surplus within the EU, and the pressure for lower prices. Meanwhile, Norway threatened to pull out of the GO market when the Labour-led government came to power in 2021\. In recent weeks they have since pulled back from that position, stating that they are no longer opposed to remaining in the GO market. If they had pulled out it would have generated a severe shortage.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/95726ca2-e0d7-4f51-886c-565ab3fbfb30_1195x547.png)

### Demand for GOs set to surge as mandatory emissions reporting begins

The Corporate Sustainability Reporting Directive (CSRD) entered into force at the beginning of 2024\. It will require all companies operating within the EU, and non-EU companies that do business in Europe, to disclose information on sustainability risks and the impact of their activities on the environment (see [*Full disclosure*](https://www.carbonrisk.world/full-disclosure/)).

The European Sustainability Reporting Standards (ESRS), complementary rules under the CSRD, mandates that companies must use contractual instruments such as GO certificates to claim renewable energy consumption. Simply being located in a country with very high renewable energy generation is not sufficient.

Companies can also use the instruments to report their carbon intensity of production. When disclosing market-based emissions, the ESRS indicates that businesses can report “emissions linked to purchased electricity bundled with instruments such as Guarantees of Origin or Renewable Energy Certificates.”

### High prices required to pass the additionality test

Academic research suggests that EAC’s have been non-additional in nature, i.e., renewable energy generation and emission reductions would have occurred in the absence of the EACs. Part of this is a function of their historically low prices, which in turn is a consequence of their original function as a tracing mechanism. Other viewpoints suggests that although individual EACs fail the additionality test, the aggregation of all the EACs does provide a valuable signal of market demand.

_This post is for paying subscribers only._
### Divining reality from the hype
URL: https://www.carbonrisk.world/divining-reality-from-the-hype/
Last updated: 2025-08-21T10:36:17.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 6 mins*

> *“Whenever you find yourself on the side of the majority, it is time to pause and reflect.”*  
>  
> Mark Twain

Nascent climate change adaptation technologies are beginning to emerge, but expectations are low. In contrast, carbon capture, utilisation and storage (CCUS) might be suffering from inflated expectations. Investors remain disillusioned with ESG, but the worst may be behind it. The same cannot be said for the voluntary carbon market where more bad news and disappointment are likely to be forthcoming.

These are just some of the conclusions that can be drawn from the recently published Environmental Sustainability Hype Cycle from Gartner. The chart below illustrates the maturity and adoption of relevant technologies and applications (although by no means an exhaustive list), based on the same hype cycle methodology that Gartner uses to assess technological hype in other industries.[1](#footnote-1)

The position of each innovation on the hype cycle is based on a consensus assessment of hype and maturity. Gartner selects a variety of market signals and proxy indicators to establish the level of expectations.

During the first part of the hype cycle, an innovations position on the curve is guided more by its hype levels and market expectations. Hype plays a smaller role in determining the innovation’s position during later stages, as more information about maturity, performance and adoption becomes available (see [*A 'green' unicorn: What the cleantech boom and bust tells us about the future of climate tech*](https://www.carbonrisk.world/a-green-unicorn/)).

**Environmental Sustainability Hype Cycle 2024**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/cfeec480-8bb7-4fcf-a2d0-094b36849f06_736x422-1.png)

Gartner break down the hype cycle into five distinct phases of a technology's life cycle:

1. Innovation Trigger: A potential technology breakthrough! Early proof-of-concept stories generate significant interest in the media. Commercial viability is unproven though - it’s often the case that no usable products exists.
2. Peak of Inflated Expectations: Early publicity produces a number of success stories, often accompanied by several failures that do not get the same publicity. Investor interest is huge with forecasts extrapolating early progress on a straight linear path many years into the future.
3. Trough of Disillusionment: Interest wanes as experiments and implementations fail to deliver. Producers of the technology shake out or fail. Investors realise they have overpaid, and now shun the sector completely, even if there are attractive opportunities available.
4. Slope of Enlightenment: The technology begins to see broader adoption as the benefits start to become more widely understood. Other companies improve on the initial technology. While some forward looking companies and individuals take a punt, the majority are too cautious to adopt it.
5. Plateau of Productivity: This is where mainstream adoption really starts to take off. Criteria for assessing provider viability are more clearly defined according to Gartner. If the technology is ever going to become more than a niche market then this is the time that it should continue to grow.

Although each technology follows the same hype cycle, the length of time it may take to move from “Innovation Trigger” through to “Plateau of Productivity” (and each phase in-between) may vary enormously. For some nascent technologies (e.g., AI for sustainability and biodiversity accounting) Gartner expects them to reach phase 5 within 2-5 years, while others are likely to take more than 10 years (e.g., resource positive building and climate change adaptation).

Of course just because a technology is passing through the hype cycles does not mean that it is guaranteed to hit the “Plateau of Productivity”. Often a technology becomes obsolete well before it reaches the “Slope of Enlightenment”, let alone reach mass adoption.

Technologies may also experience more than one hype cycle, each separated by long periods of time, with investors calling for this latest hype cycle to be the big one where it finally reaches the sunny uplands of the “Plateau of Productivity”. Green hydrogen for example has experienced multiple hype cycles (see [*Europe's hydrogen economy and what it means for carbon prices*](https://www.carbonrisk.world/europes-hydrogen-economy-and-what/)).

_This post is for paying subscribers only._
### Transformers - A supply chain problem in disguise
URL: https://www.carbonrisk.world/transformers-a-supply-chain-problem/
Last updated: 2025-08-21T10:36:18.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 10 mins*

First published on [E-FWD](https://efwd.energyvoice.com/insights/grid/transformers-a-supply-chain-problem-in-disguise?ref=carbonrisk.world)

- Transformers are vital conduits to transport electricity from the point of generation to the point of consumption
- The lead time for transformers has increased 10-fold since 2020, to around two years, while transformer prices have risen by almost 80%
- Transformer supply is highly concentrated with little appetite among manufacturers to expand capacity
- Around one-quarter of global renewable energy projects are thought to be at risk of delay due to the transformer shortage
- The lifespan of transformer is 35-40 years, but many in use today are much older. Ageing transformers are highly inefficient, contributing to wasted energy

Transformers are the energy transition’s hidden supply chain challenge.

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![A Siemens Energy transformer in a warehouse](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/641b6d1a-8a7b-41ff-9305-10730aaa2325_2560x1440-jpeg-1.jpg)

A Siemens Energy transformer in a warehouse

In contrast to the spinning blades of a wind farm, the army of electricity pylons stretching across the horizon and the vast array of solar panels seen on hillsides from afar, the humble transformer does not get the attention it deserves.

Boxed away in refrigerator-sized containers, the inner workings of the transformer are invisible. Yet without them, the energy transition is impossible.

Transformers are large pieces of electrical equipment built from a laminated steel core upon which are wound coils of copper wire. The main function of a transformer is to “step up” or “step down” the voltage of electricity using the principles of electromagnetism.

The voltage is increased to enable electricity to be transported long distances along transmission line with minimal losses. The voltage is reduced before the power is distributed to homes and businesses, ready to be used to power the appliances we need. Without the humble transformer, modern life would be impossible.

## **Surging demand hits fixed supply**

Yet our dependency on the transformer is set to grow significantly over the next decade as two powerful trends – the energy transition and AI – look set to overwhelm supply.

Unbeknownst to many commentators who study these two emerging themes, the supply of transformers is already heavily constrained. The lead time to wait for delivery of a transformer has increased from 12-14 weeks pre-pandemic to 115-130 weeks in 2024.

The reason behind the surge?

The supply of transformers is fixed and highly price inelastic. Meanwhile, demand for transformers has surged. Utilities are rolling out renewable energy and technology companies are investing in vast data crunching capacity.

Meanwhile, transformer manufacturers have been hit by higher costs. For example, Grain Oriented Electrical Steel (GOES), used to produce the core of the transformer, has almost doubled in price since 2020\. Meanwhile the cost of copper has increased by about two-thirds. Raw material costs account for around 45% of the total price of a transformer.

The upshot of the severe supply-demand imbalance and surging cost of raw materials is that the price of transformers has soared by 60-80% since the beginning of 2020.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/41915b00-a29c-4ca5-8fe8-88b3d12ee3db_940x335.png)

## **Bullwhip effect**

Another factor is the manufacturing base for transformers is highly concentrated.

Three large companies dominate the market: Germany’s Siemens Energy, US’ GE Vernova, and Japan’s Hitachi Energy. Once the electrical grid was largely built – roughly between the 1950s and 1970’s – the industry went into a period of consolidation.

Transformer manufacturers have been wary of over expanding their production capacity, for fear that demand might fall short of expectations.

Many firms were burnt by the housing crisis that followed the great financial crisis of 2008-09\. Manufacturers that had expanded capacity anticipating house builds continuing – and hence increased demand for transformers – found themselves overextended when housing builds came to an abrupt halt.

Although transformer demand is dictated by similar technological dynamics, firms are also wary, given what has happened to the price of semi-conductors and PV cells during past periods of over-expansion. Manufacturers in these latter products have encountered volatile trading conditions, with periods of exuberance and despondency upsetting supply patterns.

Unlike semi-conductors and PV cells, transformers are bespoke pieces of kit. This means that it’s difficult to establish economies of scale in the same way that manufacturers of modular pieces of equipment enjoy. The bespoke nature also means that the availability of trained staff for both manufacturing and repair is limited.

## Longer than expected

“There’s a real block on transformers,” Dorothy Thompson, former CEO of Drax and now board member at Eaton said earlier this year. “When I say block, we’re talking about lead times of 18 months to two years.”

Thompson noted a visit to an Eaton plant six years ago, “they were worried because they were making such low margins, \[there was a question\] of whether they should keep production going or should they rationalise? Fortunately they didn’t.”

Thompson, speaking at the Aurora Energy Forum, said people knew demand was coming for “grid reinforcement. But if you’re a manufacturer, you might know demand is there, but you have to be able to see it before you really invest. You’re not going to put scale investment in the supply chain until it really begins to materialise. Quite often in the energy transition, it’s taken longer to materialise than expected.”

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

## **Transformer delays slow the energy transition**

Competition for turbine foundations, high-voltage cables and other components is likely to hamper the buildout of wind turbines, solar panels, and grid infrastructure across the UK, according to a [recent report](https://assets.publishing.service.gov.uk/media/6617b12ed88c988e81b95af8/uk-renewables-deployment-supply-chain-readiness-study-executive-summary.pdf?ref=carbonrisk.world) commissioned by the UK government.

The report, carried out by Baringa, also identified strong demand for transformers as a key supply chain constraint. This, it said, could have an impact on the development of the UK’s renewable energy capacity, as well as upgrading the power grid. “Transformer availability is a result of increasing demand from renewables projects, electricity networks, and industrial and commercial sectors,” it said.

Transformers are such an important piece of equipment that developers are reluctant to source equipment from suppliers they are not able to verify.

“There is also a reluctance to source transformers from non-European suppliers due to perceived reliability concerns. Transformers represent a single source of failure for wind farms, and a defective device can cause significant financial losses,” the report added.

The transformer market is heavily concentrated. But many of its vital components are even more heavily dependent on one or a small number of suppliers. For example, in Europe, the main suppliers of electrical steel are Germany, Sweden and Turkey.

However, competition from other energy transition demands coupled with geopolitical uncertainty has made the situation worse according to Baringa,

“There is also a shortage of electrical steel used for transformer cores due to competition from electric vehicle motors and the loss of Ukrainian and Russian manufacturing.”

It’s unclear to what extent UK renewable projects are directly affected by the high lead times involved in securing transformers. [Wood Mackenzie](https://www.woodmac.com/news/opinion/supply-shortages-and-an-inflexible-market-give-rise-to-high-power-transformer-lead-times/?ref=carbonrisk.world) has estimated that 25% of global renewable energy projects are at risk due to the shortage.

![A Siemens Energy transformer in a warehouse](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/54c7f9f3-86ad-414b-ae1c-e1a0cd315e42_2560x1440-jpeg.jpg)

*A Siemens Energy transformer*

## **Transformers seeking efficiency**

Stepping up and stepping down voltage contributes to transmission and distribution losses. The European Commission estimates that 2.9% of all energy generation wasted across the EU27+UK is a result of transformer losses. This is equivalent to 93 TWh.

Load losses are produced by the electrical current flowing through the copper coils and vary according to the load. No-load losses are caused by the magnetising current needed to energise the core. This second type of loss is constant irrespective of the load placed on the transformer.

Transformers are typically designed to last 35-40 years. More than 70% of transformers in the UK have been in operation for 25 years or more, according to [Powerstar](https://powerstar.com/how-ageing-transformers-cost-you-money/?ref=carbonrisk.world), a UK manufacturer of transformers. The firm believes that energy losses and the risk of an outage is significantly higher after just 20 years.

Increasing numbers of transformers are exceeding their design lifespan. Indeed, a freedom of information request submitted to the UK energy regulator Ofgem revealed the average age of a distribution transformer in the UK is 63 years old. [Wilson Power Solutions](https://committees.parliament.uk/writtenevidence/104392/html/?ref=carbonrisk.world#:~:text=We%20found%20out%20that%20the,transformers%20that%20we%20can%20replace.), another UK manufacturer, submitted the request to Ofgem.

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## **T**echnology shift

Old transformers increase the risk of down time, but they are also energy inefficient compared with newer versions. An ageing transformer is estimated to be around 85% efficient, although it may be even lower depending on its age and how it has been used.

In comparison, the energy efficiency of modern transformers can be as high as 99.75%.

Amorphous metal transformers (AMT), typically made up of Metglas, an alloy of iron with boron, silicon, and phosphorus, can eliminate up to 80% of the energy losses experienced by conventional transformers. AMTs require higher upfront costs compared with traditional steel core transformers. The operational energy savings offset this.

The move towards AMT has also been spurred by manufacturers concerned that they are overly dependent on GOES. Although amorphous cores utilise more readily available commodities such as silicon and iron, the global supply is also thought to be tight. Despite the benefits, manufacturers are wary of allocating the significant amounts of capital necessary to convert to AMT.

## Regulation’s role

Eco-design regulations have also forced manufacturers to design new transformers with energy efficiency in mind.

EU regulations (EU No 548/20141 and Amendment (EU) 2019/17832) have introduced requirements for load and no-load losses for distribution and power transformers.

Tier 1 regulations came into effect in 2015, while Tier 2 followed in 2021 and incorporates stricter energy loss requirements. The UK also adopted Tier 2, despite Brexit.

The US is also tightening regulations. The Department of Energy (DoE) is currently consulting on measures to improve the energy efficiency of distribution transformers.

Despite the undoubted improvement in the energy efficiency of new transformers placed on the market, it will take decades to upgrade the hundreds of thousands of old, outdated, and inefficient transformers that are currently connected to the power grid.

![The world's 1st large flexible transformer from GE Vernova installed and undergoing field validation at Cooperative Energy's major substation in Columbia, MS.
Photo credit: Cooperative Energy. October 2021. ](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7a9206ed-4fbf-4c06-9df1-f11992ca611e_1450x967-jpeg.jpg)

*The world’s 1st large flexible transformer from GE Vernova.* *It is installed and undergoing field validation at Cooperative Energy’s major substation in Columbia, MS. Photo credit: Cooperative Energy. October 2021.*

## **AI may eat transformers lunch**

Demand is rising for electrification, feeding into demand for transformers. One of the drivers of new demand is data centres, springing up to feed AI.

Where there is a supply-demand imbalance, markets and technology inevitably find a way to resolve the bottleneck.

Indeed, AI may yet provide the answer to the transformer shortage. Indeed, one such solution is currently in development by a British tech start-up called [IONATE](https://www.ionate.energy/?ref=carbonrisk.world). The firm has developed a smart grid solution. This aims to increase data visibility and real-time control of the flow of energy in electricity grids.

The company’s Hybrid Intelligent Transformer (HIT) replaces the passive transformer. Instead, in introduces a real-time control node, regulating voltage and reactive power with millisecond-level precision using magnetics.

In late 2023, Portuguese multi-national utility [EDP announced a collaboration with IONATE](https://www.ionate.energy/post/edp-trials-ionate-s-cutting-edge-transformer-to-underpin-a-future-smart-grid?ref=carbonrisk.world). Under this agreement, the companies agreed to deploy in Portugal, Spain and Brazil, following a period of testing.

Announcing the collaboration, Luís Manuel, executive board member of EDP Innovation, commented on the potential to usurp conventional transformers. The HIT “has the potential to be a game-changer, replacing conventional passive transformers with state-of-the-art real-time control nodes”.

## **The mother of invention**

It’s clear that transformers represent a major bottleneck to the energy transition. In contrast to specific shortages of equipment and materials that affect different parts of the energy transition in isolation, transformers affect everything.

The transformer industry is reluctant to invest for fear that the current demand surge is a one-off. However, on this occasion they may be misinterpreting the signals.

Government and corporate commitments to net zero suggests this is no ordinary boom.

There is new demand, for renewable energy and data centre connections. And this comes in addition to the backlog of inefficient transformers that must undergo repair and upgrading.

The extreme transformer supply-demand imbalance will be resolved somehow. Innovation will provide the answer and may even usurp the transformer industry as we know it. For the sake of the energy transition, it can’t come soon enough.

---

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---
### Know your onions
URL: https://www.carbonrisk.world/know-your-onions/
Last updated: 2025-08-21T10:36:20.000Z
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---

*Estimated reading time \~ 9 mins*

> *“How can we ignore the fact that food has become an object of speculation or is connected to movements in a financial market that, lacking in clear rules and moral principles, seems anchored on the sole objective of profit?”*  
>  
> Pope Benedict XVI

Fears that geopolitics could present a material risk to natural gas supply has fuelled a surge in speculative bets on higher European natural gas prices.

Investment funds increased their net length in TTF futures by 60 TWh in the week ending 2nd August, according to data from the European Securities and Markets Authority (ESMA) and analysed by .

Funds are now sitting on their biggest net long position in TTF (+192 TWh) since September 2021, during the period ahead of the Russian invasion of Ukraine. The switch apparently triggered as much by the closing out of earlier short positions as it is by taking out new long positions (see [*A market driven by illiquidity*](https://www.carbonrisk.world/a-market-driven-by-illiquidity/)).

### Ukraine in the cross sights of investment funds

The prolonged build in net length really began to gain momentum during March and into April. Aside from the ever present geopolitical fears stalking the Middle East, attention has switched to the conflict between Ukraine and Russia.

The recent Ukrainian military incursion into Russia has forced market participants to monitor gas pipeline flows at the Sudzha compressor station. The potential flash point could result in a complete curtailment of piped Russian natural gas into Europe; transits via the station account for 5% of total EU gas imports.

Meanwhile fears over the Russian response has meant that European gas traders have shunned Ukraine’s large underground gas storage facilities. Several attacks occurred during the spring, largely affecting above ground infrastructure. If these were to suffer serious damage it could affect traders ability to move gas out of Ukrainian storage.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/407e6b14-b334-44ec-a163-a7d59de11bb6_4240x1824.png)

### Gas market perhaps not as comfortable as it appears

The uber-bullish positioning comes despite high European gas storage levels, despite moribund gas demand growth from European industry, and despite an expected surge in LNG capacity (estimated to be up to 270 bcm per year), with the majority due to come online before the end of the decade.

As so often happens in commodity markets, it’s what happens at the margin that’s important. And here it seems speculators are sniffing out the potential for stronger demand growth than expected, as countries, particularly in Asia increase demand for cooling amid heatwaves and switch to LNG.

In addition, the narrative that there is a wave of LNG supply on the horizon is also being tested amid concern that exporters may struggle to build liquefaction capacity. Supply fears are heightened by concerns that geopolitical risks may well get worse, before they get better - perhaps even affecting a broader array of the worlds LNG supply.

### Funds dominant role in TTF price formation

The correlation between fund positioning and the TTP price is growing according to . Econometric analysis reveals that fund positioning accounted for 63% of changes in the weekly TTF price during the period November 2023 to August 2024\.  concludes that as “speculative capital becomes an even more dominant force in gas price formation, we should expect more extreme price swings in response to fast-moving geopolitical headlines.”[1](#footnote-1)

Whether this is a problem or not is an open question. Speculators play an important role in price discovery in commodity markets. If there is a risk that fundamentals are going to get much tighter then specs pushing up the price of futures contracts should provoke a response - either lower demand or higher supply, or some combination of the two.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/ac2d4514-c769-4186-87dc-9a519c129e74_3946x2010.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

### Spec squeeze affects other commodity markets too

Arguably the spec squeeze affecting natural gas prices is similar in nature to that observed across a number of soft commodity markets. For example, structural changes in the market for cocoa (accelerated by climate change) have contributed to much higher prices, an increase in volatility, and a reluctance by market players to short the market.

Funds have taken advantage of this, taking long-term long positions in the cocoa market, confident that the highly inelastic nature of cocoa supply means there could be several years of larger and larger deficits. It’s worth noting that the cocoa market has slumped by 40% since April, as some of the froth has left the market. At $6,000 per tonne it remains very high versus historical levels, at least on a nominal basis.

This may look dramatic but its par for the course in commodity markets where fundamentals are tight and the supply response is measures in several years, rather than a few months (see [*The sword of inelastic supply cuts BOTH ways*](https://www.carbonrisk.world/the-sword-of-inelastic-supply-cuts/)).

### Knock-on impact on EU carbon market

The surge in speculative positioning in TTF is also having a knock-on impact on the EU carbon market given the strong correlation between natural gas and EUA prices. To recap, as natural gas prices increase in value, it eventually reaches the point at which utilities are better off reactivating thermal coal plants. This leads to higher emissions versus gas-fired facilities, resulting in more demand for EUAs.

The correlation does break down occasionally. The parabolic movement in TTF during 2022 did not lead to a commensurate movement in the EUA price, and so the correlation broke down. More recently, the relationship also broke down in the aftermath of the European Parliament elections. Traders had been unduly pessimistic in interpreting the vote result as being negative for EUA prices. The correlation has since recovered to levels near those seen earlier in 2024 (see [*Europe's green backlash was priced in a long time ago*](https://www.carbonrisk.world/europes-green-backlash-was-priced/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/bf038618-2187-4263-b36e-dd687144cb6a_561x378.png)

In contrast to the large net long position in TTF, EUA positioning data reveals that hedge funds and other ‘managed money’ remain net short. In early 2022 the market was net long almost 43 million EUAs. Two and a half years later the market is net short 15 million EUAs. If TTF remains bid its likely means that there will be an element of catch-up in the EUA futures market. Traders that play the EUA-TTF spread may have already moved to a net long position, but it’s now for the rest of the market to follow.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c204d050-de40-413c-acad-dda9435fbde7_1478x660-1.png)

### Some degree of concern is justified

The rising impact of investment funds on price discovery in TTF, and by extension the EU carbon market, will be a concern for many market participants including Europe’s climate policymakers. Higher energy prices and elevated carbon price volatility may suggest that the market has lost any semblance of an anchor, namely to the marginal cost of decarbonisation (see [*Boiling over*](https://www.carbonrisk.world/boiling-over/)).

_This post is for paying subscribers only._
### UK-EU ETS linkage trade turns sour
URL: https://www.carbonrisk.world/not-in-my-lifetime/
Last updated: 2025-08-21T10:36:20.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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---

🏖️ I’m taking a break from carbon markets for a couple weeks. I will be back at my desk later in August 🏖️

*Estimated reading time \~ 8 mins*

Optimism that a Labour government would quickly seek a link between the UK and EU carbon markets has evaporated based on recent moves in the UK carbon price.

To recap, the UKA percentage discount to the EUA price narrowed from 52% in September 2023 to as little as 14% in mid-June. The prospect of a closer working relationship between the UK and the EU, coupled with the Labour Party’s nod to more ambitious climate policies, helped drive a convergence between the two markets in the runup to the UK general election.

The UKA price had found support at the €40 per tonne level during the first 4-5 months of the year. But beginning in mid-May, the UKA price surged by 40% over the following four-weeks, hitting a high of close to €60 per tonne. EUA prices meanwhile were broadly rangebound during the same period.

However, a notable change in market sentiment has occurred. The spread has begun to widen again, ballooning to as high as 30% in recent weeks. Far from embracing a no holds barred closer relationship with the EU, the new UK Government has maintained a ‘closer, but not too close’ narrative that seems to have spooked those who have bet on a rapid linkage between the two markets.

At a campaign rally a couple weeks before the general election, Sir Keir Starmer made it clear that the UK would not re-join the bloc, either in the short or long term, “We are not re-joining the EU, we are not re-joining the single market or the customs union.”

Asked again days before the election if there would be any circumstances where the UK would re-join the single market or the customs union within his lifetime, 61 year-old Starmer replied: “No, I don’t think that that is going to happen. I’ve been really clear about not re-joining the EU, the single market, or the customs union, or returning to freedom of movement.”

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/5c57cddb-378a-4cee-a68e-f75213bedca3_1099x590-1.png)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/feb4dc7c-e5ee-40e3-9120-401fa94d9d6a_1073x500.png)

The first opportunity that Prime Minister Starmer can even begin discussing a linkage between the UK and EU ETS is May 2026\. It’s then that the pre-agreed review of the Trade and Co-operation Agreement (TCA) will automatically start. Article 776 of the TCA states: ‘The Parties shall jointly review the implementation of this Agreement and supplementing agreements and any matters related thereto five years after the entry into force of this Agreement and every five years thereafter.’

Importantly, the TCA does leave open the possibility of linking, but without adding much in the way of detail. Article 392 (6) of the TCA states that, ‘The Parties shall cooperate on carbon pricing. They shall give serious consideration to linking their respective carbon pricing systems in a way that preserves the integrity of these systems and provides for the possibility to increase their effectiveness.’

[Get 20% off a group subscription](#/portal/signup)

### Linkage is important to the UK

The act of linking your carbon market to a larger, more established market can be thought of as a country pegging its currency to the US dollar or a basket of currencies. One reason governments pursue this strategy is to reduce currency volatility with their main trading partners and to establish monetary policy credibility. The same principles apply when carbon markets decide to link-up (see [*Pegger thy neighbour: Why smaller carbon markets link up with larger cap-and-trade schemes*](https://www.carbonrisk.world/pegger-thy-neighbour/)).

_This post is for paying subscribers only._
### Why Canada should reform its carbon tax
URL: https://www.carbonrisk.world/why-canada-should-reform-its-carbon/
Last updated: 2025-08-21T10:36:21.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 8 mins*

![a canadian flag flying over a body of water](https://images.unsplash.com/photo-1678666821005-20cb5ab5540b?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Raymond Wong](https://unsplash.com/@rm%5F6401?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-canadian-flag-flying-over-a-body-of-water-2Tnc1Q0z8QQ?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

On the 15th of July millions of Canadian households received a tax-free payment from the government as the proceeds of the federal carbon tax were redistributed.

It’s always nice to get a tax refund, especially when its unexpected. Even better when households can bask in the warm glow that they helped Canada reduce its impact on the environment, and at no cost to themselves.

What’s not to like about putting a ‘price on pollution’, and then not having to pay it?

Yet despite the obvious attractions, the opposition Conservative Party plan to scrap the scheme if they get elected, and they currently hold a 20 point lead over the incumbent Liberal Party.

What’s going on? Let’s dive in and peel back the layers to understand why this policy has promoted such hostility.

### **The false promise of a climate dividend**

Recall that the Canadian federal government requires that 90% of the proceeds from the carbon tax are returned to households in the province or territory where they are collected. This tax-free sum is designed to help eligible individuals and families offset the cost of the carbon tax.

Households receive a refund every quarter directly into their bank account, with the sum based on where they live (provinces consume a very different fuel mix), and the size of their household. The other 10% is used to fund programs that help communities and institutions (e.g., schools, hospitals, municipalities) reduce their fuel consumption.

The federal carbon tax started at C$20 per tonne CO2e in 2019 and has increased by C$10 per tonne each year until C$50 per tonne (€34) in 2022\. From 1st April 2023 onwards it began increasing by C$15 per tonne (€10) each year. In April 2024 it increased to C$80 per tonne and is set to continue to rise each year until it reaches C$170 per tonne (€116) in 2030.

By refunding the majority of the proceeds the government reasoned that the carbon price would deliver all of the benefits, but with none of the costs - politically, financially or otherwise. A ‘climate dividend’, as it’s often called it, has long been advocated by some economists who suggest its a way to avoid the social tensions associated with carbon pricing.

### **Poor communication means few know about, much less understand it**

A climate dividend sounds good, but it presupposes that the government has done a good job in communicating it to people. If they haven’t then the costs and benefits are unclear.

A survey conducted at the beginning of 2024 found that only 49% of eligible Canadian adults believed they had received the rebate, with 86% of those associating it with the carbon tax. Overall it means that less than half of the population (48%) could correctly identify the link with carbon pricing.[1](#footnote-1) 

One problem was the name of the rebate. Up April it was known as the Climate Action Incentive Payment (CAIP). Nothing to indicate a link to carbon pricing. Nothing to suggest you are getting some of your money back. The government has taken on board this feedback and since renamed it the Canada Carbon Rebate (CCR).

Approximately four out of five eligible Canadians receive more from the rebates than they pay in carbon tax. Unfortunately, no one seems to realise. The same survey found that 43% of people believe that they would be better off if the carbon tax was scrapped, more than double (20%) the number who felt they would be worse off. The average amount people felt they would save if the tax was scrapped was C$1,226 per year.[2](#footnote-2) 

### **Failure to address barriers to switching**

The logic of putting a price on carbon is the Polluter Pays Principle (PPP). By incorporating the cots of the externality, carbon pricing acts as a signal to consumers as to which products are more or less carbon intensive. In theory this should encourage them to switch to a less carbon intensive alternative.

Over 300 of Canada’s top economists have chimed in to support the government’s position on carbon pricing. In an open letter published in March the economists address five of the main claims levelled by critics. In addition to addressing its impact on emissions, the cost of living, and businesses competitiveness, and whether carbon pricing is even necessary, the letter also responds to concerns about rebates, echoing the theory of the PPP:[3](#footnote-3) 

> **Critics’ Claim #3: It makes little sense to have both a carbon price and rebates.**  
>  
> *What the evidence shows: The price-and-rebate approach provides an incentive to reduce carbon emissions (due to the price), while maintaining most households’ overall purchasing power (due to the rebate).*  
>  
> Carbon pricing works by raising the price of carbon-intensive products, so consumers and businesses are incentivized to adopt lower-carbon options, such as smart thermostats, heat pumps, or hybrid/electric vehicles.  
>  
> Giving back most of the carbon-pricing revenues in rebates doesn’t undermine this goal; consumers still have the incentive to reduce emissions. The rebates just ensure that most households come out ahead, because they receive an amount back that is slightly above what the average household spends on carbon pricing. Those that reduce emissions the most will come out further ahead; they will pay less in carbon fees but still get the full rebate.

However, the paper fails to address the barriers that prevent people from switching in response to the carbon price. For example, although there may be alternatives that save households money on their fuel bills - heat pumps, electric vehicles, etc. - many of these solutions involve households stumping up significant upfront expenses, even more challenging for lower income households that may not be able to access finance on good terms. Noting these concerns a recent paper co-written by Joseph Stiglitz, argues that the political success of carbon pricing will be measured not by the amount of money it returns to consumers, but by the degree to which it enables them to switch:[4](#footnote-4)

> To many, the application of the polluter-pays principle only seems fair if they, as polluters, indeed have an economically viable choice not to pollute. On balance, to secure sufficient support for carbon pricing policies, it seems like their design needs to be attuned more to enhancing people’s ability for switching towards low-carbon substitutes – especially in times of high inflation and high interest rates.

### The perception of political machination, real or otherwise

In [Europe must learn from Canada's 'price on pollution' debacle](https://www.carbonrisk.world/a-cautionary-tale/), I outlined why Europe needs to learn from the other countries as it seeks to expand carbon pricing to cover transportation and buildings, while also cushioning the impact on lower income households.

The problem with rebates is that even in the best will in the world, it’s very difficult for individual households to be sure whether they have received their fair share or not. There is an inherent risk that one group will feel that it is being unfairly penalised relative to another, especially so if there is blatant electioneering:

> In October Prime Minister Trudeau announced a package of measures designed to ease the pressure on low income families. The government would introduce an almost immediate three-year pause on the carbon price for home heating oil, while increasing the carbon tax rebate for people living in rural areas from April 2024\. Although the exemption applies across Canada, only about 3% of the population use heating oil to heat their homes, but a disproportionate number of lower-income families burn it on the Atlantic coast. It’s here that Trudeau’s Liberal party also has a strong contingent of parliamentarians.  
>  
> Carving out a blatant politically motivated exemption to the carbon price has understandably provoked a backlash. An exemption for one part of the electorate is likely to provoke pressure for exemptions elsewhere. It has put the policy under the spotlight ahead of the next general election - likely to take place in 2025 - when it needn’t have been. The opposition Conservative party plan to scrap the carbon tax if they get elected, and currently they hold a significant poll lead over the Liberals. The uncertainty is likely to mean that households and industries considering how they might cut their carbon emissions will now put their plans on ice until after the election.

### Revenue recycling also has an economic cost

A recent report by ABN Ambro compares the economic impact of carbon pricing depending on whether the revenues are returned to households, or used to increase government investment. Comparing analysis undertaken by the Network for Greening the Financial System (NGFS) with their own research using the Oxford Economics GEM model, they find that adverse impact on headline GDP is significantly reduced when carbon pricing revenues are used for government investment, rather transferred back to households.[5](#footnote-5) 

![ESG 27 mei ENG1](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/26ab00b9-2c38-4127-a4eb-d3e6fa273e47_1126x449-jpeg.jpg)

![ESG 27 mei ENG2](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/64cef36e-3e78-49c5-80de-6785b12d7bc7_1125x442-jpeg.jpg)

The basis for their conclusion rests on the fiscal multiplier of government investment being greater than that of an income transfer to households. For example, the International Monetary Fund (IMF) estimates that a shock to public investment equal to 1% of GDP has an estimated multiplier equal to 1.3% of GDP in the short term, and 2% of GDP after one year:

> Although compensating households would limit the damage to private consumption from higher carbon prices and inflation in the short term, the upward impact on total GDP growth would be moderated by the fact that households probably will save part of the extra income…. On top of that, part of consumer spending will be on imported goods, which also reduces the impact on EU GDP, whereas governments can actively chose to spend locally.

Carbon Risk is an advocate for carbon pricing of course, but there is always room for improvement. The Canadian Government should reform the carbon tax, and while they should support those least able to afford it, they should also commit to redistributing the bulk of the proceeds into funding measures that actually help households switch to lower carbon alternatives.

---

**👋 If you have your own newsletter on Substack and enjoy my writing, please consider recommending** [**Carbon Risk**](https://carbonrisk.substack.com/) **to help grow this amazing community of readers! Thank You!👍**

---

1. https://abacusdata.ca/carbon-tax-pollution-pricing-carbon-action-incentive-payment-abacus-data-polling/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://distribution-a617274656661637473.pbo-dpb.ca/7590f619bb5d3b769ce09bdbc7c1ccce75ccd8b1bcfb506fc601a2409640bfdd [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://ecofiscal.ca/2024/03/26/open-letter-carbon-pricing/ [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=4800442 [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
5. https://www.abnamro.com/research/en/our-research/esg-economist-economic-impact-of-carbon-price-sensitive-to-how-revenue-is [↩](#footnote-anchor-5 "Jump back to footnote 5 in the text.")
### Repost: The EU carbon market and its stock-to-flow ratio
URL: https://www.carbonrisk.world/repost-the-eu-carbon-market-and-its-e1d/
Last updated: 2025-08-21T10:36:21.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 11 mins*

![aerial photography of waterfalls near mountains at daytime](https://images.unsplash.com/photo-1513883524931-aaab83bcb19b?fm=jpg&q=60&w=3000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Robert Bye](https://unsplash.com/@robertbye?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/aerial-photography-of-waterfalls-near-mountains-at-daytime-36K5WckeU3o?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Commodity markets are typically interpreted through the lens of changes in supply and demand, and the impact on inventories in any particular year.

Inventories of ‘consumable’ commodities (e.g. crude oil, wheat, etc.) typically only cover consumption demand for a few months. If there were no inventories at all, supply would have to correspond exactly to production and demand exactly to consumption.

However, if there are inventories, consumption can temporarily exceed production. Since inventories of consumable commodities are as a rule very low, their price will rise quickly in anticipation of a future supply shortage and bring consumption into balance with production.

This model works for most commodities that are consumed, but is useless to understand the value of those commodities used for investment purposes.

While the economic utility of a consumable commodity is created when it is destroyed or used up, the utility of investment commodity lies in its possession and later resale. Investors should be very careful about interpreting short term demand supply balances in the same way that they would for consumable commodities.

So how should we interpret the market for carbon allowances, and what can we learn from different types of commodities?

_This post is for paying subscribers only._
### California's emissionary zeal begins to crack
URL: https://www.carbonrisk.world/californias-emissionary-zeal-begins/
Last updated: 2025-08-21T10:36:22.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 5 mins*

A strong carbon price is a signal that investors, businesspeople, and citizens trust their government’s commitment to combat climate change. It is the ‘Currency of Decarbonisation’.

It’s in this context that we should view how the Californian carbon market was behaving earlier in 2024\. The price of Californian Carbon Allowances (CCAs) surged to more than $40 per tonne in February. Speculators and other market participants were emboldened by the state’s political commitment to emission cuts, and optimism that policy reforms would tighten the market for CCAs.

In 2022, a bill was passed mandating a reduction in California’s emissions by 85% below 1990 levels by 2045\. To meet the more ambitious 2045 targets the California Air Resources Board (CARB) developed a series of scoping plans illustrating that emission cuts under the cap-and-trade scheme would need to rise to 48%, up from 40% previously (see [*Is a repeat of 2021 on the cards for California's carbon market?*](https://www.carbonrisk.world/is-a-repeat-of-2021-on-the-cards/)).

CARB holds regular workshops (\~5 per year) updating market participants on potential amendments to the states cap-and-trade regulations. The meetings give a regular insight into how CARB, and by extension California’s politicians, are thinking about the future of the market.

The 31st May workshop made no mention of a delay, but perhaps it was the absence of a firm commitment to the implementation schedule that spooked the market. Over the following month the CCA price fell by 10%, and after a brief short covering rally in late June the market plunged by 20%.[1](#footnote-1) 

During the 10th July workshop the news came that CARB had pushed back the timeline for new regulations by one year. The rulemaking process is now expected to be completed in early 2025 with the changes taking effect in 2026\. What’s interesting is that rather than rallying on the news that the rumour had been confirmed, the market has continued to fall even deeper. Overall, the CCA price has dropped by \~35% since its February highs to around $27 per tonne.[2](#footnote-2) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/456649cc-7bc5-4b0b-8c7b-7e66b7dce6cc_1270x801-1.png)

Note: The KCCA ETF is used as a proxy for the CCA price.

_This post is for paying subscribers only._
### Putting a price on contrails
URL: https://www.carbonrisk.world/putting-a-price-on-contrails/
Last updated: 2025-08-21T10:36:22.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 7 mins*

![a jet flying through a cloudy blue sky](https://images.unsplash.com/photo-1633431455917-0be1eb11a814?crop=entropy&cs=tinysrgb&fit=max&fm=jpg&ixid=M3wzMDAzMzh8MHwxfHNlYXJjaHw5MXx8Y29udHJhaWxzfGVufDB8fHx8MTcyMTAzMzQ1MHww&ixlib=rb-4.0.3&q=80&w=1080)

Photo by [Terence Pereira](true) on [Unsplash](https://unsplash.com/?ref=carbonrisk.world)

Eliminating contrails is the most cost-effective abatement opportunity available to the aviation industry as it seeks to reduce the impact of flying on global warming.

Although estimates vary on the extent of the impact, contrails are thought to account for between 35% and up to 60% of the total global warming impact of air travel. The sector accounts for around 2.5% of global greenhouse gas (GHG) emissions, but once you incorporate contrails, the global warming impact of aviation is likely to be more than 4%.[1](#footnote-1) 

The white streaks you see coming off high-altitude airplanes, contrails are formed when water vapour condenses and freezes around aerosols in an aircrafts exhaust. Depending on the atmospheric conditions, contrails might dissipate after a few minutes, or hang around for up to 18 hours.

Planes fly most efficiently where the air is thin, but this is also the altitude where contrails form easily. Meanwhile, contrails that form at night interfere with the Earth’s natural cooling. A process known as radiative forcing acts to prevent heat from escaping.

Only a small fraction of flights produce contrails. Researchers from Imperial University in London analysed flight data over Japan and found that \~80% of the total contrail warming impact is caused by only \~2% of flights. In particular, those involving long haul flights and night time air travel.

However, the impact of contrails on global warming is likely to get worse as air traffic continues to grow and there is an increase in the amount of long-haul flights. A study published in 2019 projects that global contrail cirrus radiative forcing will increase by a factor of 3 between 2006 and 2050.[2](#footnote-2) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/696ced13-9100-43b7-9235-324410e5884d_1920x1081.png)

Source: Google

### Regulation and markets are evolving to tackle the issue

From the beginning of 2025, new EU regulations will require airlines to monitor and report their non-CO2 emissions (contrails, nitrogen oxide, and sulphur). The mandate covers all flights, entering or leaving the European Economic Area (EEA), as well as intra-EEA. It’s worth noting that the shipping industry has been subject to a similar monitoring, reporting, and verification (MRV) mandate covering non-CO2 emissions since the start of 2024.

_This post is for paying subscribers only._
### The Time Value of Carbon
URL: https://www.carbonrisk.world/the-time-value-of-carbon/
Last updated: 2025-08-21T10:36:23.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 6 mins*

The Time Value of Carbon (TVC) is the concept that emission cuts today are worth more than those carried out in the future.

The term ‘Time Value of Carbon’ was first used in relation to climate change by Larry Strain in a 2017 white paper for the Climate Leadership Forum. Although there is one earlier mention of the term, Larry Strain appears to have been the first to connect it with climate change:[1](#footnote-1)

> When we evaluate emission reduction strategies, there are two things to keep in mind: the amount of reduction, and when it happens. Because emissions are cumulative and because we have a limited amount of time to reduce them, carbon reductions now have more value than carbon reductions in the future.

The reason why the TVC arises is because climate change is a ‘stock-flow’ problem. The stock refers to the total concentration of GHG’s in the atmosphere. The net flow refers to the difference between man-made GHG emissions (⬆️the stock of CO2e), and their removal (⬇️ the stock of CO2e), through natural processes or via engineered carbon dioxide removal (CDR).

The science of climate change argues that there is a limit to how much additional CO2e that can be pumped into the atmosphere - known as the carbon budget. If the stock of CO2e goes over this limit then the negative impacts from climate change are likely to accelerate, with each additional threshold leading to non-linear impacts.

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The IPCC estimated that the global carbon budget at the start of 2020 consistent with limiting warming to 1.5°C and a likelihood of 50% was 500 Gt CO2\. An updated estimate, published last year in the journal Nature, concluded that the carbon budget had halved to around 250 Gt CO2, equal to around six years of current CO2 emissions.[2](#footnote-2) 

It’s important to note that estimating the carbon budget involves a great deal of uncertainty, and one of the largest sources involves the contribution of non-CO2 emissions. As the updated study highlights, the size and timing in which non-CO2 GHG emissions “depends on socioeconomic projections as much as on geophysical uncertainty, and potential warming after net zero CO2.” A single point estimate for the carbon budget gives a false impression. In reality the carbon budget could be significantly higher, much smaller, or indeed, already in negative territory.

Uncertainty over the size of the carbon budget shouldn’t be a reason to postpone putting climate mitigation actions even further. Indeed, the Precautionary Principle (PP) suggests that where there are threats of serious or irreversible climate change, a lack of full scientific certainty should not be used as a reason for postponing cost-effective mitigation measures.

The chart below illustrates the emission trajectories required to limit warming to below 1.5C, in the absence of net-negative emissions, based on a starting point of 2000, and every year subsequently through to 2019\. If emissions had peaked and begun to decline after the year 2000, the 1.5C target would have only required emission reductions of around 3% per year.[3](#footnote-3) 

Alas, rather than cutting emissions, global GHG’s pumped into the atmosphere rose by over 40% over the subsequent two decades. Fast forward to 2019 and the analysis suggests that meeting 1.5C would now require cuts of 15% each year through to 2040, without net-negative emissions. Every year that goes by where the world is not on a 1.5C pathway increases the need for even larger emission cuts.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/cd92a177-8906-4427-b7d6-673fb4e1c1f9_789x529-1.png)

Unfortunately, as the chart above illustrates, our collective decision to postpone emission cuts in the past means there must either be severe year-on-year declines in GHG emissions, an increased focus on carbon removal, or some combination of the two.

This is despite the uncertainties over the carbon removal properties of natural systems (i.e., the degree to which the climate system responds to emission cuts and removal is symmetrical), and the potential technological progress we make towards gigatonne scalable engineered CDR (See [*Why CDR regulation could deter climate mitigation: The risk of 'moral hazard' tends to increase when governments intervene*](https://www.carbonrisk.world/why-cdr-regulation-could-deter-climate/)).

On a societal level the benefit of an individual firm cutting emissions or removing carbon today clearly outweighs putting it off for 10 years. Companies that only begin to make an impact in 2034 will have added to the stock of CO2e in the meantime, and hence drawn down the carbon budget. The likelihood that the carbon budget will be breached goes up the longer that mitigation efforts are put off.

What are the implications for investors and policymakers of the current TVC undervaluation? Well they may need to start thinking in terms of a ‘discounted carbon flow’ (DCF). Marc Guilbert, managing partner of BXV Capital developed a DCF model based on the carbon discount rates implied by the IPCC’s RCP scenarios.[4](#footnote-4)

DCF’s could be a way for climate tech investors to compare different large-scale projects with very different carbon profiles. As Guilbert highlights, “solutions of varying maturity and emission reduction profiles will be needed to abate global emissions.” Overlaying the DCF onto impact models such as the IPCC’s could become a useful diversification tool in which to reduce carbon risk (see [*A 'green' unicorn: What the cleantech boom and bust tells us about the future of climate tech*](https://www.carbonrisk.world/a-green-unicorn/)).

What about policymakers, and carbon markets in particular? Well, the TVC undervaluation suggests that policymaker should use a more dynamic means of targeting emission cuts and carbon removals. The DCF approach could be a more effective way of managing the risk associated with exceeding the carbon budget, and would likely imply much more ambitious targets (and hence higher carbon prices) than are currently in place.

To paraphrase a Chinese proverb, the best time to have begun to cut emissions, planted a forest, or invested in engineered CDR, was twenty years ago. The second best time is now.

---

**👋 If you have your own newsletter on Substack and enjoy my writing, please consider recommending** [**Carbon Risk**](https://carbonrisk.substack.com/) **to help grow this amazing community of readers! Thank You!👍**

---

[The Green Swan“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-51.png)Carbon RiskPeter Sainsbury![](https://images.unsplash.com/photo-1621525332263-6643c2ed0fa3?ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D&auto=format&fit=crop&w=1000&q=80)](https://www.carbonrisk.world/fat-tails/)

---

1. https://carbonleadershipforum.org/the-time-value-of-carbon/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.carbonbrief.org/unep-1-5c-climate-target-slipping-out-of-reach/ [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://www.nature.com/articles/s41558-023-01848-5#Sec2 [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://www.linkedin.com/pulse/time-value-carbon-discounted-flow-dcf-marc-guilbert-ph-d-/ [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### Back to the futures
URL: https://www.carbonrisk.world/back-to-the-futures/
Last updated: 2024-07-09T11:00:44.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 9 mins*

![a view of a valley with mountains in the background](https://images.unsplash.com/photo-1654053252793-417c7df08fad?fm=jpg&w=3000&auto=format&fit=crop&q=60&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Matthew Buchanan](https://unsplash.com/@mthwbchn?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-view-of-a-valley-with-mountains-in-the-background-%5Face95mpjz8?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

The Australian Securities Exchange (ASX) has announced that it will list three environmental futures products “designed to support Australia and New Zealand’s decarbonisation efforts and energy transition toward net zero.”

The three contracts cover Large Generation Certificates (LGC’s), Australian Carbon Credit Units (ACCU), and New Zealand Units (NZU). It currently plans to launch the futures contracts at the end of the month (scheduled for 29th July), subject to regulatory approval.[1](#footnote-1)

ASX hope that liquid environmental futures contracts will “provide a transparent forward curve for the market to hedge and price the energy transition”, enabling “capital to flow from those making the net-zero commitments into the hands of those with the ability to reduce and remove carbon.”

In addition to the price transparency and liquidity benefits, ASX also highlight the benefits of immediate execution and confirmation, reduction of counterparty risk, centralised clearing and risk management, and collateral management and operational efficiency.

Futures contracts are a long-standing feature of compliance carbon markets such as the EU, UK, and California ETS. The contracts are used by utilities and other obligated emitters to manage their risk, and by banks, hedge funds, and others seeking to speculate on the price of carbon (see [*The arc of carbon’s curve: What does the carbon futures curve tell us and why is it important?*](https://www.carbonrisk.world/the-arc-of-carbons-curve/)).

More recently, futures contracts have also become more commonplace in the VCM. For example, the CBL Global Emissions Offset futures contract was launched by the CME in 2021\. The exchange subsequently launched two other VCM futures contracts during the following two years.

Regulators are beginning to catch-up with the burgeoning demand for risk management in the VCM. For example, in December 2023 the US Commodity Futures Trading Commission (CFTC) issued proposed guidance regarding the listing of carbon credit futures contracts on CFTC-regulated exchanges.

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### Build it, but will they come?

Simply because an exchange launches a futures contract doesn’t mean it will be successful in delivering on its promised benefits. Futures contracts don’t always succeed. According to Hilary Till of Premia Capital Management there are three factors that determine whether a futures contract succeeds or not:

1\. There must be a commercial need for hedging;

2\. A pool of speculators must be attracted to a market; and

3\. Public policy should not be too adverse to futures trading.

**A commercial need**

Most successful futures contracts have emerged to deal with new risks. For example, the breakdown in the structure of the oil industry during the 1970’s caused a shift from long-term contracts to the spot market.

The volatility meant there was a commercial need for a means to hedge price risk. In response, the New York Mercantile Exchange (NYMEX) launched a suite of energy futures contracts, starting in 1978 with the heating oil contract.

_This post is for paying subscribers only._
### Frequent fryer
URL: https://www.carbonrisk.world/frequent-fryer/
Last updated: 2025-08-21T10:36:24.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 11 mins*

A letter based on this article is published in the FT, [*Risk of palm oil in aviation biofuel is not a flight of fancy*](https://www.ft.com/content/e0bd5f55-b2b2-4d4b-990f-8c43a9a46c62?ref=carbonrisk.world)

![slice potatoes cook in deep fryer](https://images.unsplash.com/photo-1518207429941-5b17e09f4d86?fm=jpg&w=3000&auto=format&fit=crop&q=60&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Wine Dharma](https://unsplash.com/@winedharma?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/slice-potatoes-cook-in-deep-fryer-7ZU8XLk1yU4?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Europe pioneered the use of biofuels as ‘renewable’ alternatives to fossil fuels.

The original EU Renewable Energy Directive (RED) 2009 classified palm oil biodiesel, and soy biodiesel among other feedstocks as renewable fuels. However, it quickly became clear that they were far from renewable, and certainly not sustainable. Indeed, virgin oil biodiesel was found to emit up to twice as much CO2 as fossil diesel, once deforestation and land use changes were taken into account.

Under the revised directive, known as RED II, Europe agreed to gradually phase out virgin oil-based fuels linked to deforestation by 2030\. In response, Europe has favoured so-called second generation biofuels including agricultural and forest residues, and waste products such as used cooking oil (UCO) and animal fats to meet its renewable fuel targets. Biofuels derived from these waste products are commonly referred to as Hydro-processed Esters and Fatty Acids, or HEFA.

UCO is by far and away the most important feedstock for HEFA. Europe consumed almost 7 Mt of UCO in 2023, according to Stratos Advisors. Almost all of the UCO was used in road transport, with demand driven by EU mandates that require a small but growing blend of biodiesel into road fuel. RED II mandates a minimum share of renewable energy in the EU transport sector of at least 14% by 2030.[1](#footnote-1)

Europe collects the majority of its UCO from restaurants and food manufacturers with an estimated 7% coming from households. The latter accounts for about half of the continents collection potential, but a lack of collection infrastructure and high transport cost act as a barrier to growing the collection rate much further. With demand for UCO eight times more than it currently collects, Europe needs to import the remainder to fill the gap.

A deficit also exists in the US, where similar road transport blending rules are in place at both state (e.g. the California LCFS) and federal level. In contrast to Europe, the majority of American UCO demand is met by domestic collections, although it still needs to import a significant amount. Nevertheless, the UCO deficit in both regions is likely to balloon later this decade as Sustainable Aviation Fuel (SAF) mandates begin to bite, and other transport sectors such as maritime also come under pressure to cut their emissions.[2](#footnote-2)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/14263efa-fa93-4d74-9b96-4d8c7becd51d_759x597.png)

### Jet zero aspirations

On the 28th November 2023, Virgin Atlantic Flight100 Boeing 787 set off from London heading for New York. Shorn of paying passengers, the plane was stocked full of media, politicians, scientists, and leaders of the aviation industry. The only difference to every other trip from Heathrow was that this flight was the first transatlantic plane powered by UCO biofuel.

Jet fuel must comply with strict standards to ensure safe operability under the conditions encountered during a flight. Flight100 was designed to showcase that those standards had been met. Airlines have understandably been slow to increase their adoption of SAF - it accounted for less than 0.2% of global jet fuel use in 2023 - but that looks set to change if the aspirations of government and the aviation industry are anything to go by (see [*Blending in: Decarbonising air travel with 'sustainable' fuel*](https://www.carbonrisk.world/come-fly-with-me/)*)*.

_This post is for paying subscribers only._
### The burning question
URL: https://www.carbonrisk.world/the-burning-question/
Last updated: 2025-08-21T10:36:24.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 7 mins*

![orange fruit on white surface](https://images.unsplash.com/photo-1585246132506-0f3890089150?fm=jpg&w=3000&auto=format&fit=crop&q=60&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [charlesdeluvio](https://unsplash.com/@charlesdeluvio?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/orange-fruit-on-white-surface-7tw1GLJt7BU?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Donald Trump’s chances of regaining the keys to the White House have surged since the presidential debate against Joe Biden. The implied probability of a second Trump term reached a high of 64% at one point, according to the Betfair exchange. It has since retreated to below 60%.

The potential impact of Trump 2.0 on climate policy has been a talking point for several months. However, in light of the recent surge in his chances of becoming president again, it’s worth revisiting some of policies most likely to see the chop and the potential impact on emissions in both the US and the rest of the world (see [*Climate policy uncertainty is on the rise*](https://www.carbonrisk.world/climate-policy-uncertainty-is-on/)).

Recall that during the his first term as president, Trump is estimated to have rolled back more than 100 environmental policies. Analysis by Rhodium estimated that had Trump remained in power, the rollback of domestic US regulations alone would have potentially added 1.8 Gt CO2e into the atmosphere by 2035.

Putting aside the dismantling of domestic environmental regulations, Trump’s most notable (read notorious) move was announcing the US withdrawal from the 2015 Paris Agreement. It took three years to actually leave, but in doing so, the US became the first (and only) nation to formally withdraw from the climate accord.

Although the US subsequently re-joined the accord under Biden the chances of Trump having a change of heart towards global climate policies appears slim. Labelling the Paris Agreement as “a rip off of the United States” during the TV debate with Biden, it will come as no surprise that Trump is likely to pull the US out of the climate accord for a second time.

This time Trump might go even further and make it much more difficult for subsequent administrations to re-join. A recent article in Politico highlights the possibility that Trump might remove the US from the United Nations Framework Convention on Climate Change (UNFCCC). This is the framework that underpins global climate talks:[1](#footnote-1) 

> “Doing so would effectively end U.S. participation in global climate talks, obliterating international cooperation when nations are still far off track from goals to limit warming to 1.5 degrees Celsius since the pre-industrial era.  
>  
> A U.S. departure would impede the UNFCCC’s operations, as the U.S. is a major funder of the treaty. It also could erect more significant hurdles for a future president to rejoin the Paris climate agreement.  
>  
> Leaving the UNFCCC, which also would take one year, would also excuse the U.S. from contributing to funding streams aimed at helping developing countries reduce their emissions and respond to the effects of climate change.”

The decision by the US to leave the climate accord in 2016 led to a malaise in global climate negotiations. But the impact was arguably offset to some extent by the strength of commitment elsewhere in the world, and in particular Europe. With the macro and political backdrop now much more hostile to ambitious climate policies, the threat to progressive global climate talks is much greater.

_This post is for paying subscribers only._
### Bringing home the bacon, sustainably
URL: https://www.carbonrisk.world/bringing-home-the-bacon-sustainably/
Last updated: 2025-08-21T10:36:25.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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---

*Estimated reading time \~ 8 mins*

![white pig](https://images.unsplash.com/photo-1537033206914-9d3551ff8103?fm=jpg&w=3000&auto=format&fit=crop&q=60&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Pascal Debrunner](https://unsplash.com/@debrupas?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/white-pig-b-zyMn%5Fe%5FR4?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

No country has yet succeeded in implementing a carbon price on agricultural emissions.

Over 20 years ago the then-Labour government of New Zealand proposed a levy on livestock emissions. It’s millions of sheep and cattle are responsible for around half of the country’s emissions, ahead of those from the power generation and transportation sectors. What became known as the “back-door-tax”, or more commonly the “fart-tax”, kicked up such a stink among farmers that the government eventually beat a retreat.

Efforts to put a price on emissions saw a comeback under Jacinda Ardern’s government. Rather than be forced to comply with New Zealand’s ETS (with the inherent uncertainty that presents), a separate proposal was developed that would see farmers who met a minimum threshold pay a levy based on their livestock emissions (see [*New Zealand's carbon market: The carbon trade you've probably never heard of*](https://www.carbonrisk.world/repost-new-zealands-carbon-market/)).

The price would be determined by the government and would reflect the country’s progress in cutting methane emissions by 10% between 2017 and 2030\. One proposal for a methane pricing framework set out a levy that would rise from $NZ3.70 (€2.10/ $2.30) per tonne of CO2e in 2025, to around $NZ6 and $NZ12 per tonne of CO2e by 2030\. The government also proposed to introduce incentive payments to adopt less carbon intensive technology, while also rewarding farmers for sequestering carbon.

First announced in 2022, the levy was due to come in by the end of 2025\. Or at least it was. Ardern’s Labour Party were booted out of government in October 2023, and in the past couple weeks the Conservative Party confirmed suspicions by announcing that the levy would now be canned.

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### Heavy lies the krone

On the other side of the world, in one small but important country in Europe, things are moving in the opposite direction. Denmark’s coalition government announced this past week that it will introduce the world’s first tax on agricultural emissions in a bid to meet its 2030 climate target. Like New Zealand, Denmark is heavily dependant on farming (its a major pig and dairy exporter), with agriculture responsible for around one-third of the country’s emissions. Do nothing and farming was projected to account for almost half (46%) of Danish emissions by 2030.[1](#footnote-1) 

The current government came into power in 2022 and its programme included a commitment to develop a system for pricing emissions from agriculture. The proposed levy, which will start in 2030 at DKr300 (€40 or $43) per tonne of CO2, is expected to rise to DKr750 (€100/$108) per tonne of CO2 by 2035\. The tax will be phased in gradually with a 60% basic tax reduction for at least the first two years. The proceeds from the levy will be returned to farmers in the form of a transition support pool to help the sector cut its emissions. Nevertheless, even at the discounted rate, the 2030 carbon levy is 8 times higher than the initial tax proposed in New Zealand.

The so-called “green tripartite” agreement between the Danish government and leading industry, agriculture and environmental groups could not be more different than New Zealand’s experience. At the same time that the levy was announced, the government also introduced a slew of other policy reforms. For example, the state has committed to constructing 250,000 hectares of forest, there will be a subsidy scheme for the storage of biochar produced using pyrolysis, and it will establish a new green fund, among other initiatives to support the agricultural sector transition to more sustainable practices (see [*Char grilled: Why biochar is the most promising carbon removal technology*](https://www.carbonrisk.world/char-grilled/)).

Denmark, like many other European countries, also imposes a separate carbon tax in addition to the EU ETS. Covering 35% of the country’s emissions, the Danish carbon tax was priced at €24.37 per tonne of CO2 in 2023 (the European average is €44.49 per tonne of CO2). It means that Danish heavy emitters face an carbon price exposure of almost €100 per tonne (€24.37 + EUAs \~€70). The proposed 2030 carbon tax is significantly below this level, potentially skewing investment in decarbonisation towards those industries that already bear a high carbon cost.[2](#footnote-2) 

Denmark’s dairy and cattle farmers will be hit particularly hard by the levy given their high carbon intensity. Based on the average cow emitting 6 tonnes of CO2 per year, Danish farmers would incur an initial charge (including the 60% deduction) of €96.50 per cow each year, rising to €603 per cow assuming the full force of the tax comes in by 2035 (i.e. with no tax reduction).

A better way of thinking about the cost is on a per kg of protein basis. The carbon footprint of beef is estimated to be 17 kgs of CO2 per 100g of protein. The initial cost will be €0.68 per 100g of protein, rising to €1.7 per 100g of protein in 2035\. In contrast, pigs are much more carbon efficient producers of protein, emitting less than 25% of the CO2 per 100g of protein than beef cattle. For pig farmers the cost of the tax will be a €0.16 per 100g of protein at first, rising to €0.4 per 100g of protein in 2035.

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

### Stick or switch

Analysis published in February by the expert advisory group outlined three models based on different price levels for the levy. If emissions are priced at the high end (i.e., DKr750 (€100/$108) per tonne of CO2), cattle and dairy farmers could see their production decline by around 20%, output from arable farmers would drop by 12%, while overall agricultural output would fall 15%.[3](#footnote-3)

This seems overly pessimistic. The carbon price coupled with the government incentives will spur innovation. For example, earlier in the year the Danish government announced that they had set aside around €70 million to finance feed additives that would halt the fermentation process inside the stomachs of cows, preventing the production of methane. The technology could cut methane emissions from cows by 30% by 2030.

Other research also based on DKr750 suggests that the tax would increase the proportion of Danish farms with a negative net income from around 25% at the moment to 45% around 2030\. This would force some of farmers, especially small holders on the margin, to consider selling up.

For larger agribusiness, better able to manage the impact of the levy, the opportunities could be substantial, especially if exports can secure a premium for low carbon dairy, beef, and bacon. However, as the recent high court ruling against Danish Crown, Europe’s largest pork producer, for misleading consumers with “climate-controlled pork” makes clear, there is no place for greenwashing (see [*Better in than out: The worlds largest meat and dairy corporations are under pressure to cut greenhouse gas emissions*](https://www.carbonrisk.world/turning-sour/)).

The overall impact of the law - as announced this week - is estimated to result in a 1.8 Mt reduction in CO2 emissions by 2030, with the potential for a 2.6 Mt CO2 decline. Even if the law only achieves an emission reduction of 1.8 Mt CO2, it would close the current expected shortfall in meeting the 2030 climate target by 70%.

The pushback from critics who say that agricultural emissions can’t be taxed directly is that accurately measuring emissions from livestock is very difficult. However, because Danish farmers are obliged to report the number and types of animals that they rear as part of national food security regulations, the administrative hurdle required to calculate methane emissions is though to be minimal.

One potential knock-on effect of the levy is on the production of biomethane in Denmark, one of the most developed markets for biomethane across Europe. In 2022, almost 40% of Denmark’s gas consumption was biomethane and the country is on course for 100% by 2030\. In late 2022 oil and gas major Shell agreed to buy Denmark’s Nature Energy, Europe’s largest producer, for €1.9 billion.

Manure is one of the main feedstocks for the biomethane industry alongside municipal waste, crop and forestry residues. If there’s less biomethane available from manure then it could mean more demand for natural gas as well as making it harder for industries to use it to decarbonise (see [*Biomethane is the killer application Europe needs to decarbonise*](https://www.carbonrisk.world/biomethane-is-the-killer-application/)).

Denmark’s agricultural carbon tax is a massive step forward for carbon pricing. For a continent widely thought to be suffering a green backlash and plagued by agricultural populism, the announcement gives hope that it can be used as a template elsewhere in Europe. This would reduce the risk of carbon leakage (i.e., an increase in carbon intensive farming practices elsewhere in Europe), and give farmers confidence to invest in cutting emissions, without fear that the tax might suffer the same fate as New Zealand’s.

---

**👋 If you have your own newsletter on Substack and enjoy my writing, please consider recommending** [**Carbon Risk**](https://carbonrisk.substack.com/) **to help grow this amazing community of readers! Thank You!👍**

---

[Europe's green backlash was priced in a long time ago Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭 If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-54.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/91a0219e-35a8-4a4a-a756-a42a7148f490_1296x872.png)](https://www.carbonrisk.world/europes-green-backlash-was-priced/)

---

1. https://via.ritzau.dk/pressemeddelelse/13927192/regeringen-og-parterne-i-gron-trepart-indgar-historisk-aftale-om-et-gront-danmark [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://taxfoundation.org/data/all/eu/carbon-taxes-in-europe-2023/ [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://skm.dk/aktuelt/publikationer/rapporter/groen-skattereform-endelig-afrapportering [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
### The carbon moonshot
URL: https://www.carbonrisk.world/the-carbon-moonshot/
Last updated: 2025-08-21T10:36:26.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 10 mins*

In 2020 Microsoft announced that it would be carbon negative by the end of the decade, taking account of both its operational (Scope 1 and 2) and supply chain emissions (Scope 3).

A bold pledge and one that Microsoft described as their ‘carbon moonshot’!

But that wasn’t the end of their ambitions. The tech company also announced plans to “remove from the environment all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975,” by 2050.[1](#footnote-1) 

Recognising that none of this would be possible simply by cutting emissions alone, the company outlined that it would deploy $1 billion of its own capital “to accelerate the development of carbon reduction and removal technologies that will help us and the world become carbon negative,” while also supporting the development of new policy initiatives that supported these technologies.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e3353a9d-76a5-466a-8c9c-97eb2737d2f0_864x496-1.png)

Source: Microsoft

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We’re beginning to see the impact of Microsoft’s commitment to carbon dioxide removal (CDR). The growth in durable CDR credit purchases has been explosive since 2022 with the market growing more than 7-fold to 4.5 Mt in 2023\. Alexander Rink, co-founder of CDR.fyi highlights the sheer scale of the tech giant’s involvement in the CDR market in a recent article:[2](#footnote-2) 

> Peel one layer beneath the surface, however, and concerns emerge. One company, Microsoft, now accounts for roughly ⅔ of cumulative durable CDR purchases. Said another way, they have purchased almost twice as much durable CDR as all other companies on the planet. Combined.  
>  
> A second group of purchasers, which we term Leaders, take up spots 2 to 10 on the CDR.fyi leaderboard. They include proactive and forward-thinking companies such as Stripe, Shopify, Alphabet, Meta, and others in the Frontier consortium; the NextGen buying group; as well as Airbus, Amazon, BCG, and Boeing, to name a few. While they continue to be significant contributors, they helped bring this market into being 2020 - 2022 and paved the way for Microsoft to enter in a big way in 2023.  
>  
> The drop-off, however, is dramatic: Microsoft’s cumulative CDR purchasing volume being 150x that of the last of the 10 in the Leaders group, Climate Cent Foundation at #11 on the CDR.fyi Purchaser leaderboard. Another 300 purchasers collectively account for 9% of the total market to date.

The latest data suggests that the global CDR market will continue to grow in 2024\. Recent activity suggests that CDR purchases are likely to increase to 5.2 Mt in 2024, a 15% rise on 2023 volumes. Microsoft is again the largest source of absolute demand growth (up 0.4 Mt), but as other buyers are also growing at the same rate, Microsoft’s dominance remains broadly stable at close to 70%.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/0acd3153-1890-4ec3-98ec-6c40a2beba0a_565x426.png)

Source: CDR.fyi

The largest CDR deal to date was signed earlier in the summer when Microsoft announced a 10-year 3.3 Mt CO2 offtake agreement with Stockholm Exergi. The energy company runs a biomass plant in the Swedish capital which also supplies heat for district heating systems. Stockholm Exergi will begin construction of a BECCS unit at the plant in 2025, and when its finished it will be able to capture 0.8 Mt of CO2 emissions per year. It follows a previous deal one year earlier in which Microsoft agreed to purchase 2.67 Mt CO2 over 11 years from Danish energy company Ørsted, also employing BECCS technology.

It’s important to remember that CDR purchases ≠ the simultaneous removal of CO2 from the atmosphere. CDR purchases are typically used to help accelerate the development of CO2 removal capacity, and then backed up by actual CO2 removal at some point in the future. CDR purchases are often known as advanced market commitments (AMC).

In contrast to the exponential growth in CDR purchases, actual CDR removal is doubling roughly every year. In 2023 125kt of CO2 was removed from the atmosphere using technology based CDR, less than 3% of CDR purchase volumes. Microsoft purchased 3.5 Mt of CDR credits (on an annualised basis) in 2024, but it will need to back this up with actual CDR removal to come close to meeting its 2030 target. And remember the company will need more than 5 Mt of actual CO2 removal per year to meet its 2030 target.

### **AI growth signals more demand for CDR**

Rather than moving towards being carbon negative by 2030, the company’s emissions have been going up. The latest data shows that Microsoft’s emissions in 2023 were 29.1% higher than when the pledge was made in 2020.

While it’s Scope 1 and 2 emissions declined 6.3% versus the 2020 baseline, its Scope 3 emissions, which account for the bulk (>90%) of Microsoft’s carbon foot print, have surged by 30.9%.

_This post is for paying subscribers only._
### Europe's green backlash was priced in a long time ago
URL: https://www.carbonrisk.world/europes-green-backlash-was-priced/
Last updated: 2025-08-21T10:36:27.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

\*\*\* was kind enough to interview me after reading this article. Check out my interview at 25:46, or listen to the whole podcast. Highly recommended podcast on all things climate tech! \*\*\*

[ClimateX's £18m A round, Political Risk, and London Climate WeekRichard Delevan reports from London Climate Week 2023\. Starting at the Groucho Club, he brings listeners to the flagship event at the ExCel, showcasing the vibrancy of the climate tech sector. He highlights interviews with key industry leaders including Duncan Reid of Reset Connect,![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b41ad73c-ae0c-49d3-826d-13df57d4d076_1000x1000.png)Wicked Problems](https://news.wickedproblems.uk/p/climatexs-18m-a-round-political-risk?ref=carbonrisk.world)

---

*Estimated reading time \~ 6 mins*

> *“Our brain uses a really clever and almost science-fictional trick that prevents us from living in the past: we look into the future. Our visual system is continuously predicting the future, and the world that you are now perceiving is the world that your visual system has predicted to be the present in the past.” - Magician Gustav Kuhn*

As most readers will no doubt know, Europe’s Green parties suffered a serious backlash in the recent European Parliament elections. In Germany their share of the vote fell from 20.5% in 2019 to 11.9% in 2024, while in France it dropped by 8 percentage points to 5.5%. The overall number of Green seats in the EU Parliament fell from 74 to 53, one more than their position prior to the 2019 elections.

EU elections normally struggle to get much attention. Domestic priorities and political stories tend to take precedence. Not this time. As the surprise decision by President Macron to hold legislative elections later this month suggests, the political reverberations from the European Parliament elections may only be beginning.

It’s worth taking a step back and looking at what the world was like a mere five years ago. The strong performance by the Greens in 2019 occurred during a remarkable period of benign macro and political conditions. It’s hard to look back at that time now and not appreciate just how good things were.

Alas, periods of calm tend to sow their own demise. It wouldn’t be long before pandemic induced lockdowns, conflict infused energy price shocks, and a migration fear-led swing to far-right political views would take over the narrative.

The year 2019 may prove to be a high-water mark for European climate ambition, one that could take years to return to.

But that doesn’t mean Europe regresses, just that it doesn’t move forward at the speed that many expected (and hoped for) a few years ago. European policy is characterised by slow and deliberate movements forward. Higher climate ambition may be kept in check, but that does not mean that the current set of policies will be unwound.

It’s with that context in mind that we look at the EU’s Green Deal. To recap, the Green Deal was unveiled in late 2019 by Ursula von der Leyen, days after she became president of the European Commission (EC). It’s a package of policy initiatives which aim to set the EU on the path to reaching climate neutrality by 2050\. For von der Leyen, the Green Deal was (and still is) her flagship project.

_This post is for paying subscribers only._
### Why CDR regulation could deter climate mitigation
URL: https://www.carbonrisk.world/why-cdr-regulation-could-deter-climate/
Last updated: 2025-08-21T10:36:28.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 10 mins*

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/72ca3584-3086-48ae-93e6-2b874dfa36a9_2069x1382-4.png)

Photo by [Micaela Parente](https://unsplash.com/@mparente?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/people-on-shore-GpOpP4YPu30?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Moral hazard refers to the tendency for individuals or institutions to take on more risk when they are insulated from the potential consequences of their actions. The term originates from the insurance industry and recognises that those with some level of protection might be more careless compared to those without.

For example, doing without expensive off-street parking for your vehicle if its insured against being vandalised, cycling fast down a steep hill safe in the knowledge that your helmet will save you should you fall, or speculating with OPM (other people’s money) confident that any gains will be yours, while losses are for someone else to worry about.

Moral hazard has nothing to do with morality. It has everything to do with incentives, and how people behave when risk sharing is skewed.

Moral hazard can make insurance markets more expensive and less efficient. Safety features make cyclists and drivers feel safer, but perhaps at the expense of pedestrians. Meanwhile, moral hazard can also cause financial markets to depart from any sense of fundamental value. But without insurance, road safety improvements, and financial markets, a great many things would be impossible to do.

And despite much hand-waving regarding it’s impact, there is surprisingly little research into understanding how big a problem moral hazard is. The challenge is that moral hazard costs are conjectural, difficult to quantify, and often only become apparent with the benefit of hindsight, sometime in the distant future.

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### **Moral hazard in carbon markets**

The argument that companies reliance on carbon credits is delaying action to decarbonise is well known. Critics suggest that by purchasing carbon credits, moral hazard looms larger and larger. Net zero claims give those who purchase credits - as well as other heavy carbon emitters - undue comfort that climate targets can be easily met. You just need to shell out a few dollars per tonne of CO2 to cover your emissions. Job done! The outcome some fear is that this leads to ‘mitigation deterrence’, a slightly misleading term that more accurately means deterring emission reductions.

Fortunately, there is very little evidence that moral hazard exists in the verified carbon market (VCM). Indeed, the opposite is true. Analysis by Trove Research found that firms that voluntarily purchased a ‘material’ number of carbon credits cut their emissions by 6% per annum between 2017 and 2022 (based on the median), double the rate of decarbonisation as those firms that did not purchase carbon credits (see [*Carbon credits - a permission to pollute, or a signal to decarbonise?*](https://www.carbonrisk.world/carbon-credits-a-license-to-decarbonise/)).

Carbon dioxide removal (CDR) is fast becoming the next battleground.

_This post is for paying subscribers only._
### Repost: Resolving The Green Paradox
URL: https://www.carbonrisk.world/repost-resolving-the-green-paradox/
Last updated: 2025-08-21T10:36:28.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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---

*Estimated reading time \~ 7 mins*

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/33fc1107-01a6-4da6-af6d-fb3bffcd7cc9_495x710-1.png)

The conventional argument behind the introduction of climate policies (such as carbon pricing, subsidies for renewable energy, and energy efficiency), is that consumers of energy will respond by switching over to lower carbon energy sources and becoming more energy efficient. Meanwhile, producers of fossil fuels, who now expect demand for their product to decline in the future, will respond by cutting production and instead, invest in alternative, low carbon sources of production.

But is that really how the market works? There is an argument that climate policy announcements could have exactly the opposite impact to that intended, at least when looking at it from a global perspective, and considering carbon emissions are a global problem that is the only perspective that matters.

Let’s dive in.

First, lets have a look at the demand response. Introducing climate policies intended to decrease demand for fossil fuels will not lead to a global decline in emissions if participation is limited to a certain low percentage of the global economy. The reason why is that demand restraint (and lower emissions) from those countries introducing green policies is likely to be outweighed by the additional consumption (and higher emissions) from those countries that have not introduced green policies - the latter benefiting from lower fossil fuel prices.

As I note in [Harnessing the invisible fuel](https://www.carbonrisk.world/harnessing-the-invisible-fuel-to/), the knock-on effect of successful energy efficient measures introduced in North America, Europe and other developed economies will be a drop in the price of coal, oil and natural gas. For developing nations hungry for affordable energy, the drop in the price of fossil fuels will only fuel demand for gasoline consuming vehicles and fossil fuel-fired generation plants.

Secondly, there will be a reaction on the supply side from fossil fuel producers, but maybe not the one that you expect. The ‘Green Paradox’ theory suggests that to avoid the negative consequences of future climate policies fossil fuel owners will seek to frontload production. This way they can maximise the rent they receive from their reserves, while also seeking to reduce the risk that those same reserves are rendered ‘stranded’, i.e. no longer able to generate an economic return, when climate policies become overwhelming in the future.

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The assumptions underpinning the Green Paradox are consistent with those of Hotelling’s rule, i.e. that resource owners are forward-looking, revenue maximising, and base their production decisions on expectations of future prices. Hotelling’s rule states that the most socially and economically profitable extraction path for a non-renewable resource (one blind to the externalities of carbon dioxide emissions) is one along which the price of the commodity, determined by the marginal net revenue from its sale, increases at the rate of interest. If an oil producer believed that prices were not going to keep up with higher interest rates, then they would be better off selling as much as possible for cash and then purchasing bonds. Conversely, if they expected prices would increase faster than the prevailing interest rate, they would be better off keeping the oil in the ground.[1](#footnote-1)

The Green Paradox theory was originally put forward by German economist, Hans-Werner Sinn in 2008, who argued that if the announcement of climate policies “reduce the discounted value of the carbon price in the future more than in the present…resource owners will have an incentive to anticipate the price cuts by extracting the carbon earlier.” That’s exactly the opposite of what climate policies set out to achieve. Instead of cutting production, the rational decision by individual fossil fuel producers is to increase output, monetising more of their reserves now.[2](#footnote-2) [3](#footnote-3)

In reality, there are three key reasons why the Green Paradox may not be as strong as the theory suggests. First, demand is typically highly price inelastic and so if producers frontload supply excessively the price drop may be too steep to bear. Second, rigidities in expanding hydrocarbon production capacities (infrastructure, reservoir decline rates) limit the ability of producers to expand supply. Finally, the sensitivity of fossil fuel prices to expected future carbon prices varies - relatively small for crude oil, but much larger for coal.

As I explain in [*Big Oil's bigger brothers*](https://www.carbonrisk.world/big-oils-bigger-brothers/), when it comes to channelling the ire of environmental campaigners, the five major energy companies - BP, Shell, Total, Exxon and Chevron - tend to get all the attention despite only accounting for 15% of global oil and gas output. But it’s the state-led national oil companies (NOC’s) - the so-called “hidden half” of the oil and gas industry - that account for the majority of global fossil fuel related emissions.

And while some NOC’s have recognised that they will not be able to compete in a carbon constrained world, others are doubling down, betting that only the lowest cost, least emissions intensive oil and gas producers will win the prize to supply the “last barrel”. It’s these producers (as well as an increasing number of oil and gas majors) that are economically rational enough to see that they should be investing in increasing their productive capacity, not scaling back to meet net zero.

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

How can we resolve the Green Paradox? Carbon taxes are ineffectual since they only raise the marginal cost of fossil fuel extraction, resulting in a small but unpredictable impact on emissions. There is also the risk that subsequent governments decide to water down or remove the carbon tax entirely if it suits their political needs. According to Sinn, only by expanding the use of cap-and-trade systems such as the European emissions trading scheme (ETS) across the globe, will we bind all countries and industries (but especially the fossil fuel business) into only producing what is consistent with meeting net zero:

> “I would argue that nothing short of binding global agreements on quantity constraints can successfully reduce the speed of global warming. Measures that simply work through price signals are not sufficiently reliable to do the job, as it is the changes in prices, rather than their levels, that will determine success; and it is easy enough to get the price changes wrong through re-optimization by successive generations of policymakers.”

At the moment the world is falling well short of this ideal. Almost one-quarter (24%) of global carbon emissions are covered by ETS’s or carbon taxes, according to the World Bank’s State and Trends of Carbon Pricing 2024 report. Approximately 18% of emissions are covered by an ETS, carbon taxes cover 5.5%, while 0.5% is covered by both an ETS and carbon taxes.[4](#footnote-4)

Nevertheless, the scope of global GHG emissions covered by carbon pricing is expected to grow substantially over the next decade, although not fast enough to meet the 60% by 2030 goal underpinned by the Global Carbon Pricing Challenge (GCPC). However, as I outline in [*It's the carbon price, stupid!*](https://www.carbonrisk.world/its-the-carbon-price-stupid/), it’s unlikely to cover more than 40% by the end of the decade.

Governments seeking to introduce an emissions trading scheme must signal three things to the market to avoid the Green Paradox: rapid introduction (not decades), high participation rates (little or no free allowances), and high ambition (big emission reductions and an appetite for high carbon prices). Unfortunately, this tends to be the opposite of what occurs. Instead governments seek to introduce cap-and-trade schemes gradually, softening the blow for industry via free permits and low prices.

Resolving the Green Paradox is probably the greatest challenge we face if we are to decarbonise the global economy.

---

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[The climate casino\*\*\* This is the last Carbon Risk article for 2023\. I will be back in the first week in January. Thanks again for your support and I wish you all a merry Christmas and a happy New Year \*\*\* \*\*\* A couple weeks ago I was interviewed by Monna Dimitrova from Homaio. We talked about my reasoning for launching Carbon Risk, why carbon markets are important and how they can have an environmental impact, plus some of the things I’m watching out for in the future. Please check out the article![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-57.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/4495c26b-0050-495d-8554-c3ff62e01bbe_1000x774-jpeg-1.jpg)](https://www.carbonrisk.world/the-climate-casino/)

---

1. https://www.hanswernersinn.de/dcs/2008\_ITAX15\_Public\_Policies\_Against\_Global\_Warming.pdf [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. http://links.jstor.org/sici?sici=0022-3808%28193104%2939%3A2%3C137%3ATEOER%3E2.0.CO%3B2-G. [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. Sinn’s book, *The Green Paradox: A Supply-Side Approach to Global Warming,* was published by MIT in 2012\. [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://openknowledge.worldbank.org/entities/publication/b0d66765-299c-4fb8-921f-61f6bb979087 [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### The RGGI power grab
URL: https://www.carbonrisk.world/the-rggi-power-grab/
Last updated: 2025-08-21T10:36:31.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

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---

*Estimated reading time \~ 7 mins*

The benchmark RGGI carbon futures contract has increased by \~40% since the start of the year to almost $23 per tonne - by far the best performing compliance carbon market of 2024.

Three factors are behind the surge in the cost of carbon in the northeast US regional compliance market: drought conditions in Québec affecting hydroelectric power flows into the US northeast, surging power demand forecasts due to expected high temperatures and data centre expansion, and the exhaustion of the RGGI strategic reserve of emission allowances (the so-called Cost Containment Reserve, or CCR).

![Image preview](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/045b9db1-29a9-4b3a-a776-855a7ae66953_800x800-jpeg-1.jpg)

### “Battery of the US northeast” running on empty

During both February and March 2024, Canada imported more electricity from the US than it exported. Canada is usually a net exporter as hydroelectric facilities send power south of the border. However, a prolonged drought in Canada and reduced water volumes available to its hydroelectric plants led to a sharp drop in power generation (down >15% year-on-year).

_This post is for paying subscribers only._
### India's catch-22
URL: https://www.carbonrisk.world/indias-catch-22/
Last updated: 2025-08-21T10:36:32.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents** [**\[Start here\]**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

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---

*Estimated reading time \~ 9 mins*

It’s been a momentous week in India where incumbent prime minister Narendra Modi won a third term in office, but his party, the BJP, fell short of maintaining its parliamentary majority. The election pollsters, much of the voting public, and the financial markets were clearly taken by surprise at the unexpectedly slim margin of victory. The risk is that as the BJP get bogged down in coalition politics, the speed at which the economy is reformed will naturally begin to slow.

Capital Economics for one believe that Modi is still in a strong position to introduce reforms and maintain a strong economic growth rate (India’s GDP grew 8.2% in 2023-24, up from 7% in 2022-23), “The next Modi administration still has enough of a mandate to enact reforms that will keep potential growth at 6-7%. That would fall short of the double-digit growth rates that the very best-performing EM economies have managed to sustain. But growth of 6-7% would nevertheless still place India among the top third of performers at its stage of development.”

India needs to maintain a strong rate of economic growth. Last year it became the most populous country in the world, overtaking China, and the only way to drag hundreds of millions of people out of poverty is to grow the economy, and ensure as broad a share of the population as possible are able to share in that prosperity. That growth comes at a cost however. India is at a much earlier state of development than China, and the likelihood is that energy consumption and hence emissions have significant room to grow.

In contrast to India, there are encouraging signs emerging that China’s greenhouse gas (GHG) emissions at least may have now peaked. China’s emissions from fossil fuels and cement production finally dropped in March (down 3%), ending a 14-month consecutive increase, with wind and solar generation reportedly meeting 90% of the country’s power demand growth in March. If the trend towards lower emissions in China is confirmed over the rest of the year, global attention will begin to shift towards India, and the pressure on the government to reform the economy towards a low-carbon future will grow.[1](#footnote-1) 

The urgency with which to act is likely to come from within too. The staggered, six-week long election was marred by extreme high temperatures and gave a snapshot of what could become a more common occurrence. More than 37 cities in parts of northern and central India have been sweltering under temperatures in excess of 45°C (113°F). Average temperatures in the capital New Delhi have been some 15% above the long-term average since the start of April.

India is the seventh most climate-vulnerable country with nine of its states among the top 50 most vulnerable regions globally, increasing the risk of flooding, disease, and crop failure. As the country’s leaders worry about how to maintain a strong rate of economic development, extreme heat should also be a concern due to its adverse impact on human productivity, risk of power outages, etc.

Whatever happens, mitigating the risk of climate change and adapting to warmer and more volatile weather conditions is likely to become a more pressing issue for the next government to address. Lets dive in and see what the trends say about the challenges facing India as it seeks to mitigate climate risk, while also supporting economic development.

_This post is for paying subscribers only._
### The knock-on effect: The curious case of California's LCFS program
URL: https://www.carbonrisk.world/the-knock-on-effect-the-curious-case/
Last updated: 2025-08-21T10:36:33.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 15 mins*

> *“The knock-on effect: The idea that one action or event has secondary or indirect consequences. In economics the knock-on effect is a reminder that the economy operates as a system in which any action will have subsequent reactions that cease only when a new equilibrium has been reached.” - Oxford Press Dictionary of Economics*

It’s very easy for policymakers to fall into the trap of thinking that there is some invisible line marking the boundary by which a particular policy affects the environment. The mistake that’s often made is failing to consider the knock-on impacts of the policy on market participants decision making, including those from outside the sphere of influence the policy is directly targeted at.

Government policies tend to be most effective when they directly address the problem they are trying to solve. Once they start to impact indirectly, or try and influence more than one policy outcome, policies inevitably result in unintended consequences, invariably negative.

It’s with that in mind that we look at California’s Low Carbon Fuel Standard (LCFS) program. To recap, the current target underpinning the LCFS program is a 20% cut in the carbon intensity of the states transportation fuel pool by 2030, and by 80% by 2050, compared with a baseline year of 2010 (see [*Everything you need to know about Low Carbon Fuel Standards (LCFS)*](https://www.carbonrisk.world/everything-you-need-to-know-about-792/)).

The LCFS imposes a market based carbon cost on transport fuels that have a carbon intensity (CI) score above the state’s requirements, and in theory at least, is designed to incentivise the transportation sector to gradually move towards meeting the targets.

The CI score is a measure of all the greenhouse gases (GHG) emissions associated with the production, distribution and consumption of a fuel. CI scores are developed based on a life-cycle analysis methodology, with varying scores due to feedstock types, origin, raw material processing efficiencies and use within transportation.

Each LCFS credit represents one tonne of CO2 reduced below this requirement. If an obligated entity (such as refiners, petroleum importers and wholesalers) has a deficit of LCFS credits then they are required to either generate additional LCFS credits or purchase them from another entity that has a surplus, and who is willing to sell them.

### Technology neutral, or not technology neutral

At first glance there’s much to be admired about the scheme. It gives the appearance at least of being technology neutral. It is up to the market to decide where to invest in innovation and how much capacity is required to meet the target.

Dig a little deeper and you find that’s not strictly true.

_This post is for paying subscribers only._
### The Currency of Decarbonization
URL: https://www.carbonrisk.world/the-currency-of-decarbonization/
Last updated: 2024-05-31T11:01:22.000Z
_No content available._
### The carbon footprint fallacy
URL: https://www.carbonrisk.world/the-carbon-footprint-fallacy/
Last updated: 2025-08-21T10:36:34.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

![footprints on desert towards mountain](https://images.unsplash.com/photo-1498144668414-48bf526766cf?q=80&w=1000&auto=format&fit=crop&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

*Estimated reading time \~ 8 mins*

Describing the financial industry’s attempts to help investors allocate capital on the basis of ESG as “an unholy mess that needs to be ruthlessly streamlined”, The Economist magazine once argued that ESG should be boiled down to the letter E for environment.

The author of the piece goes further and argues that even within ‘E’, investment screening should focus on one simple measure: emissions. As the magazine goes onto suggest, the regulatory burden is already moving in that direction anyway, while improved transparency will help investors avoid being exposed to carbon intensive companies:[1](#footnote-1)

> “Investors and regulators are already pushing to make disclosure by firms of their emissions more uniform and universal. The more standardised they are, the easier it will be to assess which companies are large carbon culprits—and which are doing most to reduce emissions. Fund managers and banks should be better able to track the carbon footprints of their portfolios and whether they shrink over time.”

Warren Buffett once said, “In the business world, the rear view mirror is always clearer than the windshield.” When a company reports its annual emissions to the regulator, or publishes the data in its annual report to shareholders, the data is akin to looking in the rear view mirror. Real-time emissions monitoring, such as that increasingly carried out by drones and satellites, is akin to looking out the side windows. For investors, what really matters is what’s coming up the road ahead. What path is the company’s carbon footprint going to take, why will it take that path, how much is it going to cost, and how sustainable is the drop in carbon intensity?

### Short term emissions trends don’t tell the whole story

In April the Financial Times (in partnership with Statista) published *Europe’s Climate Leaders 2024*, the fourth edition of the data set which ranks European companies in terms of who is doing best at cutting emissions. The research primarily focuses on those companies that have a) reported the largest reduction in Scope 1 and 2 emissions intensity (tonnes of CO2e per £ million in revenue) over a 5-year period (2017-22), and b) made further climate related commitments, such as being a signatory to the Science Based Targets initiative (SBTI) or collaborating with the CDP. Each company is then assigned a score based on these factors plus a few other emissions-based metrics (see *[Carbon intensity: The key to an economically sustainable green transition](https://www.carbonrisk.world/carbon-intensity-the-key-to-an-economically/)*).[2](#footnote-2)

This leaves much to be desired. The score doesn’t factor in the industry in which the company is operating in (i.e., on what scale are emissions hard-to-abate?), how far along it is in cutting emissions (i.e., have the ‘low hanging fruit already been picked?), nor the method or reason by which emissions have been cut (i.e., is it due to a drop in demand, or a decision to outsource production?).

The permanence of the emission reductions is important, and you can only gauge that if you understand the underlying reasons. If the drop followed a series of investments in new technology or energy efficiencies that ensures emissions stay low in the future, then a company really should receive a much higher score than one where the emission cuts are merely due to transitory factors. In short, it’s hard to separate the signal from the noise.

### Short termism, avoided emissions, and unlikely beneficiaries

A focus on short-term emission reductions could also discourage investment in more sustainable long-term solutions. For example, it’s not hard to imagine that a company active in the cement business might avoid investing in new but perhaps speculative technology, and instead focus on known iterative measures. Focus on the former and they might be downgraded in the eyes of myopic ‘E’ focused investors. Far better to incentivise a culture of innovation in which the impact of new technologies can percolate through the rest of the cement industry.

The same principles apply to innovation where it leads to decarbonisation in other often unrelated industries - so called ‘Scope 4 emissions. These are the ‘avoided emissions’ resulting from the production and use of more carbon efficient products, or the employment of services such as energy efficiency that avoid carbon emissions. As I explain in [*Scope 4 emissions: Unlocking low-carbon innovation*](https://www.carbonrisk.world/scope-4-emissions-unlocking-innovation/), if “all the incentives are focused on individual companies bearing down on their Scope 1, 2 and 3 emissions then we may be missing out on innovations that, while far from optimal at the individual firm or industry level, could have much larger net emissions benefits for the global economy.”

The carbon footprint of a company can also give a misleading picture of its exposure to carbon pricing. The key factor is cost-pass-through, in this case the degree to which the carbon price is transmitted along the value chain. Economic theory indicates that cost-pass-through is likely to be very high in markets where demand is highly price inelastic and consumers have little choice but to pay up. Market power tends to weaken the incentive for cost-pass-through as an individual firm might fear it will lose market share to a rival, while more fragmented markets tend to result in higher levels of cost-pass-through.

Jan Ahrens from SparkChange uses the example of Engie, the French multi-national energy company, as a business who benefits from higher carbon prices even though it emitted almost 25 Mt CO2 in 2023, “In their most recent annual report, Engie states that an increase of EUA prices by €2/EUA would INCREASE pre-tax income by €12m. Engie will thrive in a high carbon price future.” In addition to high levels of cost-pass-through in the EU power market, Ahrens highlights Engie’s generation portfolio (significant renewable capacity and low carbon intensity fossil fuel assets), suggesting that as carbon and power prices rise, its generation costs won’t increase as fast.[3](#footnote-3)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-62.png)

Get more from Peter Sainsbury in the Substack appAvailable for iOS and Android[Get the app](https://substack.com/app/app-store-redirect?utm%5Fcampaign=app-marketing&utm%5Fcontent=author-post-insert&utm%5Fsource=carbonrisk)

### Investing is more than just ‘green’ versus ‘brown’ stocks

The debate over whether carbon footprint is the correct measure or not goes to the heart of the issue for many climate orientated investors. Analysis published in 2023 by the University of Hamburg found that ‘green’ stocks (as measured by firms own reported carbon intensity) generally delivered higher returns than ‘brown’ stocks during the period 2012-2021, across all G7 countries with the exception of Italy. Although the pattern did reverse somewhat as the energy crisis took hold during late 2021 and into 2022\. As the report notes, other researchers who have examined this relationship have often come up with conflicting conclusions.[4](#footnote-4)

Ok, there’s some evidence - albeit inconclusive - that screening out ‘brown’ firms might improve returns for investors. But will it actually result in improved environmental outcomes, or is it just a means of reducing the stranded asset risk that could come with exposure to carbon intensive companies? Conventional thinking based on the power of divestment suggests that by not investing in ‘brown’ companies, investors are somehow starving them of capital, and in turn forcing them to either clean-up, or close down. However, as this article has demonstrated, focusing too narrowly on recent trends in a company’s carbon intensity can be misleading, and potentially damaging.

An alternative approach involves ‘tilting’, or otherwise investing in a ‘brown’ firm if it has taken corrective action to decarbonise, thereby rewarding a firm for investing in cutting its carbon intensity. The research, published by the European Corporate Governance Institute (ECGI) in 2023 suggests that the optimal strategy is to tilt if the investment in cutting emissions offers high return (tonnes of CO2 per $ invested). This is especially the case where managers have a strong stock option incentive in place, and where news of the company’s investment in decarbonisation is public knowledge.[5](#footnote-5) 

It may seem that divesting your capital from carbon intensive firms is the most responsible investing strategy as it hinders ‘brown’ firms from expanding, and reduces your exposure to climate transition risks (i.e. high carbon prices, stranded asset risk). However, being willing to provide capital to ‘brown firms’ that are best-in-class will encourage such companies to reduce their emissions.

The upshot is that there is too much focus on rewarding ‘green’ firms where the opportunity for gains in cutting emissions is marginal. That’s the carbon footprint fallacy. The much bigger prize comes from getting your hands dirty and investing in those ‘brown’ firms who have made a clear and transparent plan to decarbonise, and are incentivised to deliver.

---

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---

[Ready mixed Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭 If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-63.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/188c1ae2-065a-4889-a10f-1ab401b9aebd_1920x1440-jpeg-1.jpg)](https://www.carbonrisk.world/ready-mixed/)

---

1. https://www.economist.com/leaders/2022/07/21/esg-should-be-boiled-down-to-one-simple-measure-emissions [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.ft.com/climate-leaders-europe-2024 [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://www.linkedin.com/posts/janahrens1\_carbon-eua-activity-7178417697641099265-19G5/ [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://www.brookings.edu/wp-content/uploads/2023/01/WP83-Bauer-et-al\_1.12.23.pdf [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
5. https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=4093518 [↩](#footnote-anchor-5 "Jump back to footnote 5 in the text.")
### Backing BECCS
URL: https://www.carbonrisk.world/backing-beccs/
Last updated: 2025-08-21T10:36:34.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 4,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 12 mins*

It’s been over twelve months since the Drax power station in Yorkshire officially called time on coal, as the last of its generating units still to be burning coal was switched off. Once Western Europe’s largest coal-fired power station, the plant had long since converted most of its other units to burn biomass instead. Now the power station is looking to build the worlds largest bioenergy with carbon capture and storage (BECCS) project.

By capturing and permanently storing the carbon emitted from the power station, Drax claims that it will result in net carbon removal from the atmosphere. This requires two things to be true. First, the EU’s Renewable Energy Directive (since applied by the UK Government after Britain left the EU) counts electricity generated using biomass as renewable energy, which means that carbon emitted from the burning of biomass is offset as it grows. Second, capturing the emissions from the smokestack and then permanently sequestering the CO2 results in net negative emissions, i.e. carbon removal.

According to Drax, carbon capture technology will remove up to 8 Mt CO2 per year from the two biomass units. The first BECCS unit (capable of capturing up to 4 Mt CO2 per year) is due to become operational by 2030, with the second unit expected to come online in the early 2030’s. The captured CO2 will be piped under the North Sea for permanent storage.

BECCS continues to face critics who counter that a) using biomass to generate electricity should not be counted as renewable energy, b) biomass should not receive subsidies given its relatively high cost of generation versus renewables, c) BECCS does not adequately account for the emissions involved with the biomass supply chain, d) biomass extraction risks causing indirect negative environmental outcomes (habitat loss, displaced farmland, etc.), and e) BECCS has no track record in delivering carbon capture and storage on this scale.

The criticism has been especially acute in certain corners of Substack. For example, see *Cooking the Books: Exposing the lunacy of the Green New Math* by , and *A Pulp Fiction - Pt. 1: Burning trees to generate electricity is a quintessential form of "Sustainabilchemy"* by . Indeed, my first article on the subject (see [*BECCS - the carbon removal chimera*](https://www.carbonrisk.world/beccs-the-carbon-removal-chimera/)) wasn’t particularly sympathetic either, concluding that:

> …BECCS has very little in the way that it can offer the world seeking to accelerate the energy transition: inefficient conversion of sunlight energy, failure to scale generation capacity, and dubious carbon benefits claims. If governments look to support the development of BECCS capacity then they risk cementing in some poor outcomes that are likely to have adverse consequences for the energy transition and the environment.

Despite these drawbacks and the concerns outlined above, I’m coming round to the view that BECCS is in the process of being de-risked as environmental groups, corporations, and governments realise its better that BECCS be done well, than not at all.

Let’s dive in.

_This post is for paying subscribers only._
### It's the carbon price, stupid!
URL: https://www.carbonrisk.world/its-the-carbon-price-stupid/
Last updated: 2025-08-21T10:36:36.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 12 mins*

> *“we need broader and more ambitious carbon-pricing mechanisms worldwide. The price mechanism exists in order to allocate scarce resources, and in this case the scarce resource is the limited amount left in the atmosphere for further concentrations of GHGs. This, in fact, is the ultimate scarce resource, and it needs to be priced accordingly.”*

Almost one-quarter (24%) of global carbon emissions are covered by ETS’s or carbon taxes, according to the latest estimates from the World Bank. Approximately 18% of emissions are covered by an ETS, carbon taxes cover 5.5%, while 0.5% is covered by both an ETS and carbon taxes.[2](#footnote-2)

Although the total share of global emissions covered by carbon pricing is broadly unchanged relative to one year ago, the stable picture masks some important trends that are happening beneath the surface.

First, when a new ETS or carbon tax is introduced it increases the share of global emissions covered by carbon pricing. In total there are 75 ETS’s and carbon taxes currently in operation, a net gain of two over the past twelve months. One of the main additions identified by the World Bank is Australia’s reformed Safeguard Mechanism which has been transformed into an intensity-based ETS (see [*Everything you need to know about Australian Carbon Credit Units (ACCUs)*](https://www.carbonrisk.world/australias-reformed-safeguard-mechanism/)).

Second, remember that carbon pricing, and ETS’s in particular are designed to achieve a reduction in emissions. In the case of a cap-and-trade scheme such as the EU ETS, the linear reduction factor (LRF) details the rate at which the emissions cap is reduced year-on-year. For example, emissions covered by the EU ETS are estimated to have declined by 15.5% between 2022 and 2023, much faster than the 2.2% LRF in operation at the time. The decline in emissions inevitably means a lower percentage of the global economy is covered by carbon pricing.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/74d59f2b-fa0a-4504-b009-ea194c434b15_718x629-2.png)

Source: World Bank

### Growth in carbon price coverage unlikely to hit targets

One of the most important strategies to be announced at COP26 in 2021 was the Global Carbon Pricing Challenge (GCPC). The challenge laid down by the Canadian Government was to expand carbon pricing across the global economy, with a goal of covering 60% of GHG emissions by 2030\. The larger the percentage of global emissions covered by carbon pricing, the more efficient the allocation of scarce resources is likely to be, and the lower the carbon price will need to hit to achieve the required emission reductions.[3](#footnote-3)

Unfortunately the World Bank thinks that carbon pricing is unlikely to rise above 30% of global emissions in the near future. The World Bank estimates that if those ETS’s under development in the large economies of Brazil, India, and Turkey were to launch then they could account for 3% of global emissions. However, the share of emissions covered by these plus those of other smaller economies could account for almost 10% at the maximum (see [*No Turkish delight: Cheap Russian coal, macroeconomic disarray, and the EU's carbon border levy*](https://www.carbonrisk.world/no-turkish-delight/)).

In contrast to the trend historically whereby individual jurisdictions have implemented carbon pricing, the next 3-5 years could be dominated by commodity and sector specific carbon pricing. For example, the EU’s CBAM introduces a carbon price on the embedded emissions of certain carbon intensive products (iron and steel, aluminium, hydrogen, fertiliser, cement, and electricity) imported into the EU. The World Bank estimates that this represents between 0.15% and 0.6% of global emissions based on the current scope of the EU CBAM.

Other forms of carbon pricing target specific global industries. For example, CORSIA applies to international aviation and requires airlines who emit more than their baseline level of emissions to purchase CORSIA eligible carbon credits. Another example highlighted by the World Bank is the global carbon tax on maritime being considered by the International Maritime Organisation (IMO). Both schemes are currently scheduled to enter into force (i.e., mandated) in 2027\. The two schemes are thought likely to cover 1.5% of global emissions (see [here ](https://www.carbonrisk.world/the-skys-the-limit/)and [here ](https://www.carbonrisk.world/run-out-of-steam/)for the background).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/86a32377-24b5-4676-8153-740d07ec78b9_810x715.png)

Source: World Bank

The report doesn’t seem to consider the potential expansion in the Chinese ETS and the impact that could have on the share of global emissions. China’s ETS currently only covers the power generation sector, including some 2,200 utilities, responsible for 4.5 billion tonnes of GHG per year, or 40% of Chinese emissions (\~13% of global emissions).

Seven other carbon intensive industries (petrochemicals, chemicals, building materials, iron and steel, nonferrous metals, paper, and aviation), are expected to be included over the next few years. If all of these industries join it would mean that around 70% of China’s emissions are covered by carbon pricing. At 7.8 Mt CO2, China’s ETS alone would cover for \~22% of global emissions (see [*A battle for global carbon pricing supremacy is brewing: Why you need to pay more attention to China's carbon market*](https://www.carbonrisk.world/a-battle-for-global-carbon-pricing/)).

_This post is for paying subscribers only._
### Repost: Aluminium's climate paradox
URL: https://www.carbonrisk.world/repost-aluminiums-climate-paradox/
Last updated: 2025-08-21T10:36:37.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 9 mins*

*The global supply of low-carbon aluminium is under pressure this year as drought in China’s Yunnan province forces the curtailment of the regions aluminium smelters. About 12% of China’s output is powered by hydroelectric dams located in Yunnan, and the region is one of the few global suppliers of low-carbon aluminium.*

*The current difficulties affecting Chinese producers could be a boon for low-carbon aluminium suppliers elsewhere in the world. Aluminium is one of the few commodities that is able to generate a ‘green premium’ reflecting manufacturers willingness to buy low-carbon and the relative scarcity of the material (see* [*Deciphering nickels green premium*](https://www.carbonrisk.world/the-illusory-green-premium/))*.*

*This isn’t the first time Yunnan’s aluminium industry has suffered severe drought conditions. The province experienced the same problems two years ago as hot weather and a lack of rainfall forced smelters to cut production due to power shortages. Hydropower seems to be the most vulnerable form of energy generation to climate change, and in China, as it is the case elsewhere, more frequent and intense periods of drought have been the defining factor behind the decline in hydropower’s capacity factor (see* [*Utility player: Climate change threatens hydropower's under-appreciated role in the energy transition*](https://www.carbonrisk.world/utility-player/))*.*

*China accounts for 60% of global aluminium output, and up until recently smelters had been attracted by the cheap renewable energy in Yunnan. Solar and wind energy might be able to help, but what they really need is reliable baseload supply. The upshot is that the next wave of aluminium capacity is likely to be built in north-west China close to abundant coal reserves, and with it higher carbon emissions.*

*Note: The article below was first published in May 2023 behind the paywall, but is now free to view.*

---

Aluminium is often referred to as “congealed electricity”

One of the most notorious power hungry industries, it takes about 15 MWh of electricity to produce one tonne of aluminium. That’s more than three times as much energy as zinc and about 40 times more than copper or steel.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/aa0d70fe-2067-4e29-abb2-e5f592768a93_1025x553-3.png)

Producing aluminium is also highly carbon intensive. On average, mining and processing results in around 15 tonnes of CO2e emitted per tonne of aluminium produced. Overall, aluminium production emits some 1.1 billion tonnes of CO2 per year, accounting for around 2.5% of global emissions.

In addition to the huge power demands, the industry’s reliance on electricity generated using thermal coal underpins why it is so emissions intensive. Aluminium smelters consumed 880 thousand GWh in 2021, according to estimates by International Aluminium. Almost 55% of this electricity was generated via thermal coal (primarily in China), hydropower accounted for 30% (Europe and North America), with 10% coming from natural gas (Middle East), and the remaining 5% split between nuclear and other renewables.

**Power source used by primary aluminium smelters, 2021**

![Table II. Percentage of power sources utilized by primary aluminum smelters in 2021. (Data compiled from the IAI and the U.S. Geological Survey.)7-8](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/5c829cff-54f4-43d9-b9b4-914aa5b2d452_1874x1361-jpeg.jpg)

Source: International Aluminium

### **“Miracle metal” must do better**

Aluminium production is highly carbon intensive, yet without aluminium decarbonisation cannot take place. To see why, consider it’s attributes. Aluminium is lightweight but strong, good conductivity, resistance to corrosion, elasticity and easily recyclable. Aluminium has more than one nickname, and if the metal had feelings it would probably prefer it’s other name - the “miracle metal”.

Global demand for the metal could grow 50% to 108 million tonnes by 2050, according to recent projections by CRU. Growth in demand will be supported by population growth and industrialisation, but also due to its vital role in enabling the energy transition: it is used to lightweight electric vehicles, vital in solar power generation, green buildings and electricity cabling. However, the highest growth in terms of absolute demand is expected to come from the shift in the transportation sector to EVs.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a4bd43b4-b61b-4245-be30-1f6b879d3791_1209x499.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

Despite its good side, the “miracle metal” cannot escape its own carbon footprint being scrutinised by automobile manufacturers, governments and investors (see [*'Green' lithium*](https://www.carbonrisk.world/green-lithium/)).

There is increasing pressure from manufacturers with action-oriented climate targets to procure low carbon aluminium, also commonly known as “green aluminium”. Low carbon aluminium is defined as emitting 4 tonnes of CO2 or less, one-quarter of the global average carbon emissions from aluminium production.

Automobile companies, particularly European manufacturers are at the forefront of this trend. For example, Porsche recently announced a deal to supply with Norwegian aluminium and renewable energy company, Norsk Hydro to supply it with low carbon aluminium. In 2022, rival German car company, Mercedes also announced a similar deal with Norsk Hydro. Meanwhile, BMW's North American factories will receive aluminium sourced from Rio Tinto's hydro-powered aluminium operations in Canada.[1](#footnote-1)

All of these deals help to drastically cut the embodied emissions in their vehicles. For example, the aluminium used in Porsche’s Taycan electric sports car, which already consists of about 30% aluminium by weight, will soon be produced using 60% less emissions than the European average. Global demand for low carbon aluminium is projected to increase from 23 million tonnes in 2021 to 62 million tonnes by 2030, according to McKinsey. Demand to reduce emissions even further is growing, especially from the luxury automotive and energy generation sectors.

[Get 20% off a group subscription](#/portal/signup)

### **Drought could scupper further declines in emission intensity**

Global production of low carbon aluminium is expected to grow from 44 Million tonnes in 2021 to 71 million tonnes in 2030, according to McKinsey. However, future growth in low carbon aluminium supply is primarily dependent upon the availability of hydropower, the economic sustainability of which is brought into question by one of the main threats posed by global warming - prolonged high temperatures and persistent drought.

Global supplies of low carbon aluminium dipped in 2022 as drought in southern China forced Yunnan province authorities to order aluminium smelters to lower production in order to help balance the power system; first by 10% in September last year, then by 20%, and most recently by 40% as the drought worsened. Smelters had been lured to Yunnan due to the availability of cheap hydro power - around 80% of Yunnan’s electricity comes from hydropower. By 2022, smelters accounted for an estimated 30% of electricity consumption across the province.[2](#footnote-2)

China is the dominant global supplier of aluminium, accounting for over 55% of production, while Yunnan province accounts for 12% of the country’s capacity. What happens in Yunnan matters, especially in a world where demand for low carbon aluminium is high and set to grow. Although China has ambitious plans to expand its renewable energy generation, the interconnectedness of its aluminium and hydropower generation sectors, and the increased frequency with which drought affects Yunnan, suggests that China may struggle to reduce the emissions intensity of its aluminium. That may leave it lying uncompetitive relative to other, lower carbon suppliers of aluminium.

Meanwhile in Europe, hydropower generates around 650 TWh of electricity per year, of which some 15% of this is consumed by the continents aluminium smelters, many of which are located in Norway - the largest supplier of aluminium to the EU in 2022\. Norway didn’t escape the drought that afflicted much of central Europe last year. Low reservoir levels cut hydropower generation to it’s lowest level in 20 years (see [*The forgotten giant of clean energy: Why carbon market investors need to keep an eye on Europe's drought*](https://www.carbonrisk.world/the-forgotten-giant-of-clean-energy/)).

Europe also relies on imports from Russia, Turkey, Mozambique and South Africa. The aluminium produced from these four countries are all near the European average emissions intensity and considered low carbon aluminium due to their use of hydropower generation.

**Key suppliers of aluminium to the EU and their emission intensity**

![Source: Company reports, IAI, Eurostat, ING Research](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b6ebc530-3df1-4e89-9b06-6c22d5a250b1_963x438.png)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-66.png)

Get more from Peter Sainsbury in the Substack appAvailable for iOS and Android[Get the app](https://substack.com/app/app-store-redirect?utm%5Fcampaign=app-marketing&utm%5Fcontent=author-post-insert&utm%5Fsource=carbonrisk)

### **Lingering impact of sky-high European power prices**

It’s worth remembering that the sky high power prices seen during 2002, and particularly during the height of summer were partly due to the severe drought in Europe and the adverse impact it had on hydropower and nuclear power output.

Western European aluminium output fell 12.5% between 2021 and 2022 as record power prices forced operators of aluminium smelters to cut production or mothball their plants. Aluminium output in December dropped to 2.73 million tonnes (on an annualised basis), down by 540 thousand tonnes on December 2021 (down 16.5%), and the lowest production rate this century (see [*Power down: Why the outlook for European electricity consumption will be crucial in determining carbon prices in 2023*](https://www.carbonrisk.world/power-down/)).

The impact of those record power prices looks set to linger.

Aluminium Dunkerque Industries France, Europe’s largest aluminium smelter is perhaps the sole plant expected to restart curtailed capacity (60 thousand tonnes per year) by the end of May, following intervention from the French government.

The challenge facing smelter operators is that although power prices have come down, they are still high by historical standards, and even if they bring back production (a long and costly process), there are no guarantees that there will be sufficient demand for them to profitably sell into. And even if they manage to restart production they face the risk of a rebound in power prices, especially if there is another drought this summer. Norsk Hydro warned that a further 600 thousand tonnes of European aluminium smelting capacity could be at risk if prices were to spike again.

The outlook is grim for those smelters that are not on a long-term power contract set at pre-energy crisis levels, that are not protected by government subsidies or have access to their own renewable energy supplies. However, if Europe doesn't have the basic industries in place, they stand no chance of building the industries of tomorrow, and especially those industries required to enable the energy transition. In response to concerns that Germany would lose access to these vital building blocks, the German government recently announced that it would provide billions of euros in state support to guarantee lower energy prices for energy intensive companies through to 2030.[3](#footnote-3) 

Aluminium is a climate paradox.

Highly carbon intensive due to the prevalent use of coal, aluminium is essential to decarbonisation - especially the growth in EV’s and solar generation.

Yet, reducing aluminium’s emissions requires an increased reliance on hydropower, but this means being increasingly exposed to the drought conditions that have become more intense under a warmer climate.

Meanwhile, persistent drought has led to dramatic power price spikes in Europe and elsewhere as low water levels led to weak hydropower generation and limited nuclear output.

High power prices threaten the financial sustainability of the remaining aluminium smelters. For those that remain, a switch to thermal coal generation supported by state subsidies may be the only way to survive.

More than a climate paradox, aluminium is stuck in a vicious circle.

[Carbon Risk Testimonials](https://www.carbonrisk.world/testimonials/)

[Long-term drought puts Europe's hydroelectric generation at riskThe risk of a severe and prolonged drought across much of Europe continues to rise. This is important for the EU carbon market because low reservoir levels mean less power can be generated from the continents hydroelectric dams. That means more power will need to come from the burning of natural gas and thermal coal. European utilities will look to hedge this risk by buying EU carbon allowances.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-67.png)Carbon Risk](https://www.carbonrisk.world/megadrought/)

---

1. https://www.reuters.com/business/autos-transportation/norsk-hydro-supply-porsche-with-low-carbon-aluminium-2023-04-26/#:\~:text=OSLO%2C%20April%2026%20(Reuters),the%20companies%20said%20on%20Wednesday  
https://www.reuters.com/markets/commodities/rio-tinto-enters-agreement-with-bmw-provide-hydro-produced-aluminum-2023-02-21/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.hydroreview.com/environmental/drought-hits-hydropower-supplies-for-chinese-aluminum-smelting-hub/ [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://www.cleanenergywire.org/news/german-economy-minister-wants-lower-industry-electricity-costs-billions-subsidies [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
### A bear market rally, or the start of a new bull run?
URL: https://www.carbonrisk.world/a-bear-market-rally-or-the-start/
Last updated: 2025-08-21T10:36:39.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 13 mins*

A gain of 40% since the late February lows more than meets the technical definition of a bull market (that would require a mere 20% increase), but yet despite the strong rebound in the EU carbon price, it’s not yet clear whether its just part of a broader and deeper bear market.

The EUA price has cleared its 23.6% Fibonacci retracement level (€63.92) and its 38.2% retracement level (€71.86). At the end of last week it also touched a long-term trend line that’s been in place for over 12 months, since the EU carbon market peaked. The €75 per tonne mark has been approached several times over the past couple of weeks only to fall away. If it does clear that level, in what appears to be a key psychological barrier, the next level to watch out for is the 50% retracement level (€78.89).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/9e470507-456f-40aa-b0ec-2ffa78ddec0c_1270x801-1.png)

Nevertheless, there are several important factors that indicate the recent rebound in carbon prices may not be as sustainable as it first appears. In short, the EUA price may need to correct lower before market participants can really focus their attention on an EUA supply-demand imbalance that favours much higher prices later this decade (see [*Short covering brings carbon market bulls out of hiding*](https://www.carbonrisk.world/short-covering-brings-carbon-market/)).

In this article we focus on recent developments in fossil fuel generation, Europe’s increasing exposure to the volatile LNG market, check the foundations of Germany’s industrial recovery, manufacturers ability and inclination to hedge their forward carbon risk, and finally the political support underpinning the EU’s ‘Currency of Decarbonisation’!

_This post is for paying subscribers only._
### France's focus on 'energy sovereignty' is starting to payoff
URL: https://www.carbonrisk.world/frances-focus-on-energy-sovereignty/
Last updated: 2025-08-21T10:36:41.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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---

*Estimated reading time \~ 7 mins*

![undefined](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/9c33cf6c-6d1f-4a19-87a3-0f9ad3cb773e_1920x1080-1.png)

By JKremona - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=144092641

2022 was the French nuclear industry’s *annus horribilis*.

Nuclear power giant, Electricité de France (EDF) faced a triple threat: maintenance to repair cracks discovered during routine inspections, sporadic strike action by militant unions, and drought which forced the curtailment of a number of reactors. Power output dropped by almost one-quarter (23%) between 2021 and 2022\. At 278 TWh the country’s nuclear power generation dropped to its lowest level since 1989.

For Europe it came at the worst possible time. Power prices surged as Russian natural gas exports were curtailed, countries scrambled the globe for LNG supplies and fired up their remaining thermal coal plants, while a scorching hot summer fuelled demand for cooling.

From being a net exporter of power to its neighbours for decades, the country swung to a net importer in the autumn of 2022, placing Europe under even more strain. France’s nuclear nadir was one of the most important factors powering the EU carbon price to €100 per tonne (see [*Europe's nuclear fallout: What EDF's woes mean for carbon prices*](https://www.carbonrisk.world/europes-nuclear-fallout/)).

In July 2022 the French Prime Minister announced that the government would be upping its stake in EDF from 84% to 100% in a bid to secure France’s “energy sovereignty”. After starting the process to renationalise EDF in October 2022, the nuclear giant finally moved back into state hands in June 2023\. EDF was formed in the aftermath of World War II as a state monopoly, but was partly privatised in 2004 following its integration into the EU single market.

Things have improved for EDF since it returned to state hands. The company posted a net profit of €10 billion in 2023, versus a €18 billion loss in 2022\. The operational challenges EDF faced in 2022 were compounded by the need to buy power on the wholesale market at - admittedly partly self-inflicted - stratospheric prices. 2024 has started off well too with France’s nuclear output hitting its highest level in three years during the first quarter. EDF’s latest projection is that French nuclear output is likely to be in the range of 315-345 TWh in 2024, increasing to 335-365 TWh in 2025 and in 2026 (see [*France's nuclear risk premium has faded, for now*](https://www.carbonrisk.world/frances-nuclear-risk-premium-has/)).

**French nuclear generation 2021-24, MW**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/28888732-1c03-4c6e-afdf-d493b0e1226e_1909x830.png)

Source: Energy Graph [energygraph.info](https://energygraph.info/d/vJYZk6MVk/french-nuclear-yearly-availability?orgId=1&from=1640998800000&to=1672527599999&viewPanel=2&ref=carbonrisk.world)

### Risk management in focus

Nevertheless, maintenance, drought, and strikes remain a threat.

Earlier this year EDF said that it still expected to be grappling with stress corrosion maintenance until the end of 2025\. Of the 16 reactors most sensitive to stress corrosion, 15 had been repaired by the end of last year, and the final reactor will be repaired during its ten-year inspection, which began in February.

A shortage of welders, boiler makers, and pipe-fitters with nuclear experience has been filled by flying in personnel from other parts o the world, especially from the US and Canada. Longer-term, a recruitment and training drive is seeking to ensure there is enough labour available in France.

_This post is for paying subscribers only._
### A battle for global carbon pricing supremacy is brewing
URL: https://www.carbonrisk.world/a-battle-for-global-carbon-pricing/
Last updated: 2025-08-21T10:36:42.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 8 mins*

The price of carbon on China’s national emissions trading scheme (ETS) has traded at around €6 per tonne (CNY45) since the market launched in 2021\. However, since mid-2023 the China Emission Allowance (CEA) price has doubled as market participants have anticipated a gradual tightening in the market. In spring 2024 CEAs have traded close to €13 ($11, or CNY93.75) per tonne.

It’s good to see the strong performance, but much more needs to be done for China’s carbon price to become a significant driver of decarbonisation. The CEA price would need to rise 4-6 fold to be on a par with more established carbon markets such as the California or EU ETS for example.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/82c90368-a6d0-4c35-b37f-c7989b3f1012_792x477-3.png)

Source: Lombard Odier Asset Management

### Tighter supply and broader industry coverage

As other compliance carbon markets have also found themselves in at a similar stage of development, the Chinese ETS is currently plagued by an oversupply of emission allowances. The London Stock Exchange Group (LSEG) estimates total oversupply at 360 Mt CO2 due to generous carbon intensity benchmarks and dodgy emissions data reporting. In response, China’s Ministry of Ecology and Environment plans to significantly tighten the supply of CEAs.

First, power generation utilities are expected to see the CEAs allocated to them in 2023 subject to a larger than expected retroactive cut. Second, CEAs that have been hoarded and not used for compliance will lose their value after 2025\. The latter is thought to account for around 180 Mt, or half of the oversupply in the market. It means that from 2025 onwards only 2025 vintage CEAs can be used for compliance.

China’s ETS currently only covers the power generation sector, mirroring the early development stages taken by other compliance carbon markets. In total some 2,200 utilities, responsible for 4.5 billion tonnes of GHG per year, or 40% of overall emissions are covered by the scheme. Measured in terms of emissions, China’s ETS is already more than 3 times larger than the EU ETS.

Seven other carbon intensive industries (petrochemicals, chemicals, building materials, iron and steel, nonferrous metals, paper, and aviation), are expected to be included over the next few years. Aluminium (both direct and indirect emissions) and cement producers the most likely short-term candidates. If all of these industries join it would mean that around 70% of China’s emissions are covered by its carbon market. At 7.8 Mt CO2, China’s ETS would balloon to 5 times the emissions covered by the EU ETS.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7ebb0df7-da38-4486-a992-baca5038a7dc_793x301-1.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

The regulatory framework for China’s ETS allows obligated emitters to cover up to 5% of their compliance obligation with China Certified Emission Reduction certificates (CCERs). CCERs refers to emissions reduction activities conducted by companies on a voluntary basis that are then certified by the Chinese government. Offset projects can include renewable power generation, waste-to-energy as well as forestry (see [*Everything you need to know about China's national carbon market*](https://www.carbonrisk.world/everything-you-need-to-know-about-e31/)).

Based on the markets current industry coverage (and assuming participants used the offset option in full) it would equate to 225 Mt CO2 per annum , or 390 Mt CO2 per annum under an expanded industry scheme. It means that China’s ETS has the potential to become by far the largest compliance-based carbon credit market. As Article 6 develops it could put China in pole position to benefit from global demand for credits.

[Get 20% off a group subscription](#/portal/signup)

### **Time to press its advantage**

The next twelve months are significant. By early next year countries must submit their next round of Nationally Determined Contributions (NDC), including their 2035 emission reduction targets. One of the key events will be whether Trump returns to the White House in 2025\. If he does it could mark another retrenchment in US climate policy momentum. Although that takes the pressure off the Chinese government in some respects, it could be the opportunity for China to press its advantage, and perhaps establish an unassailable lead in global climate policy and delivery (see [*Climate policy uncertainty is on the rise*](https://www.carbonrisk.world/climate-policy-uncertainty-is-on/)).

Under an even stronger climate commitment the CEA price is likely to be well supported in the market. DNV has assessed what carbon price is required for China to reach net zero in the late 2040’s. It estimates that China must frontload its ambition and so the CEA price would need to average $100 per tonne by 2030, rising to $200 per tonne by 2040.

China is the worlds largest exporting country and is the biggest trading partner to the EU and the United States. China might recognise that it has an opportunity, in the absence of US resolve to pursue carbon pricing, to become the largest and most important carbon market. China’s ETS could be a counterweight to the EU ETS and eventually supplant the EU ETS as a carbon pricing benchmark used in global trade (see [*Why Asia is pivotal to future carbon market growth*](https://www.carbonrisk.world/why-asia-is-pivotal-to-future-carbon/)).

_This post is for paying subscribers only._
### Ready mixed
URL: https://www.carbonrisk.world/ready-mixed/
Last updated: 2025-08-21T10:36:43.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 12 mins*

Europe’s cement industry emits 110 Mt CO2 per annum, accounting for 8.2% of EU ETS verified emissions. Cement comes a close second to the iron and steel industry as the industry with the highest emissions in the EU.

The sector is commonly thought of as one of the ‘hard-to-abate’ industries, and as such it is generally expected to struggle to cut emissions in line with the drop in the EU ETS cap. The upshot is that the cement sector is assumed to need much higher carbon prices to decarbonise.

Unlike other energy intensive industries, there isn’t one single method by which the cement companies can employ to cut their emissions. For example, about 60% of cement emissions in the EU relate to the calcination of limestone into calcium oxide, some 30% of the emissions are due to the need for heat to power thermal processes (it relies on coal for about 18% of its thermal energy); while the rest (\~10%) are emissions linked to electricity consumption.

Europe’s cement industry is highly concentrated. Three companies (Heidelberg Materials, Holcim, and CEMEX) accounted for almost half (47%) of EU-27 production capacity in 2022\. It means that the actions of just a handful of companies could make a significant difference to one of the most important sources of industrial emissions in Europe.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/2351ebe7-999c-4f5c-98c9-3e6a982ddf98_957x540.png)

Up until 2021 the EU carbon price was too low to incentivise investment in decarbonisation. Europe’s cement producers had also been shielded from the full impact of the carbon price due to the high number of free EUAs they had received. The signoff of the EU’s ‘Fit-for-55’ package in 2021, requiring a 55% reduction in carbon emissions by 2030 compared with 1990 levels, changed everything. In addition to the faster emission reduction required, the package also brought forward the phase out of free EUAs.

As the EU’s carbon border levy (the CBAM) is gradually introduced between 2026 and 2034, the proportion of free EUAs available to industrial emitters such as cement companies will also decline. Heidelberg Materials and Holcim quickly updated their emission reduction targets in response to the EU’s more ambitious 2030 climate targets. The cement companies have also spotted an opportunity. If they can cut emissions fast enough they will be able to bank the free EUAs and either sell them immediately, or hold onto them to sell to other industries that might not be able to cut their emissions as easily.

The cement companies are also demonstrating their commitment to decarbonisation in other ways. In late 2022 the Science Based Targets initiative (SBTi), the go-to arbiter of corporate climate action, launched the first framework for companies in the cement sector and other potential users of cement to set near and long-term science-based targets in line with 1.5°C.[1](#footnote-1) 

Later that year Holcim became the first cement producer to have its 2050 net zero targets validated by the SBTi under the new framework. In early 2023, the organisation also validated Heidelberg Materials 2030 carbon reduction targets. Other EU cement producers including CRH and Cemex have also received target validation from the SBTi.

Does the EU’s cement sector deserve to be categorised as one of the ‘hardest-to-abate’ industries? Yes, it probably does, but there’s plenty of evidence to suggest its not quite as difficult as many imagine. Lets look at what some of the main European cement companies are doing to cut their emissions.

_This post is for paying subscribers only._
### Table of contents [Start here]
URL: https://www.carbonrisk.world/table-of-contents-start-here/
Last updated: 2026-09-07T16:30:29.000Z
Welcome to the **Table of contents** for *Carbon Risk*.

If you’re not sure how to navigate this publication, you’re now in the right place. From A (Asia-Pacific) to V (verified carbon market) this is your jumping-off point. I’ll update this post every month so you can always stay on top of things.

Remember that even though you may only receive my posts in your inbox, there’s a massive back-catalogue waiting for your perusal, most of which is evergreen content **\- 485 articles as of end August 2026**.

### **Asia-Pacific**

- [KAU-pop! Korean carbon price jumps 50% as government gets serious about climate, but AI clean energy conundrum awaits](https://www.carbonrisk.world/kau-pop/)
- [Could transition credits solve Asia's coal dilemma?](https://www.carbonrisk.world/could-transition-credits-solve-asias-coal-dilemma/)
- [Readying for the descent: Proposed reforms to China's emissions trading system suggest the government is preparing for peak emissions](https://www.carbonrisk.world/readying-for-the-descent/)
- [Demystifying Japan's climate policy riddle](https://www.carbonrisk.world/demystifying-japans-climate-policy/)
- [China's carbon credit market takes off](https://www.carbonrisk.world/chinas-carbon-credit-market-takes/)
- [India's catch-22: How to balance adapting to extreme temperatures, slowing the growth in emissions, while also alleviating poverty](https://www.carbonrisk.world/indias-catch-22/)
- [A battle for global carbon pricing supremacy is brewing: Why you need to pay more attention to China's carbon market](https://www.carbonrisk.world/a-battle-for-global-carbon-pricing/)
- [Japan's 'Green Transformation' receives a welcome shot of credibility](https://www.carbonrisk.world/japans-green-transformation-receives/)
- [Inflexion point: The Indian economy is pivotal to the future direction of global carbon emissions](https://www.carbonrisk.world/tipping-point/)
- [Everything you need to know about the Korean Emissions Trading Scheme (KETS)](https://www.carbonrisk.world/everything-you-need-to-know-about-4c1/)
- [Everything you need to know about China's national carbon market](https://carbonrisk.substack.com/p/everything-you-need-to-know-about-4c1https://carbonrisk.substack.com/p/everything-you-need-to-know-about-e31)
- [Why Asia is pivotal to future carbon market growth](https://www.carbonrisk.world/why-asia-is-pivotal-to-future-carbon/)

### **Australia / New Zealand**

- [Australia needs a 'climate competitiveness strategy': Phasing out the Diesel Fuel Tax Credit to mining companies would be a good start](https://www.carbonrisk.world/australia-needs-a-climate-competitiveness-strategy/)
- [Mixed signals: Last years crash in the New Zealand carbon price holds lessons for policymakers everywhere](https://www.carbonrisk.world/mixed-signals/)
- [New Zealand's carbon price slumps as confidence cracks: Government announces it will break link with net zero target](https://www.carbonrisk.world/new-zealands-carbon-price-slumps-as-confidence-cracks/)
- [Taxing times as Australia looks to secure its energy transition: Consensus builds for an expansion in 'target-consistent' carbon pricing](https://www.carbonrisk.world/taxing-times-as-australia-looks-to/)
- [New Zealand needs a market stability reserve: Climate Change Commission's advice fails to achieve "predictable and stable market"](https://www.carbonrisk.world/new-zealand-needs-a-market-stability/)
- [Safeguarding Australia's climate policies: The trifecta of carbon market sensitive elections is almost over](https://www.carbonrisk.world/safeguarding-australias-climate-policies/)
- [New Zealand's carbon market is close to resolving its commitment issues](https://www.carbonrisk.world/new-zealands-carbon-market-is-close/)
- [The other side of the table](https://www.carbonrisk.world/the-other-side-of-the-table/)
- [Everything you need to know about Australian Carbon Credit Units (ACCUs)](https://www.carbonrisk.world/australias-reformed-safeguard-mechanism/)
- [Australia's carbon market reforms get the green light](https://www.carbonrisk.world/australias-carbon-market-reforms/)
- [Australia's carbon price poised for bull market: Reforms look set to restore trust, significantly increasing ambition](https://www.carbonrisk.world/australias-carbon-market-is-about/)
- [Pulling the rug out from 'Down Under': What can investors learn from the collapse of the Australian carbon market?](https://www.carbonrisk.world/pulling-the-rug-out-from-down-under/)
- [New Zealand's carbon market: The carbon trade you've probably never heard of](https://www.carbonrisk.world/the-new-zealand-carbon-market/)

### **Compliance carbon markets - general**

- [Hammer time: Financial institutions are bidding for a role in how permits are allocated](https://www.carbonrisk.world/hammer-time/)
- [No carbon copy: Emissions trading schemes are ploughing their own furrow, and that's a risk to future growth](https://www.carbonrisk.world/no-carbon-copy/)
- [Mind the carbon price gap: A 'Currency of Decarbonisation' crisis could be on the cards](https://www.carbonrisk.world/mind-the-gap-2/)
- [Carbon pricing doesn't have to be taxing](https://www.carbonrisk.world/carbon-pricing-doesnt-have-to-be-taxing/)
- [Long and variable lags](https://www.carbonrisk.world/long-and-variable-lags/)
- [It's all political](https://www.carbonrisk.world/its-all-political/)
- [Emissions trading: past, present, and future](https://www.carbonrisk.world/emissions-trading-past-present-and/)
- [What's in a \[carbon market\] name? Why governments should adopt the 'Cap-and-Invest' nomenclature](https://www.carbonrisk.world/whats-in-a-carbon-market-name/)
- [Brazil's carbon market gets the green light: Policy secures the nation's climate leadership among world's biggest oil producers](https://www.carbonrisk.world/brazils-carbon-market-gets-the-green/)
- [Three carbon markets facing electoral turbulence in 2025: Opposition parties paint carbon pricing as inflations 'pantomime villain'](https://www.carbonrisk.world/three-carbon-markets-facing-electoral/)
- [Pricing carbon at its social cost: Carbon markets will increasingly be influenced by the social cost of carbon](https://www.carbonrisk.world/pricing-carbon-at-its-social-cost/)
- [It's the carbon price, stupid!](https://www.carbonrisk.world/its-the-carbon-price-stupid/)
- [Pegger thy neighbour: Why smaller carbon markets link up with larger cap-and-trade schemes](https://www.carbonrisk.world/pegger-thy-neighbour/)
- [A carbon floor price is a bad idea: Meddling in markets built on trust is rarely successful](https://www.carbonrisk.world/a-carbon-floor-price-is-a-bad-idea/)
- [Second-best climate policy: When political economy trumps economic efficiency](https://www.carbonrisk.world/second-best-climate-policy/)
- [Carbon market convergence does not mean a single global carbon price](https://www.carbonrisk.world/carbon-market-convergence-does-not/)
- [Carbon markets are going global](https://www.carbonrisk.world/carbon-markets-are-going-global/)
- [BP's emissions trading scheme](https://www.carbonrisk.world/bps-emissions-trading-scheme/)
- [The arc of carbon’s curve: What does the carbon futures curve tell us and why is it important?](https://www.carbonrisk.world/the-arc-of-carbons-curve/)
- [Whack-A-Mole: How patchy global carbon markets channel fossil fuel finance](https://www.carbonrisk.world/regulatory-arbitrage/)
- ["Don't touch my carbon revenue!" Focus on incentives to anticipate the next move in the EU carbon market](https://www.carbonrisk.world/dont-touch-my-carbon-revenue/)
- [Does a stable carbon market equilibrium exist?](https://www.carbonrisk.world/does-a-stable-carbon-market-equilibrium/)
- [Hedging carbon risk](https://www.carbonrisk.world/the-big-hedge/)
- [The path to a global carbon price: Why carbon markets will converge and become increasingly correlated](https://www.carbonrisk.world/why-carbon-markets-will-converge/)
- [The great sulphur dioxide allowance bull market: What lessons can we learn from the first cap-and-trade system?](https://www.carbonrisk.world/hero-to-zero/)
- [Carbon is an emerging asset class, but what is it?](https://www.carbonrisk.world/the-carbon-price-is-the-currency/)
- [How to think about political risk in carbon markets](https://www.carbonrisk.world/how-to-think-about-political-risk/)

### **Carbon dioxide removal (CDR)**

- [How to survive CDR's "Death Valley"](https://www.carbonrisk.world/how-to-survive-cdrs-death-valley/)
- [CDR "moonshot" aborted, for now: Reboot needed as Microsoft allegedly suspends carbon removal purchases](https://www.carbonrisk.world/cdr-requires-a-reboot/)
- ['Big Carbon': Is this the next trillion dollar market?](https://www.carbonrisk.world/big-carbon/)
- [Carbon dioxide removal and the buyer of first resort: The window for high cost, novel CDR technologies is closing fast](https://www.carbonrisk.world/carbon-dioxide-removal-and-the-buyer/)
- [The carbon moonshot: Microsoft dominates the market for carbon removal](https://www.carbonrisk.world/the-carbon-moonshot/)
- [Why CDR regulation could deter climate mitigation: The risk of 'moral hazard' tends to increase when governments intervene](https://www.carbonrisk.world/why-cdr-regulation-could-deter-climate/)
- [Backing BECCS: Demand for sustainable bioenergy with CCS set to intensify](https://www.carbonrisk.world/backing-beccs/)
- [Nature's 'black gold' rush](https://www.carbonrisk.world/natures-black-gold-rush/)
- [How modularity will supercharge growth in Direct Air Capture (DAC)](https://www.carbonrisk.world/how-modularity-will-supercharge-growth/)
- [Everything you need to know about enhanced weathering](https://www.carbonrisk.world/everything-you-need-to-know-about-a66/)
- [Scrubbing the skies: Direct Air Capture (DAC) offers a scalable route to net zero](https://www.carbonrisk.world/direct-air-capture-dac-will-determine/)
- [BECCS - the carbon removal chimera](https://www.carbonrisk.world/beccs-the-carbon-removal-chimera/)
- [Char grilled: Why biochar is the most promising carbon removal technology](https://www.carbonrisk.world/char-grilled/)
- [Carbon farming puts a value on dirt: Soil carbon sequestration is the next frontier of the carbon market](https://www.carbonrisk.world/carbon-farming-puts-a-value-on-dirt/)
- [Climate engineering: The case for technology-based carbon removal](https://www.carbonrisk.world/engineering-the-climate-to-hit-net/)
- [The planet's carbon removal scarcity problem](https://www.carbonrisk.world/scaling-up-a-scare-resource/)
- [Technology-based carbon removal credits crucial if net-zero targets are to be met](https://www.carbonrisk.world/technology-based-carbon-removal-credits/)

### **CO2 capture, storage, transportation & end markets**

- [Losing steam: Europe's carbon capture and storage ambitions are starting to flag](https://www.carbonrisk.world/losing-steam/)
- [Northern Lights the way: Europe's CO2 network is being bult in the North Sea, but for now it remains fragile](https://www.carbonrisk.world/northern-lights-the-way/)
- [US 'energy dominance' will depend upon CO2: Billions of barrels of oil could be unlocked, but only if thousands of miles of CO2 pipeline are laid](https://www.carbonrisk.world/us-energy-dominance-will-depend-upon/)
- [Carbon capture and storage (CCS) is misunderstood](https://www.carbonrisk.world/carbon-capture-and-storage-ccs-is/)
- [Following in LNG's wake: First shipment of liquefied CO2 could be a prelude to a global marketplace](https://www.carbonrisk.world/following-in-lngs-wake/)
- [Not in my backyard](https://www.carbonrisk.world/not-in-my-backyard/)
- [Pipe dreams](https://www.carbonrisk.world/pipe-dreams/)
- [The emergence of the carbon economy: Why construction materials are likely to dominate future CO2 demand](https://www.carbonrisk.world/the-emergence-of-the-carbon-economy/)
- [Why Europe's heavy industry needs carbon capture and storage](https://www.carbonrisk.world/why-europe-needs-carbon-capture-and/)
- [The carbon capture superpower: The United States will dominate global CCUS capacity](https://www.carbonrisk.world/the-carbon-capture-superpower/)
- [Mind the decarbonisation gap: Storage capacity needs to scale fast if carbon capture is to reach its potential](https://www.carbonrisk.world/mind-the-decarbonisation-gap/)
- [Everything carbon investors really need to know about carbon capture, use and storage (CCUS)](https://www.carbonrisk.world/everything-carbon-investors-really/)

### **Concepts**

- [The Polluter Pays (in) Principle: Or, one rule for me, another for thee](https://www.carbonrisk.world/the-polluter-pays-in-principle/)
- [Return of the MACC](https://www.carbonrisk.world/return-of-the-macc/)
- [Flattening the curve: Economic development coupled with climate policies is the pathway to lower emissions](https://www.carbonrisk.world/flattening-the-curve/)
- [Repricing the 'Tragedy of the Horizon'](https://www.carbonrisk.world/repricing-the-tragedy-of-the-horizon/)
- [Carbonomics returns: Hydrogen headwinds, a fragmenting world order, and new energy frontiers](https://www.carbonrisk.world/carbonomics-returns/)
- [The Kaya identity](https://www.carbonrisk.world/the-kaya-identity/)
- [The Carbon Laffer Curve](https://www.carbonrisk.world/the-carbon-laffer-curve/)
- [The Time Value of Carbon](https://www.carbonrisk.world/the-time-value-of-carbon/)
- [The carbon footprint fallacy: Why green investors need to get their hands dirty](https://www.carbonrisk.world/the-carbon-footprint-fallacy/)
- [Carbon intensity: The key to an economically sustainable green transition](https://www.carbonrisk.world/carbon-intensity-the-key-to-an-economically/)
- [Energy efficiency is undervalued and misunderstood](https://www.carbonrisk.world/energy-efficiency-is-undervalued/)
- [Harnessing the invisible fuel](https://www.carbonrisk.world/harnessing-the-invisible-fuel-to/)
- [Climate change - A tragedy in three parts](https://www.carbonrisk.world/the-three-tragedies/)
- [Prosperity bends the curve](https://www.carbonrisk.world/the-environmental-kuznets-curve/)
- [The 'sailing ship' effect and the energy transition](https://www.carbonrisk.world/the-sailing-ship-effect-and-the-energy/)
- [Carbonomics returns: The past, present and future cost of decarbonisation](https://www.carbonrisk.world/carbonomics/)
- [Everything you need to know about the Social Cost of Carbon (SCC)](https://www.carbonrisk.world/weighing-the-future/)
- [Money to burn: How investors should think about the 'invisible fuel'](https://www.carbonrisk.world/money-to-burn/)
- [Carbonomics 2023: Chinese EV battery deflation offsets offshore wind cost inflation](https://www.carbonrisk.world/carbonomics-2023/)

### **Climate policy**

- [The decarbonisation bargain](https://www.carbonrisk.world/the-decarbonisation-bargain/)
- [Priming the pump: The price of fossil fuel subsidies is high: carbon emissions, air pollution, and energy insecurity](https://www.carbonrisk.world/priming-the-pump/)
- [Climate policy under a new world order: Retracement, evolution, or revolution?](https://www.carbonrisk.world/clim/)
- [Trading hazes](https://www.carbonrisk.world/trad/)
- [An article of faith](https://www.carbonrisk.world/an-article-of-faith/)
- [A chaotic patchwork of inconsistent incentives: The UK is a carbon pricing pioneer, but it's system of taxes and subsidies makes it more expensive to reach net zero](https://www.carbonrisk.world/a-chaotic-patchwork-of-inconsistent/)
- [Known unknowns: Climate policy uncertainty appears to have peaked](https://www.carbonrisk.world/darkest-before-dawn/)
- [The carbon abatement return on investment: Emerging markets offer the highest rewards, and China knows it](https://www.carbonrisk.world/the-carbon-abatement-return-on-investment/)
- [Blue sky thinking: As climate policy splutters, governments should sell the benefits of clean air](https://www.carbonrisk.world/blue-sky-thinking/)
- [Europe's greener cost of capital under threat as monetary policy eases](https://www.carbonrisk.world/europes-greener-cost-of-capital-under/)
- [A uniform global carbon price is unworkable, and unnecessary](https://www.carbonrisk.world/a-uniform-global-carbon-price-is/)
- [Free rider: Carbon border levies could trump US withdrawal from Paris](https://www.carbonrisk.world/free-rider/)
- [A new political trilemma](https://www.carbonrisk.world/a-new-political-trilemma/)
- [Britain makes coal history: Unique approach to carbon pricing instrumental to securing coal's fate](https://www.carbonrisk.world/britain-makes-coal-history/)
- [Bringing home the bacon, sustainably: Denmark's carbon tax on agriculture allays fears of a European green backlash](https://www.carbonrisk.world/bringing-home-the-bacon-sustainably/)
- [Europe's green backlash was priced in a long time ago](https://www.carbonrisk.world/europes-green-backlash-was-priced/)
- [The knock-on effect: The curious case of California's LCFS program](https://www.carbonrisk.world/the-knock-on-effect-the-curious-case/)
- [Through the looking glass: Country level emissions data are (probably) not what they seem](https://www.carbonrisk.world/through-the-looking-glass/)
- [Climate policy uncertainty is on the rise](https://www.carbonrisk.world/climate-policy-uncertainty-is-on/)
- [The net zero fiscal trilemma](https://www.carbonrisk.world/the-net-zero-fiscal-trilemma/)
- [The Green Swan: Conventional approaches to pricing carbon fail to capture risk of climate catastrophe](https://www.carbonrisk.world/fat-tails/)
- ['Greenflationary' expectations revisited](https://www.carbonrisk.world/greenflationary-expectations-revisited/)
- [Carbon market vigilantes: The case for carbon-linked bonds](https://www.carbonrisk.world/the-carbon-bond-vigilantes/)
- [Thermal coal's Coasian bargain: Paying coal plants to retire early is a viable route to net zero](https://www.carbonrisk.world/coals-coasian-bargain/)
- [Resolving The Green Paradox](https://www.carbonrisk.world/the-green-paradox/)
- [Fuelling controversy: Fossil fuel subsidies act like a negative carbon price](https://www.carbonrisk.world/everything-you-need-to-know-about-232/)
- [Everything you need to know about Low Carbon Fuel Standards (LCFS)](https://www.carbonrisk.world/everything-you-need-to-know-about-792/)
- [Zero carbon supremacy: Why governments are looking to secure their green industrial sovereignty](https://www.carbonrisk.world/zero-carbon-supremacy/)
- [Keeping their powder dry: Investors shy away from powering the emerging market energy transition](https://www.carbonrisk.world/keeping-their-powder-dry/)
- [Commitment issues](https://www.carbonrisk.world/commitment-issues/)
- [A climate-driven "Minsky Moment": Revisiting the impact of a sudden repricing of carbon prices](https://www.carbonrisk.world/a-climate-driven-minsky-moment/)
- ['Greenflationary' expectations](https://www.carbonrisk.world/greenflationary-expectations/)
- [What happens if policymakers are forced to "stamp on the brakes" and force carbon prices higher?](https://www.carbonrisk.world/what-happens-if-policymakers-are/)
- ['Greenflation' fears are a twin threat to the EUs monetary and climate credibility](https://www.carbonrisk.world/greenflation-fears-are-a-twin-threat/)
- [The impossible trinity at the heart of net zero](https://www.carbonrisk.world/the-impossible-trinity-at-the-heart/)

### **Canada**

- [A statement of intent: What Mark Carney's 'variable geometry' approach reveals about the future of carbon pricing in Canada](https://www.carbonrisk.world/a-statement-of-intent/)
- [Canada's industrial carbon pricing system should be protected](https://www.carbonrisk.world/canadas-industrial-carbon-pricing/)
- [A tactical retreat: Mark Carney axes Canada's consumer carbon tax](https://www.carbonrisk.world/a-tactical-retreat/)
- [Striking first: Why Canada could beat Europe to a carbon border levy](https://www.carbonrisk.world/striking-first/)
- [Why Canada should reform its carbon tax](https://www.carbonrisk.world/why-canada-should-reform-its-carbon/)
- [Canada shows how NOT to use Carbon Contracts for Difference](https://www.carbonrisk.world/a-powerful-tool-to-leverage-energy/)
- [Canada's oil and gas cap-and-trade scheme does not go far enough](https://www.carbonrisk.world/canadas-oil-and-gas-cap-and-trade/)
- [Europe must learn from Canada's 'price on pollution' debacle](https://www.carbonrisk.world/a-cautionary-tale/)

### **Commodities**

- [Deciphering nickels green premium](https://www.carbonrisk.world/the-illusory-green-premium/)
- [Big Oil's bigger brothers: The battle to supply the "last barrel" in a carbon constrained future](https://www.carbonrisk.world/big-oils-bigger-brothers/)
- [Commodity markets begin to price carbon risk](https://www.carbonrisk.world/commodity-markets-begin-to-price/)
- [Aluminium's climate paradox](https://www.carbonrisk.world/aluminiums-climate-paradox/)
- ['Carbon neutral' LNG 2.0](https://www.carbonrisk.world/carbon-neutral-lng-20/)
- ['Green' lithium](https://www.carbonrisk.world/green-lithium/)
- [Decarbonising the oil sands](https://www.carbonrisk.world/decarbonising-the-oil-sands/)
- [Carbon risk dulls allure of gold miners](https://www.carbonrisk.world/carbon-risk-dulls-allure-of-gold/)
- [Why metal mining investors should support a global carbon price](https://www.carbonrisk.world/debottlenecking-the-energy-transition/)
- [Carbon neutral LNG faces its toughest test yet](https://www.carbonrisk.world/carbon-neutral-lng-faces-its-toughest/)

### **Europe’s emission trading scheme (ETS)**

- [Carbon price uncertainty is a drag on industrial 'green' investment: High carbon prices matter, but high volatility may matter even more. What to do?](https://www.carbonrisk.world/carbon-price-uncertainty-is-a-drag-on-industrial-green-investment/)
- [Resisting the siren's call: Europe's climate policymakers should continue to offer "forward guidance"](https://www.carbonrisk.world/resisting-the-sirens-call/)
- [Strings attached: The European Commission's proposals fail to counter systemic issues deterring investment in industrial decarbonisation](https://www.carbonrisk.world/strings-attached/)
- [Curb your enthusiasm: Investment funds step back as EU ETS review nears](https://www.carbonrisk.world/curb-your-enthusiasm/)
- [No such thing as a free allowance](https://www.carbonrisk.world/no-such-thing-as-a-free-allowance/)
- [EUAs reaching critical turning point: Despite the noise, EU ETS reform discussions are yet to start in earnest](https://www.carbonrisk.world/euas-reaching-critical-turning-point/)
- [Article 6 and the EU ETS, lessons from Japan](https://www.carbonrisk.world/article-6-and-the-eu-ets-lessons-from-japan/)
- [Europe readies armoury for carbon market endgame: Early reform proposal is not without trust issues](https://www.carbonrisk.world/europe-readies-armoury-for-carbon-market-endgame/)
- [Signals amidst the noise: EUAs consolidate, awaiting direction from policymakers](https://www.carbonrisk.world/signals-amidst-the-noise/)
- [Rule it in: Adjusting the emissions cap according to a fixed formula could be a good idea](https://www.carbonrisk.world/rule-it-in/)
- [Pushing back on EU ETS myopia: For Europe's most influential lobby group, carbon pricing is a delicate balancing act](https://www.carbonrisk.world/for-industry-the-eu-ets-is-a-delicate-balancing-act/)
- [Refund policy: Industry compensation for indirect carbon costs must be conditional](https://www.carbonrisk.world/refund-policy/)
- [Cap-and-Invest: Europe set to leverage its carbon markets to boost investment in decarbonisation](https://www.carbonrisk.world/cap-and-invest/)
- [No tree grows to heaven: EUAs caught in cross-commodity liquidation](https://www.carbonrisk.world/no-tree-grows-to-heaven/)
- [€100 carbon draws near: Europe's cornerstone climate policy shrugs off the gloom](https://www.carbonrisk.world/eu100-co2-draws-near/)
- [#EUAPredict 2026: What's your forecast for the EU carbon price in 2026?](https://www.carbonrisk.world/euapredict-2026/)
- [Committed traders](https://www.carbonrisk.world/committed-traders/)
- [Softening the blow](https://www.carbonrisk.world/softening-the-blow/)
- [All in: Investment funds race to stack EUA futures as price breakout looms](https://www.carbonrisk.world/all-in/)
- [Dawn breaks for Europe's battered manufacturers](https://www.carbonrisk.world/dawn-breaks-for-europes-battered-manufacturers/)
- [Hot and bothered](https://www.carbonrisk.world/hot-and-bothered/)
- [Has Europe learnt from its great carbon price debasement?](https://www.carbonrisk.world/has-europe-learnt-from-its-great/)
- [Straight and narrow: Europe's polluters comply with the EU ETS, despite the low risk of a penalty](https://www.carbonrisk.world/straight-and-narrow/)
- [Forward guidance: EU climate ministers may soon begin to “mumble with great incoherence.”](https://www.carbonrisk.world/forward-guidance/)
- [Hot property: The long-term outlook for the ETS2 carbon price is tethered to heat pumps](https://www.carbonrisk.world/hot-property/)
- [Europe is no longer in control of its destiny: What a ceasefire in Ukraine means for the EU carbon market](https://www.carbonrisk.world/europe-is-no-longer-in-control-of/)
- [The Fear Index](https://www.carbonrisk.world/the-fear-index/)
- [ETS2 carbon price could rapidly breach €100: Europe's second carbon market is expected to be very sensitive to emission allowance scarcity](https://www.carbonrisk.world/ets2-carbon-price-could-rapidly-breach/)
- [Running of the bulls: Investment funds position for higher EUA prices](https://www.carbonrisk.world/running-of-the-bulls/)
- [Resolving the emerging endgame: Charting a path towards net-negative emissions with carbon removal](https://www.carbonrisk.world/resolving-the-emerging-endgame/)
- [Good green derivatives: A peek beneath the hood of the EU carbon market](https://www.carbonrisk.world/good-green-derivatives/)
- [The emerging endgame](https://www.carbonrisk.world/the-emerging-endgame/)
- [Beware false prophets: The EUA forward curve is not a forecast of future carbon prices](https://www.carbonrisk.world/beware-false-prophets/)
- [Germany's manufacturing malaise set to curb demand for EUAs](https://www.carbonrisk.world/germanys-manufacturing-malaise-set/)
- [Know your onions: Concern over the role of speculators in Europe's energy markets is overplayed](https://www.carbonrisk.world/know-your-onions/)
- [A bear market rally, or the start of a new bull run?](https://www.carbonrisk.world/a-bear-market-rally-or-the-start/)
- [Over-hedged: One of Europe's most active players in the carbon market has gone conservative](https://www.carbonrisk.world/over-hedged/)
- [Short covering brings carbon market bulls out of hiding](https://www.carbonrisk.world/short-covering-brings-carbon-market/)
- [Deflationary expectations](https://www.carbonrisk.world/deflationary-expectations/)
- [To catch a falling knife](https://www.carbonrisk.world/to-catch-a-falling-knife/)
- [Smoke signals: Why Europe's policymakers should take heed to its carbon market](https://www.carbonrisk.world/smoke-signals/)
- [Boiling over](https://www.carbonrisk.world/boiling-over/)
- [Breaking the bottleneck](https://www.carbonrisk.world/breaking-the-bottleneck/)
- [Testing long term support: The EU carbon price needs a cold winter and renewed political support to stop prices falling below a critical level](https://www.carbonrisk.world/testing-long-term-support/)
- [Tipping point](https://www.carbonrisk.world/passing-the-batton/)
- [Playing with fire](https://www.carbonrisk.world/playing-with-fire/)
- [Collateral damage revisited](https://www.carbonrisk.world/collateral-damage-revisited/)
- [No room for complacency: Gas supply worries jolt Europe's energy markets](https://www.carbonrisk.world/gas-spike-jolts-european-energy-markets/)
- [Commitment anxiety: EUA investment fund positioning rebounds from record net short](https://www.carbonrisk.world/the-bigger-short/)
- [Reflexivity and the EU ETS 'Endgame'](https://www.carbonrisk.world/reflexivity-and-the-eu-ets-endgame/)
- [Investment funds ditch carbon after failure to decisively breach €100](https://www.carbonrisk.world/investment-funds-ditch-carbon-after/)
- [Squaring up](https://www.carbonrisk.world/squaring-up/)
- [Crash course](https://www.carbonrisk.world/crash-course/)
- [The only number that matters](https://www.carbonrisk.world/the-only-number-that-matters/)
- [Out of ammunition: What can the EU do to stop carbon prices surging over €100](https://www.carbonrisk.world/out-of-ammunition/)
- [Power down: Why the outlook for European electricity consumption will be crucial in determining carbon prices in 2023](https://www.carbonrisk.world/power-down/)
- [On a knife edge](https://www.carbonrisk.world/on-a-knife-edge/)
- [Europe's carbon footprint defies expectations](https://www.carbonrisk.world/carbons-footprint/)
- [Witching hour returns: What chance a repeat of the late 2021 EUA price surge](https://www.carbonrisk.world/witching-hour-returns/)
- [Still betting on black? A deep dive into EUA futures and options activity, physical allowance demand and real time emissions data](https://www.carbonrisk.world/still-betting-on-black/)
- [Seasonal shifts in the EU carbon market? Don't bet on it](https://www.carbonrisk.world/beware-seasonal-shifts-in-the-eu/)
- [Return to the 70's: What's behind the surge in EU carbon prices?](https://www.carbonrisk.world/return-to-the-70s/)
- [What RWE's 2030 coal burn phase out means for carbon prices](https://www.carbonrisk.world/what-rwes-2030-coal-burn-phase-out/)
- [EU member states ditch MSR sale proposal](https://www.carbonrisk.world/eu-member-states-ditch-msr-sale-proposal/)
- [The big short: Record net short position underlines the extreme negative sentiment towards carbon](https://www.carbonrisk.world/the-big-short/)
- [Is the MSR sale really a 'win-win'? Calls grow for sale of emission allowances to fund Europe's energy transition](https://www.carbonrisk.world/raiding-the-piggy-bank/)
- [The zero lower bound: What happens when EU ETS emissions approach zero?](https://www.carbonrisk.world/the-zero-lower-bound/)
- [Watch out for €60](https://www.carbonrisk.world/watch-out-for-60/)
- [Hibernation: How the EU carbon market is adapting to a long geopolitical winter](https://www.carbonrisk.world/hibernation/)
- [The sword of inelastic supply cuts BOTH ways](https://www.carbonrisk.world/the-sword-of-inelastic-supply-cuts/)
- [Beware the algorithms ‘robo-herding’ the EU carbon market](https://www.carbonrisk.world/beware-the-algorithms-robo-herding/)
- [The next domino to fall](https://www.carbonrisk.world/the-next-domino-to-fall/)
- [Carbon's 'diamond hands' about to get tested once more](https://www.carbonrisk.world/carbons-diamond-hands-about-to-get/)
- [Back to black? There's more to Germany's energy security plan than burning more coal](https://www.carbonrisk.world/back-to-black/)
- [Charting carbon's course](https://www.carbonrisk.world/charting-carbons-course/)
- [In search of a new narrative](https://www.carbonrisk.world/in-search-of-a-new-narrative/)
- [Whatever it takes: Why forward guidance in the EU carbon market is here, and is set to stay](https://www.carbonrisk.world/whatever-it-takes/)
- [Funding REPowerEU - What impact would frontloading EUA sales have on carbon prices?](https://www.carbonrisk.world/funding-repowereu-what-impact-would/)
- [A market driven by illiquidity](https://www.carbonrisk.world/a-market-driven-by-illiquidity/)
- [Europe's steel industry yet to feel the full force of the carbon market](https://www.carbonrisk.world/how-have-higher-carbon-prices-affected/)
- [The EU carbon market and its stock-to-flow ratio](https://www.carbonrisk.world/the-eu-carbon-market-through-the/)
- [What is the long-term impact of Ukraine-Russia conflict on European carbon emissions?](https://www.carbonrisk.world/what-is-the-long-term-impact-of-ukraine/)
- [EU vote to extend 24% MSR withdrawal rate signals commitment to carbon market: Attention now focuses on upcoming TNAC estimate](https://www.carbonrisk.world/eu-vote-to-extend-24-msr-withdrawal/)
- [Carbon market tremors](https://www.carbonrisk.world/carbon-market-tremors/)
- [What price King Coal's return to Europe?](https://www.carbonrisk.world/what-price-king-coals-return-to-europe/)
- [Are investment funds buying the rebound in carbon?](https://www.carbonrisk.world/reading-the-tea-leaves/)
- [Carbon market sentiment check](https://www.carbonrisk.world/carbon-market-sentiment-check/)
- [Europe's hydrogen economy and what it means for carbon prices](https://www.carbonrisk.world/europes-hydrogen-economy-and-what/)
- [Everything you need to know about EU emission allowance (EUA) auctions](https://www.carbonrisk.world/everything-you-need-to-know-about-19c/)
- [The unravelling](https://www.carbonrisk.world/the-unravelling/)
- [The Day After: Reflections on the carbon market liquidation](https://www.carbonrisk.world/the-day-after/)
- [Option market headwinds](https://www.carbonrisk.world/option-market-headwinds/)
- [Collateral damage](https://www.carbonrisk.world/collateral-damage/)
- [In the trigger zone: What proposed changes to Article 29a mean for EU carbon prices](https://www.carbonrisk.world/in-the-trigger-zone/)
- [Option market tailwinds: Carbon price near levels where gamma hedging begins](https://www.carbonrisk.world/carbon-option-tailwind-close-at-hand/)
- [What to make of speculation curb fears](https://www.carbonrisk.world/what-to-make-of-speculation-curb/)
- [What happens to carbon prices if Russia turns off the taps?](https://www.carbonrisk.world/what-happens-to-carbon-prices-if/)
- [Romania's coal powered utility receives bailout to buy carbon allowances: How many more distressed buyers are there?](https://www.carbonrisk.world/how-many-more-distressed-buyers-of/)
- [The carbon market is not immune from equity market malaise](https://www.carbonrisk.world/the-carbon-market-is-not-immune-from/)
- [The road to perdition? 100 days to compliance](https://www.carbonrisk.world/the-road-to-perdition-100-days-to/)
- [Back to the 70's](https://www.carbonrisk.world/back-to-the-70s/)
- [The wrecking ball: Margin calls, illiquidity and the race for collateral](https://www.carbonrisk.world/the-wrecking-ball-margin-calls-illiquidity/)
- [Carbon crash: WTF happened?](https://www.carbonrisk.world/carbon-crash-wtf-happened/)
- [To infinity and beyond! What the non-compliance penalty and a shortage of allowances means for the price of carbon](https://www.carbonrisk.world/to-infinity-and-beyond/)
- [The witching hour approaches: The increasing role that options play in the EU carbon market](https://www.carbonrisk.world/the-witching-hour-approaches/)
- [German coalition proposals de-risk the path to higher carbon prices](https://www.carbonrisk.world/german-coalition-proposals-de-risk/)
- [The changing fortunes of the EU carbon market](https://www.carbonrisk.world/the-changing-fortunes-of-the-eu-carbon/)

### **Europe macro**

- [Looking through it: Climate policy trade-offs complicate the outlook for eurozone monetary policy](https://www.carbonrisk.world/looking-through-it/)
- [Cracking under pressure](https://www.carbonrisk.world/cracking-under-pressure/)
- [Vollgas](https://www.carbonrisk.world/vollgas/)
- [Escaping the Euro doom loop: A new steady state, the power of narrative economics, and the mispricing of consensus expectations](https://www.carbonrisk.world/escaping-the-euro-doom-loop/)
- [Is permanent deindustrialisation of Europe still a tail risk?](https://www.carbonrisk.world/is-the-permanent-deindustrialisation/)
- [Chemical reaction](https://www.carbonrisk.world/chemical-reaction/)
- [The battle for Europe's industrial sovereignty](https://www.carbonrisk.world/the-battle-for-europes-industrial/)
- [Demand destruction averted, or simply a matter of time? European industrial emissions (and demand for EUAs) have been supported by state protection against high energy prices](https://www.carbonrisk.world/whats-happening-to-european-industrial/)
- [Demand destruction: Which industries are most exposed to high natural gas prices?](https://www.carbonrisk.world/demand-destruction/)
- [What impact would a recession have on the EU carbon market?](https://www.carbonrisk.world/the-eu-ets-and-its-recession-proof/)
- [Europe's industrial slump: How bad will it get, and what does it mean for carbon?](https://www.carbonrisk.world/what-does-europes-industrial-slump/)
- [Taking off, or coming into land: The outlook for European aviation emissions](https://www.carbonrisk.world/taking-off-or-coming-down-to-land/)
- [Dead cat bounce: European industrial gas demand yet to reach rock bottom](https://www.carbonrisk.world/dead-cat-bounce/)

### **Europe’s low carbon energy**

- [In search of lost revenue: Europe's transition to a low carbon, energy secure economy may succumb to debt-laden paralysis](https://www.carbonrisk.world/in-search-of-lost-revenue/)
- [Electric avenue: Europe set to outline its path to electrification and energy security](https://www.carbonrisk.world/electric-avenue/)
- [Europe's new joule order](https://www.carbonrisk.world/europes-new-joule-order/)
- [Batteries not included](https://www.carbonrisk.world/batteries-not-included/)
- [Power play: Norway is not Europe's battery, and it never will be](https://www.carbonrisk.world/power-play/)
- [How to power up Europe's industrial decarbonisation: Closing the spark spread would be a good start](https://www.carbonrisk.world/how-to-power-up-europes-industrial/)
- [France's focus on 'energy sovereignty' is starting to payoff](https://www.carbonrisk.world/frances-focus-on-energy-sovereignty/)
- [The forgotten giant of clean energy: Why carbon market investors need to keep an eye on Europe's drought](https://www.carbonrisk.world/the-forgotten-giant-of-clean-energy/)
- [France's nuclear risk premium has faded, for now](https://www.carbonrisk.world/frances-nuclear-risk-premium-has/)
- [France's nuclear winter of discontent](https://www.carbonrisk.world/frances-nuclear-winter-of-discontent/)
- [The rate of change](https://www.carbonrisk.world/the-rate-of-change/)
- [High and dry: Drought threatens Germany's plan to burn more coal](https://www.carbonrisk.world/high-and-dry/)
- [Utility player: Climate change threatens hydropower's under-appreciated role in the energy transition](https://www.carbonrisk.world/utility-player/)
- [Split by the atom: Political divisions threaten nuclear powers role in Europe's energy transition](https://www.carbonrisk.world/split-by-the-atom/)
- [In the shade: Europe's solar power does not get the credit it deserves](https://www.carbonrisk.world/under-the-shade/)
- [Long-term drought puts Europe's hydroelectric generation at risk](https://www.carbonrisk.world/megadrought/)
- [Europe's nuclear fallout: What EDF's woes mean for carbon prices](https://www.carbonrisk.world/europes-nuclear-fallout/)

### **Emissions reporting**

- [Full disclosure returns: The $500 billion Scope 3 opportunity](https://www.carbonrisk.world/full-disclosure-2/)
- [Scope 3 forces mining companies into rethink](https://www.carbonrisk.world/scope-3-forces-mining-companies-to/)
- [Scope creep: Mandatory climate disclosures target under-reported carbon risk](https://www.carbonrisk.world/scope-for-improvement/)
- [Full disclosure](https://www.carbonrisk.world/full-disclosure/)
- [How much should we trust the dictator’s CO2 estimates?](https://www.carbonrisk.world/how-much-should-we-trust-the-dictators/)
- [Not just hot air?](https://www.carbonrisk.world/not-just-hot-air/)
- [Owning up to Scope 3: How investors should think about the SEC's proposed disclosure requirements](https://www.carbonrisk.world/owning-up-to-scope-3-emissions/)
- [In the shadows: Everything you need to know about internal carbon pricing](https://www.carbonrisk.world/in-the-shadows/)
- [Owning up to carbon: Why mandatory climate disclosure requirements could drive demand for emission allowances](https://www.carbonrisk.world/owning-up-to-climate-risk/)

### **Emissions monitoring technology**

- [Loss of the methane hunter: MethaneSAT goes dark, imperilling global methane emission accountability](https://www.carbonrisk.world/loss-of-the-methane-hunter/)
- [Picking the ‘low hanging fruit’: Technology key to North Sea methane abatement](https://www.carbonrisk.world/picking-the-low-hanging-fruit-technology/)
- [Interview with Clémentine Serey of emissions tracking firm Kayrros](https://www.carbonrisk.world/interview-with-clementine-serey-of/)
- [The carbon tracking opportunity: Real time tracking of GHG emissions and carbon sinks is a huge growth market](https://www.carbonrisk.world/carbon-footprints/)

### **Fuzzy forecasts**

- [Caution! Net zero scenarios are not forecasts: Why the blurring of the normative and the predictive is leading to a misallocation of capital](https://www.carbonrisk.world/caution-net-zero-scenarios-are-not/)
- [The climate casino](https://www.carbonrisk.world/the-climate-casino/)
- [A margin of safety](https://www.carbonrisk.world/the-margin-of-safety/)
- [Weighing the value of carbon price predictions](https://www.carbonrisk.world/how-accurate-are-commodity-price/)

### **Investment**

- [In search of carbon alpha](https://www.carbonrisk.world/in-search-of-carbon-alpha/)
- [How to hedge long-term carbon risk: Carbon contracts for difference are the instrument of choice](https://www.carbonrisk.world/how-to-hedge-long-term-carbon-risk/)
- [The climate tech emissions-funding mismatch](https://www.carbonrisk.world/the-climate-tech-emissions-funding/)
- [Hedging your portfolio against carbon price risk: 12 exchange traded products (ETPs) with exposure to carbon allowances](https://www.carbonrisk.world/hedging-your-portfolio-against-carbon/)
- [Divining reality from the hype](https://www.carbonrisk.world/divining-reality-from-the-hype/)
- [Mind the behaviour gap: How to avoid losing money investing in the energy transition](https://www.carbonrisk.world/mind-the-behaviour-gap/)
- [Carbon as an impact investment](https://www.carbonrisk.world/carbon-as-an-impact-investment/)
- [Investing in the EU carbon market: 11 ways investors can gain exposure](https://www.carbonrisk.world/how-to-start-investing-in-the-eu/)
- [A 'green' unicorn: What the cleantech boom and bust tells us about the future of climate tech](https://www.carbonrisk.world/a-green-unicorn/)
- [Does the stock market care about the carbon price?](https://www.carbonrisk.world/does-the-stock-market-care-about/)
- [Which industries benefit from a high carbon price?](https://www.carbonrisk.world/which-industries-benefit-from-a-high/)
- [GEO versus N-GEO: Investing in the VCM futures market](https://www.carbonrisk.world/investing-in-vcm-futures-contracts/)
- [The 'green lairds': How carbon and natural capital investors are driving demand for land](https://www.carbonrisk.world/the-green-lairds/)
- [How to invest in North America's carbon markets](https://www.carbonrisk.world/how-to-invest-in-north-americas-carbon/)
- [Buy and hold going physical](https://www.carbonrisk.world/buy-and-hold/)
- [The emerging marginal buyer of carbon](https://www.carbonrisk.world/the-marginal-buyer-of-carbon/)
- [Short selling is a poor hedge against carbon risk](https://www.carbonrisk.world/short-selling-is-a-poor-hedge-against/)
- [Carbon credits ≠ carbon allowances: Probably best not to invest in a fund that doesn't know the difference](https://www.carbonrisk.world/carbon-credits-carbon-allowances/)
- [How to invest in the EU carbon market](https://www.carbonrisk.world/how-to-invest-in-the-eu-carbon-market/)
- [How institutional investment affected the structure of commodity markets, and what it might mean for carbon markets](https://www.carbonrisk.world/how-institutional-investment-affected/)
- [The carbon price is an inflation hedge](https://www.carbonrisk.world/the-carbon-price-is-an-inflation/)
- [Getting off zero: Institutional investment likely to give carbon markets the short squeeze](https://www.carbonrisk.world/getting-off-zero-institutional-investment/)
- [Investors have a new way to help the environment](https://www.carbonrisk.world/investors-have-a-new-way-to-help/)

### **Industrial decarbonisation**

- [Walking the torque](https://www.carbonrisk.world/walking-the-torque/)
- [The Green Premium chimera](https://www.carbonrisk.world/the-green-premium-chimera/)
- [Amping up: Electrification of oil and gas production is controversial, but necessary](https://www.carbonrisk.world/amping-up/)
- [Ukraine's biomethane opportunity: The war torn nation could become a major exporter of 'renewable natural gas' to Europe](https://www.carbonrisk.world/ukraines-biomethane-opportunity/)
- [Ready mixed: How Europe's largest cement producers are rapidly cutting their Scope 1 emissions](https://www.carbonrisk.world/ready-mixed/)
- [An iron will: Sweden's first mover advantage in green steel will be tough to replicate](https://www.carbonrisk.world/an-iron-will/)
- [Europe's bridge to 'green' steel](https://www.carbonrisk.world/the-bridge-to-green-steel/)
- [Stranded asset, or last mover advantage?](https://www.carbonrisk.world/stranded-asset-or-last-mover-advantage/)
- [Biomethane is the killer application Europe needs to decarbonise](https://www.carbonrisk.world/biomethane-is-the-killer-application/)
- [Rotten returns: Biomethane could play a big role in European decarbonisation](https://www.carbonrisk.world/rotten-returns/)
- [Heat pumps on the factory floor](https://www.carbonrisk.world/heat-pumps-on-the-factory-floor/)
- [Carbon's shifting anchor: The growth in electrolyser capacity is pivotal to Europe's decarbonisation ambitions](https://www.carbonrisk.world/carbons-shifting-anchor/)
- [The long term price of emission: Clearing the industrial decarbonisation bottleneck will require significantly higher carbon prices](https://www.carbonrisk.world/the-industrial-decarbonisation-bottleneck/)
- [A volatile gas: Hydrogen's latest hype cycle still suffers from overinflated expectations](https://www.carbonrisk.world/hydrogen-hype-cycle-not-over-yet/)
- [Concrete returns: Laying the foundations for a decarbonised cement industry](https://www.carbonrisk.world/concrete-returns/)

### **Methane and other superpollutants**

- [Putting a price on superpollutants](https://www.carbonrisk.world/putting-a-price-on-superpollutants/)
- [Setting the standard: A market-led approach to pricing methane emissions](https://www.carbonrisk.world/pricing-methanes-low-hanging-plumes/)
- [Low hanging plumes: Methane abatement suffers from opportunity costs and misaligned incentives](https://www.carbonrisk.world/low-hanging-plumes/)
- [Greener growing still in the red: From the Strait of Hormuz to Hauts-de-France, Europe's response to the fertiliser crisis must tackle 'green' profitability](https://www.carbonrisk.world/green-in-the-black/)
- [Gas pains: A super-pollutant gets the cold shoulder](https://www.carbonrisk.world/methane-2/)
- [Step on the gas: Donald Trump may have ditched the methane fee, but energy producers are still under pressure to cut emissions](https://www.carbonrisk.world/step-on-the-gas/)
- [Nitrogen fix: Curbing excess use is key to solving synthetic fertiliser emissions](https://www.carbonrisk.world/solving-fertilisers-nitrogen-fix/)
- [Better in than out: The worlds largest meat and dairy corporations are under pressure to cut greenhouse gas emissions](https://www.carbonrisk.world/turning-sour/)
- [No free lunch: Cutting global methane emissions from oil and gas is more difficult than it seems](https://www.carbonrisk.world/no-quick-win/)
- [Pricing methane emissions out of the atmosphere: America's first nationwide price on a greenhouse gas does not go far enough](https://www.carbonrisk.world/pricing-methane-emissions-out-of/)

### **Miscellaneous**

- [The hidden cost of keeping cool: Everyone should have access to cooling, but its vital we purge this superpollutant](https://www.carbonrisk.world/cold-comfort/)
- [Tackling carbon wealth inequality](https://www.carbonrisk.world/tackling-carbon-wealth-inequality/)
- [Scorchio! The hot take on Europe's extreme heatwaves, why the ECB is worried but knows how to fix it, and why decarbonisation requires deeper Single Market integration](https://www.carbonrisk.world/scorchio/)
- [Wall Street has not turned its back on climate change](https://www.carbonrisk.world/wall-street-has-not-turned-its-back-on-climate-change/)
- [His father's son: Flávio Bolsonaro spells trouble for Brazil's climate policies](https://www.carbonrisk.world/his-fathers-son/)
- [Carbon Risk 2025 year in review: A look back at year four of the Carbon Risk newsletter](https://www.carbonrisk.world/carbon-risk-2025-year-in-review/)
- [The Green Premium chimera](https://www.carbonrisk.world/the-green-premium-chimera/)
- [Climate change is showing its claws - it's time to adapt](https://www.carbonrisk.world/climate-change-is-showing-its-claws-its-time-to-adapt/)
- [Spread bets: Why "energy transition assets" could drive commodity trading returns](https://www.carbonrisk.world/spread-bets/)
- [Energy emergence at the frontier: Jevons Paradox, the Khazzoom-Brookes Postulate, and DeepSeek](https://www.carbonrisk.world/energy-emergence-at-the-frontier/)
- [Five books that made me think differently in 2024](https://www.carbonrisk.world/five-books-that-made-me-think-differently/)
- [Transformers - A supply chain problem in disguise](https://www.carbonrisk.world/transformers-a-supply-chain-problem/)
- [Back to the futures: Three factors will determine whether ASX's new environmental futures contracts are a success](https://www.carbonrisk.world/back-to-the-futures/)
- [The clouds silver lining: Why data centre emissions are the least of our worries](https://www.carbonrisk.world/clouded-judgement/)
- [Scope 4 emissions: Unlocking low-carbon innovation](https://www.carbonrisk.world/scope-4-emissions-unlocking-innovation/)
- [A chilling prospect](https://www.carbonrisk.world/a-chilling-prospect/)
- [Growing the circle to get to net zero: High carbon prices and supportive government policies will reenergise circular economy investment](https://www.carbonrisk.world/the-foundations-of-a-circular-economy/)
- [Book and claim - Part 1: Energy Attribute Certificates play a vital but controversial role in the energy transition](https://www.carbonrisk.world/book-and-claim/)
- [Book and claim - Part 2: How SAF and green H2 are harnessing the power of Energy Attribute Certificates](https://www.carbonrisk.world/book-and-claim-part-2/)
- [What are Carbon Contracts for Difference (CCfD)?](https://www.carbonrisk.world/what-are-carbon-contracts-for-difference/)

### **Maritime / airlines**

- [CORSIA-correction required: UN carbon offset scheme likely to be superseded in Europe by the EU ETS](https://www.carbonrisk.world/corsia-correction-required/)
- [Gunboat climate diplomacy ratchets up a notch: Trump administration seeks to torpedo carbon price on shipping, once and for all](https://www.carbonrisk.world/gunboat-climate-diplomacy-ratchets-up-a-notch/)
- [Up in the air](https://www.carbonrisk.world/up-in-the-air/)
- [A port in the storm: Cruise ships face carbon pricing, fuel intensity targets, and penalties for idling while docked](https://www.carbonrisk.world/a-port-in-the-storm/)
- [Smoke on the water](https://www.carbonrisk.world/smoke-on-the-water/)
- [Full steam ahead, or steady as she goes?](https://www.carbonrisk.world/full-steam-ahead-or-steady-as-she/)
- ['Single European Sky' cleared for take off: More efficient air traffic management should counteract expected growth in emissions](https://www.carbonrisk.world/single-european-sky-cleared-for-take/)
- [Putting a price on contrails: The 'low-hanging fruit of aviation’ emission abatement](https://www.carbonrisk.world/putting-a-price-on-contrails/)
- [Frequent fryer: Demand for biofuels made from used cooking oil is soaring, but could there be a sting in the tail?](https://www.carbonrisk.world/frequent-fryer/)
- [The green methanol economy is emerging in Denmark: Off-take agreements signal an industry ripe for growth](https://www.carbonrisk.world/the-green-methanol-economy/)
- [Run out of steam: Delay in implementing levy on global shipping emissions leaves decarbonisation all at sea](https://www.carbonrisk.world/run-out-of-steam/)
- [Putting a cap on European shipping emissions: The maritime sector is beginning to price in EU carbon prices](https://www.carbonrisk.world/putting-a-cap-on-european-shipping/)
- [What price decarbonised shipping? A carbon price will have powerful knock-on effects on global ship supply](https://www.carbonrisk.world/what-price-decarbonised-shipping/)
- [Blending in: Decarbonising air travel with 'sustainable' fuel](https://www.carbonrisk.world/come-fly-with-me/)
- [The sky's the limit](https://www.carbonrisk.world/the-skys-the-limit/)
- [Clean air turbulence over Europe](https://www.carbonrisk.world/clean-air-turbulence-over-europe/)

### **Natural capital markets**

- [Nature for sale: Biodiversity credits and offsets are a distraction from the real problem](https://www.carbonrisk.world/biodiversity-credits-and-offsets-are-a-distraction/)
- [Down to earth: Putting a value on biodiversity has consequences, and not all good](https://www.carbonrisk.world/down-to-earth/)
- [Protection money: Halting deforestation will come with a hefty price tag](https://www.carbonrisk.world/stopping-deforestation-faces-an-opportunity/)
- [Repricing deforestation risk in the wake of Brazil's presidential election](https://www.carbonrisk.world/repricing-deforestation-risk-in-the/)
- [Putting a price on H₂O: Carbon markets are just the start of a revolution putting a price on natural capital](https://www.carbonrisk.world/putting-a-price-on-ho/)
- [Natural capital markets: Putting a price on nature](https://www.carbonrisk.world/natural-capital-markets-putting-a/)

### **Technology**

- [The battery that lies beneath](https://www.carbonrisk.world/the-battery-that-lies-beneath/)
- [A bump in the road: Network effects suggest that any EV growth slowdown will be brief](https://www.carbonrisk.world/a-bump-in-the-road/)
- [Exponential](https://www.carbonrisk.world/exponential/)
- [Alternative proteins climb the slope of enlightenment](https://www.carbonrisk.world/alternative-proteins-hit-the-slope/)

### **The carbon border levy**

- [What constitutes an “effectively paid” carbon price?](https://www.carbonrisk.world/what-constitutes-an-effectively-paid-carbon-price/)
- [A green and level playing field? The European Commission faces a tortuous task refereeing CBAMs winners and losers](https://www.carbonrisk.world/a-green-and-level-playing-field/)
- [Join the club](https://www.carbonrisk.world/join-the-club/)
- [CBAMs 'domino effect' on global carbon pricing could be about to get even stronger](https://www.carbonrisk.world/cbams-domino-effect-on-global-carbon-pricing-could-be-about-to-get-even-stronger/)
- [Call of duties: Mozambique demonstrates how CBAM could redraw global commodity trade flows](https://www.carbonrisk.world/call-of-duties/)
- [Building blocs: As global carbon pricing grows and becomes more fragmented, regional carbon markets offer a solution](https://www.carbonrisk.world/building-blocs/)
- [No Turkish delight: Cheap Russian coal, macroeconomic disarray, and the EU's carbon border levy](https://www.carbonrisk.world/no-turkish-delight/)
- [Carbon border risk: EUAs offer a tradeable hedge against future CBAM exposure](https://www.carbonrisk.world/carbon-border-risk/)
- [No level playing field: Europe's carbon levy will accelerate adoption of carbon pricing, but not everyone will win](https://www.carbonrisk.world/no-level-playing-field/)
- [Hedging the CBAM: What the EU's carbon border tax might means for carbon investors](https://www.carbonrisk.world/hedging-the-cbam/)

### **UK emissions trading scheme (UK ETS)**

- [Britain's green credibility gap](https://www.carbonrisk.world/will-andy-burnham-close-britains-green-credibility-gap/)
- [Persistent UKA-EUA spread reveals deep political paralysis](https://www.carbonrisk.world/persistent-uka-eua-spread-reveals-deep-political-paralysis/)
- [When Europe sneezes, Britain catches a cold: UK carbon price down \~40% since mid-January](https://www.carbonrisk.world/uk-carbon-price-down-40/)
- [Cleaning up: UK carbon market to incentivise greenhouse gas removal](https://www.carbonrisk.world/cleaning-up/)
- [All-in on Brexit reset: Funds betting on early agreement to link UK and EU carbon markets may be disappointed](https://www.carbonrisk.world/all-in-on-brexit-reset/)
- [Britain's green credibility gap: UK carbon price slumps to record low, 50% below the EU](https://www.carbonrisk.world/britains-green-credibility-gap/)
- [UK-EU ETS linkage trade turns sour: Prime Minister Starmer pledges never to re-join the EU](https://www.carbonrisk.world/not-in-my-lifetime/)
- [UK carbon market nadir has passed](https://www.carbonrisk.world/uk-carbon-market-nadir-has-passed/)
- [Subject to further consultation: The state of play in the UK carbon market](https://www.carbonrisk.world/subject-to-further-consultation/)
- [Recoupling?](https://www.carbonrisk.world/recoupling/)
- [The convergence trade: What's behind the collapse in the UKA-EUA carbon market spread?](https://www.carbonrisk.world/spread-betting/)
- [The UK carbon market continues to dodge political headwinds...but for how long?](https://www.carbonrisk.world/the-uk-carbon-market-continues-to/)
- [Majestic performance: The first anniversary of the UK carbon market](https://www.carbonrisk.world/happy-birthday-uka/)
- [The UK carbon market looks like a smarter 'risk-adjusted' bet for investors](https://www.carbonrisk.world/the-uk-carbon-market-is-a-more-attractive/)
- [Splendid isolation: UK carbon prices have not suffered the same sharp declines as the EU](https://www.carbonrisk.world/splendid-isolation/)
- [To intervene or not to intervene: An update on the UK carbon market](https://www.carbonrisk.world/to-intervene-or-not-to-intervene/)
- [Why carbon investors need to pay attention to the UK carbon market](https://www.carbonrisk.world/why-carbon-investors-need-to-pay/)

### **United States carbon markets - California / RGGI / Washington State**

- [United states of net zero](https://www.carbonrisk.world/united-states-of-net-zero/)
- [The state we're in: How carbon pricing policy has evolved amidst America's "affordability crisis"](https://www.carbonrisk.world/the-state-were-in/)
- [What now for America's state carbon markets?](https://www.carbonrisk.world/what-now-for-americas-state-carbon-markets/)
- ["Affordability" narrative weighs on California's carbon market: A 'Blue Wave' may need a greyer shade of green in the Golden State](https://www.carbonrisk.world/why-affordability-now-trumps-climate-in-california/)
- [California strikes back: Decision to reauthorise Cap-and-Invest Program an inflexion point for carbon markets in North America](https://www.carbonrisk.world/california-strikes-back/)
- [Cap and fade, or golden opportunity? It's crunch time for California's cap-and-trade program](https://www.carbonrisk.world/cap-and-fade-or-golden-opportunity/)
- [California's 'energy transition' will not be linear](https://www.carbonrisk.world/californias-energy-transition-will/)
- [America's carbon border tariff isn't credible](https://www.carbonrisk.world/americas-carbon-border-tariff-isnt/)
- [America's state carbon markets are under siege](https://www.carbonrisk.world/americas-state-carbon-markets-are/)
- [The future of California's cap-and-trade program beyond 2030 is now in doubt: Clean hydrogen production tax credit rules complicate the legislative process](https://www.carbonrisk.world/the-future-of-californias-cap-and/)
- [It's the climate, stupid!](https://www.carbonrisk.world/its-the-climate-stupid/)
- [California's emissionary zeal begins to crack: Carbon market tumbles as climate policies are delayed](https://www.carbonrisk.world/californias-emissionary-zeal-begins/)
- [The burning question: What climate legacy will Trump 2.0 leave in his wake?](https://www.carbonrisk.world/the-burning-question/)
- [The RGGI power grab: The underappreciated beneficiary of surging electricity demand in the US northeast](https://www.carbonrisk.world/the-rggi-power-grab/)
- [The spectre of 'gilets jaunes' returns: Revolt over gasoline price hikes could lead to carbon price rebellion](https://www.carbonrisk.world/revolt-over-gasoline-price-hike-could/)
- [Is a repeat of 2021 on the cards for California's carbon market?](https://www.carbonrisk.world/is-a-repeat-of-2021-on-the-cards/)
- [Participation game: What Pennsylvania’s participation in RGGI means for emission allowance prices](https://www.carbonrisk.world/participation-game/)
- [Washington State's inaugural carbon auction clears near $50: High premium to other North American carbon markets will increase calls to link up with California](https://www.carbonrisk.world/first-washington-state-auction-clears/)
- [California's 'forgotten giant of clean electricity' is set to reawaken in 2023: What it means for power sector emissions and the demand for carbon allowances](https://www.carbonrisk.world/californias-forgotten-giant-of-clean/)
- [Everything you need to know about Washington State's "Cap-and-Invest" carbon market](https://www.carbonrisk.world/everything-you-need-to-know-about-1b9/)
- [California's carbon market left to "fill the gap" in revised climate strategy](https://www.carbonrisk.world/californias-carbon-market-sidelined/)
- [Post summer blues hit the Californian carbon market](https://www.carbonrisk.world/post-summer-blues-hit-the-californian/)
- [Diablo Canyon Resurrected?](https://www.carbonrisk.world/diablo-canyon-resurrected/)
- [The disunited state of American power generation](https://www.carbonrisk.world/the-disunited-states-of-american/)
- [California's carbon rush: How the next wave of speculation in its carbon market could play out](https://www.carbonrisk.world/how-the-next-wave-of-speculation/)
- [MAC curve steepening: What California's mix of carbon policies means for price discovery](https://www.carbonrisk.world/mac-curve-steepening/)
- [California's carbon market: The 6 factors to pay attention to right now](https://www.carbonrisk.world/californias-carbon-market-the-5-factors/)
- [Volatile RGGI carbon prices as Virginia's Governor continues to push to leave the scheme](https://www.carbonrisk.world/volatile-rggi-carbon-prices-as-virginias/)
- [An asymmetric bet on a phase transition](https://www.carbonrisk.world/an-asymmetric-bet-on-carbon/)
- [Parched: How California's drought impacts the carbon market](https://www.carbonrisk.world/what-does-drought-in-california-have/)
- [Tackling carbon offset oversupply in California could be bullish for CCA prices: But only if regulator makes necessary reforms](https://www.carbonrisk.world/tackling-carbon-offset-oversupply/)
- [Everything you need to know about the RGGI carbon market](https://www.carbonrisk.world/everything-you-need-to-know-about/)
- [Great expectations: How legacy issues could snuff out California's carbon market boom](https://www.carbonrisk.world/great-expectations-how-legacy-issues/)
- [The trend is your friend in California but could there be a sting in its tail?](https://www.carbonrisk.world/the-trend-is-your-friend-in-california/)
- [What the demise of BBB means for CCA](https://www.carbonrisk.world/what-the-demise-of-bbb-means-for/)
- [The green light from the Golden State: The California carbon market opportunity](https://www.carbonrisk.world/the-green-light-from-the-golden-state/)

### **Verified carbon market (VCM)**

- [Under-rated: Should we be pricing the compliance carbon risk curve?](https://www.carbonrisk.world/under-rated/)
- [No company is a net zero island](https://www.carbonrisk.world/no-company-is-a-net-zero-island/)
- [Carbon's "lemon" dilemma](https://www.carbonrisk.world/carbons-lemon-dilemma/)
- [Carbon credits 2.0: The verified carbon market climbs the slope of enlightenment](https://www.carbonrisk.world/carbon-credits-2-0/)
- [Eyes on the prize: Revised SBTi standard amplifies role of internal carbon prices, carbon credits, and Environmental Attribute Certificates (EACs)](https://www.carbonrisk.world/eyes-on-the-prize/)
- [Escaping hells kitchen: Advanced cookstove methodologies offer a promising recipe to slash emissions and cut air pollution](https://www.carbonrisk.world/escaping-hells-kitchen/)
- [Coming of age: The evolution of carbon credits fits a pattern of financial innovation](https://www.carbonrisk.world/coming-of-age/)
- [Shifting the narrative: Common sense prevails as SBTi approves credits for Scope 3 abatement](https://www.carbonrisk.world/shifting-the-narrative/)
- [Whose carbon?: Emerging economies struggle to balance climate finance and carbon sovereignty](https://www.carbonrisk.world/whose-carbon/)
- [An underappreciated climate change risk](https://www.carbonrisk.world/an-underappreciated-climate-change/)
- [Is the VCM a trillion dollar business opportunity?](https://www.carbonrisk.world/a-one-trillion-dollar-business/)
- [Fight Fire With Fire: The case for controlled burning carbon credits](https://www.carbonrisk.world/fight-fire-with-fire/)
- [Consumer carbon offset market faces a knowledge gap](https://www.carbonrisk.world/consumer-carbon-offsets-faces-a-knowledge/)
- [Carbon credits - a permission to pollute, or a signal to decarbonise?](https://www.carbonrisk.world/carbon-credits-a-license-to-decarbonise/)
- [Green and black: Guyana's huge bet on a carbon and oil constrained future](https://www.carbonrisk.world/guyanas-carbon-trade/)
- [REDD+ and the common knowledge game](https://www.carbonrisk.world/redd-and-the-common-knowledge-game/)
- [The signal and the noise: Pricing the carbon credit risk curve](https://www.carbonrisk.world/the-signal-and-the-noise/)
- [ESG investment backlash hits nature-based carbon credit prices](https://www.carbonrisk.world/esg-investment-backlash-hits-nature/)
- [Under the hammer: What the auction of 250,000 blue carbon credits tells us about the market](https://www.carbonrisk.world/blue-carbon-under-the-hammer/)
- [How the other half cooks: Carbon credits with co-benefits](https://www.carbonrisk.world/how-the-other-half-cooks/)
- [The big sovereign carbon trade: Africa's "green superpower" expected to issue 90 million carbon credits](https://www.carbonrisk.world/the-big-sovereign-carbon-trade/)
- [VCM futures no refuge from equity market malaise: Strong corporate demand for carbon credits masks declining willingness to pay](https://www.carbonrisk.world/vcm-futures-are-no-refuge-from-market/)
- [Banking on 'blue carbon': Everything you need to know about carbon credits sourced from the ocean](https://www.carbonrisk.world/banking-on-blue-carbon/)
- [Plumbing the depths of the VCM](https://www.carbonrisk.world/plumbing-the-depths-of-the-vcm/)
- [Africa's "green superpower"](https://www.carbonrisk.world/africas-green-superpower/)
- [Nature-based carbon credit prices need to rise: High commodity prices increase the incentive to clear forests and plant crops](https://www.carbonrisk.world/nature-based-carbon-credit-prices/)
- [The first signs of carbon credit nationalism? Why are the Indonesian and Papua New Guinea carbon credit markets on hold?](https://www.carbonrisk.world/the-first-signs-of-carbon-credit/)
- ['Winner takes all' in the VCM](https://www.carbonrisk.world/winner-takes-all-in-the-vcm/)
- [The pros and cons of carbon credit 'streaming'](https://www.carbonrisk.world/the-pros-and-cons-of-carbon-credit/)
- [The voluntary carbon market (VCM): At the edge of the carbon market risk curve](https://www.carbonrisk.world/the-voluntary-carbon-market-vcm-a/)
### A bump in the road
URL: https://www.carbonrisk.world/a-bump-in-the-road/
Last updated: 2025-08-21T10:36:45.000Z
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---

*Estimated reading time \~ 10 mins*

“The electric vehicle revolution is running out of steam” - The FT

“Industry pain abounds as electric car demand hits slowdown” - Reuters

“Tesla can’t outrun the EV slowdown” - Business Insider

If you took recent headlines in the press at face value you would think that no one is buying electric vehicles anymore. Yet despite recent investor worries about Tesla and BYD sales in Q1 2024, overall global EV sales in the first quarter are actually up 25% versus year earlier according to data published by the International Energy Agency (IEA). China accounted for the majority of that growth, with EV sales up almost 35% year-on-year. Sales in the US rose by 15%, while Europe observed a 5% increase in EV sales. Annualised Q1 2024 sales (typically 15-20% of annual EV sales) suggests that global sales of EVs in 2024 could reach 17 million, which if it materialises, will mean a 20% rise on 2023.[1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e40e30a2-dc9b-4731-aadf-7a5f98519dc6_761x450.png)

Thirty one countries surpassed a crucial EV tipping point at the end of 2023, whereby new EV car sales surpassed 5% of total new sales. Together these 31 countries account for two-thirds of the worlds car sales. Analysis by Bloomberg Green based on the trajectory taken in countries with higher rates of EV adoption suggests that it only takes 4 years for EV adoption to move from the 5% threshold to 25% of new car sales. Not a single country has taken more than 3 years to go from 5% to 15%. Although Europe remains at the centre of EV adoption (the top 10 countries in terms of EV adoption are all European), some of the fastest growth is happening elsewhere. For example, EV adoption in Thailand only passed the 5% threshold in Q1 2023, but by the end of the year it had already reached 13%. On a global basis, EV adoption reached 12% of new car sales in Q4 2023, having reached 5% in 2021.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/de53c088-3499-4683-a3d7-c79819b37cd9_570x472-2.png)

The US passed the 5% tipping point towards the end of 2021, and by end 2023 it had reached 8.1% of new sales. That’s far short of the 18.1% average for 20 countries at the same point on the adoption curve, according to Bloomberg Green. In part that’s because American cars tend to be much larger and heavier than those driven in many other countries, in turn requiring much larger batteries; the average car sold in the US in 2022 was 20% heavier than that sold across the Atlantic. It also reflects strategic choices made at the state level regarding policies that support EV rollout; California with EVs \~20% of new car sales, stands out as the exception that proves the rule.

Research into the individuals perceptions of EVs by American consumers by Potential Energy Lab reveals a consensus around high cost and driving range as obstacles to adoption, but a wide disparity of views on pollution and the environment, energy security and EVs importance to US manufacturing. As Bloomberg illustrate in the previous chart, if the US does return to trend it would mean that 25% of new car sales will be EVs by 2026\. This seems unlikely. Over a third (37%) of Americans expect to lease or own an EV in the next five years, with 60% expecting to do so in the next 10 years. At the other end of the spectrum, around one-fifth said they would never buy an EV.[2](#footnote-2) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/1cfd7f6a-c4a9-44a8-9190-509bd0aa174a_1119x601.png)

**Energy system maximalism**

Energy systems derive a significant part of their value from network effects.

The value of oil for example is, at least in part, derived from the transportation and refining network that serves it (the pipelines, tankers, refineries and so on), which in turn enables end consumers to derive value from it. Oil, and for that matter coal or natural gas can be burnt outside of this network, but without access to it the value of the fossil fuels are compromised; the range of applications and the markets for which they can serve are severely diminished.

Threats to an incumbent energy system can be profoundly disorientating for people that are physically and financially invested in the network value being maintained. This is why the energy transition - exemplified by the growth in renewables and EVs - is seen as such a threat to the fossil fuel network. Each energy system has their own community of investors and ideological supporters for which there is no alternative - an energy system maximalism where being fully invested (financially and ideologically) in fossil fuels or the green energy transition is seen as the only way forward.

Of course, government policy will play a big part in how this shakes out. Countries have subsidised both fossil fuel supply and demand in the past, and many continue to do so today. At the same time, governments have also employed subsidies to kickstart the growth in renewable energy generation, invested in the rollout of EV charging infrastructure, and offered generous incentives to buy EVs. Ultimately though the future will be determined by the collective choices of millions of individuals, each deciding for themselves which network offers the best value.

It’s worth remembering that all previous energy transitions have been additive in terms of primary energy demand, and so although people may argue about the relative shares, it potentially means that renewable energy, nuclear, and fossil fuels will all have a role to play. Arguably then, nowhere are the battle lines more explicitly drawn than EVs versus internal combustion engine (ICE) vehicles.

Perceptions of how EVs will fare in one jurisdiction, perhaps your own country, does not mean that they will suffer the same fate elsewhere in the world. As someone who recently got a Tesla, and immediately sold their diesel car, I have my own limited experience to go on, but equally I know it’s not necessarily representative of others. Path dependency, individual incentives, and local geography matter a great deal.

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**The EV network effect**

The survey by Potential Energy Lab suggests that affordability and range anxiety are the two most important factors holding back EV adoption in the US. Research carried out elsewhere in the world also points the finger at these issues as topping the concerns among drivers. Rather than focus on data in the rear view mirror (i.e., last quarters EV sales), a much better gauge of future EV adoption and the value of the network will be the price of an EV relative to an ICE car, and the growth in the EV charging infrastructure.

A rapid improvement in affordability is evident in the narrowing of the price gap between EVs and ICE vehicles over the past 5 years; this has occurred across geographies and by model size, by both the retail ticker price and the total cost of ownership (i.e. taking account of lifetime operating costs such as fuel, repairs, etc.). EV manufacture is still on a steep learning curve, while battery prices (the main EV component by value) continues to fall in price (the price of lithium and nickel are down sharply), and see improved performance (longer range models now available). Further cost reductions are likely as economies of scale begin to work through, bringing the cost of an EV more in line, or even below, the cost of an equivalent ICE vehicle.

The decline in the price that EV manufacturers can charge may keep them awake at night, but it’s a good thing for consumers. Tesla’s announcement that it will accelerate the introduction of “more affordable” models, with production expected to start in early 2025, should be seen in this context. Companies selling new products often develop too much capacity early on as management mistakenly believe a short-term upward departure from the exponential growth trajectory will be maintained indefinitely. High levels of competition (there are over 129 EV brands in China for example) may be bad for margins, but it weeds out the bad ideas from the good.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/866d2300-43fd-412e-8b42-88276d2090d7_764x640.png)

As EV manufacturers increasingly compete on price and gradually begin to bring the cost to the consumer closer to ICE levels, governments are shifting their support towards expanding the EV charging networks. Resolving range anxiety is key to enabling an EV network effect to take hold since demand for EVs depends on the availability of accessible EV charging stations, while the supply of charging infrastructure depends on the installed base of EVs to use the stations. Charging infrastructure includes the ability to power your EV up at home (not always accessible to people, especially in urban areas), and a network of publicly available fast and slow charging stations.

According to the IEA, the global EV charging stock increased by more than 40% in 2023\. The number of fast chargers grew by 55%, and now account for 35% of publicly available EV chargers. China dominates the development of slow and fast chargers, and there’s more to come. In their latest report, the IEA note that “China is shifting focus to charging infrastructure development, targeting full coverage in cities and on highways by 2030, as well as expanded rural coverage.” Meanwhile, new EU regulation signed off in late 2023 means that from 2025 onwards there must be a public fast charger every 60km along the EU’s main transport corridors.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/728afd33-8732-4e63-802a-cc8ccca5724b_752x518.png)

Other countries, especially those lower down the adoption curve, are likely to learn the lessons of history, and focus on developing their EV charging networks first. Research carried out by the World Bank found that investing in charging infrastructure is 4-7 times as effective in promoting EV adoption than subsidising the cost of an EV to the consumer. Their analysts calculated that if the $43 billion of subsidies dished out in the top 13 EV markets between 2013 and 2020 had been spent on charging infrastructure instead, it would have resulted in a threefold increase in the cumulative induced EV sales across those 13 end markets.[3](#footnote-3)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

**EU ETS II and EVs**

The future EV adoption trajectory will be of increasing concern for investors in carbon markets too. California has been the pioneer here, but now market participants in other jurisdictions, including Europe as it launches EU ETS II (covering road transportation and heating), will need to factor in EV’s network effects into their strategies. Scheduled to begin trading in 2027, the supply-demand fundamentals underpinning EU ETS II is expected to be incredibly tight, potentially resulting in carbon prices reaching $200 per tonne. The rollout of EV’s and EV charging infrastructure is expected to be the main solution by which this cost can be mitigated.

So what does the public EV charging network look like in Europe? The latest data from the European Alternative Fuel Observatory (EAFO) shows that the EU had over 630,000 public charging points by the end of 2023, up from 450,000 a year earlier. Fast chargers make up 7% of the total public charging points, with Norway leading the pack (25% fast chargers), followed by Finland and Estonia (each with 16%), Germany (13%), and Austria (11%).[4](#footnote-4) 

![Chart EU27 Number of Public Charging Points Based on AFIR Classification (Units) (2020-2023)](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8e127a83-3998-4d4d-b42e-661e7b1d008d_650x471.png)

Source: European Alternative Fuels Observatory (EAFO)

While the growth in overall numbers is encouraging, EV chargers need to be broadly spread geographically, close to population centres, and along transport routes for the EV network value to be maximised. At the moment, Europe’s EV charging network is heavily concentrated. In 2023, over half (52%) of Europe's total charging infrastructure was concentrated in just three countries: the Netherlands, Germany, and France. Netherlands also has by far the most public charging points per head of population.

One of the main obstacle’s to broader EV charging infrastructure coverage is permitting. Specific guidelines for EU member states to accelerate permitting are expected at some point over the next two years, according to a timeline issued by the European Commission, but that might come too late for country’s still struggling to allay driver anxiety over EV driving range.

![Chart EU27 Public Charging Points per 100K Inhabitants by Country (Units) (2022)](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a3ffbd56-35ee-4bdb-9a6f-1b9b6fadf635_650x471-jpeg.jpg)

Source: Statzon/ ChargeUp EUROPE 

Overall, EV adoption is occurring at a much faster rate than the media portray. Five percent represents a crucial threshold before adoption hits the mainstream part of the S-curve. Today, some 31 countries, accounting for two-thirds of the worlds car sales, have surpassed that critical point. While margin pressure is a concern for EV manufacturers, low prices are vital if EV sales are to accelerate.

It’s understandable for individual consumers to rail against government mandates forcing them to drive an EV. True adoption will only happen when individuals feel that the EV network offers better value than the incumbent. History suggests that the best way for that to happen is for governments and the EV supply chain to roll out publicly available EV charging infrastructure, removing any barriers that prevent the network from being built, and allowing individuals to make the choice themselves.

The slowdown in EV sales is likely to be a mere bump in the road towards much broader EV adoption.

[Exponential“Our society is being propelled forward by several new innovations - computing and artificial intelligence, renewable electricity and energy storage, breakthroughs in biology and manufacturing. These innovations are improving in ways that we don’t yet fully understand. What makes them unique is the fact they are developing: at an exponential pace, getting faster and faster with each passing month.”![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-75.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/89dcdbe9-6240-4627-b8e6-965c548be714_824x552.png)](https://www.carbonrisk.world/exponential/)

---

1. https://iea.blob.core.windows.net/assets/aa21aa97-eea2-45b4-8686-ae19d8939161/GlobalEVOutlook2024.pdf [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://potentialenergycoalition.org/wp-content/uploads/2024/03/EV-Report.pdf [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://blogs.worldbank.org/en/transport/if-you-build-it-they-will-come-lessons-first-decade-electric-vehicles [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://statzon.com/insights/ev-charging-points-europe [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### Nature's 'black gold' rush
URL: https://www.carbonrisk.world/natures-black-gold-rush/
Last updated: 2025-08-21T10:36:47.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 8 mins*

Up until 1709 the only way to produce iron was to smelt iron-ore with charcoal. Produced using a technique known as pyrolysis, wood is heated to a temperature of around 400 °C in the absence of oxygen to form charcoal.

As demand for iron soared, it was critical that enough charcoal was on hand to keep the furnaces stoked. Charcoal-based iron smelting had a serious cost however. Alongside the clearing of land for agriculture and timber, demand for charcoal from the ironmasters was one of the major causes of deforestation in Europe during the 17th Century.

Scarce supplies of wood and charcoal prompted the search for an alternative. It was Abraham Darby, a British ironmaster, who first demonstrated that iron could be produced in a furnace fired with metallurgical coal, or met coal for short. The discovery helped alleviate the pressure on Europe’s remaining forests, but so began the search for met coal to mine and exploit. Today, steel production accounts for \~7% of global greenhouse gas (GHG) emissions, of which met coal is a major contributor.

315 years later, demand for a product that is chemically very similar to charcoal is enjoying a renaissance as solutions that remove carbon from the atmosphere grow ever more important. Biochar, as its known, is also produced using pyrolysis, but can be made using a wider range of biomass feedstock, and crucially, it is heated to a much higher temperature (600-1000 °C).

While charcoal’s physical properties mean that it is useful for heating, biochar’s greater porosity and surface area means that it is ideal for carbon sequestration. Analysis also indicates that it will take at least 1,000 years to degrade, and realistically well beyond 10,000 years. To all intents and purposes, biochar is permanent given the timescales required to keep the rise in global temperatures below 1.5 °C. As well as its carbon removal properties, biochar also plays a role in improving soil health and increasing crop yields.

There’s a reason why it is called nature’s ‘black gold.’

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/585350c8-f469-47cb-9454-7655a46741ab_1920x1080-1.png)

_This post is for paying subscribers only._
### Biomethane is the killer application Europe needs to decarbonise
URL: https://www.carbonrisk.world/biomethane-is-the-killer-application/
Last updated: 2025-08-21T10:36:49.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 10 mins*

Almost two years ago, shortly after the Russian invasion of Ukraine, the European Commission presented its REPowerEU plan, a framework for how Europe was going to “rapidly reduce \[its\] dependence on Russian fossil fuels and fast forward the green transition.”

The plan focused on three core objectives: reducing energy consumption, diversifying sources of supply, and accelerating the rollout of renewable energy. Largely forgotten about amid the excitement of solar power, heat pumps, and renewable hydrogen, the EU’s plan also pushed for an ambitious scaling up of biomethane production.

To recap, biomethane is typically produced by upgrading the biogas that is released through the anaerobic digestion (AD) of organic waste (municipal waste, agricultural residues, food waste, etc.). It is defined as carbon neutral since only the CO2 absorbed by the organic matter during its growth can be released during its use.[1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/6c57c5df-4a82-41f1-9de1-f3276b9d8339_1034x504-4.png)

Also known as ‘renewable natural gas’, biomethane is extremely versatile. Indistinguishable from natural gas, biomethane can displace it without the need for retrofitting existing infrastructure - pipelines, tankers, appliances etc. Current consumption is evenly split across heating for buildings, industrial feedstock, transportation fuels, and power generation. As it is zero carbon, increasing consumption of biomethane enables emitters to claim they have avoided the emissions associated with natural gas.

### More investment required if biomethane is to hit 2030 target

REPowerEU set a non-binding target of at least 35 bcm of biomethane production per year by 2030, a 10-fold increase on 2022 levels. The latest data indicates that EU production increased to 3.4 bcm in 2023 (equivalent to 1.5% of EU gas consumption), and pretty much in line with recent historical growth rates of around 15%. If Europe is serious about meeting the 2030 REPowerEU target of 35 bcm, the annual growth rate will need to more than double to 33.8%.[2](#footnote-2)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7017f1ec-a79c-4c8c-b520-7966d4981ece_457x417-1.png)

Source: Gas for Climate: A path to 2050, Guidehouse; Rest of Europe includes Iceland, Norway, Serbia, Switzerland, Ukraine and the United Kingdom

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In short, investment in the sector will need to increase sharply. Around £18 billion has been earmarked for European biomethane investment, according to the European Biogas Association (EBA), with two-thirds of this capital scheduled to be spent between 2026 and 2030\. However, the EBA estimates that €83 billion of investment is required to fully unlock biomethane potential based on the construction of an additional 5,000 medium and large-scale AD plants (see [*Rotten returns: Biomethane could play a big role in European decarbonisation*](https://www.carbonrisk.world/rotten-returns/)).

### Current policy support fails to make economics stack-up

The economics of biomethane production have not been favourable. The International Energy Agency (IEA) estimates that it costs European biomethane producers around $17-28 per MBtu (€55-90 per MWh) with injection and liquefaction adding \~$5 per MBtu. Europe’s producers were in a strong position during the height of the energy crisis as natural gas prices surged towards $70 per MBtu. However, it wasn’t to last. Natural gas prices have dropped below the biomethane cost base since spring 2023\. And although prices have rallied on geopolitical concerns over the past month or so, this hasn’t been sufficient to move the economics in favour of biomethane.

Biomethane is a relatively mature industry that up until now has been focused on serving narrow geographical markets, supported by national government policies. Economies of scale have been possible, but it only really becomes apparent among the largest of biomethane plants, i.e., those that are 14 MW or more in size. The other main components of the overall cost includes the feedstock (lowest cost is typically municipal waste, forestry is the most expensive), and other operational expenditures.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a2d84d17-f9aa-4feb-81f2-d3e447e99b77_790x422-1.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

It’s clear that something has to change if biomethane is going to meet its promise. Lets dive in.

_This post is for paying subscribers only._
### Shifting the narrative
URL: https://www.carbonrisk.world/shifting-the-narrative/
Last updated: 2025-08-21T10:36:49.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 8 mins*

![cityscape photography of city near body of water](https://images.unsplash.com/photo-1546878347-4d35c66bc4c3?q=80&w=1000&auto=format&fit=crop&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Malcolm Lightbody](https://unsplash.com/@mlightbody?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/cityscape-photography-of-city-near-body-of-water-4MbiKlr1kgU?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

The Science Based Targets initiative (SBTi) has been the go-to arbiter of corporate climate action.

Setup in the aftermath of the 2015 Paris COP, the SBTi recently demerged from its founding partners - the CDP, the United Nations Global Compact, the We Mean Business Coalition, the World Resources Institute (WRI), and the World Wide Fund for Nature (WWF) - to become an independent registered UK charity. SBTi’s role is to help companies and organisations set net zero targets in line with the 2015 Paris Agreement, while also defining and promoting best practice in emission reductions and carbon removals.

By the end of 2022, companies representing over one-third (34%) of global market capitalisation had either set an SBTi approved target, or had committed to setting one over the next couple of years. By the end of 2023, over 6,000 companies had either set a target or had committed to doing so. Analysis by Trove using the MSCI AWCI IMI as a proxy for the global economy indicates that companies covered by SBTi (approved or committed) now represent \~45% of the global economy. Other organisations offer similar types of support and accreditation as the SBTi, but none has yet been able to supplant the SBTi as the dominant player in this market.

SBTi’s commanding position means that it has not been without critics in recent years. More broadly, companies have been concerned that SBTi has not been sufficiently transparent in its analysis and decision making process, are worried about potential conflicts of interest, and often exasperated at the time necessary to assess and approve individual companies net zero plans.

Its methodology has come in for particular criticism. For example, many companies feel that SBTi has failed to make allowance for companies historical emission reductions, a move that some companies say puts pioneers at a disadvantage versus the laggards who are just getting started. Other methodological criticisms include not rewarding products that help others avoid emissions, so-called ‘Scope 4 emissions’.

One of the biggest criticisms has been levelled at the SBTi’s opposition to the use of carbon credits.

Things may be starting to change.

This week, the SBTi’s board of trustees announced that “when properly supported by policies, standards and procedures based on scientific evidence,” they now believe that “environmental attribute certificates, including but not limited to voluntary carbon markets” could be used for abatement purposes limited to Scope 3 emissions.[1](#footnote-1)

The announcement, posted on the SBTi’s website, came unexpectedly and left many critics of the use of carbon credit bewildered and angered as to why the SBTi had apparently eschewed its normal governance and technical processes. Civil society groups such as Carbon Market Watch called the plan a “blow to the SBTi’s credibility”. Reuters reports that even SBTi staff have sent a letter calling for the CEO to be ousted and for the plan to be overturned.[2](#footnote-2)[3](#footnote-3) 

### **Scope 3 challenge**

To recap, Scope 3 emissions typically account for three-quarters of a company’s emissions, according to estimates from the CDP. However, this varies considerably by sector and can vary from as low as 16% of a company’s emissions for the cement industry, and approach 100% for firms involved with transport, capital goods and financial services. Companies covered by SBTi targets and commitments emit more than 30 Gt CO2e per year, of which 27 Gt CO2e is estimated to be Scope 3 emissions.

_This post is for paying subscribers only._
### Carbon intensity: The key to an economically sustainable green transition
URL: https://www.carbonrisk.world/carbon-intensity-the-key-to-an-economically/
Last updated: 2025-08-21T10:36:51.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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---

*Estimated reading time \~ 11 mins*

Carbon intensity is a measure of CO2 and other greenhouse gas (GHG) emissions involved in a unit of activity.

Carbon intensity can be used as a metric at the individual commodity level (e.g., emissions involved in producing or extracting thermal coal, crude oil, etc.), and at the manufacturing process or activity (e.g., emissions involved in generating electricity, steel manufacture, personal transportation, etc.). With companies under increasing pressure to account for, and have an impact on emissions across their supply chains, carbon intensity will become the most important metric by which the market judges progress.

However, the most important measure of carbon intensity is the global economy (e.g., emissions per unit of GDP). A high carbon intensity amplifies the effect of economic growth on emissions. It’s only by dramatically reducing carbon intensity that we can continue to see strong improvements in living standards, while at the same time remaining within the carbon budget necessary to achieve the Paris Agreement.

### **The carbon intensity of the commodity**

Although people tend to use a standard carbon intensity to measure the overall emissions associated with a particular activity, the average hides a broad range of carbon emissions. For example, the carbon intensity of crude oil production varies significantly between countries, but even on a local basis, the carbon intensity can also differ dramatically. The chart below from the International Energy Agency (IEA) shows the global range of carbon intensity for crude oil, by production (Scope 1 and 2), by activity, during 2022\. Production of the crudes on the far right of the chart are responsible for \~10 times as much carbon per barrel as those on the far left.[1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/ae0c8498-0a6b-4609-aa8b-1589f66d3c61_814x471.png)

This second chart from S&P Global illustrates the difference in Scope 1 GHG emissions intensity across production hubs in the North Sea (primarily the UK and Norway). Over 60% of crude production from the basin has a carbon intensity of 10 kgs CO2e per barrel or less. However, similar to the variation on a global basis, the most carbon intensive hubs emit 10x or more GHG emissions as the least carbon intensive.

As energy and commodity producers come under pressure to reduce their environmental impact, cutting the carbon intensity of production is a lever that is within their grasp. For example, crude producers in the North Sea could look to electrify their platform using stand-alone or grid-connected renewable energy, and cut methane emissions by repairing pipelines and other aging infrastructure, and halting the practice of unnecessary flaring (see [*No free lunch: Cutting global methane emissions from oil and gas is more difficult than it seems*](https://www.carbonrisk.world/no-quick-win/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/78257762-cfef-4f42-8efe-759ce4b3c220_984x469.png)

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### **The carbon intensity of the process**

Global carbon emissions associated with generating electricity have doubled since 2000 to 12.4 Gt CO2 in 2022, according to Ember. Around 70% of the growth in emissions has been due to urbanisation and industrialisation in China, spurring rapid demand growth for electricity. Countries with the most carbon intensive electricity generation, such as South Africa and Mongolia, are of course heavily reliant on thermal coal.[2](#footnote-2) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/958bb218-bc49-4ced-9445-68a5d58886b0_3400x2400.png)

Nevertheless, over the same period the carbon intensity of electricity generation declined by 6% to around 425g CO2 per kWh. Ember data reveals that the largest absolute changes in power generation carbon intensity over that period came from Australia, the USA, and the UK as thermal coal generation was pushed out in favour of natural gas, and renewables captured a larger proportion of the generation mix.[3](#footnote-3) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b5be0c05-4ecf-426c-b047-1b7244f0e0c7_815x529.png)

Source: Ember

Meanwhile, the steel-production process plays a pivotal role in determining the overall carbon intensity of manufactured steel. Blast furnace operations typically emit 2-2.3 tonnes of CO2 per tonne of steel, while at the other end of the scale, Electric Arc Furnaces (EAFs) typically emit less than 0.5 tonnes of CO2 per tonne of steel. The carbon intensity of the power grid, and the quality of the iron ore used to produce the steel also have an important role to play (see [*An iron will: Sweden's first mover advantage in green steel will be tough to replicate*](https://www.carbonrisk.world/an-iron-will/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/20e1cf47-1128-4b22-8376-2bb5a816ec24_1068x522.png)

As the chart below illustrates, high carbon intensive steel can push low carbon intensive competition out of the market, especially if they have a cost advantage. Between 2013 and 2022, the carbon intensity of EU steel imports became progressively higher as supplies from China, South Korea, Russia, India, and Ukraine pushed low carbon intensive exporters such as Brazil and Taiwan, out of the market.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/842275db-e8c5-4638-88d2-6e2949476077_1028x657.png)

Click [HERE ](https://public.flourish.studio/visualisation/12591907/?ref=carbonrisk.world)for interactive version

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### **The carbon intensity of the economy**

Efforts to cut the carbon intensity of individual commodities, manufacturing processes, and other economic activities mean very little if they are counterbalanced by rising carbon intensity elsewhere in the economy. Analysis of 200 years of global emissions and GDP data by the Federal Reserve Bank of San Francisco (FRBSF) reveals that global carbon intensity follows a bell-curve (indicated by the dashed line). Global carbon intensity peaked around 1920 and has gradually dropped to levels consistent with that last seen in the early Industrial Revolution.[4](#footnote-4)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/45702cb4-3a70-40af-b563-bb918266bb05_805x616-1.png)

Different parts of the world are of course at different stages of development, yet the evidence indicates that carbon intensity in both advanced and emerging economies do typically follow a similar bell-curve formation. The chart below shows large advanced economies (the US, Japan, and Germany), versus large emerging economies (China, India, and Russia). Advanced economies saw their carbon intensity peak in the 1910’s, while it wasn’t until the 1980’s that emerging economies witnessed peak carbon intensity.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/2e81e6da-6215-40ec-9015-92f924f97117_796x615-1.png)

Assuming future carbon intensity is based on countries continuing to follow the bell-curve lower, and combining it with long-term forecasts of real GDP growth by the OECD, the FRBSF projected what it might mean for overall global emissions. Economic, political, and technological factors are inherently unpredictable and so the shaded region broadly reflects the uncertainty (+1 / -1 standard deviation) in the bell curve approach, and the GDP growth projections from the OECD. The horizontal lines correspond to the 2030 emission reduction targets set by the countries of each group in accordance with COP26.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/093e39e6-ca4e-4072-9668-4fcb7fb67d54_806x614.png)

Over the past 30 years, carbon intensity in advanced economies (and to a lesser extent in emerging economies) has diverged (to the upside) from what the bell-curve formation would suggest. This isn’t necessarily something to be concerned about. As the historical data shows, there have been some notable departures from the trend in the past, with carbon intensity subsequently returning to the long-term fitted line of the bell-curve. Nevertheless, FRBSF’s analysis indicates that advanced economies need to play catch-up if they are to return to the bell-curve, and go on to hit their 2030 emission reduction targets. Emerging economies face an even smaller chance of achieving their announced targets, even if they follow the bell-curve. Indeed, the analysis indicates that for this latter group, emissions will still continue to grow and perhaps only peak in 2030 or soon after.

To meet global climate targets, there needs to be much greater focus on bringing carbon intensity at least back into line with the bell-curve trend. As we’ll see, by itself, the market is not doing enough to make this happen, but with government and regulatory support set to ramp up, the chances of success do appear to be on the rise.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-79.png)

Get more from Peter Sainsbury in the Substack appAvailable for iOS and Android[Get the app](https://substack.com/app/app-store-redirect?utm%5Fcampaign=app-marketing&utm%5Fcontent=author-post-insert&utm%5Fsource=carbonrisk)

### **Putting a value on carbon intensity**

Efforts to differentiate commodities and derived products based on their carbon intensity have, so far at least, proved somewhat illusory. As I outlined in [*Deciphering nickels green premium*](https://www.carbonrisk.world/the-illusory-green-premium/), there are three good examples of commodities in Europe where green premiums exist based on low carbon intensity production: aluminium, steel, and ammonia. Each of these commodities benefits from carbon intensity being measurable with a methodology that is agreed upon by industry, while negotiation takes place in an open and transparent market.

If those conditions are in place then the price buyers are willing to pay for low carbon intensity commodities depends on the value they derive from it. Important factors include the potential to reduce emissions at a later stage of production, meeting certain sustainability criteria, differentiating themselves versus their competitors, the size of the carbon benefit, and if it reduces their demand for emission allowances.

The scarcity of the low-carbon commodity relative to the equivalent ‘standard’ emissions substitute is also crucial in determining the existence of a ‘green’ premium. In addition, the existence of additional costs (e.g., the need to procure renewable energy, meet certain criteria) necessary to produce the low carbon commodity - relative to the ‘standard’ emissions substitute - will also influence the size of the premium.

### **Carbon intensity-based emissions trading schemes**

Emissions trading schemes typically operate with an absolute emissions cap. Obligated emitters are required to cut their absolute emissions by an amount equivalent to the annual decline in the cap, or otherwise compete with other operators for an ever scarcer supply of emission allowances.

However, not every ETS operates on this basis. For example, China’s and Australia’s ETS are designed to cut the carbon intensity of obligated emitters to achieve an overall decline in emissions. Under a carbon intensity-based ETS (also known as a tradable performance standard), allowances are allocated according to actual production levels (e.g. kWh of electricity generated) and predetermined carbon intensity benchmarks (e.g. CO2/kWh), either set at the individual plant level or using industry averages. The baseline is adjusted each year to account for changing production levels and the relative and absolute change in carbon intensity by industry.

Under the Chinese ETS, power generators with a carbon intensity higher than the benchmark will have a deficit of emission allowances and must buy allowances to be compliant. While those generators with more efficient plants will show an allowance surplus, which can then be sold to those in deficit. A carbon intensity-based ETS is unlikely to incentivise a shift from coal power to gas or renewable generation. It’s more likely that it will incentivise power generators to switch from lots of old, small, inefficient coal plants towards newer, larger, and more efficient coal facilities (see [*Everything you need to know about China's national carbon market*](https://www.carbonrisk.world/everything-you-need-to-know-about-e31/)).

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### **Other carbon intensity-based emission regulations**

The EU’s Carbon Border Adjustment Mechanism (CBAM) represents probably the most ambitious and wide-ranging policy tool to incentivise a decrease in carbon intensity. During the CBAM transitional phase - 1st October 2023 to 31st December 2025 - importers must submit a CBAM report every quarter containing information on the quantity of CBAM obligated products imported into the EU, the direct and indirect emissions involved in their production (i.e., Scope 1 and 2 emissions), as well as the carbon price due in the country of production. The cost of complying with CBAM will be gradually phased in between 2026 and 2034\. However, significant uncertainty remains as to how importers of CBAM products are going to accurately and consistently report carbon intensity when even the exporters of those commodities might not have access to reliable emissions data (see [*Through the looking glass: Country level emissions data are (probably) not what they seem*](https://www.carbonrisk.world/through-the-looking-glass/)).

Governments will increasingly go beyond CO2 and focus on some of the other GHGs. Both the US and the EU are in the process of introducing limits on methane emissions intensity, above which a fee is applied. In August 2022 the US Government announced that it would be introducing a methane fee on its oil and gas industry under the Inflation Reduction Act (IRA). The methane emissions charge began in 2024 at $900 per tonne of methane and is set to rise to $1,200 per tonne next year and $1,500 per tonne thereafter. The "waste emission threshold" above which the Environmental Protection Agency (EPA) will collect the methane fee, ranges from 0.05-0.2%.

Meanwhile, the EU Methane Regulation will impose methane emission intensity limits on imports of fossil fuels into the EU. By 2030 imported fossil fuels will have to meet a maximum methane intensity threshold, or the importer must pay a financial penalty. The methane intensity methodology, the threshold at which a penalty becomes payable, and the financial penalty itself have yet to be decided (see [*Pricing methane emissions out of the atmosphere: America's first nationwide price on a greenhouse gas does not go far enough*](https://www.carbonrisk.world/pricing-methane-emissions-out-of/)).

Remember that we don’t demand energy and other commodities for their own sake, but for what we can do with them. Access to resources has been instrumental in raising global economic development across advanced economies, and they will continue to be vital in improving opportunities for people across the worlds emerging economies.

History shows that global carbon intensity per unit of GDP has peaked and will most likely continue to decline, both in advanced and emerging economies. Recent policy announcements (Europe’s carbon border levy and methane emission limits on the energy sector) are likely to be the first of many such policies that penalise producers with a high carbon intensity.

Carbon intensity is set to become perhaps the most valued metric by which markets judge the competitiveness of different industries, and even the economic prospects of individual countries. A relentless focus on improving carbon intensity is the key to an economically sustainable green transition.

[Prosperity bends the curve"Distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long term. Goals for more growth should specify more growth of what and for what." - Simon Kuznets, the creator of Gross National Product (GNP), the predecessor to GDP.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-80.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/ece33470-b1b1-46cf-abe1-51df8d2ba91d_702x377.png)](https://www.carbonrisk.world/the-environmental-kuznets-curve/)

---

1. https://iea.blob.core.windows.net/assets/2f65984e-73ee-40ba-a4d5-bb2e2c94cecb/EmissionsfromOilandGasOperationinNetZeroTransitions.pdf [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://ourworldindata.org/grapher/carbon-intensity-electricity [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. file:///C:/Users/Peter%20Sainsbury/Downloads/Global-Electricity-Review-2023%20(1).pdf [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://www.frbsf.org/research-and-insights/publications/economic-letter/2023/10/bell-curve-of-global-co2-emission-intensity/ [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### Pegger thy neighbour
URL: https://www.carbonrisk.world/pegger-thy-neighbour/
Last updated: 2025-08-21T10:36:52.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 7 mins*

At least one carbon market is considering linking up with a larger, more established emissions trading scheme.

Washington State has only been in operation for a little over 12 months, but there is already pressure to establish a link with the Western Climate Initiative (WCI) that counts California and Quebec as its members. As discussed in [*The spectre of 'gilets jaunes' returns*](https://www.carbonrisk.world/revolt-over-gasoline-price-hike-could/), high carbon prices are at least partly to blame for an increase in gasoline prices in the Pacific state. At least until speculation over the future of Washington State’s carbon market sent its carbon price into a tailspin, the price of emission allowances in the state were almost double the prevailing price in California.

Meanwhile, industrial emitters in the UK have been lobbying to link up with the EU ETS. In contrast to the situation in Washington State, UK manufacturers gripe is a function of carbon prices being too low in the UK relative to the rest of Europe. First off they are concerned that low carbon prices could have a detrimental impact on investment in decarbonisation in the UK. Secondly, the low carbon price will also negatively affect UK exports to Europe when the EU’s CBAM is gradually phased in from 2026\. Recall that the cost of meeting CBAM is based on the relative difference in carbon prices between the EU and the exporting nation (see *[No level playing field: Europe's carbon levy will accelerate adoption of carbon pricing, but not everyone will win](https://www.carbonrisk.world/no-level-playing-field/)*).[1](#footnote-1)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/bc6eb5bc-3f19-42fa-92f7-53a833d9b2f8_1714x810-1.png)

An election in the UK is expected to take place in the autumn. The UK and the EU are likely to enjoy a closer relationship under a Labour government, and could look to begin negotiations on linking up. The European Commission would need to get a mandate from the Council and Parliament before negotiations on an international treaty, such as the one agreed with Switzerland, could proceed. Speaking to OPIS, a spokesperson from the Department of Energy Security and Net Zero (DESNZ) stated that the UK maintains an open position to linking to the EU ETS:

> “We are open to the possibility of linking the UK ETS internationally and will continue to work collaboratively with other jurisdictions to tackle shared challenges and learn from the experience of others as we develop the scheme.”

Although there only a few examples of carbon markets linking up with another, the limited sample does give an indication of what we might expect.

Quebec launched its carbon market in 2013, but after only one year it linked up with California under the WCI. The linkage process was relatively seamless as both jurisdictions are sub-national (avoiding complications such as Article 6 of the Paris Agreement), while Quebec’s ETS had been constructed based on the California blueprint, and so was already pretty well harmonised.

A harmonised approach to ETS design meant that Quebec’s linkage with California meant little in the way of redesign was necessary. The same is likely to hold true for both Washington State and the UK ETS should they link with their larger, more established carbon market neighbours. The former was designed with the potential for linkage in mind, even before it was launched. The latter split from the EU, closely mirroring the EU ETS in its design. The two markets have developed along similar lines and have also explored broadly comparable iterations (e.g. including carbon removals), albeit on slightly different timescales. The closer the two markets develop in a coordinated fashion, the easier it will be to link up at some point in the future (see [*UK carbon market nadir has passed*](https://www.carbonrisk.world/uk-carbon-market-nadir-has-passed/)).

Another important lesson from Quebec’s linkage with California is that the relative size of the two markets is the most important factor in price formation. Carbon prices in Quebec (prior to linkage) had consistently been lower than California, despite a high share of renewables in the generation mix and fewer low-cost emissions reduction opportunities. When Quebec established a link with California (whose carbon market was \~6 times bigger), carbon prices moved higher to align with the price in California. If Washington State does seek to establish a link with California, it’s worth noting that Californian Carbon Allowances (CCA) are now much higher (up \~60% versus early 2023), limiting the potential for cost savings.[2](#footnote-2) 

The act of linking your carbon market to a larger, more established market can be thought of as a country pegging its currency to the US dollar or a basket of currencies. By tying their hands, governments pursuing this strategy bolster their economic credibility with the market, often enabling domestic industry to benefit from lower capital costs than would be present otherwise

Although linkage reduces the opportunity for asymmetric action that might weaken the carbon price, it also comes at a cost. As we’ve seen it can result in a higher carbon price, which might be too high for the domestic industry to bear. Linkage could also import carbon price volatility if political changes in the larger ETS introduce uncertainty. Finally, it could also result in financial flows out of the country, especially if decarbonisation is more efficient in the larger ETS.

Not all linkages go well, and like a prenup might prevent a married couple from going to war, having a plan in place should parties decide to split tends to help market stability. For example, much less well known is that Ontario, the largest Canadian province by GDP and twice as big as Quebec, also established a linkage, albeit a brief one, with California-Quebec in 2018\. The election of a new premier in June that year resulted in a change of heart as Ontario’s participation was deemed to be a bad deal for the province. On the day that Ontario announced the split, the WCI temporarily suspended the trading accounts of emitters based in the province preventing the allowances from being dumped on the market.

A more recent example is the state of Virginia’s and the Regional Greenhouse Gas Initiative (RGGI). The state’s Democratic lawmakers voted to join RGGI in 2020, joining almost a dozen other states in the northeast US. However, a change in political leadership in 2022 led to the Republican leader seeking to remove Virginia from the scheme, citing higher energy costs for consumers. Over two years later the state remains in a legal stalemate, with neither supporters or detractors seemingly able to secure the state’s future (see [*Volatile RGGI carbon prices as Virginia's Governor continues to push to leave the scheme*](https://www.carbonrisk.world/volatile-rggi-carbon-prices-as-virginias/)).

The first international carbon market linkage to occur was between the EU ETS and Switzerland’s ETS (set up in 2008). Beginning in 2011, it took 6 years to finalise negotiations on linking the two schemes. A referendum on anti-EU immigration legislation in 2014 prompted retaliation from the EU in other areas of cooperation which slowed down negotiations. However, it wasn’t until 2020 that the linkage actually became operational. Under the terms of the linking arrangement, Switzerland's system remains separate from the EU ETS, rather than joining it as a participating country, but there is two-way fungibility of EU and Swiss emission allowances.

In the early 2010’s the EU had indicated it was willing to discuss linking its ETS with other compatible schemes elsewhere in the world. Improved market liquidity, more cost-effective emission reduction, and lowering the risk of carbon leakage were seen as the main benefits. The EU had even agreed a pathway for linking with Australia’s fledgling carbon market by 2018, before a change in political leadership in 2013 and a move towards less ambitious climate policies scuppered those plans. Other countries where the EU had increased its technical cooperation included South Korea and China, although any direct link was always thought to be several years away, if ever.

Other than the UK ETS potentially linking with the EU ETS, it is very unlikely that any other country currently fits the bill, and its unlikely that there would be much appetite for it from the EU. Rather than pursue an expansion in the EU ETS to achieve improved liquidity, reduce costs, and lower leakage risk, the more likely scenario is that the EU looks to its CBAM, coupled with promoting the adoption of carbon markets among its trading partners, as a more suitable way to achieve those same benefits.

[Carbon markets are going global“The answer to the global climate crisis is carbon pricing.” - Kurt Vandenberghe, the European Commission’s Directorate-General for Environment (DG ENV) Carbon pricing plays a number of roles including internalising the cost of negative externalities resulting from greenhouse gas (GHG) emissions and putting a price on the remaining carbon budget consist…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-81.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/db67191d-b6d3-4c5f-88aa-80540df5772e_634x569.png)](https://www.carbonrisk.world/carbon-markets-are-going-global/)

---

1. https://www.energy-uk.org.uk/publications/without-linking-emissions-trading-systems-uk-companies-face-higher-bills-and-red-tape/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.theccc.org.uk/wp-content/uploads/2019/08/Vivid-Economics-The-Future-of-Carbon-Pricing-in-the-UK.pdf [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
### The spectre of 'gilets jaunes' returns
URL: https://www.carbonrisk.world/revolt-over-gasoline-price-hike-could/
Last updated: 2025-08-21T10:36:53.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

![undefined](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/2b51c0af-b7cf-410d-b315-f62a6eaa4cf8_1280x853-jpeg-2.jpg)

By Olivier Ortelpa - https://www.flickr.com/photos/copivolta/46193754882/, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=74961674

*Estimated reading time \~ 8 mins*

> *"There are three things that move the needle in this country: politics, religion, and gas prices. It's incredible what gas prices do to American psychology. We love cheap gas." - Denton Cinquegrana, OPIS*

The price of gasoline plays an outsized role in shaping consumer sentiment.

The cost of filling up is one of the largest components of consumer spending, and is typically one of the highest individual weightings when measuring the cost of living. Frequent purchases mean that changes in the price of gasoline are highly visible.

A rapid increase in the price has a dramatic and immediate impact on motorists perception of how well their individual finances are holding up, while also exacerbating fears about the state of the economy. In short, its no wonder that the price of gasoline is perhaps the most politically sensitive economic indicator there is.[1](#footnote-1)

A return to the ballot box in the United States this November, and sometime before 20th October 2025 in Canada, has opposition parties ire focused on the upward trend in gasoline prices. Although individual states and federal governments have very little impact on the overall price of gasoline, that doesn’t stop those who wish to assume power from questioning the economic competency of the incumbent leader, and his or her administration.

The future of carbon pricing in North America, Europe and elsewhere could pivot on decisions made in Washington State, located in the Pacific Northwest region of the US. It’s carbon market, only the second state-wide emissions trading scheme in US history after California, is close to seeing its legislation repealed after only 15 months of operation. The culprit: the perceived impact of carbon prices on the cost of gasoline across the state (see [*Everything you need to know about Washington State's "Cap-and-Invest" carbon market*](https://www.carbonrisk.world/everything-you-need-to-know-about-1b9/)).

Whether the Washington State carbon market continues as it is, establishes a link with California and Quebec, or abandons carbon pricing completely is likely to have an impact on whether New York and other north-eastern states implement their own cap-and-trade schemes. Together, the three states - California, Washington State, and New York - account for one-quarter of the US economy.

Across the border, Canada’s national carbon price rises 23% this week to C$80 per tonne. Opposition to carbon pricing may increase further if it leads to higher gasoline prices. The recent obfuscation over the national carbon price may well have led to a loss of trust in the ruling party’s claims over the impact.

Finally, it could also have implications across the Atlantic where EU Parliamentary elections are scheduled to take place in June, and the EU is about to press ahead with implementing EU ETS II. In 2025 the bloc will begin to expand carbon pricing via a separate cap-and-trade market that covers road transport and buildings (see [*Europe must learn from Canada's 'price on pollution' debacle*](https://www.carbonrisk.world/a-cautionary-tale/)).

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### Repost: The signal and the noise
URL: https://www.carbonrisk.world/repost-the-signal-and-the-noise/
Last updated: 2025-08-21T10:36:53.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

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![trees covered with fog](https://images.unsplash.com/photo-1535025075092-5a1cf795130b?ixlib=rb-4.0.3&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)

Photo by [Tobias Tullius](https://unsplash.com/@tobiastu?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/photos/RhjVGxILcqE?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

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*Estimated reading time \~ 11 mins*

*Every month or so I repost an article from the Carbon Risk archives. The subscriber base for Carbon Risk has grown significantly over the past couple of years and so many of my current readers probably haven’t seen some of the earlier articles. Many of the posts are arguably even more relevant now than the day they were first published. Following that theme, this months repost focuses on carbon credit risk.*

*Carbon market innovation never stops, and some of the best ideas can be borrowed from other asset classes. The role that carbon credit ratings agencies are now playing in the carbon credit market is the perfect example. Over the past twelve months the ratings agencies have delivered what the market wants: the ability to price a credit on the likelihood that it will deliver the carbon it says it will. Mirroring the development of the bond market, high quality carbon credits now enjoy a sizeable price premium versus lower quality credits.*

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/27bfa0cd-df07-4b5c-a263-ee0e1c01249f_687x618.png)

*The ability to accurately price risk in the carbon credit market, even for projects that have yet to begin issuing any credits, is crucial in boosting investor confidence, and ensuring capital flows to the most promising, most impactful projects. As the scope of credit types assessed expands, and the breath and depth of data available grows, so the efficiency with which risk is assessed and priced will improve. Indeed, there’s evidence that it is already happening. The average price premium for the highest-rated BeZero credits ('A' or above) versus ('BBB' or lower) has surged from around 50% twelve months ago to 200% in late 2023.*

---

At the edge of the carbon market risk curve.

That’s how I described the voluntary carbon market in one of my first Carbon Risk articles.

> “At the edge of the carbon market risk curve you will find the voluntary carbon market (VCM).  
>  
> Up until this point I have only discussed carbon markets from the perspective of the formal carbon compliance markets, such as the ones active in Europe and California.  
>  
> Regulated. Legal. Transparent. The rules of the market are (mostly) clear.  
>  
> The voluntary carbon market (VCM) has none of those features.”

The process goes a little like this. A developer seeks to restore a mangrove or reforest a hillside to remove carbon from the atmosphere. A carbon credit can be issued as long as the carbon offset project meets the methodology laid down by the verification body. The decision to issue a carbon credit is a binary answer - yes or no. Once issued, the credits are tagged and tracked, and the holder or purchaser of the carbon credit can surrender it or retire it to meet their carbon neutrality or emission reduction goals, or sell it onto another party.

The developer of a carbon offset project may have passed the verification checks and so be in a position to issue credits, but that does not mean that the carbon project has a 100% chance of success. Carbon offset projects operate in the real world. Their success or failure in avoiding emissions or removing carbon from the atmosphere is subject to significant uncertainty, as is any venture. According to carbon credit ratings agency BeZero, there are six main risk factors that determine whether a carbon credit will deliver on its claims:

1. Additionality: The risk that a credit purchased and retired does not lead to a tonne of CO2e being avoided or sequestered that would not have otherwise happened.
2. Over-crediting: The risk that more credits than tonnes of CO2e achieved are issued by a given project due to factors such as unrealistic baseline assumptions.
3. Non-permanence: The risk that the carbon avoided or removed by the project will not remain so for the time committed and any associated information risk.
4. Leakage: The risk that emissions avoided or removed by a project are pushed outside the project boundary.
5. Perverse incentives: The risk that benefits from a project, such as offset revenues, incentivise behaviour that reduces the effectiveness.
6. Policy: The risk that the policy environment undermines the project’s carbon effectiveness.

**The noise**

A recent investigation into nature-based credits, jointly published by the Guardian, Die Zeit and SourceMaterial, highlights the challenge faced at the edge of the carbon market risk curve. The researchers analysed the performance of forestry based credits issued under Verra, the largest verification body, concluding that more than 90% of the carbon offsets failed to deliver on the carbon offset claims.[1](#footnote-1)

Of the six risks noted earlier in this article, the researchers highlight risk number 1 - additionality - as the primary reason for the poor quality of the carbon credits. Project developers look to counter this risk by ensuring a reasonable counterfactual or baseline is in place. If the baseline is not estimated correctly then there is likely to be an over-issuance of unjustified carbon credits.

Each carbon project has it’s own unique baseline. Instead, the investigation appears to have applied synthetic baseline, i.e., creating counterfactuals by selecting areas to serve as proxies for the project areas. Sylvera, another carbon credit ratings agency, argues that this approach overestimates the problem. Their own analysis suggests that \~70% of the project baseline estimates could be incorrectly estimated.[2](#footnote-2) 

Despite the flaws in its analysis, the Guardian/Die Zeit/SourceMaterial publication has had an immediate impact on the market for reforestation credits (REDD+) with buyers retreating from the market (see [*ESG investment backlash hits nature-based carbon credit prices*](https://www.carbonrisk.world/esg-investment-backlash-hits-nature/)).

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### Energy efficiency is undervalued and misunderstood
URL: https://www.carbonrisk.world/energy-efficiency-is-undervalued/
Last updated: 2025-08-21T10:36:55.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 9 mins*

Conventional thinking says that energy efficiency is pointless.

Critics suggest that it will always lead to a rebound effect. This is where lower energy prices lead to a rebound in consumption, overwhelming the initial decline brought about by the efficiency improvement.

It was William Stanley Jevons who first drew attention to this. The English economist observed that Britain’s consumption of coal soared after James Watt introduced the steam engine in 1712\. In his essay, “The Coal Question”, Jevons concluded, “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth.”

Another criticism is that opportunities for energy efficiency inevitably suffer from diminishing marginal returns. For example, it might be relatively straightforward and cost-effective to cut energy consumption by 20% say, but over and above that, every additional 1% decline in consumption becomes progressively more expensive and difficult to do.

Either way, the conclusion based on conventional thinking is that any impact on emissions from improving energy efficiency are likely to be meagre, and will inevitably and rapidly be swallowed up by increased energy demand. Some argue that rather than wasting precious resources trying to be more efficient it is far better to invest in additional sources of energy supply.

Even worse than being pointless, energy efficiency is also linked with exaggerated ideas of thrift (such as President Jimmy Carter’s call to beat the oil crisis by wearing a jumper), and de-growth (cutting energy consumption in a “Cutting off one's nose to spite one's face" reaction to concerns about climate change).

Conventional thinking misses several important factors. In short, energy efficiency is misunderstood.

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First off, people often fall prey to the primary energy fallacy. This is the assumption that *all* of the energy embedded in the fossil fuels we burn today needs to be replaced by an equivalent amount of clean energy (i.e., renewables and nuclear). Those who fall for this line of reasoning point to primary energy trends since the Industrial Revolution. History shows that every previous energy transition has tended to be additive, i.e., each new source of energy (fossil fuels, nuclear, renewables etc.) has added to overall primary energy demand, rather than substituted for the incumbent. For example, despite the surge in renewable generation capacity over the past two decades, the share of fossil fuels in primary energy demand has been stuck at around 80-85%, yet overall primary energy demand has continued to rise. In the face of these primary energy trends, advocates argue that energy efficiency - and the clean energy transition more broadly - is a futile endeavour.

The focus on primary energy fails to take adequate account of the energy losses involved with fossil fuels. Every year the Lawrence Livermore National Laboratory in California produces a Sankey diagram illustrating primary energy flows through the US. It’s latest report shows that over two-thirds of primary energy ends up as ‘Rejected Energy’. The majority of these losses arise in the the form of waste heat as primary energy is first extracted, converted, and used for power generation, and then transmitted and distributed to the final energy consumer. Overall, it means that only one-third of primary energy in the US is actually used by consumers as ‘Energy Services’. A relentless focus on expanding supply promises to lock in high levels of energy inefficiency.[1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/5b5efd4a-e6b9-4e7c-bd86-a76420f243de_3249x1887-1.png)

It’s important to note that we don’t demand energy for its own sake, but for what it enables us to do. Energy comes in many different forms, each with a different inherent quality (energy density, ease of transport, environmental impact, etc.). It’s no good to simply compare oil with renewables, or nuclear with coal. At its most basic level we use energy to perform work. Exergy is the term that scientists use to define the maximum amount of work that can be produced from a flow of energy. Electricity enables consumers to make better use of exergy. For example, one joule of electricity can be used to power a wider range of activities than an equivalent amount of heat.

In the past energy efficiency has tended to focus on the actions of individual industries or countries, and importantly in isolation. This includes businesses adopting more efficient means of production, or governments introducing regulations that ban energy inefficient appliances. Energy efficiency is also misconstrued as individuals deliberately cutting their living standards in order to save energy. What all of these actions have in common is that they represent only an iterative change to the energy system. In contrast, electrification and decentralised energy generation - two of the most powerful forms of energy efficiency - go beyond the isolated actions of individuals and change the entire system.

The largest source of inefficiency in absolute terms is power generation. Two-thirds of primary energy is lost from extraction, heat loss in power generation, through to electricity transmission and distribution. The conventional electricity grid comprises centralised power generation and an elaborate web of transmission infrastructure in order to deliver power to where it is needed. It doesn’t need to be this way. According to  decentralised energy delivers higher levels of electrical and thermal efficiency, relieving pressure on the grid, while also being lower cost and more reliable. Decentralised generation refers to energy that is generated off the main grid and includes micro-renewables, heating and cooling.[2](#footnote-2)

The second biggest source of energy loss is transportation. The internal combustion engine is eye-wateringly inefficient, losing around 80% of primary energy, mostly in the form of heat from the engine. In comparison, electric vehicles achieve almost 90% efficiency; electric motors deliver around 67%, plus an additional 22% from regenerative braking.  makes the point that decarbonising transportation seems almost impossible when you only think about primary energy demand. However, once you consider the efficiency gains from electrification it begins to become clear that you only need to displace a fraction of the fossil fuels currently consumed.[3](#footnote-3)

The third largest source of energy losses is industry, with more than half of primary energy being lost. The same is true here, electrification can also make a big dent to industrial demand for primary energy. For example, industrial heat accounts for \~20% of global energy demand. Around three-quarters of that heat is supplied using fossil fuels, primarily natural gas and coal and contributes around 10% of global greenhouse gas (GHG) emissions.

Electrification via heat pumps has the potential to account for about 30% of total industrial heat demand by 2050, according to the IEA’s Net Zero Emissions by 2050 Scenario. Unlike conventional electrical space heating systems that convert one form of energy (electricity) to another (heat), heat pumps work by transferring heat from one place to another. As heat pumps only use electricity for heat transfer they use far less energy than conventional heating. Overall, heat pumps tend to be 3-4 times as efficient, depending on the external temperature (see [*Heat pumps on the factory floor*](https://www.carbonrisk.world/heat-pumps-on-the-factory-floor/)).

Whole energy system change dramatically alters the equation. Rather than being limited to diminishing marginal returns, an energy efficient world akin to the one I’ve outlined could have increasing returns to scale. Decentralisation coupled with lower energy and resource demands should reduce geopolitical pressures. Fixing the current broken energy system means that instead of upgrading and expanding the grid, capital can be deployed for more productive uses. Last but not least, an energy efficient global economy will increase competitiveness and productivity. Rather than being a drag on living standards, system-wide energy efficiency promises to accelerate economic development.

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How are we doing so far? Well, the annual improvement in global energy intensity - the amount of primary energy used to produce a given amount of GDP - slowed from 2% in 2022 to 1.3% in 2023, according to estimates from the International Energy Agency (IEA). However, to be consistent with the IEA’s Net Zero Emissions by 2050 Scenario, the annual improvement in energy intensity will need to double to 4% across the period 2022-30\. The IEA predict that the improvement in energy intensity would result in 7 Gt CO2 lower emissions – 20% of current emissions. Importantly, the IEA indicates that energy efficiency and related measures could account for half of all emission reductions achieved this decade.[4](#footnote-4) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/34725686-5a4c-438d-a971-8555be565e47_851x528-1.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

History shows that it can be done. The annual improvement in global energy intensity more than doubled from 0.8% in 2001-10 to 1.7% in 2011-20\. Fourteen of the G20 economies accelerated their energy intensity improvements in 2011-20 versus the previous decade. Nine out of every ten countries have achieved the 4% rate at least once over the past decade, and half have done so at least three times. Nevertheless, in an illustration of how challenging it is to do on a consistent basis, only four G20 countries – France, China, Indonesia, and the UK – have done so over a continuous 5-year period.

A doubling in energy intensity is going to require a lot more investment. The IEA calculates that global annual investment in energy efficiency will need to triple to $1.8 trillion by 2030\. As always though the burden is unlikely to be shared equally. The IEA estimates that investment in energy efficiency in advanced economies needs to more than double by 2030 to almost $900 billion, but the challenge is even greater in less developed economies. The IEA think that investment needs to scale by a factor of 3.5 to be on course for net zero.

Energy efficiency is the cleanest and cheapest way to decarbonise our economy while also meeting our energy needs. It is also the most misunderstood. That will need to change if the energy transition is to succeed.

[Harnessing the invisible fuelWe don’t demand energy for its own sake, but for what it enables us to do. If energy is life, then we should be careful how we use it. Energy efficiency simply means using less energy to perform the same activity, eliminating waste. The “invisible fuel” as energy efficiency is sometimes known as, provides some of the quickest and most cost-effective options to reduce energy consumption and cut carbon emissions. Done right, improving energy efficiency can help the environment while also reducing energy poverty.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-85.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c719fe53-c1db-4f2b-8b7e-c5d89f7c08ec_903x544.png)](https://www.carbonrisk.world/harnessing-the-invisible-fuel-to/)

---

1. https://flowcharts.llnl.gov/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. [Broken Promises?Labour’s £28 billion green investment pledge This week, the UK’s Labour Party pulled the plug on a promise to spend £28 billion per annum on green investments. Asked to comment, I found that I just couldn’t wade into a wailing chorus of protest. The Guardian covered my point of view, which is that what we should be shouting about is the real problem – th…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a197cedf-7d1c-4735-8801-6bde28aae4da_1200x1200.png)Jonathan Maxwell’s Substack](https://jonathanmaxwell.substack.com/p/broken-promises)
3. [Most of the energy you put into a gasoline car is wasted; this is not the case for electric carsThe internal combustion engine is shockingly inefficient. For every dollar of petrol you put, you get just 20 cents’ worth of driving motion. The other 80 cents is wasted along the way – most of it as heat from the engine. Electric cars are much better at converting energy into motion. For every dollar of electricity you put in, you get 67 cents of drivin…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/0b3f5948-e0e4-4164-975a-d4b800dedf19_1080x1080-2.png)Sustainability by numbers](https://www.sustainabilitybynumbers.com/p/inefficiency-ice?ref=carbonrisk.world)
4. https://iea.blob.core.windows.net/assets/dfd9134f-12eb-4045-9789-9d6ab8d9fbf4/EnergyEfficiency2023.pdf [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### Over-hedged
URL: https://www.carbonrisk.world/over-hedged/
Last updated: 2025-08-21T10:36:56.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 4 mins*

Czechia has the most emissions intensive power sector in the EU on a per capita basis, pumping out 3.3 tonnes of CO2 per person, more than twice the EU average. The central European country also has the second highest power sector emissions intensity. With coal accounting for 40% of the country’s electricity generation, the power sector emits \~450 grams CO2 per kWh. Only its more coal dependant northern neighbour, Poland has a higher emissions intensity.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/49318eaa-6878-4b60-b767-bafd66d7f2cf_769x540-1.png)

As befits a country so dependant on fossil fuels, the majority state-owned utility CEZ, has historically been very active in the EU carbon market. Their financial statements give some insight into their past EUA hedging strategies their expectations for future generation requirements, and hence likely EUA hedging demand.

It’s latest financial results show that CEZ generated some 51.5 TWh of electricity in 2023, including nuclear (30.6 TWh), renewables (3.6 TWh), and fossil fuels (17.5 TWh). EU ETS covered generation fell by 13% between 2022 and 2023; the decline primarily the result of lower coal-fired electricity generation in Czechia (-10%). Despite the drop in output, it still beat expectations for 2023 by \~5% versus its published forecast twelve months ago.

_This post is for paying subscribers only._
### A carbon floor price is a bad idea
URL: https://www.carbonrisk.world/a-carbon-floor-price-is-a-bad-idea/
Last updated: 2025-08-21T10:36:56.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 9 mins*

Over the past couple of weeks calls for the EU to introduce a carbon floor price have become louder.

The last time that a floor price was mooted was in the autumn of 2021 following the German general election. At the time the Green Party was riding a wave of support from voters concerned about the climate. The coalition’s policy proposals included a national carbon floor price that would come into operation if the EU ETS carbon price fell below €60 per tonne, while the coalition partners signalled they would also push for an EU wide floor price.

Three years earlier a group of eight EU Member States led by France, and including the UK, called for enhanced measures “to strengthen the carbon price signal, to improve overall ambition, coverage, and predictability,” noting that this might include “carbon price floors for electricity generation to complement the EU ETS.” The French government led the proposal following presidential candidate Macron’s 2017 election pledge to introduce a floor price.

Alas, despite the bluster nothing ever came of the €60 floor price, or indeed any other level. In early February 2024 the EUA price scythed its way into the €50’s, barely skipping a beat on its way down (see [*German coalition proposals de-risk the path to higher carbon prices*](https://www.carbonrisk.world/german-coalition-proposals-de-risk/)). Although the price has subsequently rebounded in line with stronger natural gas prices recent market history in addition to volatile prices has led to renewed interest in a floor price.

A cynic might suggest that support for a floor price from some quarters is less worry about the weak signal that a low carbon price presents, but rather more concern over the value of the vast stock of EUA’s they have acquired. Anyway, putting that aside, and notwithstanding that calls for a floor price might well be the perfect countercyclical indicator, lets dive into how a floor price might work, whether it really would incentivise more investment in decarbonisation, and what it might mean for ‘The Currency of Decarbonisation’.

The argument for a carbon floor price tends to centre on the certainty that it provides investors safe in the knowledge that the government have set a minimum price way out into the future. If firms know that the carbon price will gradually increase over time, so the argument goes, they are more likely to be able to access the long-term capital they need to invest in new low carbon technology. However, simply setting a floor price and an annual escalator does not eliminate political risk.

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### No Turkish delight
URL: https://www.carbonrisk.world/no-turkish-delight/
Last updated: 2025-08-21T10:36:57.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 6 mins*

Turkey has experienced several severe climate events over the past few years, including wildfires in 2021 that scorched over 1,700 square kms of the Mediterranean coastline, a severe heatwave in the summer of 2023, followed by record rainfall and flooding.

The proportion of the country’s territory considered to be at high risk of severe climate events is projected to increase from 25% currently to 40% by 2050, according to Jupiter Intelligence. It means that by mid-century \~35 million people are expected to be living in areas at high risk of heat waves, flooding, and droughts.

Sufficient incentive you might think to spur an investment boom in decarbonising the country’s power system and industrial base. Alas, Turkey finds its attention focused on resolving its own domestic economic turmoil, and at the centre of geopolitical forces buffeting the region in the aftermath of Russia’s invasion of Ukraine.

Turkey’s economy has been plagued by a currency crisis (down 37% in 2023) and soaring inflation (averaging \~65% in 2023) as the country’s unorthodox economic policies pummel investor confidence. In response to the crisis, power generators have favoured cheap coal imports, particularly from Russia, over more expensive LNG. The EU’s decision to ban coal imports from Russia in August 2022 meant heavily discounted Russian cargoes became even more attractive to countries such as Turkey, desperate for cheap fossil fuels.[1](#footnote-1)

Turkey generated 118 TWh of power from thermal coal in 2023, overtaking Poland (97 TWh) to become the second largest coal-fired generator of electricity in Europe as cheap coal helped fuel the country’s power plants. If current trends continue Turkey is likely to overtake Germany (121 TWh) by 2025 and become the largest coal-fired generator in Europe, according to analysis by the think tank Ember.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/64f12378-dfd6-4f0f-aec8-af327de2ccdb_910x662-1.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

Over the past decade, Turkey’s share of electricity generated from burning thermal coal has risen from 25% to 36% in 2023, as newly commissioned power plants increased demand for coal. In contrast, coal’s share of power generation in the EU has slumped to 12% as countries increasingly switched to natural gas, while also ramping up their renewable energy generation capacity.

_This post is for paying subscribers only._
### Deciphering nickels green premium
URL: https://www.carbonrisk.world/the-illusory-green-premium/
Last updated: 2025-08-21T10:36:58.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 8 mins*

![photography of excavators at mining area](https://images.unsplash.com/photo-1523848309072-c199db53f137?q=80&w=1000&auto=format&fit=crop&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Dominik Vanyi](https://unsplash.com/@dominik%5Fphotography?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/photography-of-excavators-at-mining-area-Mk2ls9UBO2E?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Over the past few weeks, two of Australia’s largest nickel suppliers, BHP and Wyloo Metals, have called on the London Metal Exchange (LME) to do more to differentiate between so-called “dirty” nickel and clean, low-carbon nickel supply.

The words of Andrew Forrest, the billionaire owner of Wyloo Metals, illustrate the exasperation that many in the industry feel as they seek to remain competitive against cheap, dirty nickel from Indonesia - the dominant global supplier of nickel:

> “We have got to differentiate between dirty nickel and green nickel. The LME must differentiate between dirty and clean. They are two different products, they have two vastly different impacts,”

Meanwhile, BHP’s latest *Economic and Commodity Outlook* questions whether the LME’s Responsible Sourcing Policy is fit-for-purpose, given the increasingly well–known ESG concerns stemming from Indonesia:[1](#footnote-1) 

> “The LME’s current policy towards responsible sourcing is narrowly defined, limiting its scope to certain risks both at the point of production which is typically the refinery (health & safety and environmental management system standards focussed) and to due diligence with the upstream metals supply chain (human rights, conflict and financial crimes focussed). Critical ESG risks such as biodiversity, Indigenous rights, tailings, GHG emissions profile and environmental due diligence are not in scope.”

The issue has been thrown into the limelight following the steep drop in the price of nickel over the past year. In the twelve months to mid-February, the price of nickel declined by almost 50% to $16,000 per tonne. Weak demand from China’s construction sector combined with slower than expected growth in EV sales has played a part. The most important factor though has been a surge in supply from Indonesia, partly supported by Chinese investment in local nickel smelting capacity.

Nickel prices have subsequently rallied to over $18,000 per tonne over the past week or so, but the industry remains under intense pressure. The deep bear market has forced suppliers of less carbon intensive nickel such as BHP and Glencore to cut production and even shut down unprofitable mines. However, things could get worse. Christel Bories, the head of French nickel miner Eramet, recently warned that Indonesia’s low-cost, high carbon intensive nickel gives them an unfair competitive advantage, one that they will use to dominate the market, and in turn drive clean nickel suppliers out of the market by the end of the decade (see [*Commodity markets begin to price carbon risk*](https://www.carbonrisk.world/commodity-markets-begin-to-price/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/49801f1e-4cf3-4f41-adec-045ff8f2ec96_1318x616.png)

In response, BHP, Wyloo Metals and others have been pushing the LME to differentiate between clean and dirty nickel supplies, by launching a separate contract for clean nickel. They argue that the current LME nickel contract fails to provide an adequate reward for cutting carbon emissions from their production operations. Instead, they believe that clean nickel should trade at a premium to dirty nickel, a so-called ‘green premium’.

The LME ultimately rejected the miners request to create a separate contract, arguing that; a) the market isn’t large enough to “attract sufficient stocks and trading volumes to be viable,” b) continued uncertainty over how exactly to define clean nickel, and c) it would be more efficient to resolve the green premium question through a separate price index reflecting negotiations between buyers and sellers over the value of their green credentials.

The nickel market is only the latest commodity to wrestle with how best to reward low-carbon production. Every other commodity business will have to consider how it can reduce its carbon intensity - if it isn’t doing so already. Simply because a commodity is essential to delivering the energy transition does not mean that it can escape public scrutiny. Failure to address climate concerns will just fuel further accusations of greenwashing (see [*'Green' lithium*](https://www.carbonrisk.world/green-lithium/)).

Nevertheless, there some commodities that are a step ahead of the game when it comes to using prices to signal climate credentials. Before we get to them and what makes them unique, we need to do a deep dive into the world of the green premium.

_This post is for paying subscribers only._
### How modularity will supercharge growth in Direct Air Capture (DAC)
URL: https://www.carbonrisk.world/how-modularity-will-supercharge-growth/
Last updated: 2025-08-21T10:36:59.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 11 mins*

“*Using CDR today builds future capacity, it does not deplete it.” -*

An ideal carbon dioxide removal (CDR) technology requires three important attributes.

It must store carbon in a way that can be monitored and is easily verified. It must be scalable so that it can meet the multi-gigatonne scale required to not only meet net zero, but to go beyond this and deliver negative net zero emissions. Last but not least, the cost of the carbon removal must be affordable.

Achieving more than two out of the three attributes is very hard for any of the existing CDR technologies. Herein lies the problem known as the carbon removal trilemma.

At over $500 per tonne, DAC currently sits in the verifiable, scalable, but expensive camp. The technology enables the captured CO2 to be easily monitored and verified, whether it is used for permanent carbon storage or for other end uses. DAC only uses a small area of land, and doesn’t place additional pressure on the environment (e.g. water, resources) other than it’s energy needs. As such it is almost infinitely scalable, if only the cost could be brought down (see [*Scrubbing the skies: Direct Air Capture (DAC) offers a scalable route to net zero*](https://www.carbonrisk.world/direct-air-capture-dac-will-determine/)).

The key to achieving that is modularity, and learning by doing.

_This post is for paying subscribers only._
### Short covering brings carbon market bulls out of hiding
URL: https://www.carbonrisk.world/short-covering-brings-carbon-market/
Last updated: 2025-08-21T10:37:00.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

![four yaks on snowy field](https://images.unsplash.com/photo-1535435734705-4f0f32e27c83?q=80&w=1000&auto=format&fit=crop&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Lieve Ransijn](https://unsplash.com/@lievemax?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/four-yaks-on-snowy-field-FsJ%5Fvzp%5FNI4?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

*Estimated reading time \~ 8 mins*

Its been a long bleak winter for EU carbon market bulls.

But for investment funds and other investors able and willing to play the short side, the bear market in carbon has been one wild ride.

Twelve months ago, with the EU carbon price flirting with €100, investment funds sat on a net long position of almost 22 million EUAs. Funds rapidly trimmed their long positions as the market failed to breach this psychological barrier.

Since August though attention has been firmly focused on the weak fundamentals and positioning has decisively shifted to a net short. Apart from a brief change of direction in late December, the market has been overrun by the bears with every step down in European natural gas prices being an additional reason to build EU carbon short positions (see [*Deflationary expectations*](https://www.carbonrisk.world/deflationary-expectations/)).

Nevertheless, we may be approaching the point that the bulls come out of their winter hiding. The latest COT report (w/e Friday 1st March) shows that investment funds may have begun to close out some of their shorts. After reaching a record 74.6 million EUAs in the previous week, short positions have since been cut by 2.4 million EUA’s. The overall net short position may have fallen slightly to 36.8 million EUAs, but this remains huge by historical standards.

If you are new to carbon futures positioning data then check out the EUA COT 101 explainer at the bottom of this article ⬇️.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c456ca0f-6996-4253-8509-35c50fdb595a_1493x674.png)

The problem with crowded trades is that it only takes a small spark for traders to start running for the exits all at once and seek to cover their shorts. Worries over LNG supplies from the US, and the discovery of corrosion at the Blayais 4 nuclear power plant in France have been sufficient for traders to turn bullish on European power and natural gas markets. Bear market rallies in any asset can be explosive, and that’s exactly what we’ve seen in carbon, as EUA’s surged more than €10 to above €60 (see [*France's nuclear risk premium has faded, for now*](https://www.carbonrisk.world/frances-nuclear-risk-premium-has/)).

The options market often acts as a anchor for prices ahead of futures contracts coming up to expiry.It may point to even more upside, at least in the short term. The main area of option contract activity for end Q1 is around the €65 strike, with further significant interest at €80 strike. At 0.79, the overall put-call ratio gives a bullish signal for EU futures prices.

The question is whether upon expiry, the market succumbs to its bearish tendencies once more and looks to retest €50 as a market floor. A crucial level as €50 marked the level where the EU’s ‘Fit for 55’ package was finally approved, and from where the market could begin to set it’s sights on much higher carbon prices.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/1b22cbef-683f-44f7-ab16-823b3c2ef5f8_949x521.png)

[Get 20% off a group subscription](#/portal/signup)

**Speculators always get the blame…**

Given the role played by funds in price discovery it’s not surprising that they occasionally get the attention of the regulator. This usually happens towards the top of the market when speculators are often blamed by politicians for ‘forcing’ prices beyond that warranted by the fundamentals. And so it was during the boom in carbon prices during 2021.

_This post is for paying subscribers only._
### Picking the ‘low hanging fruit’: Technology key to North Sea methane abatement
URL: https://www.carbonrisk.world/picking-the-low-hanging-fruit-technology/
Last updated: 2025-08-21T10:37:01.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** **If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.**

[Subscribe now](#/portal/signup)

**By subscribing you’ll join more than 3,000 people who already read Carbon Risk. You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world) **and benefit from my** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program. Thanks for reading!**

---

*Estimated reading time \~ 11 mins*

**\*** [**First published on E-FWD**](https://efwd.energyvoice.com/low-hanging-fruit-technology-north-sea-methane-abatement?ref=carbonrisk.world) **\***

A wealth of new technology and analytics tools are helping the industry slash methane emissions - and removing any excuses around inaction.

- **UKCS upstream methane intensity - the percentage of methane emitted per unit of oil or gas produced - has declined by about 40% since 2018**
- **Overall UKCS methane emissions are likely to be an underestimate, as conventional forms of measurement face limitations**
- **Remote monitoring technology – satellites in particular – coupled with advanced analytics are supporting more accurate and timely measurement**

[Subscribe now](#/portal/signup)

The UK offshore oil and gas industry has made significant progress in cutting its methane emissions. Since 2018 methane emissions have declined by 40% to 0.98 million tonnes of CO2 equivalent in 2021, according to data from the National Atmospheric Emissions Inventory (NAEI).

A decline in gas production, maintenance activity, and improvements in the efficiency of equipment and leakage detection systems have all contributed to declining methane emissions, according to a recent report from the [North Sea Transition Authority (NSTA)](https://www.nstauthority.co.uk/media/h3sgxd5i/nsta-emissions-monitoring-report-2023-final-accessible.pdf?ref=carbonrisk.world). Yet provisional estimates for 2022 based on Environmental Emissions and Monitoring System (EEMS) data, indicates that the decline may be starting to plateau, with emissions only dropping by 1%.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a2d91f16-13dd-4ee2-8fb7-0cd5b5f15200_1349x598.png)

Source: NSTA/NAEI

Nevertheless, [research published](https://pubs.rsc.org/en/content/articlepdf/2023/ee/d2ee03072a?ref=carbonrisk.world) by academics from Colorado State and Princeton Universities suggests that the NAEI’s methane emission estimates are significantly underestimated. The study covered oil and gas extraction, transport by pipeline, and activity at onshore terminals and so covers a broader scope of activities than illustrated in the chart above.

The researchers posit that since the NAEI’s ‘bottom-up’ approach only accounts for emissions from “processes and activities designated as emission sources and for which emission factors exist,” it cannot account for every source of methane. While 2019 NAEI data gives an overall methane intensity estimate of 0.14%, the study which is based on a ‘top-down’ approach to measurement suggests that this should be 0.72%.

**What gets measured**

Access to frequent and consistently measured emissions data is vital if UKCS operators are to continue to cut methane emissions from their upstream facilities. The NSTA is working with the Offshore Petroleum Regulator for Environment and Decommissioning (OPRED) to help industry increase the accuracy of these measurements.

One of the most important actions is increasing the number of flare and vents that have meters installed. Most flares have these equipped, though historically vents do not. However, the latter represent a far smaller proportion of emissions and priority has tended to be placed on larger sources.

The UK is unlikely to be alone in underestimating methane emissions from the oil and gas industry. In 2022 the International Energy Agency (IEA) published a [report](https://www.iea.org/news/methane-emissions-from-the-energy-sector-are-70-higher-than-official-figures?ref=carbonrisk.world) showing that national inventories underestimate energy sector methane emissions by 70%. Furthermore, a growing [body of research](https://iopscience.iop.org/article/10.1088/1748-9326/ac8566?ref=carbonrisk.world) suggests that estimated methane emissions from offshore oil and gas facilities elsewhere in the world may also be skewed to the upside.

The potential for underestimating methane means that care must be taken when comparing different jurisdictions based on official reported data. Very few countries report upstream methane emissions by source. Those that do, such as the UK, Norway and the US typically use different methodologies, source categories and exclusions. This makes direct comparison and quantification difficult - something that will become more important as regulations begin to tighten.

**Pressure for change**

Up until recently, the only country to penalise methane emissions was Norway. Its government introduced a tax on oil and gas sector methane emissions in 1991\. In 2022 the tax was set at an eye watering NOK 766 per tonne CO2e (equivalent to $71).

In August 2022 the US government announced that it would be introducing a methane fee on its oil and gas industry. The charge came into force at the start of 2024 at $900 per tonne of methane ($36 per tonne of CO2e) and is set to rise gradually to $1,500 a tonne ($60 per tonne of CO2e) in 2026.

In late 2023 EU policymakers [signed off on the EU Methane Regulation](https://efwd.energyvoice.com/eu-legislates-to-plug-methane-leaks?ref=carbonrisk.world), the bloc’s first legislation specifically targeting methane emissions from the energy sector. In addition to bans on routine venting and flaring, the regulation will impose methane emission intensity limits on imports of fossil fuels into the EU. If imported oil and gas fails to meet a maximum methane intensity threshold the importer will be stung with a financial penalty.

The oil and gas industry are also stepping up their own commitments. At the UN COP28 climate conference in December, 50 major oil and natural gas producers signed an agreement to cut methane intensity to 0.2% by 2030, while also eliminating routine flaring. The 50 signatories include many that are active in the UK North Sea. For example, national oil companies (NOCs) such as CNOOC, and international oil companies (IOCs) including BP, ExxonMobil, and Shell.

The Oil & Gas Decarbonisation Charter (OGDC) as it’s known was the first time that several NOCs have pledged to reduce their operational emissions. Despite this the OGDC was criticised by many NGOs for falling short of the ambition signalled by the same signatories elsewhere. For example, members of the Oil and Gas Climate Initiative (OGCI) have committed to a methane intensity target of “well below” 0.20% by 2025, five years earlier than outlined in the OGDC.

While large single-source emissions may garner headlines, ‘snow-ballers’ such as leaking valves, pneumatic devices, venting from tanks and wellheads and incomplete combustion in generators and flare stacks can also have a significant cumulative impact.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-92.png)

Get more from Peter Sainsbury in the Substack appAvailable for iOS and Android[Get the app](https://substack.com/app/app-store-redirect?utm%5Fcampaign=app-marketing&utm%5Fcontent=author-post-insert&utm%5Fsource=carbonrisk)

**Eyes in the sky**

As governments look to tighten methane regulations, the pressure to adopt consistent measurement methodologies is likely to increase, especially where it affects cross-border trade in oil and gas. As such there is an increasing focus on technology – and satellites in particular - to support more accurate and timely measurement of methane emissions.

There are currently three main classes of greenhouse gas (GHG) monitoring satellite. Class 1 is the oldest and provides high–quality data on average GHG concentrations in large geographic regions. For example, the European Space Agency’s TROPOMI satellite. Class 2 satellites are not yet operational but will cover regional–scale emissions. The [MethaneSAT project](https://www.methanesat.org/?ref=carbonrisk.world), devised by the Environmental Defense Fund (EDF), is scheduled to launch in the first half of 2024 and will be the first class 2 satellite.

Finally, class 3 satellites focus on point–source emissions, often at the expense of wider coverage. GHGSat, CarbonMapper and PRISMA are examples of satellites designed to provide high-resolution monitoring down to individual industrial facilities.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8e77316b-716d-413a-9864-a91ea42e0a11_1194x683-1.png)

Render of the MethaneSAT system in orbit. Supplied by EDF

MethaneSAT aims to monitor at least 80% of global oil and gas production, detecting both concentrated point emissions sources and dispersed emissions. A recent interview by [Energy Voice](https://www.energyvoice.com/renewables-energy-transition/505252/methanesat-satellite-will-track-oil-and-gas-emissions-from-orbit/?ref=carbonrisk.world) with MethaneSAT’s lead chief scientist revealed that the technology means emissions can be quantified down to an area of just one square kilometre, while picking up sources of methane down to around 500kgs of CH4 per hour. Importantly, the data will be available for online for free, enabling anyone to keep tabs on the industry’s methane emissions.

Technology-based measures are already being put into place to hold oil and gas companies to account for their methane emissions. Shortly after the signing of the OGDC in December, a partnership including [the EDF](https://www.edf.org/media/bloomberg-philanthropies-un-environment-programme-environmental-defense-fund-international?ref=carbonrisk.world), the UN’s International Methane Emissions Observatory (IMEO), the IEA, Bloomberg Philanthropies, and the non-profit think tank RMI announced that they will use “cutting-edge data” to make methane emissions from oil and gas “visible and quantifiable.”

A key part of this global transparency and accountability initiative will be the MethaneSAT satellite, coupled with data from class 3 satellites that can identify emissions at the facility level.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/2952c7b6-d941-4cce-b97b-31c232fef1a3_788x727.png)

Data captured by GHGSat's Claire mission on 21 May 2020, this image shows methane emissions from an onshore oil & gas facility in the Caspian Sea Region.

Methane ‘super-emitters’ - vast plumes of methane releases that exceed 10,000 kg per hour – tend to receive all the media’s attention. Although some may only last a few hours, others may splurge methane for several months. A ‘super-emitter’ can be the result of pipeline or storage tank ruptures, or intentional acts such as direct venting or incomplete combustion.

However, there is a more nefarious type of methane emission event. ‘Snow-ballers’, as they are known, include leaking valves, pneumatic devices, venting from tanks and wellheads, and incomplete combustion in generators and flare stacks. These small-scale operational emissions all add up and can have a huge cumulative impact. It is exactly these types of events that UK oil and gas operators in the North Sea are attempting to identify and abate.

It can be much more difficult to readily identify these emissions remotely. Methane is highly dispersible and so frequency gaps (the time between satellite observations) make it difficult to track down the source. Translating any satellite imaging into facility–level emissions data requires a significant amount of continuous and granular weather and atmospheric measurements at ground level.

Current satellite technology also has trouble detecting methane emitted from offshore operations. Satellites use spectrometers to measure different molecules in the atmosphere but similarities in the absorption profiles of water, methane and other gases make measurements over water, especially in rough seas, particularly difficult. As spectrometer technology develops, the accuracy of satellite methane measurements will improve.

Every methane monitoring solution has its limitations. And so, a combination of approaches is required to provide the most accurate emission estimates, including bottom-up methods (meters, sensors and cameras) and top-down approaches (satellites, drones, etc.).

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**Harnessing AI**

Measurement is one thing, but analysis is quite another. Instead of investing in their own hardware, several analytics companies are using AI to analyse public satellite imagery to extract a trove of precise, actionable, and near-real time information that can be used to inform the oil and gas industry, regulators, and other authorities.

For example, [Rystad Energy](https://www.rystadenergy.com/news/methane-emissions-cop-upstream-oil-gas?ref=carbonrisk.world) has developed a field-level, upstream oil and gas methane emissions database that incorporates and combines publicly available methane data, proprietary facility-level estimates, and global satellite data measurements in a consistent manner.

Analysis by the consultancy shows that North America (primarily the United States) and the Middle East (including Iraq and Iran) make up nearly half of global methane emissions from upstream oil and gas activities. Asia (i.e., China and Kazakhstan), Russia and Africa (i.e., Libya, Egypt, and Algeria) make up the vast bulk of the remaining emissions. Europe is by far the smallest contributor to global upstream oil and gas methane emissions.

Yet that doesn’t mean Europe can escape its responsibility. The eyes in the sky will ensure that there is no hiding place.

[Kayrros](https://www.kayrros.com/?ref=carbonrisk.world), the digital MRV and environmental intelligence company, harnesses the latest satellite data drawn from the Copernicus network of satellites, coupled with its own proprietary algorithms to deliver near-real time insights on methane emissions. According to data published on its free-to-access [Methane Map website](https://methanewatch.kayrros.com/map?ref=carbonrisk.world), the UK oil and gas industry had an average methane intensity of 0.24 kg per boe in 2022 – some 12 times higher than the Norwegian industry.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/6d7d1af1-2026-4c99-b28c-ae05ca2a3d53_1019x704.png)

Kayrros' Methane Map service, showing emissions hotspots in Europe.

In addition to more widespread metering of flares and vents, it’s clear that remote monitoring technology will be crucial if the UK is to narrow the gap with Norway while also meeting its methane emission reduction targets. Many offshore oil and gas operators in the UKCS are already employing remote monitoring technology to monitor methane emissions.

For example, Neptune Energy, operator of the Cygus Platform in the North Sea, has deployed advanced drone technologies to monitor its methane emissions. In 2022 Neptune Energy joined the Aiming for Zero Methane Emissions Initiative, a project developed by the OGCI to cut methane emissions to near zero by 2030.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/ced0ac57-b552-47ee-8beb-7959b116afa2_1368x768.png)

Drone study on the Cygnus Platform. North Sea. Supplied by Neptune Energy

However, it’s only through broader adoption that measurement accuracy can improve, and actions can be taken to mitigate the emissions. In October 2023, the NSTA and the Net Zero Technology Centre (NZTC) launched a [call for emissions measuring and monitoring technologies](https://www.netzerotc.com/news-insights/call-for-emissions-measuring-and-monitoring-technologies-to-shape-groundbreaking-roadmap/?ref=carbonrisk.world), giving companies developing these solutions the opportunity to have their product featured in a new roadmap.

Methane abatement by the oil and gas industry is one of the most cost-effective ways to cut greenhouse gas (GHG) emissions. It’s no wonder it’s getting so much attention. For example, the [IEA estimates](https://www.iea.org/data-and-statistics/data-tools/methane-tracker?ref=carbonrisk.world) that just over one-third (36%) of the UK’s oil and gas methane emissions could be mitigated at no net cost, based on average 2017–2021 natural gas prices.

Up until recently it has been difficult to identify these opportunities – described by the IEA and others as the ‘low hanging fruit’ in tackling climate change - nor incentivised to fix them. But now, the development of remote methane monitoring, coupled with regulatory and voluntary scrutiny, means that there is no longer any excuse.

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### Through the looking glass
URL: https://www.carbonrisk.world/through-the-looking-glass/
Last updated: 2025-08-21T10:37:02.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** **If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.**

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**By subscribing you’ll join more than 3,000 people who already read Carbon Risk. You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world) **and benefit from my** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program. Thanks for reading!**

---

*Estimated reading time \~ 9 mins*

> *“…the most basic metric of development , GDP, should not be treated as an objective number but rather as a number that is the product of a process in which a range of arbitrary and controversial assumptions are made. As a result the metric should be used with the utmost care.” - Morten Jerven*

Uncertainty over the true level of greenhouse gases (GHG) emitted by individual countries is likely to become an increasingly important issue. While multi-national companies are looking to cut their carbon risk, climate orientated investors are seeking to allocate capital to those opportunities with the best carbon abatement returns.

As it is with economic data, researchers lament the dearth of credible country-level emissions data across much of the world, at least outside of the most advanced economies. A lack of transparency, mediocre and outdated methodologies, and the opportunity for data manipulation are common criticisms.

China offers a perfect example of some of the challenges involved. Its emissions estimates come with a health warning, bigger even than the air quality alerts familiar to residents of the country’s most polluted cities.

Estimates by the Centre for Research on Energy and Clean Air (CREA) indicate that Chinese energy sector emissions are likely to have increased by 5.2% in 2023, matching official estimates of Chinese GDP growth. CREA’s recent report highlights “preliminary official data” that shows Chinese total energy consumption increased by 5.7% in 2023, with coal demand growing by 4.4%.[1](#footnote-1)

Most economic forecasters take a more pessimistic (read realistic) view of recent trends in Chinese economic growth. For example, analysis by the Rhodium Group, a research firm with a focus on China, suggests that actual growth in 2023 was more like 1.5%, highlighting the “realities of a still-shrinking property sector, limited consumer spending, falling trade surplus, and battered local government finances,” for the poor performance.[2](#footnote-2)

The government may say that GDP expanded by 5.2% in 2023, but it’s long been an open secret that Chinese economic data is just for show. Li Keqiang – the late Chinese premier, but previously known as the head of Liaoning province’s communist party – admitted over dinner with the US ambassador to China in 2007 that the country’s GDP figures were “man-made” and therefore unreliable. Mr Li went on to say that when evaluating his province’s economic progress he instead concentrated on just three data points – electricity consumption, rail cargo volume and bank lending.

Analysts quickly compiled a compilation of the metrics, coining the group of data points the “Li Keqiang index'“. Although the switch to a more services-based economy has meant that traditional indicators have not been as reliable in predicting GDP, there was something more nefarious going on. Businesses are often asked to misreport data including electricity consumption by local government officials, while others are also nudged to keep electricity intensive machines idling away in order to bump up the consumption figures. It seems that once an indicator becomes widely used, its worth as a gauge of economic activity rapidly diminishes through manipulation.

The statistical window on Chinese economic activity became even more opaque following Xi Jinping’s election as general secretary of the Communist Party in 2012\. In 2022, the Financial Times reported that the annual number of economic indicators made available by China’s National Bureau of Statistics (NBS) dropped from over 80,000 to less than 20,000 in the early 2020’s. Long running statistical series that shed some light on far corners of the Chinese economy have been quietly discontinued.[3](#footnote-3) 

The lack of robust official data sources has forced analysts into relying on ever more esoteric means of gauging activity. For example, analysis of night-time light intensity from satellite imagery over China found that annual economic growth may have been one-third slower than official GDP estimates. The study, which was published in 2018, found that annual GDP growth rates were inflated by 15%-30% in the most authoritarian regimes. If correct it suggests that China’s economy is both much smaller than previously believed, but also responsible for a lower level of GHG emissions (see [*How much should we trust the dictator’s CO2 estimates?*](https://www.carbonrisk.world/how-much-should-we-trust-the-dictators/)).

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Even if the official energy and economic data could be relied upon, getting a reliable gauge on carbon intensity is an enormous challenge, and one that can have a major implications for country level emissions estimates. CREA base their China carbon intensity estimates on the calorific values embedded in different fuels, according to estimates provided by NBS, while also using default emissions factors from the Intergovernmental Panel on Climate Change (IPCC). This reliance on default estimates fails to capture significant underlying changes in emissions intensity.

For example, the quality of the coal is an important determining factor in many countries such as China. The lower the quality of the coal, the higher the carbon intensity, all else being equal. A study published in the journal Nature in 2015 found that the carbon intensity of thermal coal burned in Chinese coal-powered plants was on average 40% lower than IPCC recommended values. Rather than using global default values the study looked at the actual carbon content found in over 4,000 coal mines in China and in lab tests using 602 coal samples. A deterioration in the quality of the coal (and a corresponding increase in carbon intensity) typically occurs when state controlled mining companies are told to boost domestic output, at the expense of cleaner imports of thermal coal.[4](#footnote-4)

So, how should companies and investors assess the quality of a country’s emissions data? The first step is to understand how good the economic data is. Without sound macroeconomic and industrial statistics there is no foundation upon which to build reliable GHG emission estimates. World Economics has reviewed the usefulness of individual countries official GDP data using five factors to judge the quality of their data.

_This post is for paying subscribers only._
### Repost: Is a repeat of 2021 on the cards for California's carbon market?
URL: https://www.carbonrisk.world/repost-is-a-repeat-of-2021-on-the/
Last updated: 2025-08-21T10:37:02.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** **If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.**

[Subscribe now](#/portal/signup)

**By subscribing you’ll join more than 3,000 people who already read Carbon Risk. You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world) **and benefit from my** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program. Thanks for reading!**

---

*Estimated reading time \~ 9 mins*

*Amidst the general malaise that has afflicted the EU carbon market in recent months, it’s easy to forget that other carbon markets do exist. Indeed, one particular market is setting record highs.*

*The price of Californian Carbon Allowances (CCA’s) has increased by \~50% over the past twelve months to $42 per tonne (€39). As I outlined in the article below from July last year, the pressure to comply with an upcoming compliance deadline is likely to drive increased demand for allowances. Speculators have pre-empted this move of course, but the bullish backdrop has also been supported by low offset issuance and strong signs of policy commitment from the state.*

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/afde1a8d-9b83-4cfa-b628-ced55a1429fc_912x616-1.png)

*It’s worth remembering that there are mechanisms in place that could be activated in the event that CCA prices increase further. For example, two cost containment reserve tiers are set at $56.20 per tonne and $72.21 per tonne enabling additional supply to enter the market. Meanwhile the price ceiling is set at $88.20 per tonne (see* [*An asymmetric bet on a phase transition*](https://www.carbonrisk.world/an-asymmetric-bet-on-carbon/)*).*

*With CCA prices potentially set to increase further into the compliance window and EUA prices continuing to fade, the chances that the Californian market trades at a premium to the EU ETS later this year are growing. That would represent a remarkable turnaround for the Californian market, after many years in Europe’s shadow.*

---

A major compliance deadline in the California carbon market is approaching in November 2024\. The race to secure sufficient emission allowances could spark the next big upward move in the state’s carbon price.

Normal procedure requires obligated entities to surrender Californian Carbon Allowances (CCA’s) equal to 30% of the previous year’s verified emissions by the start of November. However, CCA’s equal to all remaining emissions must be surrendered by November in the year following the last year of a compliance period.

California’s carbon market is now in its fourth compliance period (2021-23), which means that obligated entities must deliver sufficient CCA’s to cover the entire compliance period (minus those already delivered) by 1st November 2024\. The last time this happened was of course in November 2021, at the end of the third compliance period (2018-2020).

Back then demand at the previous quarterly auction (Q3 2021) was especially strong, clearing at what was then a record 32% premium above the Auction Reserve Price (ARP). An influx of investment fund activity was partly responsible for the surge in demand. Around 30% of the auction volume was sold to investment funds, anticipating that the compliance window was nearing. In response, the CCA futures price jumped from \~$18 per tonne in early 2021 to a high of $35 per tonne in early November. [1](#footnote-1)

_This post is for paying subscribers only._
### Climate change - A tragedy in three parts
URL: https://www.carbonrisk.world/the-three-tragedies/
Last updated: 2025-08-21T10:37:02.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** **If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.**

[Subscribe now](#/portal/signup)

**By subscribing you’ll join more than 3,000 people who already read Carbon Risk. You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world) **and benefit from my** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program. Thanks for reading!**

---

*Estimated reading time \~ 9 mins*

There are three tragedies at the heart of climate economics: the commons, the horizon, and inertia.

The tragedy of the commons arises when individuals, acting in their own self-interest, over-exploit a scarce resource, contrary to the common good. The tragedy of the horizon reflects the fact that we tend to weigh the wellbeing of those alive today as worth more than those born tomorrow. Lastly, the tragedy of inertia refers to the situation in which as energy demand goes up, and our economies become increasingly complex, so the chance to improve on the status-quo becomes ever more constrained.

It’s important to understand the tragedies. Solving climate change demands that we tackle all three.

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**The tragedy of the commons**

![body of water near trees during daytime](https://images.unsplash.com/photo-1598287634985-f68494938d5d?q=80&w=1000&auto=format&fit=crop&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Karsten Winegeart](https://unsplash.com/@karsten116?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/body-of-water-near-trees-during-daytime-JCa8xxcC8aY?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

The tragedy of the commons is a classic problem in environmental economics. It occurs when a public resource (also called a commons) is over-exploited as individuals, acting in their own interest, ultimately deplete the resource, to the detriment of others. Although the theory was first conceptualised in 1833 by British writer William Forster Lloyd, it wasn’t until 1968 that the term “tragedy of the commons” was used for the first time by Garret Hardin in an article in Science Magazine:[1](#footnote-1) 

> The tragedy of the commons develops in this way. Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons. Such an arrangement may work reasonably satisfactorily for centuries because tribal wars, poaching, and disease keep the numbers of both man and beast well below the carrying capacity of the land. Finally, however, comes the day of reckoning, that is, the day when the long-desired goal of social stability becomes a reality. At this point, the inherent logic of the commons remorselessly generates tragedy.  
>  
> As a rational being, each herdsman seeks to maximize his gain. Explicitly or implicitly, more or less consciously, he asks, "What is the utility *to me* of adding one more animal to my herd?" This utility has one negative and one positive component.  
>  
> 1) The positive component is a function of the increment of one animal. Since the herdsman receives all the proceeds from the sale of the additional animal, the positive utility is nearly +1.  
>  
> 2) The negative component is a function of the additional overgrazing created by one more animal. Since, however, the effects of overgrazing are shared by all the herdsmen, the negative utility for any particular decision-making herdsman is only a fraction of -1.  
>  
> Adding together the component partial utilities, the rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another; and another.... But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit--in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all.

Of course, the term ‘tragedy of the commons’ has subsequently been used to identify multiple instances in which individual incentives lead to the over-exploitation of the commons. Examples of ‘commons’ that have been over-exploited include the ocean (over-fishing, plastic pollution), medicines (over-use of antibiotics), the road network (congestion, air pollution), rainforests (deforestation, desertification, pollution), and the atmosphere (greenhouse gases, air pollution).

The solution to the tragedy of the commons lies in property rights, supply management and pricing the externality. Assigning property rights (or privatisation) should mean that resources are managed more sustainably, but it raises issues of inequality of wealth and access. Members of a community can also come together to prevent scarce resources from being exploited. Political decisions such as those agreed at COP are an example, but of course they come with the need for consensus, and that takes time. The third solution is to price the externality. A cap-and-trade scheme is an example of a policy tool that seeks to override the tragedy of the commons. By allocating permits to emit carbon dioxide through a competitive auction, individual emitters have an incentive not to exhaust the carbon budget (see [*The great sulphur dioxide allowance bull market*](https://www.carbonrisk.world/hero-to-zero/)).

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

**The tragedy of the horizon**

![a snow covered field with a body of water in the background](https://images.unsplash.com/photo-1670879300315-4237f6ec38d8?q=80&w=1000&auto=format&fit=crop&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Joakim Honkasalo](https://unsplash.com/@jhonkasalo?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-snow-covered-field-with-a-body-of-water-in-the-background-0swKgzBAPvM?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

The term ‘tragedy of the horizon’ was coined by Mark Carney, former Governor of the Bank of England. First outlined in a speech to Lloyds of London in September 2015, and then subsequently expanded on in Carney’s book, *Values: An Economists Guide to Everything That Matters,* it refers to the tendency to let subsequent generations bear the burden of climate change. Carney warns that once climate change becomes a defining issue for financial stability - the outer boundary of the credit cycle is only about a decade - it may already be too late to do anything about it:[2](#footnote-2)

> “Climate change is the tragedy of the horizon. It’s catastrophic impacts will be felt beyond the traditional horizons of most actors - imposing a cost on future generations that the current generation has no direct incentive to fix. That means beyond the business cycle, the political cycle and potentially the horizons of technocratic authorities, like central banks, which are bound by their mandates.”

The key factor underpinning the tragedy of the horizon is how much weight we assign to the welfare of future generations. One argument is that the returns to climate mitigation should be compared against other investments, in healthcare, adaptation, energy security, and so on. Here the discount rate will reflect the long-term risk free real interest rate. However from a climate risk perspective it also implies that the wellbeing of those alive today is worth more than future generations. Alternatively, the discount rate should be based on ethics. For economists such as Nicholas Stern, the discount rate need to be very low, possibly even zero, reflecting the fact that those likely to be impacted the most by climate change do not have a voice in the decision.

Carney suggests that the tragedy of the horizon can be broken “if the transition to a low-carbon economy begins early and follows a predictable path.” However, markets can only anticipate and smooth the adjustment to net zero if they have “the right information, proper risk management, and coherent, credible public policy frameworks.”

It’s why companies are now publishing data regarding their climate impact (many voluntarily, but increasingly mandated), remote monitoring equipment and AI are tracking emissions, banks are benchmarking their robustness across a variety of climate scenarios, and investors are increasingly using climate policies to guide their capital allocation decisions - at least in regions where its not politically contentious (see *[Full disclosure](https://www.carbonrisk.world/full-disclosure/)*).[3](#footnote-3) 

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**The tragedy of inertia**

![gray top](https://images.unsplash.com/photo-1533928298208-27ff66555d8d?q=80&w=1000&auto=format&fit=crop&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Christophe Hautier](https://unsplash.com/@hautier?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/gray-top-902vnYeoWS4?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Newton's first law, the law of inertia states that if a body is at rest or moving at a constant speed in a straight line, it will remain at rest or keep moving in a straight line at constant speed, unless it is acted upon by a force. Inertia is one of the defining properties of the modern economy, and energy is at its core.

The tragedy of inertia is that as overall energy consumption rises, the demand for infrastructure (pipelines, refineries, transmission lines, etc.) necessary to achieve economies of scale also goes up. Yet this innate need to achieve scale embeds inertia, preventing the economy from transitioning to other forms or carriers of energy with improved characteristics (i.e. cleaner, more secure, and more efficient). In turn, ever higher levels of human ingenuity are required to break the hold that inertia has on the economy.

Humanity has undergone three energy transitions since the 19th Century, as first coal, then crude oil, and most recently natural gas supported the acceleration of economic development. The fourth transition, the one humanity is currently experiencing, involves the transition to energy sources that emit zero carbon. It takes at least 50 years for an energy transition to play out according to Vaclav Smil, a scholar of energy systems at the University of Manitoba. But Smil also notes that the speed at which energy transitions are taking pace has slowed, with every subsequent transition taking longer to establish a sizeable share of overall energy demand.

Consider the zero carbon energy transition. The foundation of our modern economy is built on electricity generated from spinning turbines. Whether it is coal, natural gas, nuclear or hydro, every single turbine is spinning at exactly the same frequency, 50hz. That inertia has value. If all the power generation turbines are spinning at the same rate it helps maintain grid frequency, and rapidly counter the impact of a power outage. Unfortunately, renewable energy such as wind and solar have too little inertia. When the wind stops and the sun stops shining there is no inertia to keep the grid balanced. Its one of the reasons why we are likely to need some conventional power generation as backup.

The tragedy of inertia also manifests itself downstream from the source of the energy supply. It is cemented for decades or even hundreds of years in the buildings that we construct, and in the systems and appliances that we use to heat and cool them. For example, high upfront costs and uncertain payoffs can be a significant barrier to replacing a gas boiler with a heat pump, or retrofitting a building with improved insulation.

The tragedy of inertia can be overcome, but as I note earlier, the more complex the energy requirements of the economy, the greater the need for human ingenuity. The acceleration in the pace at which innovations have reached mass adoption - whether it be telephone, cars or smartphones - gives reason for optimism. Artificial intelligence and machine learning may help to accelerate progress, perhaps enabling renewable energy to capture a higher share and reducing the need for conventional generation (see [*Exponential*](https://www.carbonrisk.world/exponential/)).

The rapid pace of technological change over the past few decades may have also led to unrealistically high expectations. Smil coined this phenomenon ‘Moore’s Curse’, a nod to ‘Moore’s Law’ and the time for microchip components to double. Rather than expanding at the breakneck pace seen in software, technological improvements in the physical world have been much more pedestrian. For example, the efficiency with which steam turbogenerators convert thermal power to electricity generation increased was a mere 1.5% per year during the 20th century.

[Harnessing the invisible fuelWe don’t demand energy for its own sake, but for what it enables us to do. If energy is life, then we should be careful how we use it. Energy efficiency simply means using less energy to perform the same activity, eliminating waste. The “invisible fuel” as energy efficiency is sometimes known as, provides some of the quickest and most cost-effective options to reduce energy consumption and cut carbon emissions. Done right, improving energy efficiency can help the environment while also reducing energy poverty.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-94.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c719fe53-c1db-4f2b-8b7e-c5d89f7c08ec_903x544-1.png)](https://www.carbonrisk.world/harnessing-the-invisible-fuel-to/)

---

1. Hardin’s writing about the role of eugenics in controlling population growth would put Malthus to shame https://www.science.org/doi/10.1126/science.162.3859.1243 [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.bankofengland.co.uk/-/media/boe/files/speech/2015/breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability.pdf [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://www.bis.org/review/r190322a.pdf [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
### Japan's 'Green Transformation' receives a welcome shot of credibility
URL: https://www.carbonrisk.world/japans-green-transformation-receives/
Last updated: 2025-08-21T10:37:03.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** **If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.**

[Subscribe now](#/portal/signup)

**By subscribing you’ll join more than 3,000 people who already read Carbon Risk. You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world) **and benefit from my** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program. Thanks for reading!**

---

*Estimated reading time \~ 8 mins*

![pagoda temple surrounded by trees](https://images.unsplash.com/photo-1542640244-7e672d6cef4e?q=80&w=1000&auto=format&fit=crop&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Tianshu Liu](https://unsplash.com/@tianshu?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/pagoda-temple-surrounded-by-trees-aqZ3UAjs%5FM4?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Up until very recently Japan held the coveted position as the world’s third largest economy, albeit someway behind the US and China. By virtue of its size, Japan is also a major emitter of greenhouse gases (GHG). Spewing over 1Gt CO2 in power generation, industrial, and transportation emissions, it is the fifth largest emitter of GHGs. Despite it’s economic, technological and industrial leadership on the global stage, Japan has a mixed record when it comes to leading the energy transition and advocating for ambitious climate policies.

Among its peers, Japan stands out as being unusually reliant on coal, natural gas, and oil to fire its electricity generation plants. Fossil fuels accounted for almost three-quarters of its electricity output in 2022, according to Ember. In comparison, the US, China, and Germany rely on fossil fuels for 56%, 65%, and 32% of power generation respectively.

Nuclear reactor closures in the aftermath of the 2011 Fukushima disaster led to an increased reliance on fossil fuels. Although some facilities have since been brought back online since 2015, the share of total electricity produced from nuclear remains a fraction of its pre-2011 levels. The share of renewables in power generation (particularly solar) has increased over the past decade, but remains very low by the standards of other advanced economies.[1](#footnote-1)

It’s heavy reliance on fossil fuels to generate electricity is also scuppering efforts to decarbonise Japan’s heavy industry. The overall carbon intensity of its industrial base was estimated to be 54.2g of CO2 per MJ in 2020, according to the International Energy Agency (IEA). Although it’s carbon intensity compares favourably to that of China, it is significantly worse than it’s two other nearest economic competitors - the US and Germany. Even worse, the country has made absolutely no progress in decarbonising its industry over the previous decade, while others are powering forward.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/62edcb2b-5251-4131-9692-4fd383b75410_1022x564.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

A recent study from the Lawrence Berkeley National Laboratory makes the argument that the declining cost of solar, offshore wind, and battery technology should enable Japan to achieve a 90% clean electricity system by 2035\. The study projects that solar could account for almost one-quarter of total generation by 2035, up from 10% in 2022\. If Japan was able to achieve 90% clean energy the emissions savings are estimated to represent around 345 Mt CO2, equivalent to one-third of Japan’s total emissions.[2](#footnote-2) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e22fd6dd-7bdb-41a5-8420-6ee8801962b1_791x582.png)

Source: Berkeley Lab

The report outlines several recommendations necessary to overcome current policy, market, and land-use barriers. These include increasing the price of carbon to accelerate the phaseout of coal-fired power, and investing a portion of the carbon revenues generated in the technology necessary to create a zero-carbon grid.

Japan was the first Asian country to introduce a carbon tax. In 2012 the government introduced a national carbon price of ¥289 per tonne CO2\. Equivalent to \~€2 per tonne, the carbon tax is imperceptivity low. Despite being an early pioneer in the region successive Japanese governments have been slow to move the needle on carbon pricing to a level that makes a difference. A national voluntary emissions trading system (ETS) known as the GX-ETS and launched in April 2023, could begin to inject some life into the country’s green transformation (see [*Why Asia is pivotal to future carbon market growth*](https://www.carbonrisk.world/repost-why-asia-is-pivotal-to-future/)).

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### Mind the behaviour gap
URL: https://www.carbonrisk.world/mind-the-behaviour-gap/
Last updated: 2025-08-21T10:37:05.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** **If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.**

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---

*Estimated reading time \~ 7 mins*

> *“I freely concede that the ETF is the greatest marketing innovation of the 21st century.” - John Bogle*

Exchange traded funds (ETFs) that enable investors to target specific climate themes are nothing new.

Beginning as far back as 2007, the earliest funds allowed investors to get exposure to the growth in renewable energy. More recently, several funds have launched focusing on themes as diverse as green hydrogen, battery metals and technology, veganism, Paris aligned companies, and of course carbon markets.

More broadly, thousands of new specialised ETFs have launched over the past decade, spurred on by the low cost of issuance and heightened competition between issuers to deliver innovative new products. The trend is not unique to climate: from marijuana to the metaverse, and from Brazil to bitcoin, fund issuers will have a product just for you.

Broad-based ETFs offer investors the ability to achieve diversification at low cost. This was the first breed of ETFs and began to enter the market in the mid-1990’s. Increased competition has eroded fund manager fees making them even more attractive to investors. In response, issuers took to developing specialised ETFs that could charge a much higher fee - often several times higher. Research indicates that on an average risk-adjusted basis, new specialised ETFs tend to be particularly bad investments, but not because of the high fees.

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### Following in LNG's wake
URL: https://www.carbonrisk.world/following-in-lngs-wake/
Last updated: 2025-08-21T10:37:06.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** **If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.**

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---

*Estimated reading time \~ 10 mins*

In 1959, the *Methane Pioneer*, a converted World War II freighter sailed from Louisiana across the Atlantic Ocean, heading for England. The shipment was the first ever cargo of LNG. The voyage was described by the company’s CEO as “the prelude to a new era when natural gas, previously wasted or shut in for want of accessible markets in many parts of the world, will be liquefied and transported by tanker to countries where gas is not naturally available.”

As Daniel Yergin outlines in his book, *The New Map,* the technology was developed during World War I but it wasn’t until the 1950’s that industry looked to commercialize it, spurred on by “the killer fog that enveloped London in 1952”. Over the next few years there were to be several further shipments of LNG, but it wasn’t until 1964 that the first waterborne LNG shipment to establish a firm contracted route took place - the *Methane Princess* Algeria-to-UK trip.

Sixty years later, the first waterborne commercial shipment of another gas is expected to take place. As with natural gas before it, this chemical compound has also been “wasted or shut in for want of accessible markets”, but will now “be liquefied and transported by tanker” to where it has value.

The Northern Lights project located in Norway will be the first carbon dioxide (CO2) transport and storage network when it opens later this year. The project is a partnership between Equinor, Shell and TotalEnergies. Captured CO2 will be shipped in specialised vessels to a location 60 miles off the west coast of Norway, where it will be permanently sequestered beneath the North Sea. The reservoir will initially be capable of storing 1.5 Mt CO2 per year.[1](#footnote-1)

Around half of this capacity has been reserved for CO2 captured from the Heidelberg Materials cement factory in Brevik, and the Hafslund Oslo Celsio waste-to-energy plant. Beyond the projects commitment to the Norwegian government CCS strategy, Northern Lights signed their first commercial agreement in August 2022 with fertiliser manufacturer Yara. Beginning in 2025, 0.8 Mt CO2 per year will be transported from its facility in the Netherlands and moved hundreds of miles north across the North Sea to western Norway.

Northern Lights have commissioned a vessel design adapted from one that transports liquefied petroleum gas (LPG) and will now transport liquefied CO2 instead. To counter the higher density of liquid CO2 relative to LPG, the design also includes two pressurised cargo tanks. Construction on the first two dedicated CO2 transport vessels is underway, with two further ship recently placed on order. A single 20,000 m3 ship could transport \~1 Mtpa based on typical shipping distances within the EU.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/277775d0-f0cb-4205-928b-e9edd7ac9a12_1750x1050-1.png)

Source Northern Lights

**Shipping solves geographical CO2 mismatch**

Rapidly scaling up carbon capture and storage (CCS) capacity is fundamental to meeting net zero by 2050\. However, there is often a geographical mismatch between the places that carbon capture occurs (i.e., industrial facilities and power generation plants), and the locations in which the CO2 can be permanently sequestered, or used in some other application (see [*The emergence of the carbon economy: Why construction materials are likely to dominate future CO2 demand*](https://www.carbonrisk.world/repost-the-emergence-of-the-carbon/)).

The relative location between these two points dictates the optimal mode of CO2 transportation. In the United States and Canada pipelines are likely to remain the dominant form of CO2 transportation - if they can get past local objections (see [*Not in my backyard*](https://www.carbonrisk.world/not-in-my-backyard/)). Elsewhere in the world, ships capable of transporting CO2 will play a much larger role in ensuring access to a competitive marketplace for CO2.

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### Scope 3 forces mining companies into rethink
URL: https://www.carbonrisk.world/scope-3-forces-mining-companies-to/
Last updated: 2025-08-21T10:37:08.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** **If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.**

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---

*Estimated reading time \~ 8 mins*

The mining industry is particularly exposed to new regulations that mandate companies report on their Scope 3 emissions, and rising pressure from banks and investment institutions to cut their ‘financed emissions’.

Mining is responsible for 5 Gt CO2e in Scope 1 and 2 emissions; 90% of which is fugitive coal-bed methane released during coal extraction. Yet Scope 3 emissions dwarf those emissions directly within miners control.

Almost 10 Gt CO2e of Scope 3 emissions are released due to thermal coal combustion involved in generating electricity and the use of met coal to manufacture steel. While around 4 Gt CO2e arise from gas combustion used to process metals and to manufacture mining equipment, etc.

Scope 3 accounts for \~70% of overall mining emissions, but for many of the largest miners it represents 90-95% or more of their emissions. The top seven global mining companies have combined Scope 3 emissions equivalent to 4% of global GHG emissions. These industry behemoths - multi-nationals like Rio Tinto, BHP, and Vale - are under more climate scrutiny than ever before.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/47a8e090-b23d-4198-b6c5-eae27a4533d5_1052x810.png)

It gets worse. If business continues as usual, the industry’s Scope 3 emissions will rise sharply. Global extraction of raw materials is expected to increase by 60% by 2060, according to The Global Resources Outlook 2024 report, due to be published by the UN in February. The composition of that growth in resource demands, and thermal coal’s share in particular, is perhaps even more important than the overall figure when Scope 3 is concerned.[1](#footnote-1)

Meeting net zero will require a step change in the commodities that miners are able to extract from the ground. The IEA’s Net Zero Emissions by 2050 Scenario is likely to result in the value of thermal and met coal production falling by 60% over the next six years, and by more than 90% by 2050\. At the same time miners are under pressure to deliver the commodities essential to the energy transition (copper, lithium, etc.), whose production value could rise 10-fold by 2050 (see [*Caution! Net zero scenarios are not forecasts*](https://www.carbonrisk.world/caution-net-zero-scenarios-are-not/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/50298722-3ad8-42dd-9a38-1b16750ffa2d_817x623.png)

Source: Climate Action 100+

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All seven global diversified miners have a goal of reaching net zero emissions (Scope 1 and 2) by 2050 or before, according to analysis by Wood Mackenzie. However, to make a real difference to meeting net zero, the miners will have to tackle their Scope 3 emissions. Five of those miners have set Scope 3 net zero targets for 2050, with Fortescue aiming to achieve this goal by 2040\. Nearer term targets are typically focused on particular commodities (e.g., iron ore, coal, etc.), or parts of their supply chain (e.g., shipping).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e13806f8-4d18-43c0-9de4-fbf199d8ddc0_1423x619.png)

Note: Accurate as of August 2023\. A Glencore-led consortium acquired Teck in November 2023

Constraints play a major role in influencing both the level of ambition and the energy transition strategies employed by the miners. By definition, diversified miners tend to have very different characteristics: the commodities they extract (coal, iron, copper, etc.), the demands from stakeholders in the regions they operate in (Europe, Australia and California are leading on Scope 3 disclosures), and the location of their end customers (major iron ore producers sell to steel mills mostly based in China). Nevertheless, the most vivid way of illustrating the disparity between miners is the ratio between their Scope 3 emissions and combined Scope 1 and 2 emissions. Anglo American and Glencore emit \~10x Scope 3 vs Scope 1+2, versus 40-50x for BHP and Vale.

![Chart shows miners' scope 3 emissions dwarf scope 1 and 2 ](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/def949e4-8f04-4e49-b82a-c377c4607c30_1800x1080-1.png)

**Divestment is not the answer**

Since 2017 many of the major mining companies have divested their asset portfolio of fossil fuels, while since 2022 there has been a push to acquire more energy transition-focused commodities. Although divestment of coal assets in particular has a beneficial impact on an individual company’s Scope 3 emissions, the net impact on global emissions is zero, and it may even be counterproductive.

When a mining company divests of its thermal coal assets, it doesn’t simply close their extractive business, sell the parts for scrap and move on to something greener. They will want to maximize the value they get for that asset by selling it to the highest bidder, often state owned energy companies or private equity groups.

However, divestment is meaningless if the assets are simply transferred to a company less accountable for its environmental performance. Out-of-sight, out-of-mind, but not necessarily out-of-business.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7d9f55c2-4a21-4dab-9657-e83db7858f1e_1426x618.png)

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**Managed decline**

Glencore had been the notable exception to the thermal coal divestment trend employed by many of its peers. Speaking to the Financial Times in 2020, former CEO Ivan Glasenberg outlined the flawed rationale behind divestment:[2](#footnote-2)

> “How does that help the world to reach the Paris accord? Those mines are going into the hands of other players who have no intention of reducing Scope 3 emissions and if anything gives them a free hand to start producing more.”

Rather than divest its thermal coal assets, Glencore’s strategy has been focused on gradually running down its coal mines by the mid-2040’s, and using the cash generated from the sale of thermal coal in the meantime, to reinvest in energy transition assets and support the development of low emission technologies. It remains to be seen whether this strategy survives following the late 2023 Glencore acquisition of Teck.

Other miners are reconsidering divestment and adopting a more responsible approach. In 2022 BHP announced that it will close its last thermal coal mine, Mount Arthur near Sydney by the end of 2030\. The high cost of decommissioning and anti-coal investor sentiment forced their hand into managing the asset down, rather than divesting.

**Higher quality, less carbon**

Boosting the supply of high grade iron ore increases the viability of electric arc furnace (EAFs) steel production. This is important since EAFs emit \~0.4 Mt CO2e per tonne of crude steel produced, over 80% less carbon than through a traditional blast furnaces. EAFs require ‘direct-reduced iron’ that an iron content of 67% and above. However, DR-grade iron ore currently makes up only about 4% of global iron ore supply (see *[Europe's bridge to 'green' steel](https://www.carbonrisk.world/the-bridge-to-green-steel/)*).[3](#footnote-3) 

Australian iron ore miners have long focused on lower-iron content ore (62% Fe) in response to the huge growth in blast furnace-based steel production in China. The quality of the iron ore has been declining over the past decade as mines are depleted, making it even less suitable for DRI processes.

While BHP is pursuing decarbonisation through carbon capture and storage (CCS), Vale, Rio Tinto and Fortescue (the other three major iron ore producers), are increasingly focusing on developing higher-grade iron ores, particularly in Africa and Canada.

**Carbon markets, at least for residual emissions**

Almost all of the diversified mining companies foresee a role for carbon credits if they are to meet their emission reduction targets, including and especially their Scope 3 commitments.

Last year Rio Tinto admitted that its climate targets were in jeopardy without carbon credits, announcing that it would “build a sustainable and long-term carbon credit portfolio generating 1.7 million tonnes annually by 2030”. The miner plans to co-develop or co-finance high quality carbon projects in those regions where they have significant emissions.

The most notable change since the table below was published in August 2023 is the decision by Fortescue, the world’s fourth largest iron ore miner, to shelve its plans to purchase carbon credits on the voluntary market. In September, the Australian mining giant indicated that it would divert funds previously allocated to carbon credits towards furthering its own decarbonisation.

Even if it succeeds in driving its own Scope 1 and 2 emissions to near zero, it will be much more difficult when it comes to Scope 3\. Indeed, as companies realise the extent of the challenge, pressure to use carbon credits to meet Scope 3 targets is likely to intensify. As the carbon credit market continues to mature Fortescue may well be forced to change its mind.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8c369d12-1799-40fa-9058-378edfe5f4e2_1036x453.png)

Miners must balance multiple climate goals at the same time, including ones that come into conflict with each other. They are under pressure to stop producing coal and iron ore, but yet they must not give less climate conscious operators a free pass. They need to increase production of resources essential to the energy transition, but they also need the capital that coal and iron provide to deliver on that investment. Finally, they must manage their carbon intensive assets down, but also invest in them to cut their Scope 3 emissions.

As the pressure to cut Scope 3 emissions increases, expect that dilemma to intensify.

[Upgrade to paid](#/portal/signup)

[Scope creepThis year many of the worlds largest economies are introducing tough climate disclosure laws that require companies report on their entire supply chain. Crucially many of these laws go beyond direct emissions (Scope 1 and 2), and also mandate firms report on their indirect emissions too (Scope 3).![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-98.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/f1b1f853-07e4-4812-8021-6f427a5e1db9_1920x1080.png)](https://www.carbonrisk.world/scope-for-improvement/)

---

1. https://www.resourcepanel.org/reports/coming-soon-global-resources-outlook-2024 [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.ft.com/content/3e778f6f-5008-454b-ab5c-c52adec6576b [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://ieefa.org/resources/solving-iron-ore-quality-issues-low-carbon-steel [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
### UK carbon market nadir has passed
URL: https://www.carbonrisk.world/uk-carbon-market-nadir-has-passed/
Last updated: 2025-08-21T10:37:09.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** **If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.**

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---

*Estimated reading time \~ 8 mins*

The UK carbon price fell to a record low of £31.48 per tonne (€37) last week and the media are starting to notice. The Financial Times led with *“UK carbon price falls to record low: Analysts fear inexpensive cost of polluting will deter investment in renewable energy”*.

The UK ETS launched on 19th May 2021 and began trading around €54 per tonne, but as the chart below illustrates, it’s fair to say the market has been setting a series of record lows since September. The UK carbon price is affected by the same fundamental factors that have been pressuring the EU carbon price, namely declining natural gas prices, and weak industrial demand, among other factors.

However, the absolute UK carbon price level is not the right comparison to be making. What’s actually important is how it stands up against Europe. Up until the end of 2022 the UK carbon price had been trading at an average \~15% premium to the EU. In late 2022 and into early 2023 that premium closed, and for a while the two markets were joined at the hip (see [*Recoupling?*](https://www.carbonrisk.world/recoupling/)).

Alas it wasn’t to last.

Ever since mid-March 2023 there has been a clear divergence in their respective paths. While the EUA price has since declined by \~30%, the UKA price has dropped by 55%. Overall, the UK carbon price has plunged by over two-thirds over the past 18 months. Peaking close to €130 per tonne in late August 2022, the UKA price dropped to below €40 per tonne in January 2024.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/630fd350-232d-4d67-9167-37c014721c8f_1096x587.png)

I have covered the reasons for this disconnect more than once on Carbon Risk. Regular readers will be familiar with my thesis that the carbon price is the ‘Currency of Decarbonisation’. The greater the perception that a particular government might not stick to its self-imposed climate commitments, the larger the discount the market will factor into its carbon price. Indeed, the signs that something was amiss were evident as far back as autumn 2022 (see [*Commitment issues*](https://www.carbonrisk.world/commitment-issues/)).

In July 2023 I published [*Subject to further consultation: The state of play in the UK carbon market*](https://www.carbonrisk.world/subject-to-further-consultation/). The title a not-too-subtle dig at the ubiquitous references to “subject to further consultation” throughout the long awaited consultation response on UK ETS reform. Apart from an initial rally in the aftermath of its publication, the market rapidly sold off as it became clear that many of the proposals were found lacking. For example, although the emissions cap was to be adjusted down in a manner consistent with net zero, it was achieved in the least ambitious way possible.

Rather than focus on the record low UK carbon price, I’d argue that the more accurate indicator to look at is the UKA discount versus EUA. From that perspective the UK carbon market nadir arguably took place in late September 2023, shortly after Prime Minister Sunak announced that many of the governments net zero policies would be delayed or watered down. The day after Sunak made that speech the UKA percentage discount to the EUA price hit 52%. Over the next 4-5 months the two markets have begun to narrow, although the UK carbon price remains around 35-40% below the EU carbon price.

Could there be scope for the two markets to recouple once more? A number of policy proposals, developments in the UK’s industry and power generation, and forthcoming political events suggest the gap is at least likely to carry on closing (see [Invite your friends to Carbon Risk and unlock rewards 🎁](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/6f1a551c-7559-4e52-8bb5-4a3bdcc53a7b_1071x516-1.png)

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### Second-best climate policy
URL: https://www.carbonrisk.world/second-best-climate-policy/
Last updated: 2025-08-21T10:37:10.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** **If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.**

[Subscribe now](#/portal/signup)

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---

*Estimated reading time \~ 7 mins*

> *“I have long believed that the most elegant way to drive innovation and to reduce carbon emissions is to put a price on it.” - President Obama, December 2015, at COP 21 in Paris*

Welfare economic theory focuses on finding the optimal allocation of resources. According to Vilfredo Pareto - he of 80/20 fame - a legitimate welfare improvement can only happen if a change makes one person better off, without making any other person worse off. The Pareto optimal equilibrium occurs when this is no longer possible. Pareto’s theory relies on a series of optimal conditions being in place that allow market participants to efficiently converge on the point at which welfare is maximised.

![undefined](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/06a42d92-3d32-42af-a7f0-2f9ce2c5f8ed_1024x1024-1.png)

By Njr00 - Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=31254379

The theory is central to why carbon pricing is so attractive, at least to economists. In the absence of a reason for markets to self-correct, the most efficient solution is to price the externality - the carbon emissions. A carbon price sends a signal to consumers about which goods and services are carbon-intensive; it signals to producers of products and services which inputs and activities they should switch towards to reduce their carbon costs; and it signals to innovators and entrepreneurs that demand for low carbon alternatives are likely to rise. President Obama outlined the reasoning succinctly when at the 2015 Paris climate conference:

> *“This is a classic market failure. If you open up an Econ101 textbook, it will say the market is very good about determining prices and allocating capital towards its most productive use — except there are certain externalities, there are certain things that the market just doesn’t count, it doesn’t price, at least not on its own… If you put a price on it, then the entire market would respond. And the best investments and the smartest technologies would begin scrubbing effectively our entire economy.”*

Simple in theory. Much tougher in reality. The most common obstacle is political support.

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### Whose carbon?
URL: https://www.carbonrisk.world/whose-carbon/
Last updated: 2024-01-29T12:01:03.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 10 mins*

![sunlight across trees and mountains](https://images.unsplash.com/photo-1483381266677-6dfbe064ec10?q=80&w=1000&auto=format&fit=crop&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Source: Photo by [Jonas Verstuyft](https://unsplash.com/@verstuyftj?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/sunlight-across-trees-and-mountains-kL4w5yf8-Ik?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

> *“The biggest issue in this market is revenue sharing…If we got 50% we would be very happy, those are the figures we are looking at as well.” - Zambian environment minister*

Resource nationalism is when a government seeks greater control or value from its country’s natural resources at the expense of the private sector. This can range from outright expropriation – when a government takes away a private company’s assets – to more creeping forms of appropriation – such as higher taxation or tougher regulation.

The commodity industry is no stranger to resource nationalism. In 1938, the Mexican oil industry was nationalised. Seen in the context of its people, it was viewed that, at last, a poor country, long buffeted by predatory foreign powers, had exercised its right to own the wealth of its subsoil, seeing off rich countries that treated access to these resources at low cost as their right. Meanwhile, in 1951, the Iranian government nationalised the assets of the Anglo–Iranian Oil Company (now known as BP). The decision was enormously popular within the country and seen as a long overdue staunching of its national wealth that could now be harnessed to fighting poverty in Iran. More recently, in Venezuela, the late Hugo Chávez grasped strategic assets to propagate his Bolivarian revolution. Bolivia and Ecuador followed his cue.

It’s not just a feature of the oil industry. It can also affect those resources that are critical to the energy transition. In April 2023, newly elected president of Chile, Gabriel Boric announced plans to nationalise the country’s lithium industry, with the state taking a majority stake in all new contracts. Chile is the worlds second largest producer of lithium after Australia. Only a year earlier, the Mexican government announced sweeping nationalisation of its bountiful lithium resources, even though it has yet to extract any ‘white gold’.

Governments must tread a fine line between outright resource nationalism on the one hand, and ensuring a fair deal for their country on the other. One of the defining features of resource nationalism is that it’s often prompted by a sense of unfairness, whether perceived or actual. Contracts between governments and foreign private sector operators may have been signed before the government realised the underlying value of the resource - a case of asymmetric information. Deals may have been done when the economy was on its knees and the government was desperate for cash, or secured during the depths of a recession when commodity prices were weak.

High commodity prices have been a significant driver of resource nationalism in the past, with foreign multinationals often accused of pocketing excessive windfalls or not doing enough to extract a valuable and scarce resource. However, a decline in commodity prices doesn’t necessarily signal the end of resource nationalism. If a resource dependent country suffers a slowdown in economic growth, its government may try and get a bigger share of the shrinking pie to help prop up its revenues.

The degree to which resource production is concentrated in a small number of countries also influences resource nationalism risk. This is especially important when the commodity is seen as being of strategic importance. The higher the concentration, the greater leverage a single government can have over private sector operators. In contrast, a diverse geographical distribution reduces the chances that any one government will be able to exercise its power.

Resource nationalism has a cost though. Although a government may appear to be good, transparent and welcoming to foreign producers, years later – once a mine or an oil well has opened – they may change their tune. This time inconsistency and resulting uncertainty may reduce longer term investment in the country’s resource productivity; leading to a loss of skills and capital from the private sector, reducing production, and potentially leading to higher economic volatility.

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**Carbon nationalism on the rise**

There are signs that a new form of resource nationalism may have begun to rear its head in the global voluntary carbon market. Carbon nationalism as its known is when a government asserts its control over the emissions abatement or carbon storage potential available within its national borders, at the expense of the private sector.

_This post is for paying subscribers only._
### Deflationary expectations
URL: https://www.carbonrisk.world/deflationary-expectations/
Last updated: 2025-08-21T10:37:10.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** **If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.**

[Subscribe now](#/portal/signup)

**By subscribing you’ll join more than 3,000 people who already read Carbon Risk. You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world) **and benefit from my** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program. Thanks for reading!**

---

*Estimated reading time \~ 8 mins*

The EU ETS emissions cap declines by 4.3% in 2024, an acceleration from the previous year-on-year decline of 2.2%. The Linear Reduction Factor (LRF) as it’s known continues at 4.3% until 2028 before increasing to 4.4% to 2030\. Under the normal mechanics of a cap-and-trade scheme (i.e., a reduction in the supply of EUAs available at auction) this would be considered bullish for the price of carbon.

However, the decision to auction additional EUAs to help fund the energy transition has overwhelmed the rise in the LRF and undermined the bullish narrative. Almost one year ago, members of the European Parliament (MEP’s) voted in favour of the sale of €12 billion worth of EUAs from the EU Innovation Fund, and the front-loading of EUA auction volumes from later this decade to generate €8 billion. The sale of EUAs from the Innovation Fund would be partly compensated for by the transfer of 27 million EUAs from the MSR.

To recap, the driver behind this decision was the publication of the [REPowerEU package ](https://ec.europa.eu/commission/presscorner/detail/en/ip%5F22%5F3131?ref=carbonrisk.world)by the European Commission (EC). The document outlined how the bloc was going to secure energy independence from Russia, and accelerate the decarbonisation of the European economy. An initial sum of €300 billion was tabled, although this was later increased.

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In an article at the time (see [*Out of ammunition: What can the EU do to stop carbon prices surging over €100?*](https://www.carbonrisk.world/out-of-ammunition/)) I queried whether the EU was making a classic central banking error. By adding €20bn of additional EUAs on the market had they fired too many bullets too soon, leaving nothing in reserve should emissions (and hence demand for EUAs) prove stronger than expected. A statement from Peter Liese, the lead lawmaker steering EU ETS reform through the European Parliament, drew attention to the price dampening impact of the REPowerEU financing (my emphasis):

> "All of these three measures were highly controversial, among other things, because **they will cause the price of emission allowances to not increase over the next few years**. However, in my view, this is an intentional effect. The price is now already at almost 100 EUR and no company can drastically reduce its emissions within a few weeks.

Liese went on to highlight how REPowerEU should give Europe the time it needs to build up its capacity in renewables, while also implementing the improvements it requires (training, raw materials, etc.) to meet the 2030 target. He concludes by adding that there will be no excuses if you leave it too late to invest:

> That's why I believe the compromise is the right response to the crisis and the long-term challenges we face when trying to achieve our climate targets. In the context of emissions trading, we have even increased the target for 2030\. The agreement also takes account of the fact that we now have to burn more coal in the short term in order to become independent from Russian gas, but that **we will have to increase our efforts again by the end of the decade.** By then, we will be in a position to achieve this because the excuse that there is a shortage of materials and skilled workers will no longer hold true in a few years' time. **If you have not invested by then, it's your own fault."**

In the following four weeks after I published [*Out of ammunition*](https://www.carbonrisk.world/out-of-ammunition/)[ ](https://www.carbonrisk.world/out-of-ammunition/)the EU carbon price broke through the €100 mark three more times. But lacking any conviction to go any higher, that’s as high as it went. What followed was a grinding move lower to around €90 in late September, an acceleration in the sell-off during the fourth quarter, a brief reprieve in the dying trading days of 2023, and then another dramatic fall during the first three weeks of the new year to around €60-65.

It’s fair to say that the EU did enough to stop the price of carbon surging above €100\. Over the past six weeks or so the annual rate of change in the EU carbon price has turned negative. Deflation has set in for the first time since the pandemic induced lockdowns of spring 2020, with carbon prices down some 20% over year earlier levels.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/be053972-2238-4b37-961b-d36ee7398d34_880x519-1.png)

Europe has met most of the short term REPowerEU targets according to the Center on Global Energy Policy. The continent has successfully pivoted away from Russian natural gas supplies and towards American and Qatari LNG, while households and businesses have succeeded in cutting their gas consumption - some of it voluntarily. Overall, European emissions are estimated to have declined by more than 20% between 2022 and 2023 due to higher renewable energy generation, a switch away from coal and towards natural gas, and a decline in industrial demand - the latter in part a result of high energy prices (see [*The only number that matters*](https://www.carbonrisk.world/the-only-number-that-matters/)).

Meeting the longer-term targets though to 2030 is going to need more work. Wind generation capacity, renewable hydrogen use, and biomethane production are not on track to meet the 2030 targets. Solar is close but further policy support may be needed to achieve the target, such as reducing the time required for permitting. With Europe not on track to meet its longer-term REPowerEU targets it raises the question of whether additional funding will be required to help bridge the gap.[1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8f00b45e-7408-4681-90c5-0436454f2b49_729x639.png)

Source: Center on Global Energy Policy at Colombia

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Up until a year ago compliance entities (i.e., those emitters legally obliged to purchase EUAs to cover their emissions) were fearful that a scarcity of allowances would force them to pay ever higher carbon prices in the future. The reverse dynamic may now be true with signs that deflationary expectations have set in.

European utilities are hedging less as power consumption falls and the share generated by renewable energy increases. One major utility who had hoarded EUAs in anticipation of needing them for future compliance needs recently confirmed they had closed that strategic position. Furthermore, a new wave of global liquefaction capacity is likely to lead to a significant increase in LNG supply from 2026 onwards, potentially resulting in much lower natural gas prices, and pushing thermal coal further out of the merit order (see *[Boiling over](https://www.carbonrisk.world/boiling-over/)*).[2](#footnote-2)

There are also signs that industrials may be holding back due to concerns over demand and in the expectation of lower EUA prices in the future. In a sign of underlying physical demand from compliance entities, daily auctions of EUAs are regularly settling at levels below the prevailing spot price along with low cover ratios. Finally, speculators continue to hold a record net short position, taking advantage of the occasional rebound to add further shorts, increasing their exposure to carbon prices falling.

The EU has until the end of August 2026 to raise the necessary funding from the sale of the EUAs. If it reaches the €20 billion target sooner then there will be no more additional EUA sales entering the market. One concern is that by specifying a € value the EU may precipitate a downward move in the market that might be difficult to stop. Raising €20 billion at an average price of €80 requires 250 million EUAs to be auctioned. However, if the best average price they can achieve is only €60 then 333 million EUAs will need to be sold. It gets worse. If the price were to drop to €40 then 500 million EUAs would enter the market.

Once deflationary expectations set in the rational response for market participants is to delay hedging their future carbon risk until as late as possible. Why worry about securing sufficient EUAs now when prices keep falling, and could be even lower in six months time? Of course that creates a vicious circle that could precipitate even lower prices, and so on.

One of the most important thing investors in carbon markets need to understand are the goals and reaction functions of policymakers to economic and market conditions. European policymaking proceeds slowly and deliberately. Achieving consensus around something as important as the sale of additional EUAs at auction took many months of negotiation. Officials hate being pushed into a U-turn. Reversing course is not something they like to do. Far better they might reason, to wait, deliberate, and act slowly, than risk being late.

Therein the chance of a policy misstep grows larger.

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

[Smoke signalsThe opening line of a recent article in The Economist begins, “When Europeans turn their attention to what markets have to say, it is usually because trouble is brewing.” From the spread between Italian and Greek bond yields over those issued by the German government, European natural gas prices, to the value of the Euro versus the dollar. In times of crisis past and present, investors, politicians, and the media tend to focus on what these markets are signalling about the health of the European economy and political environment.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-101.png)Carbon RiskPeter Sainsbury![](https://images.unsplash.com/photo-1578604665675-9aee692f6ddc?auto=format&fit=crop&q=80&w=1000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)](https://www.carbonrisk.world/smoke-signals/)

---

1. https://www.energypolicy.columbia.edu/publications/repowereu-tracker/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.rwe.com/-/media/RWE/documents/05-investor-relations/finanzkalendar-und-veroeffentlichungen/2023-cmd/cmd-2023\_presentation.pdf [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
### Nitrogen fix
URL: https://www.carbonrisk.world/solving-fertilisers-nitrogen-fix/
Last updated: 2025-08-21T10:37:12.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** **If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.**

[Subscribe now](#/portal/signup)

**By subscribing you’ll join more than 3,000 people who already read Carbon Risk. You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world) **and benefit from my** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program. Thanks for reading!**

---

*Estimated reading time \~ 11 mins*

![a few farm machines in a field](https://images.unsplash.com/photo-1655130944329-b3a63166f6b5?q=80&w=1000&auto=format&fit=crop&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [James Baltz](https://unsplash.com/@jimbob63?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/a-few-farm-machines-in-a-field-ch1kOhA5%5FXM?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

New regulations introduced in Europe this January, from July in Australia, and sometime during 2025/26 in California will force food and drink producers to tackle one of the hidden carbon footprints in their supply chains: fertilisers.

Climate disclosure laws will put food producers under intense pressure to delve into the far reaches of their supply chain, to understand and report on how fertiliser is being used by their ingredient suppliers. No mean feat given the enormity and complexity of modern food supply chains. But with \~87% of their emissions under Scope 3 they will have no choice (see [*Scope creep: Mandatory climate disclosures target under-reported carbon risk*](https://www.carbonrisk.world/scope-for-improvement/)).

Why the focus on fertiliser? Synthetic fertiliser has been called one of the greatest inventions of the 20th Century. The Haber-Bosch process forms the basis to today’s industrial scale production of fertiliser. It involves burning natural gas to produce hydrogen, combined with nitrogen from the air, and then subjected to extremely high pressures and temperatures to synthesise ammonia.

The process enabled agricultural fertilisers to be produced on an enormous scale, and dramatically increased global agricultural productivity. Some estimates suggests that without synthetic fertiliser almost half the world’s population would not be alive today - at least based on current high protein diets.

Yet synthetic fertiliser has a huge environmental impact. The production and use of synthetic fertilisers is responsible for emitting \~1.3 Gt CO2e, according to research published by the University of Cambridge (UoC). One-third of the emissions take place during the production of the fertilisers, with the remaining two-thirds emitted after they are spread on the land.[1](#footnote-1) 

The organic approach isn’t any better. UoC estimates indicate that manure is also responsible for emitting \~1.3 Gt CO2e. An estimated 43% of manure is applied to soils as fertiliser, a similar amount is typically left on the pasture, with the remainder lost in the waste management process. UoC analysis finds that emissions from the use of manure are \~1.9 times higher than an equivalent nitrogen content of synthetic fertilisers, mostly due to storage and transport emissions (see [*Better in than out: The worlds largest meat and dairy corporations are under pressure to cut greenhouse gas emissions*](https://www.carbonrisk.world/turning-sour/)).

In total, the production and use of manure and synthetic fertilisers was responsible for 2.6 Gt CO2e in greenhouse gas (GHG) emissions in 2019\. At around 5% of global emissions that’s more than global aviation and shipping combined. The sum total of the GHG emissions is significant, but perhaps what’s even more important is the composition of those gases.

Just under half (44%) of the emissions, amounting to around 1.15 Gt CO2e, are in the form of nitrous oxide (N2O), a GHG with almost 300 times the warming potency of CO2, and one that also lasts in the atmosphere for a long time (\~120 years). Almost 0.5 Gt CO2e is emitted from the use of synthetic fertiliser, 0.3 Gt CO2e is emitted due to manure management, and an additional 0.3 Gt CO2e is emitted after manure is applied to the land.

Excessive use of nitrogen fertiliser also results in air, land, and water pollution. For example, once excess nitrogen gets into the aquatic environment, it can cause a rapid increase in toxic algal blooms that deplete oxygen levels. High nitrate levels can leave “dead zones” behind, places where little or no organisms can survive.

Based on the FAO’s forecast for global fertiliser demand in 2050, overall GHG emissions from synthetic fertiliser production and use are projected to rise by 28% to 1.66 Gt CO2e, with a commensurate increase in nitrous oxide emissions and nitrogen pollution. That’s if nothing changes in how fertiliser is produced and applied to the land.

_This post is for paying subscribers only._
### Canada shows how NOT to use Carbon Contracts for Difference
URL: https://www.carbonrisk.world/a-powerful-tool-to-leverage-energy/
Last updated: 2025-08-21T10:37:12.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 8 mins*

This is the final article in a three-part series focusing on carbon pricing in Canada. The first article, [*Europe must learn from Canada's 'price on pollution' debacle*](https://www.carbonrisk.world/a-cautionary-tale/)*,* introduced Canada’s national carbon tax. It warns that ill conceived meddling to the household fuel tax holds important lessons for Europe as it plans to launch a second emissions trading scheme focused on transportation and buildings. The second article, [*Canada's oil and gas cap-and-trade scheme does not go far enough*](https://www.carbonrisk.world/canadas-oil-and-gas-cap-and-trade/)*,* delves into the detail of the policy, concluding that the proposed scheme while a good idea in practice, has a number of flaws in its current design.

The final article in this series focuses on the Canadian governments proposed use of Carbon Contracts for Difference (CCfD) to support the development of carbon capture and storage capacity (CCS). To recap, a CCfD involves the government setting an effective guaranteed or “strike price” for carbon. The strike price might be set at a level that covers the incremental capital (“capex”) and operating (“opex”) cost of developing the CCS capacity.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e8ca9687-2a68-4932-820d-d98bc732debc_589x403-1.png)

In theory it should work like this. Assume that a company developing a carbon capture facility signs a CCfD agreement with the government. If at the end of a specified period the carbon price is below the strike price then the project developer is guaranteed to receive a payment from the government reflecting the difference multiplied by every tonne of CO2 captured. If the carbon price is higher than the strike price then the developer pays a certain amount back to the government. In 2022 I published an [article ](https://www.carbonrisk.world/what-are-carbon-contracts-for-difference/)outlining why CCfDs can be so useful to governments and industry looking to accelerate the energy transition:

> The carbon price is the ‘Currency of Decarbonisation’. Jurisdictions need to keep it high enough to incentivise investment in low carbon technology, but not too high that it becomes socially unacceptable. Achieving a stable high price of carbon is one thing, but without the ability to hedge against future carbon prices it is very difficult to leverage the investment necessary to build-out the required capacity.  
>  
> CCfDs enables very long-term carbon price hedges to be put in place, i.e. one that covers several years or more. The CCfD also allows the agent to hedge against adverse regulatory risk, of the kind that could occur in the event that a new government was elected and decided to rip up the entire existing climate change legislation. Unlikely perhaps, but not impossible. Being protected from carbon price volatility over the long-term means that the investment becomes a lot more bankable in the eyes of investors.  
>  
> A secondary benefit of CCfDs is that they can be used by the government or institution to support and incentivise innovative, but untested technologies. For example, one technology might need higher levels of support in the early years, but less later on in the contract period. This is especially important as the variable costs of novel technologies cannot be known in advance. This could take the form of the government or institution offering a higher strike price early in the contract in return for public investment in the project, giving rights to a share of the profits in the longer term.

In short, CCfDs correct a market failure.

Even in established carbon pricing schemes such as the EU ETS, markets rarely offer the ability to hedge carbon prices more than a few years out. Even if they do there is likely to be a premium reflecting the risk that governments renege on their climate commitments. CCfDs enable companies to make long-term investments linked to the carbon price, often ones with significant upfront costs that may not be possible otherwise.

_This post is for paying subscribers only._
### Repost: The emergence of the carbon economy
URL: https://www.carbonrisk.world/repost-the-emergence-of-the-carbon/
Last updated: 2025-08-21T10:37:13.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Upgrade to paid](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 12 mins*

*In early February, two* *North American companies announced that they had successfully incorporated CO2 captured from the atmosphere using Direct Air Capture (DAC) into freshly produced concrete. Heirloom, which owns America’s only operational DAC plant delivered 30 kg of CO2 captured from the air around San Francisco to a nearby concrete facility, where CarbonCure’s carbon mineralisation solution was used to sequester it into concrete.[1](#footnote-1)*

![How the Heirloom and CarbonCure DAC to concrete sequestration process works](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/944b277d-f4a3-4052-8d27-535251d7d888_1601x934-jpeg-2.jpg)

Source: Heriloom

*Injecting CO2 reduces the overall carbon footprint associated with producing concrete by 5-15% depending on the process used. Not too bad given the industry accounts for around 6-8% of global CO2 emissions. However, the real bonus is concrete’s carbon storage properties as the CO2 can be locked up for centuries, even if the concrete is demolished.*

*The announcement - which represents a world first - could revolutionise the global market for carbon, capture and storage (CCS), beyond its current reliance on government subsidies and those companies with the foresight to back them with pre-purchases and offtake agreements.*

*Scaling this technology faces some significant barriers, not least of which is growing global DAC capacity. However, if construction materials are likely to dominate future demand for CO2 then DAC developers need to question whether they are building their facilities in the right place. Concrete demand is closely linked with urbanisation and so emerging economies in Asia and West Africa may represent the best opportunities for growth.*

*Lets dive in.*

---

We tend to think of carbon dioxide (CO2) as a bad thing: a pollutant, a ‘negative externality’ in economics speak, something to be rid of, and certainly not something of value.

However, CO2 is a valuable input for many industrial processes.

Global CO2 demand was estimated to be \~230 Mt in 2015, according to the International Energy Agency (IEA).

The fertiliser industry is the largest consumer (57%), with 130 Mt CO2 used in the production of urea in 2015\. The oil and gas industry accounted for around one-third (34%) of demand, utilising 70-80 Mt of CO2 for enhanced oil recovery (EOR).

Other commercial applications include food and beverage production (14 Mt CO2, 6%), followed by metal fabrication, cooling, fire suppression, and in support of plant growth in greenhouses (< 10Mt CO2, 4%).

China is the major market for CO2, accounting for about 28% of global demand in 2020, followed closely by North America with 27%, and Southwest Asia with 11%. In terms of market share, demand has pivoted away from traditional end markets in North America and Europe, and towards China and emerging markets in Asia.

In 2019 the [IEA projected ](https://iea.blob.core.windows.net/assets/50652405-26db-4c41-82dc-c23657893059/Putting%5FCO2%5Fto%5FUse.pdf?ref=carbonrisk.world)global CO2 demand would increase to 250 Mt CO2 in 2020 and reach 272 Mt CO2 by 2025\. This is based on the assumption that demand continues to rise at a trend rate of 1.7% per annum, led by urea and EOR. However, as we’ll see later, demand for CO2 could grow much faster than this if other applications are able to utilise additional streams of captured CO2.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/13c71a30-b1d6-4348-8cf3-9203e82306f6_919x512.png)

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_This post is for paying subscribers only._
### Scope creep
URL: https://www.carbonrisk.world/scope-for-improvement/
Last updated: 2025-08-21T10:37:13.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** **If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.**

[Subscribe now](#/portal/signup)

**By subscribing you’ll join more than 3,000 people who already read Carbon Risk. You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world) **and benefit from my** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program. Thanks for reading!**

---

*Estimated reading time \~ 7 mins*

This year many of the worlds largest economies are introducing tough climate disclosure laws that require companies report on their entire supply chain. Crucially many of these laws go beyond direct emissions (Scope 1 and 2), and also mandate firms report on their indirect emissions too (Scope 3).[1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/f1b1f853-07e4-4812-8021-6f427a5e1db9_1920x1080-2.png)

Source: Emmi

Mandatory reporting increases the pressure to provide a credible plan on how to meet emission reduction targets. It puts the onus on businesses operating both upstream and downstream to be clear on their own environmental impact. It enables investors to compare one firms emissions with another, and helps direct capital to the best carbon mitigation opportunities.

Scope 3 is critical to understanding how firms are financially exposed to carbon pricing and climate risks. Indeed, there is evidence that firms that are already publishing comprehensive emissions data, including their Scope 3 emissions are benefitting from lower borrowing costs. An emissions transparency premium (see [*Owning up to Scope 3*](https://www.carbonrisk.world/owning-up-to-scope-3-emissions/)).

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**A global trend in climate disclosure**

Lets first look at Europe. New laws introduced in January 2024 require companies operating in the European Union to start collecting and then disclosing a wide range of data regarding their impact on the planet. In addition to information on water, biodiversity, and social impacts, the EU’s Corporate Sustainability Reporting Directive (CSRD) requires firms to report on their Scope 1, 2 and 3 emissions. Although the CSRD will be introduced in stages starting with the largest companies that are already subject to the Non-Financial Reporting Directive (NFRD), the directive is expected to ensnare some 50,000 companies, including many non-European companies that have operations in the EU.

On the other side of the world, the Australian government has issued a proposal that requires large companies and financial institutions to disclose their climate impacts (including their Scope 3 emissions). The law, which is expected to be introduced in July 2024, will require obligated companies to provide climate related disclosures covering the 2024-25 financial year. Companies that fail to disclose their data or provide inaccurate data could face civil penalties.

Across the Pacific, companies based in California will need to comply with supply chain emissions reporting requirements from 2026\. The Climate Corporate Data Accountability Act, signed into law in 2023, will require companies with an annual revenue of more than $1 billion to report their annual direct and indirect supply chain emissions. Businesses will need to begin capturing data from 2025 in order to be ready.

The Securities and Exchange Commission (SEC) has yet to announce their final climate disclosure rules. The decision to include or exclude Scope 3 emissions appears to be the most contentious part of the ruling, with critics arguing that it would be unduly burdensome. A compromise deal might involve companies being required to report on Scope 3 emissions if deemed “material”, or if they are included in an emissions reduction target. The latest regulatory agenda indicates that the SEC is likely to publish their final iteration of the rules in April 2024.

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**Under-reported impact**

Scope 3 emissions typically account for three-quarters of a company’s emissions, according to estimates from the CDP. However, this varies considerably by sector and can vary from as low as 16% of a company’s emissions for the cement industry, and approach 100% for firms involved with transport, capital goods and financial services.

Measuring Scope 3 emissions accurately is fraught with difficulty. It requires obtaining information on all of the inputs and products sourced by the business (potentially thousands of products from hundreds of suppliers located across the globe), in addition to making reasonable assumptions about how the outputs from the firm (i.e. the products and services sold) are being used by their own customers

Research conducted by Emmi, the carbon risk management firm, in collaboration with Griffith University and The University of Otago, discovered that Scope 3 emission disclosures were found to be under-reported by up to 44%. The analysts used a sample of over 9,500 observations from 1,972 firms that disclosed Scope 3 emissions between 2010 and 2019.[2](#footnote-2) 

Not every source of Scope 3 emissions was reported on by companies, and those that did get reported tended to be those that mattered the least to overall indirect emissions. For example, categories such as travel emissions (low materiality) were reported much more frequently than the use of products and processing of sold products (high materiality).

Predicting Scope 3 emissions for individual companies via simple scaling techniques or more elaborate machine learning is limited by the low number of estimates. Scope 3 disclosures have improved over time with companies typically reporting a broader range of categories. The study suggests that extensive reporting on a consistent basis is likely to improve the accuracy of Scope 3 estimates considerably. As jurisdictions such as the EU, Australia, and the US embed Scope 3 reporting, the accuracy of that data and its value to investors is likely to grow.

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

**Internalising a Scope 3 carbon price**

Irrespective of whether they are subject to a regulatory carbon price or not, a growing number of firms are putting their own internal price on carbon. The three main reasons companies cite for doing so are driving low carbon investment, encouraging energy efficiency, and changing internal behaviour (see [*In the shadows: Everything you need to know about internal carbon pricing*](https://www.carbonrisk.world/in-the-shadows/)).

Analysis by the CDP for Reuters found that 20% of 5,345 global companies making climate-related disclosures in 2022 used an internal carbon price, up from 17% in 2021\. Internal carbon prices range from close to zero to more than €1,000 per tonne CO2\. The median is closer to €25 per tonne, roughly one-third of the prevailing price in the EU ETS.

Carbon taxes and compliance carbon markets typically put a carbon price on Scope 1 emissions, while only covering Scope 2 emissions indirectly via utilities obligation on electricity generation. Scope 3 emissions go unpriced. Up until recently individual companies have taken the same approach to applying an internal price on carbon.

However, as companies become more familiar with their Scope 3 emissions, and more concerned about the underlying climate and financial risk, an increasing number of companies are likely to expand internal carbon pricing to also cover Scope 3 emissions. CPD data from 2021 shows that of those companies that applied a separate internal carbon price for each scope of emissions, the median Scope 3 price was roughly double the Scope 1 or Scope 2 price.

As Scope 3 emission data becomes more accurate, other companies are likely to engage by applying their own internal carbon price - helping to drive capital to the best internal mitigation opportunities. However, the evidence suggests that the impact could be much broader than that. Scope 3 disclosure requirements and internal carbon pricing is also likely to mean that more capital is directed towards carbon credit projects.

Analysis by MSCI Carbon Markets (née Trove Research prior to its acquisition by MSCI) found that firms which purchased a ‘material’ number of carbon credits cut their emissions twice as fast as those firms that did not purchase carbon credits. The result also tallies with previous analysis conducted by Sylvera, the carbon credit rating firm. Both pieces of research revealed that those companies most engaged with decarbonising their own operations are also likely to be active in the carbon credit market, and vice versa (see [*Carbon credits - a permission to pollute, or a signal to decarbonise?*](https://www.carbonrisk.world/carbon-credits-a-license-to-decarbonise/)).

Whether it’s those companies subject to climate disclosure laws, or those firms further up or down the supply chain, every business will now be under pressure to assess their carbon risk.

[Full disclosureMany companies publish emissions data on a voluntary basis, but with no consistent methodology it can be difficult to know whether an individual firm is performing well or not. Mandatory disclosure requirements increase the degree of transparency, cutting the considerable search costs involved with analysing one company’s emissions against its competitors. Policymakers reason that forcing businesses to publish detailed emissions data will motivate them to push for ever greater cuts to their emissions.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-105.png)Carbon RiskPeter Sainsbury![](https://images.unsplash.com/photo-1606994868513-d480e1a1cab0?ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D&auto=format&fit=crop&w=1000&q=80)](https://www.carbonrisk.world/full-disclosure/)

---

1. There are three layers of greenhouse gas emissions - Scope 1, Scope 2 and Scope 3\. According to the definition provided by the UK’s Carbon Trust, “Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company's value chain.” [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.emmi.io/post/new-emmi-research-suggests-7billion-tonne-gap-in-scope-3-reporting [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
### Canada's oil and gas cap-and-trade scheme does not go far enough
URL: https://www.carbonrisk.world/canadas-oil-and-gas-cap-and-trade/
Last updated: 2025-08-21T10:37:14.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Upgrade to paid](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 8 mins*

In December 2023 the Canadian government announced that it plans to introduce a cap-and-trade scheme on the country’s oil and gas sector. The proposed scheme will cover its upstream oil and gas sector, including its offshore and LNG production facilities. If its implemented on schedule in 2026 it would be the first time that a major fossil fuel producing country has introduced a national oil and gas emissions cap.[1](#footnote-1)

The reasons for capping the sectors emissions are sound. Canada’s upstream oil and gas sector is the country’s largest source of emissions, accounting for around one-quarter (171 Mt CO2e) of the country’s annual greenhouse gas (GHG) emissions in 2019\. It is also one of the few sectors where emissions have continued to grow over the past couple of decades (upstream emissions have increased by 21.2% since 2005). Furthermore, emissions are likely to continue to grow in the absence of policy intervention, especially since the industry is looking to expand its LNG capacity, and be ready to take advantage of global energy markets.[2](#footnote-2) [3](#footnote-3)

Despite the rationale behind introducing a cap-and-trade scheme on the sector, its complexity risks delays and unintended consequences. For example, unlike other more established cap-and-trade schemes such as the EU ETS, Canada’s proposed oil and gas scheme will cover carbon dioxide, methane, nitrous oxide and other GHGs. The measurement, reporting and verification of a wide range of GHG emissions is likely to be very challenging. Methane emissions in particular are very difficult for individual operators to measure, especially considering the possibility of leaks from equipment and pipes.

The cap will also only apply to Scope 1 emissions, i.e., those emissions directly involved on site to produce oil and gas. To ensure a level playing field the cap will also account for the transfer of indirect emissions (e.g., a facility might only use electricity from the grid, or it might use thermal energy or hydrogen from another oil and gas site). Finally, the cap will also take account of emissions that are captured and used in some way (e.g. enhanced oil recovery, permanent storage).

**Emissions cap not ambitious enough**

The proposed 2030 emissions cap is between 106-112 Mt CO2e, equivalent to a 35-38% drop in emissions below 2019 levels. Analysis by Navius Research on behalf of the Canadian Climate Institute indicates that reducing methane emissions could deliver one-third of the emission cuts required to achieve the 2030 cap. Carbon capture, use and storage (CCUS) is also expected to play a major role, as well as electrification and fuel switching.[4](#footnote-4) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b219df94-fcdb-4792-ad8d-ccc4b75bbd11_1240x598-1.png)

In setting the cap “slightly below what emissions would be if covered sources achieved technically achievable emission reductions by 2030”, the government are only pushing very softly on the boundaries of what is possible. It’s not a stretch target by any means. For context, the government’s initial modelling suggested that the most efficient pathway to meeting the 2030 target was for the oil and gas sector to cut emissions by 42% by 2030, compared with 2019 levels (see [*Europe must learn from Canada's 'price on pollution' debacle*](https://www.carbonrisk.world/a-cautionary-tale/)).

_This post is for paying subscribers only._
### Caution! Net zero scenarios are not forecasts
URL: https://www.carbonrisk.world/caution-net-zero-scenarios-are-not/
Last updated: 2025-08-21T10:37:16.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Subscribe now](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 9 mins*

Back in 2017, I wrote a book about the perils involved with forecasting commodity prices, and how to spot the underlying incentives guiding those who proffer such predictions. My book, [Crude Forecasts: Predictions, Pundits & Profits in the Commodity Casino](https://www.amazon.co.uk/Crude-Forecasts-Predictions-Pundits-Commodity-ebook/dp/B077BZXG8R/ref=sr%5F1%5F1?keywords=crude+forecasts&sr=8-1&ref=carbonrisk.world) outlines how to become a smarter consumer of forecasts and avoid getting suckered into the compelling narratives spun by think tanks, investment banks and market pundits. I suggest that rather than forecast, it’s much better for companies involved with commodities to scenario plan instead:

> “…scenario planning involves sketching out different possibilities and bringing together people with different perspectives to work through the details. The end result should be several plausible, internally consistent and emotionally compelling stories about the future. The scenarios will highlight hidden connections and make distant consequences seem real. Importantly, though, the scenarios should also contradict each other.  
>  
> Since scenarios are persuasive stories, they can help us face up to uncomfortable prospects and think clearly about possibilities we would rather ignore. And because scenarios contradict each other, they force us to acknowledge that, in the end, we cannot actually see into the future. As a result, we move from a sterile question to a fertile one – from “What will happen?” to “What will we do if it does?”

The danger, as I outline in the book, is that once out in the public domain, scenarios are very easily misinterpreted as being a forecast. In mid-2017, it was the International Energy Agency (IEA) that was on the hook as analysts poked fun at the organisations poor record at predicting photovoltaic (PV) capacity. If they had been so slow to forecast PV capacity growth, so the argument went, then they could also be underestimating the growth in electric vehicles. Here’s the IEA’s response to its critics (emphasis added my own):

> “The projections in the New Policies Scenario signal to policy-makers and other stakeholders the direction in which today’s policy ambitions are likely to take the energy sector. **This does not, however, make this scenario a forecast – a point that needs constantly to be kept in mind.”**

It’s very easy to slip into making decisions about the future based on what we wish to happen, especially if that happens to coincide with the commonly accepted narrative. Take the IEA’s Net Zero scenario as an example. It’s treated by many to be the gospel as to where the world *will* be in 2050.

Acting on predictive analysis that conflicts with that normative perspective is psychologically disconcerting, but that’s the position many companies find themselves in as they look to invest capital over the next 2-3 decades.

Rather than force carbon intensive businesses to wrestle with conflicting versions of the future, the risk is that companies succumb to stasis. Sitting on their hands and muddling through, rather than taking an assertive position.

Let’s consider an example.

Fossil fuels producers typically get all the attention when it comes to tackling GHG emissions and getting to net zero. Investors are naturally fearful that climate policies, and the energy transition more broadly, will mean that oil, gas, and coal producing assets could become ‘stranded’.

However, it’s worth remembering that there is a whole supply chain that supports the trade in oil, natural gas, and thermal coal. Tens of thousands of crude and product tankers, dry bulk ships, and LNG vessels criss-cross the globe. The shipping industry plays a vital role in ensuring these commodities can be transformed across space, time and form so that supply meets demand.

The shipping industry contributes to climate change, but its future is a function of the production decisions taken by fossil fuel producers and mining companies decades into the future.

Could net zero scenarios lead them astray? Let’s dive in.

_This post is for paying subscribers only._
### Europe must learn from Canada's 'price on pollution' debacle
URL: https://www.carbonrisk.world/a-cautionary-tale/
Last updated: 2025-08-21T10:37:16.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

[Upgrade to paid](#/portal/signup)

**You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)**. The Carbon Risk** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the** [**table of contents**](https://www.carbonrisk.world/table-of-contents-start-here/)**.**

**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

*Estimated reading time \~ 10 mins*

![white and blue metal building during night time](https://images.unsplash.com/photo-1604397653091-f08b42e22bb9?q=80&w=1000&auto=format&fit=crop&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

Photo by [Hans Eiskonen](https://unsplash.com/@eiskonen?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/white-and-blue-metal-building-during-night-time-tmHzuxeZUAQ?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

As governments seek to ramp up efforts to meet their climate commitments, attention now turns to sectors hitherto not exposed to the full force of direct carbon pricing: buildings and transportation. By quirk of the high proportion of their income spent on the fuel necessary to heat their homes and travel to work, poorer households are increasingly having to bear the cost of decarbonisation.

Policymakers are of course trying to shield those same citizens (their voters) from shouldering the full costs. However, the experience that befell the Canadian government last year is salutary to any jurisdiction looking to introduce such a regressive carbon policy.

In 2018 the Canadian government passed the Greenhouse Gas Pollution Pricing Act. The law (first applied as of 1st April 2019) required provinces and territories to either establish a levy on greenhouse gas emissions or adopt the federal minimum carbon price system.

There are two components to the policy. The first was a “fuel charge” that is applied to 21 different fuels and is levied on the fuel distributor who may then pass on the charge to households, businesses and motorists. The second component is the “output-based pricing system”, and applies to large industrial producers on their non-fuel based production emissions.

The carbon price is the same whether you are a household or a large chemical producer. It started at C$20 per tonne CO2e in 2019 and has increased by C$10 per tonne each year until the price reached C$50 per tonne (€34) in 2022\. From 2023 onwards it began increasing by C$15 per tonne (€10) each year, and is set to continue at that rate until it reaches C$170 per tonne (€116) in 2030.

The federal government requires that 90% of the proceeds from the carbon price are returned to households in the province or territory where they are collected. Households receive a refund every quarter directly into their bank account, with the sum based on where they live (provinces consume a very different fuel mix), and the size of their household. The other 10% is used to fund programs that help communities and institutions (e.g., schools, hospitals, municipalities) reduce their fuel consumption.

Canada’s government managed to get broad support for its carbon tax by calling it a ‘price on pollution’. Fuels with a higher carbon intensity should be more expensive than those with a lower carbon intensity, and so, in theory, consumers should react to that incentive by switching or at least becoming more efficient in their consumption. By refunding the majority of the proceeds the government reasoned that the carbon price would deliver all of the benefits, but with none of the costs - politically, financially or otherwise.

_This post is for paying subscribers only._
### The climate casino
URL: https://www.carbonrisk.world/the-climate-casino-68a6f6241c3290001bf25255/
Last updated: 2025-08-21T10:37:17.000Z
*\*\*\* This is the last Carbon Risk article for 2023\. I will be back in the first week in January. Thanks again for your support and I wish you all a merry Christmas and a happy New Year \*\*\**

*\*\*\* A couple weeks ago I was interviewed by Monna Dimitrova from Homaio. We talked about my reasoning for launching Carbon Risk, why carbon markets are important and how they can have an environmental impact, plus some of the things I’m watching out for in the future. Please check out the article* [*here*](https://www.homaio.com/post/writing-about-carbon-markets-for-a-living-interview-with-peter-sainsbury?ref=carbonrisk.world) *\*\*\**

---

![UNITED STATES - CIRCA 1960s:  Pair of green plastic dice, showing 'lucky 7'.](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/4495c26b-0050-495d-8554-c3ff62e01bbe_1000x774-jpeg-4.jpg)

The challenge for anyone who was producing content ahead of an important climate summit such as COP28 is standing out from the crowd. Of course, every company, organisation, institution and media outlet is clamouring for attention. But no matter the quality of the work, there are only so many hours in the day to actually read. Amid the cacophony of noise, some nuggets of wisdom are inevitably going to pass by without getting the attention they deserve.

It’s to that end that I felt compelled to highlight one recent piece of analysis that passed under the radar of pretty much everyone, whether that be mainstream media or social media. The report is the first instance I can find that provides a probabilistic approach to forecasting global greenhouse gas (GHG) emissions and the impact on the climate. It’s one that takes account of past performance, rather than a stylised ‘hope-for-the-best’ policy scenario. An approach whose audience is the real world, rather than the arcane world of climate policymakers.

The analysis which will now be updated annually has important implications for carbon market and climate tech investors. For example, the results, perhaps controversially, suggest that we should be devoting a lot more resources to decarbonising the production of oil and gas than we are currently.

Lets dive in.

_This post is for paying subscribers only._
### Interview with Clémentine Serey of emissions tracking firm Kayrros
URL: https://www.carbonrisk.world/interview-with-clementine-serey-of/
Last updated: 2025-08-21T10:37:18.000Z
As corporations, financial institutions and governments begin to realise they are sitting on a big uncovered short position on carbon, demand for data and analytics that helps them manage that carbon risk (and take advantage of any opportunities in carbon markets) is growing fast.

I recently had the pleasure to talk to Clémentine Serey, Product Manager at Kayrros about how their company is revolutionising carbon markets by analysing satellite information and delivering real time emissions data.

Their data (shown in the chart below) indicates that EU ETS carbon emissions spent most of the year well below 2022 levels, and indeed even recently they were significantly below 2020 levels. However, over the past few weeks Kayrros data suggests that carbon emissions from EU ETS covered emitters have rebounded strongly to levels more inline with December 2022.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e3c1057e-e4a5-4681-839a-7ff6fa63b2b2_864x471-1.png)

If you enjoy this conversation with Clémentine Serey please click ‘like’ and share it with your networks.

**1\. Could you begin by introducing Kayrros.**

Kayrros is a digital MRV and environmental intelligence company. We use AI to process tens of terabytes of satellite imagery and other raw data every day to generate standardized datasets and insights for three main purposes: to slow down climate change and to manage climate and transition risks. We support the first of these goals by monitoring greenhouse gas emissions, including both positive methane and CO2 emissions as well as natural carbon sinks like forestry. For the second mission, we help our customers protect themselves and their assets by tracking their exposure to wildfire and flooding risks. We help manage the energy transition by bringing transparency on the pace of deployment of renewables and by monitoring fossil-fuel supply chains. Instead of investing in our own expensive hardware, we prefer to build super-sophisticated algorithms to analyse public satellite imagery. This allows us to extract troves of precise, actionable information from these underlying data, while keeping our imagery costs down.

**2\. How long has Kayrros been monitoring EU ETS emissions, and what was the motivation behind it?**

Kayrros started monitoring EU ETS emissions in 2022 to help EU and UK carbon traders up their game by getting more visibility on underlying trends in demand for allowances. We realised that there was a real lack of reliable and timely public data on carbon emissions, and that carbon markets would never reach the desired volumes and efficiency as long as that remained the case. We understood that satellites could help monitor demand for allowances with an accuracy, frequency, and granularity that no other methodology can provide. Making carbon markets more efficient will also help send industry participants the right signals and give them the right incentives to decarbonise the economy faster.

**3\. Could you outline how Kayrros begins to monitor and estimate emissions? Are there any differences in approach between power generation and industrial emissions for example?**

We use a combination of public data, geolocation signals and satellite imagery. The first step consists in gathering activity data for each of the sectors covered in the ETS market. Each sector is monitored with a different approach, depending on its specificity. For power generation, publicly available data provide a good starting point. Not so for the industrial sector, which is far more difficult to track. That’s where earth observation technologies come into play. We measure industrial emissions by using satellite imagery to detect activity at the plant level. Finally, we use transponder data to assess transportation activity from ships and planes. These measurements are refreshed weekly, a much higher frequency than can be achieved through any official source. The second step is to convert this activity data into emissions. This is possible thanks to a methodology that we have jointly developed with three academic research centres, called [Carbon Monitor](https://carbonmonitor.org/?ref=carbonrisk.world).

**4\. What proportion of EU ETS obligated emitters does Kayrros monitor? For example, some estimates suggest that 30 companies were responsible for more than half of EU ETS emissions in 2022.**

We track 100% of the EU ETS scope, but don't provide the data at the company or asset levels. Our products provide aggregated data.

**5\. Has the accuracy improved over time, and do you foresee further improvements? I think I’m correct in saying that your estimate of total EU ETS verified emissions was 98.43% accurate in 2022.**

You are correct! The accuracy can improve even further over time, but the levels reached are already really high. In coming months, we will work on improving the level of granularity (sub-sector or company/asset level data) that we provide in the industrial sector.

[Subscribe now](#/portal/signup)

**6\. The maritime sector will be included in the EU ETS from 2024\. Will you be covering obligated emissions by shipping activity in the EU/EEA area from next year? Is the shipping sector – perhaps like aviation – a more challenging sector to monitor and estimate emissions?**

We already started covering maritime emissions to give our users a preview of the sector's emissions going back all the way to 2016\. I would not say that the shipping and aviation sectors are more challenging to track (Industrial activity is the most challenging one!), the approaches we use to monitor the emissions of these sectors are actually quite similar, as we use geolocation data from both vessels and planes.

**7\. Do you use a similar methodology for the Californian carbon market? If not, could you expand on the difference? I know transport plays a role in CCA demand that is missing from the EU ETS.**

The core principles of the methodology remain the same for tracking emissions in California: we first detect activity levels in each sector and then convert that information into emissions. You are right that transportation accounts for a much larger share of regulated emissions in California than in the EU, with road transportation, which is not included in the EU, making up roughly half of covered California emissions. For this sector, we have a similar approach to the one we have for the maritime and aviation categories in the EU market.

**8\. Do you have any plans to focus on other compliance carbon markets? The UK, China, or Australia perhaps.**

The UK market is already tracked as part of our Carbon Watch product. We plan to expand to other US markets after California, and of course all Asian markets are on our list as well.

**9\. Who is your target customer base for the emissions data? I presume that utilities, energy trading companies, and hedge funds have a big interest.**

Yes indeed, our customers are energy trading companies, hedge funds and utilities.

**10\. What emissions data do you offer to firms that sign up? How much detail can they view and how often is it updated?**

Our users have access to daily updates of carbon emissions in Europe, at the country level and more important at the sector / sub sector level. There are several ways of getting the data: they can use the Kayrros Portal, updated daily, for a high level view of emissions level with charts and tables. They can also use our API to programmatically access our daily emissions data. Finally, they receive on a weekly basis a newsletter presenting the latest trends and a quick analysis.

**11\. How should my subscribers find out more if they think your service could be of use?**

They can reach out to us via the [Kayrros website](https://www.kayrros.com/request-a-demo/?ref=carbonrisk.world). We will be happy to meet them and present our product and offer a short trial if they find it interesting!

[Upgrade to paid](#/portal/signup)

[To catch a falling knife“Bottom fishing is a popular investor pastime, but it’s usually the fisherman who gets hooked. Trying to catch the bottom on a falling stock is like trying to catch a falling knife. It’s normally a good idea to wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it. Grabbing a rapidly falling stock results in painful surprises, because inevitably you grab it in the wrong place.”![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-109.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7a6e3020-b9bf-4fa3-8e03-01f85cd0f9ea_1129x514.png)](https://www.carbonrisk.world/to-catch-a-falling-knife/)
### The rate of change
URL: https://www.carbonrisk.world/the-rate-of-change/
Last updated: 2025-08-21T10:37:19.000Z
Gaining an edge in any market comes not from paying attention to absolute levels, but rather by focusing on the rate of change (ROC) in prices, fundamentals, and how they intersect.

Over the past twelve months, the EU carbon market has been buffeted by strong growth in renewable generation (particularly solar), the return of French nuclear capacity from its 2022 nadir, the return to pre-energy crisis gas and power prices, and a slump in European industrial production - particularly evident in the energy intensive chemical sector.

Even if these trends continue through 2024, the ROC is unlikely to be a high as that which unfolded in 2023\. That may present an opportunity for investors looking for a longer-term entry point into the EU carbon market.

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Lets look at one of the largest contributors to EU emissions ROC in 2023\. The growth in installed EU solar PV capacity. According to data compiled by SolarPower Europe 55.9 GW of new capacity was installed across the EU-27 in 2023, an increase of 40% on the previous year. It marks the third year in a row that annual installed capacity has increased by at least 40% and has been led by installations in Germany and Spain. Across Europe an estimated 263 GW of cumulative solar PV capacity is installed. That’s up 27% y-o-y, and represents an acceleration in the annual growth rate from the 24% seen in 2022 and 20% in 2021.[1](#footnote-1)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/08f2e67b-81a5-4558-89ad-57aa01db0b32_790x594-1.png)

One of the most important factors underpinning the surge in EU solar PV capacity has been the sharp increase in wholesale and domestic energy prices over the past couple of years combined with the fear - stoked by the Russian invasion of Ukraine - that energy shortages might develop. However, as SolarPower Europe make clear, as electricity and gas prices began to fall dramatically during 2023 there has been a marked slowdown in demand for solar PV installations. Permitting delays and a shortage of engineers has increased the time lag between the decision to install and the capacity actually coming onstream, and so we’re still seeing some of that residual demand resulting from the energy crisis.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/fc23b806-f4a9-4892-9cc2-e167ac1df699_799x634.png)

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Twelve months ago SolarPower Europe published their outlook for EU27 solar PV installation in 2023\. Their central scenario was for an additional 53.6 GW in capacity, just shy of the eventual outturn (see [*In the shade: Europe's solar power does not get the credit it deserves*](https://www.carbonrisk.world/under-the-shade/)). In their latest report, which details projections for the period 2024-2027, the group expect capacity growth to slow significantly as the urgency to install - at least from an energy price risk and security perspective - is all but gone. Rather than a shortage of engineers being the main challenge in 2024 and 2025, SolarPower Europe believe that power networks now require time to adjust to the growth in the share of solar in the generation stack.

Although their central scenario is for PV installations to increase by 11% to 62 GW in 2024, their low scenario (one that they weight a higher probability to than past outlooks) would see annual installations drop to 49.4 GW in 2024\. If the latter scenario unfolds it would still represent a 19% increase inn EU-27 solar PV capacity to 312 GW. But importantly, the ROC has slowed dramatically relative to the experience over the past few years.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/9a46505f-6c06-4ae9-aafd-f2efbce18182_777x621.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

As I highlighted in [*Carbonomics 2023: Chinese EV battery deflation offsets offshore wind cost inflation*](https://www.carbonrisk.world/carbonomics-2023/)*,* Europe’s reaction to geopolitical concerns could scupper the bloc’s ability to meet its climate targets, and that includes the rollout of solar PV capacity. Right now more than 90% of Europe’s demand for wafers and other solar PV components are imported from China. The glut of cheap imports has been a boon for Europe’s installers and utility scale generators, but it hasn’t been so nice for Europe’s solar PV manufacturing industry where many companies have been gone bankrupt. If the EU responds with import tariffs and government purchases of surplus EU manufactured stock (which is dearer than Chinese imports), it will only make it more expensive to meet the EU’s renewable and emission targets, while also being no guarantee of a future burgeoning European solar PV industry.

A double digit increase in solar PV capacity across Europe may sound like good news for the climate, and bad news for the price of carbon, but that isn’t necessarily true. Remember that the annual decline in the EU ETS emissions cap accelerates to 4.3% from next year (from 2.2% currently), there is a one-off ‘rebasing’ of the cap in 2024 (reducing it by 90 million EUAs), while the Market Stability Reserve (MSR) continues to stow away 24% of the total number of EUA’s in circulation each year, leaving less available to utilities and industrial emitters to meet compliance.

Rather than base your outlook on absolutes, much better to focus on the ROC.

[Smoke signalsThe opening line of a recent article in The Economist begins, “When Europeans turn their attention to what markets have to say, it is usually because trouble is brewing.” From the spread between Italian and Greek bond yields over those issued by the German government, European natural gas prices, to the value of the Euro versus the dollar. In times of crisis past and present, investors, politicians, and the media tend to focus on what these markets are signalling about the health of the European economy and political environment.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-110.png)Carbon RiskPeter Sainsbury![](https://images.unsplash.com/photo-1578604665675-9aee692f6ddc?auto=format&fit=crop&q=80&w=1000&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)](https://www.carbonrisk.world/smoke-signals/)

---

1. https://www.solarpowereurope.org/insights/outlooks/eu-market-outlook-for-solar-power-2023-2027#download [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
### Carbonomics 2023
URL: https://www.carbonrisk.world/carbonomics-2023/
Last updated: 2025-08-21T10:37:21.000Z
It’s not uncommon for institutions to throw around huge trillion dollar numbers when talking about the cost of meeting net zero. By itself any number is meaningless, and either generates derision or hopelessness, or both. Far better to break down the cost by technology, understand what factors influence the relative cost, and be able to show what the recent trends are.

To that end the Goldman Sachs (GS) *Carbonomics cost curve of decarbonisation* is the banks estimate of the global marginal abatement cost (MAC) curve. Sloping upwards from left to right, the MAC curve gradually steepens as additional tonnes of carbon emissions get increasingly more difficult, and hence more costly, to abate. The marginal carbon abatement cost, i.e., the cost of abating the last tonne of emissions required to meet a target, is one way that investors can get a fix on where carbon prices need to be in the future.

The Carbonomics cost curve of decarbonisation takes account of the cost of technologies available at commercial scale, and assumes economies of scale for those currently in the pilot phase. The cost curve is applied globally, across power generation, industry, transport, buildings and agriculture.[1](#footnote-1)

GS have updated their estimates each year since 2019, taking account of changes in the cost of carbon abatement technologies and the relative cost of energy. The 2023 edition of the Carbonomics cost curve, published by the bank in late November, is shown below in Chart 1.

**Chart 1: Carbonomics cost curve of decarbonisation, 2023**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/9c30bd57-43fe-44d5-9f0c-f3448c22a2cd_803x517-1.png)

Chart 2 shows the evolution of the Carbonomics cost curve since the first edition in 2019\. Note that the steepening in the curve now occurs at much higher levels of carbon abatement. This reflects the fact that global emissions have continued to increase since 2019, but also because innovation means that a higher proportion of the cost curve can potentially be abated (at the right price) using existing conservation technologies.

**Chart 2: Evolution of the Carbonomics cost curve, 2019-23**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/f4199f3f-c479-4782-b37c-4b776dcc245f_949x551-1.png)

Twelve months ago GS identified that the lower end of the cost curve was declining, whilst the extreme higher end of the cost curve had moved higher. Technologies focused on energy efficiency had become relatively more competitive as high energy prices meant a decline in the implied carbon abatement cost. Meanwhile, conservation technologies involving substituting for oil moved higher on the cost curve due to escalating transport climate tech cost inflation (see [*Carbonomics returns: The past, present and future cost of decarbonisation*](https://www.carbonrisk.world/carbonomics/)).

However, developments in the Carbonomics cost curve over the past twelve months represent a reversal in the preceding trend (Chart 3). There has been a divergence. The lower end of the curve has risen up as the cost of renewable energy has increased, while the higher end of the curve has declined as transport climate tech costs have declined.

_This post is for paying subscribers only._
### To catch a falling knife
URL: https://www.carbonrisk.world/to-catch-a-falling-knife/
Last updated: 2025-08-21T10:37:21.000Z
> *“Bottom fishing is a popular investor pastime, but it’s usually the fisherman who gets hooked. Trying to catch the bottom on a falling stock is like trying to catch a falling knife. It’s normally a good idea to wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it. Grabbing a rapidly falling stock results in painful surprises, because inevitably you grab it in the wrong place.”*  
>  
> \- Peter Lynch, One Up on Wall Street

During the summer, the FT featured an article on Per Lekander, a hedge fund manager the newspaper say “profited handsomely from calling the 2018 rally in carbon prices,” and who was now “betting on the market falling sharply in the coming months.” Lekander, who is managing partner at the Clean Energy Transition investment group, is quoted, “I see coal and gas prices falling, and I think they are going to go way lower in the longer term. And the emissions market is going to collapse.”[1](#footnote-1)

At the time of the article the EU carbon price was trading a little over €85\. The market peaked earlier in the year during February and into March, nudging past €100 on three separate occasions, but failing to break through decisively. Since the interview went to press in mid-July the EU carbon price has continued to slump, dropping below €70 per tonne in early December, and now sits at levels last seen in October 2022.

Lekander’s bet has been borne out by the fundamentals. However, as short interest has grown among other traders too, simple market dynamics could bring about an end to the current price slump. It doesn’t even need a change in fundamentals, just a change in perception will do.

Lets dive in.

_This post is for paying subscribers only._
### The green methanol economy is emerging in Denmark
URL: https://www.carbonrisk.world/the-green-methanol-economy/
Last updated: 2025-08-21T10:37:22.000Z
What does LEGO, the world’s largest toy company have in common with Maersk, the global container shipping company?

Other than both businesses being from Denmark, the answer is that both companies are looking to ‘green methanol’ to decarbonise their operations.

Methanol (CH3OH) is one of four basic chemicals - the others being ethylene, propylene and ammonia - used to manufacture all other chemical products. Around two-thirds of methanol produced is used in the manufacture of acetic acid, formaldehyde, and plastics (polyethylene and polypropylene in particular). The remaining one-third is mainly used as fuel, typically as an additive to unleaded gasoline to reduce emissions resulting from combustion.

Global methanol production has almost doubled over the past decade to a little less than 100 Mt, with most of the recent capacity growth occurring in China. Unfortunately, the majority of the worlds methanol production is based on fossil fuels. Methanol is made from syngas, a mixture of hydrogen, carbon monoxide and carbon dioxide (CO2) that is typically sourced from natural gas (accounting for \~two-thirds of the feedstock) or coal. Around three tonnes of CO2 are emitted for every tonne of methanol produced. Overall, the global methanol industry emits some 0.3 Gt CO2 per year, around one-tenth of total chemical sector emissions.

Green methanol is the ultra-low carbon version of this chemical. There are two types, bio-methanol and e-methanol. Bio-methanol involves replacing coal and natural gas as feedstocks with biomass or biogas. Feedstocks include municipal solid waste (MSW), wood and pulp waste, agricultural residues, etc. E-methanol meanwhile is produced by reacting green hydrogen (manufactured using renewable generation) with CO2 captured from direct air capture (DAC) or biogenic sources.

Green methanol is fast becoming a leading contender to decarbonise a range of industries. A green shipping fuel. A central building block for a decarbonised chemicals industry. A hydrogen carrier to enable long-term energy storage.

Lets look at the most promising opportunities.

_This post is for paying subscribers only._
### An underappreciated climate change risk
URL: https://www.carbonrisk.world/an-underappreciated-climate-change/
Last updated: 2025-08-21T10:37:22.000Z
Land-based nature-based solutions (NbS) could deliver \~11.8 Gt CO2e per year of cost-effective carbon mitigation, according to a recent report by Climate Focus and the Food and Land Use Coalition (FOLU). This chimes with the conclusions of other academic estimates that suggest that 8-14 Gt CO2e could be mitigated per year.[1](#footnote-1)

However, academic studies rarely consider what’s realistic in practice.

There are significant barriers in the way of broader adoption, including political, economic, social, spatial, and legal factors. Based on these constraints Climate Focus/FOLU estimate that land-based NbS has a realistic mitigation potential of 2-3.6 Gt CO2e per year by 2030, rising to 3.2-5.1 Gt CO2e per year by 2050.

Overall, based on this analysis at least, NbS could realistically deliver \~12% of the mitigation needed by 2030 to be on course for 1.5°C by 2050.[2](#footnote-2)

Climate Focus/FOLU analysis suggests that improved agricultural practices have the potential to deliver the bulk of the mitigation (43%, 1.15 Gt CO2e). Avoided deforestation, the dominant NbS category today, is next (32%, 0.86 Gt CO2e), followed by afforestation/reforestation (11%, 0.28 Gt CO2e), improved forest management (7%, 0.19 Gt CO2e), and the restoration and conservation of wetlands (7%, 0.19 Gt CO2e).

Carbon sequestration via agriculture only really makes sense when there are dramatic economies of scale to exploit. The cost involved with project development, testing, monitoring and then introducing technology to improve the management of the land, not to mention the long timescales involved, mean that only the largest farms can currently exploit and take advantage. It’s for this reason that the practice is only really gaining traction in the United States and Australia (see [*Carbon farming puts a value on dirt: Soil carbon sequestration is the next frontier of the carbon market*](https://www.carbonrisk.world/carbon-farming-puts-a-value-on-dirt/)).

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Are the NbS mitigation estimates realistically going to be achieved over the rest of the decade?

_This post is for paying subscribers only._
### Climate policy uncertainty is on the rise
URL: https://www.carbonrisk.world/climate-policy-uncertainty-is-on/
Last updated: 2025-08-21T10:37:23.000Z
In a little under 50 weeks time we’ll know the identify of the next US president.

Leading in five critical swing states and with a four-point lead in national polling versus Biden, Donald Trump is the current favourite. Betting markets give the Republican’s an implied probability of 51.8% of being the winning party, while Trump has a 38.2% chance of being elected as president.[1](#footnote-1) 

The increased likelihood of a second Trump presidency could have big implications for climate tech investment and the speed at which US emissions fall, especially if his administration follows the pattern from his previous time in office. Over the course of his four year presidency the Trump administration is estimated to have rolled back more than 100 environmental policies. For example, replacing Obama's Clean Power Plan (which would have limited carbon emissions from fossil-fuel fired power plants), with the much weaker Affordable Clean Energy rule, and the decision to revoke California’s right to set its own emission standards. Most notably though, shortly after taking office, Trump announced that the US would withdraw from the 2015 Paris Agreement. It took three years to actually leave, but in doing so, the US became the first nation to formally withdraw from the climate accord (one of the first actions of the Biden administration was to re-join).[2](#footnote-2)

One of the best ways to gauge climate policy uncertainty is by analysing how it is reflected in the press. The media is both a mirror on the zeitgeist, and also a chief protagonist in its development. To do that we turn to the Climate Policy Uncertainty (CPU) index, constructed by Konstantinos Gavriilidis from the University of Stirling. Based on the same methodology used by Scott R. Baker et al. to produce the Economic Policy Uncertainty index, the CPU index measures the frequency of specific climate policy related words (e.g. uncertainty, climate, emissions, regulation, policy, plus several others), published in eight US newspapers, including the New York Times and the Wall Street Journal. The averaged series are normalised to have a mean value of 100 from April 1987 to August 2023 (the latest date available).[3](#footnote-3)

The three environmental policy roll-backs by Trump can be seen as spikes in the CPU index chart below. However, the biggest spike in uncertainty during the Trump presidency occurred when car manufacturer VW pleaded guilty to the US Environmental Protection Agency (EPA) for fixing diesel emissions tests, followed shortly after by Trump approving the controversial Keystone XL pipeline that would have enabled oil to be transported from the oil sands of Alberta, Canada all the way to Nebraska.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/bf2b81f8-38d3-4d65-bb1f-e7575e9c3bd4_914x512-2.png)

Source: Gavriilidis, K. (2021).

_This post is for paying subscribers only._
### No free lunch
URL: https://www.carbonrisk.world/no-quick-win/
Last updated: 2025-08-21T10:37:24.000Z
Methane abatement by the oil and gas industry is one of the most cost-effective measures available to cut greenhouse gas (GHG) emissions. Recall that methane (CH4) is one of the most potent GHG with a global warming potential \~85 times greater than that of CO2 over a 20-year period. It’s no wonder that it’s getting so much attention recently.

Unfortunately it’s common for methane to be released across the oil and gas supply chain. Around two-thirds of its methane emissions comes from venting, one-quarter results from leaks (known as fugitive emissions), while the remainder arises from incomplete flaring during oil extraction. Overall, the oil and gas industry emits \~80 Mt of methane each year, accounting for about 20% of global anthropogenic (i.e., human induced) methane emissions. The methane leakage has a commercial cost too. Nearly 210bcm of natural gas is lost due to non-emergency flaring and methane emissions from oil and gas operations, according to the International Energy Agency (IEA).[1](#footnote-1)

The top 10 oil and gas companies most responsible for the emissions released 26 Mt of methane into the atmosphere in 2022, according to Global Energy Monitor (GEM). Eight of these companies, and by far and away the largest emitters, were national oil companies (NOCs) such as Gazprom (2nd place) and Saudi Aramco (5th). Two of the top 10 were international oil companies (IOCs); ExxonMobil and BP in 8th and 9th place respectively (see *[Big Oil's bigger brothers: The battle to supply the "last barrel" in a carbon constrained future](https://www.carbonrisk.world/big-oils-bigger-brothers/)*).[2](#footnote-2) 

The IEA estimates that over 75% of the sectors methane emissions can be reduced by implementing leak detection and repair programs, installing vapour recovery units, replacing pumps and compressor seals, and replacing existing devices with instrument air or electric motor systems. None of these abatement measures is particularly challenging from a technological perspective. Unlike other areas where decarbonisation is necessary, methane abatement from the energy sector is mostly *not* in the ‘hard-to-abate’ category.

_This post is for paying subscribers only._
### Repost: How the other half cooks
URL: https://www.carbonrisk.world/repost-how-the-other-half-cooks/
Last updated: 2025-08-21T10:37:24.000Z
*In a first for the VCM, carbon credits issued to an independent standard have been publicly recognised to have an Article 6 authorisation. The carbon credit project? A clean cooking initiative in Rwanda that achieves its emission reductions by replacing traditional stoves with highly efficient biomass-fired cookstoves. The Rwandan Governments agreement prevents the double counting of these emission reductions towards its NDC obligations under the Paris Agreement.*

*The average value of a cookstove carbon credit is \~$5-10 per tonne, however developers say prices need to rise to $30-50 per tonne to really scale the market. One of the issues faced by buyers in the market is whether the carbon avoided represents real additional tonnes. Clean cookstoves should reduce the need to chop down tress, but establishing a baseline to measure against - what would have happened in the absence of the project - is complex.*

*A key risk factor in assessing cookstoves is estimating the fraction of non-renewable biomass (fNRB), i.e. the proportion of wood and other biomass harvested unsustainably. An fNRB of 0.8 suggests that 80% of the biomass is harvested faster than it regrow. However, some reports suggest that this fraction can be overestimated by a factor of 3-4.*

*While the agreement with the Rwandan government is a vote of confidence in the cookstove credit market, a lot more investment is required to ensure it can thrive. What’s at stake? Universal access to clean cooking could result in thousands of lives saved each year and an almost 0.9 Gt reduction in CO2eq emissions by 2030.*

---

Across much of the developing world, open fires fuelled by wood, dung or other biomass are used to cook inside the house.

These stoves have adverse health consequences for households, accelerate local deforestation, and emit significant quantities of carbon dioxide. The World Health Organisation (WHO) estimates that smoke from traditional cookstoves is equivalent to smoking 2 packets of cigarettes a day and is responsible for 4 million excess deaths per year.

Some 128 countries currently lack universal access to clean cooking. Almost 2.5 billion people, around 30% of the worlds population can only cook with heavily polluting stoves, 40% of them are in sub‐Saharan Africa and 55% in developing Asia.

There have been improvements over the past decade. The number of people with no access to clean cooking technologies has declined by 0.5 billion since 2010, an annual rate of improvement of 1.7%. A rapid improvement in access to clean cooking technologies in developing Asia (in particular China, India and Indonesia) outweighed a deterioration in sub‐Saharan Africa.

**How big could the cookstove market be?**

The IEA estimates that only 39 of the 128 countries without universal access have clean cooking targets in place, and fewer than half of these are targeting achieving it by 2030.

Under the IEA’s Announced Pledges Scenario (APS), it is assumed that all clean cooking targets are met on time and in full. If all the targets are achieved it would still leave 780 million people without access to clean cooking technologies by 2030.

In order to meet the IEA’s Net Zero Emissions by 2050 (NZE) Scenario, the annual rate of improvement needs to increase from 1.7% to 4.6% - 2.7 times faster. To make progress as rapidly as projected in the NZE Scenario, investment needs to be focused on sub‐Saharan Africa where countries need to improve their historical rate of progress by 15 times. 

[Get 20% off a group subscription](#/portal/signup)

_This post is for paying subscribers only._
### Celebrating two years of Carbon Risk
URL: https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/
Last updated: 2025-08-21T10:37:25.000Z
![round chocolate cake](https://images.unsplash.com/photo-1573127275465-722f36cc4d44?q=80&w=1000&auto=format&fit=crop&ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D)

> *"Don’t judge each day by the harvest you reap but by the seeds that you plant" - Robert Louis Stevenson*

Writing a newsletter is a strange business.

I read hundreds of articles, capture loads of charts and pictures, listen to several podcasts a week to learn what experts are thinking, and brainstorm reams of article ideas. But when I click publish I really have no idea how my latest incarnation will be received. So when I get nice messages like the ones below from smart, knowledgeable people doing great things in carbon markets, I know I’m on the right path.

First, this from [Valentin ](https://www.linkedin.com/feed/update/urn:li:activity:7128644976883724288/?ref=carbonrisk.world)recognising my work on compliance markets…

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/13047e76-3f97-4546-a2f7-f2a06c511562_567x770-2.png)

…and last month, [Rene ](https://www.linkedin.com/posts/renevelasquez%5Frepost-commitment-issues-activity-7110610727492587520-q3Qr?utm%5Fsource=share&utm%5Fmedium=member%5Fdesktop)was kind enough to recognise my VCM analysis.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/147ae04f-1071-47d9-a980-0c5a7d9c448f_569x784-2.png)

I couldn’t do what I do without the Valentin’s and Rene’s of this world that have promoted my work. Special thanks also go out to , , , , , and many other Substack’s that have helped grow through their recommendations. Carbon Risk turns two today, and over 270 articles later, the total number of subscribers is closing in on 3,200.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/00606545-3818-4046-8141-d4f625f8fd3a_1037x647-1.png)

It wouldn’t be a business though if it wasn’t also for the lovely people that have taken out a paid subscription. Substack recently rolled out a feature that enables new paid subscribers to add a note. The price of your subscription helps me continue to do what I do, but the messages make it all the more worthwhile.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7cfd0413-5a39-47b6-9e27-3c455401928e_731x336.png)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a846c24f-55db-4e2a-99db-f5faf2ef4242_730x274.png)

## Six articles that I felt had the biggest impact over the past 12 months

- Carbon credits have received plenty of bad press over the past twelve months, and at least some of it has been justified. However, the stakes are too high simply to abandon development of this market. In [*The signal and the noise: Pricing the carbon credit risk curve*](https://www.carbonrisk.world/the-signal-and-the-noise/)I consider how information asymmetry is priced in bond markets, and whether that could be a way forward to pricing the risk that a carbon project fails to deliver. Carbon markets are better served by embracing their complexity. It’s only then that capital can be allocated to where its needed the most.
- A $10bn market, or is it a $1,000bn market? Lots of big numbers are thrown around as to how big the verified carbon market could become. In [*Is the VCM a trillion dollar business opportunity?*](https://www.carbonrisk.world/a-one-trillion-dollar-business/) Without necessarily having all of the underlying assumptions underpinning these projections its impossible to know what’s realistic. In this article I looked at some of the key factors to consider, and the main sources of uncertainty. TLDR? A big market valuation is achievable, indeed its necessary if net zero is to be achieved, but it will require many economic, political and technological stars to align.
- In 2023 I created a number of deep dives into the most important engineered carbon removal technologies, including biochar, bio energy with carbon capture and storage (BECCS), direct air capture (DAC) and enhanced rock weathering (ERW). They all have their pros and cons. They will probably all be needed in some shape or form to help meet net zero. In [*Scrubbing the skies: Direct Air Capture (DAC) offers a scalable route to net zero*](https://www.carbonrisk.world/direct-air-capture-dac-will-determine/)I outline why the cost of DAC is likely to fall sharply over the next decade due to economies of scale and as the learning curve accelerates. Unlike, other forms of carbon removal DAC may be able to leverage a growing market for CO2 as an industrial feedstock.
- Capturing CO2 merely to store it permanently under ground seems like poor business, especially as for many industries (e.g., fertiliser, enhanced oil recovery, etc) it’s a valuable feedstock. In [*The emergence of the carbon economy*](https://www.carbonrisk.world/the-emergence-of-the-carbon-economy/)[ ](https://www.carbonrisk.world/the-emergence-of-the-carbon-economy/)I show that the market for CO2 is likely to expand significantly over the next couple of decades with construction materials likely to dominate future CO2 demand. Concrete has the advantage of being high volume, lots more of it will be needed in emerging markets as their economies develop, and it has the ability to sequester CO2 for hundred of years.
- The energy transition and decarbonisation faces many trade-offs, trilemmas, and paradoxes. One article I published in 2023, [*Aluminium's climate paradox*](https://www.carbonrisk.world/aluminiums-climate-paradox/)[ ](https://www.carbonrisk.world/aluminiums-climate-paradox/)highlights how aluminium is essential to decarbonisation, yet is highly energy and carbon intensive to produce. Reducing aluminium’s emissions requires an increased reliance on hydropower, but this means being exposed to the drought conditions that have become more intense under a warmer climate. One of many tricky pathways that government must tread over the next few decades.
- Two-thirds of global emissions could be covered by an emissions trading scheme by 2030, according to a recent estimate from the International Emissions Trading Association (IETA). In [*Carbon markets are going global*](https://www.carbonrisk.world/carbon-markets-are-going-global/)[ ](https://www.carbonrisk.world/carbon-markets-are-going-global/)I outline the journey to where we are today (\~18% of global GHG emissions), and how things could evolve over the next couple of decades. In particular, Europe’s carbon border tax, the CBAM is accelerating adoption as countries seek to avoid their exports to the EU becoming uncompetitive.

## The Carbon Risk referral program

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## Looking forward to year 3 of Carbon Risk

Committing to a regular publishing schedule has been likened to Indiana Jones in “Raiders of the Lost Ark”, trying to outrun a gigantic boulder, each and every week. The pressure to publish has it’s drawbacks of course, but it keeps me focused on improving and refining my process.

And so taking the time once a year to pause and reflect how my newsletter has grown is invaluable. Every article I publish is a new seed planted. It’s only months later that I can appreciate what I’ve created, the attention I’ve harvested, and the impact my work has had on my readers.

I'm very grateful I that I get to write for a living about something I’m passionate about. There’s nothing I’d rather be doing, and I couldn't do it without you.

Thank you for your support.

Peter
### Dead cat bounce
URL: https://www.carbonrisk.world/dead-cat-bounce/
Last updated: 2025-08-21T10:37:28.000Z
European gas demand is showing the first signs of life since the energy crisis.

October saw the first year-on-year increase in gas demand since late 2021, driven by a rebound in industrial gas demand, and to a lesser extent by an uptick in residential & commercial consumption.

Is it just blip, or can the most meagre of green-shoots be sustained?

In the short term the answer has implications for European industrial emissions and hence demand for EUA’s. Longer term any sign of a recovery in industrial gas demand (\~20% of Europe’s demand for natural gas) will be eagerly anticipated by EU governments and energy companies invested in bolstering the continents LNG infrastructure (see [*Europe's industrial slump: How bad will it get, and what does it mean for carbon?*](https://www.carbonrisk.world/what-does-europes-industrial-slump/)).

However, look back at October/November 2022 and you can see that gas demand was collapsing just as the energy price spike reached the peak of its parabolic ascent. Base effects are really what’s driven the apparent increase in natural gas demand.

![chart, histogram](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/610c5150-b09a-4318-9deb-cce66b509918_1125x667-jpeg-1.jpg)

Source: Greg Molnar, IEA

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Industrial gas consumption in Europe is concentrated in a handful of industries. Prior to the energy crisis just six sectors accounted for 87% of total industrial gas consumption: chemicals, non-metallic mineral products (cement and glass), food & beverages, basic metals (iron and steel), refining and coking, and pulp & paper.

European chemical production has been one of the most hardest hit sectors given its heavy reliance on natural gas (see [*Chemical reaction*](https://www.carbonrisk.world/chemical-reaction/)). Output during the first eight months of 2023 was down 11.2% versus the same period in 2022\. Only the paper sector experienced a larger year-on-year decline, 11.6%.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/4ccf4ddd-c6ef-47f2-8769-21be2473036b_1729x583.png)

The map below vividly highlights the scale of the ongoing disruption to European chemical and fertiliser production. Several facilities remain mothballed since October 2021, many have shutdown completely, while others continue to operate at reduced rates. Eurostat data shows that the decline in chemical production has been sharpest in Poland (⬇️18.3%), followed by Portugal (⬇️17%), the Netherlands (⬇️15.7%), Bulgaria (⬇️15%), and Germany (⬇️14.3%).[1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/821363dd-90f2-434d-8168-7a333f218c7b_1245x868.png)

Forward looking indicators continue to worsen. A continued slump in the order book combined with a pullback in business confidence across the sector in Europe suggest little prospect of an uptick in chemical production just yet. Natural gas prices may have come down, but that’s just one part of the equation. Operators are unwilling to restart production if they are not sure that demand is strong enough to justify the time and expense involved in restarting. Double-digit declines in selling prices for fertiliser, plastics and petrochemicals (Jan-Aug 2023 versus year earlier) point to a lack of impetus for a restart.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/283bed4b-31bc-42d2-b025-fd9f688708ca_1219x421.png)

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Other natural gas intensive industries are also now coming under pressure. Production of construction materials (cement, lime & glass) is starting to decline as construction activity across the continent begins to wane. EU construction volumes slowed from 2.7% in 2022 to a projected zero in 2023 and ING expects output to contract by 1% in 2024\. Due to the long lead times involved with construction it can take many months before the impact from lower demand is felt across the supply chain. High prices for construction materials during 2022 helped insulate the sector from the turmoil affecting other energy intensive sectors, but slowing demand and downward price pressure is starting to force producers to cut production of building materials.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/faa911a2-6aae-4eb2-abee-173e3dd232da_813x493.png)

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European steel production also has a big impact on overall natural gas demand given its use in the production of pig iron in blast furnaces (\~60% of Europe’s production involves blast furnaces). According to The European Steel Association (Eurofer), overall European steel production growth declined from 3% in 2022 to 0.6% in 2023, and is projected to slow to a mere 0.4% in 2024\. Over one-third of European production is tilted towards the construction sector, and so any further slowdown there will have an impact on the sectors demand for natural gas.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8371f8c4-9e7a-448f-8095-923c20ca1b2d_1069x500.png)

Source: Eurofer

The outlook from those industrial sectors most dependent on natural gas isn’t exactly signalling an uptick in demand. What can we learn from past energy price shocks? Analysis published by two analysts from the Bank of Italy examined data from 2010 to 2022 to compare the impact of energy price shocks on European economies. In particular they looked at the typical length of time before the worst effects were observed in core inflation and industrial production.

Their modelling showed that it typically takes about 20 months for a gas price shock to completely filter through to core inflation. Given that European gas prices started their exponential rise in October 2021, this points to a peak impact in core inflation by the spring/summer of 2023 - pretty much what we have observed.

However, the full impact on industrial production takes around 35 months after the initial gas price shock. If correct this suggests that it won’t be until the middle of next summer before European industrial production is over the worst of the gas price shock.[2](#footnote-2)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/09514b12-5be9-4a40-b810-1b8708f4223d_761x544.png)

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The question then becomes what shape the recovery in demand will look like: ‘U’, ‘V’, ‘W’, or even ‘L’. We can get some idea if we understand the reasons for the breakdown in industrial demand for gas since the beginning of the energy crisis, and what motivates those companies most affected by the downturn in demand.

The International Energy Agency (IEA) estimated that about 80% of the response was simple demand-supply dynamics. They estimated that around 50% of the decline in industrial gas demand in 2022 came from production curtailments, about 30% from fuel switching. The rest of the impact was the result of efficiency gains, import substitutions, and the effect of the weather. This analysis suggests that once input and output prices return to comfortable levels then we should expect industrial production rebound. However, it’s important to look at the underlying incentives affecting those industrial companies most exposed to the energy crisis.[3](#footnote-3)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/f59ac529-0bb3-460e-afe0-0d0d8844b703_904x583.png)

When looking at which industry was responsible for the decline in industrial demand for gas. One sector stands out. The chemical sector is estimated to account for around 40% of the decline in industrial gas demand. Despite this it’s incorrect to paint all chemical businesses in the same light. While some reported a significant downturn due to the energy crisis, others reported that the impact was negligible.

Analysis by OIES suggests that the ability of chemical companies to replace gas in their processes or raise sales prices was key to how the crisis affected them. Companies that produced a larger share of base products (such as BASF in particular), appeared to see a much larger adverse impact on output than those producing specialised chemicals for example.[4](#footnote-4) 

According to analysis by Goldman Sachs published in early 2023, up to 40% of the Europe’s chemical industry (primarily activities carried out by BASF) is at risk of permanent rationalisation unless natural gas prices fall to \~€70 per MWh or lower. BASF's European gas consumption fell by one third between 2021 and 2022 to 32TWh. Overall, the company accounts for almost 5% of total European industrial gas demand, the majority of which (24TWh) is centred on its Ludwigshafen site in Germany.

Gas prices have dropped significantly below that level (month-ahead prices are currently around €50 per MWh), and while chemical output prices remain mired in a downturn it’s becoming clearer that something more fundamental is going on. In February the chemical giant announced that it would close several production units at Ludwigshafen by 2026, permanently reducing its gas consumption at the site by 4.8 TWh per year.

The energy crisis may have sparked BASF into action, but its part of a longer term transition to reorientate the company towards locations elsewhere around the world where energy costs are lower, environmental regulations are less burdensome, and demand for their end products are still growing fast.

Whatever letter the eventual rebound in European industrial gas demand takes it’s likely to be a long and slow recovery, and will most likely never reach pre-energy crisis levels.

[Is permanent deindustrialisation of Europe still a tail risk? European chemicals behemoth BASF is one of Germany’s largest consumers of natural gas and has been particularly hard hit by the surge in energy prices following Russia’s invasion of Ukraine. In September 2022 the company announced that it was going to introduce a €500 million annual cost saving program in response to the energy crisis. BASF CEO Dr Martin Brudermüller confirming that BASF would downsize in Europe “as quickly as possible, and also permanently”.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-117.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8ba5a01a-a94a-4882-8ee7-dc476331c660_946x719.png)](https://www.carbonrisk.world/is-the-permanent-deindustrialisation/)

---

1. Note that in March this year the German chemical industry association Verband der Chemischen Industrie (VCI) were expecting Germany’s chemical industry to suffer an 8% decline in output between 2022 and 2023 https://www.vci.de/vci-online/presse/pressemitteilungen/brighter-mood-persistent-worries-business-situation-of-the-german-chemical-pharmaceutical-industry.jsp [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=4549079 [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://iea.blob.core.windows.net/assets/227fc286-a3a7-41ef-9843-1352a1b0c979/Naturalgassupply-demandbalanceoftheEuropeanUnionin2023.pdf [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://www.oxfordenergy.org/wpcms/wp-content/uploads/2023/11/Insight-137-German-industrial-gas.pdf [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### The clouds silver lining
URL: https://www.carbonrisk.world/clouded-judgement/
Last updated: 2025-08-21T10:37:28.000Z
One hundred zettabytes of data was created and consumed in 2022, according to the International Data Group. By 2024 that figure is projected to rise by 50%. Every picture, email, Zoom meeting, ChatGPT request, and Substack article has to be stored somewhere. Our reliance on data storage is only likely to grow as AI’s tentacles proliferate into other parts of our everyday life.

All that data storage is very energy intensive. Server racks produce lots of heat and must be cooled to between 18 to 27 degrees Celsius to ensure they work efficiently. Total power demand estimates tend to come with a wide error band, but latest estimates suggest that global power consumption is between 250-350 TWh. The International Energy Agency (IEA) estimates that data centres and the transmission networks that underpin the digital economy were responsible for 330 Mt CO2e of emissions in 2020 (0.6% of global GHG emissions), roughly one-third of global airline emissions.

Data centre workload - measured in number of compute instances - grew by 3X between 2015-20\. Over the same period power demand from data centres has only increased by 6%. System-level efficiency gains have been crucial in mitigating the impact on overall power demand. Firstly, data centres have been able to get better energy performance from CPU and memory devices, and secondly, chip performance has enabled a migration towards energy efficient hyperscale/cloud services.

According to Goldman Sachs, data centre workloads are projected to rise by another 3X between 2020 and 2025\. It might be more difficult to get the same improvement in efficiency over the next few years. The bank expects a significant jump in power demand (\~50%) between 2020 and 2025 to 300-350 TWh, but that’s still clearly much less than the increase in data centre workload.[1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/d884b1f0-65ce-4cf0-8a95-872e09d223b1_1211x550.png)

Part of the reason for this is that efficiency gains have slowed down since 2018\. The easy wins gained from consolidation and improvements in cooling systems are now being replaced by much more difficult, incremental efficiency improvements. The other reason is that remote servers today perform three functions: storage, networking and increasingly, processing. It’s this last function that is the most energy intensive of all. Nevertheless, Goldman Sachs estimate that in the absence of any efficiency improvements, power consumption from global data centres in 2025 would be \~ six times higher.

To begin to understand the impact of the cloud on the climate and where it’s going we need to go to Northern Virginia. It’s here where the world of CPU’s and zettabytes collides with carbon markets and the growth in renewable energy. The region, located a short distance from the nations political capital, is the data centre capital of North America, accounting for around 3,440 MW of data centre inventory (45% of US capacity). With another 651 MW under construction, the regions dominance of data centre power demand is set to grow. Northern Virginia’s data storage capacity also towers over the rest of the world. It is over three times larger than the next biggest market, currently Singapore. Overall, Northern Virginia accounts for around one-third of global data centre capacity.[2](#footnote-2)

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### An iron will
URL: https://www.carbonrisk.world/an-iron-will/
Last updated: 2025-08-21T10:37:29.000Z
Sweden dominated the production of steel in the 18th Century, churning out around one-third of global output. Although it has since been usurped by cheaper coking coal elsewhere in the world, the country is uniquely positioned to be a world leader in the production of H2-DRI green steel.

To recap, hydrogen-based direct reduced iron (H2-DRI) replaces coke or natural gas with hydrogen as the sole reductant of iron ore. The H2-DRI is then fed into an electric arc furnace (EAF) powered by renewable energy, and after further processing and the addition of carbon, the final product is ‘green’ steel.

Two centuries on the Nordic state is in a prime position to gain an early lead in the market for green steel. In addition to significant deposits of high-grade iron ore, the country also has ample supplies of zero carbon energy (both renewable and nuclear). Northern Sweden in particular benefits from a surplus of hydroelectric energy which means planned green steel plants such as H2GS Boden will be able to take advantage of relatively cheap, zero carbon electricity.

The H2GS Boden plant Sweden is at the forefront of the push towards green steel and will be the first H2-DRI plant to produce green steel commercially. H2 Green Steel (H2GS) was only founded as recently as 2020 to manufacture steel using zero carbon hydrogen and renewable energy. Production at the plant is scheduled to start towards the end of 2025 and will manufacture up to 5 Mt per annum of green steel by 2030\. [1](#footnote-1)

‘Direct reduction ironmaking’ (DRI) isn’t a new technology. DRI based steel capacity produced an estimated 120 Mt of steel in 2021, accounting for around 6% of global output. In conventional DRI steel plants the reductant (typically coke or natural gas) is used to reduce iron ore pellets to produce DRI, also known as ‘sponge iron’. Conventional DRI emits \~1.2 tonnes CO2 per tonne of steel. In comparison, H2-DRI steel production emits a mere 0.1 tonnes CO2 per tonne of steel.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/20e1cf47-1128-4b22-8376-2bb5a816ec24_1068x522-2.png)

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### Smoke signals
URL: https://www.carbonrisk.world/smoke-signals/
Last updated: 2025-08-21T10:37:30.000Z
The opening line of a recent article in The Economist begins, “When Europeans turn their attention to what markets have to say, it is usually because trouble is brewing.” From the spread between Italian and Greek bond yields over those issued by the German government, European natural gas prices, to the value of the Euro versus the dollar. In times of crisis past and present, investors, politicians, and the media tend to focus on what these markets are signalling about the health of the European economy and political environment.[1](#footnote-1)

The Economist then highlights a market that in their words is “far jollier” - the one for carbon credits. 🤦🏻‍♂️Wait, what! We really should be getting the terminology correct by now. Carbon allowances, not carbon credits. To their credit, The Economist go onto highlight how carbon price action over the past five years is a sign that investors and compliance participants believe Europe’s environmental ambitions to be credible:

> Another market that is relatively new is the one for carbon credits—and the verdict here is far jollier. In 2005 the EU set up an emissions trading system, whereby large-scale polluters such as power plants need to pay for the right to belch carbon into the atmosphere. For years the price of these pollution credits languished at €10 a tonne or less. Such a low price gave no incentive for dirty factories to invest in green technologies, and suggested that Europe was not serious about cleaning up its act. No longer. Credits have soared since about 2018, briefly passing €100 earlier this year, and are now at €81\. This helps fill state coffers. Better still, it suggests investors believe Europe’s environmental ambitions are credible. In recent times voters in many rich countries, including Germany and the Netherlands, have lashed out at costly green policies. Markets, crunching the views of countless participants, are indicating carbon credits do in fact have value—ie, the ambitious carbon-cutting agenda is here to stay.

The Economist have a reputation of being rather late to the party when identifying market trends. “Drowning in oil”, “The end of the Oil Age”, and “Recoil” are just three magazine covers that come to mind when it comes to their analysis of just one commodity, oil. Their market ‘insight’ features tend to make print only once a trend has become firmly established, and then of course the risk is that they overplay the staying power of the underlying trend.

In an article penned in early October (see [*Testing long term support*](https://www.carbonrisk.world/testing-long-term-support/)) I identified that unless there was a cold winter and renewed political support for the EU carbon market then prices would likely fall below critical trend line support that has been in place since the middle of 2021\. As I say in the article, “Normally, \[an ascending triangle is\] a sign of a bullish continuation, a decisive drop bellow the trend line could presage significant downside to EU carbon prices.”

Neither cold winter forecasts, nor renewed political support for the EU carbon market have emerged to support the EU carbon price. In the absence of these supporting factors the path of least resistance has been down.

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### Carbon market convergence does not mean a single global carbon price
URL: https://www.carbonrisk.world/carbon-market-convergence-does-not/
Last updated: 2025-08-21T10:37:31.000Z
Almost one-quarter of global emissions are covered by some form of direct carbon pricing, up by around 10 percentage points over the past decade. By 2030 almost two-thirds of global emissions could be covered by carbon pricing.

As the share of emissions covered by regulated compliance carbon pricing expands, many governments are reserving a role for the carbon credit market, allowing at least some of the obligation to be met through emissions avoidance or carbon removal credits.

This blurring of the lines between regulated compliance carbon markets and the verified carbon market is likely to intensify as countries start to focus on how they can realistically meet their Paris Agreement commitments. In particular, international trading of carbon credits will start to play a much bigger role in carbon markets.

This convergence of global carbon markets will reignite the vision of a global price on carbon, or at least that all carbon markets will converge on the highest price in the marketplace. But as this article serves to highlight, that is not necessarily how things will, or indeed should, turn out. Rather than pushing for uniformity, the carbon market is better served by embracing its differences.

Lets dive in.

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### Not in my backyard
URL: https://www.carbonrisk.world/not-in-my-backyard/
Last updated: 2025-08-21T10:37:31.000Z
Deadly pipeline ruptures. The risk of groundwater contamination. An excuse for fossil fuel producers to continue.

These are just some of the environmental and safety concerns expressed by landowners and residents in parts of the Midwest to the development of new carbon dioxide (CO2) pipelines. The furore is unlikely to be getting much attention outside of the United States, but it is something to pay attention to. The backlash could have implications far beyond the US, and threaten the growth of the entire global carbon capture industry.

To recap, carbon capture, utilisation, and storage (CCUS) involves catching concentrated industrial emissions at their source, preventing them from entering the atmosphere. The ‘U’ component of CCUS can mean that the CO2 is used as a feedstock for another industrial process (e.g. fertiliser, enhanced oil recovery, etc.). Other longer term uses for CO2 are being developed that could lock up the gas for a considerable period (e.g. construction materials), or at least ensure its net zero (e.g. Sustainable Aviation Fuels, or SAF). The ‘S’ component of CCUS involves permanently storing the carbon dioxide deep underground, by injecting it into saline aquifers or spent oil and gas reservoirs (see [*Everything carbon investors really need to know about carbon capture, use and storage (CCUS)*](https://www.carbonrisk.world/everything-carbon-investors-really/)).

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Several companies have sought to develop the CO2 pipeline network infrastructure necessary to utilise the deep pool of underground sequestration options available in the US. Generous tax credits for CCS, announced as a part of the Inflation Reduction Act (IRA), are also a big driver. The most cost effective way to take advantage of this opportunity, at least in the short-term, is to help the ethanol industry capture its carbon emissions for use in other industries. Ethanol production emits a pure stream of CO2 and so lends itself well to carbon capture projects, while also allowing ethanol producers to position their product as a green fuel (see [*The carbon capture superpower: The United States will dominate global CCUS capacity*](https://www.carbonrisk.world/the-carbon-capture-superpower/)).

Over the past few weeks a number of CO2 pipeline deals have fallen apart. Iowa-based Summit Carbon Solutions and Nebraska-based Navigator CO2 Ventures had proposed building a vast network of pipelines capable of siphoning carbon from ethanol plants located in the Midwest, and transporting it to underground storage sites in neighbouring states. The outcry over the risks is one factor that led to the rejection of the project’s permitting applications. Both pipeline companies have either delayed their projects (Summit has postponed their project until 2026), or forced them to cancel them altogether (in Navigator’s case).

Negotiations over the pipeline deals have also exposed an erratic regulatory position between states. According to the Sabin Center for Climate Change Law, few of the federal legal frameworks governing pipeline infrastructure were designed with CO2 pipelines in mind. Moreover, with individual states having authority over the regulation of pipeline siting, development, and operation, putting together a network of CO2 pipelines across state borders is fraught with difficulty. A recent paper from the Sabin Center identified four key barriers to CO2 pipeline development:[1](#footnote-1) 

1. Ambiguous or patchwork governance regimes at the state and federal level;
2. Economic regulations of interstate pipeline networks often vary from state to state;
3. Responsibility for regulatory approvals, permitting processes, land assembly, and cultural and environmental responsibilities are scattered among different agencies, subject to different standards, and undertaken with different levels of rigor;
4. Gaps in the federal Pipeline and Hazardous Material Safety Administration’s regulations addressing the safety of CO2 pipelines.

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The rejection of the pipeline applications throws a spotlight on the infrastructure challenge facing many countries as they look to hit net zero. CCUS will need to grow from 40 Mt CO2 in 2022 to 1 Gt CO2 by 2030 to be on course for net zero, according to the International Energy Agency (IEA). The agency’s NZE Scenario assumes that global capture of carbon will need to rise to 6 Gt CO2 by 2050, of which around one-quarter comes from bioenergy (BECCS) and direct air capture (DAC). Amid the outcry over its use by the ethanol and fossil fuel industries, it’s worth remembering that carbon capture is the only way that many heavy industries can decarbonise, at least on the timescales required to hit net zero (see [*Why Europe's heavy industry needs carbon capture and storage*](https://www.carbonrisk.world/why-europe-needs-carbon-capture-and/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/169476b3-ef50-460d-b993-32d450595e79_854x544-1.png)

As the pipeline spat highlights, it doesn’t matter how much CO2 is sucked out of the sky or extracted from the chimney of a factory or power plant, it will be stranded unless there is adequate transport infrastructure to move it to where it can be used or stored. Transporting these huge volumes of carbon will require a massive expansion in pipelines - usually the cheapest way to transport CO2 - capable of carrying the gas long distances.

The IEA estimates that 600,000 kms of CO2 pipelines will be needed in their NZE Scenario. To put that into some kind of perspective, global CO2 pipeline infrastructure is currently estimated to be around 9,500 kms. To achieve net zero we will need pipeline capacity to expand 63 fold over the next three decades. As the IEA explain in their latest World Energy Outlook, that’s a similar order of magnitude to the 1 million plus kms of natural gas transmission pipelines that have been constructed over the past century.[2](#footnote-2)

The cancellation of recent CO2 pipeline deals could be a harbinger of things to come elsewhere in the world. The challenge involved with laying thousands of miles of CO2 pipelines in densely populated parts of Europe and Asia is likely to be much more challenging than the US. At the very least, the episode should be a warning to other governments of the need to ensure that all the safety, environmental and bureaucratic procedures are in place. The decarbonisation plans for many heavy emitters depends on it.

[Pipe dreamsThe United States is set to become a carbon capture superpower later this decade, but it will need a massive expansion in its CO2 pipeline infrastructure if it is to reach its full strength. The US is crisscrossed by \~4.2 million kms of pipelines, predominantly funnelling trillions of cubic feet of natural gas each year, as well as hundreds of billions of tonnes of liquid petroleum products.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-122.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8bebb7d4-f34a-4645-9562-f631b233b89d_1269x713.png)](https://www.carbonrisk.world/pipe-dreams/)

---

1. https://scholarship.law.columbia.edu/sabin\_climate\_change/207/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.iea.org/reports/world-energy-outlook-2023 [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
### Boiling over
URL: https://www.carbonrisk.world/boiling-over/
Last updated: 2025-08-21T10:37:33.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** **If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access.**

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**By subscribing you’ll join more than 3,000 people who already read Carbon Risk. You can also follow my posts on** [**LinkedIn**](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world) **and benefit from my** [**referral**](https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/) **program. Thanks for reading!**

---

> *"We have all of the right factors in place, but the price is very sensitive... The price elasticity has changed. It is volatile, and the situation is potentially fragile." - Michael Lewis, Uniper CEO*

Elevated price volatility will remain a feature of European natural gas markets for at least the next few years.

On the supply-side, European demand for LNG imports (as a share of LNG in overall gas imports) has more than doubled over the past few years which means it is now much more sensitive to supply-demand imbalances in global liquefaction capacity and LNG shipments. Meanwhile, on the demand-side, European natural gas demand is expected to become increasingly sensitive to winter weather conditions as gas generation is displaced by the growth in renewables.

Either way, natural gas prices are expected to remain highly sensitive to subtle changes in the underlying supply and demand dynamics. You cannot simply state that the market fundamentals are bullish or bearish any more. It’s on a knife edge, and is likely to remain that way.

This represents an extreme challenge for carbon market analysts since small changes can have big impacts on major end users of natural gas here in Europe.

For power generators gas prices affect fuel switching levels (i.e., clean-spark and clean-dark spreads), the overall impact on emissions from the power sector (the carbon intensity of future generation), and hence the desire to hedge future EUA requirements.

Natural gas is also a key feedstock and energy source for heavy industry (cement, chemicals, etc.). The past year has shown that companies are increasingly sensitive to the outlook for natural gas prices. Quick to stop production when prices become unaffordable, but then not wanting to resume output only to see gas prices spike once more.

Lets dive in.

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### Repost: The EU carbon market and its stock-to-flow ratio
URL: https://www.carbonrisk.world/repost-the-eu-carbon-market-and-its/
Last updated: 2025-08-21T10:37:34.000Z
*In writing Carbon Risk I try and develop different ways in which investors should think about carbon markets. Quite often the basis for these frameworks are borrowed from other financial markets.*

*For example, thinking about carbon allowances as a currency in which trust in government commitment to net zero targets underpins everything, to the verified carbon market where the bond market offers a way of pricing the risk that a given project will deliver what it claims.*

*In* *this repost (originally published in April 2022) I look at the EU carbon market from the perspective of the precious metals market, specifically the role that stock-to-flow ratio has on the long-term pricing dynamics and what if anything we can derive for the future of the EU ETS.*

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---

Commodity markets are typically interpreted through the lens of changes in supply and demand, and the impact on inventories in any particular year.

Inventories of ‘consumable’ commodities (e.g. crude oil, wheat, etc.) typically only cover consumption demand for a few months. If there were no inventories at all, supply would have to correspond exactly to production and demand exactly to consumption.

However, if there are inventories, consumption can temporarily exceed production. Since inventories of consumable commodities are as a rule very low, their price will rise quickly in anticipation of a future supply shortage and bring consumption into balance with production.

This model works for most commodities that are consumed, but is useless to understand the value of those commodities used for investment purposes.

While the economic utility of a consumable commodity is created when it is destroyed or used up, the utility of investment commodity lies in its possession and later resale. Investors should be very careful about interpreting short term demand supply balances in the same way that they would for consumable commodities.

So how should we interpret the market for carbon allowances, and what can we learn from different types of commodities?

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### Alternative proteins climb the slope of enlightenment
URL: https://www.carbonrisk.world/alternative-proteins-hit-the-slope/
Last updated: 2025-08-21T10:37:36.000Z
> *"We shall escape the absurdity of growing a whole chicken in order to eat the breast or wing, by growing these parts separately under a suitable medium." - Winston Churchill*

Animals are a wildly inefficient means of producing edible protein.

Cattle consume roughly 25 calories of plant material for every calorie of edible protein they produce. Even chickens, the most efficient form of livestock, eat around 10 calories of food for every calorie of edible protein produced.

All this extra energy comes at a cost, in particular a significant carbon footprint. The production of meat, seafood, eggs, and dairy accounts for \~15% of global greenhouse gas (GHG) emissions (8.1 Gt CO2e). Around half of these emissions are the result of livestock belching and farting, one-quarter is due to land-use changes (e.g. deforestation), with the remainder arising from the growth in animal feed and other parts of the supply chain (e.g. transport, storage).

As the global population continues to grow and incomes rise, total emissions from animal-based protein are expected to grow. Although the demand for basic foods like cereals peaks at early levels of development, typically when GDP per capita is under $5,000, the demand for foods high in animal protein tends to climb as countries shift from low to middle income levels. Consumption of animal based protein in Asia (excl. China) and Sub-Saharan Africa is around 10-20 grams per capita per day (g/cap/day). However, in Europe and North America it jumps to around 50-60 g/cap/day. As less developed economies also adopt Western diets the environmental impact is likely to grow.[1](#footnote-1) 

Alternative sources of protein including plant-based proteins (e.g. Beyond Meat, Quorn sausages), micro-organism based proteins (via fermentation), and animal-cell-based protein (i.e., lab grown) have been developed in response to these concerns. Plant-based burgers typically have a carbon footprint 25-times lower than the global average emissions associated with producing beef.[2](#footnote-2) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e50be78a-cb14-4640-9e90-27dec6605fc1_1640x1228.png)

According to BCG, plant-based alternative proteins (excluding micro-organism and cell-based proteins) have the best emissions savings return on capital employed of any green investment. The reduction in emissions has a 3X better return than an equivalent green technology investment in the cement industry, and 10X better than directing climate capital to the light road transport or shipping sectors.

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### Breaking the bottleneck
URL: https://www.carbonrisk.world/breaking-the-bottleneck/
Last updated: 2025-08-21T10:37:36.000Z
The Rhine is a microcosm of the climate challenges facing Europe and other parts of the world.

The river is a crucial 800-mile transport artery stretching through the centre of Germany from the Alps to the North Sea. The world’s largest integrated industrial complexes depend on the Rhine, to feed their factories with energy and raw materials, and to ferry away finished products to end markets throughout northwest Europe.

Two of Germany’s thermal coal plants (accounting for \~4% of the country’s thermal coal generation capacity) are also situated on the Rhine and rely on the river for deliveries. Overall, between 20% and 30% of fossil fuels and refined products transported in Germany are shipped on it’s inland waterways, of which over 80% takes place on the Rhine (see [*High and dry: Drought threatens Germany's plan to burn more coal*](https://www.carbonrisk.world/high-and-dry/)).

In recent years the waterway has suffered severe droughts, culminating in frequent restrictions on the barges that carry the raw materials, and even the closure of the transit route at times. Industries that rely on the Rhine are seeking to mitigate the impact on their operations, yet simultaneously they must also invest in the technology necessary to decarbonise the waterway. Adding to the uncertainty many firms are questioning their long-term future in the Rhine-Ruhr, Germany’s industrial heartland, as high energy prices and overburdensome regulations curb their ability to compete with global competitors.

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The critical section of the Rhine is a place called Kaub. Here the river snakes through much of Germany’s industrial heartland, and where the most important water measuring station is located. The Rhine typically sees its lowest water levels during October and November. This year, the navigation channel depth at Kaub is forecast to reach the 1.9cm critical level over the next couple of weeks. A lack of normal autumnal rainfall means that water levels are well below levels seen last year, or indeed the 5-year average.

The last time this level was breached decisively was in July/August 2022, towards the end of a prolonged drought. If the water level declines too much then barges may have to lighten their load to prevent the propellers from hitting the river bottom. In an extreme scenario, one that is becoming more frequent, shipping at this crucial section of the waterway can come to a stop completely.

![Image](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/9ebda343-fe4e-40a0-afc1-44f7527b8bc3_680x559-jpeg.jpg)

Low water levels on the Rhine can have a significant adverse impact on the German economy. Research published in 2020 by the Kiel Institute for the World Economy revealed that 30 days of low water levels led to a 25% decline in transportation volume on the river and a 1% fall in German industrial production. Overall, the analysts estimated that a 1% decline in shipping volume along the Rhine has historically led to a 0.04% drop in German industrial production. The results also need to be considered in the context that European supply chains are often tightly woven into Germany’s industrial heartland. Disruption in the Rhine can often spiral into delays elsewhere on the continent.[1](#footnote-1) 

The research was carried out in response to the 2018 drought in which low water levels on the Rhine severely disrupted shipping volumes, shaving 0.4% from Germany’s GDP. In the aftermath, industries located along the Rhine sought to mitigate the risk of future disruption, including relying on road and rail transport, while also ensuring that inventories can cover a longer period of disruption. These measures do not come cheap. Transporting bulk products by road or rail is costly and also results in higher emissions - one barge is roughly equivalent to 100 extra trucks on the road. There’s also no guarantee that road and rail transport will be free of disruption either. Shortages of lorry drivers, and strikes by railway operators may also result in delays.

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Companies are experimenting with options that enable them to continue to use the Rhine, while mitigating the risk of disruption in the event that water levels drop too low. Smaller boats able to traverse the river, even when water levels are very low, have been employed by some companies. However, these typically suffer from poor economies of scale relative to traditional barges that can carry much larger freight volumes.

Technological solutions are also coming to the rescue, but they take time to enter the marketplace, and even then will only be available to those companies most willing to pay for them. In May 2023, BASF launched the Stolt Ludwigshafen. Costing over €10 million, the vessel is about 50% broader than conventional barges, enabling it to navigate low water levels of the kind often seen near Kaub. Using a combination of electric and diesel engines, the barge and others like it using the same propulsion technology, emits around one-third less carbon dioxide than a conventional barge.

Longer-term the aim is to cut shipping emissions to zero using hydrogen powered barges. For example, Covestro and NPRC, a logistics service provider plan to convert the salt transport fleet (salt is one of Covestro’s most important raw materials) from diesel to hydrogen. Initially each vessel will be fuelled by hydrogen produced as a by-product of Covestro’s operations, before eventually being powered by green hydrogen, saving up to 1,000 tonnes of carbon versus diesel fuelled barges. The project is part of the RH2INE Initiative (Rhine Hydrogen Integration Network of Excellence), founded on the idea of using hydrogen to establish a net zero transport route along the inland waterways of central Europe. The partnership aim to have two vessels in operation by 2024, with plans to expand it to 280 by 2030 (see *[A volatile gas: Hydrogen's latest hype cycle still suffers from overinflated expectations](https://www.carbonrisk.world/hydrogen-hype-cycle-not-over-yet/))*.[2](#footnote-2) 

In the same way that Germany’s industrial heartland is a prisoner of its natural geography, manufacturers are also captive to past geopolitical and economic decisions. In particular, the one to locate their factories next to a network of natural gas pipelines stretching to Russia in the east. In the aftermath of last years energy crisis, and when the future of Germany’s energy intensive industrial base continues to be uncertain, it is difficult to justify the expense involved in rolling out these vessels. Even senior management of BASF itself have expressed that they want to reorientate their business towards those countries where energy prices are cheaper, where less onerous regulations exist, and towards those economies still experiencing rapid growth in chemical demand (see [*Is permanent deindustrialisation of Europe still a tail risk?*](https://www.carbonrisk.world/is-the-permanent-deindustrialisation/)).

Water scarcity is often the point at which climate change hits home. The Rhine is a prime example of where the ‘energy-carbon-water’ nexus is now colliding. Resolving it is vital if net zero is to be achieved, not just for the industries located next to the river, but for the whole of Europe too.

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[Repost: Putting a price on H₂OThe UN water summit, the first for more than four decades, begins today in New York. It comes as the IPCC revealed this week that half of the global population experience severe water stress for at least part of the year. The deficit could get worse over the next decade. Demand for freshwater is expected to outstrip supply by 40% by 2030 if current prac…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-126.png)Carbon RiskPeter Sainsbury![](https://images.unsplash.com/photo-1615957148446-6a1647193298?ixlib=rb-1.2.1&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)](https://www.carbonrisk.world/repost-putting-a-price-on-ho/)

---

1. https://www.ifw-kiel.de/fileadmin/Dateiverwaltung/IfW-Publications/Saskia\_Moesle/KWP\_2155\_low\_water\_econ\_activity.pdf [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. Inland water transport is unlikely to come under the EU ETS (due to start in 2024), or FuelEU Maritime (due to start in 2025), as both sets of legislation only apply to vessels over 5,000 gross tonnes. The average loading capacity or deadweight of a vessel in the Rhine fleet was around 1,500 tonnes in 2020 https://inland-navigation-market.org/chapitre/6-cargo-fleets/?lang=en [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
### Carbon border risk
URL: https://www.carbonrisk.world/carbon-border-risk/
Last updated: 2025-08-21T10:37:37.000Z
The EU’s carbon border levy could be a significant source of new demand for EU emission allowances (EUAs).

To recap, the levy, known as the ‘Carbon Border Adjustment Mechanism’ or CBAM for short seeks to address the problem of ‘carbon leakage’. This is where EU firms might lose market share to more carbon intensive products from countries without a corresponding carbon price. The loss of competitiveness might prompt a carbon intensive firm (or even a whole industry) to move their operations to migrate to a jurisdiction with less onerous environmental regulations.

The CBAM transitional phase began on 1st October 2023 and ends on 31st December 2025\. During this period importers are only obligated to report emissions. Each importer must submit a CBAM report within one month of the end of every reporting quarter. This report will contain information on the quantity of CBAM obligated products imported into the EU, the direct and indirect emissions involved in their production (i.e., Scope 1 and 2 emissions), as well as the carbon price due in the country of production. The penalty for non-compliance is set by the individual Member State but must be €10-50 per tonne of unreported embedded emissions.

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### The net zero fiscal trilemma
URL: https://www.carbonrisk.world/the-net-zero-fiscal-trilemma/
Last updated: 2025-08-21T10:37:37.000Z
Governments face a trilemma between meeting net zero, fiscal sustainability, and political feasibility.

Splurge enough public money on new green projects and you may get to net zero faster. It probably won’t do your re-election chances any harm either, but it might provoke a harsh rebuke from the bond market.

Be more selective and controlled with your subsidies. The debt markets will be more relaxed but you’ll need something else to meet net zero. That has to mean using carbon pricing - whether direct or indirect - to alter behaviour and incentives. The downside is that it could result in higher prices and a backlash from your voters.

Where does the world currently stand on this net zero fiscal trilemma, and what can governments do to solve it?

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### The other side of the table
URL: https://www.carbonrisk.world/the-other-side-of-the-table/
Last updated: 2025-08-21T10:37:38.000Z
> *“If you are in a poker game and after 20 minutes you don’t know who the patsy is, then you’re the patsy.” - Warren Buffett*

![person holding clear drinking glass](https://images.unsplash.com/photo-1609769322709-2de28ae6503a?ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D&auto=format&fit=crop&w=1000&q=80)

Photo by [Amol Tyagi](https://unsplash.com/@amoltyagi2?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash) on [Unsplash](https://unsplash.com/photos/7dkLbNE6ycI?utm%5Fcontent=creditCopyText&utm%5Fmedium=referral&utm%5Fsource=unsplash)

Navigating carbon markets revolves around understanding how the most important participants in the market play the game.

In the EU ETS and other major compliance markets it is typically hedging activity by utilities that drives price formation, at least in the short-medium term. Utilities typically hedge 80-90% of their generation at least two quarters before delivery so their actions provide a valuable tell as to underlying fundamentals. As heavy industry, airlines, shipping, and other sectors of the economy become more exposed to carbon price risk in the EU so their hedging behaviour will start to have an influence on carbon prices.

Unlike most other major compliance schemes electricity generation is regulated separately in Australia’s Safeguard Mechanism (SGM). A recently published report examined the key sensitivities influencing the outlook for carbon prices in Australia. Instead of utilities, fossil fuel producers are thought to be the most important actors in the marketplace to watch out for. The pace at which the sector looks to abate their emissions, and the risk management strategy they employ for managing compliance are likely to be central to carbon price formation.

In short, Australia’s carbon price is likely to be very sensitive to the investment decisions made by only a few companies.

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### Testing long term support
URL: https://www.carbonrisk.world/testing-long-term-support/
Last updated: 2025-08-21T10:37:39.000Z
There is an inevitable tension between the short and long term fundamentals in any market. The EU carbon market is no different.

Look out into the future and you will see the emissions cap declining at a steady rate, year after year until at some point in the late 2030’s when the cap will reach zero. The Market Stability Reserve (MSR) will continue to cut into the available balance of emission allowances that can be used to meet compliance. Meanwhile, decarbonising heavy industrial processes such as cement manufacture will be a lot more difficult than switching from thermal coal to natural gas and scaling up renewable generation capacity.

Yet, right now those bullish long term factors are taking a back seat to more pressing short term considerations.

Lets dive in.

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### Carbon markets are going global
URL: https://www.carbonrisk.world/carbon-markets-are-going-global/
Last updated: 2025-08-21T10:37:41.000Z
> *“The answer to the global climate crisis is carbon pricing.”* *\- Kurt Vandenberghe, the European Commission’s Directorate-General for Environment (DG ENV)*

Carbon pricing plays a number of roles including internalising the cost of negative externalities resulting from greenhouse gas (GHG) emissions and putting a price on the remaining carbon budget consistent with achieving a certain temperature objective.

It acts as a signal to consumers about which goods and services are carbon-intensive. It signals to producers of products and services which inputs and activities they should switch towards to reduce their carbon costs. It also fosters innovation and entrepreneurship by signposting that demand for low carbon alternatives are likely to rise.

Carbon Risk is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Yet currently less than one-quarter of global emissions are covered by some form of direct carbon pricing according to estimates from the World Bank; 18% is covered through emissions trading schemes (ETS) also known as cap-and-trade, carbon taxes cover 5.5%, while 0.4% is covered by both an ETS and carbon taxes.[1](#footnote-1) [2](#footnote-2)

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There have been three major step changes in terms of coverage since the year 2000\. The launch of the EU ETS in 2005 marked the first step (initially covering \~5% of GHG emissions). The advent of California’s carbon market in 2012 was the second step. Over the rest of the decade carbon pricing only expanded incrementally. The most recent and the single largest step in carbon pricing occurred in 2021 following the launch of China’s ETS (initially covering \~40% of its annual GHG emissions).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/db67191d-b6d3-4c5f-88aa-80540df5772e_634x569-3.png)

Source: World Bank

In 2022 almost $100 billion of fiscal receipts was raised by governments from carbon pricing with ETS’ accounting for around two-thirds of the revenue raised. According to the Institute for Climate Economics, 40% of the total revenue was earmarked for dedicated purposes such as green investment, 20% formed part of general taxation, 10% was recycled and used to support those households and firms adversely affected by carbon pricing, tax cuts were funded using 9% of the revenue, while the remainder used for other purposes.

While carbon taxes involves controlling the price of carbon and letting the market decide the emissions response, an ETS controls for emissions (by setting a cap) and lets the market decide the price. The greater the share of global emissions covered by cap-and-trade carbon pricing the better.

From 18% in 2023, the percentage of global GHG emissions covered by ETS’ is expected to grow substantially over the next decade. The president of the International Emissions Trading Association (IETA) recently estimated that around two-thirds of global emissions could be covered by an ETS by 2030.[3](#footnote-3) 

In 2022 the global traded market in emission allowances reached in excess of $900 billion according to Refinitiv, an increase of 14% on 2021\. The EU ETS, the worlds largest carbon market by value traded around $750 billion in emission allowances last year. Scaling up based on recent carbon prices and trading activity suggests that carbon allowances could be a $3.3 trillion market by the end of this decade ([*see Is the VCM a trillion dollar business opportunity?*](https://www.carbonrisk.world/a-one-trillion-dollar-business/)).

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One of the biggest issues with the current patchy coverage is ‘carbon leakage’. This occurs when firms located in a region subject to carbon pricing loses market share to more carbon intensive imports, or where a carbon intensive firm (or even a whole industry) seeks to move its operations to a jurisdiction with less onerous environmental regulations.

The risk of ‘carbon leakage’ limits the effectiveness of carbon pricing. Consumers may decide to import cheaper products from jurisdictions not subject to carbon pricing, while producers may decide not to invest in new low carbon technology if the demand for innovative products and services is likely to be limited, or subject to extreme uncertainty.

The imminent launch of Europe’s Carbon Border Adjustment Mechanism (CBAM) seeks to address ‘carbon leakage’ by ensuring importers of carbon intensive goods account for the negative externality by paying a levy. Other jurisdictions including the UK, Australia and the US are all considering introducing their own version of the EU’s carbon levy.

The CBAM is fast becoming one of the main drivers towards a greater share of global emissions being covered by carbon pricing. As I outline in [*No level playing field*](https://www.carbonrisk.world/no-level-playing-field/), “The only way to avoid buying a CBAM certificate \[the equivalent to an emission allowance\] is if the country of origin has the same climate ambition as the EU. It follows that the CBAM should act as an accelerant for global climate ambition and the adoption of carbon markets as an instrument for decarbonisation.”

Earlier this year the World Bank launched a tool to help identify those countries most exposed to the CBAM. Their *aggregate relative CBAM exposure index* calculates the sum of the total excess embodied carbon payments, divided by the sum of the country's total value of exports of CBAM products to the world. The deeper the orange colour in the map below, the higher an individual country’s aggregate relative CBAM exposure. Three of the most heavily exposed countries - all substantial contributors to global emissions - look set to introduce carbon pricing gradually over the next few years - Indonesia, Brazil, and India.[4](#footnote-4) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/ea4f6ec2-dd7b-4375-a1b7-7cc487491067_793x682.png)

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

In February 2023, the Indonesia government launched the first phase of their emissions trading scheme as the largest coal powered electricity generators (those with a capacity of at least 100MW) began bilateral trading of allowances. In late September the carbon exchange was formally launched enabling a much deeper pool of liquidity to develop. The government is reportedly considering expanding the cap-and-trade scheme to also include forestry, industrial processes and product use, agriculture and waste management (see [*Commodity markets begin to price carbon risk*](https://www.carbonrisk.world/commodity-markets-begin-to-price/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/32bd4d02-7eeb-4911-b8a0-23a907a7bc89_1728x820.png)

Brazil is the most recent country to announce its carbon pricing plans. Although not quite as exposed as some countries, Brazil is a significant exporter of iron and steel to the EU. Although the exact scope of industries included in its ETS is yet to be confirmed, it’s thought unlikely to affect the agricultural and forestry sector despite them being responsible for the lions share of Brazil’s emissions and the leading cause of deforestation. Around 5,000 carbon intensive companies, primarily from the oil and gas, chemicals, steel, and cement sectors are thought likely to be impacted by the legislation once it has been implemented. After a interim reporting period of 1-2 years, the scheme is likely to start in full around 2028/29 (see [*Repricing deforestation risk in the wake of Brazil's presidential election*](https://www.carbonrisk.world/repricing-deforestation-risk-in-the/)).

India is a notable omission from the earlier map of carbon pricing initiatives, but that could be about to change. Reuters reported in October that the government are planning on introducing an emissions intensity based carbon trading scheme (similar to how the Chinese ETS works). The article suggests that the targets will be introduced in 2024/25 with trading of carbon allowances beginning in 2025/26\. The sectors included in the ETS are expected to be petrochemicals, iron and steel, cement, and pulp and paper. As I highlight in *[Inflexion point: The Indian economy is pivotal to the future direction of global carbon emissions](https://www.carbonrisk.world/tipping-point/)*, India is not new to environmental markets. However, they have yet to gain a foothold across large parts of the economy. But with India expected to be at the centre of global energy demand growth over the next couple of decades it will need to introduce carbon pricing quickly if it is to meet its net zero commitments and reduce its CBAM exposure.[5](#footnote-5)

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Extending carbon pricing to cover the rest of the world’s emissions is likely to be a key discussion point at COP28 in Dubai this November and December. In recent weeks European and African leaders have called for a global carbon pricing to help channel capital to less developed economies and help them accelerate their own net zero energy transition. However, any meaningful increase in carbon pricing coverage could impose a high short term cost on those economies (and sectors of society) that are fossil fuel intensive. Mitigating the regressive nature of carbon pricing will be key to accelerating the global adoption of emissions trading, especially as governments come under pressure to water down or even drop net zero policies (see [*Collateral damage revisited*](https://www.carbonrisk.world/collateral-damage-revisited/)).

To that end governments need to recycle a much greater proportion of the funds raised by carbon pricing back to those who are adversely affected. As I explained earlier in this article, only 10% of the revenue raised by carbon pricing is currently recycled back to vulnerable parts of society. Transfers need to take the form of transparent cash transfers (being clear on the source of the funds should engender support for the carbon pricing policy), while also offering generous incentives to help them mitigate their carbon exposure (e.g. funding heat pumps, solar panels, insulation, etc.).

Three decades ago the United States introduced a sulphur dioxide emissions trading scheme covering the country’s power plants. The scheme was the first in the world to put a tradable price on pollution and its success in cutting emissions set the stage for the development of the European carbon market and subsequent ETS’. Today, those same market concepts are being used to signal where to cut carbon emissions, while allocating scarce resources in the most efficient way possible. It’s time that all governments took heed of that signal and seek to rapidly expand emissions trading to cover a much greater proportion of global emissions.

Carbon markets are going global. You don’t want to be left behind.

[The great sulphur dioxide allowance bull marketThe EU’s carbon market was not the worlds first cap-and-trade system to tackle a serious environmental problem. That honour goes to the United States sulphur dioxide (SO2) allowance trading system. Flue gas emissions from coal-fired power generation released huge quantities of sulphur dioxide (SO2) and nitrogen oxides (NOx) emissions high into the atmos…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-128.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e0e391af-6de3-4634-80d8-6a1efe8181b8_839x443-1.png)](https://www.carbonrisk.world/hero-to-zero/)

---

1. https://openknowledge.worldbank.org/entities/publication/58f2a409-9bb7-4ee6-899d-be47835c838f [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. Indirect pricing of carbon is far more prevalent than the direct pricing methods discussed in this article. For example, governments often put a price on carbon indirectly through gasoline and diesel taxes, fossil fuel heating levies, and renewable energy price premiums, etc. The production and consumption of fossil fuel is also subsidised in many parts of the world, indirectly pricing carbon as a negative value. The net average effective carbon rate (ECR) is a way to aggregate the overall impact of these policies (direct and indirect, positive and negative) into a single price (see *[Fuelling controversy: Fossil fuel subsidies act like a negative carbon price](https://www.carbonrisk.world/everything-you-need-to-know-about-232/)*). [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/electric-power/032723-interview-net-zero-goals-changing-global-politics-carbon-markets-in-for-a-bumpy-ride-ieta [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://www.worldbank.org/en/data/interactive/2023/06/15/relative-cbam-exposure-index#4 [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
5. https://www.reuters.com/sustainability/climate-energy/india-set-emission-reduction-mandates-4-sectors-start-carbon-trading-2025-2023-09-26/ [↩](#footnote-anchor-5 "Jump back to footnote 5 in the text.")
### A volatile gas
URL: https://www.carbonrisk.world/hydrogen-hype-cycle-not-over-yet/
Last updated: 2025-08-21T10:37:42.000Z
Green hydrogen is expected to play a central role in Europe’s decarbonisation.

Industries as diverse as transportation (ships, planes, trains and automobiles), heavy industry (steel, fertiliser, and cement), and utilities (energy storage, heating) are all looking to the element to help accelerate cuts to their carbon emissions.

The hype around its role in combating climate change tends to focus on potential sources of demand for hydrogen, but the same elevated expectations could also be afflicting the supply side too.

The outlook for green hydrogen (produced using renewable energy) ultimately depends on it being competitive versus conventional grey hydrogen (produced using natural gas via steam-methane). What I call the ‘green-grey’ hydrogen spread.

Manufacturing grey hydrogen is highly sensitive to natural gas prices and is carbon intensive to produce. If natural gas prices were to stay low then producers of green hydrogen need higher carbon prices to compensate. However, that’s outside of their control.

The industry requires a massive expansion in electrolyser capacity to ensure they are competitive (see [*Carbon's shifting anchor: The growth in electrolyser capacity is pivotal to Europe's decarbonisation ambitions*](https://www.carbonrisk.world/carbons-shifting-anchor/)). Economies of scale coupled with innovation need to drive down the cost of producing green hydrogen, at least on a par with grey hydrogen and ideally well below. Importantly though, costs need to stay competitive, and not just when natural gas prices are high, but all of the time.

Is that realistic? Lets take a deeper look.

_This post is for paying subscribers only._
### Repost: Commitment issues
URL: https://www.carbonrisk.world/repost-commitment-issues/
Last updated: 2025-08-21T10:37:43.000Z
*Almost twelve months to the day since I published this article, the price of UK emission allowances (UKA’s) has fallen by over 50% to a mere €35 per tonne. The malaise is even more striking when you consider that just across the English Channel, the EU carbon market continues to trade at around €80-85 per tonne.*

*In late June, the CCC published their annual report on the UK’s progress towards net zero calling for the UK government to develop a “clearer strategy to develop Net Zero industries.” In July the government published its consultation into the UK ETS, setting an emissions cap through to 2030, but at the least ambitious level available (see* [*Subject to further consultation: The state of play in the UK carbon market*](https://www.carbonrisk.world/subject-to-further-consultation/)*).*

*Yesterday, the UK Prime Minister, Rishi Sunak went further and announced that many of his governments net zero policies would be delayed or watered down. A ban on the sale of new ICE cars was put back five years to 2035, while a plan to phase out the installation of gas boilers by 2035 was downgraded to only an 80% phase-out.*

*It’s important to be clear about the costs of meeting net zero and the significant challenges involved. As with everything though it involves trade-offs. If the UK does less to achieve the necessary emission reductions today, then it must by definition do more of the heavy lifting tomorrow.*

*To their credit the government have reaffirmed their commitment to meeting net zero by 2050\. But what value does that commitment have? If the government renege on their interim 2030 targets then what are the chances that they do the same as 2050 looms on the horizon?*

*The problem is that without trust in that commitment it is very difficult for industries to invest, at least not without a hefty risk premium that will inevitably be passed onto consumers in the form of higher prices. Over the past twelve months the most vivid illustration of how trust in that commitment has diminished is the perilous drop in the UK carbon price.*

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---

> *“It takes many good deeds to build a good reputation, and only one bad one to lose it.” - Benjamin Franklin*

When a government begins to lose economic credibility, the market will punish it by selling government bonds, forcing up interest rates and washing itself of it’s currency.

As I’ve outlined in previous posts, I believe that one way of framing carbon markets is through the lens of a currency - ‘The Currency of Decarbonisation’.

If a government introduces a carbon price and commits itself to this policy for the foreseeable future, then obligated emitters, investors and other market participants will react by incorporating the expected carbon price into their investment decisions.

However, the market will judge the governments commitment as somewhere between zero and absolute. The greater the perception is that a government might not stick to its self-imposed commitment, the larger the discount the market will factor in to the carbon price.

A loss of climate policy credibility means that businesses will either postpone investing until the policy uncertainty is resolved, or they will demand higher rates of return. Either way, the total level of emissions abatement achieved is likely to be reduced.

Knowing the ‘commitment issues’ signs to watch out for is going to be more important over the next few years. Commitment perceptions will influence the future direction of compliance carbon markets such as the EU emissions trading scheme (ETS), voluntary demand for carbon credits from the corporate sector, and individual nation demand for carbon credits with which to meet their commitments under the Paris Agreement.

**How strong carbon markets show commitment**

Assuming that the government or institution responsible for carbon markets acts in its self-interest, the more the observable gains from compliance with the ETS outweigh the observable gains from reneging, the more credible a policy is. Reputation and commitment devices are central to determining the credibility of a government, or an institution responsible for climate policy.

A long history of policy support is a strong reputational indicator of commitment. As I outline above, this creates a virtuous circle whereby emission abatement is achieved at lower cost. Even better if the policy has been gradually tightened over time. That kind of political support is difficult to achieve, and even harder to achieve over a long period of time.

A commitment device is often used by the government or institution responsible for implementing policy to demonstrate commitment. By deliberately restricting the option to deviate from the policy, other stakeholders become more confident that it will not be revoked.

There are three distinct types of commitment device used in carbon markets: legislation, delegation and securitisation.

_This post is for paying subscribers only._
### Full disclosure
URL: https://www.carbonrisk.world/full-disclosure/
Last updated: 2025-08-21T10:37:43.000Z
Many companies publish emissions data on a voluntary basis, but with no consistent methodology it can be difficult to know whether an individual firm is performing well or not. Mandatory disclosure requirements increase the degree of transparency, cutting the considerable search costs involved with analysing one company’s emissions against its competitors. Policymakers reason that forcing businesses to publish detailed emissions data will motivate them to push for ever greater cuts to their emissions.

Being able to compare one firms emissions with another helps management, investors and the wider public understand who is responsible, provide clues as to best-in-class emission cutting behaviour, and importantly, help direct capital to the best carbon mitigation opportunities. In the absence of a carbon price, mandatory reporting is the next best thing. Indeed, acceptance of the latter could at some point become a prelude for the introduction of the former. Get the basics right and its likely to mean that carbon pricing will be much more effective.

California already has a carbon price covering some 80% of the states emissions. Nevertheless, there’s always room for improvement. In the past week a landmark climate bill passed the state’s legislature. The new law (the Climate Corporate Data Accountability Act) will require all companies with more than $1 billion in revenue to disclose their Scope 1, 2 and 3 emissions. The law would be the first of it’s kind in the United States and cover over 5,000 companies. California’s governor has until 14th October to sign-off the legislation. If passed, the law would require those firms that meet the revenue threshold to report their Scope 1 and 2 emissions from 2026, and Scope 3 emissions from 2027 (see [*Owning up to Scope 3*](https://www.carbonrisk.world/owning-up-to-scope-3-emissions/)).

_This post is for paying subscribers only._
### Is the VCM a trillion dollar business opportunity?
URL: https://www.carbonrisk.world/a-one-trillion-dollar-business/
Last updated: 2025-08-21T10:37:44.000Z
**Welcome to** [**Carbon Risk**](https://www.carbonrisk.world/celebrating-two-years-of-carbon-risk/) **— helping investors navigate 'The Currency of Decarbonisation'!** 🏭

**If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what** [**other subscribers** ](https://www.carbonrisk.world/testimonials/)**are saying.**

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**Thanks for reading Carbon Risk and sharing my work! 🔥**

---

Being able to accurately gauge the potential size of a rapidly growing market is vital if investors aren’t to waste precious capital developing businesses, especially if better risk-adjusted opportunities are available elsewhere. The voluntary carbon market (VCM) is one such business where investors periodically question just how big the market could become.

Giancarlo Savini from Future Energy Ventures recently shared the chart below on LinkedIn. Based on projections compiled from a range of investment banks and consultancies, it suggests that the VCM could grow from $0.50-2 billion today, to $10-100 billion by 2030, before surging towards $200-1,000 billion by 2050.[1](#footnote-1)

I only have limited access to how the projections outlined in the chart were prepared, with many only being covered very lightly in news reports (see footnotes). If any of my subscribers have more details (or even links to the underlying analysis) then please share in the comments, or by contacting me directly. It’s probably not an exhaustive list of projections, but it’s a good enough place to start.

I’m also not convinced that the numbers presented in the chart necessarily reflect the latest thinking by each institution, or indeed are necessarily comparing apples with apples. For example, Berenberg put out a figure of $200 billion for 2050 over 3 years ago, and the bank doesn’t appear to have updated it’s thinking since then, at least not publicly.[2](#footnote-2)

With those caveats in mind, I thought it might be worth adding some context behind the high level numbers, to try and unpick what is important, uncover where the biggest source of uncertainty lies.

![Image preview](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/81ea91cb-3370-48c6-b371-0899a1b5f4eb_800x773-jpeg-1.jpg)

Lets start off by saying that the carbon credit market VCM in 2030 (and certainly by 2050) is likely to look very different to where we are today. The first thing to get right is the terminology. The VCM is commonly used as an abbreviation for the voluntary carbon market. However, it’s worth tweaking the terminology slightly to give a better sense of what the market is likely to become. Rather than voluntary, lets start calling it the verified carbon market.

The VCM will still include companies voluntarily channelling capital into funding carbon projects, but it will increasingly be an integral part of regional and global carbon compliance regulations. Ensuring that carbon avoidance and removal claims can be verified will be vital to their integrity - whether that demand is voluntary or compliance.

It’s not always clear from the various projections what assumptions have been made regarding the split between compliance and voluntary demand for carbon credits. BCG explicitly assumes that \~80-90% of demand for carbon removal’s will be voluntary purchases by 2030-40\. What assumptions been made by other analysts is much less clear.

How will the balance shift between avoidance and removal credits? Avoidance credits have dominated the VCM, accounting for around 80% of the volume of credits issued over the past 5-10 years. However, over the rest of the decade avoidance credits are projected to fall to around two-thirds of the market, according to Shell/BCG with removal credits accounting for one-third of credits issued. As the market focuses on the need for carbon removal this proportion is likely to dominate the market, but the speed at which it does so is highly uncertain. The balance between avoidance and removal credits feeds into the next question.

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How much will carbon credits cost in 2030 and 2050? Assuming demand for carbon credits moves towards a removal centred market then we need to make an assumption on how demand and supply for nature and technology based carbon removals evolve over the next two and a half decades. [Forests](https://www.carbonrisk.world/nature-based-carbon-credit-prices/), [soil](https://www.carbonrisk.world/carbon-farming-puts-a-value-on-dirt/), [mangroves](https://www.carbonrisk.world/banking-on-blue-carbon/), [biochar](https://www.carbonrisk.world/char-grilled/), [bio-energy with carbon capture and storage (BECCS)](https://www.carbonrisk.world/beccs-the-carbon-removal-chimera/), [direct air capture (DAC)](https://www.carbonrisk.world/direct-air-capture-dac-will-determine/) and [enhanced rock weathering (ERW)](https://www.carbonrisk.world/everything-you-need-to-know-about-a66/) will each face their own resource constraints, limiting their expansion. In the short-medium term it’s likely that demand will grow much faster than supply can realistically respond.

What about the cost evolution of technology-based carbon removals? Direct air capture (DAC) is currently the most expensive form of carbon removal, but arguably has the greatest potential to scale. If the cost can be brought down from the \~$400 per tonne mark to nearer $100 per tonne then this will force other carbon removal methods to compete. But for that to occur capacity needs to expand rapidly, generating learning effects that bring costs down even further. By its very nature that process and the timing is highly uncertain. Finally, a substitution effect could result in increased demand for nature-based removal, and a subsequent rise in the price of those credits towards technology based credit prices (see [*Technology-based carbon removal credits crucial if net-zero targets are to be met*](https://www.carbonrisk.world/technology-based-carbon-removal-credits/)).

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How much carbon actually needs to be removed? As I’ve discussed in previous articles, we are going to need carbon removal to stand any chance of getting to net zero by 2050\. We can’t simply wait until the 11th hour to start investing in carbon removal. It needs to start happening today. However, as Robert from outlines, there is more than one reason why we should want to invest in carbon removal and it makes a big difference to how much carbon needs to be removed.[3](#footnote-3) 

Robert estimates that the world will need 2-5 Gt per year of permanent carbon removal to offset continuous residual carbon emissions and halt the global increase in temperatures. However, that isn’t the end of the story. Methane and nitrous oxide gases are significantly more powerful than carbon dioxide in warming the planet, account for a significant share of emissions (especially from agriculture), and are very difficult to eliminate. The impact of the former is relatively short-lived (20 years), while the latter stays in the atmosphere for 100+ years.

Offsetting the global warming impact from rising methane emissions would require a multiple Gt’s per year of carbon removal (Robert puts it at 13 Gt per year), plus 1-2 Gt per year of carbon removal to account for nitrous oxide. Overall, potentially up to 20 Gt per year of carbon may need to be removed by 2050\. That’s a factor of 3-4 times higher than what many of the banks and consultancies have pencilled into their projections.

If we assume that carbon credits trade for $100 per tonne in 2050, and that 5 Gt per year is removed or otherwise avoided, then that puts the market size at $0.5 trillion. If we also take account of the other GHG’s (methane and nitrous oxide) then the market could be worth $2 trillion (again assuming $100 per tonne). However, both of these estimates include both voluntary and compliance demand for credits. How much of this demand will be voluntary?

What about all of the other ancillary services that make the VCM possible? There is going to be increased demand for services that can monitor emissions in real time and be able to accurately report and benchmark different GHG emissions. The global oil and gas methane detection market alone could be worth almost $1 billion by 2025, according to projections from BNEF. That’s just one industry, and one greenhouse gas. Any projection of future market value also needs to consider the role of standard setting, verification bodies, carbon credit rating agencies, project developers, carbon credit exchanges, technology providers, and the ongoing cost of carbon storage, etc. (see [*The carbon tracking opportunity: Real time tracking of GHG emissions and carbon sinks is a huge growth market*](https://www.carbonrisk.world/carbon-footprints/)).

Overall, the speed at which the VCM market is evolving means its almost impossible to compare one projection to another. Unless we are clear what definitions and assumptions underpin the analysis it’s impossible to be clear. Nevertheless, the projections outlined in the chart provide a reasonable guide to what the verified carbon market could be worth in 2050\. One trillion dollars is achievable, although it will require many economic, political and technological stars to align.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-132.png)

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[A 'green' unicorn“It is my belief that the next 1,000 unicorns — companies that have a market valuation over a billion dollars — won’t be a search engine, won’t be a media company, they’ll be businesses developing green hydrogen, green agriculture, green steel and green cement,” - Larry Fink, CEO and Chairman of Blackrock, 25th October 2021![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-133.png)Carbon RiskPeter Sainsbury![](https://images.unsplash.com/photo-1574607407517-cd664b1504f5?ixlib=rb-4.0.3&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)](https://www.carbonrisk.world/a-green-unicorn/)

---

1. https://www.linkedin.com/feed/update/urn:li:activity:7104660442609799168/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/natural-gas/051320-global-carbon-offsets-market-could-be-worth-200-bil-by-2050-berenberg#:\~:text=%22The%20global%20carbon%20offset%20market,Berenberg%20said%20in%20the%20note.  
https://www.morganstanley.com/ideas/carbon-offset-market-growth#:\~:text=With%203%2C800%20more%20projects%20listed,around%20%24250%20billion%20by%202050.  
https://www.shell.com/shellenergy/othersolutions/carbonmarketreports.html#vanity-aHR0cHM6Ly93d3cuc2hlbGwuY29tL2NhcmJvbm1hcmtldHJlcG9ydHMuaHRtbA  
https://www.sustainabletimes.co.uk/post/report-global-voluntary-carbon-credit-industry-estimated-to-hit-250bn-by-2030  
https://www.bloomberg.com/professional/blog/long-term-carbon-offsets-outlook-2023/  
https://about.bnef.com/blog/carbon-offset-market-could-reach-1-trillion-with-right-rules/#:\~:text=Demand%20for%20high%2Dquality%20offsets,to%20%2432%2Fton%20in%202050.  
https://www.bcg.com/publications/2023/the-need-and-market-demand-for-carbon-dioxide-removal [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. [How much carbon will we need to remove? There are a lot of projections and plans hinging on the question of how much carbon dioxide we need to remove (CDR), but few satisfactory answers. The discussion is mixing up very different scenarios. There is a big difference between the need to use CDR now, to reach net zero, and to bring temperatures back down. Let’s examine the different needs for …![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a1844b1f-3f84-4b97-9b4f-a434db6ec9b8_1080x1080-1.png)Marginal Carbon](https://marginalcarbon.substack.com/p/how-much-carbon-will-we-need-to-remove)
### France's nuclear risk premium has faded, for now
URL: https://www.carbonrisk.world/frances-nuclear-risk-premium-has/
Last updated: 2025-08-21T10:37:44.000Z
The poor state of French nuclear generation was one of the most important stories in European energy markets during 2022.

In the aftermath of the Russian invasion of Ukraine, when Europe’s supplies of natural gas were curtailed and longer term supplies were under increasing threat, what the continent really needed was a secure and reliable source of low carbon nuclear energy.

Unfortunately, a combination of unexpected maintenance to repair cracks discovered during routine inspections, drought which forced the curtailment of a number of reactors, and sporadic strike action resulted in French nuclear generation dropping 23% between 2021 and 2022 to 278 TWh - the lowest level since 1989.

Although Europe’s solar expansion helped offset some of the loss of French nuclear generation, many utilities resorted to firing up their lignite and thermal coal generation units. Coupled with weak hydropower generation, the hike in coal generation during 2022 led to an increase in emissions and hence demand for EUAs (see [*France's nuclear winter of discontent*](https://www.carbonrisk.world/frances-nuclear-winter-of-discontent/)).

Historically at least, nuclear generation has been uncorrelated with EU carbon prices. The exception is when low nuclear generation coincides with a period of high power prices, tight carbon allowance supply, and strong hedging demand by utilities. The surge in European power prices during August 2022 coincided with a sharp increase in EU carbon prices towards €100 per tonne as utilities looked to hedge their carbon intensive power generation, while the supply of allowances via auction was limited.

Up until the end of the first quarter there was little sign that this year would be any better. And then on 6th March, EDF sent the French Nuclear Safety Authority (ASN) a notice disclosing that they had detected further stress corrosion issues at the Penly 1 nuclear reactor. This was the same issue that had caused exceptionally low availability levels in the preceding summer.

_This post is for paying subscribers only._
### Fight Fire With Fire
URL: https://www.carbonrisk.world/fight-fire-with-fire/
Last updated: 2025-08-21T10:37:44.000Z
> *“Small forest fires periodically cleanse the system of the most flammable material, so this does not have the opportunity to accumulate. Systematically preventing forest fires from taking place ‘to be safe’ makes the big one much worse.”*

\-Nassim Nicholas Taleb, Antifragile: Things That Gain From Disorder *\**

![trees on fire](https://images.unsplash.com/photo-1511027643875-5cbb0439c8f1?ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D&auto=format&fit=crop&w=1000&q=80)

Photo by [Matt Howard](https://unsplash.com/@thematthoward?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/photos/eAKDzK4lo4o?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

When we look back at what made the headlines in 2023, wildfires are likely to feature as one of the most important news stories of the year. From the Canadian forest fires that belched orange smoke over New York, to Greece which experienced the largest ever recorded wildfire in the EU, and to the deadly blaze on the Hawaiian island of Maui.

Climate scientists believe that a warmer world coupled with land-use changes mean that extreme wildfires are likely to become more intense, increasingly frequent, and afflict areas of the world not currently use to dealing with fire risk. According to the UN Environment Programme (UNEP), the global incidence of extreme fires is projected to increase by up to 14% by 2030, 30% by the end of 2050 and 50% by the end of the century.[1](#footnote-1) 

In addition to the risk to human life and livelihoods, wildfires result in massive plumes of carbon emissions and a loss of biodiversity.

When wildfire intensity rises to extreme levels, dead organic material that would otherwise decompose is burnt under the high temperatures. Instead of carbon being sequestered into the soil, it is released into the air. Intense wildfires also destabilise the soil, breaking off carbon-based organic matter from minerals and killing soil bacteria and fungi.

Global emissions from wildfires in 2023 are estimated to be the third-worst on record, according to Copernicus, the European earth observation agency, covering data for the first eight months of the year. The Canadian wildfires accounted for more than one-quarter of the global total.

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

**Where there’s smoke, there’s fire**

Governments typically start trying to mitigate fire risk in the wrong places. The initial step is better predictions. A better fire-forecasting system would of course have enormous benefits. It would enable firefighters to put fire breaks in place, position expensive fire planes in the right locations, all the while minimising the risk to life and property.

However, if you thought weather forecasting was complex, predicting the path that wildfires take is on another level. To stay one step ahead of the fanning flames you need to simulate the wind direction, temperatures, humidity, soil temperatures and dryness, the amount and type of flammable material, as well as the potential reflexive impact that the wildfire, in turn, could have on the weather. And that ignores predicting the most important variable - the source and location of the ignition. Lightning is one of the main causes of wildfires.

The next step governments take is investing in the equipment to douse the fire with water and fire retardants. For example, in the aftermath of the Greek wildfires this year the European Commission announced it will purchase 12 new ‘Canadair’ aircraft to increase the capacity of its aerial firefighting fleet. There’s very little evidence of a correlation between airdrops and fire-fighting success. Aerial firefighting could be more about being seen to do something, rather than nothing at all.

The chances of success are much greater if authorities invest in prevention. Unfortunately no one won an election for preventing a raging wildfire from happening. That being said, we can learn from experiences elsewhere in the world where small fires have long been allowed to burn out in a bid to prevent huge wildfires from occurring.

The tropical savannahs of northern Australia are among the world’s most fire prone regions. The savannas tend to burn in the late dry season, ignited by high temperatures, fanned by strong winds, and fuelled by the build-up of dry tinder. Indigenous communities in Australia had long used fire to manage natural resources. But as indigenous people were forced from or left their traditional lands, the practice stopped, allowing large and intense bushfires to develop.

Controlled (also known as prescribed) burning cleanses the area of the most flammable material, preventing it from accumulating. This form of active fire management means that the savannah is subject to frequent shocks, but one never big enough to be catastrophic. Controlled burning, primarily in the early dry season, helps to protect communities from catastrophic fires and means that significantly less carbon is emitted since there is less biomass available to burn.

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### The Green Swan
URL: https://www.carbonrisk.world/fat-tails/
Last updated: 2025-08-21T10:37:45.000Z
> *“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”*

\- John Maynard Keynes

There are two conventional approaches used by economists to determine the appropriate price of carbon, depending on what objective policymakers are trying to achieve.

The first is often associated with the economist Arthur C. Pigou and is set at the marginal social cost of carbon (SCC). The objective here is to internalise the cost of the negative externalities resulting from greenhouse gas emissions. The second was originally advocated by economist William Nordhaus. He was the first to use a dynamic integrated climate model (DICE) to estimate the carbon price necessary to attain a given temperature objective (e.g. 1.5 degrees of warming).

Both approaches use integrated assessment models that seek to quantify the link between economics (e.g. agriculture yields, human health and productivity) and the climate (e.g. temperature changes and biodiversity). Each involves applying an appropriate discount rate that translates the future net cost of climate damages and mitigation into equivalent values experienced today (see [*Everything you need to know about the Social Cost of Carbon (SCC)*](https://www.carbonrisk.world/weighing-the-future/)).

However, both approaches fail to price in the extreme uncertainty inherent in climate science; the impact that rising carbon concentrations will have on global temperatures, what this will mean on a regional level and the risk of extreme weather events, what this might for the economy and society at large given uncertain technological change and adaptation strategies. All we know is that things are going in the wrong direction.

For example, a recent meta analysis of 5,900 SCC estimates, across 207 papers, published over the course of four decades found assessments of climate change and its impacts have become much more pessimistic over time. According to Professor Richard Tol, professor of economics at the University of Sussex Business School and one of the authors of the report, "The central estimate is that the social cost of carbon becomes 2.2% larger every year. We have found that every ton of carbon is four times as damaging now as it was 10 years ago.”[1](#footnote-1)

Tail risks are the big problem, one that conventional models fail to tackle. Climate models are poorly calibrated to deal with the risk that climate tipping points could result in extreme adverse climate impacts, so-called non-linear impacts. At the far end of the risk curve, climate change could lead to ruin. Ironically for a book entitled *The Climate Casino: Risk, Uncertainty, and Economics for a Warming World*, it’s author, William Nordhaus devotes barely two pages to the subject of risk and uncertainty, concluding only that “A sensible strategy would suggest an insurance premium to avoid the roulette wheel in the Climate Casino.”

DICE models such as that developed by Nordhaus assume that societal risk preferences (i.e. our willingness to substitute consumption across states of nature) are equal to its willingness to substitute consumption over time. It’s known as the constant-relative risk aversion (CRRA) preference. Since the economic damage to societies consumption is assumed to occur far into the future, a CRRA utility function with a high level of risk-aversion results in a high discount rate and a low carbon price.

The outcome of both approaches is that carbon prices tend to start off very low and then increase gradually over time, as the damage arising from climate change begins to become clearer, and the cost of abating the marginal unit of carbon rises. Supporters suggest that small course corrections over time mean we will avoid hitting the proverbial iceberg. A low and steady carbon price doesn’t rock the boat too much with the voters, and so it’s politically acceptable too.

An alternative approach to pricing carbon - one that seeks to capture the risk of ruin - suggests that that prices should start at an extremely high level, and then only gradually fall over time as climate uncertainty dissipates. This view is centred on what is commonly known as “The Precautionary Principle (PP)”, developed and popularised by a number of experts in risk and complex systems, but most notably Nassim Taleb:[2](#footnote-2)

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### Tipping point
URL: https://www.carbonrisk.world/passing-the-batton/
Last updated: 2025-08-21T10:37:46.000Z
**\*\*\* I’m taking a break from carbon markets next week. I will be back at my desk in early September \*\*\***

Over the next few years, one of the main drivers of EU carbon prices will be passed from utilities to industrials. First gradually, then suddenly.

Hedging demand by utilities is one of the most important factors affecting EU carbon prices. Utilities typically hedge 80-90% of their generation at least two quarters before delivery. That means their expectations of future generation and the associated emissions can give an insight into how demand for EUA futures will evolve.

The large drop in EU power sector emissions seen in the first half of 2023 and expectations of a significant year-on-year decline, ongoing uncertainty about near-term power and natural gas demand, coupled with the exponential growth in renewable generation in Europe is reflected in the hedging guidance from some of the EU’s largest utilities.

For example, one year ago Czech majority state-owned utility CEZ - one of the most active utilities in the EU carbon market - estimated its expected EUA requirements for the period 2023-26 as being within the range of 16-18 million EUA’s per year. In March this was cut to 10-18 million EUA’s per year, and in its most recent financial report that estimate was cut further to 8-15 million EUA’s per year (see [*Squaring up*](https://www.carbonrisk.world/squaring-up/)).

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### Scope 4 emissions: Unlocking low-carbon innovation
URL: https://www.carbonrisk.world/scope-4-emissions-unlocking-innovation/
Last updated: 2025-08-21T10:37:46.000Z
We typically think of an individual company’s greenhouse gas (GHG) emissions being pigeonholed into one of three categories, or scopes as they are known. Scope 1 covers direct emissions from a company’s own operations. Scope 2 covers indirect emissions resulting from the generation of energy that a company buys. Finally, Scope 3 includes all the other indirect emissions that occur in a company's value chain.

While Scope 1 and 2 emissions are relatively straightforward to measure and report on, Scope 3 is much more challenging. In part this is due to the potential for double counting (i.e., one firms Scope 3 emissions may be another’s Scope 1 and 2 emissions), but also because of the sheer size and complexity. Scope 3 typically accounts for three-quarters of a company’s emissions (although this varies significantly by sector), and measuring it involves gauging the emissions both up and down the supply chain, often involving thousands of individual suppliers and products (see [*Owning up to Scope 3: How investors should think about the SEC's proposed disclosure requirements*](https://www.carbonrisk.world/owning-up-to-scope-3-emissions/)).

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Just when you thought it couldn’t get any more complicated, Scope 4 emissions offer the potential for even more confusion. Scope 4 emissions are the “avoided emissions” resulting from the production and use of more carbon efficient products, or the employment of services such as energy efficiency that avoid carbon emissions (see [*Harnessing the invisible fuel*](https://www.carbonrisk.world/harnessing-the-invisible-fuel-to/)).

The idea behind Scope 4 emissions was originally put forward by the World Resources Institute (WRI). The non-profit organisation originally defined the term in a 2013 article highlighting the need for a new avoided emissions category to complement the standard Scope 1, 2, and 3 emissions. In theory, Scope 4 emissions enable businesses to think beyond their own operations and supply chain, and instead consider the broader carbon benefit they may be having on the global economy.[1](#footnote-1) 

If all the incentives (monetary, reputational or otherwise) are focused on individual companies bearing down on their Scope 1, 2 and 3 emissions then we may be missing out on innovations that, while far from optimal at the individual firm or industry level, could have much larger net emissions benefits for the global economy. The manufacturing of electric batteries or a wind turbine may be energy and carbon intensive, but this may be vastly outweighed by their Scope 4 emissions.

For example, wind turbine manufacturer Vestas estimates that over the last four decades their turbines avoided emissions totalling 1.7 billion tonnes of CO2e, when compared to the average carbon footprint of electricity in the countries the turbines were installed. Vestas estimates that the turbines produced in 2021 will avoid 532 million tonnes of emissions over their expected operational lifetime. In comparison the wind turbine estimates its 2021 annual Scope 1, 2 and 3 emissions at 100,000 tonnes, 3,000 tonnes and 10.5 million tonnes respectively.[2](#footnote-2) 

[Refer a friend](https://www.carbonrisk.world/leaderboard/)

Estimating the avoided emissions made by one firm is fraught with difficulty. Just ask the carbon credit market. One of the biggest risks there is over-crediting, i.e., more credits being issued than tonnes of CO2e avoided. The same challenges also apply to companies keen to take some credit for their Scope 4 emissions. The first question firms need to answer is what baseline level of emissions the new product is being compared against? Their previous product, the average emissions in the product category, or perhaps the previous technological solution (e.g. electric vehicles versus ICE)? Next, what assumption to make regarding the carbon intensity of the energy powering it? Charge that same efficient battery in South Africa or China and it will have much higher carbon emissions than if it is plugged into the grid in Canada or Norway. Another factor to consider is whether the new product or service will result in any rebound effects, perhaps offsetting any emissions saved as a result of the improvement. Unless businesses are employing a consistent approach across these and many other critical questions then it’s impossible to know (see *[The carbon tracking opportunity: Real time tracking of GHG emissions and carbon sinks is a huge growth market](https://www.carbonrisk.world/carbon-footprints/)*).[3](#footnote-3) 

Some companies might even consider using their Scope 4 emissions to obviate any obligation to address their Scope 1, 2 and 3 emissions. This is an absolute non-starter. Arguably, Scope 4 emissions should have already been accounted for under Scope 1, 2 and 3 emissions anyway, by some other firm, somewhere else in the economy. Nevertheless, the opportunity to realise and be rewarded for innovation with broad based net zero benefits has got many companies interested. Their own operations may be highly carbon intensive, but if they can point to the broader carbon benefits their products enable then they begin to look much more attractive, say for example, to sustainability orientated investors (see *['Green' lithium](https://www.carbonrisk.world/green-lithium/)*).[4](#footnote-4) 

Remember that the dominant sustainable investment strategy involves divesting from firms with a high emissions footprint, while re-directing capital towards companies with very low emissions, even if the scope for further reductions is negligible. Unfortunately this strategy of focusing on percentage emissions reductions, no matter the base level of emissions creates a misallocation of investment capital and results in unintended consequences.

Divesting from high emitting companies may increase their cost of capital, but in doing so it also reduces their incentive and ability to decarbonise. Instead of being shunned by investors for their adverse environmental impact, firms with an outsized Scope 4 emissions profile may be able to benefit from a lower cost of capital, helping them deliver products with carbon emission avoidance benefits to a much broader array of the global economy.

All too often critics point to the need for every single individual, company or government to pull their own weight, sharing in the burden of meeting net zero through cutting emissions. However, that isn’t necessarily the optimal way to achieve net zero. Carbon markets explicitly recognise that the most efficient way to achieve carbon abatement is by exploiting the lowest cost options first, with high cost emitters paying those more able to cut emissions.

Scope 4 emissions takes this one step further. It’s not only what you emit that counts, but what you enable others *not* to emit. Recognising the contribution played by Scope 4 emissions means putting a value on those avoided emissions.

[Growing the circle to get to net zeroAt Carbon Risk I’ve typically focused on supply side approaches when outlining the potential for technologies to cut emissions. For example, employing carbon capture to reduce the emissions associated with the production of cement, employing innovative feedstocks to cut the emissions from grazing livestock, and using renewable energy to extract and process lithium, gold, and other metals in a less carbon intensive way.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-137.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/89b074a8-3dd1-43d4-b34a-3b7090bdf22c_694x575.png)](https://www.carbonrisk.world/the-foundations-of-a-circular-economy/)

---

1. https://www.wri.org/insights/do-we-need-standard-calculate-avoided-emissions [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.mirova.com/sites/default/files/2023-05/Call-for-Expression-of-Interest-global-avoidance-factor-database.pdf [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. The challenge involved in estimating Scope 4 emissions hasn’t stopped investment institutions trying to develop a consistent methodology for estimating them and so enabling Scope 4 to be integrated at a company level. In May, a group of eleven investment institutions launched a call for expressions of interest (closed 16th July) to develop a database on Scope 4 emissions https://www.mirova.com/sites/default/files/2023-05/Call-for-Expression-of-Interest-global-avoidance-factor-database.pdf [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. Note that the same principles might also apply to a country seeking to decarbonise. Take Indonesia. How should it balance the need to cut emissions by replacing its coal fleet with renewables versus the avoided emissions resulting from nickels use in electric vehicle batteries? [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### Repost: Everything you need to know about China's national carbon market
URL: https://www.carbonrisk.world/repost-everything-you-need-to-know/
Last updated: 2025-08-21T10:37:47.000Z
*Over the past few months I have reposted a number of articles from the Carbon Risk archives. The subscriber base for Carbon Risk has grown significantly over the past year and so many current readers probably haven’t seen some of the earlier articles. Many of the posts are arguably even more relevant now than the day they were first published. Following that theme, this months repost focuses on China’s national carbon market which recently passed two years since its launch in July 2021.*

*China’s carbon price hit a record high of 72.85 yuan per tonne last week. The price of emission allowances have surged by over 40% since April as the government has encouraged obligated emitters (>2000 eligible power generators) to secure sufficient allowances by the end of 2023\. In order to avoid last minute volatility power stations are being encouraged to cover 85% of their annual emissions by 15th November.*

*Equivalent to \~€9.30 per tonne, China’s carbon market is clearly a long way short of the €85-90 per tonne that carbon allowances trade for in the EU. The 10-fold difference is likely to become ever more important as the EU’s carbon border tax (CBAM) is gradually introduced beginning in 2026\. China is expected to be one of the most heavily exposed countries to the trade in carbon intensive products to Europe. The policy is likely to accelerate plans to expand China’s ETS to industrial sectors such as steel manufacturing.*

*As this article serves to highlight, China’s unique design of emissions trading scheme is designed in a way that can result in very different outcomes than conventional schemes such as the EU ETS for example. As recent trends suggest, China’s market is entirely consistent with new coal powered plants being constructed.*

---

China hosts the world’s largest carbon market by emissions. One year ago, almost to the day, trading in carbon allowances began changing hands.

Over 2,100 liable coal and gas power stations participate in the compliance scheme, covering about 4.5 billion tonnes carbon dioxide (CO2e) per year - around 40% of China’s total annual emissions.

China’s allocation of emissions allowances is based on emissions intensity - each allowance represents the right to emit one tonne of CO2e. Allowances are allocated according to actual production levels of coal and gas fired power plants (e.g. kWh of electricity generated) and predetermined emissions intensity benchmarks (e.g. CO2/kWh).[1](#footnote-1) 

This is very different from the approach taken by other emissions trading schemes (ETS) such as the EU’s where there is an absolute emissions cap. The design of the ETS is in line with China’s decarbonisation ambitions under its Nationally Determined Contribution (NDC), which includes a 65% reduction in carbon emission intensity (carbon emitted per yuan of GDP) by 2030, versus 2005 levels.

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### Playing with fire
URL: https://www.carbonrisk.world/playing-with-fire/
Last updated: 2025-08-21T10:37:48.000Z
The latest COT report (w/e Friday 11th August) shows that investment funds increased their short position by 4.9 million EUAs verus week earlier to 11.3 million EUAs.

It’s dangerous to be too heavily exposed to lower carbon prices this time of year. The risk of a heatwave leading to higher power prices, the annual cut in auction volumes during August, coupled with low futures market liquidity and you’ve got a recipe for some long green candles on the daily charts. Oh, and throw in concerns about an LNG strike the other side of the world for good measure (see [*No room for complacency: Gas supply worries jolt Europe's energy markets*](https://www.carbonrisk.world/gas-spike-jolts-european-energy-markets/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/ba6ddd1e-3aca-4985-be5d-2e74fee70cda_1467x658-1.png)

The decline in the net short position was a function of funds cutting their long exposure, while also increasing their short positions. The overall short position is now at its highest level since early June when funds were short 40-44 million EUAs, albeit only for a couple weeks. Putting those two weeks aside and the current short position is the biggest its been since November 2021.

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### 'Greenflationary' expectations revisited
URL: https://www.carbonrisk.world/greenflationary-expectations-revisited/
Last updated: 2025-08-21T10:37:48.000Z
Despite signs that inflation may have peaked in Europe, investors are naturally fearful that another bout may be lurking around the corner.

Expectations over the future direction of inflation are pivotal in determining investor allocation between various assets - cash, bonds, equities, currencies, commodities, etc. Nevertheless, asset markets tend to be at their most vulnerable when there is a surprise rise in inflation.

Unexpected inflation often leads to lower expected future cash flows for business, particularly as it is usually associated with economic weakness. Unexpected inflation also typically leads to higher risk premiums which serve to reduce equity valuations. Unexpected inflation, especially when it is high and volatile is a potent source of economic uncertainty.

For some investors, government policy focused on meeting net zero, particularly rising carbon prices is likely to be the source of the next rise in inflation (see [*'Greenflationary' expectations*](https://www.carbonrisk.world/greenflationary-expectations/)).

So should investors be concerned?

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### Carbon market vigilantes
URL: https://www.carbonrisk.world/the-carbon-bond-vigilantes/
Last updated: 2025-08-21T10:37:49.000Z
> *"I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a . 400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody."*

\- James Carville, political adviser to President Clinton

One of the challenges that investors must face in managing an exposure to carbon markets is anticipating how governments will respond in the face of political pressure to water down their commitments when the going gets tough. In economic terms, investors run the risk of ‘time-inconsistency’, i.e. that governments will behave inconsistently over time, promising to maintain a strong carbon price today, but relent when circumstances change tomorrow.

Any market that is heavily influenced by government policy is exposed to the risk of time-inconsistency. For climate policy, the risks are especially pronounced since the costs are borne today, yet the gains lie many years into the future and are subject to high uncertainty. A future where the men and women in charge of the incumbent government may have long since been voted out of office, let alone still in the employment of seeking power and influence.

Building on this idea, I first introduced my model for how to think about the price of carbon in [*Carbon is an emerging asset class, but what is it?*](https://www.carbonrisk.world/the-carbon-price-is-the-currency/). In the article, published in January 2022 I outline why the carbon price in a regulated compliance market is best thought of as a currency, one built on trust that the government will remain committed to a strong carbon price, even when political considerations might steer them otherwise:

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### Everything you need to know about enhanced weathering
URL: https://www.carbonrisk.world/everything-you-need-to-know-about-a66/
Last updated: 2023-08-08T11:00:52.000Z
Over the past few months I have created a number of deep dives into the most important engineered carbon removal technologies: biochar, bio energy with carbon capture and storage (BECCS) and direct air capture (DAC) - see [here](https://www.carbonrisk.world/char-grilled/), [here ](https://www.carbonrisk.world/beccs-the-carbon-removal-chimera/)and [here ](https://www.carbonrisk.world/direct-air-capture-dac-will-determine/)if you missed them or want to remind yourself how they compare.

In the final post in this series I’m going to focus on enhanced weathering. In short, enhanced weathering involves accelerating the natural geological process whereby carbon dioxide is mineralised into rock.

Before we get into the detail though here's a quick recap on why carbon removal technologies are so important, their relationship with emission trading schemes, and the key characteristics to look out for.

Almost all of the 2 Gt of CO2 currently sequestered each year comes from ‘conventional’ methods such as afforestation, reforestation and management of existing forests. In contrast, only 0.002 Gt CO2 per year is currently sequestered using engineered carbon removal.

The latter may only account for a tiny fraction of overall carbon removal today, but that will need to change significantly over the next three decades. For we cannot simply rely on conventional, nature-based carbon removal if we are to meet net zero targets. The *Global Warming of 1.5 ºC* report from the Intergovernmental Panel on Climate Change (IPCC) states that “all pathways that limit global warming to 1.5°C with limited or no overshoot project the use of carbon dioxide removal.” The IPCC report estimates that the world will need cumulative carbon removal in the order of 100–1,000 Gt CO2 over the 21st century.[1](#footnote-1)

It’s important to keep an eye on how carbon removal technology is developing. Not only because it is in demand from corporations wanting to invest in removing their current (and even their historical emissions), but also because regulated carbon compliance schemes such as the EU and UK ETS’ are in the process of considering how best to incorporate such carbon removals. If approved, some of these carbon removal methods will be used alongside cuts to emission allowances in meeting regulated compliance targets, providing a strong government backed tailwind to their adoption (see [*Reflexivity and the EU ETS 'Endgame'*](https://www.carbonrisk.world/reflexivity-and-the-eu-ets-endgame/)).

Demand for engineered carbon sequestration solutions is high because of their long-term durability relative to nature-based (‘conventional’) solutions and the lower requirement for ongoing monitoring. Nature based carbon removal benefits accrue over several decades or more, but risk being undone due to fire or illegal logging. On the other hand, engineered carbon removal projects typically sequester carbon much more rapidly and with much less risk of subsequent release (see [*Technology-based carbon removal credits crucial if net-zero targets are to be met*](https://www.carbonrisk.world/technology-based-carbon-removal-credits/)).

That being said, it would be unfair to characterise engineered carbon removal technologies as all offering very similar attributes. Each technology delivers carbon removal and sequestration across a spectrum of durability, requirement for ongoing monitoring and challenge involved, overlap with natural processes, risk of subsequent release, current cost, potential scalability, knock-on impacts on energy or land use, degree of co-benefits, and potential unintended consequences.

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With that recap complete, let’s get into the detail on enhanced weathering.

When CO2 combines with rainwater it forms carbonic acid. As it falls from the sky and interacts with soil and rock it mineralises into a stable carbonate form. Naturally occurring rock weathering typically takes thousands of years to sequester carbon, but once completed the carbon is locked away for hundreds of thousands of years, with a corresponding very low risk of the carbon being re-released back into the atmosphere. Natural rock weathering absorbs around 0.3% of global greenhouse gas emissions.

Using a variety of techniques, including spreading crushed silicate rocks on farmland, enhanced weathering speeds up this natural biological process, reducing the time it takes to sequester the carbon to a matter of years. enhanced weathering relies on the most reactive rocks (e.g. silicate rocks such as basalt that are rich in calcium and magnesium) and the quarrying industries for rock mining, grinding and spreading the crushed mineral. Since rocks such as basalt and the industries that depend upon it are well-established across the globe, enhanced weathering has the potential to be highly scalable.

How much does enhanced weathering cost? Recent estimates from academics led by the University of Sheffield put the global cost of enhanced weathering at around $75-250 per tonne CO2\. That puts enhanced weathering firmly in the same cost bracket as BECCS and DACCS, but slightly more expensive than biochar (see [*BECCS - the carbon removal chimera*](https://www.carbonrisk.world/beccs-the-carbon-removal-chimera/)).

On a regional basis the difference in costs reflects the relative difference in the price of labour, diesel and electricity. Enhanced weathering is estimated to cost $160-190 per tonne CO2 in North America and Europe, versus $55-120 per tonne CO2 in less developed but no less large emitters such as China, India, Mexico, Indonesia, and Brazil.[2](#footnote-2)

Although basalt is one of the most widely available minerals on the planet, and is applicable to most agricultural conditions, the main limiting factor in terms of developing its economies of scale is transporting the basalt from the quarry and then spreading it on the field. The longer the distance the less likely the economics stack up, and the more likely that the emissions associated with transportation overwhelm the carbon removed from the atmosphere.

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Unlike BECCS, enhanced weathering does not rely on sourcing significant quantities of biomass, and placing a potentially unsustainable burden on land and agricultural resources. There is an energy cost involved with pulverising the rocks down to the required level (thought to be around 10-30% of the amount of carbon sequestered), but this could be reduced using renewable energy generation. Besides, the energy demands pale into insignificance compared with those required to suck carbon out of the atmosphere using direct air capture (see [*Scrubbing the skies: Direct Air Capture (DAC) offers a scalable route to net zero*](https://www.carbonrisk.world/direct-air-capture-dac-will-determine/)).

In contrast, enhanced weathering also provides certain co-benefits that only biochar can begin to compete with. Silicate rocks such as basalt act as soil enhancers when spread on agricultural land: reducing the need for fertiliser, reversing soil acidification, and cutting nitrogen oxide emitted from the land. The benefits from enhanced weathering don’t stop there. The bicarbonate ions created by enhanced weathering eventually wash out into the ocean where they promote ocean de-acidification. Crustaceans use the calcium carbonate to construct their shells which eventually fall to the seabed to form carbonate rocks like limestone. Once people begin to account for the value of those co-benefits, the net cost of enhanced weathering is likely to decline even further.

The same academic research also estimates that enhanced weathering has the potential to sequester between 25-100 Gt CO2 over a period of 50 years. This means that enhanced weathering could remove up to 10% of the cumulative 1,000 Gt of CO2 which the IPCC estimates is at the high end of that required to stay within the carbon budget. At \~0.5-2 Gt of CO2 per year, enhanced weathering has a similar potential for carbon removal as DAC, BECCS or biochar (see [*Char grilled: Why biochar is the most promising carbon removal technology*](https://www.carbonrisk.world/char-grilled/)). Meanwhile, the countries with the greatest potential to utilise enhanced weathering as a form of carbon removal are those that have extensive land area devoted to crops, as such, China, the USA and India have the largest opportunity to use enhanced weathering for carbon removal.

The enhanced weathering process is nothing new, except in the past farmers have only focused on the soil improvement attributes. There is a long history of applying crushed limestone to arable land, reversing the acidification of the soil that can result from the intensive use of fertiliser. For example, Brazil, Malaysia and parts of Africa have been spreading crushed basalt on highly weathered agricultural land for over 100 years. The fact that enhanced weathering has been used in the past, and continues to be used today does give some confidence that the risk of unintended consequences on the environment, particularly marine ecosystems, can be minimised.

One of the main challenges involved with scaling enhanced weathering is accurately monitoring, reporting and verifying (MRV) the carbon sequestered. It really is only DAC that can currently offer a precise quantity of carbon captured from the atmosphere. Balancing the competing demands for cost, frequency and accuracy, academics have proposed a combination of expensive yet accurate radioactive measurements plus inexpensive yet convenient alkaline water measurements. As the value of the carbon removal method begins to be realised, expect to see a lot more investment into improving the MRV process (see *[The carbon tracking opportunity: Real time tracking of GHG emissions and carbon sinks is a huge growth market](https://www.carbonrisk.world/carbon-footprints/)*).[3](#footnote-3) 

Enhanced weathering is beginning to be recognised by investors and corporates wanting to meet their climate commitments. In December 2022, Finnish verification body Puro.earth published the world’s first carbon removal methodology based on enhanced weathering. It means that enhanced weathering projects can now be rewarded financially for each tonne of carbon sequestered, selling ‘CO2 Removal Credits (CORCs)’ to corporate buyers wanting to compensate for their carbon emissions while also contributing to scaling up this powerful form of carbon removal. In mid-2023 enhanced weathering credits were reportedly offered at over $500 per tonne.[4](#footnote-4)

BECCS and DACS get all of the headlines when it comes to carbon removal. In contrast, enhanced weathering and biochar tend to be forgotten or misunderstood. Yet the latter provide some of the best opportunities to scale carbon removal without any adverse impacts on energy consumption or land and resource use.

When it comes to carbon removal, all four engineered carbon removal solutions will be required to meet net zero. However, it makes sense to focus on those methods that work in tandem with existing natural processes, rather than placing even higher demands on that which is already under pressure.

---

1. https://www.ipcc.ch/sr15/chapter/spm/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://oro.open.ac.uk/71197/8/71197.pdf [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://pubs.acs.org/doi/10.1021/acs.est.3c03757 [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://www.qcintel.com/carbon/article/enhanced-rock-weathering-credits-offered-at-up-to-536-t-14332.html [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### Thermal coal's Coasian bargain
URL: https://www.carbonrisk.world/coals-coasian-bargain/
Last updated: 2025-08-21T10:37:49.000Z
As a source of energy, thermal coal has many advantages: availability, affordability, reliability, and security.

These are by far the most important characteristics of any energy source, especially for economies in the early stages of their development. Historically, it is only at later stages in their development that citizens pressure their government for cleaner forms of energy (see [*Prosperity bends the curve*](https://www.carbonrisk.world/the-environmental-kuznets-curve/)).

Recent history in the developed world suggests that thermal coal can persist as a dominant energy source long after cheaper and cleaner sources of energy are available. For example, economies that are heavily reliant on thermal coal generation often face strong resistance to change from workers and the communities they depend on.

This is also a factor today for many countries heavily dependent on coal, despite the potential to switch to a greater share of renewable generation. The average age of active coal plants in Asia is estimated to be around 13 years, compared with well over 30 years in Europe and North America. If these relatively young coal assets are allowed to continue to operate until the end of their designated operating lifespan they will spew many millions of tonnes of carbon dioxide into the atmosphere.

The thermal coal supply chain (i.e., mining firms, power stations, equipment-makers and the banks that finance them) is often owned or controlled by the state. That means there is little incentive for the government of the day to introduce sweeping changes, lest they face the wrath of their citizens. Incentives being as they are there is little point in the domestic coal industry attempting to be more efficient, or moving away from the status-quo.

Although flexible generation like coal has a role to play in balancing grid demands as intermittent solar and wind generation take on an increased share of the generation mix, the development of storage and demand side options will mean this role is increasingly obsolete over time. In addition, having coal assets on the books of utilities is increasingly resulting in financial institutions demanding a higher cost of capital - an obstacle in the way of investing in decarbonisation.

Price signals, or the lack of them, are also important. Apart from Europe and a few other jurisdictions, carbon prices are either non-existent or too low to have an impact on the relative cost of generating electricity using coal versus natural gas or renewable energy. Many countries in Asia (including China, Indonesia, Vietnam, etc.) are highly dependent on thermal coal, and have either introduced carbon pricing, or are in the process of doing so. For the most part though, carbon prices remain well below levels necessary to stimulate a gradual phase out from coal (see *[Why Asia is pivotal to future carbon market growth](https://www.carbonrisk.world/why-asia-is-pivotal-to-future-carbon/)*).[1](#footnote-1)

Even if carbon prices were introduced at a level that could theoretically move the needle, there is no guarantee that it actually will bring about change. Thermal coal generation is often heavily insulated from market forces, whether that’s through long-term contracts such as power purchase agreements, or other policies that insulate domestic coal prices from global markets. The think tank RMI estimates that 93% of the world’s coal plants are insulated from market forces through just these kinds of policies.[2](#footnote-2) 

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**The Coasian bargain**

As regular readers of Carbon Risk will know, I typically focus on the role that carbon markets have in decarbonising the economy and helping investors navigate the various markets. A carbon price seeks to internalise the cost of the negative externality associated with exceeding the available carbon budget. The approach is often associated with the economist Arthur C. Pigou and is ideally set at the marginal social cost of carbon. In doing so, carbon prices provide an incentive to decarbonise in the most efficient way possible, recognising that there are other demands for scarce resources, and that governments (or some other central body) are unlikely to be able to allocate capital (via infrastructure, innovation, etc.) as well as the private sector.

However, there is another way of thinking about carbon risk and how capital can be used to move the economy towards an efficient outcome.

Its a bit controversial. Let’s dive in.

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### Consumer carbon offset market faces a knowledge gap
URL: https://www.carbonrisk.world/consumer-carbon-offsets-faces-a-knowledge/
Last updated: 2025-08-21T10:37:50.000Z
When you think of carbon offsets and individual consumers, what normally comes to mind are airlines giving passengers the option to offset the emissions involved with jetting off on holiday, or taking a business trip. Other parts of the travel industry, such as the hotel sector, have begun offering carbon offsets to their customers. By and large though, offering carbon offsets has been the sole preserve of the travel industry.

That could change during the rest of the decade as other industries tap into increased consumer willingness to pay for the carbon cost of the products and services they consume. According to recent research by Deloitte, the food, transportation and entertainment industries are prime candidates to offer carbon offsets to their customer base.

The consultancy believes that spending on carbon credits by consumers in developed economies could hit $115 billion per year by 2030\. To put that in some kind of perspective, the total value of the voluntary carbon market in 2022 was a mere $2 billion. If their 2030 projection becomes even remotely true it would mean that direct consumer purchases of carbon credits will become the primary driver of funding towards carbon avoidance and removal. Here’s Deloitte’s rationale behind their estimate:[1](#footnote-1)

> “About 40% of US consumer spending on goods and services could incorporate an option to purchase carbon offsets, particularly in the categories of food, transportation, and entertainment. If only 0.5% of these expenditures include a supplemental offset, Americans could spend US$21.3 billion a year to mitigate the environmental impact of their purchases by 2030, adjusting for expected inflation. If other developed economies mirror these habits, their consumers could collectively pay US$115 billion to offset goods and services at decade’s end.”

Remember that an optimal Pigouvian tax (of which carbon pricing is an example) is where the full marginal cost of the negative externality (i.e. the social cost of carbon or the cost of carbon abatement) is passed through to the final consumer. By making the cost of the associated emissions transparent to the consumer, he or she can then make an informed decision about whether to purchase a less carbon intensive product or not, and / or push the company selling it to decarbonise more rapidly.

So bearing that in mind, how does Deloitte’s projection stack up against other indicators of market demand for carbon offsetting by individuals, their willingness to pay, and crucially how much they actually pay when it comes to the crunch? Consumers may say they are willing to stump up for the cost of carbon when questioned in a survey, but that doesn’t necessarily mean they actually will when it comes to handing over their payment details at the till.

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### Utility player
URL: https://www.carbonrisk.world/utility-player/
Last updated: 2025-08-21T10:37:50.000Z
Hydropower is perhaps the most vulnerable form of energy generation to climate change.

In some of my earliest articles for Carbon Risk ([here ](https://www.carbonrisk.world/the-forgotten-giant-of-clean-energy/)and [here](https://www.carbonrisk.world/megadrought/)), I highlighted how drought conditions in Europe were something that carbon market participants needed to keep an eye on. Last summer, European utilities were forced to reduce hydropower output in the face of very low reservoir levels. Together with French nuclear outages, hydro’s weak performance was one of the most important factors that contributed to the surge in power prices, and a switch towards more carbon intensive forms of energy generation.

Hydropower generated 15% of global electricity production in 2022, producing almost one-quarter more electricity than solar and wind together, according to data from Ember. Despite an overall increase in power generation over the past two decades, hydropower has not been able to keep up with the underlying growth in global electricity demand, and as such, it has seen its share of the global generation mix gradually decline from 18% in 2000.[1](#footnote-1)

The global hydroelectric capacity factor (the amount of electricity produced per year divided by the installed capacity) has declined from an average of 38% during the period 1990-2016 to about 36% during 2020-2022, according to the International Energy Agency (IEA). That two percentage point drop in the capacity factor might not sound very much, but overall it means that some 240 TWh less zero carbon electricity is generated each year than would otherwise be the case.[2](#footnote-2)

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### Exponential
URL: https://www.carbonrisk.world/exponential/
Last updated: 2025-08-21T10:37:52.000Z
> *“Our society is being propelled forward by several new innovations - computing and artificial intelligence, renewable electricity and energy storage, breakthroughs in biology and manufacturing. These innovations are improving in ways that we don’t yet fully understand. What makes them unique is the fact they are developing: at an exponential pace, getting faster and faster with each passing month.”*

\-, author of Exponential: Order and Chaos in an Age of Accelerating Technology

Azeem’s book, *Exponential* seeks to provide some context to the overwhelming feeling that innovation is accelerating, creating turmoil across industries, while drastically altering our expectations about what the future might bring. One of the emerging technologies identified in the book is renewable energy generation, in particular solar and wind power.

According to data compiled by Ember, solar and wind accounted for 12% of global power generation in 2022, pushing up the share of clean energy (renewables, nuclear, hydro, bioenergy, etc.) to almost 40%. Meanwhile, solar and wind electricity generation met 80% of the incremental electricity demand growth in 2022.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/89dcdbe9-6240-4627-b8e6-965c548be714_824x552-4.png)

The speed at which these two generation sources are changing the electricity generation mix is astounding. In every region, solar and wind power is making inroads into the share previously held by fossil fuel generation. Not all regions are moving at the same speed, but everyone is moving in the same direction.

Europe was the first to start on the journey towards high levels of solar and wind generation, it’s share rising to over 15% in 2022\. However, it’s no longer the leader. Over the past few years Oceania has overtaken Europe, as capacity in Australia has ramped up. In contrast, Africa and the Middle East remain significantly below the global average, but even there the speed of adoption is accelerating (see [*In the shade: Europe's solar power does not get the credit it deserves*](https://www.carbonrisk.world/under-the-shade/)*)*.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/bed771a7-3479-44da-b08e-b8c1ae49e64b_821x504.png)

Indeed, there are signs that the growth in solar and wind especially is bringing us close to a tipping point, one where global power sector emissions are about to start a long period of decline. In a report published in April, Ember predicted that this could happen as soon as this year. The question then becomes, what happens next?[1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/2ee9cd9a-7cb8-4735-adc5-2091f3482e86_826x516.png)

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### Repost: The sword of inelastic supply cuts BOTH ways
URL: https://www.carbonrisk.world/repost-the-sword-of-inelastic-supply/
Last updated: 2025-08-21T10:37:52.000Z
*Workers in Europe are about to leave their desks behind, and depart for the beaches of the Med, bracing themselves for the brutal heatwave afflicting much of southern Europe. For Europe’s carbon traders looking to escape the volatility for a couple of weeks, the EU carbon market often has other ideas. As my post from twelve months ago makes clear, August is rarely quiet for those still monitoring the action in the market.*

*The period from late July and into mid-August is often one of the most bullish periods of the year for EU carbon prices. Every summer there is a risk that a heat wave will induce a spike in energy prices. Last summer, high temperatures and drought meant high power demand but also low hydro and nuclear power generation. The halving in EUA auction volumes during the month of August provides the tinder for market volatility to ensue.*

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---

The EU carbon market is no stranger to volatile prices.

Compared with other commodity markets, EU carbon market volatility tends to be significantly higher than crude oil or coal, and broadly comparable with natural gas (see [*Weighing the value of carbon price predictions*](https://www.carbonrisk.world/how-accurate-are-commodity-price/)).

Over the past four weeks EU carbon prices have surged by almost one-third, hitting a new record high just shy of €100 per tonne. However, over the past two days carbon has dropped €10 per tonne to around €90 per tonne.

What explains the current bout of volatility?

The supply of EUA’s is essentially fixed in the short-term. Auctions take place daily according to a predetermined [calendar](https://www.eex.com/fileadmin/EEX/Downloads/Trading/Calendar/Auction%5FCalendar/EEX%5FAuction%5FCalendar%5F02.03.2022.pdf?ref=carbonrisk.world). Auctions are paused between 21st December and 10th January but otherwise they continue throughout the year. In August auction volumes are cut by 50%, reducing the primary supply of EUA’s onto the market. Overall then the supply of EUA’s is likely to be highly price inelastic, and especially so during August.

If you combine this with parabolic increases in natural gas and power prices then even a small increase in demand can result in a sharp rise in the price of carbon. Utilities seek to hedge their future power generation by either purchasing allowances, or by hedging that requirement using the carbon futures market (D1 to D2 in the chart below).

Up until recently the focus was on natural gas, but over the past few weeks its been European power prices that have stepped into the limelight, but for all the wrong reasons. A combination of low hydro generation, nuclear plant maintenance in France, logistical issues related to the River Rhine and strong demand due to high temperatures have supported electricity prices.

Nothing we didn’t know before the summer break. What has changed though is that the whole of the forward curve - both for power and natural gas - has jumped sharply higher. This means that utilities need to consider their hedging requirements for next winter and the winter beyond, especially if they may need to burn more thermal coal in order to meet demand.

The EU carbon market has also been in somewhat of a political vacuum with policymakers having long since downed tools for the summer. Without any new news on the “Fit for 55” package or the RepowerEU proposal, and in the absence of ‘forward guidance’ from EC politicians, carbon prices have been left with only one way to go.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/22bc7d75-ee4f-4000-bbf5-92c4e0fc6ce7_457x398-2.png)

However, as former Goldman Sachs commodity trader, likes to say, “The sword of inelastic supply is very sharp and it cuts BOTH ways”.

If compliance buyers or other market participants (e.g., financial institutions) are constrained in some way then carbon prices may reach a point at which only a small amount needs to be sold for the market to quickly move sharply down (D2 to D1).

For example, an extended shutdown by industrial emitters could result in them offloading EUA’s or closing their hedges. Industrials may also seek to cash in their allowances if they are capital constrained.

Compliance entities have also been caught out by the high collateral requirements involved with hedging. As the price of carbon goes higher, the more collateral needs to be put down in order to hedge any position. If utilities are capital constrained in some way then there may be no way for them to hedge their forward generation.

EUA auctions resume in September, albeit the fortnightly volume will drop from 22.25 million EUAs to 21.89 million EUAs. That will improve the supply situation for EUA’s, while also reducing the angle of the supply curve (S1 to S2), which could reduce price volatility.

In the end it is the European energy market that will ultimately determine where on the inelastic supply curve the demand curve will intersect.

European energy prices are exhibiting these parabolic movements due to extreme scarcity, and the perception that it is going to become even more acute. As the price moves along the parabola it holds very little in the way of signal, only noise.

And so the message is buyer beware. The sword of inelastic supply is very sharp and it cuts BOTH ways.

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[No room for complacencyTen months ago the European benchmark Dutch TTF front-month gas contract reached an all-time high above €340 per MWh. As of a week ago European natural gas prices had slumped more than 90% as European gas inventories surged. Natural gas inventories are estimated to be around 70% full, well on schedule to achieving the EU’s target of filling storage to at least 90% by 1st November. A slump in industrial demand for natural gas and the lack of any sustained demand for LNG from Asia helped support stock levels, soothing the worries of gas traders concerned about next winter.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-144.png)Carbon RiskPeter Sainsbury![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/18fbe36d-aef4-44f0-b536-0059bb399eaf_1920x1032.png)](https://www.carbonrisk.world/gas-spike-jolts-european-energy-markets/)
### Subject to further consultation
URL: https://www.carbonrisk.world/subject-to-further-consultation/
Last updated: 2025-08-21T10:37:53.000Z
The UK government did everything right to establish net zero credibility.

The UK was the first major economy in the world to pass laws to end its contribution to global warming by 2050\. The UK Climate Change Act (CCA) of 2008 stipulates ‘legally binding’ interim and long-term (2050) targets for emission reductions. Meanwhile, the Committee on Climate Change (CCC), the independent monitoring entity, has the authority to advise and monitor the governments performance on a regular basis. The government have a legal obligation to regularly obtain and respond to the CCC’s advice.

There are three distinct types of commitment device used in carbon markets: legislation, delegation and securitisation. Enshrining net zero into law and delegating responsibility (albeit some, but not all) ticks off two of the boxes required. The third commitment device, *securitisation*, was met when the UK ETS launched in May 2021 (see [*Commitment issues*](https://www.carbonrisk.world/commitment-issues/)).

That credibility was at least partly reflected in the strength of the UK’s emissions trading scheme and the price of it’s carbon allowances (UKA’s). Over the first 18 months or so of the UK ETS, the UKA price traded at an average premium of \~10-15% to the EUA price.

However, as Benjamin Franklin said, “It takes many good deeds to build a good reputation, and only one bad one to lose it.”

From a peak of around €120 per tonne in late August 2022 (a premium of almost 50% over EUA’s), the price of UKA’s had slumped to €60 per tonne by late June 2023 (a discount of \~33% to EUA’s). Unfortunately, a sequence of poor judgements and weak guidance towards future policy support left the market bereft of credibility.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/fba1fbff-bf3d-40f4-95ec-c609ef7a8e0b_1075x505-1.png)

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### The disunited state of American power generation
URL: https://www.carbonrisk.world/the-disunited-states-of-american/
Last updated: 2025-08-21T10:37:54.000Z
The overall carbon intensity of US electricity generation has declined by around one-third during the 21st Century, from 538 grams of CO₂ emitted per kilowatt-hour (gCO2 per kWh) in 2001 to 367 gCO2 per kWh in 2022\. The US compares favourably to the global average (436 gCO2 per kWh), but still has some way to go to match that of the EU (277 gCO2 per kWh).[1](#footnote-1)

Although we often interpret developments in the United States in the aggregate (especially for analysts based elsewhere in the world), it’s important to look at developments on a state-by-state basis. Here the map below reveals a patchwork of progress towards the decarbonisation of power sector emissions. This map plus the one that follows was put together by based on underlying data sourced from Ember Climate. I encourage you to check out the interactive maps and charts [here](https://hannahritchie.com/data-explorer-us-electricity/?ref=carbonrisk.world).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/be0965b6-56c5-4c66-a0bd-8b2bfe995b76_779x595-1.png)

The Northeast state of Vermont generated 100% of it’s electricity from renewable sources in 2022\. Only three other states generated at least three-quarters of their electricity from renewables: South Dakota, Washington and Idaho. At the other end of the scale four states are barely edging towards 5%: Kentucky and West Virginia (70%-90% reliant on thermal coal), Delaware (\~90% natural gas), and Puerto Rico (\~50% oil fired generation).

Each state is blessed with certain resources - either below or above the ground - that make them more or less likely to burn coal (West Virginia), install solar panels (California), or build dams to harness the power of water (Vermont). Permitting, transmission infrastructure, and interconnection issues also play a major role in determining the speed at which renewable energy capacity can be rolled out, and these are often dealt with differently state-by-state.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/d64cbf24-e874-4f37-a3b5-aa2d3dbd1bb8_773x616.png)

Individual states are also subject to a certain basket of policy measures that play a major role in determining what generation type utilities are likely to pursue. For example, tax credits designed to encourage the growth in renewable capacity, feed-in-tariffs guaranteeing higher electricity prices for renewables, or cap-and-trade schemes that seek to price out carbon intensive generation. Despite this, almost half of the growth in renewable electricity generation since 2000 is thought to be due to one policy - Renewable Portfolio Standards (RPS).

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### Run out of steam
URL: https://www.carbonrisk.world/run-out-of-steam/
Last updated: 2025-08-21T10:37:55.000Z
Last week, the International Maritime Organisation (IMO) agreed to reduce the carbon intensity of international shipping by 40% by 2030, compared with 2008 levels. Governments also agreed to cut total global shipping emissions by at least 20% by 2030, (with an ambition to cut by 30%), reach 70% by 2040 (but striving for 80%), and reach net zero “by or around” 2050.[1](#footnote-1)

It’s worth noting that although the IMO is a branch of the UN, global shipping emissions are excluded from the Paris climate agreement. The reason relates to shipping’s notoriously complex ownership structures whereby ships are often registered in one of a handful of small countries (e.g. the Marshall Islands, Liberia, and Panama), owned in another country (e.g. Greece, South Korea, China etc.), but commissioned by someone else entirely (often commodity exporting nations such as Brazil, Argentina and South Africa or major trading economies like China’s).

Prior to last week’s negotiations, the best the IMO could agree on was a halving in emissions by 2050 compared with 2008 levels and an aspirational goal of net zero. The revised strategy does represent an improvement (i.e. interim targets for 2030 and 2040), however the pace of the decline and the absence of stricter targets falls short of what is required to meet the 1.5°C target set out in the Paris accord. For that to be achieved global shipping emissions must fall 45% by 2030 and reach net zero by 2050 according to the UN.

One of the most important mechanisms to decarbonise shipping to run-aground in the negotiations was a shipping levy on marine fuel. Described as a “maritime GHG emissions pricing mechanism” in the IMO’s strategy paper, the levy will undergo further review over the next few years, but it now looks unlikely that it will be introduced before 2027 at the earliest.

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Marine fuel oil will need to face an *average* carbon price of almost $200 per tonne (€180 per tonne) in order to reach net zero by 2050, according to a report published by the Getting to Zero Coalition, an industry group led by the think tank Global Maritime Forum (GMF):[2](#footnote-2)

> In order to achieve 50% GHG emissions reduction by 2050 compared to 2008 (-50% scenario), the carbon price level averages US$173/tonne CO2\. For a 2050 target of full decarbonisation (-100% scenario), the average carbon price would only need to be slightly higher: around US$191/tonne CO2\. In both scenarios, according to the model, the price level begins at US$11/tonne CO2 when introduced in 2025 and is ramped up to around US$100/tonne CO2 in the early 2030s at which point emissions start to decline. The carbon price then further increases to US$264/tonne CO2 in the -50% scenario, and to US$360/tonne CO2 in the -100% scenario.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/066217b1-778f-47ba-a6a2-31bdf064cbab_1053x361-2.png)

GMF indicated that the carbon price could be half that level if revenues from the levy were ‘recycled’ to further support the decarbonisation of shipping. The ultimate decision on how much can be ‘recycled’ is a political one as funds are also going to be required to help less developed countries manage the cost of the transition:

> Depending on the level of revenue recycling, an MBM \[market based measure\] with global scope in the -100% scenario could be designed to have a carbon price level averaging between US$96-191/tonne CO2 and reaching a maximum of between US$179-358/tonne CO2.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/89149764-13b8-48e0-adca-0aa628dc1ab8_1224x417.png)

Barriers to switching to zero carbon alternatives in the shipping sector are immense, and unlike other sectors much of the investment needs to go into infrastructure that individual shipping companies have little or no control over. The GMF report estimates that some 87% of the $1.4-1.9 trillion in investment required to decarbonise needs to be directed at land based infrastructure. This includes hydrogen production, ammonia synthesis and storage/distribution.

Despite the disappointing outcome, the IMO’s shipping levy proposal isn’t the only carbon pricing initiative to hit the shipping industry.

Beginning in 2024, the maritime industry will be included under the EU ETS. Ships travelling within the EU (intra-EU voyages) will be required to pay for all of their emissions, while for voyages to or from a non-EU destination, half of the emissions will be covered. Vessel operators will need to purchase EUAs amounting to 40% of their emissions in 2024 (payable by April the following year), 70% in 2025, and reaching 100% of 2026 emissions (see [*Putting a cap on European shipping emissions: The maritime sector is beginning to price in EU carbon prices*](https://www.carbonrisk.world/putting-a-cap-on-european-shipping/)).

Due to come into effect one year later, the FuelEU Maritime regulation sets annual targets for the GHG intensity of energy used onboard by a ship or pool of ships. Starting at -2% in 2025 (compared to a 2020 baseline), the emissions intensity target rises to -14.5% in 2035, through to -80% by 2050\. A bit like Low Carbon Fuel Standards (LCFS), FuelEU Maritime issues a penalty or reward based on the extent of under or overperformance relative to the annual target ([*Everything you need to know about Low Carbon Fuel Standards (LCFS)*](https://www.carbonrisk.world/everything-you-need-to-know-about-792/)).

European regulations help to influence investment decisions elsewhere in the world at the margin. However, the absence of a global price on shipping emissions means that the cost of decarbonising the sector is likely to be much higher in its absence. The greater the degree of participation among countries, the more likely it is that private sector capital can be allocated to the most efficient decarbonisation technologies. There is little incentive to build out the long term infrastructure necessary if each region faces significantly different price signals.

With vessels expected to enjoy 20 to 30 years of service before being scrapped, the shipping industry are looking to 2050 right now. Any delay in implementing a levy risks low carbon technologies being left to flounder, and less carbon efficient ones being locked in.

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[The 'sailing ship' effect and the energy transitionThe ‘sailing ship’ effect – also known as the ‘last gasp effect of obsolescent technologies’ - occurs where competition from new technologies stimulates improvements in incumbent technologies and the firms that produce them. For example, the advent of steam power inspired the makers of sailing ships to innovate, transform…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-146.png)Carbon RiskPeter Sainsbury![](https://images.unsplash.com/photo-1512418583934-7d7df6317b64?ixlib=rb-4.0.3&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)](https://www.carbonrisk.world/the-sailing-ship-effect-and-the-energy/)

---

1. https://www.imo.org/en/MediaCentre/PressBriefings/pages/Revised-GHG-reduction-strategy-for-global-shipping-adopted-.aspx [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.globalmaritimeforum.org/content/2021/12/Closing-the-Gap\_Getting-to-Zero-Coalition-report.pdf [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
### BP's emissions trading scheme
URL: https://www.carbonrisk.world/bps-emissions-trading-scheme/
Last updated: 2025-08-21T10:37:56.000Z
BP is often derided for vacuous slogan’s like “Beyond Petroleum”. However, the oil major was a pioneer in implementing unconventional ideas that have since been instrumental in cutting emissions.

In a speech at Stanford University in May 1997, BP CEO John Browne (now Lord Browne) announced that BP would reduce its greenhouse gas (GHG) emissions, becoming the first oil and gas major to formally recognise climate change and the contribution played by burning fossil fuels. In September 1998, BP set a target of cutting emissions 10% below 1990 levels by 2010, broadly consistent with national emission reduction proposals considered at the time as part of the Kyoto Treaty.

One of the main tools the company established to help achieve this collective goal was an internal emissions trading system. BP's individual business units were to be allowed to trade emissions credits between themselves, the theory being that by doing so they would find the most efficient way of cutting emissions and meeting BP’s overall emissions target.

There were of course other motivations behind the launch. First, BP was looking to gain an advantage over their competitors, gaining experience using mechanisms which they suspected might form the foundation of future nationwide programs. Second, BP’s executives were hoping to demonstrate that an ETS would be more effective and more economical than any of the alternatives, such as a carbon tax or product standards.

It’s hard to imagine right now, but in late 1997 as diplomats were preparing to meet at Kyoto, the United States was proposing an international ETS. The US of course had experienced the benefits of implementing an ETS following its use in cutting sulphur dioxide emissions from power plants (see [*The great sulphur dioxide allowance bull market*](https://www.carbonrisk.world/hero-to-zero/)). In contrast, the EU wasn’t even considering carbon trading at the time, instead putting forward a complex array of policies and measures.

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### Resolving The Green Paradox
URL: https://www.carbonrisk.world/the-green-paradox/
Last updated: 2025-08-21T10:37:56.000Z
The conventional argument behind the introduction of climate policies (such as carbon pricing, subsidies for renewable energy, and energy efficiency), is that consumers of energy will respond by switching over to lower carbon energy sources and becoming more energy efficient. Meanwhile, producers of fossil fuels, who now expect demand for their product to decline in the future, will respond by cutting production and instead, invest in alternative, low carbon sources of production.

But is that really how the market works? There is an argument that climate policy announcements could have exactly the opposite impact to that intended, at least when looking at it from a global perspective, and considering carbon emissions are a global problem that is the only perspective that matters.

Let’s dive in.

_This post is for paying subscribers only._
### Is a repeat of 2021 on the cards for California's carbon market?
URL: https://www.carbonrisk.world/is-a-repeat-of-2021-on-the-cards/
Last updated: 2025-08-21T10:37:56.000Z
A major compliance deadline in the California carbon market is approaching in November 2024\. The race to secure sufficient emission allowances could spark the next big upward move in the state’s carbon price.

Normal procedure requires obligated entities to surrender Californian Carbon Allowances (CCA’s) equal to 30% of the previous year’s verified emissions by the start of November. However, CCA’s equal to all remaining emissions must be surrendered by November in the year following the last year of a compliance period.

California’s carbon market is now in its fourth compliance period (2021-23), which means that obligated entities must deliver sufficient CCA’s to cover the entire compliance period (minus those already delivered) by 1st November 2024\. The last time this happened was of course in November 2021, at the end of the third compliance period (2018-2020).

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### Repost: Banking on 'blue carbon'
URL: https://www.carbonrisk.world/repost-banking-on-blue-carbon/
Last updated: 2025-08-21T10:37:57.000Z
*Governments and corporations are beginning to realise the value that marine ecosystems provide as a carbon sink, an economic growth engine, and a source of coastal protection.*

*In July 2022 I published an article on the economic value that mangroves, tidal marshes and seagrass meadows provide, while also delving into the nascent market for ‘carbon credits sourced from the ocean’.*

*A recent study undertaken by Stanford University on the small South American country of Belize has gone one step further and quantified the economic value that mangroves provide. The researchers hope that the study will help encourage other countries to develop their own ‘blue economy’, while also helping to meet their Nationally Determined Contributions (NDC’s).[1](#footnote-1)*

*In comparison to other nature-based carbon projects that have suffered weaker prices and integrity concerns, blue carbon credits have seen strong demand. For example, a recent auction of 50,000 carbon credits tied to the Delta Blue Carbon Project (DBC-1) in Pakistan, the world’s largest mangrove restoration project, achieved an average price of $29.72 per tonne of CO2\. This was broadly in line with prices achieved at a much larger auction of credits from the same project last November (see [Under the hammer](https://www.carbonrisk.world/blue-carbon-under-the-hammer/)).*[2](#footnote-2)

*My original article was published behind the paywall, but considering the timeliness of the issues raised I’ve decided to remove it for the benefit of all Carbon Risk subscribers. I hope you find it useful and please leave a comment.*

---

![](https://images.unsplash.com/photo-1632807515528-ddd9967acb94?ixlib=rb-1.2.1&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)

Photo by [David Clode](https://unsplash.com/@davidclode?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/s/photos/mangrove-forest?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

In previous articles I’ve written about the planet’s carbon removal scarcity problem, why competition for land and commodities means that nature based carbon credits need to rise, and why technological solutions may ultimately be required to meet net-zero targets.

We can push the envelope of carbon removal options even further. Just off the coast, and deep beneath the water lie other sources of natural capital that can be exploited to sequester carbon from the atmosphere.

‘Blue carbon’ as it’s known includes mangrove forests, tidal marshes and seagrass meadows.

According to the United Nations Educational, Scientific and Cultural Organization (UNESCO), blue carbon assets are among Earth’s most efficient absorbers and long-term repositories of carbon.

For example, mangrove forests can store more than 1,000 tonnes of carbon per hectare, more than four times the amount sequestered by terrestrial forests. Seagrass can suck up even more, ingesting 15 times as much carbon per year for the same area of forest.

Alongside seaweed farming, protecting and restoring these marine ecosystems could reduce global carbon emissions by as much as 1.4 billion tonnes of CO2-equivalent emissions annually by 2050, according to the World Resources Institute (WRI).[3](#footnote-3)

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**Underwater blues**

These coastal and marine ecosystems store more carbon than terrestrial ecosystems. However, they are just as vulnerable to damage as land-based natural capital assets. Infrastructure development, land-use conversion and poor waste management are all factors that can damage blue carbon assets.

Disturbing a hectare of mangroves releases as much carbon as cutting down between 3 and 5 hectares of tropical forest. Mangroves are thought to be eroding at about 2% per annum, while seagrasses are estimated to be disappearing at a rate of between 2% and 7% per year.

Unlike other blue carbon assets, much less is known about changes in tidal marsh acreage. Whist tidal marshes have been mapped on a local and national level, no attempt has been made to map the distribution and extent of tidal marshes on a global level, preventing any accurate estimate of overall decline rates.

![winding river across plains under downcast ssky](https://images.unsplash.com/photo-1550498178-466f87328eaa?ixlib=rb-1.2.1&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)

Photo by [Brian Sumner](https://unsplash.com/@bmsumner?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/s/photos/salt-marsh?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-149.png)

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**The blue carbon wealth of nations**

Seagrass beds are found in all regions, from cold polar waters to the heat of the tropics. Tidal marshes are also found across the globe, but are most commonly located in temperate areas including North West Europe and Australia. In contrast, mangroves are typically confined to tropical and sub-tropical areas.

The three countries generating the largest positive net blue carbon contribution for the world are Australia, Indonesia and Cuba (see [*Africa's "green superpower"*](https://www.carbonrisk.world/africas-green-superpower/)). However, not all countries are in the same position to benefit from this blue carbon wealth, reflecting the different stages in project development of the three blue carbon assets.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/31184100-f8f5-4855-8394-0c2c5e0e5d47_2063x1041.png)

Covering almost 50 million hectares, blue carbon assets also help protect vulnerable coastal communities from extreme weather (e.g. reducing the risk of flooding), regulate water quality and provide a haven for seafood production. These co-benefits are significant and especially attractive to buyers of carbon credits.

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**Blue carbon financing beginning to bloom…**

Blue carbon is a relatively new addition to the list of nature-based assets able to generate carbon credits. It was only in 2015 that offset certification company Verra published its first [methodology](https://verra.org/methodology/vm0033-methodology-for-tidal-wetland-and-seagrass-restoration-v1-0/?ref=carbonrisk.world) to give credits to tidal wetland and seagrass restoration, before expanding its rules to cover [wetland conservation](https://verra.org/first-blue-carbon-conservation-methodology-expected-to-scale-up-finance-for-coastal-restoration-conservation-activities/?ref=carbonrisk.world) in 2020.

So far, mangrove restoration is the most advanced kind of blue carbon credit project. The main projects centre on Africa and include ecosystems in Kenya, Senegal, and Madagascar. Indonesia, India and Colombia have also seen investment.

![green grass under water during daytime](https://images.unsplash.com/photo-1629215833475-7d88001b7448?ixlib=rb-1.2.1&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)

Photo by [Benjamin L. Jones](https://unsplash.com/es/@boardshortsben?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/s/photos/seagrass-meadow?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

Overall, although some 20% of the world’s mangrove forests are likely to qualify for blue carbon financing[4](#footnote-4), only around 10% are thought to be financially sustainable as a blue carbon investment based on a carbon price of $5-$10 per tonne over a 30-year period (see *[Nature-based carbon credit prices need to rise](https://www.carbonrisk.world/nature-based-carbon-credit-prices/)*).[5](#footnote-5)

Mangrove carbon credits issued by projects located in Asia and Central America were being offered in the $13-$35 per tonne range as recently as October 2021\. However, blue carbon credit prices appear to have softened along with the rest of the carbon credit market. As of April 2022 blue carbon credits typically sold for around $10 per tonne, according to Plan Vivo, another offset certification company with prices varying from as low as $2 per tonne all the way up to $20 per tonne depending on the degree of co-benefits included (see [*Plumbing the depths of the VCM*](https://www.carbonrisk.world/plumbing-the-depths-of-the-vcm/)).

There is far less activity involved in developing seagrass meadows and tidal marshes, partly reflecting data issues and other challenges. Australia, one of the three ‘blue carbon’ superpowers and home to about one-third of the plant’s tidal marshes will be hoping to rectify these issues as quick as possible if it is to steal a share of the market.

Interest in blue carbon credits tends to be especially strong from the shipping and tourism sectors, i.e. those businesses that have the greatest direct impact on marine ecosystems. But interest is growing from all corporates looking to offset their emissions and meet their net-zero commitments. Part of the reason is that blue carbon credits are seen as particularly high quality because of their carbon sequestration potential and their co-benefits.

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**…but questions remain as to how far they can be scaled**

Although blue carbon projects do not appear to have any adverse impacts on human development (such as reducing land use available for growing crops), it’s still unclear whether or not there are long-term side-effects. For example, it’s unclear whether their large scale development would undermine marine life elsewhere, or create other unintended consequences. The fact that these projects lie in areas which can be difficult to access complicates the ability to monitor their progress.

Related to this is the question of permanence. Underwater assets have the advantage of not going up in smoke at the first sign of hot, dry weather but they face their own risk such as whether a storm would uproot the blue carbon asset, releasing the carbon stored within the soil. For unlike land-based forests which store most of the carbon within the actual tree, blue carbon assets sequester and store the captured carbon in the soil lying beneath them (see [*The planet's carbon removal scarcity problem*](https://www.carbonrisk.world/scaling-up-a-scare-resource/)).

Blue carbon credits appear to offer a bankable route to carbon removal and storage, avoiding many of the pitfalls plaguing land nature-based carbon projects. Mangrove offset projects in particular are ready to take the next step to wider acceptance. As with nature-based offsets located on land, those countries that are able to monetise their natural ‘blue carbon’ capital may gain a crucial first mover advantage.

[Natural capital markets: Putting a price on natureCarbon markets are just the start of a revolution putting a price on nature. Whether its the deforestation of our rainforests, the leakage of waste plastics into the ocean, or the destruction of the coral reefs by pollution, the damage being done to our natural ecosystem is becoming clearer by the day.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-150.png)Carbon Risk](https://www.carbonrisk.world/natural-capital-markets-putting-a/)

---

1. https://www.nature.com/articles/s41559-023-02081-1 [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://tribune.com.pk/story/2422073/carbon-credits-auction-for-pakistan-mangrove-project-oversubscribed [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://www.wri.org/insights/turning-tide-ocean-based-solutions-could-close-emission-gap-21 [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. Carbon credits can only be issued when a project proves its additionality, i.e. it would not exist in the absence of carbon finance. [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
5. https://www.sciencedirect.com/science/article/pii/S0960982221001354 [↩](#footnote-anchor-5 "Jump back to footnote 5 in the text.")
### Everything you need to know about Australian Carbon Credit Units (ACCUs)
URL: https://www.carbonrisk.world/australias-reformed-safeguard-mechanism/
Last updated: 2025-08-21T10:37:58.000Z
Australia’s new carbon market, the revised Safeguard Mechanism, launches this coming Saturday, 1st July.

For an in-depth review of how it works, the companies most likely to be affected, and the prospects for decarbonisation of the Australian economy, check out [*Australia's carbon market reforms get the green light*](https://www.carbonrisk.world/australias-carbon-market-reforms/).

This article looks in more detail about one particular aspect of the market - Australian Carbon Credit Units (ACCUs). ACCU’s are generated when qualified entities carry out activities that avoid or remove carbon emissions. Each ACCU is equivalent to one tonne of CO2e. They can then be sold to obligated emitters who are struggling to meet their target emission reduction.

It’s important to note that there is no single ACCU price. Just like the carbon credits that exist in the voluntary carbon market, ACCU trade across a range of different prices and depend upon the underlying methodology, the degree of co-benefits, and the relative balance between demand and supply for those credits.

Before we get to how the supply of ACCU’s will evolve under the revised Safeguard Mechanism, lets look at where ACCU supply has come from over the past few years.

_This post is for paying subscribers only._
### Collateral damage revisited
URL: https://www.carbonrisk.world/collateral-damage-revisited/
Last updated: 2025-08-21T10:37:59.000Z
Four days after the Russian invasion of Ukraine I published [*Collateral damage*](https://www.carbonrisk.world/collateral-damage/). In the article I discuss the main factors investors need to pay attention to when considering how the crisis could impact the EU carbon market:

> No market is immune from a crisis, no matter how compelling the underlying fundamentals may be.  
>  
> Rather than closing your eyes and hoping for the best, it is my intention in writing this article to illustrate some of the risk factors to be aware of. Even the most unlikely scenarios have a non-zero chance of occurring. It would be foolish for investors not to consider them in their analysis. As things unfold I will return to cover each in detail to update you on where things stand.  
>  
> There are four channels through which the Ukraine-Russia war could impact EU carbon prices - financial, economic, political and social. Each channel varies in its immediacy and ferocity of impact, and the potential legacy it may leave in its wake.

Lets take a look at each of these four channels in turn.

In less than one month, the EU carbon price collapsed from almost €100 per tonne in early February 2022 to \~€60 per tonne. Once the initial market volatility subsided, turmoil in the continents energy markets continued to have an impact on many of Europe’s utilities, with some putting their hedging activities on ice as market liquidity evaporated and margin calls soared. For now at least it appears that the battle to stop markets from boiling over appears to have been contained.

During the first few weeks after the invasion the term on everyone’s lips was “demand destruction”. It seemed inevitable that the spike in energy prices would cause a nasty recession. In the end, governments stepped in to help support households and businesses through the ‘energy crisis’, alleviating the worst fears. However, with European manufacturing data showing signs of renewed weakness in early summer 2023, it doesn’t look like we’ve seen the last of the economic impact.

Europe’s political leaders were quick to reiterate their support for the EU carbon market in the weeks after the invasion. Later in 2022, member states even succeeded in raising the level of ambition while also signing off on the worlds first carbon border tax - the CBAM. It wasn’t all plain sailing though. The debate around raiding the Market Stability Reserve (MSR) to help fund an acceleration in the bloc’s energy transition raised concerns that they would undermine one of the foundations of the EU carbon market.

Although I describe each of the three factors separately, it’s clear that they are inextricably linked.

Lets turn our attention to the fourth, the social impact. It’s here where the impact is felt last, but from which the biggest impact on the EU carbon market may eventually reverberate from. Here’s how I describe some of the social issues to watch out for back in February 2022:

> It is now common knowledge that Europe receives a significant share of its energy needs from Russia, and potentially at the whim of one man, President Putin. Turning its back on Russian energy will inevitably result in higher European energy prices. That will come at a cost, one which the European public may be unwilling to bear.  
>  
> The real test will be changing public opinion.  
>  
> Will EU member states be prepared to ramp up their support for households and businesses hit by high energy costs? In the long run, open ended subsidies by the state increases sovereign debt risks.  
>  
> Will EU citizens recognise the impossible trinity at the heart of net zero, and now favour energy security and affordable energy versus net zero? The shock from recent geopolitical events are likely to reverberate long after the conflict comes to an end, whenever that may be.

From the perspective of EU climate policies and the EU ETS, the most important location to monitor for signs of social disturbance is Germany. High energy prices have savaged German industry given its historical reliance on Russian natural gas, and the energy intensive nature of its industrial complex, although up until now at least the impact on unemployment has been muted (see [*Chemical reaction*](https://www.carbonrisk.world/chemical-reaction/)). The country has also experienced an influx of migrants from Ukraine seeking asylum, estimated to be almost 1 million in 2022, as well as from other countries, that is putting increasing strain on the country’s cities.

Meanwhile, support for climate policies is faltering in Germany as energy prices have increased, with many citizens increasingly critical of the governments approach. Continuing to phase out nuclear power generation in the midst of the energy crisis and recent proposals (since watered down) to ban the installation of gas or oil fired boilers in new homes has come in for particular criticism.

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### Invite your friends to Carbon Risk and unlock rewards 🎁
URL: https://www.carbonrisk.world/invite-your-friends-to-carbon-risk/
Last updated: 2025-08-21T10:37:59.000Z
Thank you for reading Carbon Risk — your support allows me to keep doing this work.

If you enjoy Carbon Risk, it would mean the world to me if you could invite your friends and colleagues to subscribe as well. Starting today I’m launching the Carbon Risk referral program. If the people you refer go onto subscribe to Carbon Risk (either free or paid), you will benefit from complementary access to the newsletter.

**1\. Share Carbon Risk 📢 :** When you use the referral link below, or the “Share” button on any of my articles, you'll get credit for any new subscribers to Carbon Risk. Simply send the link in a text, email, or share it on social media with your friends and colleagues. Directly copying and pasting the URL from your browser usually won’t include the referral ID. If you’re sharing links online, make sure the URL ends with **?r=16dij**

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**2.** **Earn benefits 🎁:** The more people who use your referral link to subscribe to Carbon Risk, the bigger the rewards.

- 🥉Get 1 month complementary access for **1** referral
- 🥈Get 3 month’s worth of complementary access for **4** referrals
- 🥇Get 6 month’s worth of complementary access for **7** referrals

Note: You can still benefit if you're already an existing paid subscriber to Carbon Risk. The complimentary paid subscription will be applied at the end of your current billing period.

**3\. Follow the leader board** 🏁**:** You can see how close you are to unlocking a reward on the referral leader board. Once you've reached a referral milestone, you'll receive an email with the reward.

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If you are relatively new to Carbon Risk please check out my post [*Celebrating one year of Carbon Risk 🎂*](https://www.carbonrisk.world/celebrating-one-year-of-carbon-risk/)in which I talk a bit more about my background, why I launched Carbon Risk and my highlights from the first year.

Don’t forget that I also offer a group subscription offer. Get a discount of 30% if you purchase two or more annual subscriptions to Carbon Risk. Click the button below to set up your group subscription.

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Finally, I’ve started to post more frequently on the Substack [Notes ](https://carbonrisk.substack.com/notes)feature. This is where I give the occasional quick take on carbon markets, quote some of the important bits of my work, and also highlight the work of other writers on Substack.

Thanks again for your support and helping to get the word out about Carbon Risk!

Peter

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-153.png)

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### Harnessing the invisible fuel
URL: https://www.carbonrisk.world/harnessing-the-invisible-fuel-to/
Last updated: 2025-08-21T10:38:00.000Z
We don’t demand energy for its own sake, but for what it enables us to do.

If energy is life, then we should be careful how we use it. Energy efficiency simply means using less energy to perform the same activity, eliminating waste.

The “invisible fuel” as energy efficiency is sometimes known as, provides some of the quickest and most cost-effective options to reduce energy consumption and cut carbon emissions. Done right, improving energy efficiency can help the environment while also reducing energy poverty.

Global energy efficiency progress, as measured by improvements in ‘energy intensity’, compares energy use to the overall output of the economy. Over the past decade, energy intensity has improved by 1.6% per year on average, an acceleration from the 1% per year improvement during the previous decade.

Over the course of the 21st Century energy efficiency measures appear to have had a significant impact in curtailing carbon emissions that would have otherwise occurred. The International Energy Agency (IEA) estimates that energy efficiency has cut in half the CO2 emissions arising from fuel combustion resulting from population growth and rising incomes.[1](#footnote-1)

The acceleration in the electrification of the economy, especially from renewables, has been one of the main drivers of recent energy intensity improvements. As the share of renewables increases, energy intensity benefits from smaller heat losses during power generation. For example, the typical thermal efficiency for utility-scale electrical generators is 30- 40% for coal and oil-fired plants, and up to 60% for combined cycle gas-fired plants. In comparison, solar PV and wind generation are 100% efficient.

However, to be on track to reach the IEA’s Net Zero 2050 Scenario, global energy efficiency will need to roughly double to 4.3% per year by 2030\. In this scenario, the IEA project that energy efficiency will more than offset the upward pressure on emissions resulting from population growth and the expected increase in incomes.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c719fe53-c1db-4f2b-8b7e-c5d89f7c08ec_903x544-3.png)

During the energy crisis of 2022, global energy efficiency jumped to 2.2%. Given the speed at which wholesale energy prices escalated during 2022, you would be forgiven for thinking there would be a bigger improvement. Afterall, a sudden increase in energy prices to very high levels should prompt a big response from consumers.

However, by seeking to protect consumers and businesses from the impact of the energy crisis, governments have blunted the signal that high energy prices provides. The IEA estimates that governments spent $1.1 trillion in 2022 seeking to protect citizens and industry from the impact of the energy crisis - between two and three times normal annual subsidy levels (see [*Fuelling controversy: Fossil fuel subsidies act like a negative carbon price*](https://www.carbonrisk.world/everything-you-need-to-know-about-232/)).

Even if governments had done nothing to soften the blow, it’s doubtful as to whether it would have made a big difference to energy efficiency, at least in the short term. Remember that demand for energy is highly price inelastic. You might be more strict on your kids to turn the lights off, but you still need to cook food, and heat your home. Being more efficient with energy consumption takes investment, and that takes time.

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### Heat pumps on the factory floor
URL: https://www.carbonrisk.world/heat-pumps-on-the-factory-floor/
Last updated: 2025-08-21T10:38:01.000Z
Heat is the backbone of any industrial process.

Melting the steel that we need to build our bridges and trains, firing the cement kilns that provide the building blocks to construct our houses and offices, and the factories that heat the ceramics and glassware that we eventually eat and drink from.

Industrial heat accounts for \~20% of global energy demand. Around three-quarters of that heat is supplied using fossil fuels, primarily natural gas and coal and contributes around 10% of global greenhouse gas (GHG) emissions. In addition, industrial heat generates air and soil pollutants such as NOx, SOx and particulate matter.

It’s no wonder that industrial heat demand is a focal point for decarbonisation and pollution control.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a5fef451-8ae9-4755-a17e-d4cd6fcd50c3_799x749-1.png)

Temperature matters, a lot. The products that we commonly think of when it comes to industrial heat applications include steel, cement, glass and ceramics. Industries such as these require high temperatures (more than 400 °C, and over 1,000 °C for metal smelting) and account for about half of global industrial demand for heat.

However, there are a vast number of other industries that need heat to manufacture, but typically require significantly lower temperatures. As the chart below shows, one quarter of industrial heat demand is for temperatures below 100 °C, and includes industries such as food, paper and textile manufacture.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/1bc875d7-fb95-489c-9075-d44ea2bd9654_672x622.png)

Analysis examining the options available to decarbonise industry tends to focus on the high temperature manufacturing processes - steel, aluminium, cement, etc. Solutions tend to centre on investing in electric arc furnaces, hydrogen-based direct reduction ironmaking (H-DRI), powering aluminium smelters using nuclear or hydropower, and replacing natural gas with biomethane (see [here](https://www.carbonrisk.world/the-bridge-to-green-steel/), [here](https://www.carbonrisk.world/aluminiums-climate-paradox/), and [here](https://www.carbonrisk.world/rotten-returns/)). Many of these technologies are expensive, time consuming to implement, and untested on a commercial scale.

There is a technology that has been around for decades, one that has been used in many peoples homes that could offer an immediate solution to decarbonising industrial heat demand for those manufacturing sectors that rely on low temperature heat demand.

It probably hasn’t escaped you that heat pumps are getting a lot of attention at the moment. Although the technology was invented as far back as the 1850’s, they are increasingly being installed in homes to decarbonise residential heating. Much less well known is that there is a growing market for much heat pumps in difficult to decarbonise industrial sectors that use a lot of low temperature heat.

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### Carbon as an impact investment
URL: https://www.carbonrisk.world/carbon-as-an-impact-investment/
Last updated: 2025-08-21T10:38:01.000Z
ESG investing promised the opportunity to combat climate change while also earning strong returns for investors.

However, over recent years investors and regulators have questioned whether financial products under the ESG umbrella are actually helping the economy decarbonise. Meanwhile, greenwashing claims coupled with a political backlash, particularly in North America, has meant many investors have become disenchanted with the theme.

In contrast to some of the dubious claims peddled by ESG themed financial products, purchasing physical EU emission allowances (EUAs) is one of the few ways that investors can have a high degree of confidence that their actions are having a direct impact on the climate.

By buying one EUA, investors are withdrawing a carbon allowance from the market. This reduces the supply available to obligated emitters, preventing them from using it to emit one tonne of carbon into the atmosphere. At the margin, buying one EUA helps to drive up the cost of the remaining allowances, increasing the incentive to invest in decarbonisation.

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The SparkChange Physical Carbon EUA ETC (CO2) was launched on the London Stock Exchange in November 2021 and was the first opportunity investors had to gain direct exposure to physical EU carbon allowances. SparkChange subsequently launched the fund on exchanges in Mexico, Italy and Germany. At the end of May 2023 the fund held almost 1,450,000 EUA’s.[1](#footnote-1)

At the end of 2022, Kakubi was the first company to offer access to physical EUAs using blockchain technology. One KKB token equals one physical EUA. As of June 2023 Kakubi has vaulted just over 6,000 EUAs.[2](#footnote-2)

The total supply of EUAs that can potentially be used to meet compliance in a given year is known as the TNAC - the ‘Total Number of Allowances in Circulation’. On 15th May, the European Commission published data showing the TNAC for 2022 amounted to 1,134,794,738 EUAs.

The Market Stability Reserve (MSR) gradually withdraws 24% of the EUA’s from the TNAC every year, with a minimum of EUAs 200 million placed in the MSR each year. The MSR will continue to reduce the number of EUA’s entering the market until the TNAC falls below 833 million.

Overall, the number of EUA’s held within these funds represent a tiny fraction (0.128%) of the TNAC.

However, as the TNAC diminishes in size, and the EU ETS cap on emissions gradually declines towards zero in the 2030’s, the value of EUA’s held off the market by investors to those obligated emitters seeking to meet their compliance requirements is expected to increase.

Of course, unless investors wish to hold their physical EUA’s for perpetuity then at some point they are going to offload some or all of their holdings into the market. This additional supply of EUA’s will enable obligated emitters to emit carbon, and so you could argue that investing in physical EUA’s is merely delaying emissions, not stopping them completely. However, by restricting the supply, even by a little bit, investors are acting to encourage obligated emitters to cut their emissions sooner rather than later.

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The argument for investing in the EU carbon market using futures is much more nuanced.

In conventional commodity futures markets, speculators perform a much needed service for physical traders: providing a source of liquidity, while taking on risk from producer hedges. The reason why this works is that commodity producers tend to be on the short side (hedging their future production), while speculators dominate the long side.

In contrast to commodity markets, commercial activity in the carbon market is focused on the buy side - obligated emitters such as utilities and energy intensive industries look to the futures market to hedge their future carbon risk exposure. By buying and holding a EUA futures contract an investor is contributing to price discovery and is also in competition with both other investors and obligated emitters looking to hedge.

Buying an EUA futures contract allows an investor to benefit from appreciation in the EU carbon price (the negative roll yield notwithstanding), but they can’t claim that they are preventing carbon from being emitted into the atmosphere (see [*The arc of carbon’s curve: What does the carbon futures curve tell us and why is it important?*](https://www.carbonrisk.world/the-arc-of-carbons-curve/)).

Investors may ask why do I need to invest in the EU’s emission allowance market when one tonne of carbon emitted into the atmosphere has the same impact whether it is emitted in Europe, North America or Asia? Why not buy physical elsewhere in the world instead, perhaps where allowances are trading for a fraction of the price of those traded in the EU?

Although carbon dioxide is the same wherever you are in the world, emission allowances are not necessarily comparable. Investors in the EU carbon market can be confident that the total supply of EUA’s will not be diluted in the future.

Although there are mechanisms for dampening extreme price movements (i.e., Article 29a) and European member states recently agreed to to use the EU ETS to help fund REPowerEU, both of these mechanisms involve borrowing from future EUA supply. They do not involve the creation of additional EUA supply.

Remember that carbon markets are ‘The Currency of Decarbonisation’. Other carbon markets such as California’s, Australia’s, and others around the world are typically priced at a steep discount to the EU ETS to reflect the risk that policymakers will renege on their promises.

If you want to be sure your investment is having an impact on the climate then it pays to invest in the strongest ‘Currency of Decarbonisation’ there is. The EU ETS.

[Investing in the EU carbon market: 11 ways investors can gain exposureAsset management tends to operate on a “bucket” principle which describes a grouping of related assets. A low risk, low return bucket might include short-term Treasury bills, other bonds with a short-term maturity and cash. Meanwhile, a high risk bucket with volatile returns could be filled with frontier market equities, junior gold miners and crypto.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-156.png)Carbon Risk](https://www.carbonrisk.world/how-to-start-investing-in-the-eu/)

---

1. https://www.hanetf.com/product/30/fund/sparkchange-physical-carbon-eua-etc [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://kakubi.com/audit [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
### No room for complacency
URL: https://www.carbonrisk.world/gas-spike-jolts-european-energy-markets/
Last updated: 2025-08-21T10:38:03.000Z
Ten months ago the European benchmark Dutch TTF front-month gas contract reached an all-time high above €340 per MWh. As of a week ago European natural gas prices had slumped more than 90% as European gas inventories surged.

Natural gas inventories are estimated to be around 70% full, well on schedule to achieving the EU’s target of filling storage to at least 90% by 1st November. A slump in industrial demand for natural gas and the lack of any sustained demand for LNG from Asia helped support stock levels, soothing the worries of gas traders concerned about next winter.

The slump in natural gas prices was so deep that it provided a big incentive for utilities to switch from burning thermal coal and lignite to natural gas. Burning natural gas is of course significantly less carbon intensive than generating power using thermal coal or lignite. In response, demand for EUAs from utilities wanting to cover their emissions has waned.

In the week ending 2nd June Commitment of Traders (COT) data shows that investment funds had built up a record short position in the EU carbon market totalling 25.4 million EUA’s, traders betting that there was more fuel switching to come. The selling pressure was enough to push the carbon price below the $80 per tonne level, hitting levels which have offered support since early 2022.

However, a doubling in European natural gas prices over the past week has caused turmoil in the EU carbon market with the EUA price jumping \~€15 as funds looked to cover their short positions.

The initial spark was an announcement by Gassco, the Norwegian infrastructure operator, that it was postponing the restart of the Nyhamna gas processing plant from 21st June 15th July. A few days later the Dutch government announced that the Groningen gas field, the largest in Europe will permanently shutdown in October; ministers had previously announced that production at the field would end by 1st October 2024 at the latest.

The jolt has reawakened fears that a resumption in LNG cargo interest from north-east Asian buyers could put the European stock position at risk as we head towards winter.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/18fbe36d-aef4-44f0-b536-0059bb399eaf_1920x1032-2.png)

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The latest COT report (w/e Friday 9th June) shows that investment funds began to cut their record short position by 5.3 million EUAs to 20.1 million EUAs. By the end of last week carbon had rebounded to $87 per tonne breaking back up through the 200-day moving average and the 23 and 30-day exponential moving average.

Moving beyond those key technical indicators was enough to support further gains. Breaching the bullish wedge that had gradually formed since late February provided extra fuel for the upside. At the end of April I highlighted early June and the $80 level as a point to watch out for a rebound in the market (see [*Investment funds ditch carbon after failure to decisively breach €100*](https://www.carbonrisk.world/investment-funds-ditch-carbon-after/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7cec4bea-80a3-4637-be48-20383b877511_1480x660.png)

_This post is for paying subscribers only._
### Big Oil's bigger brothers
URL: https://www.carbonrisk.world/big-oils-bigger-brothers/
Last updated: 2025-08-21T10:38:04.000Z
When it comes to channelling the ire of environmental campaigners, the five major energy companies - BP, Shell, Total, Exxon and Chevron - tend to get all the attention.

They are easy targets of course; well-known consumer brands, ubiquitous physical targets, and a significant investor base. Despite the pressure imposed on these companies to change their ways and divest of their fossil fuel producing assets, it’s worth bearing in mind that collectively they only account for 15% of global oil and gas output (see [*Not just hot air?*](https://www.carbonrisk.world/not-just-hot-air/)).

When an oil or gas company divests, it doesn’t simply close their extractive business, sell the parts for scrap and move on to something greener. They will want to maximize the value they get for that asset by selling it onto the highest bidder. The oil and gas producing assets may no longer be on the books of Big Oil, it’s on someone else’s books.

Divestment campaigners may celebrate the victory, but it will be a pyrrhic one if the assets are simply transferred to a less accountable company with little need to pander to outside interests. All too often, it is the state-led national oil companies (NOC’s) that picks up the pieces left over as the private sector retreats.

And so, to really make a dent in global fossil fuel related emissions requires engaging with the NOC’s - the “hidden half” of the oil and gas industry. These state-led behemoths produce the majority of the worlds oil and gas, often operating in jurisdictions with weak environmental rules.

As the rest of the oil and gas industry gets shamed into slimming down, the power of the NOC’s is likely to grow.

However, as we’ll see, to paint all NOC’s in the same light would be a mistake. When it comes to the energy transition and reaching net zero, each NOC is exposed to very different incentives.

Lets dive in.

_This post is for paying subscribers only._
### Pipe dreams
URL: https://www.carbonrisk.world/pipe-dreams/
Last updated: 2025-08-21T10:38:05.000Z
The United States is set to become a carbon capture superpower later this decade, but it will need a massive expansion in its CO2 pipeline infrastructure if it is to reach its full strength.

The US is crisscrossed by \~4.2 million kms of pipelines, predominantly funnelling trillions of cubic feet of natural gas each year, as well as hundreds of billions of tonnes of liquid petroleum products.

In comparison, the length of pipelines dedicated to transporting carbon dioxide (CO2) are miniscule in comparison. In the US there is estimated to be \~8,500 kms of CO2 pipelines, primarily located in the Permian Basin, Texas. The nations CO2 pipelines currently transport 80 Mt CO2 each year, with the majority of the CO2 being used for enhanced oil recovery (EOR).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8bebb7d4-f34a-4645-9562-f631b233b89d_1269x713-2.png)

Pipelines are usually the cheapest way to transport CO2, especially when transporting large volumes. Transporting CO2 by onshore pipeline is estimated to cost \~$6 per tonne CO2 per km, while offshore pipelines cost \~$10 per tonne CO2 per km. Trucks and rail compete with onshore pipelines are more expensive but offer flexibility for the last mile, whereas ships can only really compete with pipelines once the distance travelled is greater than 800km.[1](#footnote-1)

Analysis from BNEF published last summer forecast that US carbon capture capacity (including emissions captured from power, industry and Direct Air Capture) will soar from some 20 Mt CO2 today, to 134 Mt CO2 by 2030 based on likely projects already announced (see [*The carbon capture superpower: The United States will dominate global CCUS capacity*](https://www.carbonrisk.world/the-carbon-capture-superpower/)). However, their projection did not take into account the likelihood for a bounce in capacity announcements following the announcements in the US Inflation Reduction Act (IRA).

Other analysts were much more aggressive in their outlooks. For example, [Rhodium Group ](https://rhg.com/research/climate-clean-energy-inflation-reduction-act/?ref=carbonrisk.world)projects that US carbon capture capacity will reach \~100 Mt CO2 in 2030, but could rise to \~300 Mt CO2 by 2035 as new capacity comes onstream. A separate analysis by researchers at [Princeton University ](https://repeatproject.org/docs/REPEAT%5FIRA%5FPrelminary%5FReport%5F2022-08-12.pdf?ref=carbonrisk.world)thinks carbon capture could grow much faster, rising to \~200 Mt CO2 in 2030 and to 450 Mt CO2 in 2035.

With the country’s carbon capture capacity projected to rise at least six-fold by the end of the decade, and perhaps as much as 40-fold by 2035, there is a pressing need to build out the country’s network of CO2 pipelines. With no means of transport, it doesn’t matter how much CO2 is sucked out of the sky or extracted from the chimney of a factory or power plant, it will be stranded.

_This post is for paying subscribers only._
### Repost: What are Carbon Contracts for Difference (CCfD)?
URL: https://www.carbonrisk.world/repost-what-are-carbon-contracts/
Last updated: 2025-08-21T10:38:05.000Z
*The German government announced this week that it is launching a €50bn Carbon Contract for Differences (CCfDs) scheme aimed at helping heavy emitting industries bridge the decarbonisation investment gap. As I outline in my article below from May 2022, CCfDs give those industries that requiring many decades to recoup an investment in decarbonisation sufficient certainty to plan long term and leverage funding.*

*Starting today (Thursday 8th June), industrial sectors like cement, steel, chemicals, glass and paper are able to submit initial submissions of interest with a deadline in two months.*

*German companies obligated under the EU ETS and looking to invest will then have to bid how much government support they need to avoid one tonne of CO2, i.e. what price of carbon do they need to make it worthwhile to decarbonise? Those companies that are able to decarbonise at the lowest cost will be awarded a 15-year CCfD and gain access to the funding pot. Much more detail* [*here* ](https://www.bmwk.de/Redaktion/DE/Artikel/Klimaschutz/klimaschutzvertraege-vorverfahren.html?ref=carbonrisk.world)*(in German).*

*The launch of the CCfD scheme can be seen in the context of Germany wishing to respond to the US Inflation Reduction Act (IRA) which has unleashed a bounty of tax credits to encourage the spread of decarbonisation technologies. However, in a European context other states are likely to be hostile to Germany’s plan, especially if they do not have sufficient funds in their government’s coffers to compete.[1](#footnote-1)*

*Finally, as I discuss below, the CCfD plan has both bullish and bearish implications for the EU carbon market - accelerating industrial decarbonisation, while also providing an incentive to maintain a high carbon price.*

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---

![gray building with smoke under white clouds](https://images.unsplash.com/photo-1477949547006-b5ca1efd0f09?ixlib=rb-4.0.3&ixid=M3wxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8fA%3D%3D&auto=format&fit=crop&w=1000&q=80)

Source: Photo by [Brina Blum](https://unsplash.com/pt-br/@brina%5Fblum?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/photos/rsrhoWJe8j0?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

We are going to be hearing a lot more about Carbon Contract for Differences (CCfDs) over the next few months.

As Europe looks to wean itself off Russian gas and accelerate its timetable for decarbonisation, CCfDs could be a powerful tool for unlocking investment in industrial decarbonisation, and in particular the uptake of green hydrogen technologies.

The revised [REPowerEU plan](https://ec.europa.eu/commission/presscorner/detail/en/ip%5F22%5F3131?ref=carbonrisk.world), launched last week, sets a target for 10Mt of green hydrogen to be produced in the EU by 2030, with plans for a further 10Mt to be imported. The combined 20Mt would require approximately 600GW of new wind and solar power, and 200GW of electrolysers. To support hydrogen uptake and electrification in industrial sectors, the Commission:

> “will roll out carbon contracts for difference and dedicated REPowerEU windows under the Innovation Fund to support a full switch of the existing hydrogen production in industrial processes from natural gas to renewables and the transition to hydrogen-based production processes in new industrial sectors, such as steel production.”

**What are Carbon Contract for Differences (CCfDs)?**

A Carbon Contract for Difference (CCfD) works by setting an effective guaranteed or “strike price” for CO2\. The strike price would be set at a level that covers the incremental capital (“capex”) and operating (“opex”) cost of the technology.

For example, assume a project developer (say a chemical producer looking to adopt green hydrogen) agrees on a CCfD with the government where the strike price is €90 per tonne. If at the end of the year the average annual EU carbon price was €70 per tonne the project investor would be guaranteed that for each tonne of avoided CO2 from the project, the government would provide the difference (i.e. €20 per tonne). If the average annual ETS price was at or above €90 per tonne, the project owner would not receive any payment in that year.

That’s an example of a one-way payment mechanism. Alternatively, the government could offer a two-way mechanism whereby the project owner would also be required to pay the government the difference in the event that the average annual ETS price is above the €90 per tonne strike price.

**Why do we need CCfDs?**

The carbon price is the ‘Currency of Decarbonisation’. Jurisdictions need to keep it high enough to incentivise investment in low carbon technology, but not too high that it becomes socially unacceptable.

Achieving a stable high price of carbon is one thing, but without the ability to hedge against future carbon prices it is very difficult to leverage the investment necessary to build-out the required capacity.

Carbon prices can be very volatile due to the fixed allowance supply and volatile demand. The supply of allowances is highly price inelastic which means that small changes in demand can result in large swings in the price of carbon.

That’s fine if you are able to trade it, but not so great for businesses that rely on the carbon price as a source of revenue (for example, by selling excess allowances), or to make their business commercially viable against more carbon intensive competitors. This is vitally important when investing in industrial decarbonisation since the level of funding required is enormous and given the lifetime of the assets involved, the investment is irreversible.

Currently, there is very little in the way of futures hedging in Europe further than three years. CCfDs enables very long-term carbon price hedges to be put in place, i.e. one that covers several years or more. The CCfD also allows the agent to hedge against adverse regulatory risk, of the kind that could occur in the event that a new government was elected and decided to rip up the entire existing climate change legislation. Unlikely perhaps, but not impossible. Being protected from carbon price volatility over the long-term means that the investment becomes a lot more bankable in the eyes of investors.

A secondary benefit of CCfDs is that they can be used by the government or institution to support and incentivise innovative, but untested technologies. For example, one technology might need higher levels of support in the early years, but less later on in the contract period. This is especially important as the variable costs of novel technologies cannot be known in advance. This could take the form of the government or institution offering a higher strike price early in the contract in return for public investment in the project, giving rights to a share of the profits in the longer term.

CCfDs also act as commitment devices for governments and institutions to keep the price of carbon high and stable. If it were to fall then that represents a cost which the government will need to pick up and recompense the project developer as part of the contract. Equally, the government have an incentive to ensure carbon prices are broadly stable, as otherwise the potential future cost to the government is more difficult to predict and budget for.

**Potential downsides to CCfDs**

One argument against CCfDs is that they could interfere in the functioning of the carbon market. The argument being that the existence of CCfDs would result in less trading in the longer dated carbon futures market and existing forward markets, damaging price discovery and making it more costly for other market participants to hedge their risks.

The risk of that occurring is probably overstated. CCfDs exist to enable hedging over periods of several years or more. As I mention earlier, the private sector does not currently offer the ability to do that, apart from isolated deals by large utilities hedging the future compliance related carbon exposure of their power generation.

Another argument is the existence of information asymmetries. This could make it difficult for governments to gauge the true cost of bidding technologies and the required carbon strike price. In theory the private sector - perhaps as part of a competitive bidding processes - will arrive at a more realistic price estimation of the true cost. However, the private sector may not be in a position to stump up the initial capital required to accelerate ‘learning-by-doing’ efficiencies - which can rapidly lower costs as markets becomes more established.

CCfDs are a powerful tool. By leveraging and reinforcing existing regulations and the powerful signal that high carbon prices provides, CCfDs should accelerate industrial decarbonisation. Their adoption will create opportunities for investors, eager to benefit from investing in the decarbonisation of steel, chemicals, cement and other large emitting sectors of the economy.

[Get 20% off a group subscription](#/portal/signup)

[Celebrating one year of Carbon Risk 🎂Dear Carbon Risk subscribers, In the summer of 2021 I left my job as an economist, a position I had worked in for over a decade, with the dream of writing for a living. Full of optimism and brimming with ideas, I spent the next couple of months attempting to write a second edition of my book, ‘![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-160.png)Carbon Risk](https://www.carbonrisk.world/celebrating-one-year-of-carbon-risk/)

---

1. The only other European country to introduce CCfDs, albeit in a limited way is the Netherlands https://carbon-pulse.com/128571/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
### Carbon credits - a permission to pollute, or a signal to decarbonise?
URL: https://www.carbonrisk.world/carbon-credits-a-license-to-decarbonise/
Last updated: 2025-08-21T10:38:06.000Z
The common refrain by critics of the voluntary carbon market is that by doing, or at least appearing to do good for the environment, carbon credits give companies the ‘moral license’ to carry on polluting the atmosphere, warm in the fuzzy glow that they can wave a certificate showing they have planted some trees.

In short, a licence to pollute.

But does the narrative around carbon credits fit the facts?

_This post is for paying subscribers only._
### Scrubbing the skies
URL: https://www.carbonrisk.world/direct-air-capture-dac-will-determine/
Last updated: 2025-08-21T10:38:07.000Z
In the summer of 2025, a facility in Texas is due to come on stream that could mark a step change in the business of carbon removal.

The facility, known as DAC-1 is operated by Occidental Petroleum and is located in the Permian Basin, Texas. DAC-1 will extract 0.5 Mt CO2 per year directly out of the air and then either be pumped underground for permanent storage, or it will be used for Enhanced Oil Recovery (EOR).

The project was due to begin in 2024 but supply chain issues have pushed the start date back one year. Eventually, the plant will be able to extract 1 Mt CO2 per year.

Up until now I’ve tended to focus on nature-based forms of carbon removal (e.g. afforestation, mangroves, etc.), and hybrid techniques that combine both technology and natural processes to capture carbon from the atmosphere (e.g. biochar and BECCS). In contrast, Direct Air Capture (DAC) is the only form of carbon removal that is completely technology based (see [*Char grilled: Why biochar is the most promising carbon removal technology*](https://www.carbonrisk.world/char-grilled/)).

Despite concerns from some quarters that DAC is a dangerous diversion, deflecting attention from cutting emissions first before resorting to carbon sequestration, rolling out DAC capacity is crucial if we are to decarbonise a number of hard-to-abate sectors, such as aviation and potentially other sectors too (see [*Blending in: Decarbonising air travel with 'sustainable' fuel*](https://www.carbonrisk.world/come-fly-with-me/)).

Furthermore, unlike other forms of carbon removal, DAC offers the potential to be almost infinitely scalable. The resource requirements in terms of land are minimal compared with BECCS or biochar. Access to zero carbon baseload power is the main factor determining it’s effectiveness, and as innovation hots up, and the number and size of DAC plants increases, their energy efficiency is expected to improve significantly.

Lets dive in.

_This post is for paying subscribers only._
### Commodity markets begin to price carbon risk
URL: https://www.carbonrisk.world/commodity-markets-begin-to-price/
Last updated: 2025-08-21T10:38:08.000Z
I was recently invited to contribute an article on carbon pricing and commodity markets to the inaugural edition of Commodity Insights Digest (CID). The CID is a publication of Bayes Business School - City, University of London, in association with Premia Research LLC. You can find a link to my article [here](https://www.bayes-cid.com/pdf/issues/2023-summer/publications/CID%20Summer%202023%20Sainsbury%20052923.pdf?ref=carbonrisk.world) \- also printed in full below. I also encourage you to sign up for a subscription to the CID journal [here](https://www.bayes-cid.com/subscribe/?ref=carbonrisk.world).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/cb1d85f8-361a-4256-97a1-f18ede435a65_642x736-2.png)

**Abstract**

The rise of carbon markets and the increased cost of compliance is forcing commodity markets to respond. The carbon risk facing commodity markets is acute, including (a) the emissions associated with the extraction, refining and combustion of fossil fuels, (b) the energy required to dig and process ore into metal, and (c) the risk of deforestation and high emissions associated with carbon intensive agriculture. In addition to the increased regulatory burden, companies are having to face up to much greater scrutiny as to the provenance and the emissions associated with their products. But as this *CID* article also demonstrates, the commodity industry is not sitting idly by. Companies across various commodity industries have a rich capacity to innovate in the face of these new and emerging pressures. 

---

The science of climate change argues that there is a limit to how much additional carbon dioxide that can be pumped into the atmosphere, known as the carbon budget. Go over this limit and it’s likely that the negative impacts from climate change may accelerate, with each additional threshold leading to non-linear impacts.

In response to this threat, signatories to the 2015 Paris Agreement have backed a long-term target of limiting global average temperatures to “well below 2°C”, requiring emissions to reach net zero by 2050.

The tragedy of the commons means that no single emitter is incentivized to cut their emissions. In the absence of a reason for markets to self-correct, the sensible solution is to price carbon emissions. A carbon price sends a signal to consumers about which goods and services are carbon-intensive; it signals to producers of products and services which inputs and activities they should switch towards to reduce their carbon costs; and it signals to innovators and entrepreneurs that demand for low carbon alternatives are likely to rise.

There are two ways in which governments can introduce a price on carbon: via a carbon tax, or by way of an emissions trading scheme (ETS). A carbon tax involves the government setting a price on the carbon emissions associated with the production and consumption of goods and services, raising the price relative to less carbon intensive alternatives. However, the government cannot be sure that the tax is set sufficiently high enough to be sure of cutting emissions. In contrast, an ETS typically involves the government or another institution imposing a cap on emissions. This is achieved through the issue of allowances denominated in tonnes of carbon. The emissions cap is typically reduced by a fixed percentage each year to move those covered by the scheme towards a long-term target of emissions cuts.

Almost one-quarter of global emissions are covered by some form of carbon pricing; 17% is covered via an ETS (often known as compliance markets, or cap-and-trade schemes) with some 6%-8% of greenhouse gas emissions covered through a carbon tax. Many countries, especially those in Europe combine both carbon taxes and cap-and-trade schemes, covering different sections of the economy.[1](#footnote-1)

Although the price of carbon emission allowances in Europe (the oldest and most established ETS) have reached €80-€100 per tonne (equivalent to US$85-US$110), the price of allowances in other jurisdictions covered by an ETS tend to be substantially lower. Overall, the global ETS market-weighted average carbon price in 2021 was just US$28 per tonne. Outside of those countries with a tax or an ETS, the other three-quarters of global GHG emissions are effectively starting from zero cost of carbon. On a global basis this means the price of carbon is low, less than US$5 per tonne. Global carbon prices need to be well north of US$75 per tonne if the world is to decarbonize in the timescales set out by the 2015 Paris Agreement.

Capital markets have of course been taking things into their own hands, anticipating what climate policies are likely to mean, even in the absence of global transparency and coordination on carbon pricing. For example, the spread in the cost of capital between hydrocarbon and renewables widened by ten percentage points between 2015 and 2020, according to Goldman Sachs. The investment bank estimates that this is equivalent to a global carbon tax of US$80 per tonne CO2e.[2](#footnote-2)

Nevertheless, the scope of global GHG emissions covered by carbon pricing is expected to grow substantially over the next decade. In a recent interview with S&P Global Commodity Insights, the president of the International Emissions Trading Association (IETA) estimated that 60%-70% of emissions are likely to be covered by an ETS by 2030\. The price of carbon in other ETS’s is also likely to increase as countries adopt aggressive emission reduction targets like Europe and look to avoid being subject to carbon border taxes on their carbon intensive exports.[3](#footnote-3) [4](#footnote-4)

In the following, I discuss how carbon pricing is beginning to be felt across various commodities, including (a) the drive to cut emissions from the Canadian oil sands, (b) the growing demand for electric vehicles and the need to mine more nickel, (c) the role that agriculture can play in increasing the sequestration of carbon from the atmosphere, and (d) the impact carbon risk will have on the movement of commodities around the globe.

Underpinning all these examples is the growing need from other parts of the industrial supply chain for information on the provenance of commodities. The environmental performance of fossil fuel producers, metal miners and farmers are likely to become a key differentiator, with strong leadership on emissions reduction also likely to be rewarded by institutions allocating capital to the sectors. Across the various commodity industries discussed below, I also demonstrate how firms are responding to the price incentives, *i.e*., investing in decarbonization and implementing more efficient practices.

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**Decarbonizing the Canadian Oil Sands**

Canadian oil sands are far more emissions intensive to produce (*i.e*., Scope 1 emissions) than most other fossil fuels. In 2020 the average emissions intensity of Canadian heavy oil projects was estimated to be \~70 kgs CO2e per barrel, compared with 15-50 kgs CO2e per barrel for most other crudes.

Canada is targeting a cut in its carbon emissions of at least 40% by 2030, before achieving net zero emissions by 2050\. To do that the Canadian government is calling for the country’s oil and gas sector (both upstream and downstream) to cut emissions by 42% (85 Mt CO2e), by 2030 compared with 2019 levels. Oil sands production will be required to share in that burden, cutting emissions by 34% (28 Mt CO2e) by 2030.

The Canadian government already has a national carbon tax. In November 2020, the Canadian Prime Minister announced that the carbon tax will increase by C$15 per tonne each year, rising from C$50 per tonne in 2022 (equivalent to US$37 per tonne) to C$170 (US$125) per tonne in 2030\. The national carbon tax allows the governments of Canada’s provinces and territories to set their own carbon taxation if it meets the minimum federal standard. The Canadian government is consulting on options to increase the pressure on the fossil fuel sector through carbon pricing - either taking the form of an additional carbon tax imposed on the industry, or an industry cap-and-trade scheme.

Either way, the pressure on Canadian fossil fuel producers to cut emissions is only just getting started.

Today, crude price differentials typically reflect the value that the refiner expects to achieve from processing various grades of crude oil. The density of the crude, the sulphur content, its acidity, the cost of transportation and refining all influence the price that a refiner is willing to pay for a particular crude.

Under a carbon constrained world, high carbon intensity crudes will be at a big disadvantage compared with lower carbon intensity crudes. Crudes with relatively high carbon intensities could see their price discounts widen even further if they do not reduce their emissions intensity significantly.

For upstream oil producers in Canada, the introduction of carbon pricing should accelerate action to decarbonize their upstream operations. The top producers may be able to close the gap, or even overtake, their low carbon global competitors. Given the pressure that companies are under from governments, investors, and consumers, those producers that can demonstrate their low carbon credentials are likely to be rewarded by the market.

**“Green” Nickel**

Demand for commodities essential to the green energy transition are expected to rise fourfold by 2040 if we are to reach the goals of the Paris Agreement, *i.e.*, climate stabilization at “well below a 2°C global temperature rise.” To achieve net-zero globally by 2050, six times more commodity inputs will be required by clean energy technology in 2040, according to the International Energy Agency (IEA).[5](#footnote-5)

However, the average growth in commodity demand does a disservice to the growth requirements of certain niche metals essential to the energy transition. For example, demand for nickel, cobalt and graphite are all projected to grow 20-25 times under the IEA’s Sustainable Development Scenario (SDS) by 2040\. Despite delivering an overwhelmingly positive environmental outcome in the growth of electric vehicles, nickel cannot escape its own carbon footprint being scrutinized by manufacturers of power cells, automobile manufacturers and investors. Indeed, buyers are increasingly willing to pay a premium to ensure that the material has been secured sustainably.

Indonesia is in pole position to supply battery grade nickel to power the electrical vehicle (EV) transition. However, it has a carbon problem. Firstly, Indonesia’s nickel reserves are primarily in the form of abundant laterite ore. Compared to the increasingly scarce sulphide ore found in Canada, Russia and Australia, laterite ore requires significantly more processing. That would be less of a problem if Indonesia's grid was powered by solar and wind, but instead thermal coal accounts for over half of Indonesia’s electricity supply, and that means the power used by nickel miners and refiners is very carbon intensive. Overall, processing results in between 20 and 60 tonnes of CO2e per tonne of nickel, 2-6-times more than sulphide ore processing depending on the process used.[6](#footnote-6)

In February 2023, the Indonesia government launched the first phase of their emissions trading scheme covering coal powered electricity generators. At first only the largest coal facilities (those with a capacity of at least 100MW) will be covered by the scheme, before being rolled out to smaller coal and other fossil fuel power plants later. The energy ministry's own analysis indicates that the price of allowances is expected to be in the range of US$2-US$18 per tonne, much lower than that necessary to incentivize a switch away from thermal coal. Even if the ETS is successful in decarbonizing much of the nation’s grid by 2030, it is still likely to be more carbon intensive than other nickel suppliers.[7](#footnote-7)

**Carbon Farming**

Although governments and industry recognize that everything must be done to reduce emissions first, it is very unlikely that we will meet net zero without carbon removal. And so, carbon markets are not only putting a price on emissions, but they are also increasingly incentivizing the sequestration of carbon from the atmosphere too, via the carbon credit market. Carbon credits are a way for governments, corporations and even individuals to direct finance to where it can make the most difference to the climate.

Rewarding the sequestration of carbon into the soil via the carbon credit markets is becoming an increasingly attractive option. Soil carbon storage plays a vital role in regulating the amount of carbon dioxide that gets into the atmosphere. In addition, it improves soil fertility which enhances agricultural yields; it improves water storage and the supply of clean water; and finally, it also helps to maintain and enhance biodiversity.

Carbon sequestration practices include planting seeds without disturbing soil, spreading nutrient-rich compost over fields, and rotating where cattle graze. The role of soil carbon sequestration in cutting carbon emissions is gaining traction in the United States and in Australia in particular. In part this is due to supportive policies, but it is also due to the existence of large farm sizes in both countries, enabling carbon sequestration techniques to benefit from economies of scale.

For many parts of the world, however, carbon markets are being used to protect vast stores of carbon sequestered in tropical rainforests. Commodities are the primary driver of tropical deforestation, and typically involve the permanent conversion of forests to graze cattle, or to grow oilseeds such as soy and palm oil. When forests are cut down, vast quantities of carbon are released, while the carbon sequestration potential is lost. Halting deforestation is critical to meeting the 2050 net zero targets. Indeed, there is no pathway to limit global warming to 1.5°C without immediate action to halt deforestation.[8](#footnote-8)

Carbon credits go some way to offset the opportunity cost of deforestation faced by local landowners and other agents as they consider whether the forest is worth more to them alive, or more if they strip it bare and use it for agriculture. So called “Reducing Emissions from Deforestation and forest Degradation” (REDD+) credits help to finance activities that focus on the sustainable management and conservation of at-risk mature forests. Although they have typically been purchased by corporates in the past, governments with significant tropical forests on their land (*e.g.*, Guyana, Gabon) are increasingly looking to issue sovereign REDD+ credits that protect their land from deforestation. A viable carbon credit market helps companies sourcing commodities from regions at risk of deforestation avoid their products being tainted by the perception that they have contributed to the destruction of the rainforest.

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**What Price Decarbonized Shipping?**

Responsible for sending around 3% of global greenhouse gases into the atmosphere, the shipping sector emits more than the aviation industry, and about the same as the Japanese economy. Maritime emissions are forecast to increase over the next few decades as global trade in energy, commodities and goods continues to grow.

Given the shipping sector’s major role in facilitating the global trade in commodities, climate related policies including carbon pricing are likely to have a major impact on commodity markets. First, by affecting the cost of moving resources around the globe, and secondly, by opening trade routes as new commodities seen vital to the energy transition (such as hydrogen produced using renewable energy, so-called “green hydrogen”) are increasingly shipped to across the world.[9](#footnote-9)

The International Marine Organization (IMO) sets regulations for the international shipping industry. IMO 2030 is designed to sharply reduce the shipping industry’s carbon intensity and aim at forcing older, less-efficient ships off the market. However, beginning in 2024, the shipping sector will be subject to carbon pricing for the first time. Ships travelling within the EU (intra-EU voyages) will be required to pay for all their emissions, while for voyages to or from a non-EU destination, half of the emissions will be covered. Overall, some 10-15% of international shipping emissions are likely to be affected.[10](#footnote-10)

The most straightforward way for ship owners to cut carbon emissions is to slow-steam - *i.e.*, deliberately sail at a reduced speed to cut fuel costs. Reducing the speed at which ships travel by 10% could reduce fuel usage by almost one-third. This will impact the availability of vessels in the region and lead to higher freight rates as charterers bid for the dwindling supply of vessels. Of course, there is a limit to how slow vessels can reduce their speed and continue to provide a reliable service.

In the longer term, ship owners must invest in decarbonizing their fleet. However, there is considerable uncertainty over what technological solution to pursue. For example, it is unclear whether hydrogen, ammonia or another candidate will provide the best low carbon option at an affordable cost. This could result in ship owners delaying placing orders, which might lead to a tightening in the supply of ships.

**Pricing Carbon Risk**

The rise of carbon markets and the increased cost of compliance is forcing commodity markets to respond.

The carbon risk facing commodity markets is acute, including (a) the emissions associated with the extraction, refining and combustion of fossil fuels, (b) the energy required to dig and process ore into metal, and (c) the risk of deforestation and high emissions associated with carbon intensive agriculture.

In addition to the increased regulatory burden, companies are having to face up to much greater scrutiny as to the provenance and the emissions associated with their products.

But as this article also demonstrates, the commodity industry is not sitting idly by. Industry has a rich capacity to innovate in the face of these new and emerging pressures. Indeed, carbon markets and increased pressure from stakeholders has sparked a wave of innovation and new practices.

There is much more to be done, but commodity markets are now beginning to put a price on carbon risk.

---

1. https://icapcarbonaction.com/en/publications/emissions-trading-worldwide-2023-icap-status-report [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.goldmansachs.com/intelligence/pages/carbonomics-dual-action-of-capital-markets-transforms-net-zero-cost-curve.html [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. The world’s first levy on the importation of carbon intensive products is scheduled to be introduced in Europe. The levy, otherwise known as the Carbon Border Adjustment Mechanism (CBAM), seeks to address the problem of “carbon leakage.” This is whereby firms located in the EU might lose market share to more carbon intensive products exported into the EU by firms located elsewhere in the world. Other jurisdictions including the United States, United Kingdom and Australia have discussed introducing similar carbon border taxes. [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/electric-power/032723-interview-net-zero-goals-changing-global-politics-carbon-markets-in-for-a-bumpy-ride-ieta [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
5. The IEA’s Sustainable Development Scenario (SDS) is consistent with the goal of meeting the Paris Agreement, *i.e*., climate stabilisation at “well below a 2°C global temperature rise.” [↩](#footnote-anchor-5 "Jump back to footnote 5 in the text.")
6. https://www.iea.org/data-and-statistics/charts/ghg-emissions-intensity-for-class-1-nickel-by-resource-type-and-processing-route [↩](#footnote-anchor-6 "Jump back to footnote 6 in the text.")
7. https://www.reuters.com/business/energy/indonesia-launches-carbon-trading-mechanism-coal-power-plants-2023-02-22/ [↩](#footnote-anchor-7 "Jump back to footnote 7 in the text.")
8. https://www.energy-transitions.org/wp-content/uploads/2023/04/ETC\_FinancingtheTransition\_DeforestationAnnex\_vf.pdf [↩](#footnote-anchor-8 "Jump back to footnote 8 in the text.")
9. Approximately one-third of the overall dry bulk trade (iron ore, coal, grains, and minor bulks such as fertilizer) and around 60% of the world’s oil and products are transported by ship. [↩](#footnote-anchor-9 "Jump back to footnote 9 in the text.")
10. https://www.schroders.com/en-us/us/institutional/insights/green-shipping-a-1-9tn-investment-opportunity/ [↩](#footnote-anchor-10 "Jump back to footnote 10 in the text.")
### Taking off, or coming into land
URL: https://www.carbonrisk.world/taking-off-or-coming-down-to-land/
Last updated: 2025-08-21T10:38:09.000Z
> “Its the not the Destination, It's the journey.”

― Ralph Waldo Emerson

Aviation was one of only two non-power generation sectors (the other being oil & gas) covered by the EU ETS that saw an increase in emissions between 2021 and 2022\. European aviation emissions covered by the EU ETS increased by 85.2% to 50 Mt CO2, according to estimates by Refinitiv.

You can start to see why emissions have jumped so much by looking at this chart which shows how airline travel (by major route and region) has recovered from the pandemic. Revenue Passenger Kilometres (RPK) is a measure of passenger airline travel and is calculated as the number of paying passengers multiplied by the total distance travelled. The key data to look out for in terms of EU ETS covered emissions is ‘Within Europe’. In line with most other major airline routes, domestic European airline travel has recovered strongly, but still remains around 10% below 2019 levels.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/3a93e85b-1798-46b3-913a-9858ce22d967_851x582-1.png)

_This post is for paying subscribers only._
### Inflexion point
URL: https://www.carbonrisk.world/tipping-point/
Last updated: 2025-08-21T10:38:11.000Z
India is expected to be at the centre of global energy demand growth over the next couple of decades.

Emerging from the shadow of its regional rival on the other side of the Himalayas, India is now the most populous country in the world. India is the fifth‐largest economy in nominal terms, behind the United States, China, Japan and Germany.

The Indian economy grew at an annual average rate of 5.5% during the decade to 2021, while at the same time reducing its emissions intensity of GDP by 1.3% per annum to 1.5 kg of CO2e per $ per annum. Ever so slightly it is decoupling its emissions from economic growth.

Yet despite its strong growth and sheer size on an aggregate basis, India remains someway behind other countries on a number of per person metrics. Whether its energy demand, steel and cement use or car ownership, India has the potential to grow significantly according to the International Energy Agency (IEA). And grow it should. Remember, the underlying purpose of economic development is to lift people out of poverty.[1](#footnote-1)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7e3b1c69-06c6-44c4-86b3-3fb9735e96aa_714x463.png)

**India’s economy is at a crucial inflexion point**

India’s energy needs are expected to grow at three times the global average under today’s policies as urbanisation fuels a construction boom, consumers increase purchases of air conditioning (AC) systems and hundreds of millions of vehicles hit the roads.

The speed at which urbanisation has occurred in India has been much slower than other East Asian industrialising countries. Even under the IEA's central scenario based on India's existing policy mix, urbanisation is only expected to reach 46% by 2040\. That is much lower than comparable countries in percentage terms, yet in absolute terms this will be equivalent to adding 13 cities the size of Mumbai over the next twenty years.

Much of the slow uptick in urbanisation relative to other countries has been due to agricultural policies such as subsidies (accounting for \~4% of GDP) that discourage the movement of people to more productive jobs in the city. The recent protests by Indian farmers, distrustful of market reforms are a sign that India could be near the tipping point where urban growth and overall economic growth starts to take off.

Known as the 'Lewis turning point', it is the point at which economic development where surplus rural labour is fully absorbed into the manufacturing sector. This typically causes agricultural and unskilled industrial real wages to rise. However, in a country where over 40% of the workforce are employed in agriculture, those farm workers represent significant political clout, which can block reform.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/5e7c8cdc-0c36-47c5-904e-4c80ee3bfcb2_712x456.png)

The process of urbanisation is initially extremely commodity intensive and once completed it then locks in very high levels of energy consumption. For example, first it generates demand for steel, cement, copper and other commodities. And then once built city dwellers tend to spend more of their income on energy - specifically the cost of travelling around the city. Because of the huge sunk costs involved in building out this infrastructure, energy consumption patterns tend to get locked in over a long period of time (see [*Concrete returns: Laying the foundations for a decarbonised cement industry*](https://www.carbonrisk.world/concrete-returns/)).

Urban dwellers also tend to purchase more appliances (TV's, refrigerators, washing machines, etc.) to furnish their flats, which then consumes more and more commodities on an ongoing basis. In a hot country like India the share of households with an AC unit stands at less than 10% in urban dwellings and negligible in rural areas. In China 60% of households have AC while in South Korea this figure jumps to 86%.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/0d89a206-b214-4426-b374-edced86504c7_573x399.png)

According to the IEA AC units see faster growth than any other household appliance over the period to 2040, and become the largest single driver of energy demand growth in buildings. Growth in AC demand tends to follow an ‘S-curve’ in which households tend to begin to want AC installed when income reaches $10,000 per annum and then reaches saturation levels when incomes approach $100,000 per annum (see [*A chilling prospect*](https://www.carbonrisk.world/a-chilling-prospect/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/d28bd1b8-43c7-4554-9434-e998b2a414f0_577x362.png)

**Tales of King Coal’s death have been greatly exaggerated**

The Indian economy emitted 3.3 Gt of CO2e in 2019\. One-third of these emissions come from the power generation sector (primarily coal). In addition, an estimated 28% arises from industrial activities (steel and cement in particular), while 18% come from agriculture (dairy is the largest contributor). Taking account of the country’s natural carbon sinks (estimated to be 0.35 Gt CO2e), India was a net emitter of almost 3 Gt CO2e in 2019.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e38585b0-3f17-4d30-b948-7e11b0a7ad26_1004x812.png)

Overall, India’s greenhouse gas (GHG) emissions are the third largest globally, but much lower down the leader-board on a per person basis. And that’s a concern, especially given the expected take-off in energy and commodity demand as urbanisation gathers pace, and household adoption of appliances reaches the steepest part of the ‘S-curve’. Given that India is so reliant on thermal coal to generate electricity, a massive expansion in energy requirements based on the current energy generation mix would pose a significant risk to global ambitions to meeting net zero.

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### A chilling prospect
URL: https://www.carbonrisk.world/a-chilling-prospect/
Last updated: 2025-08-21T10:38:12.000Z
> *“Air conditioning. Air conditioning was a most important invention for us, perhaps one of the signal inventions of history. It changed the nature of civilization by making development possible in the tropics.”*

\- Lee Kuan Yew, Singapore’s first prime minister, when asked about the secret to his country’s success.

As the world warms, the demand for cooling increases. Yet the demand for cooling may end up worsening the very problem it is trying to adapt to, especially if it draws on fossil fuels, or leaks refrigerants that are also potent greenhouse gases (GHG’s).[1](#footnote-1)

Over one-third of global households (34.5%) were estimated to have air-conditioning (AC) in 2021\. The distribution of AC’s is predominantly centred on North America (mainly the southern US states) where 83.3% of households have AC installed. Adoption is especially high given that only a relatively small proportion of the population live in a hot climate.[2](#footnote-2)

The other two regions with large household adoption are Asia Pacific (primarily the richest nations including Singapore, Japan and Australia) and the Middle East where over 40% of households have AC. In comparison, AC adoption is very low in Africa and Central and South America, (between 10% and 20%), especially so given the hot climate. AC adoption by households in Europe and Eurasia is also around the same level, although there climate is much more temperate.

Despite their different starting points and individual circumstances, AC demand is increasing across all regions. Global adoption rose by almost 15 percentage points between 2020 and 2021 levels, driven largely by Asia-Pacific where the share of households with AC doubled to over 40%. High temperatures played their part in stirring demand, but as we’ll see later, rising incomes also play a key part in determining household adoption of AC.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/fa134f60-0986-47a4-af03-60012ddcbd13_673x730-1.png)

**Adapting to a warmer world**

Summer 2022 ranks among the hottest on record, according to data from NASA and the National Oceanic and Atmospheric Administration (NOAA). Hot weather baked much of the globe, with Europe and China both recording their warmest meteorological summers, while other countries experienced record daily temperatures and prolonged, record breaking heatwaves.

Only in the past month, a heatwave in southern Europe with resulted in Spain and Portugal experiencing record April temperatures of over 40°C, while in Asia temperatures climbed to 45°C in Myanmar, 44.5°C in India and 41.9°C in China, with Thailand and Laos breaking all-time high records.

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### Commitment anxiety
URL: https://www.carbonrisk.world/the-bigger-short/
Last updated: 2025-08-21T10:38:13.000Z
The latest Commitment of Traders (COT) report (w/e Friday 12th May) shows that investment funds had a net short position of 8.6 million EUAs, down slightly from the record short of 11 million EUAs seen one week earlier.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a54689c9-0397-46a1-88c9-674109c56715_1480x677-1.png)

The decline in the net position over the past 5 weeks has continued to be due to closing out of long positions; down 13.2 million EUAs to 20 million EUAs. Short positions have remained around the 20-30 million EUA level (see [*Investment funds ditch carbon after failure to decisively breach €100*](https://www.carbonrisk.world/investment-funds-ditch-carbon-after/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/2f8c1310-fb26-45ab-b183-8cc4cb2d7421_1534x643.png)

Whenever the market has been this short in the past, the EUA price tends to rally strongly during subsequent weeks as funds re-establish their long positions. As the chart towards the end of this article shows, the carbon price has staged something of a rebound, up by \~€5 since the 4th May to around €90 currently (see [*The big short: Record net short position underlines the extreme negative sentiment towards carbon*](https://www.carbonrisk.world/the-big-short/)).

The ratio of long / short positions has also declined even further, settling down below 1\. As with the first chart, the EU carbon market also tends to rally strongly when the long / short ratio drops below 1.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/9f949a50-a7f5-4c9b-b821-53a6ccbc10b8_1513x613.png)

The liquidation in EUA long positions mirrors the picture in commodity markets. Over the past few weeks there has been a big scaling back in net length, especially in energy and metals markets, as fears over the strength of demand have persuaded traders to scale back their positions. In the same way that the EUA price has bounced, Brent crude is up by \~$4 per bbl over the same period to $76 per bbl.

![Image](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/2c552aaa-96e6-46b4-a6d5-a60348afc6c4_780x482.png)

Despite the rebound in the carbon price towards €90 there appears to be little in the way of bullish drivers for the market to move much further.

Low emissions during the first four months of the year (something that has been corroborated by recent results posted by utilities), a recovering in French nuclear output during April and into May (and an expectation of further output gains), the change in the EU ETS compliance timetable (from April 2024 to September 2024), low energy prices, coupled with weak industrial production (and a reluctance by large energy users to bring back capacity despite low prices), all appear to be pointing towards a moderation in demand for EUA’s from compliance buyers.

That combination of those factors means we could have a much more speculative driven market for the next 4-6 months, before utilities and other compliance buyers re-enter the market.

From a technical point of view my base case is that the price will gradually move down towards €80 (somewhere in or around the grey oval in the chart below), and then breakout higher from there.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c00c2151-97d3-4917-acd0-2066be38472d_1270x815.png)

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[Aluminium's climate paradoxAluminium is often referred to as “congealed electricity” One of the most notorious power hungry industries, it takes about 15 MWh of electricity to produce one tonne of aluminium. That’s more than three times as much energy as zinc and about 40 times more than copper or steel.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-166.png)Carbon Risk](https://www.carbonrisk.world/aluminiums-climate-paradox/)

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**EUA Commitment Of Traders (COT) data 101**

Commodity futures exchanges tend to publish data on the hedging and speculative activity of participants on a weekly basis. This publication is known as the Commitment Of Traders (COT) report. The Intercontinental Continental Exchange (ICE) COT reports breaks down futures market participants into the following five categories:

IFCI: Investment firms or credit institutions

IF: Investment funds

OFI: Other financial institutions

CU: Commercial undertakings

Other: Operations with compliance obligations under directive

There are four challenges carbon investors have about using positioning analysis: the time lag between when open interest data is collected and published, how traders are classified, the challenge in disentangling the motivations of traders, and the ‘age’ of the positions.

The ICE typically publishes the COT report on the same day each week. Although there is a small lag in the positioning information, its important to remember that this data is still very much real-time compared with almost all other data that is reported in the market. Importantly, everyone in the market gets the same report, at the same time.

The second concern relates to how traders are classified. For example, simply because a CU and Other are compliance buyers does not preclude them from using commodity futures markets for speculation, in addition to hedging. Meanwhile, some of the activity in the IFCI and OFI category will also involve hedging on behalf of compliance buyers. This muddies the water to some extent in interpreting the motivations of the various participants in the market.

The third challenge that investors raise about positioning data supplied by the COT report is closely related to the second concern above. How to disentangle the motivations of traders? For example, IF’s are a broad church and include macro funds trading equities, a commodity fund speculating on the shape of the futures curve, an index or ETF management firm. This can mean that positions are placed that do not solely reflect participants view on the price direction of carbon.

The ‘age’ of the positions is also a concern. For example, long-term investment positions - for example, positions that underpin carbon ETFs and long-term hedging positions - can make certain positioning profiles difficult to interpret.

**Investment fund (IF) behaviour**

The most closely watched category of trader is IF - investment funds - which encompasses hedge funds and asset managers. Despite the concerns over categories expressed above, market participants must, in the main, behave according to the category that they have been assigned.

One factor here is crucial, market participants in the IF category have to close out their positions, i.e. they can’t go to delivery. If they are playing in the physical market they would have to have been assigned to a different category. And so when you see a very large short position in the IF category they are going to have to close that position out.

This can get interesting when prices are at an extreme. For example, it can often be a very interesting buying opportunity when you see that money managers have made a nice paper profit by building up a large short position, especially if prices are at the lowest level for some period of time.
### Aluminium's climate paradox
URL: https://www.carbonrisk.world/aluminiums-climate-paradox/
Last updated: 2025-08-21T10:38:14.000Z
Aluminium is often referred to as “congealed electricity”

One of the most notorious power hungry industries, it takes about 15 MWh of electricity to produce one tonne of aluminium. That’s more than three times as much energy as zinc and about 40 times more than copper or steel.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/aa0d70fe-2067-4e29-abb2-e5f592768a93_1025x553-5.png)

Producing aluminium is also highly carbon intensive. On average, mining and processing results in around 15 tonnes of CO2e emitted per tonne of aluminium produced. Overall, aluminium production emits some 1.1 billion tonnes of CO2 per year, accounting for around 2.5% of global emissions.

In addition to the huge power demands, the industry’s reliance on electricity generated using thermal coal underpins why it is so emissions intensive. Aluminium smelters consumed 880 thousand GWh in 2021, according to estimates by International Aluminium. Almost 55% of this electricity was generated via thermal coal (primarily in China), hydropower accounted for 30% (Europe and North America), with 10% coming from natural gas (Middle East), and the remaining 5% split between nuclear and other renewables.

**Power source used by primary aluminium smelters, 2021**

![Table II. Percentage of power sources utilized by primary aluminum smelters in 2021. (Data compiled from the IAI and the U.S. Geological Survey.)7-8](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/5c829cff-54f4-43d9-b9b4-914aa5b2d452_1874x1361-jpeg-1.jpg)

Source: International Aluminium

**“Miracle metal” must do better**

Aluminium production is highly carbon intensive, yet without aluminium decarbonisation cannot take place. To see why, consider it’s attributes. Aluminium is lightweight but strong, good conductivity, resistance to corrosion, elasticity and easily recyclable. Aluminium has more than one nickname, and if the metal had feelings it would probably prefer it’s other name - the “miracle metal”.

Global demand for the metal could grow 50% to 108 million tonnes by 2050, according to recent projections by CRU. Growth in demand will be supported by population growth and industrialisation, but also due to its vital role in enabling the energy transition: it is used to lightweight electric vehicles, vital in solar power generation, green buildings and electricity cabling. However, the highest growth in terms of absolute demand is expected to come from the shift in the transportation sector to EVs.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a4bd43b4-b61b-4245-be30-1f6b879d3791_1209x499-1.png)

Despite its good side, the “miracle metal” cannot escape its own carbon footprint being scrutinised by automobile manufacturers, governments and investors (see [*'Green' lithium*](https://www.carbonrisk.world/green-lithium/)).

There is increasing pressure from manufacturers with action-oriented climate targets to procure low carbon aluminium, also commonly known as “green aluminium”. Low carbon aluminium is defined as emitting 4 tonnes of CO2 or less, one-quarter of the global average carbon emissions from aluminium production.

Automobile companies, particularly European manufacturers are at the forefront of this trend. For example, Porsche recently announced a deal to supply with Norwegian aluminium and renewable energy company, Norsk Hydro to supply it with low carbon aluminium. In 2022, rival German car company, Mercedes also announced a similar deal with Norsk Hydro. Meanwhile, BMW's North American factories will receive aluminium sourced from Rio Tinto's hydro-powered aluminium operations in Canada.[1](#footnote-1)

All of these deals help to drastically cut the embodied emissions in their vehicles. For example, the aluminium used in Porsche’s Taycan electric sports car, which already consists of about 30% aluminium by weight, will soon be produced using 60% less emissions than the European average. Global demand for low carbon aluminium is projected to increase from 23 million tonnes in 2021 to 62 million tonnes by 2030, according to McKinsey. Demand to reduce emissions even further is growing, especially from the luxury automotive and energy generation sectors.

**Drought could scupper further declines in emission intensity**

Global production of low carbon aluminium is expected to grow from 44 Million tonnes in 2021 to 71 million tonnes in 2030, according to McKinsey. However, future growth in low carbon aluminium supply is primarily dependent upon the availability of hydropower, the economic sustainability of which is brought into question by one of the main threats posed by global warming - prolonged high temperatures and persistent drought.

Global supplies of low carbon aluminium dipped in 2022 as drought in southern China forced Yunnan province authorities to order aluminium smelters to lower production in order to help balance the power system; first by 10% in September last year, then by 20%, and most recently by 40% as the drought worsened. Smelters had been lured to Yunnan due to the availability of cheap hydro power - around 80% of Yunnan’s electricity comes from hydropower. By 2022, smelters accounted for an estimated 30% of electricity consumption across the province.[2](#footnote-2)

China is the dominant global supplier of aluminium, accounting for over 55% of production, while Yunnan province accounts for 12% of the country’s capacity. What happens in Yunnan matters, especially in a world where demand for low carbon aluminium is high and set to grow. Although China has ambitious plans to expand its renewable energy generation, the interconnectedness of its aluminium and hydropower generation sectors, and the increased frequency with which drought affects Yunnan, suggests that China may struggle to reduce the emissions intensity of its aluminium. That may leave it lying uncompetitive relative to other, lower carbon suppliers of aluminium.

Meanwhile in Europe, hydropower generates around 650 TWh of electricity per year, of which some 15% of this is consumed by the continents aluminium smelters, many of which are located in Norway - the largest supplier of aluminium to the EU in 2022\. Norway didn’t escape the drought that afflicted much of central Europe last year. Low reservoir levels cut hydropower generation to it’s lowest level in 20 years (see [*The forgotten giant of clean energy: Why carbon market investors need to keep an eye on Europe's drought*](https://www.carbonrisk.world/the-forgotten-giant-of-clean-energy/)).

Europe also relies on imports from Russia, Turkey, Mozambique and South Africa. The aluminium produced from these four countries are all near the European average emissions intensity and considered low carbon aluminium due to their use of hydropower generation.

**Key suppliers of aluminium to the EU and their emission intensity**

![Source: Company reports, IAI, Eurostat, ING Research](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b6ebc530-3df1-4e89-9b06-6c22d5a250b1_963x438-1.png)

**Lingering impact of sky-high European power prices**

It’s worth remembering that the sky high power prices seen during 2002, and particularly during the height of summer were partly due to the severe drought in Europe and the adverse impact it had on hydropower and nuclear power output.

Western European aluminium output fell 12.5% between 2021 and 2022 as record power prices forced operators of aluminium smelters to cut production or mothball their plants. Aluminium output in December dropped to 2.73 million tonnes (on an annualised basis), down by 540 thousand tonnes on December 2021 (down 16.5%), and the lowest production rate this century (see [*Power down: Why the outlook for European electricity consumption will be crucial in determining carbon prices in 2023*](https://www.carbonrisk.world/power-down/)).

The impact of those record power prices looks set to linger.

Aluminium Dunkerque Industries France, Europe’s largest aluminium smelter is perhaps the sole plant expected to restart curtailed capacity (60 thousand tonnes per year) by the end of May, following intervention from the French government.

The challenge facing smelter operators is that although power prices have come down, they are still high by historical standards, and even if they bring back production (a long and costly process), there are no guarantees that there will be sufficient demand for them to profitably sell into. And even if they manage to restart production they face the risk of a rebound in power prices, especially if there is another drought this summer. Norsk Hydro warned that a further 600 thousand tonnes of European aluminium smelting capacity could be at risk if prices were to spike again.

The outlook is grim for those smelters that are not on a long-term power contract set at pre-energy crisis levels, that are not protected by government subsidies or have access to their own renewable energy supplies. However, if Europe doesn't have the basic industries in place, they stand no chance of building the industries of tomorrow, and especially those industries required to enable the energy transition. In response to concerns that Germany would lose access to these vital building blocks, the German government recently announced that it would provide billions of euros in state support to guarantee lower energy prices for energy intensive companies through to 2030.[3](#footnote-3) 

Aluminium is a climate paradox.

Highly carbon intensive due to the prevalent use of coal, aluminium is essential to decarbonisation - especially the growth in EV’s and solar generation.

Yet, reducing aluminium’s emissions requires an increased reliance on hydropower, but this means being increasingly exposed to the drought conditions that have become more intense under a warmer climate.

Meanwhile, persistent drought has led to dramatic power price spikes in Europe and elsewhere as low water levels led to weak hydropower generation and limited nuclear output.

High power prices threaten the financial sustainability of the remaining aluminium smelters. For those that remain, a switch to thermal coal generation supported by state subsidies may be the only way to survive.

More than a climate paradox, aluminium is stuck in a vicious circle.

[Long-term drought puts Europe's hydroelectric generation at riskThe risk of a severe and prolonged drought across much of Europe continues to rise. This is important for the EU carbon market because low reservoir levels mean less power can be generated from the continents hydroelectric dams. That means more power will need to come from the burning of natural gas and thermal coal. European utilities will look to hedge this risk by buying EU carbon allowances.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-167.png)Carbon Risk](https://www.carbonrisk.world/megadrought/)

---

1. https://www.reuters.com/business/autos-transportation/norsk-hydro-supply-porsche-with-low-carbon-aluminium-2023-04-26/#:\~:text=OSLO%2C%20April%2026%20(Reuters),the%20companies%20said%20on%20Wednesday  
https://www.reuters.com/markets/commodities/rio-tinto-enters-agreement-with-bmw-provide-hydro-produced-aluminum-2023-02-21/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.hydroreview.com/environmental/drought-hits-hydropower-supplies-for-chinese-aluminum-smelting-hub/ [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://www.cleanenergywire.org/news/german-economy-minister-wants-lower-industry-electricity-costs-billions-subsidies [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
### Fuelling controversy
URL: https://www.carbonrisk.world/everything-you-need-to-know-about-232/
Last updated: 2025-08-21T10:38:15.000Z
The carbon price is the most efficient way to cut emissions since it allows the market (consumers, businesses and innovators) to decide on the most effective way to respond.

Almost one-quarter of global emissions are covered by some form of carbon pricing; 17% via an emissions trading scheme (ETS) with some 6%-8% of GHG emissions covered through a carbon tax.[1](#footnote-1)

There is another form of government policy that often work directly in competition with carbon markets. Fossil fuel subsidies encourage the production and consumption of oil, gas and coal and lead to an increase in emissions.

Fossil fuel subsidies can be thought of as a ‘negative price of carbon’.

As this article shows, government expenditure on fossil fuel subsidies dwarfs the revenue generated by carbon taxes and emissions trading schemes by a factor of 15.

Let’s look at those subsidies used to support production first. ‘Capex’ related subsidies are often targeted at writing-off capital costs against taxable income, reducing costs associated with exploration, research and development, and feasibility studies, in addition to providing funding for infrastructure (ports, roads and pipelines, etc.). Meanwhile, ‘opex’ subsidies such as tax breaks, reduced royalty payments and inadequate environmental regulations enable a fossil fuel company to increase its profitability.

Governments also frequently subsidise the consumption of fossil fuels, regulating consumer prices at below market levels and providing direct cash transfers to consumers. In normal times, fossil fuel resource rich nations, particularly those with autocratic governments, often provide access to cheaper energy as a way of providing a visible example of the benefit of the country’s resource wealth. Following Russia’s invasion of Ukraine, many governments set energy price caps and direct transfers to consumers.

Subsidies encourage the inefficient production fossil fuels, locking-in future carbon emissions by enabling the economic extraction of fossil fuel deposits, and discouraging investment in infrastructure (renewable energy in particular), while inducing higher levels of consumption and numbing consumers response to higher prices. In either case, the implication is an increase in greenhouse gas emissions.

Once subsidies are in place, they are also extraordinarily difficult to remove.

Production subsidies are often used to support state-owned companies, while companies with close relationships to the country’s leaders also benefit. Well-connected businesses tend to be very adept at lobbying for subsidies to continue, especially given the ‘sunk cost’ nature of capital invested in fossil fuel infrastructure. Meanwhile, citizens who are accustomed to administratively established food and energy prices tend to hold their government responsible in the event that prices rise sharply, often triggering a political backlash against the ruling political party.

However, removing subsidies for fossil fuel production and consumption will be crucial to decarbonising the global economy and keeping global warming below 1.5 degrees. As we’ve seen, they act as a negative carbon price, increasing the incentive to emit carbon dioxide and other greenhouse gases into the atmosphere.

What is the potential carbon benefit from removing fossil fuel production and consumption subsidies, and how much progress have the major economies made towards phasing them out?

Lets dive in.

_This post is for paying subscribers only._
### Participation game
URL: https://www.carbonrisk.world/participation-game/
Last updated: 2025-08-21T10:38:17.000Z
Pennsylvania’s participation in the Regional Greenhouse Gas Initiative (RGGI) could contribute to an 80%+ decline in the price of emission allowances in the north-eastern US cap-and-trade market between now and 2030, according to recent analysis.

If you are invested in the KraneShares KFA Global Carbon ETF (KRBN), or the Ninepoint Carbon Credit ETF (CBON) then you will have at least some exposure to the RGGI market; the former less than 5%, while the latter accounts for around 25% of assets under management within the fund.

To recap, eleven states from the Northeast and Mid-Atlantic US currently participate in RGGI: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey (withdrew in 2012, but re-joined in 2020), New York, Rhode Island, Vermont, and Virginia (joined the program at the beginning of 2021).

On 1st July 2022, Pennsylvania became the 12th state to join RGGI. However, one week later the Commonwealth Court of Pennsylvania issued an injunction preventing the state from carrying out its obligations under its membership of RGGI. At the moment the state sits out on the quarterly auctions of RGGI emission allowances.

Legal wrangling has continued for the best part of a year, but a final ruling is expected to be issued soon, potentially paving the way for Pennsylvania to finally participate in RGGI.

The price of RGGI emission allowances has tripled over the past 5 years to around $15 per tonne. The price has been supported by higher emissions as strong natural gas prices increased demand for thermal coal, risk averse compliance entities in Pennsylvania looked to secure allowances ahead of the state’s entry into the scheme, and a decline in the availability of free emission allowances.

**RGGI allowance price**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/f7f74ac0-9140-4afb-bd5e-a9e74ef44f7b_1084x524.png)

Source: ICAP Allowance Price Explorer

The significance of the $15 per tonne level is that it is close to where the Cost Containment Reserve (CCR) trigger price is currently set. The CCR immediately introduces a fixed quantity of additional allowances into each auction if there is sufficient demand above the CCR price (see [*Everything you need to know about the RGGI carbon market*](https://www.carbonrisk.world/everything-you-need-to-know-about/)).

Unlike many other mandatory emissions trading schemes, RGGI only covers the power generation sector. RGGI requires fossil fuel power plants with capacity greater than 25 MW to obtain an allowance for each tonne of carbon dioxide they emit annually. RGGI prices are trading for around half of the price of Californian carbon allowances (CCA’s). This is at least partly due to the much wider proportion of the economy that is subject to a carbon price in California. Other sectors such as industry typically require a much higher carbon price than the power sector to incentivise decarbonisation.

Despite improvements over the past 15 years, as thermal coal generation has increasingly been substituted for natural gas, the electricity generation sector remains the second largest emitter in Pennsylvania after industry. As recently as 2019 thermal coal still accounted for over 50% of its power generation emissions. If Pennsylvania does get to participate in RGGI, total emissions covered by the cap-and-trade scheme will increase by almost 70%.

Given that backdrop, how is it that the addition of a large, relatively fossil fuel intensive jurisdiction to the RGGI could have such a big bearish impact on the price of emission allowances?

_This post is for paying subscribers only._
### Reflexivity and the EU ETS 'Endgame'
URL: https://www.carbonrisk.world/reflexivity-and-the-eu-ets-endgame/
Last updated: 2025-08-21T10:38:17.000Z
In an earlier [post ](https://www.carbonrisk.world/investment-funds-ditch-carbon-after/)for Carbon Risk I referenced an article published in the Financial Times called ‘[Carbon price: efficient market does its bit for the planet](https://www-ft-com.ezp.lib.cam.ac.uk/content/a19b8d5d-e554-4ad8-be0d-49944193e2c1?ref=carbonrisk.world)’. Coming just weeks after the EU carbon price reached €100 per tonne the author concludes that, “Finally, carbon has reached a price high enough to reflect environmental costs and to change behaviour.”

Is it really true that the EU carbon market has become what can be called an ‘efficient market’ in classical economics; one that correctly prices in the cost of meeting the EU’s near term 2030 emission reduction targets and the longer term ambition of a net zero economy?

Classical economic theory assumes that market participants act on the basis of perfect knowledge, or at the very least act based on rational expectations. This means that even though not all participants are equally as informed, there is one single optimum, 'rational' view of the future, and eventually all participants in the market will converge on this view.

This deterministic way of thinking enables many of the same methods employed in the study of physics to be applied in the field of social sciences like economics. This is where impenetrable algebra and complex modelling are used in the pursuit of certainty (or at least to give the impression of it).

There is one key difference though. Unlike physics, economics includes the presence of subjects that have the ability to think. This means that rather than simply playing a passive role in the market, we also play an active role too, since our perceptions and our actions also influence the market. This introduces an additional element of uncertainty since there is likely to always be a divergence between what participants think, and the actual facts. Yet that thinking also has a role in shaping the facts.

George Soros, one of history’s most successful financiers, was the first person to develop and formalise the concept known as ‘reflexivity’. Here is how Soros summarises his General Theory of Reflexivity as it pertains to financial markets:[1](#footnote-1)

> "I believe that market prices are always wrong in the sense that they present a biased view of the future. But distortion works in both directions: not only do market participants operate with a bias, but their bias can also influence the course of events. This may create the impression that markets anticipate future developments correctly, but in fact it is not present expectations that correspond to future events but future events that are shaped by present expectations. The participants perceptions are inherently flawed, and there is a two-way connection between flawed perceptions and the actual course of events, which results in a lack of correspondence between the two. I call this two-way connection "reflexivity".

According to Soros participants thinking serves two functions. The first is to understand the world (the ‘cognitive function’), while the other is to advance the participants’ interests (the ‘manipulative function’). Participants’ thinking (subjective reality) and the actual state of affairs (objective reality) are connected in opposite directions:

> When both the cognitive and manipulative functions operate at the same time they may interfere with each other. How? By depriving each function of the independent variable that would be needed to determine the value of the dependent variable. The independent variable of one function is the dependent variable of the other, thus neither function has a genuinely independent variable – the relationship is circular or recursive. It is like a partnership where each partner’s view of the other influences their behavior and vice-versa.

The upshot of Soros’ theory of reflexivity is that there there can be no genuinely independent reality from which to anchor your thinking on. How does this relate to carbon markets, and the EU ETS in particular? To begin to think this through we first need to consider what the ‘Endgame’ for the EU ETS might look like, and work back from there.

_This post is for paying subscribers only._
### The carbon tracking opportunity
URL: https://www.carbonrisk.world/carbon-footprints/
Last updated: 2025-08-21T10:38:19.000Z
As governments, corporates and financial institutions begin to realise they may be sitting on a big uncovered short position on carbon, demand for data and analytics that helps them begin to manage that carbon risk, and take advantage of any opportunities is growing fast.

Global investment into climate change data intelligence start-ups has surged over the past couple of years. Over $2.8 billion in capital was raised during the first three quarters of 2022, according to PwC' analysis, up five-fold on levels seen during the period 2018-2020.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/26979d39-a3e7-40d2-b18c-f46085254cac_1101x813-1.png)

There are three main investment trends that venture capitalists and other investors are leveraging to gather better climate insights - monitoring and quantifying emissions, mapping and measuring carbon sinks, and company-level measurement and reporting:

1. Monitoring and quantifying emissions: Regulated emissions trading schemes such as the EU ETS rely on verified emissions by third parties. Remote monitoring of emissions is becoming more important for financial markets. As greenhouse gas levies get rolled out to specific sectors, remote tracking technology will provide an early sign as to whether obligated entities are complying with the regulations.
2. Mapping and measuring carbon sinks: Nature-based carbon sinks including forests, soil and mangroves will become increasingly important to meeting net zero. As their value rises so the greater the incentive to protect and accurately monitor the region for changes in land use.
3. Company-level measurement and reporting: More onerous climate reporting requirements mean that there is greater demand from companies wanting to track and measure their carbon footprints, and assess the climate risk associated with their future investments.

Each of these investment trends is interrelated, and is likely to become ever more so as carbon markets become more globalised, multi-national companies start to map their entire Scope 1, 2 and 3 emissions, and global treaties on a range of greenhouse gases and pollutants become more stringent. This article delves a bit more deeply into each of the three key investment themes, piecing together the main demand drivers underpinning the investment case, and outlines where I think things may develop over the next few years.

[Subscribe now](#/portal/signup)

**Carbon checking**

In the past, commodity producers and trading houses would deploy people to count cocoa stocks in the Ivory Coast, use infrared cameras to monitor oil levels in storage tanks in the US, count crude and product tankers discharging at ports, or set up cameras to film coal stocks at Japanese power stations. The firms used this data to determine inventory levels and profit from price discrepancies. Although some of these methods are still being used, satellites and drones, combined with on the ground verification are increasingly being used to monitor fundamentals in ‘real time’.

These same technologies have been deployed to monitor emissions from power stations, factories and airplanes. Remember that the EU ETS reached a €750 billion market valuation in 2022, with other compliance markets accounting for an additional €100 billion. Meanwhile, the value of individual companies is being increasingly affected by their exposure to compliance carbon markets. Gaining advanced insight into the potential demand for EUAs is very valuable for carbon focused investment funds, large compliance entities and investors in Europe’s equity markets (see *[Does the stock market care about the carbon price?](https://www.carbonrisk.world/does-the-stock-market-care-about/)*).[1](#footnote-1)

The chart below shows 2022 EU ETS emissions by sector, comparing verified emissions data and estimates made by Kayrros, a French geo-analytics company, using satellite technology. Overall, Kayrros’ estimates of EU ETS emissions achieved a 98.43% accuracy, with industrial emissions 98.78% accurate. This might explain why the publication of EU ETS verified emissions, at the beginning of April each year, is not the market moving data release it once was (see *[The only number that matters](https://www.carbonrisk.world/the-only-number-that-matters/)*).[2](#footnote-2) 

**EU ETS verified emissions, 2022**

![Image](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/64141b29-842b-4fdf-a100-7c4a4dc0498a_2371x1327-jpeg.jpg)

Source: Kayrros

It’s not only those emissions trading schemes that correspond to a certain jurisdiction that are likely to face increased calls for emissions monitoring. On a global basis, as the focus shifts to cutting carbon emissions, countries greenhouse gas data will face much greater scrutiny, especially once global carbon trading occurs under Article 6\. As I outline in [*How much should we trust the dictator’s CO2 estimates?*](https://www.carbonrisk.world/how-much-should-we-trust-the-dictators/), governments have every incentive to exaggerate how well their economy is doing, and they tend to do this in more authoritarian countries. Could the same incentive to lie exist when discussing the quality of a country’s air?

Last November, the Climate TRACE coalition released the most detailed facility-level global inventory of greenhouse gas (GHG) emissions to date, including emissions data for 72,612 individual sources worldwide. It revealed thatemissions from top oil and gas-producing countries, which report their data to the UN, are up to three times higher than self-reported figures, in part, due to insufficient reporting requirements and consistent underestimation of methane emissions from both intentional flaring and leaks.[3](#footnote-3) 

**Methane “super-emitters”**

The Inflation Reduction Act (IRA) introduces a fee on methane emitted by US oil and gas companies. The methane emissions charge as its known begins in 2024 at $900 ($36 per tonne of CO2e), increases to $1,200 ($48 per tonne of CO2e) in 2025, and will rise to $1,500 a tonne ($60 per tonne of CO2e) in 2026 (see [*Pricing methane emissions out of the atmosphere*](https://www.carbonrisk.world/pricing-methane-emissions-out-of/)). The methane charge is likely to accelerate the market for monitoring systems that can detect and track methane emissions.

The US oil and gas methane detection market could be worth $533 million by 2025, according to projections from BNEF versus a global market of $918 million. One third of this investment is expected to go into satellite monitoring, 35%-40% into drone and aircraft monitoring, with the remainder spent on sensors. As Kayrros outline in this [report ](https://www.ief.org/%5Fresources/files/pages/methane-initiative/ief-methane-report.pdf?ref=carbonrisk.world)with the International Energy Forum, a combination of these technologies - including AI - are required to accurately estimate emissions, and this is being refined constantly.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/1a5e7ef7-d938-47e0-ad16-d69b4a7fdced_595x420.png)

BNEF estimate that the total global addressable market for methane detection from the oil and gas industry could be in the region of $14.9 billion. However, to achieve that market valuation, methane emissions outside of the US and Europe will need to receive significantly more regulatory attention. As monitoring technology develops there is no reason that regulations including levies could not be imposed on other sectors of the economy responsible for significant methane emissions. In turn that will increase the potential size of the global methane emission detection market.[4](#footnote-4)

For example, technology is being used to identify the worst culprits responsible for huge plumes of methane emissions. Satellite data analysed by Kayrros identified 1,005 super-emitter events in 2022\. These “super-emitters” as they are known, are estimated to contribute up to half of total methane emissions for some countries, with around 100 of these major methane leaks happening in the world at any one time. Although some may only last a few hours, some may splurge methane for several months. Over half (559) were identified as oil and gas fields in 2022, 105 were coalmines, and 340 of the “super-emitters” were waste sites. At 184, Turkmenistan had the highest number of super-emitting events - a function of aging Soviet infrastructure. It also had the biggest leak - 427 tonnes an hour - in August, near a major pipeline.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/358d583f-f6d5-40a2-96c6-b014cac63b43_888x729.png)

Source: The Guardian

As regular readers of Carbon Risk will know, man-made emissions of methane are not the sole fault of the fossil fuel industry. The worlds largest meat and dairy corporations are under pressure to cut greenhouse gas emissions too. Some 15% of total GHG emissions (81 Gt CO2e) rise as a result of animal related products, with half of this estimated to be methane. As these companies increase their commitments under the [Global Methane Pledge](https://www.globalmethanepledge.org/?ref=carbonrisk.world) and increasingly become subject to emissions pricing then the demand for remote emissions monitoring will grow (see [*Better in than out: The worlds largest meat and dairy corporations are under pressure to cut greenhouse gas emissions*](https://www.carbonrisk.world/turning-sour/)).

**Deforestation’s minority report**

In [*Protection money*](https://www.carbonrisk.world/stopping-deforestation-faces-an-opportunity/) I discuss the challenges involved with protecting vulnerable parts of tropical rainforests from environmentally damaging economic development; things like illegal logging, cattle grazing and mining. One option is to compensate landowners for the opportunity cost associated with the value of commodities that could be extracted from deforested land. Protecting the frontier of the forest means that the economics of exploiting the interior become much more difficult to stack up. However, as I outline in the article, the cost involved with persuading landowners and other agents not to deforest is immense.

An alternative approach that can help enforcement of existing deforestation laws is being developed by environmental non-profit organisation Imazon. They have developed an artificial intelligence platform designed to prevent deforestation from happening at all, by first predicting the areas where it is most likely to occur.

According to Imazon, 90% of accumulated deforestation is concentrated within 5.5km of a road, 90% of logging takes place within 3km, and 85% of fires within 5km. That means monitoring the construction of roads is crucial to predicting where deforestation is likely to occur next. PrevisIA combs through thousands of satellite images to spot new roads slicing through the biome, notifying agencies that monitor the forest of the high-risk areas, enabling enforcement agencies to warn landowners of the penalties, should deforestation occur.[5](#footnote-5)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-170.png)

Read Carbon Risk in the Substack appAvailable for iOS and Android[Get the app](https://substack.com/app/app-store-redirect?utm%5Fcampaign=app-marketing&utm%5Fcontent=author-post-insert&ref=carbonrisk.world)

**Everything including the carbon sink**

Nature-based carbon credits, in particular those associated with REDD+, have come in for significant criticism over the past six months. Although some of the negativity has been warranted, much of it belies a false belief in how the projects work in the real world. Simply because they have passed all the verification checks does not mean that the carbon project has a 100% chance of success. Their success or failure in avoiding emissions or removing carbon from the atmosphere is subject to significant uncertainty, as is any venture.

Carbon credit ratings agencies such as BeZero and Sylvera use a combination of observation techniques, from satellites to ground-level measurement, coupled with advances in AI to assess the quality of nature-based projects. The technology can be used detect ecosystem change with greater accuracy, distinguish observed change from business as usual, using dynamic baselines, and systematically refine assessments of carbon stock densities.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/675fcdc3-5045-42d7-a2c9-f011e0e38f62_815x543.gif)

Source: Sylvera

Specifically the firms have invested in the technology to help them assess the risk of additionality, over-crediting, non-permanence and leakage. The idea is to get to a situation where the rating represents the risk that the carbon offset project fails to deliver its claims. For example, ‘D’ rated projects will be cheap, but they come with high risk of ‘greenwash’. ‘AAA’ rated projects will be expensive, but they reflect the low risks involved to the buyer. At least then, buyers can make an informed decision about how they use carbon credits to help them meet their net zero strategy.

Although people tend to think about forests when they first consider the role of natural carbon sinks to mitigate climate change, they tend to forget what lies beneath may be even more important. Minor changes in that vast carbon sink beneath us have major implications for the amount of carbon in the atmosphere and the outlook for global warming. Some estimates suggest that soil degradation due to human activity has contributed about a quarter of all manmade global greenhouse gas emissions. Soil also has the potential to act as a big carbon sink, if we manage it effectively. Recent estimates suggest that global soil carbon sequestration has the potential to be in the range of 2-6 GtCO2 each year, assuming full adoption of carbon sequestration practices.

As I outline in [*Carbon farming puts a value on dirt*](https://www.carbonrisk.world/carbon-farming-puts-a-value-on-dirt/), one of the main types of companies to benefit from the influx of capital from venture capitalists over the past 18 months are start-ups specialising in climate change data intelligence, many of which are focusing on soil. Rather than relying on the lengthy and costly process involved with physical soil sampling, soil data firms are making use of satellites, drones, machine learning, coupled with ground observation to track soil quality in real time. For now at least, attention is focused on the US and Australia, both countries with large farms and a burgeoning soil carbon credit market. As the technology improves there is scope for other markets that value the soils carbon sink properties correctly to emerge.

**Corporate carbon accountancy**

Individual companies may have to report on their Scope 1 carbon emissions if they are obligated under a emissions trading scheme. Some, such as those oil and gas companies subject to the methane charge in the US, will soon be required to report on their methane emissions, while others may be doing it voluntarily under The Methane Pledge.

The Securities and Exchange Commission (SEC), the US government agency responsible for ensuring the integrity of securities markets, is expected to publish new rules shortly requiring listed companies to provide detailed climate related disclosures. This includes vital quantitative data such as greenhouse gas emissions - Scope 1, Scope 2 and Scope 3 (the latter only where they were deemed “material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions”.[6](#footnote-6)

In [*Owning up to Scope 3*](https://www.carbonrisk.world/owning-up-to-scope-3-emissions/), I argue that, “there is going to be increased demand for services that can monitor emissions in real time, for example companies that use drones, satellites, AI, etc to accurately report and benchmark different GHG emissions. All of this data will require software that can source and collate disparate data sources together. Demand for trusted carbon accountants will also increase.”

For those companies that have to, or decide to report their Scope 3 emissions there is going to be increased demand for data that can prove the provenance of a particular commodity or good. It is increasingly being pursued to track deforestation risks, but will need to be a lot more comprehensive if we are to accurately track Scope 3 emissions, both up and down the supply chain for various industries.

The material damage to a company that fails to accurately report on emissions could be high. For example, accusations of cheating or greenwashing, overall bad publicity, losing their ability to borrow on competitive terms. It’s possible that investors will use satellite and other remote monitoring to track the emissions of companies (and indeed whole countries) required to publish their emissions. Maybe even competitors in the same industry will use the technology to keep tabs on each other (see [*Not just hot air?*](https://www.carbonrisk.world/not-just-hot-air/)).

[Get 20% off a group subscription](#/portal/signup)

[A 'green' unicorn“It is my belief that the next 1,000 unicorns — companies that have a market valuation over a billion dollars — won’t be a search engine, won’t be a media company, they’ll be businesses developing green hydrogen, green agriculture, green steel and green cement,” - Larry Fink, CEO and Chairman of Blackrock, 25th October 2021![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-171.png)Carbon RiskPeter Sainsbury![](https://images.unsplash.com/photo-1574607407517-cd664b1504f5?ixlib=rb-4.0.3&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)](https://www.carbonrisk.world/a-green-unicorn/)

---

1. https://twitter.com/Kayrros/status/1647876135814930432/photo/1 [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.reuters.com/business/sustainable-business/global-carbon-markets-value-hit-record-909-bln-last-year-2023-02-07/#:\~:text=The%20world's%20biggest%20carbon%20market,87%25%20of%20the%20global%20total. [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://climatetrace.org/news/more-than-70000-of-the-highest-emitting-greenhouse-gas [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. Satellite data analysed by Kayrros identified 1,005 super-emitter events in 2022\. These “super-emitters” as they are known, are estimated to contribute up to half of total methane emissions for some countries, with around 100 of these major methane leaks happening in the world at any one time. Although some may only last a few hours, some may splurge methane for several months. Over half (559) were identified as oil and gas fields in 2022, 105 were coalmines, and 340 of the “super-emitters” were waste sites. At 184, Turkmenistan had the highest number of super-emitting events - a function of aging Soviet infrastructure. It also had the biggest leak - 427 tonnes an hour - in August, near a major pipeline. [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
5. https://www.theguardian.com/technology/2023/apr/29/could-ai-save-amazon-rainforest-artificial-intelligence-conservation-deforestation [↩](#footnote-anchor-5 "Jump back to footnote 5 in the text.")
6. According to the SEC [proposal](https://www.sec.gov/news/press-release/2022-46?ref=carbonrisk.world), published in March 2022, large companies would be required to disclose and have independently verified their Scope 1 and Scope 2 emissions. Unlike Scope 1 and 2 emissions, Scope 3 emission disclosures would not need third-party verification and would be protected from legal liabilities. [↩](#footnote-anchor-6 "Jump back to footnote 6 in the text.")
### Repost: Why Asia is pivotal to future carbon market growth
URL: https://www.carbonrisk.world/repost-why-asia-is-pivotal-to-future/
Last updated: 2025-08-21T10:38:20.000Z
*A prolonged heatwave has cooked much of Asia during the month of April.*

*Temperatures climbed to 45°C in Myanmar, 44.5°C in India and 41.9°C in China, with Thailand and Laos breaking all-time high records. The oppressive weather has resulted in a surge in electricity consumption as air-con demand has surged, with many schools closed to avoid the worst of the health risks.*

*Only last August, factories across the Chinese province of Sichuan were ordered to stop production for 6 days to protect power supplies to residential consumers. This after a heatwave and prolonged drought prompted fears that the regions hydroelectric generation would not be able to supply sufficient power.*

*As this article from last summer demonstrates, Asia is particularly vulnerable to climate change, not simply because of the health risks to its population, but also to its future economic development. According to recent projections by the Asian Development Bank, climate change under a high emissions scenario could impose GDP losses of 24% in the whole of developing Asia, 35% in India, 30% in Southeast Asia, and 24% in the rest of South Asia by 2100.*

*The Association of Southeast Asian Nations (ASEAN), a bloc of ten countries in the region, are all parties to the Paris Agreement. Eight of its members have committed to net zero by 2050, while Indonesia is targeting 2060 or sooner, and only the Philippines yet to make a definitive promise. Many countries in the region are also heavily reliant on thermal coal power generation to power their economic development. But this isn’t stopping their governments from moving forward with climate policies including carbon pricing.*

*In February 2023, the Indonesia government launched the first phase of their emissions trading scheme covering coal powered electricity generators. At first only the largest coal facilities (those with a capacity of at least 100MW) will be covered by the scheme, before being rolled out to smaller coal and other fossil fuelled power plants at a later date.*

*As you’ll see, many countries in Asia are also in a unique position as a result of their immense carbon sinks (e.g. forests, mangroves, etc.) to benefit from global carbon credit trading under Article 6\. Asia’s natural capital may soon start to be correctly valued - bringing a halt to deforestation and also helping to support local economies.*

*Given the extreme weather events of recent weeks, and the growing support from governments and investors for carbon markets and climate focused investing respectively, this article is perhaps more relevant than ever.*

---

Sometime it’s can be difficult for investors to see the potential in a market beyond their own immediate borders.

Investors in Europe, North America and other developed economies appear to be hardening their stance to investing in anything that feels like ‘ESG’. The proportion of company earnings calls mentioning ESG looks like it may have topped out earlier this year at 20-25%.

Carbon credits, by definition, sit under the ‘E’ in ESG. Like their ‘ESG’ brethren, the valuations of companies involved in the carbon credit sector have also been shaken to the core in recent weeks.

In recent articles I’ve highlighted some of the specific headwinds currently affecting the carbon credit sector. In particular, signs of resource nationalism as countries with bountiful natural capital understand the implications of global commitments ([here](https://www.carbonrisk.world/the-first-signs-of-carbon-credit/)), the impact of higher agricultural commodity prices ([here](https://www.carbonrisk.world/nature-based-carbon-credit-prices/)), and concerns over energy security costs trumping those of energy transition ([here](https://www.carbonrisk.world/carbon-neutral-lng-faces-its-toughest/)).

It’s important to recognise the difference between short term and long term factors. And in the context of the current malaise over 'ESG’, its even more important than ever to take a broader, world-view of the problem carbon offset projects and the credits they generate are trying to fix, and the opportunity they may present.

Asia is particularly vulnerable to climate change. Asia is also blessed with significant natural capital. Protecting forests, peatlands and coastal zones at risk of deforestation help to conserve carbon stocks. Asia is experiencing the downside to climate change now.

Policies to support decarbonisation in the region are at a relatively early stage. However, there are no signs yet that investors are wavering, while funds exposure to ‘ESG’ remains low relative to Western levels. Commitment to climate action among Asia’s governments, corporates and consumers remains high, even though they are being buffeted by many of the same economic forces hitting elsewhere.

As carbon investors we need to recognise when shorter term factors make the long-term opportunity more attractive. Lets dive in.

_This post is for paying subscribers only._
### BECCS - the carbon removal chimera
URL: https://www.carbonrisk.world/beccs-the-carbon-removal-chimera/
Last updated: 2025-08-21T10:38:21.000Z
Once Western Europe’s largest coal-fired power station, the Drax power station in North Yorkshire, England officially called time on coal this week.

Over the past decade the power station has converted all four of its coal units to burn biomass instead, and now imports wood pellets sourced from forests in Canada. Under UK rules, at least 70% of a power generator’s woody biomass consignment must be classified as ‘sustainable’. However, claims that the wood pellets have been sourced in a sustainable manner have been disputed. Ofgem, the UK’s energy regulator, has commissioned a probe into Drax’s compliance with the sustainability rules.

Advocates of burning biomass say that because carbon emitted is offset by the trees as they grow then it can be classified as carbon neutral. Drax had hoped to take this one step further and capture the carbon emitted from the biomass combustion, a process supporters claim would have resulted in net carbon removal from the atmosphere.

The process is known as bioenergy with carbon capture and storage (BECCS). BECCS involves power generation using biomass as a fuel, with carbon capture technology used to capture and permanently store the carbon dioxide.

_This post is for paying subscribers only._
### Investment funds ditch carbon after failure to decisively breach €100
URL: https://www.carbonrisk.world/investment-funds-ditch-carbon-after/
Last updated: 2025-08-21T10:38:22.000Z
After first pushing through €100 per tonne on 21st February, the EU carbon market then twice attempted to push decisively through the €100 per tonne level, failing on both occasions.

That was enough of a signal for investment funds to dial back their exposure.

The latest Commitment of Traders (COT) report (w/e Friday 21st April) shows that as carbon failed to even breach the €98 per tonne level in the second week of April, investment funds cut their exposure even more, culling their net long position by 4.7 million EUAs to 7.4 million EUAs. By the end of last week, EUAs had declined to the €90 level (see *EUA Commitment Of Traders (COT) data 101* at the end of this article if you are new to the data).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/64db124b-4bd3-4564-811b-089539c166dc_1485x672-1.png)

Analysing the COT report can give investors an insight into how market participants react at different price levels and to certain fundamental factors. Investment funds are especially important to watch. This article delves into the COT report into even more detail to understand what clues we can glean from their past behaviour, what it might mean for EU carbon prices in the short term, and the fundamental factors we need to watch out for during the rest of 2023 and beyond.

_This post is for paying subscribers only._
### Protection money
URL: https://www.carbonrisk.world/stopping-deforestation-faces-an-opportunity/
Last updated: 2025-08-21T10:38:23.000Z
In 2021, world leaders from countries that contain close to 85% of the world’s forests agreed to end net deforestation by 2030\. Halting deforestation is critical to meeting the 2050 net zero targets because when forests are cut down, vast quantities of carbon are released, while the carbon sequestration potential is lost.

There is no pathway to limit global warming to 1.5°C without immediate action to halt deforestation. However, to be on course for 2030, deforestation rates needs to decline by 10% per year, every year.

Unfortunately, the value we currently place on tropical forests in particular, is far too low if we want to protect them from deforestation.

A recent report by the Energy Transitions Commission (ETC) suggests that payments to protect the frontier of tropical forests from being cleared and releasing carbon into the atmosphere, will need to rise by at least 50-fold per year compared with current funding arrangements. However, once you take full account of the opportunity cost of the land to those who would look to exploit it for commodities and other uses, payments will need to rise at least 400-fold per year.[1](#footnote-1)

Commodities are the primary driver of deforestation in the tropical rainforests of Latin America and South East Asia. It typically involves the permanent conversion of forests to graze cattle or to grow oilseeds such as soy and palm oil. In contrast, shifting agriculture is the main cause of deforestation in West African tropical forests. This latter process involves the clearing of forest for agriculture, often by smallholder farming, before it is then temporarily abandoned.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/45c2d7de-2066-4df6-bcff-5046f6ce1fef_885x811-2.png)

Although some governments have succeeded in implementing measures protecting vulnerable parts of their tropical forest from economic development, via effective monitoring and enforcement of anti-deforestation laws, for the most part this has only been achieved to a very limited degree.

In the absence of adequate protection by the state, another way to deal with deforestation is to tackle the underlying incentives, enabling landowners and other agents to put a value on the forest and the embedded carbon. This means they can then make an informed decision as to the economic value of cutting down the forest to grow crops and graze cattle, versus the value of maintaining the forests in-situ.

The opportunity cost of not deforesting will vary significantly depending on the attractiveness of the local soil and climatic conditions, the input and supply chain costs required to extract the commodities and access to the end market (e.g. labour, transport, storage, regulatory enforcement), and finally, the type of commodities produced and the price they can be sold at.

The marginal cost of avoiding deforestation is \~$35 per tonne of CO2, according to estimates by Vertree. Their analysis is based on the cost of producing and selling deforestation linked commodities in over 50 tropical forest countries, including Brazil, Indonesia, Malaysia, and the Democratic Republic of Congo. This tallies with other research published in 2019 that calculated the average opportunity cost of avoided oil palm expansion in Indonesia at $27.74 per tonne of CO2 (see [*Nature-based carbon credit prices need to rise: High commodity prices increase the incentive to clear forests and plant crops*](https://www.carbonrisk.world/nature-based-carbon-credit-prices/)).

Compensation to landowners to avoid deforestation is significantly less than $5 per tonne CO2 based on the Nature-Based Global Emissions Offset (N-GEO) futures contract price. Meanwhile, price assessments by Trove Research analysing both exchange and OTC trades suggest the weighted average REDD+ price was around $8 per tonne CO2 in late Q1 2023, down from $14 per tonne CO2 in early 2022.

Whichever way you price it, the economic case for deforestation is well in the money.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/4bf3dbe2-6459-4a0d-aede-89c5d8cdd477_1230x666-2.png)

In theory at least, if the carbon price equals the marginal cost of avoiding deforestation then the landowner would be indifferent between deforesting to produce commodities, and keeping the forest standing and generating carbon credit payments. However, merely being indifferent to cutting down the forest or not is unlikely to be a sufficient condition to persuade farmers and ranchers to refrain from doing so.

_This post is for paying subscribers only._
### Chemical reaction
URL: https://www.carbonrisk.world/chemical-reaction/
Last updated: 2025-08-21T10:38:24.000Z
The European chemical industry has been a lightening rod for the forces unleased by the energy crisis.

In comparison to other energy intensive industries, the chemical sector is particularly vulnerable to changes in economic sentiment. Often the first to feel the impact of rising consumer demand, the sector is also the first to feel the impact when consumption softens.

Exacerbating the challenge facing the industry is the inherent volatility of petrochemical prices. Sharp upswings in virgin plastic prices typically incentivise the building of lots more capacity, but because of long lead times this capacity may only come on-stream just as prices plummet. And then, as prices plunge the depths, there is little incentive to cut capacity as long as each plant can be cash positive – further perpetuating the volatile cycle.

The worst situation for the sector is when it is caught in the middle between two opposing forces - strong energy prices and weak petrochemical prices.

In a series of articles I plan to delve into the factors driving recent European production and emission trends across six of the most carbon intensive industries. As free allowances are gradually phased out over the next decade, the outlook for production across these industries will become increasingly important in determining demand for EU carbon allowances. This update focuses on the European chemical sector.

_This post is for paying subscribers only._
### Split by the atom
URL: https://www.carbonrisk.world/split-by-the-atom/
Last updated: 2025-08-21T10:38:24.000Z
On Saturday, Germany’s three remaining nuclear facilities were shutdown. The plants - Emsland, Neckarwestheim II and Isar II - provided 4 GW of power to the country’s electricity grid.

The closures marks the end of long planned decision to stop nuclear generation in Germany, a technology that some critics argue is unsafe and unsustainable. Years of anti-nuclear protests had put pressure on successive German governments to phase out the technology. And then, in the aftermath of Japan’s 2011 Fukushima disaster in which an earthquake and tsunami caused three nuclear meltdowns, Chancellor Angela Merkel set 2022 as the deadline for Germany’s nuclear generation.

Following the Russian invasion of Ukraine and the spike in energy prices, the current German Chancellor, Olaf Scholz agreed to a one-off extension to 15th April 2023\. Of those other EU countries (among them Spain, Switzerland, Belgium) that also agreed in 2011 to phase out nuclear power, the Belgian government overturned its energy strategy in light of the energy crisis and reached an agreement to extend the life of two of its newest nuclear reactors by 10 years, abandoning the previous plan to exit nuclear power by 2025\. For Germany though, 15th April was the final cut off.

The day after Germany’s final reactors closed, Finland's 1.6 GW Olkiluoto 3 (OL3) nuclear reactor, Europe's largest and the first to be built for 16 years, began generating electricity. The facility is 14 years late. Construction at the plant began in 2005, however technical issues including a string of breakdowns and outages prevented the operators from sticking to OL3 original four year construction timeline.

Nuclear power divides Europe. Until this past weekend, 13 EU member states generated electricity with nuclear power, while 14 did not. Germany has now completely pivoted away from nuclear energy, but other countries are far more sympathetic to the benefits that the zero carbon, baseload power technology provides. Rather than being a uniform nuclear family of countries all pulling in the same direction, the dysfunctional nature of the European family of member states increases the risk of political uncertainty.

In September 2021, Poland announced plans to construct six nuclear reactors, with the first to be completed by 2033 and the rest due to follow by 2043\. The country has long sought to pivot from thermal coal to nuclear. In August 2022 the government approved legislation aimed at speeding up nuclear preparation and implementation.

In December 2021, the Netherlands coalition government proposed constructing two new nuclear power plants. Construction is scheduled to start in 2028, near the country’s only nuclear facility, with the reactors due to be built by 2035.

On 10th February 2022, two weeks before the Russian invasion of Ukraine, French President, Emmanuel Macron announced plans to build six nuclear reactors in the country, starting by 2028 with the first scheduled reactor to begin operations by 2035, plus an option to construct eight more reactors by 2050.

Last but not least, Sweden’s new government have proposed introducing a new law that would lift the current limit of 10 nuclear reactors in only three locations. Sweden has six operating reactors, but it did have twice this number prior to 2011\. An amendment to the law is scheduled to enter into force in March 2024\. No indication has been given so far as to the number of new reactors, nor the timescale for their construction.

The typical motives provided by politicians for the rebound in interest given to nuclear include energy security (especially in the aftermath of the Russian invasion), fears over the high price of energy (ditto), and the low carbon baseload electricity generation nuclear delivers (in order to first meet the EU's Fit for 55 targets and then net zero by 2050).

There are two other related reasons why countries should be so keen to ramp up their nuclear generation. The first is that power consumption is likely to soar due to the energy transition - more EV’s, heat pumps, industrial electrification, etc. That means more demand for baseload power (see [*A margin of safety*](https://www.carbonrisk.world/the-margin-of-safety/)).

The second is that countries will be increasingly dependent on power hungry processes to produce green hydrogen and other green commodities such as H-DRI vital to decarbonise their heavy industries - the latter is particularly attractive for France and Sweden (see [*Europe's bridge to 'green' steel*](https://www.carbonrisk.world/the-bridge-to-green-steel/)).

However, the ongoing historical division in Europe between supporters and detractors of nuclear power threatens the expansion of the technology. EU negotiations recently led to nuclear powered hydrogen production (so-called pink hydrogen) being labelled as ‘low carbon’, rather than green. Proponents of the argument that nuclear should be classed as green - in the same bucket as renewables - contend that it is a vital step in attracting the necessary capital to help build out nuclear capacity.

Countries intent on pushing on with nuclear face a number of headwinds, most notably underestimating the construction time necessary to build a nuclear reactor. Finland's Olkiluoto 3 reactor took 18 years to finish after all! What lessons can we learn from the history of nuclear construction?

The median time to build a nuclear reactor is 6.3 years, according to [analysis ](https://hannahritchie.substack.com/p/nuclear-construction-time)conducted by .

After digging into the construction times of all nuclear reactors across the world since the 1950’s, the author Hannah Ritchie also uncovered an extreme right-skewed distribution. Although some reactors are built in as little as 3-5 years, others take multiple decades to complete. Overall, two-thirds of the reactors built since the 1950’s took less than 8 years between the first laying of concrete to the date that commercial operations began.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/bc239ed4-ae83-4f43-acf4-896cbb301db4_1600x1209-1.png)

If we focus on only those plants where construction began since 1990 its clear that the build time is reduced - the median build time is 5.7 years. The distribution also shows less skew as well with all reactors builds completed within 15 years. There has been a notable shift in the geographical location in which reactors have been built since the 1990’s. Prior to this period, construction was predominantly based in Europe and North America, however since the 1990’s construction has been focused on Asia.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/270bd869-2737-4949-9d62-158994d3fa85_1600x937-1.png)

After controlling for factors such as the reactor type, the size of the facility, and the geographical location, two related factors appear to be important in determining the speed at which reactors are built according to :

The political and economic context is key. When the objectives underpinning these priorities align, good things happen to nuclear reactor timescales. Necessity is the mother of invention:

> In the 1960s and 1970s, electricity demand was rising quickly in France, the UK, US and other rich countries. They built quickly because delays meant blackouts. Countries such as China and South Korea have been in that position more recently. The urgency is not the same across Europe and the US anymore (other than the urgency of decarbonising their electricity grids…) which might explain why they build very little nuclear and when they do it is slower than it used to be.

Second, (un)learning curves. One of the factors behind the strong performance of Asia’s nuclear builds versus the recent experience in Europe and North America is the cumulative gain and loss respectively of the skills and insight necessary to deliver nuclear projects on time. As the article highlights, countries learn by doing big projects often They benefit from learning by doing. However, as the frequency reduces and skills are lost to other countries a process of unlearning plagues build times:

> Jessica Lovering and Jameson McBride found that ‘learning rates’ for nuclear reactors were positive in France in the 1950s and 1960s, and in South Korea more recently. In both cases the reactors designs were standardised. They learned by doing the same thing over and over. In most other countries and periods, learning rates were negative.

The current economic and political context should have been a strong foundation for the expansion of nuclear generation in Europe. Energy insecurity, high electricity prices, and tough carbon emission reduction targets to meet.

History tells us that nuclear reactors can be built in as little as 3.5 years and easily in less than 5 years. If only there is the economic incentive and political will to make it happen.

Unfortunately, political divisions over the role of nuclear power within Europe and the prospect of further infighting in the future adds to the risk that investors face. This risk adds to the cost, and increases the risk of interruptions.

Delays that Europe can ill afford if it really intends to hit its climate targets.

[France's nuclear winter of discontentNuclear generation tends to be uncorrelated with carbon prices. The exception is when high power prices coincide with a period of tight carbon allowance supply. This August’s surge in European power prices coincided with a sharp increase in EU carbon prices towards €100 per tonne as utilities looked to hedge their power generation, while the supply of a…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-175.png)Carbon Risk](https://www.carbonrisk.world/frances-nuclear-winter-of-discontent/)
### Australia's carbon market reforms get the green light
URL: https://www.carbonrisk.world/australias-carbon-market-reforms/
Last updated: 2025-08-21T10:38:26.000Z
The election of a new government in May 2022 has sparked new life into Australia’s carbon market.

In August the new government announced plans to increase the country’s 2030 emissions reduction target under the Paris Agreement to 43% below 2005 levels (up from 26–28% previously), while also reaffirming Australia’s commitment to hit net zero emissions by 2050\. In early October the government followed up that pledge by launching a consultation into the Safeguard Mechanism crediting framework.

From a low of A$26 in August 2022 prices have surged \~50% to almost A$40 in April 2023 (\~US$27) as the market anticipated the impact of the policy measures set to be introduced on 1st July (see *[Australia's carbon price poised for bull market: Reforms look set to restore trust, significantly increasing ambition](https://www.carbonrisk.world/australias-carbon-market-is-about/)*).[1](#footnote-1)

**ACCU spot price, AS$ per tonne**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/d2902faa-fbb2-4df4-b23b-8cfb08054301_1137x527-1.png)

In late March the Safeguard Mechanism (Crediting) Amendment Act 2023 was passed in a series of Parliamentary votes that represent a key stepping stone on the way to launching the carbon market this summer. Negotiations by opposition party The Greens gave them some key concessions, in particular around the treatment of natural gas and the use of carbon offsets, that are likely to increase confidence in the market compared to the governments original proposal.

_This post is for paying subscribers only._
### Prosperity bends the curve
URL: https://www.carbonrisk.world/the-environmental-kuznets-curve/
Last updated: 2025-08-21T10:38:27.000Z
> *"Distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long term. Goals for more growth should specify more growth of what and for what." - Simon Kuznets, the creator of Gross National Product (GNP), the predecessor to GDP.*

The Kuznets Curve expresses a theory, first advanced by the economist Simon Kuznets, that nations experience a rise in income inequality as they develop, but after a certain income per capita level is reached further economic development results in a decline in income inequality.

A similar relationship between economic development and environmental degradation was first recognised in 1992 as concentrations of sulphur dioxide and GDP per capita were found to exhibit a similar inverse ‘U’ shape. It became known as the Environmental Kuznets Curve (EKC).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/ece33470-b1b1-46cf-abe1-51df8d2ba91d_702x377-2.png)

Source: ONS

The EKC suggests that economic growth first leads to an increase in environmental degradation. However, once GDP reaches a certain level the relationship goes into reverse. Further economic growth is associated with a decline in environmental degradation.

As economies shift from being primarily based on agriculture to one centred on industry, increased amounts of resources are exploited to drive growth, this in turn results in an increase in air and water pollution. The negative externality of environmental damage goes unpriced in the race to increase economic development.

After a certain turning point is reached the relationship between economic growth and environmental degradation changes - there is a ‘decoupling’. Thereafter, further increases in economic development are associated with a decline in the environmental impact.

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Part of the reason for this is the shift from an industrial-based economy to one that is service-based - the de-materialisation of the economy. The other factor stems from a change in the preferences of citizens, one where pollution is too high a cost for further economic growth, and towards an economy that increasingly puts a value on negative environmental externalities. Greater awareness leads to the introduction and greater enforcement of environmental regulations, and increases the incentive to invest and deploy technology improvements that can reduce or eliminate the environmental impact.

It is often when environmental damage is at its worst and most acute in the minds of citizens that the government (and society at large) resolve to actually do something about it. In the UK at least, that point came in 1952\. Smoke generated from the excess burning of coal combined with fog, resulting in a thick layer of smog in major cities such as London, Glasgow, Leeds and Manchester. It became known as “The Great Smog of 1952” and resulted in thousands of deaths. The smog prompted Parliament to pass The Clean Air Act four years later. The Act of 1956 and another Act in 1968 forced urban households to stop burning the most polluting grade of coal (colloquially known as “nutty slack”), and encourage them and nearby factories to switch to smokeless fuels. It marked an initial turning point in the environmental impact from economic growth in the UK.

![Great Smog of London | 1952, Cause, Deaths, & Facts | Britannica](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c03d6a15-c040-430e-bd9b-0ed445ff269f_1600x1011-jpeg.jpg)

Source: Encyclopaedia Britannica

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The association between economic development and environmental degradation is likely to differ depending on the cause and type of pollution and the ease with which it can be abated through fuel substitution and regulation. For example, the UK was able to impose regulations that forced householders to switch fuels. Meanwhile, in the US the Clean Air Act Amendments of 1990 (CAAA) and the cap-and-trade system for SO2 pollution incentivised power generators to switch to low-sulphur thermal coal (see [*The great sulphur dioxide allowance bull market: What lessons can we learn from the first cap-and-trade system?*](https://www.carbonrisk.world/hero-to-zero/)).

Nevertheless, the turning point for the UK’s relationship between economic development and carbon emissions would not come until 1985\. As this [analysis from the UK’s Office for National Statistics (ONS)](https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/compendium/economicreview/october2019/thedecouplingofeconomicgrowthfromcarbonemissionsukevidence?ref=carbonrisk.world) shows, UK economic growth decoupled from carbon emissions when UK GDP per head reached £16,667 (2013 prices), corresponding to UK CO2 emissions of around 586 Mt. Over the next three decades real GDP per head grew by around 70%, while carbon dioxide emissions declined by about one-third. Central to the decline in carbon emissions was the switch from thermal coal power generation to natural gas, and subsequently the emergence of renewable energy generation.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/3ab59224-d580-4ca7-9aba-59c54070c3b5_836x545.png)

Source: ONS

One of the criticisms of the EKC is that it exaggerates the decline in environmental damage after the turning point is reached. For example, conventional wisdom suggests that as an economy moves towards a largely service based economy, the dirty business of actually making things is offshored to where they can be made more cheaply and to lower environmental standards. The products are then imported back into the country resulting in indirect emissions not accounted for within the territorial boundaries of an economy.

However, as [explains ](https://noahpinion.substack.com/p/no-the-us-didnt-outsource-our-carbon)using data from Our World In Data, offshoring of emissions just isn’t that big of a deal: “Here’s a simple graph where we can see how much the consumption-based measure changes the picture for the biggest emitters. The U.S. offshores a little bit of emissions, the EU offshores a bit more (about 18%). About 10% of China’s and India’s emissions represent offshoring, while the rest of Asia is basically neutral.”

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e67dcdb7-c8a7-49ce-93bc-2070cb9b5ab8_3400x2400.png)

Another criticism of the EKC is that it implies that policymakers in advanced economies (those that have passed the turning point), can simply focus on increasing economic growth, safe in the knowledge that environmental degradation will eventually decline to negligible levels. It also implies that developing economies are likely to follow a similar pattern, and that if we only help to nurture their economic development (perhaps via investment and an expansion in trade), they will get through the turning point quicker, and be on the same downward sloping part of the EKC that more advanced economies currently find themselves on.

As with other ‘Curves’ named after the economists that discovered relationships between two variables in the past (i.e., Phillips, Laffer, Engel, etc.), there are no guarantees that the association continues to hold in the future. Nor should policymakers hold onto the belief - as some did in the past - that merely by tinkering with one variable you can control the other. To do so ignores the underlying reasons for why the relationship exists in the first place.

In the example of the EKC it may include first mover advantage (the relationship appears to be strongest in those economies that industrialised first), and the existence of a strong government (such that strict environmental taxes and regulations can be adopted and enforced), the availability of carbon intensive resources (such as coal, oil and natural gas), and the structure of the economy (how reliant is it on heavy manufacturing).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-178.png)

Read Carbon Risk in the Substack appAvailable for iOS and Android[Get the app](https://substack.com/app/app-store-redirect?utm%5Fcampaign=app-marketing&utm%5Fcontent=author-post-insert&ref=carbonrisk.world)

Rather than an inverse ‘U’ shape, the EKC for carbon emissions or other forms of environmental degradation may show an entirely different shape. The ‘U’ may be elongated indicating the time it takes to eliminate carbon emissions given the difficulty of abating emissions that are embedded in much of the economy. For some countries there may be an inverted gamma whereby the positive impact on carbon emission reduction becomes significantly smaller after the turning point is reached.

A recent [paper ](https://www.nature.com/articles/s41598-023-28154-6?ref=carbonrisk.world#Sec10)by academics at the Ulsan National Institute of Science and Technology in South Korea found that 26 countries confirmed the EKC in terms of economic and statistical significance. Of these, 16 economies were found to have crossed the turning point (decoupled countries), whereas 10 had not (non-decoupled countries). While most countries that crossed the turning point portrayed an inverted U-shaped relationship between the income per capita and carbon emissions (e.g., Germany, France, New Zealand, Singapore, Sweden, and Switzerland), a few exhibited a gamma-shaped relationship (e.g. Australia, Canada, and Japan). Needless to say, other studies find different results, with some even questioning the validity of the EKC even in those countries where others say it appears strongest, while other researchers suggesting the relationship may be more widespread.[1](#footnote-1)

The EKC is a polarising concept in environmental economics. It strikes at the heart of two opposing views as to how policymakers should go about incentivising cutting carbon emissions, while also ensuring that their economies remain vibrant.

On the one hand unabated economic growth is seen as the enemy by many environmentalists. Governments should introduce policies that cut consumption, and we should focus on a broader measure of economic development, one that isn’t wedded to simply measuring the rate at which the value of the economy’s output increases.

Others (including this author), argue that technological innovation and productivity are the engine of economic growth. Here, price signals that enable resources to be allocated efficiently, and government support that tackles the barriers to innovation and adoption are the priority - especially when it comes to tackling climate change.

Almost a century before London was smothered by the “Great Smog”, the city’s dwellers were holding their noses through the “Great Stink” of 1858\. So many people were dying of cholera that life in the city became unbearable. A year later the authorities finally began to build a functioning sewage system. Economic development takes many forms, and yes it has come at a cost, but without growth we would not have the resources to invest in the infrastructure and technology to tackle the problem.

And so, rather than stymie less developed economies from economic progress, more advanced nations should look to invest in their energy transition and industrial decarbonisation, finance the infrastructure necessary to clean up their environment, incentivise the introduction of policies such as carbon pricing and other regulations, and most importantly, boost trade and investment to help support their economic growth.

Accelerate their progress through and beyond the tipping point, not holding them back.

[Keeping their powder dryWhere should investors direct their capital if they wish to make the biggest impact to cutting global carbon emissions? It’s an important question for investors to understand if we are to avoid a climate-driven "Minsky Moment". This could occur if rapid climate change, coupled with a lack of action by politicians dealing with other pressing issues, mean…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-179.png)Carbon Risk](https://www.carbonrisk.world/keeping-their-powder-dry/)

---

1. Since 2005, 32 countries with a population of at least one million people have absolutely decoupled emissions from economic growth according to The Breakthrough Institute https://thebreakthrough.org/issues/energy/absolute-decoupling-of-economic-growth-and-emissions-in-32-countries  
Luzzati et al. (2018), who find little or no evidence for the existence of a Kuznets curve for CO2 emissions. https://www.sciencedirect.com/science/article/abs/pii/S0301421518304646 [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
### Char grilled
URL: https://www.carbonrisk.world/char-grilled/
Last updated: 2025-08-21T10:38:28.000Z
Biochar, also known as ‘black gold’, is one of the most promising carbon removal technologies.

When biomass or other biogenic materials are burned at high temperature in the absence of oxygen (a process known as pyrolysis), a solid with a stabilised carbon content is produced known as biochar. The substance bears a striking resemblance to coal, and is aptly referred to as *Pflanzenkohle*, meaning plant coal in German. In English it is more commonly known as charcoal.

Biochar has been used for centuries as a soil improver and pesticide. However, it is biochar’s properties as a carbon sink that is getting the scientific community and many climate focused investors most excited.[1](#footnote-1) 

Pyrogenic Carbon Capture and Storage (PyCCS), or more simply biochar, is by far the most advanced of all the engineered carbon removal methods currently being used to sequester carbon from the atmosphere. Interest in the carbon removal method received a boost in October 2018 after the IPCC classified biochar as a promising “negative emission technology”.[2](#footnote-2)

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### Repost: New Zealand's carbon market
URL: https://www.carbonrisk.world/repost-new-zealands-carbon-market/
Last updated: 2025-08-21T10:38:29.000Z
*In late February I reposted an* [*article*](https://www.carbonrisk.world/repost-the-great-sulphur-dioxide/) *from the Carbon Risk archives drawing attention to the lessons we should learn from the world’s first cap-and-trade system - the United States sulphur dioxide (SO2) allowance trading system.*

*The eventual demise of the SO2 market illustrates what happens when trust is absolutely and unequivocally lost.* As I describe in the article, “the *SO2 allowance trading system also offers a cautionary tale in the power of trust and the fine line that governments must tread if environmental markets are to be successful in achieving their objectives. The term I coined to make sense of this, ‘The Currency of Decarbonisation’, comes directly from reading the economic history of cap-and-trade markets and the SO2 market in particular.”*

*Policymakers in New Zealand would do well to head these lessons as they contemplate the future of their own emissions trading market.*

*As my article from 12 months ago illustrates, the price of carbon allowances in New Zealand (NZUs) increased from less than NZ$10 in 2015 to almost NZ$90 in early 2022\. NZU prices fell sharply, as other carbon markets did after the Russian invasion of Ukraine, but then rebounded to set a record high of NZ$88.50 in November 2022.*

*However, over the next six months the NZU price has lost over 45% of its value, declining to below NZ$50 in the past week as the market lost confidence in the government commitment to its climate change targets.*

*The Climate Change Commission (CCC), an independent body tasked with advising the government on climate policy, had recommended a steep increase in carbon auction price settings to align with the country's climate goals. However*, in what was seen as a blatant attempt to cool the market ahead of an election year, the government ignored the advice of the CCC.

*They first decided to make more allowances available to the market in 2023 than the CCC recommended, meaning that the surplus NZUs available would not decline as rapidly as the market expected. Meanwhile, the cost containment reserve (CCR) trigger price was increased from NZ$70 to NZ$80.64, significantly lower than the CCC's recommendation of a two-tier price structure of NZ$171 and NZ$214\. Finally, the government increased the auction reserve price from NZ$30 to NZ$33.06, but this was much lower than the NZ$60 recommended by the CCC.*

*The uncertainty is bad news for investors in New Zealand’s carbon market of course, but it is also likely to have an adverse impact on the investment decisions of the country’s largest emitters as well. As I describe in* [*Better in than out: The worlds largest*](https://www.carbonrisk.world/turning-sour/)[ ](https://www.carbonrisk.world/turning-sour/)[*meat and dairy corporations are under pressure to cut greenhouse gas emissions*](https://www.carbonrisk.world/turning-sour/) *a high price on emissions is starting to influence the decarbonisation strategies of the largest meat and livestock companies.*

*The risk that New Zealand’s government now confronts is that after meddling in their carbon market they have now put all of that investment at risk.*

---

The New Zealand emissions trading scheme was launched in 2008 as part of the Kyoto Protocol. In a similar vein to the EU’s emissions trading scheme, it has seen some significant changes over that time.

In 2015 the New Zealand scheme transitioned to a domestic only market. However, it has only been since 2020 that the scheme has moved towards something that investors in Europe or California would recognise.

Every emissions trading scheme as a different name for their carbon allowances. Here, allowances are known as New Zealand Units (NZUs), and equate to 1 tonne of carbon dioxide equivalent. NZUs have specific vintages that relate to emissions in a particular year.

As in other carbon markets, the price of allowances in New Zealand have rocketed. Since the start of 2020, the price of NZUs has increased 3-fold to NZ$75, equivalent to almost €50.

_This post is for paying subscribers only._
### Recoupling?
URL: https://www.carbonrisk.world/recoupling/
Last updated: 2025-08-21T10:38:29.000Z
The thaw in the often frosty relationship between the UK and European Union appears to also extend to their respective carbon markets. Both emission trading schemes now appear to have set course in the same direction, shifting towards a gradual alignment, and even opening up the potential for a future link-up.

Before getting into the detail of the UK governments recent policy proposals, and how they mirror those across the channel, lets first recap how the two carbon markets have performed over the past six months. The price of carbon allowances in the UK ETS (UKAs) and EU ETS (EUAs) have converged since December 2022, and are increasingly moving in lockstep. Up until then UK obligated emitters were consistently paying 10-15% more than their European counterparts, although that had dramatically narrowed during the fourth quarter.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/de8bbaff-c211-4760-8330-d29568cc92aa_1100x585-1.png)

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### Europe's bridge to 'green' steel
URL: https://www.carbonrisk.world/the-bridge-to-green-steel/
Last updated: 2025-08-21T10:38:30.000Z
European steel has a relatively low emissions intensity, but it has been under pressure from cheaper imported steel. Unfortunately, many of those imports have been sourced from countries with a significantly higher emissions footprint. According to  the race to replace domestically produced steel is increasingly being won by the dirtiest contenders:[1](#footnote-1)

> Ten years ago, the EU’s mix of finished steel product imports was far more diverse than it is today. Countries with steel emissions intensities below the global average – Taiwan, Vietnam, Egypt and Brazil – were vying for a spot in the top-ten EU exporters club. Fast-forward to 2023 and those countries have lost significant market share to rivals with much higher steel products emissions factors: China, India, South Korea, Russia and Ukraine. The exception to the rule is Turkey, which has below average steel product emissions and was the EU’s top supplier by volume in 2022.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/842275db-e8c5-4638-88d2-6e2949476077_1028x657-3.png)

Click [HERE ](https://public.flourish.studio/visualisation/12591907/?ref=carbonrisk.world)for interactive version

Steel is the biggest industrial emitter of carbon dioxide in Europe, responsible for 5.7% of total EU emissions. Up until recently the industry has had little incentive to decarbonise further given the availability of free EUAs. Meanwhile, exporters of steel to Europe have been able to undercut the relatively low emissions footprint of European steel without penalty (see [*Europe's steel industry yet to feel the full force of the carbon market*](https://www.carbonrisk.world/how-have-higher-carbon-prices-affected/)).

However, this will all change over the next 10 years. Free emission allocations to European steel producers will be gradually phased-out between 2026 and 2034\. This will occur in parallel to the phasing-in of the CBAM, requiring carbon intensive products imported into the EU to face the same high cost of carbon that domestic producers face.

European steel industry will have to up its game, not simply to negate the impact of high carbon prices, but to fend off competition from abroad. We may be moving towards a more level playing field, but that does not necessarily mean that Europe holds all the cards (see [*No level playing field: Europe's carbon levy will accelerate adoption of carbon pricing, but not everyone will win*](https://www.carbonrisk.world/no-level-playing-field/)).

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**How is European steel currently produced?**

Blast furnace / basic oxygen furnace (BF-BOF) is the oldest and most common way of producing steel. The majority of EU steel production (60%) is manufactured using this process. Approximately 2.2 tonnes of CO2 are emitted per tonne of crude steel produced.

The quickest and most economical route to decarbonising Europe’s blast furnaces is to install carbon capture equipment. The problem is that the rollout of CCUS in Europe is still at a very early stage. Developers have focused on cement kilns and energy from waste plants, yet steel plants have not received the same attention. It can take several years to install a large-scale CCUS facility and significant investment is required to develop the pipeline infrastructure to transport the captured carbon dioxide and ensure it is stored securely (see [*Why Europe's heavy industry needs carbon capture and storage*](https://www.carbonrisk.world/why-europe-needs-carbon-capture-and/)).

Electric arc furnaces (EAF) use approximately 80% steel scrap as an input, and potentially up to 100%. This manufacturing process emits significantly less carbon than BF-BOF; around 0.3 tonnes of CO2 per tonne of crude steel. EAFs accounts for around 40% of Europe’s steel manufacturing capacity.

Powering EAFs solely on renewable energy is one solution to decarbonising Europe's EAFs even further. Unlike BF-BOF, EAFs have several operational attributes that can be exploited to complement and grow the demand for intermittent renewable energy according to . [2](#footnote-2)

> EAFs run in batches, and these can be scheduled for when electricity is cheaper – when strong winds coincide with low demand, for example. EAFs consume a huge amount of electricity, so power prices are the single biggest operating cost and a major price driver for steel produced from recycled scrap.  
>  
> EAFs can change their power consumption very quickly by adjusting their instantaneous melting power rate during operation. This enables very fast demand response, meaning EAFs can provide valuable services to grid operators without impacting the quality or safety of the steelmaking process.

Despite this potential opportunity, there is no getting away from the main challenge to scaling EAF capacity - the availability of scrap. According to estimates from Natixis, the scrap pool available to EAFs is only equivalent to 54% of current European steel output - insufficient to meet European steel demand.

Other routes to decarbonise European steel will have to be found.

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**Domestic H-DRI**

Alternatively, steel manufacturers could replace the carbon intensive reducing agent used to produce steel, with a low or zero carbon alternative. The reductant is used to reduce iron ore pellets to produce ‘direct reduced iron’ (DRI), also known as ‘sponge iron’. Hydrogen-based direct reduction ironmaking (H-DRI) replaces coke or natural gas with hydrogen as the sole reductant of iron ore.

The H-DRI is then fed into an EAF and turned into steel by further processing it and adding carbon. Alternatively, the H-DRI can also be fed into a blast furnace in the form of "hot briquetted iron" (HBI). This significantly increases the efficiency of the blast furnace, reducing the use of coke while avoiding having to do away with the sunk cost of the blast furnace (see [*Stranded asset, or last mover advantage?*](https://www.carbonrisk.world/stranded-asset-or-last-mover-advantage/)).

Recall that the REPowerEU plan is targeting 10 million tonnes of domestically produced green hydrogen by 2030 and a further 10Mt of imports by 2030\. REPowerEU also calls for around 30% of EU primary steel production to be decarbonised on the basis of renewable hydrogen by 2030.[3](#footnote-3)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/462c191c-03ef-4121-b8bb-985da40f9541_416x815.png)

One of the biggest issues with producing green hydrogen in Europe is the energy mix (the proportion of renewables) and the energy intensity required. The inherent characteristic of solar and wind generation are their intermittency, and so significant investment may be required to compensate for this according to Natixis. If that is the case then green hydrogen may remain prohibitively expensive:

> The alternative, which is a mix of using much larger electrolysers and/or increasing renewable capacity along with the installation of storage (battery for electricity and/or H2 storage) could make the project prohibitively expensive. For example, one could potentially need to install two or even three times the nominal capacity if a single source of intermittent renewable energy was used.

It’s why France has a point when it argues that hydrogen produced using nuclear should count as renewable, or at the very least countries with a high degree of reliance on nuclear should be exempt from certain rules on renewable capacity additionality. Under EU rules announced in February (Article 4 of the Delegated Act), hydrogen producers in regions where the power generation carbon emission intensity is lower than 18g of CO2e per megajoule can take electricity from the grid and offset their consumption with a power purchase agreement (PPA) for renewables. That could be a huge benefit to France, and to a lesser extent Sweden who will then be able to run electrolyser plants 24/7, without fear of intermittency, avoiding some of the issues outlined earlier that could contribute to higher costs.

However, as Natixis goes onto say, if the EU wants to meet the REPowerEU 2030 steel target then there needs to be much more investment in nuclear. That’s a big problem given France’s patchy nuclear performance in recent years, not to mention the considerable time and prospect for cost overruns involved in constructing new nuclear facilities. In the meantime, a greater call on nuclear and hydroelectric generation for hydrogen production may mean that power is diverted from supplying residential and industrial customers:

> If the EU wants the H2 electrolysis to happen on its grounds then it will need to increase the capacity of low carbon baseload by at least 14.3GW by 2030 \[the equivalent of\] 14 1,000MW nuclear reactors. All in all, to decarbonise the industry the bloc needs around 27GW of low carbon baseload.

Low cost, stable green electricity generation is not sufficient for domestic green hydrogen production to be competitive. The second largest cost component of green hydrogen production is the cost of the electrolysis unit. The growth in electrolyser capacity is pivotal to Europe's decarbonisation ambitions if it wants to meet its REPowerEU target of domestic production. And as I outline in [*Carbon's shifting anchor*](https://www.carbonrisk.world/carbons-shifting-anchor/), electrolyser costs are likely to follow Wright’s Law, whereby the technology follows a learning curve approach with the cost declining as a function of cumulative capacity deployment.

The other option is to import renewable hydrogen from countries with high renewable power generation potential and existing interest in hydrogen export projects. Countries such as Australia, Chile, Morocco, and the United Arab Emirates for example. Despite additional transport and conditioning costs, imports are likely to remain competitive versus domestically produced green hydrogen. According to projections by Aurora, transporting liquid hydrogen by ship from Morocco to Germany will cost €4.58 EUR per kg by 2030\. This compares with the levelised cost of producing renewable hydrogen in Germany in 2030 between €3.90 and €5.00 per kg.[4](#footnote-4)

**Imported H-DRI**

Historically, access to cheap affordable energy has been the main factor in determining the location of steel plants. Even better if there is a rich seam of iron ore lying close by. The latter has become less important over time as iron ore is shipped around the globe. The ore is then processed into DRI at the steel plant.

But there is no reason why this supply chain has to remain that way. Given the challenges outlined earlier in this article, perhaps the most likely way that the EU will decarbonise its steel production is by importing H-DRI from elsewhere in the world.

Countries with significant low carbon baseload power and ample supplies of iron ore will of course be vitally important. Brazil, South Africa, and Australia are blessed with ample supplies of iron ore, while also benefitting from access to low cost renewable energy in the form of hydro and solar. The H-DRI could be produced relatively cheaply from whence it can then shipped to Europe and other destinations requiring H-DRI to decarbonise their steel plants.

The other factor that is often overlooked is the availability of high grade iron ore. EAF DRI requires high-quality iron ore (DR-grade) with iron content of 67% and above. DR-grade iron ore currently makes up only about 4% of global iron ore supply, according to a recent [report ](https://ieefa.org/resources/solving-iron-ore-quality-issues-low-carbon-steel?ref=carbonrisk.world)by the Institute for Energy Economics and Financial Analysis (IEEFA). The need to decarbonise steel is expected to lead to an increase in demand for DR-grade iron ore, while also seeing an increase in innovation into techniques which mean that lower grade iron ore can be utilised, or less DR-grade iron ore needs to be processed.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/39a3bb22-a7c3-42a1-89e3-b6d1fbbe90f8_1101x634.png)

Source: [Shell](https://www.shell.com/energy-and-innovation/the-energy-future/building-low-carbon-demand-sector-by-sector/%5Fjcr%5Fcontent/root/main/section/simple%5F1738510183/list%5F1250866868/list%5Fitem%5Fcopy%5F45101/links/item0.stream/1669034355054/5b1f673472d02633f82125fef387d13c266a454d/shell-decarbonising-steel-digital.pdf?ref=carbonrisk.world)

Steel production is not particularly carbon intensive, at least compared with other metals. It is the sheer volume of steel produced each year that is the problem. And that means it’s too big to fail, it simply must be decarbonised if net zero targets are to be met.

In a perfect economic world in which countries are unconcerned about geopolitics, industrial activity would migrate to where there is a comparative advantage, with the supply chain responding to the price signals (commodity, energy, shipping and carbon, etc.) given to them. Splitting the green steel making industry along the lines described above is one such example.

Unfortunately, the steel sector has always been seen as a strategically important industry. This means that governments may well be hostile to the development of trade routes that increase the risk of destabilising an important steel making ingredient, or undermining the national sovereignty of their steel sector.

Nevertheless, I believe that the fragmentation of the green steel industry is probably the optimal way to achieve the decarbonisation of European steel. Over the next few years it will be important to watch out for H-DRI exporters announcing technological breakthroughs, followed by joint ventures between iron ore miners, hydrogen producers and steel manufacturers, and finally, potentially even trade deals with H-DRI at their core.

[Zero carbon supremacyWar in Europe has pushed its governments to pursue any measure necessary to extricate itself from Russia’s geopolitical sphere of influence. In the short term that has meant sourcing natural gas from other suppliers (e.g. from the US and Qatar), and overriding, at least temporarily, long standing political commitments to phasing out nuclear and thermal c…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-182.png)Carbon Risk](https://www.carbonrisk.world/zero-carbon-supremacy/)

---

1. [Can green steel halt EU deindustrialisation?Toxic mix of factors hurting EU’s aspirations for global leadership in green steel Cleaner domestic steel production waning, dependence on dirtier imports rising Europe’s steelmaking slump added 15.3 mtCO2 to industry’s global footprint since 2014, equivalent to annual emissions of Lithuania![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/25128294-e926-479c-990f-e3863a34ca36_200x200-2.png)Energy Flux](https://www.energyflux.news/p/can-green-steel-halt-eu-deindustrialisation?ref=carbonrisk.world)
2. [Green steel and intermittency riskDecarbonising the steel industry is a monumentally complex undertaking Electrification will be key to making ‘green’ steel Electrification-based pathways hold great promise, but there is no silver bullet The intermittency of renewables is both a help and a hindrance![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/25128294-e926-479c-990f-e3863a34ca36_200x200-3.png)Energy Flux](https://www.energyflux.news/p/green-steel-and-renewable-intermittency-risk?ref=carbonrisk.world)
3. https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/repowereu-affordable-secure-and-sustainable-energy-europe\_en [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://auroraer.com/media/renewable-hydrogen-imports-could-compete-with-eu-production-by-2030/ [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### A margin of safety
URL: https://www.carbonrisk.world/the-margin-of-safety/
Last updated: 2025-08-21T10:38:31.000Z
> *"The purpose of the margin of safety is to render the forecast unnecessary." - Ben Graham*

Arguably one of the most important pieces of climate legislation over the past twelve months is the Inflation Reduction Act (IRA). Signed into law in mid-August 2022, the IRA includes almost $370 billion that should (among many of its aims) accelerate the decarbonisation of America’s power generation sector. Understandably, investors are keen to understand the potential impact on the power generation mix, and crucially given state level compliance markets (i.e., California, RGGI and Washington State), what it might mean for future emissions (see [*The only number that matters*](https://www.carbonrisk.world/the-only-number-that-matters/)).

The key takeaway from comparing two recent reports that analyse the impact of the policy on US power sector emissions is the importance of growing long-distance transmission capacity - additional capacity enables access to more remote, but high-quality renewable resources.

But there are two broader lessons that we can learn simply by delving into the history of power generation emission forecasts. The first is that climate and energy policy rarely stands still, and even though you can guess at what it means for power generation right now, an evolving regulatory framework in the future can accelerate change, especially when it incentivises the adoption of new technologies. Secondly, as the risk of not achieving the Paris Agreement goal of limiting global warming to 1.5° looms larger, investors should consider how governments might begin to assign a margin of safety.

_This post is for paying subscribers only._
### Everything you need to know about Low Carbon Fuel Standards (LCFS)
URL: https://www.carbonrisk.world/everything-you-need-to-know-about-792/
Last updated: 2025-08-21T10:38:32.000Z
California consistently ranks among the worst states in America for air pollution. The topography of the state means that air pollution becomes trapped, often resulting in a thick smog enveloping the cities below.

The Golden State is the most populous state in the US, with the fifth largest economy in the world. Transportation is the largest contributor to greenhouse gas (GHG) emissions in California, accounting for 50% of the states emissions. The sector is also responsible for 80% of the nitrogen oxide and 95% of particulate matter emissions within the state.

The Californian carbon market will be familiar to regular readers of Carbon Risk. However, there is another carbon market in the state that is deigned to tackle the main source of its pollution - the transportation sector. It forms part of a portfolio of complementary policies that work alongside the emissions trading scheme, the Renewable Portfolio Standards and other policies aimed at improving the fuel efficiency of vehicles.

The objective of California’s Low Carbon Fuel Standard (LCFS) program is to reduce the carbon intensity of the states transportation fuel pool by 20% by 2030, and by 80% by 2050, compared with a baseline year of 2010\. The LCFS was introduced in 2011 and imposes a market based carbon cost on transport fuels that have carbon intensity (CI) score above the state’s requirements. The beauty of the scheme relative to more prescriptive policies is that it is technology neutral - it is up to the market to decide where to invest in innovation and how much capacity is required to meet the target.

_This post is for paying subscribers only._
### Squaring up
URL: https://www.carbonrisk.world/squaring-up/
Last updated: 2025-08-21T10:38:33.000Z
Market turmoil in European energy markets last year continues to have an impact on the hedging activities of many of the continents utilities, with some putting their hedging activities on ice as market liquidity evaporated and margin calls soared. The question now is whether or not utilities are done and dusted for their 2022 compliance needs. In this article I delve into the financial results of one of the most active utilities on the EU carbon market.

Investment funds have also recently been roiled by turmoil of a different kind. The re-emergence of financial and macroeconomic uncertainty after the collapse of a number of banks, beginning with SVB and ending (as far as we know) with the bailout of Credit Suisse. The latest Commitment of Traders (COT) data w/e 17th March shows that investment funds cut their net long position as carbon approached €100 per tonne, from 20 million EUAs to 8.4 million EUAs. That mirrors the pattern observed during the two previous occasions when the EU carbon market made a play for €100\. Will traders have the confidence to rebuild those positions, betting that financial authorities have done enough to stop another domino from being toppled (see [*Are investment funds buying the rebound in carbon?*](https://www.carbonrisk.world/reading-the-tea-leaves/))?

_This post is for paying subscribers only._
### Repost: Putting a price on H₂O
URL: https://www.carbonrisk.world/repost-putting-a-price-on-ho/
Last updated: 2025-08-21T10:38:34.000Z
*The* [*UN water summit*](https://www.unwater.org/news/un-2023-water-conference?ref=carbonrisk.world)*, the first for more than four decades, begins today in New York. It comes as the IPCC revealed this week that half of the global population experience severe water stress for at least part of the year. The deficit could get worse over the next decade. Demand for freshwater is expected to outstrip supply by 40% by 2030 if current practices continue, according to the World Economic Foundation (WEF).*

*At the height of last summer, in what was then the middle of a severe drought in Europe and a heatwave in North America, I published this article highlighting the supply chain risks posed by water scarcity. The most important part of the article though for me was what to do about it. As the subtitle of the article alludes to, I believe that carbon markets are just the start of a revolution in putting a price on natural capital. Putting a price on water could be next, but it won’t be easy.*

*The original article was published behind the paywall, but considering the timeliness of the issues raised in this article I’ve decided to remove it on this occasion for the benefit of all Carbon Risk subscribers. I hope you find it useful and do leave a comment.*

---

![brown and green mountains under white clouds and blue sky during daytime](https://images.unsplash.com/photo-1615957148446-6a1647193298?ixlib=rb-1.2.1&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)

Photo by [Shravan K Acharya](https://unsplash.com/@shravankacharya?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/s/photos/drought?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

> ”When a well is dry, we know the worth of water” - Benjamin Franklin

Energy is life. We price it. We trade it.

Carbon emissions are an externality of life. One that we increasingly price and trade.

Water is also essential to life. Yet we fail to put a price on it or trade. Instead it is close to free, or heavily subsidised, even to consumers who could pay more.

Putting a price on the first two in the ‘energy-carbon-water’ nexus enables scarce resources to be allocated more efficiently. Putting a price on them provides the incentive to ensure supply and demand move towards a stable balance. Not to do so would result in persistent surpluses and deficits - harming those in need of affordable energy and polluting our atmosphere with carbon dioxide. Yet despite the benefits we have yet to really begin to recognise the benefits of putting a price on water - the scarcest, most precious of the three.

According to the UN, agriculture accounts for 70% of global water use compared with 22% for industry and just 8% for domestic users. These proportions vary by region with agriculture even more important in Asia, Latin America, and Africa. Meanwhile, in Europe and North America, industry dominates demand for water.

Everything we eat, whether it is your eggs and toast you had for breakfast, the salad you had for lunch and the steak you had for dinner indirectly consumes massive quantities of water in its production. For example it takes 547 litres of water to produce a kg of potatoes, 1534 litres per kg of corn and 2,191 litres to produce a kg of soybeans. But those numbers pale into insignificance once you consider the amount of water needed to produce meat. To produce just one kg of beef requires 109,671 litres of water.

Energy runs on water. In fact, among industries, the global energy sector is the world’s largest water user. Almost all forms of energy production and power generation (whether it be nuclear, oil, coal, gas and of course hydroelectric) depend upon water for their operations, including the transportation of fuels, cooling generators and used to extract oil from beneath the ground. It takes 38 litres of water to power one house for one month from gas (\~1000 kWh), up to 2,100 litres of water from coal and up to 31,000 litres of water to power one house for one month from oil (see [*The forgotten giant of clean energy*](https://www.carbonrisk.world/the-forgotten-giant-of-clean-energy/) and [*High and dry: Drought threatens Germany's plan to burn more coal*](https://www.carbonrisk.world/high-and-dry/)*)*.

Metal supply runs on water. At a basic level drinking quality water is required to support towns that have developed in remote areas, home to mining staff. Water is also favoured in mineral processing because it is a low cost and energy efficient way of transporting materials between processes – including disposing of, or storing, waste materials. Water is also a very efficient medium for supplying chemicals and mixing materials and it is an essential ingredient for some chemical processes. It is also the most convenient medium for gravitational and centrifugal separation of minerals from host rocks.[1](#footnote-1)

Other essential industrial processes are also big consumers of water. For example, in Taiwan water reserves were so low in the summer of 2021 that water restrictions were placed on the semiconductor chip industry. The world’s largest chip manufacturer, Taiwan Semiconductor Manufacturing Co Ltd uses more than 150,000 tonnes of water per day, equivalent to approximately 80 standard swimming pools. Other areas where chipmakers are setting up, such as the US state of Arizona are also suffering from acute water shortages that threaten the production of chips.

This reliance is often most acute in areas already afflicted by water shortages, often making the problem even more acute. This is especially problematic for agriculture where water consumption is especially high and water is permanently withdrawn from its source. This can occur either because the water has been evaporated, transpired by plants, incorporated into products or crops, or consumed by people or by livestock. The majority of the water used in agriculture involves water consumption and so is otherwise removed from the immediate water environment.

Nearly 93% of the Middle East’s onshore oil reserves are exposed to medium to extremely high overall water quantity risk according to the World Resources Institute (WRI). For energy companies operating in the Middle East, inadequate desalination or other water infrastructure can disrupt ongoing projects, delaying oil drilling, production, and processing extraction and production.

Mines can also have a negative impact on the quality and availability of local water supplies. Mines that go beneath the water table are dewatered by pumping, which draws-down the water table in the surrounding landscape. This can reduce the water available to other users and reduce the discharge to streams and other groundwater-dependent ecosystems. Finally, the water from dewatering must be discharged safely to rivers, lakes, or storages and may need to be treated to remove acidity or high metal concentrations.

Energy generation and to a lesser extent, industrial processes tend to take the form of water withdrawals. Water withdrawals are defined as water that is diverted or withdrawn from surface or groundwater, but where some of this water can return back to the water system as return flows. Unfortunately the water that returns to the local environment is not always to the same quality as that first consumed.

The water demand-supply deficit is projected to reach 40% by 2030 if current practices continue, according to the WEF. Population growth, economic development including increased urbanisation, and volatile weather patterns is likely to mean that water stress escalates over the next decade. The competition between agriculture, industry and people for the scarce water supplies is going to become more intense.[2](#footnote-2) 

Unfortunately, there is a spatial mismatch between the demand for water and the ability of the Earth’s geography to supply it. Water covers approximately 71% of the earth’s surface; however, 97% of it is too salty for productive use. Of the 2.5% that is usable freshwater, 70% is in icecaps, and much of the rest is in the ground. This leaves just 0.007% of the earth’s water supply in the form of readily accessible freshwater.

Much like arable land, that freshwater is not evenly distributed with some regions experiencing surpluses relative to demands from their population, while others experience extreme scarcity. For example, \~5% of the global population live in North America and it is blessed with 29% of freshwater. Asia also has around one-third of the world’s supply of freshwater, but it has to support 60% of the world’s human population.[3](#footnote-3)

The supply of water is governed by the flow, rather than the stock. This means there is also a temporal mismatch between demand and supply. There are exceptions like reservoirs which can store water for extended periods of time. In the main though, consumers of water are concerned whether the rains will return and that the river will continue to flow. For the majority of water consumed, the weather and seasonal factors are especially important.

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**The ‘commodification’ of water challenge**

A number of factors typically complicate ascribing value to water as a commodity. For instance, the implicit value of water itself is arguably delinked from its price in that the value of water in sustaining life may be so much greater than a market price can truly capture.

Governments often deem that access to water is a basic human right for which they attempt to ensure access is equitable, no matter how rich or poor you are. In economic terminology it is known as a ‘merit good’. The historical position that water should be free at the point of consumption is very difficult to row back from.

Water assets generally do not have clear and transferable ownership title – rarely can one individual claim rights to a specific reservoir or lake – thus making it difficult to trade water assets, as opposed to more conventional commodities. To be traded on the global commodities exchanges, a resource has to be transferable (even if you are selling future rights to it) and transparently priced.

Water is often seen as a special type of good, a “commons” in the same way that the atmosphere, the oceans and the Arctic are perceived. Regulating access to the these “common” goods is fraught with difficult questions. Who pays to clean it up and in what proportion? How should access be restricted to avoid one party taking more than their fair share? The misuse of water is a classic case of the tragedy of the commons, an economic theory in which every individual tries to reap the greatest benefit from a given resource.

While the ‘merit good’ argument makes sense for the supply of water to the citizens of a country, it does not makes sense in the case of supplying water to agricultural, industrial and energy users. Here, water is an essential input into their production and so they should be made to pay at minimum the marginal cost to supply (including the externalities associated such as sewage).

Putting a price on water should mean that efficient users conserve water, and sell it onto those less efficient yet highly demanding users. This physical settlement isn’t possible with water because of complex rights issues. Trading the rights to water is not the same as trading the underlying natural capital asset. The price could go to stratospheric levels, but if there is no water available then farmers and other industries dependent on water cannot do anything about it other than try to be more efficient in their use.

As with other commodities, price can theoretically help manage demand while providing an incentive to increase supply where it is needed the most. However, the cost of transporting water over long distances means that the supply response, if there is any, is likely to be prohibitively high, at least currently.

**Trading water**

The revolution in putting a price on natural capital has barely begun. Carbon markets have flourished over the past decade or more. Investors and governments are increasingly looking at ways that biodiversity can also be priced. Water could become the next important natural capital market to grow. Indeed, trading of water rights has become more common in water-scarce regions, including Australia, Israel and China, as well as parts of Europe and the US.

The trading of water rights in Australia, an area normally associated with acute water stress but also high demand from agriculture, has existed for some time and is now a $1.4 billion market. The price of water rights in the [Murray-Darling Basin ](https://daff.ent.sirsidynix.net.au/client/en%5FAU/search/asset/1033501/0?ref=carbonrisk.world)(an area of very high water stress located in South East Australia) increased from less than A$100 per million litres (ML) in 2017 to almost A$800 per ML in 2019/20 as water storage levels fell sharply. However, in recent months water levels have increased and are now close to 100% capacity. As a result the water price has plummeted back to below A$100 per ML, or equivalent to \~US$70 per ML.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/16c6f7a5-9171-445e-bd26-da25fda6bbd4_771x535.png)

Israel has sold water to neighbouring Jordan since the mid-1990’s. Jordan is one of the world’s most water deficient countries. In 2021 the two governments agreed on a deal that would see annual water exports from Israel almost double to 50 million cubic metres.

In China, droughts and inefficient water management has meant that many areas, particularly in northern provinces of the country have experienced a water-shortage crisis. Since 2014 China has piloted several water rights markets and in 2016 set up the China Water Exchange.

However, the lack of a clear legal definition of the right to use water has stymied its development resulting in very little in the way of traded volume. In China all water is owned by the state which sets annual water-use quotas for each province. The provincial governments then distribute them among local governments under their jurisdiction.

Meanwhile, in California the right to access water has been priced. Between 2017 and 2019 the [Nasdaq Veles California Water Index](https://veleswater.com/?ref=carbonrisk.world), a weekly spot rate price of water rights in California, averaged around US$250 per one-acre foot. February 2020 was the driest February in California for over 100 years and the state suffered from acute water scarcity. Over the next three months the price more than tripled to US$700 per one-acre foot in June 2020, before gradually dropping back to US$500 per one-acre foot in October.

In late 2020 exchange operators CME Group and Nasdaq launched a cash settled futures contract based on the price of water in California. Since then water scarcity in California has become even more acute with the state enduring its driest start to the year since the late 19th Century. In July this year prices increased to US$700 per one-acre foot, a record level (equivalent to US$863 per ML).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/00e94b2c-d3ce-4a54-a099-41014d6d4202_1018x560.png)

An issue with natural capital markets such as water futures is that there is likely to be little or no information flow prior to the front month of the contract. This is a problem according to Craig Pirrong, Professor of Finance and Director, Global Energy Management Institute, Bauer College of Business University of Houston, one that’s likely to stymie the contracts development and means that it is very unlikely to turn into a means for speculation or hedging:

> “There is little information that arrives today that would motivate people to trade today contracts with payoffs contingent on future weather, even for a future only months away.”

[Get 20% off a group subscription](#/portal/signup)

**A shadow price of water**

In the same way that many companies are adopting an internal carbon price in the absence of a formal compliance carbon obligation, some are adopting an internal price for the water they use. By doing so they hope to incentivise changes in business practices to better reflect the risk that water scarcity could have (see [*In the shadows: Everything you need to know about internal carbon pricing*](https://www.carbonrisk.world/in-the-shadows/)).

Companies around the globe are increasingly talking about water related risks during earnings calls. According to Barclay’s, mentions of “clean water and sanitation” in corporate transcripts doubled over the last 15 years.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/2cc3a2e2-78c1-4e1b-a174-e60d12e4029d_675x386.png)

A [2021 report from Barclay’s ](https://www.cib.barclays/our-insights/3-point-perspective/calculating-the-true-cost-of-water-for-the-consumer-staples-sector.html?ref=carbonrisk.world)suggests that equalizing water costs across emerging and developing areas while factoring in the cost of droughts, floods or other extreme water events, reputational damage and impacts of water shortages means the true cost of water is three to five times more than that typically reported by companies.

While adopting an internal price of water may help to encourage water users to become more efficient in their use of water, potentially resulting in lower demand, it does not on its own provide a means for the physical trade in water to take place, arbitraging the price disparities between areas of water surplus and deficit. 

**Water as a natural capital asset class?**

Water has many of the features we think of in an asset. It is scarce, durable and valuable.

However, the market for carbon allowances and offset credits, there are no visible markets in the physical trade in water beyond very narrow water-scarce geographic boundaries.

This fragmentation results from the political issues involved (e.g. merit good and lobbying by major commercial users), the designation of water rights (e.g. who owns what and pays whom?), and the physical barriers in the way of more interconnected markets (e.g. the transportation of water over long distances, through pipelines or tankers).

Over time disparate water markets are likely to become more connected, extending the right to access over a broader geography while also ensuring that markets can be physically settled. You only have to look at the development of the oil and gas market - previously high regionalised markets - into a global market as an example.

The main thing stopping this from occurring is a recognition that water is currently being under priced. As its value goes up, the incentive to invest in the infrastructure required to develop a more regional, and then global market will increase.

It is still very early for investors to get involved in actively buying or trading water as an asset class. It’s time will come though. As water scarcity issues become more frequent and acute then the pressure for governments to put a market determined price on H₂O will intensify.

[Subscribe now](#/portal/signup)

---

1. Water is critical for low production, high value commodities such as gold where water is needed to transport and process very low grade ore – over 250 ML of water is required to produce a tonne of gold. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.weforum.org/impact/closing-the-water-gap [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://willembuiter.com/CitiGPSWater.pdf [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
### Crash course
URL: https://www.carbonrisk.world/crash-course/
Last updated: 2025-08-21T10:38:34.000Z
The collapse of three mid-tier American banks in quick succession, followed by a hastily arranged weekend rescue deal of one of Switzerland’s “systemically important banks” may have some carbon market investors nervously suffering from déjà vu given the obvious parallels with events 15 years earlier.

> March 2008: Bear Stearns trades for $100 a share. Days later, it's bought for $2 a share.  
>  
> March 2023: Credit Suisse trades for $3 a share. Says later, it's bought for $0.54 a share.   
>  
> History doesn't repeat itself, but it does rhyme.
> 
> — Genevieve Roch-Decter, CFA (@GRDecter) [ 6:26 PM ∙ Mar 19, 2023 ](https://twitter.com/GRDecter/status/1637520839120748546?ref=carbonrisk.world)[](https://twitter.com/GRDecter/status/1637520839120748546?ref=carbonrisk.world)

Two months after Bear Sterns was rescued the EU carbon price began to fall precipitously. Peaking at almost €30 per tonne in May 2008, carbon lost two-thirds of its value over the next eight months. By mid-January 2009 the price fell below €10 per tonne.

Upmost in the minds of market participants during the Great Financial Crisis (GFC) was the fear that a prolonged economic stagnation would lead to a significant decline in demand for EUAs. The financial crisis exacerbated the negative downward spiral as utilities and financial institutions stepped back from the market as counterparty risk soared, while many industrial emitters sold their free allocation of EUAs to build capital.

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### The only number that matters
URL: https://www.carbonrisk.world/the-only-number-that-matters/
Last updated: 2025-08-21T10:38:35.000Z
A market based approach to pricing carbon is founded on the most basic of economics problems – scarcity.

The science of climate change makes the case that there is a limit to how much additional carbon dioxide can be pumped into the atmosphere before we hit certain thresholds associated with global warming. The 2015 Paris Agreement backed a long-term goal of limiting global average temperatures to “well below 2°C”.

The scarcity is the Earth’s ability to absorb this extra carbon, sometimes known as the carbon budget. If we exceed this budget limit then it becomes more likely that the negative impacts associated with climate change will accelerate, with each additional threshold leading to non-linear impacts.

And so the only number that really matters is the amount of greenhouse gases that are released into the atmosphere.

Based on preliminary estimates, European emissions are likely to have declined between 2021 and 2022, with further falls likely to occur in 2023\. Is this the start of trend, a longer term sequence of annual emission reductions? It will need to be if the EU has any hope of meeting its net zero targets?

Greenhouse gas emissions from Germany, Europe’s biggest economy, declined by 1.9% in 2022, according to preliminary data published yesterday by UBA, the country’s environment agency. UBA report that increased output from renewables and energy saving measures on behalf of households and industry were behind the decline - the energy industry accounts for around one-third of Germany’s GHG emissions.

Although no longer a member of the EU, preliminary estimates of UK GHG emissions point to even larger declines. According to an analysis conducted by [Carbon Brief](https://www.carbonbrief.org/analysis-uk-emissions-fall-3-4-in-2022-as-coal-use-drops-to-lowest-level-since-1757/?ref=carbonrisk.world), UK emissions fell by 3.4% in 2022\. Similar to Germany and elsewhere in Europe, emissions have been under pressure from the strong growth in renewables, coupled with high energy prices that have dampened demand.[1](#footnote-1) 

Verified data on EU ETS covered emissions will be published in two weeks on 1st April. Approximately half of the EU’s emissions are covered by the EU ETS so preliminary data provides a strong indication of the magnitude of the move in official data. Remember that this data release gives a sense of the total amount of EUAs that obligated emitters will have to show that they have purchased (or received free allocations for) by the end of April.

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### The 'sailing ship' effect and the energy transition
URL: https://www.carbonrisk.world/the-sailing-ship-effect-and-the-energy/
Last updated: 2023-03-14T12:00:41.000Z
The ‘sailing ship’ effect – also known as the ‘last gasp effect of obsolescent technologies’ - occurs where competition from new technologies stimulates improvements in incumbent technologies and the firms that produce them.

For example, the advent of steam power inspired the makers of sailing ships to innovate, transforming the structure from one made of wood, to metal and other materials. These new manufacturing techniques improved the carrying capacity of the vessel while also aiding its speed.

Meanwhile, the dawn of electric lighting prompted improvements from gas lamp manufacturers, making them safer and more efficient in their consumption of gas. Steam locomotives were replaced by diesel/electric powered trains enhancing the fuel efficiency, increasing the rate at which train travel was adopted.

The impact of this competition is to lengthen the S-curve of the old, existing technology allowing it to compete, for a while at least with the innovative newcomer. Indeed, it’s often at this moment that incumbent technologies perform at their best. However, the S-curve of the old can only be extended for so long. Sooner or later, new competition hits the exponential growth section of its S-curve, and it’s clear to all to see that it is pushing out the incumbent.

If the incumbent technology is influenced by network effects it can have a powerful impact in determining how the S-curve unfolds. The greater the value proposition of the incumbent network to its participants, and the higher the switching costs involved in moving to an alternative network, the higher the value of the incumbent network. Any new energy network must present a sufficiently high value proposition to users to justify the switching costs.

The preferences of the end user are also important in influencing the S-curve. If the incentives underpinning the behaviour of the end user change in some way, then this could alter the course of the incumbent technology - reenergising technologies that had been seen as obsolete and resulting in an even more prolonged or mis-shaped S-curve.

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**On ICE**

One example of incumbent technologies heavily influenced by network effects is the internal combustion engine. For many, the internal combustion engine (ICE) epitomises the incumbent technology of the fossil fuel age. Faced with the existential threat posed by electric vehicles (EVs), ICE powered vehicles have begun to compete through incremental improvements in new powertrain technologies, the development of alternative fuels, etc.. Together these innovations have improved fuel consumption, cut emissions, and enhanced reliability.

A number of jurisdictions have passed laws banning the sale of new ICE vehicles, including California and the UK. The EU had been expected to rubber stamp its own law, phasing out new sales of ICE vehicles by 2035\. Germany, Italy and the Czech Republic are against the law and believe that there should be place for carbon neutral synthetic fuels, otherwise known as e-fuels.

E-fuels are made by synthesising captured CO2 emissions and green hydrogen (produced using renewable electricity), or blue hydrogen (produced using natural gas, but with the carbon emissions being captured and stored). The fuels release CO2 into the atmosphere when combusted in an engine, but given that those emissions are equal to the amount taken out of the atmosphere to produce the fuel, the e-fuel is carbon neutral.

Synthetic fuels have the advantage that they can use the existing ICE infrastructure, including pipelines, fuel stations, etc., and can even be pumped into current vehicles, without requiring any change in design or subsequent alterations. While some vehicle manufacturers such as VW have gone all-in on electric vehicles, others such as Porsche are pushing a role for both electric and e-fuel powered vehicles.

In a series of articles on Carbon Risk I have highlighted the potential role for synthetic fuels in decarbonising the aviation and shipping industries. There is an argument (one based on scarcity) that e-fuels manufactured using renewable energy should be reserved for hard-to-abate sectors of the economy where batteries are unlikely to scale (see [*Blending in: Decarbonising air travel with 'sustainable' fuel*](https://www.carbonrisk.world/come-fly-with-me/)).

An alternative argument (one based on abundance) is that strong demand for green hydrogen from a variety of end markets should energise investment in renewable and electrolyser capacity. In turn this will lead to further economies of scale, thus driving down prices and increasing adoption.

At present, powering an ICE car using e-fuels is likely to be close to 4 times as expensive as running an EV, according to a 2022 study by EU-based environmental advocacy group Transport & Environment. However, as the cost of producing green hydrogen in Europe comes down (or importing it from elsewhere in the world), the cost of e-fuel could begin to converge with electric.[1](#footnote-1)

Top level motorsport is often the focal point for vehicle innovations that only a few years later become standard on road cars. For example, traction control, anti-lock brakes (BS) were all conceived in Formula 1\. Now, motorsport is targeting the introduction of synthetic fuels. Formula 2 and Formula 3, the feeder series’ to Formula 1, are working towards 100% e-fuel by 2027 with the CO2 used to produce the e-fuel being sourced from Direct Air Capture (DAC). Formula 1 plans on introducing 100% e-fuel shortly afterwards (see *[Climate engineering: The case for technology-based carbon removal](https://www.carbonrisk.world/engineering-the-climate-to-hit-net/)*).[2](#footnote-2)

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**A second wind**

Five thousand years ago Egyptians mariners used to travel up and down the Nile using vessels powered by suspended woven reeds. The technology evolved gradually over time until the advent of steam and diesel engines meant sailing was relegated to a leisure activity.

Sailing ships may still have their comeuppance as the preferences of the end users change; away from speed and convenience, and towards efficiency and zero emissions.

The shipping industry accounts for about 3% of global greenhouse-gas emissions and is trying to move away from heavy fuel oil, which is highly polluting. A series of regulations are set to change the calculus among shipowners, as they now factor in the rising cost of emissions into their investment decisions.

The International Marine Organization (IMO) sets regulations for the international shipping industry. The most recent regulations (IMO 2020) were introduced to shift vessels from high-sulphur to low-sulphur fuel; this either required ship owners to introduce sulphur scrubbers or undergo an engine retrofit that would allow them to use low-sulphur fuel, both of which are expensive. The next set of regulations (IMO 2030) goes even further and are designed to sharply reduce the shipping industry’s carbon intensity. These regulations are aimed at forcing older less-efficient tankers off the market (see [*What price decarbonised shipping? A carbon price will have powerful knock-on effects on global ship supply*](https://www.carbonrisk.world/what-price-decarbonised-shipping/)).

Beginning in 2024, the shipping sector will be subject to carbon pricing for the first time. Vessel operators will need to purchase EUAs amounting to 40% of their emissions in 2024 (payable by April the following year), 70% in 2025, and reaching 100% of 2026 emissions, according to the announcement by the European Parliament. Meanwhile, to stimulate the uptake of sustainable maritime fuels and zero-emission technologies the Fuel EU Maritime proposal sets a maximum limit on the greenhouse gas intensity of energy used on-board by a ship (see [*Putting a cap on European shipping emissions: The maritime sector is beginning to price in EU carbon prices*](https://www.carbonrisk.world/putting-a-cap-on-european-shipping/)).

Now a number of ship owners are looking at reverting to wind propulsion to reduce fuel consumption and cut emissions.

While traditional sails generate lift by creating a difference in pressure between the area in front and behind the sail, more recent technologies use fans to draw air inside a cylindrical shaped tower as the wind flows around it. According to the wind propulsion company, bound4blue, this results in 6-7 times the lift of a conventional rigid sail and could reduce fuel consumption by up to 40%, especially if it is combined with better vessel design and adjustment to routes to take advantage of prevailing winds.[3](#footnote-3)

According to the International Windship Association (IWSA), 21 large commercial ships were sailing with the ability to harness the power of the wind as of September 2022\. IWSA estimates that by the end of 2023, up to 50 large ships will be making use of wind propulsion technologies based on public announcements and known shipyard orders.[4](#footnote-4)

To say that employing sails to power modern day ships is a niche endeavour is overplaying the current situation somewhat. That being said the potential for emissions savings is huge. According to bound4blue there are more than 60,000 ships sailing worldwide that could benefit from wind propulsion, including cargo carriers, tankers, ferries and cruise ships.

One obstacle to uptake of the technology is that it is typically the charterer, not the shipowner, who pays for fuel. This has meant there has been little incentive to invest, especially if the charterer fails to lease the ship long enough to generate a return on the investment. The advantage of the EU carbon price is that it forces the ship owner to pay for the vessels pollution, providing a strong incentive to invest.

**What it means for the energy transition**

For better or worse, green industrial policy is likely to become more interventionist in approach. Governments are likely to adopt more direct support for those industries seen as vital to securing their zero carbon energy transition while also securing their green industrial sovereignty.

But should it be left to policymakers to pick the winners, or should the market dictate which technology will eventually win out? Carbon Risk is all about putting a price on carbon, being completely agnostic as to how net zero should be achieved, and letting the market decide which approach is best.

The future isn’t set. The internal combustion engine and wind propulsion could yet play a much larger role in the energy transition, leveraging existing technologies to accelerate the energy transition while catalysing improvements elsewhere.

---

1. https://www.transportenvironment.org/wp-content/uploads/2021/04/Efuels-in-cars-briefing-correction.pdf [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://the-race.com/formula-1/why-f2-f3s-new-sustainable-fuel-is-more-extreme-than-f1s/ [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://horizon.scienceblog.com/2319/ships-harness-wind-for-voyage-to-a-cleaner-future/ [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://www.rina.org.uk/res/Wind%20Propulsion%202023\_Press%20Release [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### 'Carbon neutral' LNG 2.0
URL: https://www.carbonrisk.world/carbon-neutral-lng-20/
Last updated: 2025-08-21T10:38:36.000Z
A recent shipment of ‘carbon neutral’ LNG between Australia and Taiwan is the first of its kind to be delivered under a new framework supposed to give greater clarity over its origin.

The stakes could not be higher.

The continued growth in LNG over the next couple of decades hinges upon continued demand growth from China and other economies in the region - countries endowed with ample supplies of thermal coal - being persuaded that ‘carbon neutral’ LNG represents a genuine cleaner alternative.

Japan regained its spot as the worlds biggest LNG importer in 2022, according to provisional trade data, pushing China back into second place. South Korea follows in a distant third place, with India and Taiwan someway behind. The strong demand for LNG from these countries has been driven by their quest to reduce their dependence on imported oil, and to accelerate the switch away from thermal coal generation. Beginning in mid-2019, LNG importers in Japan, China and elsewhere in north east Asia began to import increasing amounts of LNG marketed as ‘carbon neutral’.

An LNG cargo can be sold as carbon neutral if the carbon emissions from the full life cycle of the natural gas have been offset through the purchase of high quality carbon credits equivalent to the emissions. This includes the Scope 1, 2 and 3 emissions released into the atmosphere during upstream gas production, liquefaction, shipping and end-user combustion. Note that this does not mean that the LNG cargo creates zero emissions, merely that they have been offset (see [*Owning up to Scope 3: How investors should think about the SEC's proposed disclosure requirements*](https://www.carbonrisk.world/owning-up-to-scope-3-emissions/)).

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### Washington State's inaugural carbon auction clears near $50
URL: https://www.carbonrisk.world/first-washington-state-auction-clears/
Last updated: 2025-08-21T10:38:37.000Z
The first Washington State carbon allowance auction cleared at almost $50 this week, a record high for any North American carbon compliance market.

Recall that what is only the second state-wide carbon trading scheme in the United States came into being on 1st January 2023\. Under the 2021 Climate Commitment Act, Washington State is legally required to reduce its greenhouse gas (GHG) emissions by 45% by 2030, 70% by 2040 and 95% by 2050 compared with 1990 levels.

The number of emission allowances available to be purchased under the Washington State “Cap-and-Invest” carbon market will gradually reduce in line with the target of achieving a 95% reduction in emissions by 2050 (see [*Everything you need to know about Washington State's "Cap-and-Invest" carbon market*](https://www.carbonrisk.world/everything-you-need-to-know-about-1b9/)).

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### Why Europe's heavy industry needs carbon capture and storage
URL: https://www.carbonrisk.world/why-europe-needs-carbon-capture-and/
Last updated: 2025-08-21T10:38:38.000Z
As Europe gradually moves towards net zero, opportunities to cut emissions even further are likely to become significantly more challenging. Rather than cut emissions, another option for heavy emitters is to capture their carbon emissions at source, before they enter the atmosphere, and then permanently sequester the carbon.

As this article shows, carbon prices are entering the realm in which this strategy could potentially pay off. The problem is that it relies on a massive expansion in carbon transport and storage infrastructure to be effective. As Europe increasingly recognises the global competition for climate tech resources and technology, carbon capture is likely - indeed, needs to be - one of the key strategies at the forefront of government support.

But first, lets take a step back and understand why there is likely to be additional demand for carbon capture.

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### The arc of carbon’s curve
URL: https://www.carbonrisk.world/the-arc-of-carbons-curve/
Last updated: 2025-12-05T12:10:23.000Z
The carbon market has the potential to become the world’s largest and most consequential commodity market. The price at which carbon allowances and carbon credits trade could become one of the most important macroeconomic variables.

Despite appearances there isn’t one single price of carbon.

Carbon allowance prices vary significantly across regulated compliance schemes, and are influenced by the local marginal abatement cost curve, the overall emission reduction target, the relative scarcity of carbon emission allowances, and the credibility that the scheme has in the eyes of market participants.

Carbon credit prices in the voluntary carbon market are influenced by their perceived and actual success in avoiding or removing carbon from the atmosphere; for instance, whether offset projects are real, additional, measurable, and permanent and if they deliver any other social or economic benefits. All of these factors are in turn influenced by geographical, political, and technological factors coupled with often volatile demand side sentiment.

There is another variable that is often forgotten when discussing carbon - its place in time.

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### Clean air turbulence over Europe
URL: https://www.carbonrisk.world/clean-air-turbulence-over-europe/
Last updated: 2025-08-21T10:38:39.000Z
The European airline industry is about to become much more exposed to developments in the EU carbon price.

Up until now airlines have been cushioned from the full impact of meeting compliance; policymakers wary of ‘carbon leakage’, global disagreements over the cost, and state support for national champions have all been used as arguments to shield airlines from the full cost of their emissions.

The next few years should give a strong insight into how these companies will react as free allowances are removed. That’s important because it might give us a clue as to how industrials will respond when their access to free allowances are taken away by the middle of the next decade.

The financial performance of the airline industry and individual airlines has been closely linked to the price of jet fuel. As carbon becomes a greater proportion of their operating costs, the hedging and investment strategy of the airline, coupled with their ability to pass costs onto the end consumer will become more important in determining margins.

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### Is permanent deindustrialisation of Europe still a tail risk?
URL: https://www.carbonrisk.world/is-the-permanent-deindustrialisation/
Last updated: 2025-08-21T10:38:39.000Z
European chemicals behemoth BASF is one of Germany’s largest consumers of natural gas and has been particularly hard hit by the surge in energy prices following Russia’s invasion of Ukraine.

In September 2022 the company announced that it was going to introduce a €500 million annual cost saving program in response to the energy crisis. BASF CEO Dr Martin Brudermüller confirming that BASF would downsize in Europe “as quickly as possible, and also permanently”.

It goes beyond simple cost cutting. Crucially, BASF wants to reorientate its business towards other parts of the world, places where energy is more competitive, permitting processes are less onerous and the market for chemicals is growing fast. Here is how Brudermüller summed up BASF’s position: “Europe’s competitiveness is increasingly suffering from overregulation, slow and bureaucratic permitting processes, and in particular, high costs for most production input factors,”

Half of the cost savings are to be incurred at BASF’s Ludwigshafen Verbund site, located 100km south of Frankfurt. A highly optimised agglomeration of chemical facilities, held together by nearly 2,850km of pipes, Ludwigshafen is the world’s largest integrated chemical complex. Energy intensive industries have spent decades and billions of Euros building this network, largely on the basis that cheap Russian natural gas would continue to flow indefinitely.

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### Repost: The great sulphur dioxide allowance bull market
URL: https://www.carbonrisk.world/repost-the-great-sulphur-dioxide/
Last updated: 2025-08-21T10:38:40.000Z
*As the EU carbon price hits the symbolic €100 per tonne mark there has understandably been a spike in interest in carbon markets and lots more Carbon Risk subscribers to boot.*

*Given the surge in interest I thought it would be a good idea to revisit one of my first articles on Carbon Risk, one that goes back to the origin of the cap-and-trade approach that underpins the EU emissions trading scheme and other schemes like it around the world.*

*The United States sulphur dioxide (SO2) allowance trading system may seem like a relic from history but it was revolutionary for its time. Instead of telling utilities how they should cut their emissions through regulation or direct subsidy, the scheme helped put a price on sulphur emissions and then it was left to the market to decide how best to achieve emission reduction targets at least cost.*

*It was technology agnostic. Very different to the situation we find ourselves in today, especially in the US where the Inflation Reduction Act (IRA) seeks to direct subsidies to particular decarbonisation technologies.*

The *SO2 allowance trading system also offers a cautionary tale in the power of trust and the fine line that governments must tread if environmental markets are to be successful in achieving their objectives. The term I coined to make sense of this, ‘The Currency of Decarbonisation’, comes directly from reading the economic history of cap-and-trade markets and the SO2 market in particular.*

---

The EU’s carbon market was not the worlds first cap-and-trade system to tackle a serious environmental problem. That honour goes to the United States sulphur dioxide (SO2) allowance trading system.

Flue gas emissions from coal-fired power generation released huge quantities of sulphur dioxide (SO2) and nitrogen oxides (NOx) emissions high into the atmosphere. They weren’t the only source of these chemicals, but they were by far the most important.

By the late 1980s, there was growing concern in the US and other countries that SO2, and, to a lesser extent, NOx was reacting in the atmosphere to form sulfuric and nitric acids. These acids were particularly damaging to forests and aquatic ecosystems. The problem became known as “Acid Rain”.

**The first cap-and-trade market**

In response to this threat, the Clean Air Act Amendments of 1990 (CAAA) were signed into law. Title IV of the CAAA established a cap-and-trade system for SO2 pollution allowances. At the time, putting a price on the right to pollute was seriously controversial, but it formed the foundations of what we now recognise in the EU ETS and other cap-and-trade systems around the world.

The objective of the policy was to reduce total annual US SO2 emissions by 10 million tons relative to 1980\. Phase I (1995–1999) required significant emissions reductions from the 263 most polluting coal-fired power plants. Phase II, which began in 2000, placed an aggregate national emissions cap of 8.95 million tons per year on approximately 3,200 power generation units. This cap represented a 50% reduction in emissions from 1980 levels.

Between 1990 and 2004, SO2 emissions from US power plants fell by 36%, even though electricity generation from coal-fired power plants increased by one-quarter over the same period. The program’s long-term goal of reducing emissions to 8.95 million tons was achieved in 2007, and by 2010 emissions had declined further, to 5.1 million tons.

At $2,000 per ton, the scheme had a particularly onerous fine for non-compliance (i.e. levied on emitters not purchasing a permit to account for each tonne of SO2 released into the atmosphere by the time of compliance). The high statutory fine and continuous emissions monitoring meant that compliance was close to 100%. But as we’ll see it began to have an important side-effect once the supply of allowances was perceived to be in serious deficit.

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**The SO2 allowance market was a major success in cutting emissions**

Overall, the program delivered emissions reductions more quickly and much cheaper than expected. The cost savings from letting the market put a price on SO2, versus a command and control regulatory approach, were estimated to be between 15% and 90%.

Technological innovation and the speed with which the market matured (the prospect of paying $2,000 per ton hastened the rapid learning curve of participants), were two key factors in the success of the scheme. However, a major component was the acceleration of input substitution by generators from high to low sulphur thermal coal.

This trend was already in place before the SO2 cap-and-trade system came into being and was the result of unrelated policy changes. Deregulation in the rail industry in the late 1970’s and early 1980’s led to a reduction in rail transport costs, which in turn resulted in the increased competitiveness of low sulphur thermal coal.

Some estimates suggest that about one-third of SO2 emissions reductions in the early years of the SO2 trading program were the result of lower freight rates enabling power plants to switch to low sulphur coal, with the remainder due to the SO2 allowance trading program.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-196.png)

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**What happened to the price of SO2 allowances?**

The price of SO2 allowances during the first few years of Phase I (1995-99) were relatively stable at around $100 per ton. As Phase II began the number of emitters caught up in the scheme widened significantly, and with it a more aggressive set of emission cuts. This pushed SO2 allowance prices up towards $150-$200 per ton.[1](#footnote-1)

By the late 1990’s and into the 2000’s it became apparent that the level of ambition outlined in the Title IV of the Clean Air Act was insufficient to counter the high societal cost of sulphur dioxide emissions that was beginning to come to light (e.g. significant adverse health effects from fine particulates). However, there was no authority within Title IV by which the Environmental Protection Agency (EPA) could impose more stringent cuts to the cap.

**Chart 1: SO2 Allowance Prices and the Regulatory Environment, 1994-2012 (1995 $ per ton)**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e0e391af-6de3-4634-80d8-6a1efe8181b8_839x443-3.png)

Source: Data on spot prices compiled by Power & Energy Analytic Resources (PEAR) Inc. from Cantor Fitzgerald until September 11, 2001, and from ICAP United thereafter.

The Administration of George W. Bush enacted its Clean Air Interstate Rule (CAIR) in May 2005 with the purpose of lowering the cap on SO2 emissions to 70% below the 2003 emissions level. In effect they were trying to massage existing legislation to make up for the absence of a mechanism elsewhere in the policy rulebook.

CAIR did this in part by applying more stringent emission requirements on states that were contributing to violations of EPA’s primary ambient air quality standards for fine particulates in the eastern United States. This meant that emitters in those states had to surrender two additional SO2 allowances for every ton of SO2 emissions. This had the effect of cutting the cap by two-thirds.

Since CAIR allowed emitters to bank SO2 allowances for use in the new program, prices rose in anticipation of the more stringent emissions cap. SO2 allowance prices increased from $273 per ton in EPA’s 2004 auction to $703 per ton in the 2005 auction, before rising further to more than $1,200 per ton by May 2005.

Market participants who had previously easily met compliance, now nervously eyed the $2,000 per tonne fine for non-compliance. If the supply of emission allowances was as to be as severe as CAIR intended then there was a risk that some firms would have to cough up and pay a fine. As a result, the price of SO2 allowances was bid up to avoid being empty handed.

Other fundamental factors also fuelled the rise in prices. Hurricanes Katrina and Rita also supported the rise in SO2 prices as natural gas prices soared due to production curtailments. Unplanned railroad maintenance also disrupted deliveries of low-sulphur thermal coal which meant power generators had to switch to high-sulphur coal, increasing demand for SO2 allowances.

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**When trust is lost**

> “If that belief fades, then so do the markets. They do not merely dive; they dive and then they disappear.” - George Goodman, The Money Game

That was to be the peak. Over the next 5 years SO2 allowance price would drop to zero.

The collapse in prices was aided by the EPA’s announcement, in May 2005 that it would re-examine CAIR and speculation about impending legal challenge to the EPA involving a number of states and utilities. The states argued that the interstate trading allowed under CAIR was inconsistent with a provision in the Clean Air Act that obliges each state to prevent emissions that interfere with any other state’s attainment or maintenance of air quality standards.

This put the prospect of a dramatic drop in the cap in serious jeopardy. We never got to see how much of a magnet the $2,000 per tonne fine would eventually serve, or indeed whether SO2 prices would have surged past as entities scrambled to secure sufficient coverage of their current and expected future compliance needs.

Two years later, on July 11, 2008, the Circuit Court of Appeals for the District of Columbia responded by withdrawing CAIR in its entirety. This invalidates the core of prior SO2 regulation including the cap-and-trade system with unlimited trading across states. On that day the SO2 allowance price fell by two-thirds, from $315 to $115 per ton.

In July, 2010, the Obama Administration proposed its Clean Air Transport Rule (CATR) to limit annual SO2 (and NOx) emissions in 28 states, as a replacement for the CAIR. The proposed rule established state-specific emissions caps for power plant SO2 emissions, limiting inter-state trading. The rule was finalized in July, 2011, as the Cross-State Air Pollution Rule (CSAPR), allowing only intrastate trading and limited trading between two groups of states.

Without the possibility of inter-state trading the SO2 market collapsed. SO2 allowance prices in the 2012 auction fell to $0.56 per ton in the spot auction and $0.12 per ton in the seven-year advance auction.

The imposition of state-level and source-specific prescriptive regulation all but eliminated the demand for allowances. States with binding caps under CSAPR have no alternative but to reduce their emissions, whether by mandating the use of scrubbers, retiring coal-fired power plants, or setting up intrastate trading. Either way, the demand for federal SO2 allowances was virtually eliminated.

The whole episode also highlights how much progress was made through bipartisanship, and also how that can easily be taken away through political polarisation. Introduced under Republican administration and then supported through Democrat ones, the likelihood that support for a similar scheme at the federal level covering carbon now appears remote.

Finally, and most importantly the demise of the SO2 allowance market illustrates what happens when trust is lost, absolutely and unequivocally lost. As I note in an earlier article, the price of carbon allowances is ‘The Currency of Decarbonisation’. The message to policymakers is that if you lose trust in that, the market will die. Worse than that you will lose the fight against climate change.

---

1. Source: [The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment](https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/files/mrcbg%5Ffwp%5F2012%5Fstavins2.pdf?ref=carbonrisk.world) [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
### Green and black
URL: https://www.carbonrisk.world/guyanas-carbon-trade/
Last updated: 2025-08-21T10:38:40.000Z
Guyana is forecast to be one of the largest incremental sources of global oil supply growth over the next decade.

For a relatively poor South American country facing a sudden influx in capital, the risk is that politicians will be tempted into splurging on all kinds of projects; some useful and productive maybe, but most likely to be pet political projects that risk undermining Guyana’s future.

Guyana is also one of only a few countries (as well as Gabon and Bhutan) that are net sequesters of carbon. In a carbon constrained world the carbon embedded in the forests of “green superpowers” such as Guyana is a valuable resource worth protecting.

The decision to sell sovereign carbon credits linked to the protection of Guyana’s pristine rainforest is a means by which the country can raise revenue, one that is likely to rise in value as the rules around global carbon trading develop. It also has the effect of tying the governments hands and that of future administrations from making the same mistake as many of its neighbours - the destruction of its rainforest.

**The new Guyana on the block**

Guyana is very new to the oil production scene. Since their initial discovery in 2015, ExxonMobil and its partners Hess and CNOOC now lay claim to reserves totally some 11 billion barrels, located some 200 kilometres off the coast of Guyana. Even though it only began producing oil in late 2019, output has already grown to \~400 thousand barrels of oil per day.

However, it’s the country’s future potential that is interesting. Based on projections from ExxonMobil and Guyana’s government, oil supply is expected to grow to 1,200 thousand barrels of oil per day by 2027\. If it achieves it that will match the production growth witnessed in the heyday of the Canadian oil sands’ between 2010 and 2015.

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### Rotten returns
URL: https://www.carbonrisk.world/rotten-returns/
Last updated: 2025-08-21T10:38:41.000Z
Biomethane is rapidly winning the approval of investors betting on European energy security and an alternative route to decarbonising hard-to-abate industries.

Nevertheless, there are significant headwinds to overcome if biomethane is to reach its full potential. These include patchy and inconsistent regulations across the EU and ensuring that biomethane is cost effective versus natural gas. For some countries in Europe biomethane even offers a way for obligated emitters to be exempt from needing to buy carbon allowances.

Before we get to that it’s worth going back to basics and explaining exactly what is biomethane.

It begins with biogas, which is produced through the anaerobic digestion (AD) of organic waste. AD occurs when bacteria break down organic matter in the absence of oxygen. The result is a mixture of methane, carbon dioxide and small quantities of other gases.

The main feedstocks for AD arise from agricultural (animal manure, agricultural residues, etc.), industrial (non-edible food waste), and household sources (municipal solid and water waste).

Biomethane (also known as “renewable natural gas”) is produced either by “upgrading” the biogas (a process that removes any CO2 and other contaminants present), or through the gasification of solid biomass followed by methanation.

In addition to displacing the consumption of natural gas that would otherwise take place, AD of organic waste prevents the release of methane that would have otherwise have been emitted into the atmosphere. It is for this reason that biomethane is described as either a zero carbon or even a negative carbon gas.

Furthermore, since biomethane is indistinguishable from natural gas it can leverage the existing gas infrastructure. This means it can be used for the production of heat and power, used as a feedstock for industry, and used as a transport fuel once compressed and liquefied. Biomethane’s big opportunity could be in decarbonising those hard-to-abate sectors, such as heavy industry and freight transport, where electrification is most challenging.

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### Repost: Europe's hydrogen economy and what it means for carbon prices
URL: https://www.carbonrisk.world/repost-europes-hydrogen-economy-and/
Last updated: 2025-08-21T10:38:41.000Z
*In early February I reposted an* [*article* ](https://www.carbonrisk.world/repost-short-selling-is-a-poor-hedge/)*from the Carbon Risk archives, one that I felt which many current Carbon Risk readers probably haven’t seen before, but is arguably even more relevant now than the day that I posted it. Following that theme, today’s repost focuses on one of the future drivers of carbon price economics - Europe’s hydrogen economy and the ‘green-grey’ hydrogen spread.*

*The outlook for green hydrogen (produced using renewable energy) ultimately depends on it being competitive versus conventional grey hydrogen (produced using natural gas via steam-methane). The resulting ‘green-grey’ hydrogen spread, as I call it, is determined by the following:*

*First, a massive expansion in European electrolyser capacity is required, one that results in economies of scale that drive down the cost of producing green hydrogen below that of grey hydrogen. According to recent projections from Aurora, the levelised cost of producing green hydrogen in Germany in 2030 is likely to be between €3.90 and €5.00 per kg, but that might not be enough.[1](#footnote-1)* 

*Second, given that the manufacture of grey hydrogen is highly sensitive to natural gas prices and is carbon intensive to produce, carbon prices must compensate for low natural gas prices. Almost one year ago natural gas prices in Europe were over €150 per MWh, and heading higher. Twelve months later and they have slumped by two-thirds to around €50 per MWh.*

*Although this might swing the short-term power generation economics away from coal and towards natural gas, it has the effect of making it more difficult to switch to green hydrogen.*

*The price of carbon must move to the point at which it makes sense to manufacture green hydrogen, given expectations over its future production costs. Understanding where that point is now, and where it is moving to, will be key to using the ‘green-grey’ hydrogen spread.*

---

Central to the decarbonisation of many sectors under the EU ETS is the widespread rollout of green hydrogen as an industrial feedstock.

Up until very recently estimates have suggested that Europe requires very high carbon prices to incentivise the switch away from hydrogen manufactured using fossil fuels, known as grey hydrogen.

However, record high natural gas prices in Europe may accelerate hydrogen's role in industrial decarbonisation, without the need for significantly higher carbon prices.

Carbon traders may have looked to the ‘clean-dark’ spread as a tool for estimating carbon allowance demand, but they may increasingly be looking to ‘green-grey’ hydrogen spread instead as the long term driver of carbon prices.

**The hydrogen economy hype cycles**

Hydrogen is the most common element in the universe, accounting for three-quarters of its mass. French scientist Lavoisier named the gas ‘hydrogen’ after the Greek name (hydro = water, genes = to create) after discovering that burning hydrogen produces water, and no carbon dioxide. The energy density of hydrogen is higher than fossil fuels, there is three times as much energy per unit weight embedded in hydrogen as there is for petrol, diesel or jet fuel. It has had a long potted history as the answer to human energy needs – one of periodic hype followed by lengthy hibernation.

The idea of an economy powered by hydrogen was first touted in 1970\. The so-called “Hydrogen Economy” rose to prominence in response to concerns over oil scarcity and America’s dependence on the Middle East. This accelerated in 1973 due to the Arab oil embargo sparked oil price spike. As energy prices returned to gravity during the 1980’s the hydrogen economy dream faded away. But by the late 1980’s the Cold War between the US and Russia, and the latter’s successful development of a hydrogen powered jet (the Tupolev-155) spurred a race to develop the technology between the two superpowers. A decade and a half later and the Cold War was over but concerns over energy independence surfaced anew. Once again hydrogen potentially offered a solution, only for US crude and gas supply to surge on the back of the shale revolution.

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### REDD+ and the common knowledge game
URL: https://www.carbonrisk.world/redd-and-the-common-knowledge-game/
Last updated: 2025-08-21T10:38:42.000Z
In mid-January UK newspaper [*The Guardian*](https://www.theguardian.com/environment/2023/jan/18/revealed-forest-carbon-offsets-biggest-provider-worthless-verra-aoe?ref=carbonrisk.world)[ ](https://www.theguardian.com/environment/2023/jan/18/revealed-forest-carbon-offsets-biggest-provider-worthless-verra-aoe?ref=carbonrisk.world)and German weekly magazine [*Die Zeit*](https://www.zeit.de/wirtschaft/2023-01/co2-certificates-fraud-emissions-trading-climate-protection-english?ref=carbonrisk.world)[ ](https://www.zeit.de/wirtschaft/2023-01/co2-certificates-fraud-emissions-trading-climate-protection-english?ref=carbonrisk.world)published the results of an investigation into rainforest carbon abatement credits, jointly carried out with [*SourceMaterial*](https://www.source-material.org/vercompanies-carbon-offsetting-claims-inflated-methodologies-flawed/?ref=carbonrisk.world), a non-profit journalism organisation focused on investigating climate change, corruption and democracy.

The researchers analysed the performance of REDD+ credits issued by Verra, the largest verification body, concluding that “more than 90% of rainforest carbon offsets by biggest certifier are worthless.”

Although there is reason to dispute some of the methods used by the researchers to arrive at their conclusions, the broader sentiment conveyed by the articles is reasonable. That a significant proportion of carbon offset projects tackling deforestation fail to deliver the emission abatement numbers they claim (see [*The signal and the noise: Pricing the carbon credit risk curve*](https://www.carbonrisk.world/the-signal-and-the-noise/)).

The impact of the article was not in exposing where REDD+ projects fall short, most participants in the voluntary carbon market (VCM) would have already been aware of the inherent risks in signing off on nature-based carbon abatement projects. No, the impact of the article was making that awareness ‘common knowledge’.

To understand why, we have to consider the three types of knowledge – private, public and common. Private knowledge is the information locked up inside our heads, while public knowledge is information that everyone knows. However, making sure that everyone knows the truth (public knowledge) isn’t enough for a narrative to spread. People only change their behaviour when a narrative becomes common knowledge. Common knowledge is when knowledge (it can be either private or public) reaches a state when everyone knows that everyone knows that everyone knows it to be true.

The classic example of the common knowledge game is the fable of *The Emperor’s New Clothes*. Everyone in the crowd possesses the same private information — the Emperor is walking around butt naked. But behaviour doesn’t change just because private information is ubiquitous. Nor would we expect behaviour to change because a couple of people whisper their doubts to each other, creating pockets of public knowledge that the Emperor is naked.

The only thing that changes behaviour is when the little girl announces the Emperor’s nudity so loudly that the entire crowd knows that everyone else in the crowd heard the news. That’s when behaviour changes. It’s only when that transition to common knowledge happens that behaviour changes. And it can change very fast. Scandals come to light in the media through the narrative of a victim, or someone brave enough to shout loudly enough. In game theory this person is known as the missionary.

As human beings we have great trouble in understanding how change actually happens. We like to believe we live in a world where small changes have a direct linear impact on outcomes. That is not how the narrative machine works. Narratives have their own structure. Narratives don’t correspond to linear change; they involve and require distinct jumps and changes in behaviour. Understand that structure and you will begin to see them everywhere.

Now that the REDD+ flaws are out in the open, everyone knows that everyone else has heard the same story. There can be no hiding. Any skeletons left in the closet must now be cleared out.

The purge has begun…

In the past week, standards body Verra has suspended the registry account of New Ireland Hardwood Timber (NIHT) after it was exposed by an investigation by the Australian broadcaster ABC. The article alleges that NIHT has been commercially logging a forest in Papua New Guinea since 2020, while at the same time selling carbon credits meant to protect it from deforestation. In the past week the country’s Climate Change Development Authority has also been raided by the country’s fraud squad.[1](#footnote-1) 

Meanwhile in India, shares in carbon credit developer EKI Energy Services (more popularly known as Enking International), crashed over 40% after its auditor raised serious red flags as to how it had been recognising revenue from carbon offset projects. In April 2022 it claimed to have traded more than 100 million credits and announced it was aiming for 1 billion credits by 2027\. In the past few months the Indian developer, who has been in business since 2008, announced separate deals with oil major Shell and financial institution DNV to develop nature based projects. At the time of writing, EKI's share price is down more than 80% from its January 2022 peak.[2](#footnote-2)

As I’ve argued in an earlier article, simply because a carbon offset project is in a position to issue credits does not mean that the carbon project has a 100% chance of success. Carbon offset projects operate in the real world. Their success or failure in avoiding emissions or removing carbon from the atmosphere is subject to significant uncertainty.

This is especially the case for REDD+ projects, operating in remote corners of the planet, often in places where it is difficult for independent, on the ground checks to be made. Bad actors like to operate in places like this, in the shadows, where the line between legal and illegal is subject to interpretation.

Their exposure is now common knowledge, and with that hopefully the foundations for renewed, sustainable growth in the market for REDD+ credits can begin. As despite their flaws, the protection of land vulnerable to deforestation depends upon them.

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[Nature-based carbon credit prices need to rise Nature-based carbon credit projects will increasingly have to compete with other demands on the land. Nowhere is the issue more stark than in South East Asia where high agricultural commodity prices means land owners have little incentive to move away from growing palm oil.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-198.png)Carbon Risk](https://www.carbonrisk.world/nature-based-carbon-credit-prices/)

---

1. https://www.abc.net.au/news/2023-02-14/carbon-credits-projects-papua-new-guinea-logging-four-corners/101936714  
https://carbon-pulse.com/191465/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.business-standard.com/article/news-cm/eki-energy-slumps-after-q3-pat-drops-76-yoy-auditor-raises-red-flags-123021300783\_1.html  
https://carboncredits.com/eki-energy-create-1-billion-carbon-credits-2027-net-zero-2030/  
https://economictimes.indiatimes.com/industry/renewables/eki-shell-float-jv-for-nature-based-solutions/articleshow/90420962.cms?from=mdr  
https://carbon-pulse.com/187335/ [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
### Out of ammunition
URL: https://www.carbonrisk.world/out-of-ammunition/
Last updated: 2025-08-21T10:38:42.000Z
In May 2022 I argued that the era of unabated price discovery in the EU carbon market may be coming to an end, and with it a new era emerges in which the EU’s climate politicians wield much more control over the direction of the carbon price.

By providing forward guidance over what is politically acceptable, I argued, the EU hopes to conjure up the magic of the central banks: suppressing carbon price volatility, lowering the cost of net-zero capital, and spurring the investment required to pivot away from Russia and achieve its climate change ambitions.

What then should we make of the European Parliament finally approving the REPowerEU package? Recall that part of the RePowerEU funding will come from the sale of €20bn worth of EU emission allowances (EUAs) over the next few years.

Yesterday, MEPs voted in favour of the sale of EUAs from the EU Innovation Fund (raising €12bn) and the front-loading of auction sales (the remaining €8bn). The sale of EUAs from the Innovation Fund will be partly compensated for by the transfer of 27 million EUAs from the MSR (raising €2.4bn, assuming €90 per tonne).

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### Everything you need to know about the Korean Emissions Trading Scheme (KETS)
URL: https://www.carbonrisk.world/everything-you-need-to-know-about-4c1/
Last updated: 2025-08-21T10:38:43.000Z
All compliance carbon markets seem to go through the same growing pains. The South Korean Emissions Trading Scheme (KETS) is no different.

That being said, the Korean government face a unique set of challenges. In particular, legacy issues surrounding the country’s past support for industry, and the fallout from a severe economic downturn due to the pandemic and the government’s strict policies.

Nevertheless, the future competitiveness of its largest and most successful businesses now depend on the country reforming its carbon market to provide a strong signal for decarbonisation.

KETS was launched at the start of 2015 and has one of the widest coverage of any compliance carbon market, accounting for almost three-quarters of South Korea’s emissions. The scheme includes power generation, industry, buildings, transport, aviation, and waste. Only New Zealand’s emissions trading scheme (ETS), which also includes forestry, covers more of the economy (see [*New Zealand's carbon market: The carbon trade you've probably never heard of*](https://www.carbonrisk.world/the-new-zealand-carbon-market/)).

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### How much should we trust the dictator’s CO2 estimates?
URL: https://www.carbonrisk.world/how-much-should-we-trust-the-dictators/
Last updated: 2025-08-21T10:38:43.000Z
> *“If liberty means anything at all it means the right to tell people what they do not want to hear.” - George Orwell*

Governments will always be tempted to exaggerate how well things are going for their citizens. Most governments must face their electorate once every four or five years, and even those that don’t have to worry about democracy, still face the risk of civil unrest.

Much better that things appear to be going well, especially when it comes to the economy. But could the environment also be the centre of government deception too?

_This post is for paying subscribers only._
### Not just hot air?
URL: https://www.carbonrisk.world/not-just-hot-air/
Last updated: 2025-08-21T10:38:45.000Z
Carbon and climate change has become a big talking point during quarterly earnings calls.

The calls are usually hosted by a publicly traded company after the publication of its earnings reports for a given period (typically quarterly). Investors, equity analysts, and business journalists listen in or comb the transcripts of the call for clues as to the company’s future prospects. Importantly, earnings calls also offer a way for company executives to massage how they would like investors to perceive the company’s stock.

Climate related talk in earnings calls was fairly constant during the first 18 years of the 21st Century. It rose gradually between 2002 and 2008/09, and then as the Great Financial Crisis hit and global efforts to accelerate climate policy stumbled, talk of carbon and other climate related discussions took a back seat.

By 2018, discussions about climate change had withered back to levels last seen in 2002\. Even the Paris Agreement of 2015, the adoption of the Sustainable Development Goals (SDGs) and the launch of initiatives such as Science Based Targets were not enough to spark a change in conversation from corporate executives. Indeed, it wasn’t until 2019 that executives began to reflect these developments in their discussions with investors. Over the next three years global climate related discussions in earnings calls soared by two-thirds.[1](#footnote-1)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a85603ec-b04a-4afe-b5e1-e8d7cbc43eb0_742x689-2.png)

Source: Do Firms Walk the Climate Talk?

What caused the spike in executives opening up about climate change to their investors, the analysts that cover their firm, and the journalists that write stories about them? Talk is cheap, as the saying goes. A cynical mind might even suggest that CEO’s and other execs were only interested in bolstering their stock price in the eyes of ESG orientated investors. The performance of low carbon portfolios only really began to take-off in 2019 after all, with companies seen as being high carbon intensive seeing their share price underperform (see *[Does the stock market care about the carbon price?](https://www.carbonrisk.world/does-the-stock-market-care-about/)*).[2](#footnote-2)

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It is important that investors can assess the risk that a company will respond to climate policy and the concerns of its stakeholders. For example, it may give an indication of the amount it will need to invest to decarbonise, and the amount of money it will need to find to cover its carbon compliance costs.

Academics from the Swiss Finance Institute and Stockholm’s Business School and School of Economics compared their corporate climate discussion data with company reported emissions to see if there was a connection. They wanted to answer the question: Do firms with more climate talk in earnings calls reduce CO2 emissions by more (or increase them by less) than companies with less climate talk? In short, is climate talk cheap?[3](#footnote-3)

First off it’s important to see which industries typically see their executives talk the most about climate change during earnings calls. The data shows that climate related talk tended to be relatively high if a company is from a sector for which climate change is highly material (e.g. resource intensive and alternative energy industries), if they are being targeted by a climate-focused investor coalition such as Climate Action 100+, or if they have endorsed the [Task Force on Climate-Related Financial Disclosures ](https://www.fsb-tcfd.org/?ref=carbonrisk.world)(TCFD).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/1c6e3093-0f5b-410f-b6ee-4500398fc8b7_740x537.png)

Source: Do Firms Walk the Climate Talk?

The researchers did find evidence of a relationship. An increase in climate-related talk tended to be associated with a reduction in CO2 emission (or a smaller increase in emissions) in the years after the earnings call. Importantly though, the researchers discovered that a high degree of climate related terms in the Q&A session (following the boards presentation) was very strongly associated with subsequent reductions in CO2 emissions. Given this part of the earnings call is less scripted, a strong degree of climate related discussion in the Q&A probably gives the best indication that executives mean what they say. Note the use of the word *associated*. While the analysis may suggest causality between the two metrics, it’s also possible that they are related for other reasons (see [*Owning up to Scope 3*](https://www.carbonrisk.world/owning-up-to-scope-3-emissions/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c8efd10d-4611-4bff-9e91-dfdf23f99e0d_697x765.png)

Source: Do Firms Walk the Climate Talk?

Finally, the researchers discovered that across the period 2002 to 2022, climate-related talk was typically negatively associated with the company’s stock price during the earnings announcement period. This may partly explain the reluctance among executives, earlier in the sample period, to talk about climate change issues. Further analysis showed that investors were particularly critical of climate talk by firms based in countries where climate change scepticism is high.

However, as I mentioned earlier, changing attitudes to ESG related investments may indicate that the relationship has disappeared, or at least reduced, in later parts of the sample period. Given that the analysis also ends in Q2 2022 (arguably the peak in ESG related investment), we might expect corporations to have become more circumspect about their use of climate language, especially when it could be accused of being ‘greenwashing’ (see [*ESG investment backlash hits nature-based carbon credit prices*](https://www.carbonrisk.world/esg-investment-backlash-hits-nature/)).

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What other evidence is there that climate related words count? Academics at Tohoku and Kyoto Universities set out to investigate the sincerity of the four oil & gas majors (BP, ExxonMobil, Chevron and Shell) by analysing language used in their annual reports and comparing it to the reality of their real-world activities and investment portfolios.[4](#footnote-4)

They first examined the frequency by which 39 keywords relating to climate change, transition, emissions and low-carbon energy, appeared in the company’s annual report. Of the four majors, Chevron lagged well behind and has only recently begun to use more frequent climate related terminology in its annual report.

**Chart 6: Frequency of climate related words in the annual reports of the big four oil and gas majors**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/d05e62d7-6045-425c-95be-78bb8bae0dbb_774x617.png)

They then ranked each companies annual performance based on the strength of its climate pledges, and the actions it took to meet those pledges. What it reveals is that BP in particular made some bold pledges, however once its actions were assessed they were found to be lacking.

Not to be outdone, the company, whose then chairman coined the moniker “Beyond Petroleum” back in 2000, announced twenty years later that it would become a net zero company by 2050 or sooner, adding that it planned to cut emissions by 35-40% by 2030\. In the past week BP announced that it would now look to cut emissions by between 20 and 30% instead (see [*VCM futures no refuge from equity market malaise: Strong corporate demand for carbon credits masks declining willingness to pay*](https://www.carbonrisk.world/vcm-futures-are-no-refuge-from-market/)).

My point in picking on BP is not to pick faults with its strategy. The world has underinvested in oil and gas for some time, and we will need it for longer than many expect. No, my argument is that it serves to highlight the risk that investors face if they rely too much on the prepared words of a company CEO, whether those words are printed in an annual report or fall off the lips of a CEO during an earnings call presentation.

**Chart 7: Climate change pledges versus actions**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/89b6ebd6-34f0-4f5b-9d95-1c51f9502cc7_1041x505.png)

If you want to know whether a company is really going to follow through on its words and cut emissions or not, don’t focus on their prepared remarks. Instead, challenge them in the Q&A session of an earnings call. Their words will probably reveal their true preferences.

[Repost: Short selling is a poor hedge against carbon riskThe readership of Carbon Risk has grown a lot since I started this newsletter. Although I often provide links to many of my early posts, there are still plenty of early articles that current Carbon Risk readers probably haven’t seen. So I thought I’d start occasionally reposting some of the most important articles from the Carbon Risk archives, adding some colour as to how those posts have aged.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-201.png)Carbon Risk](https://www.carbonrisk.world/repost-short-selling-is-a-poor-hedge/)

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---

1. The data accounts for the quarterly earnings calls of all publicly listed companies worldwide from 2002 until the end of the second quarter of 2022\. The sample included around 400,000 earnings calls for more than 11,000 unique companies.  
The United States contributes most firms to the sample, around 63% of all firms. Canada, Germany, Japan, and Sweden follow on ranks two through five.  
The sample is more populated in the most recent years of the sample period. For example, 2019 contains roughly 14% of all the firm-quarters, whereas 2002 contains just 0.6%. This is due to the growing availability of ESG and conference call transcript data over time.  
The researchers captured the extent to which companies discuss climate change in their earnings calls by measuring the textual similarity between the transcripts of such calls and the five assessment reports published by the IPCC at regular intervals between 1992 and 2014\. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.ft.com/content/c2937d7b-98f1-4179-823c-4a58e21f8e30 [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=4021061 [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0263596 [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### Growing the circle to get to net zero
URL: https://www.carbonrisk.world/the-foundations-of-a-circular-economy/
Last updated: 2025-08-21T10:38:45.000Z
At Carbon Risk I’ve typically focused on supply side approaches when outlining the potential for technologies to cut emissions.

For example, employing carbon capture to reduce the emissions associated with the production of cement, employing innovative feedstocks to cut the emissions from grazing livestock, and using renewable energy to extract and process lithium, gold, and other metals in a less carbon intensive way.

However, simply cutting supply side emissions - those involved in the production of goods and services - will not be enough to meet net zero. Economies will need to reconfigure the way in which they consume, not just energy, but the materials and resources they consume as well.

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### Repost: Short selling is a poor hedge against carbon risk
URL: https://www.carbonrisk.world/repost-short-selling-is-a-poor-hedge/
Last updated: 2023-02-03T12:02:05.000Z
*The readership of Carbon Risk has grown a lot since I started this newsletter. Although I often provide links to many of my early posts, there are still plenty of early articles that current Carbon Risk readers probably haven’t seen. So I thought I’d start occasionally reposting some of the most important articles from the Carbon Risk archives, adding some colour as to how those posts have aged.*

*Arguably the most important thing that has changed since this article saw the light of day is what happened the day after it was published. I posted it on 23rd February 2022, the day before the Russian invasion of Ukraine.*

*Energy security was right back on the global agenda, and carefully constructed short positions taken out on fossil fuel producers were looking dangerously ill thought out. For example, the share price of coal miner Thungela Resources (previously the coal assets of Anglo Resources before the miner had divested it in mid-2021) soared 230% over the following seven months as coal demand surged.*

*The idea that that by taking out short positions on carbon intensive companies, investment institutions are taking out ‘portfolio carbon offsets’ was always on shaky foundations. The world of portfolios is not the same as the real economy anyway. If it had been adopted as acceptable, it would quickly become an excuse for inaction.*

*The recent attempt to purge “greenwashing” claims by financial institutions could be a welcome nail in this particular ideas coffin. However, the regulatory framework isn’t settled yet. The Partnership for Carbon Accounting Financials (PCAF), which was created to help financial institutions assess and disclose greenhouse gas emissions of investments, has yet to offer guidance on the role of shorting in a portfolio.*

---

Investment institutions and asset allocators are under pressure to align their portfolios with net-zero targets. In addition to security selection and the use of carbon allowances and credits, a third way to reach net-zero targets has been gaining attention - short selling carbon intensive stocks.

In a [submission document ](https://www.apra.gov.au/sites/default/files/2021-11/Submission%20AQR%20Capital%20Management%20July%202021%5FRedacted.pdf?ref=carbonrisk.world)to the Australian Prudential and Regulatory Authority (APRA), hedge fund titan AQR Capital Management outline three reasons why they believe that short selling helps meet net-zero targets. The first is to hedge the risks of any remaining carbon intensive investment exposures in a portfolio, the second is to impact the business operations directly, while the third channel is that “short positions are effectively ‘portfolio carbon offsets’ which can be counted against carbon exposures on the long side”.

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### Power down
URL: https://www.carbonrisk.world/power-down/
Last updated: 2025-08-21T10:38:46.000Z
One of the most important factors affecting demand for carbon allowances is electricity demand. However, it’s not simply a case of higher consumption equals higher power generation emissions. The mix of energy sources and their relative carbon intensities is crucial to understand.

The merit order dictates which sources of generation will deliver power to the electricity grid. The power stack, as its also known, ranks the various sources of power generation in ascending order of price, together with the amount of electricity generated by each energy source. This then determines the order in which power sources are brought onto the grid.

Sitting at the top of the merit order are renewable energy sources, such as wind and solar that have no fuel costs and very low operating costs. Nuclear power typically comes next as it continually generates a large amount of power for a low cost. At the opposite end of the merit order are fossil fuel power generation sources such as natural gas, coal, and oil. These latter forms of generation have high operating costs but can adjust rapidly to changes in demand - whether that’s short-term, within day volatility, or due to longer-term, seasonal variations in demand.

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### Better in than out
URL: https://www.carbonrisk.world/turning-sour/
Last updated: 2025-08-21T10:38:47.000Z
The supply of meat and dairy products is increasingly concentrated in the hands of a small number of huge, multinational corporations. Their influence stretches from the agricultural inputs required to feed cattle, all the way through to the marketing and delivery of the final product to the end consumer.

Up until recently agri-businesses have been able to duck concerns regarding the environmental practices they employ - in particular the significant share of greenhouse gas (GHG) emissions that comes from livestock. Their sheer size and influence has been a powerful lobbying force to deflect attention towards the need for food security.

Things are starting to slowly change and global giants supplying meat and dairy are starting to face the same scrutiny normally meted out to fossil fuel companies. A combination of government targets, restrictions on land use, pricing emissions, better reporting of emissions, and action by financial institutions means the industry cannot stay under the radar anymore.

But before we get into all of that, let’s check out just how big an environmental impact the meat and dairy sector has.

Animal related products are estimated to account for 8.1 Gt CO2e (\~15%) of annual global GHG emissions. Livestock account for about half of the emissions, primarily as a result of cattle burping, but also what’s emitted from their manure. The remaining emissions come from activities that support the industry such as the production of animal feed, land-use changes and other supply chain activities.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/73ac083f-374c-4dab-aaac-f65a696d7c73_1019x734.png)

Around half of the annual greenhouse gas emitted is methane. Recall that methane is one of the most potent greenhouse gases, trapping \~34 times as much heat in the atmosphere over a 100 year period than carbon dioxide. However, over 20 years methane’s global warming potential is estimated to be \~85 times greater. CO2 and nitrous oxide both account for around one-quarter of the sectors emissions, however the latter is significantly more potent. Nitrous oxide has almost 300 times the warming potency as CO2 yet also lasts in the atmosphere for a long time (\~120 years).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/9c836da7-5b82-431b-b1b2-ae50d97003c9_1060x599.png)

Total GHG emissions arising from the 15 largest meat and dairy companies combined is estimated to be 734 Mt CO2e (\~10% of global GHG emissions from animal related products), according to the [Changing Markets Foundation](https://changingmarkets.org/wp-content/uploads/2022/11/Emissions-Impossible-%5FMethane-Edition%5FFINAL-compressed.pdf?ref=carbonrisk.world). By far the largest company in the top 15 is JBS. The Brazilian company is the worlds largest meat producer and the third biggest food and beverage company by sales. Overall, JBS is responsible for around 40% of the total emissions produced from the 15 companies outlined in the map below.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e8b76c7f-f8fb-4db7-b7b6-1f0515804af9_1261x867.png)

Together the emissions from these 15 companies exceed those of major fossil fuel companies such as PetroChina, ExxonMobil, BP and Shell. While oil and gas majors have been under sustained public pressure to reduce their emissions, large meat and dairy companies have not received the same level of scrutiny, despite their comparable emissions.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/1fb8a7cf-fb6c-44be-8c8d-fd913284c3c0_863x316.png)

Governments are typically reluctant to curb the activities of the agricultural sector. A reluctance to threaten their food security, raise affordability issues among consumers, and risk threatening important export industries explain some of the limited action among governments. The agricultural sector also tends to be a powerful lobby group, whether your country is rich or poor. However, the increased concentration of power among fewer but bigger meat and dairy companies adds to the lobbying pressure.

Overall, government policy activity remains far too slow and patchy. However, things are starting to change for the better, with some early signs that it is prompting companies to trial new solutions to cut GHG emissions. Lets look at four of the initiatives and how companies are responding.

**1\. Global Methane Pledge:** At the UN COP26 in Glasgow 2021, 125 governments committed to cutting methane emissions by 30% by 2030, compared with 2020 levels. The commitment is known as the [Global Methane Pledge](https://www.globalmethanepledge.org/?ref=carbonrisk.world). So far at least action has focused on limiting methane emissions from other sectors of the economy, namely the oil and gas sector in the United States. The signatories have yet to outline detailed plans as to how they will deal with livestock methane emissions.

In the past week, Danone announced that it will cut methane emissions from its fresh milk supply chain by 30% by 2030\. The dairy conglomerate, one of the top 15 meat and dairy corporations, works with 58,000 dairy farmers across 20 countries. It is the first company to set targets in line with the Global Methane Pledge. Other meat and dairy corporations are likely to be follow in Danone’s wake with similar commitments. However, so far at least the company has been light on details as to how it will achieve these targets.

**2\. Restrict land use:** Governments can act to curtail emissions from the sector by restricting the growth in land used for grazing cattle. This is especially concerning in Brazil which has been plagued by deforestation, much of it illegal. President da Silva, elected into office in October 2022, campaigned on a pledge to eliminate deforestation of the Amazon (see [*Repricing deforestation risk in the wake of Brazil's presidential election*](https://www.carbonrisk.world/repricing-deforestation-risk-in-the/)).

It’s also a policy that’s being considered in Europe. In 2022 the Dutch government announced plans to buy out up to 3,000 farms and major industrial polluters near protected nature reserves with the aim of cutting the country’s nitrogen emissions in half by 2030\. Getting emissions under control may require slashing livestock numbers by 30% (35 million animals) by 2030, according to projections by the Netherlands Environmental Assessment Agency.

In response to the Dutch governments plans, FrieslandCampina, the Dutch multinational dairy company announced that it would be trialling a technology which seeks to close the mineral cycle on a farm, cutting nitrogen emissions by up to 70% and reducing the need for artificial fertilisers.[1](#footnote-1)

**3\. Pricing methane emissions:** Later this spring, the New Zealand government is expected to announce the rate at which methane emissions from livestock will be charged. The nation, which has 7-times more residents on four legs than two, and where half of its GHG emissions comes from agriculture, will be the first to introduce such a levy. The charge is expected to be phased in over 5 years from 2025 to allow farmers time to respond (see *[Pricing methane emissions out of the atmosphere: America's first nationwide price on a greenhouse gas does not go far enough](https://www.carbonrisk.world/pricing-methane-emissions-out-of/)*).[2](#footnote-2) 

Fonterra dominates the market in New Zealand. Pressure to cut methane emissions and the threat of levies being imposed by the government in the near future have incentivised the dairy giant to invest in new technology. The company’s scientists have developed a natural additive, which when it comes to market before 2025, can be fed to calves and will reportedly cut their methane emissions by 20%.[3](#footnote-3) 

**4\. Smarter emissions reporting:** Governments are likely to begin enforcing better monitoring and regular reporting of emissions, especially as securities regulations are beginning to act against ‘greenwashing’ claims. Of the 15 companies, only 6 report their full Scope 1, 2 and 3 emissions with a further 2 reporting partial Scope 3 emissions, according to the Changing Markets Foundation. Three companies do not report any emissions data (see [*Owning up to Scope 3: How investors should think about the SEC's proposed disclosure requirements*](https://www.carbonrisk.world/owning-up-to-scope-3-emissions/)).

Despite the importance of methane to overall GHG emissions from the sector, the quality of the methane emissions data is even more patchy. Not one of the 15 corporations reported their methane emissions. As part of its commitment under the Global Methane Pledge, Danone has also committed to report its methane emissions as part of its “extra financial disclosure” information it provides to investors.[4](#footnote-4)

**5\. Divestment:** In the same way that financial institutions are under pressure to divest their portfolios of fossil fuel companies, they are also being pushed to reallocate capital away from meat and dairy corporations because of their high GHG emissions. This is something that will become more acute once there is more rigorous emissions disclosures in place by listed companies (see [*Whack-A-Mole: How patchy global carbon markets channel fossil fuel finance*](https://www.carbonrisk.world/regulatory-arbitrage/)).

A new [report ](https://planet-tracker.org/new-report-reveals-the-40-financial-institutions-funding-the-worlds-climate-changing-methane-problem/?utm%5Fsource=pocket%5Freader)from Planet Tracker and the Changing Markets names the 20 investors and 20 banks currently financing the methane-generating activities of the 15 largest global meat and dairy companies. The aggregate methane footprint attributable to the top 20 equity investors is 68 Mt CO2e, while the footprint is roughly three times as large for the top 20 banks (202.5 Mt CO2e). Morgan Stanley takes the top slot (40 Mt CO2e), followed by JP Morgan (31 Mt CO2e) and HSBC (19 Mt CO2e).

The rationale for divesting hangs on the same thread as it does for fossil fuel companies. By cutting access to finance, the cost of producing carbon intensive meat and dairy products will increase. This could then give lower carbon alternatives a greater competitive edge. In addition, advocates argue that by removing their social license to operate, it breaks the meat and dairy corporations influence on both investment institutions and government.

The overall impact of all of these measures will be to raise the cost of producing conventionally produced meat and dairy products relative to their low carbon alternatives. This could mean that alternative protein products such as plant-based or cultivated meat, achieve cost parity with conventional meat and dairy much sooner.

Moving forward, investors should monitor progress on the 5 instruments that are being used to leverage change, and importantly how those companies most exposed to this risk are responding. As with other carbon intensive industries, it may be those that can decarbonise faster than the competition that stand to gain the most.

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[A 'green' unicorn“It is my belief that the next 1,000 unicorns — companies that have a market valuation over a billion dollars — won’t be a search engine, won’t be a media company, they’ll be businesses developing green hydrogen, green agriculture, green steel and green cement,” - Larry Fink, CEO and Chairman of Blackrock, 25th October 2021![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-203.png)Carbon Risk](https://www.carbonrisk.world/a-green-unicorn/)

---

1. https://www.dairyreporter.com/Article/2022/07/26/frieslandcampina-lely-and-rabobank-launch-nitrogen-pilot [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. It’s not clear at this stage what the levy will be. Keith Woodford, an expert on the New Zealand dairy industry has suggested that NZ$100 per tonne of methane, equivalent to $65 per tonne ($2.60 per tonne of CO2e). This seems way too low.  
https://keithwoodford.wordpress.com/2022/11/30/moving-forward-with-methane-levies/  
In contrast, the US methane emissions charge begins in 2024 at $900 ($36 per tonne of CO2e), increases to $1,200 ($48 per tonne of CO2e) in 2025, and will rise to $1,500 a tonne ($60 per tonne of CO2e) in 2026\. [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://www.irishexaminer.com/farming/arid-40995731.html [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. https://www.just-food.com/news/danone-commits-to-a-30-cut-in-methane-emisions-by-2030/?utm\_source=pocket\_reader [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### On a knife edge
URL: https://www.carbonrisk.world/on-a-knife-edge/
Last updated: 2025-08-21T10:38:48.000Z
Decision time is fast approaching.

The EU carbon price has been trading in an ever narrower range over the past six months and is currently hovering a little above the 200-day moving average. As the end of year compliance deadline looms and the market looks forward to developments later in the spring, technical, fundamental and positioning data all point towards a market that is finely balanced.

Right now, its not clear which way the market will breakout.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/1b4f36ce-449a-4818-906b-1bd716815b44_1270x815-1.png)

_This post is for paying subscribers only._
### The signal and the noise
URL: https://www.carbonrisk.world/the-signal-and-the-noise/
Last updated: 2025-08-21T10:38:49.000Z
At the edge of the carbon market risk curve.

That’s how I described the voluntary carbon market in one of my first Carbon Risk articles.

> “At the edge of the carbon market risk curve you will find the voluntary carbon market (VCM).  
>  
> Up until this point I have only discussed carbon markets from the perspective of the formal carbon compliance markets, such as the ones active in Europe and California.  
>  
> Regulated. Legal. Transparent. The rules of the market are (mostly) clear.  
>  
> The voluntary carbon market (VCM) has none of those features.”

The process goes a little like this. A developer seeks to restore a mangrove or reforest a hillside to remove carbon from the atmosphere. A carbon credit can be issued as long as the carbon offset project meets the methodology laid down by the verification body. The decision to issue a carbon credit is a binary answer - yes or no. Once issued, the credits are tagged and tracked, and the holder or purchaser of the carbon credit can surrender it or retire it to meet their carbon neutrality or emission reduction goals, or sell it onto another party.

The developer of a carbon offset project may have passed the verification checks and so be in a position to issue credits, but that does not mean that the carbon project has a 100% chance of success. Carbon offset projects operate in the real world. Their success or failure in avoiding emissions or removing carbon from the atmosphere is subject to significant uncertainty, as is any venture. According to carbon credit ratings agency BeZero, there are six main risk factors that determine whether a carbon credit will deliver on its claims:

1. Additionality: The risk that a credit purchased and retired does not lead to a tonne of CO2e being avoided or sequestered that would not have otherwise happened.
2. Over-crediting: The risk that more credits than tonnes of CO2e achieved are issued by a given project due to factors such as unrealistic baseline assumptions.
3. Non-permanence: The risk that the carbon avoided or removed by the project will not remain so for the time committed and any associated information risk.
4. Leakage: The risk that emissions avoided or removed by a project are pushed outside the project boundary.
5. Perverse incentives: The risk that benefits from a project, such as offset revenues, incentivise behaviour that reduces the effectiveness.
6. Policy: The risk that the policy environment undermines the project’s carbon effectiveness.

**The noise**

A recent investigation into nature-based credits, jointly published by the Guardian, Die Zeit and SourceMaterial, highlights the challenge faced at the edge of the carbon market risk curve. The researchers analysed the performance of forestry based credits issued under Verra, the largest verification body, concluding that more than 90% of the carbon offsets failed to deliver on the carbon offset claims.[1](#footnote-1)

Of the six risks noted earlier in this article, the researchers highlight risk number 1 - additionality - as the primary reason for the poor quality of the carbon credits. Project developers look to counter this risk by ensuring a reasonable counterfactual or baseline is in place. If the baseline is not estimated correctly then there is likely to be an over-issuance of unjustified carbon credits.

Each carbon project has it’s own unique baseline. Instead, the investigation appears to have applied synthetic baseline, i.e., creating counterfactuals by selecting areas to serve as proxies for the project areas. Sylvera, another carbon credit ratings agency, argues that this approach overestimates the problem. Their own analysis suggests that \~70% of the project baseline estimates could be incorrectly estimated.[2](#footnote-2) 

Despite the flaws in its analysis, the Guardian/Die Zeit/SourceMaterial publication has had an immediate impact on the market for reforestation credits (REDD+) with buyers retreating from the market (see [*ESG investment backlash hits nature-based carbon credit prices*](https://www.carbonrisk.world/esg-investment-backlash-hits-nature/)).

_This post is for paying subscribers only._
### Investing in the EU carbon market: 11 ways investors can gain exposure
URL: https://www.carbonrisk.world/how-to-start-investing-in-the-eu/
Last updated: 2025-08-21T10:38:49.000Z
Asset management tends to operate on a “bucket” principle which describes a grouping of related assets. A low risk, low return bucket might include short-term Treasury bills, other bonds with a short-term maturity and cash. Meanwhile, a high risk bucket with volatile returns could be filled with frontier market equities, junior gold miners and crypto.

It’s fair to say that compliance carbon markets and the EU ETS in particular has come of age over the past twelve months. The surge in the price of EU emission allowances during 2021 and the prospect of further gains certainly got investor attention. Equally important are its diversification benefits given its historical low correlation to other major asset classes, and its role as a hedge against the carbon risks an investor may have elsewhere in their portfolio.

Compliance carbon markets do not sit neatly in one particular bucket. They have commodity and currency related properties of course, but what really marks them out is their role as an instrument of decarbonisation and for that they fall into the ESG related bucket. Carbon allowances have largely escaped the investor scrutiny that has soured many of the other assets allocated to the ESG investment bucket.

Over the past twelve months carbon compliance markets have become a more investable proposition for both institutions and individual investors. This article outlines 11 ways that investors can gain exposure to the EU carbon market, whatever your motivations for doing so, and wherever in the world you are based.

All the investment products I list below have at least some exposure to the EU carbon market. The list is broken down into two: those with 100% exposure to the EU ETS (although via very different structures), and secondly, those products that have EU ETS as a majority of AUM.

Note that every product I list below is for information purposes only. You must do your own research before you invest. As you’ll see, some of the products can only be accessed in specific parts of the world, others may have only recently launched and may suffer from being relatively illiquid, there may also be tax advantages in using one or another product, depending on where you live, while some products use very different financial instruments to track the price of EU carbon allowances - futures, physical, swaps and so on - which in some cases introduce other risks, e.g. counterparty risk.

_This post is for paying subscribers only._
### Owning up to Scope 3
URL: https://www.carbonrisk.world/owning-up-to-scope-3-emissions/
Last updated: 2025-08-21T10:38:49.000Z
The Securities and Exchange Commission (SEC), the US government agency responsible for ensuring the integrity of securities markets, is expected to publish new rules in April requiring listed companies to provide detailed climate related disclosures.

The disclosure rules will make it harder for companies to get away with “greenwashing”. That includes businesses making bogus environmental claims about their products or services, and investment institutions touting financial products that fail to deliver on promised ESG metrics (see [*ESG investment backlash hits nature-based carbon credit prices*](https://www.carbonrisk.world/esg-investment-backlash-hits-nature/)).

Many companies are releasing data on a voluntary basis, but it can be difficult to compare one firms data to another. Standardised data on climate related risks should help accelerate the expansion of sustainable investing by making it clearer to investors and firms alike where the risks and opportunities lie.

In the latest SEC [proposal](https://www.sec.gov/news/press-release/2022-46?ref=carbonrisk.world), published in March 2022, the agency has signalled that it will require companies to disclose how they plan to meet greenhouse gas (GHG) emission reduction and other climate related targets, whether they have introduced an internal carbon price, what strategies they plan using to address physical and transition risks, and vital quantitative data such as greenhouse gas emissions (see [*In the shadows: Everything you need to know about internal carbon pricing*](https://www.carbonrisk.world/in-the-shadows/)).

It is the requirement to disclose detailed emissions data that this article will focus on.

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There are three layers of greenhouse gas emissions - Scope 1, Scope 2 and Scope 3\. According to the definition provided by the UK’s Carbon Trust, “Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company's value chain.”

Scope 3 emissions typically account for three-quarters of a company’s emissions, according to estimates from the CDP. However, this varies considerably by sector and can vary from as low as 16% of a company’s emissions for the cement industry, and approach 100% for firms involved with transport, capital goods and financial services.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/66802b65-1c0f-4202-a161-8ff7d9123da2_730x744-1.png)

While Scope 1 and 2 emissions are relatively straightforward to measure and report on, it is much more challenging to measure and report Scope 3 emissions. Recall that this includes all of the other emissions the firm is indirectly responsible for - both up and down its value chain.

To measure Scope 3 emissions accurately requires obtaining information on all of the inputs and products sourced by the business (potentially thousands of products from hundreds of suppliers located across the globe), in addition to making reasonable assumptions about how the outputs from the firm (i.e. the products and services sold) are being used by their own customers.

According to the SEC proposal, large companies would be required to disclose and have independently verified their Scope 1 and Scope 2 emissions. Based on the initial proposal, it is thought that Scope 3 emissions disclosures would be limited only to situations where they were deemed “material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions”. Unlike Scope 1 and 2 emissions, Scope 3 emission disclosures would not need third-party verification and would be protected from legal liabilities.

That will be a relief to CFO’s and their lawyers across the US. By it’s nature double counting is a feature of Scope 3 emissions accounting. The Scope 1 and 2 emissions from an individual firm may also be counted under the Scope 3 emissions from some other firm elsewhere in the supply chain. Its impossible to demarcate the sphere of influence that an individual business has on GHG emissions entirely, a task that only gets more challenging as the complexity of the business increases.

Of those companies that report Scope 3 emissions already (54% of North American companies that disclosed their emissions to CDP also reported their Scope 3 emissions), its not uncommon to find similar companies in the same industry reporting vastly different Scope 3 emissions.

There are a number of sound reasons for this. First, one firm may only measure a certain portion of Scope 3 emissions, while another measures all of it. Second, their interpretation of what is and what isn’t included under Scope 3 may also be different. Without a uniform methodology it is going to be impossible to get consistent results. The charts below demonstrates this well, illustrating how the contribution to upstream and downstream Scope 3 emissions have changed since 2015.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/457128f7-0069-4c6c-97f2-84c4e7e52faf_974x645.png)

Source: Panjwani et al. (2022)

Banks and other financial institutions face a particularly challenge in accounting for their own Scope 3 emissions For example, according to the Partnership for Carbon Accounting Financials (PCAF) underwriting “exerts material impact on the direction of capital towards economic activities that will allow the transition to net zero no later than 2050”. In 2020, almost two-thirds of bank financing for fossil fuels was through underwriting. Should banks account for a proportion of the emissions they have facilitated though their activities, and if so, how much (see [*Whack-A-Mole: How patchy global carbon markets channel fossil fuel finance*](https://www.carbonrisk.world/regulatory-arbitrage/))?

Despite the significant challenges involved in estimating Scope 3 emissions, being required to do so by the SEC may still have its benefits, even if estimates come with a wide margin of error. Without some sense of an individual firms exposure to carbon, other greenhouse gases, and other environmental risks, it is impossible for management to begin engaging their supply chain, either pushing for change or making the decision to move their business elsewhere (see [*Repricing deforestation risk in the wake of Brazil's presidential election*](https://www.carbonrisk.world/repricing-deforestation-risk-in-the/)).

It may even result in some surprising conclusions. For example, Canadian heavy oil is often maligned as being the "dirtiest barrels in the world", with environmental campaigners coining the term “tar sands” to describe the region where the oil is extracted. Taking a full lifecycle approach (which is what considering Scope 1, 2 and 3 sets out to do) and you find that there is much less difference in emissions intensity between crudes, even more so once Canada’s oil industry cuts it’s Scope 1 and 2 emissions (see [*Decarbonising the oil sands*](https://www.carbonrisk.world/decarbonising-the-oil-sands/)).

Of course, the carbon risk represented by Scope 3 emissions must also be weighed up against all the other risks faced by a business. These includes other environmental risks (water scarcity and pollution, non-GHG air pollution, biodiversity, etc.), security of supply risks (geopolitical, geographical, etc.) and commercial risks (e.g. exposure to taxes including carbon, change in relative competitiveness).

Financial markets are already reacting to emissions data disclosures. A recent paper led by [Ahyan Panjwani](https://papers.ssrn.com/sol3/papers.cfm?abstract%5Fid=4205875&ref=carbonrisk.world), an economist in the Division of Financial Stability at the Federal Reserve Board of Governors, examined how credit markets reacted to those firms reporting Scope 3 emissions data as part of the [CDP carbon disclosure system](https://www.cdp.net/en?ref=carbonrisk.world). The researchers found that firms disclosing Scope 3 emissions face a lower cost of borrowing in credit markets, particularly in Europe and Asia Pacific while the trend is also starting to emerge in North America. They estimate an average disclosure premium of −20 basis points.

Firms that publish Scope 3 emissions are benefitting from a disclosure or transparency premium in their borrowing costs right now. However, once reporting is more common across industries, and as the SEC rules are introduced and enforced, credit markets are likely to be more picky, perhaps penalising those companies with high Scope 3 emissions. That might result in firms attempting to game their Scope 3 emission disclosures to appear better than their competitors.

What about the opportunities for investors? Well, there is going to be increased demand for services that can monitor emissions in real time, for example companies that use drones, satellites, AI, etc to accurately report and benchmark different GHG emissions. All of this data will require software that can source and collate disparate data sources together. Demand for trusted carbon accountants will also increase. The Big 4 accountancy firms no doubt have an eye on this market, but they will need the data and the ability to interpret complex, industry specific analysis and that’s where newer entrants into the market may have a competitive advantage.

Mandating the disclosure of businesses emissions data increases the pressure on companies to provide a credible plan on how they will meet GHG reduction targets. Carbon credits are likely to feature on many company strategies. In the past, management may have pointed to their lofty net-zero ambitions, knowing that low quality carbon credits underpinned those claims and been able to get away with it. Going forward the disclosure will invite much deeper scrutiny by investors, environmental groups, and by the SEC. Only the highest quality offset projects are likely to survive in this market.

Despite the immense challenges involved, Scope 3 emissions are simply too important to ignore. The next few years could result in opportunities as investors and companies initial confusion results in markets erroneously pricing Scope 3 carbon risk. In the meantime, the infrastructure to support credible emission disclosures and sound climate mitigation plans to respond to carbon risks will need to be built out.

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### California's 'forgotten giant of clean electricity' is set to reawaken in 2023
URL: https://www.carbonrisk.world/californias-forgotten-giant-of-clean/
Last updated: 2025-08-21T10:38:50.000Z
One of the most important factors affecting the demand for California’s carbon allowances (CCAs) is the percentage of the states electricity supply that is generated by it’s hydroelectric dams.

However, in one of the driest states in the US, one that is increasingly suffering from long periods of extreme drought, hydroelectric generation is becoming more volatile and uncertain.

Reservoir levels at this time of the year are vital in determining the power generation mix for the year ahead. Too low and the state will have to rely on carbon intensive natural gas and coal fired generators, increasing emissions and resulting in higher demand for CCAs.

Lets look at where California gets its electricity from and what current conditions might mean for power sector emissions during 2023.

_This post is for paying subscribers only._
### The emergence of the carbon economy
URL: https://www.carbonrisk.world/the-emergence-of-the-carbon-economy/
Last updated: 2025-08-21T10:38:51.000Z
We tend to think of carbon dioxide (CO2) as a bad thing: a pollutant, a ‘negative externality’ in economics speak, something to be rid of, and certainly not something of value.

However, CO2 is a valuable input for many industrial processes.

Global CO2 demand was estimated to be \~230 Mt in 2015, according to the International Energy Agency (IEA).

The fertiliser industry is the largest consumer (57%), with 130 Mt CO2 used in the production of urea in 2015\. The oil and gas industry accounted for around one-third (34%) of demand, utilising 70-80 Mt of CO2 for enhanced oil recovery (EOR).

Other commercial applications include food and beverage production (14 Mt CO2, 6%), followed by metal fabrication, cooling, fire suppression, and in support of plant growth in greenhouses (< 10Mt CO2, 4%).

China is the major market for CO2, accounting for about 28% of global demand in 2020, followed closely by North America with 27%, and Southwest Asia with 11%. In terms of market share, demand has pivoted away from traditional end markets in North America and Europe, and towards China and emerging markets in Asia.

In 2019 the [IEA projected ](https://iea.blob.core.windows.net/assets/50652405-26db-4c41-82dc-c23657893059/Putting%5FCO2%5Fto%5FUse.pdf?ref=carbonrisk.world)global CO2 demand would increase to 250 Mt CO2 in 2020 and reach 272 Mt CO2 by 2025\. This is based on the assumption that demand continues to rise at a trend rate of 1.7% per annum, led by urea and EOR. However, as we’ll see later, demand for CO2 could grow much faster than this if other applications are able to utilise additional streams of captured CO2.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/13c71a30-b1d6-4348-8cf3-9203e82306f6_919x512-2.png)

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### Australia's carbon price poised for bull market
URL: https://www.carbonrisk.world/australias-carbon-market-is-about/
Last updated: 2025-08-21T10:38:51.000Z
Australia has long dragged its heels on efforts to decarbonise its economy.

However, the election of a new government in May 2022, one intent on reversing the country’s poor international standing on climate policy, looks set to spark new energy into Australia’s carbon market.

One of the first moves by the new government was to increase the country’s 2030 emissions reduction target under the Paris Agreement to 43% below 2005 levels (up from 26–28% previously), while also reaffirming Australia’s commitment to hit net zero emissions by 2050\. Parliament has enshrined these targets into law through the Climate Change Act 2022.

Passing it into law, even if subsequent administrations could realistically alter it, is the most important driver of an effective climate change policy. Legally binding obligations force polluters to respond. By making carbon policy part of the legislative process it means that it is open to public scrutiny. That makes it much more difficult for policymakers to quietly drop the policy (see [*Commitment issues*](https://www.carbonrisk.world/commitment-issues/)).

Australia currently operates a hybrid carbon market whereby some participants have a compliance obligation, but it is also possible for firms to participate on a voluntary basis. The system relies heavily on carbon credits to deliver the emission abatement.

However, new proposals expected to be implemented in July 2023 will seek to transition Australia’s carbon market towards one more dependent on cap-and-trade. Together with a number of other reforms that tighten the market, Australia’s carbon price could get quite interesting.

Lets dive in.

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### 'Green' lithium
URL: https://www.carbonrisk.world/green-lithium/
Last updated: 2025-08-21T10:38:53.000Z
Demand for commodities essential to the green energy transition are expected to rise fourfold by 2040 if we are to reach the goals of the Paris Agreement, i.e., climate stabilisation at “well below 2°C global temperature rise”. In order to achieve net-zero globally by 2050, six times more commodity inputs will be required by clean energy technology in 2040, according to the International Energy Agency (IEA).

However, the average growth in commodity demand does a disservice to the growth requirements of certain niche metals essential to the energy transition. For example, demand for nickel, cobalt and graphite are all projected to grow 20-25 times under the IEA’s Sustainable Development Scenario (SDS) by 2040.[1](#footnote-1) 

Lithium demand is projected to grow almost twice as fast, with the IEA estimating that the requirement for lithium from clean energy technology will need to rise 42 times by 2040, primarily reflecting the expected growth in demand for electric vehicles (see [*Carbonomics returns*](https://www.carbonrisk.world/carbonomics/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/02266386-5a56-4086-96ca-fc5655ab6150_1001x473-3.png)

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Despite serving an overwhelming positive environmental outcome, lithium cannot escape its own carbon footprint being scrutinised by battery producers, automobile manufacturers and investors.

The environmental performance of lithium miners and refiners is likely to become a key differentiator in the lithium industry, with strong leadership on emissions reduction rewarded by institutions allocating capital to the sector.

So, how is lithium extracted and processed, what are the main sources of emissions, and what can be done to minimise them?

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### Carbon farming puts a value on dirt
URL: https://www.carbonrisk.world/carbon-farming-puts-a-value-on-dirt/
Last updated: 2025-08-21T10:38:53.000Z
Rewarding the sequestration of carbon into the soil is becoming an increasingly attractive option for governments and companies looking to meet their net zero commitments.

Soil carbon sequestration occurs when plants capture carbon dioxide from the atmosphere through photosynthesis, transferring the carbon to plant biomass, and then sequestering it to the soil as the plant matter decays.

Soil carbon storage plays a vital role in regulating the amount of carbon dioxide that gets into the atmosphere. The average amount of soil organic carbon (SOC) stored in the first 100 cm of soil is estimated to be around 1,500 Gt - more than the entire carbon stored in the atmosphere and terrestrial vegetation combined.

Although carbon naturally moves in a cycle, eventually being released into the atmosphere, human activity can dramatically affect the speed at which carbon is released. For example, converting forests and grasslands to farmland changes the structure of the soil, which can then release much of the sequestered carbon back into the atmosphere. This is especially relevant to land conversion in the tropics where carbon may have been sequestered, undisturbed for centuries, deep in the soil (see [*Repricing deforestation risk in the wake of Brazil's presidential election*](https://www.carbonrisk.world/repricing-deforestation-risk-in-the/)).

Minor changes in that vast carbon sink beneath us have major implications for the amount of carbon in the atmosphere and the outlook for global warming. Some estimates suggest that soil degradation due to human activity has contributed about a quarter of all manmade global greenhouse gas emissions. If we can figure out how to manage that carbon sink effectively, then it could be our best bet to meet net zero.

Scientific estimates of soil carbon sequestration’s potential vary widely, but have gradually been revised upwards over the past twenty years. More recent estimates suggest that global soil carbon sequestration has the potential to be in the range of 2-6 GtCO2 each year, assuming full adoption of carbon sequestration practices.

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### Europe's carbon footprint defies expectations
URL: https://www.carbonrisk.world/carbons-footprint/
Last updated: 2025-08-21T10:38:54.000Z
Over the past couple of weeks EU carbon prices have dropped 17%, from almost €95 per tonne in mid-December to around €76-€78 per tonne currently.

The decline accelerated as the price broke through a number of key technical indicators: first the 23 and 30 day exponential moving averages, followed by the 200 day moving average.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/d0fcedfa-3a99-4f45-93e4-f8d7c2bcc3ec_1510x815-1.png)

As I highlighted in [Return to the 70's](https://www.carbonrisk.world/return-to-the-70s/), published in late October, €76-€78 was a key support level during the period Jan-Feb 2022, and then again from mid-March through to the end of August. EUA prices broke through this level during November only to retest it again a couple weeks later, before then surging towards €95 per tonne in mid-December.

Concern over ongoing maintenance at France’s nuclear facilities, coupled with the prospect of a cold snap and low wind generation in early December meant many market participants were concerned about increased demand for natural gas and higher thermal coal power generation (see [*Gone is the wind: How the winter doldrums, wind "droughts", and "global stilling" affect power generation and the demand for carbon*](https://www.carbonrisk.world/gone-is-the-wind/)).

A return to this level marks a remarkable turnaround for the EU carbon market given the geopolitical turmoil, EU carbon policy uncertainty, and the macroeconomic hit wrought by high and volatile energy prices. Over the past twelve months EU carbon prices are right back to where they started 2022.

Focusing on the demand side (i.e. the demand for carbon allowances), perhaps the most surprising fact is that despite expectations at the beginning of the year, and especially in the aftermath of Russia’s invasion of Ukraine, EU carbon emissions in 2022 are likely to be down on 2021.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/f97b550d-2eba-4908-8ca0-20866df2a3c2_1068x747.png)

Lets look at some of the key factors that affected demand for carbon allowances during 2022, and what it might mean for 2023.

**Warm, often wet, and a bit windy**

Instead of a bitterly cold winter, we (at least in Europe) got something more akin to spring. Record high temperatures for the time of year have even left much of the Alps bereft of snow. A harbinger of a warmer climate to come perhaps, but for this winter at least, the warmer weather was welcomed.

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### Whack-A-Mole
URL: https://www.carbonrisk.world/regulatory-arbitrage/
Last updated: 2025-08-21T10:38:55.000Z
The introduction of a carbon tax, or the launch of an emissions trading scheme (ETS) has a powerful impact on lending to fossil fuel companies, according to recent research.

The introduction of a carbon price tends to result in financial institutions reallocating funds away from domestically domiciled fossil fuel producers, and towards oil, gas and coal companies located elsewhere.

The research findings have important implications for policymakers. In the absence of a global push towards a uniform carbon price, banks may seek to circumvent domestic carbon prices by channelling capital to those jurisdictions where environmental stringency is low, or scrutiny of companies active in fossil fuels is non-existent.

The analysis could also be important to investors in fossil fuel companies and the underlying energy commodities. Understanding which country will introduce a carbon tax or ETS next means that investors can factor in the likelihood of lower funding available to fossil fuel companies domiciled in that jurisdiction.

Let’s dive in.

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### Zero carbon supremacy
URL: https://www.carbonrisk.world/zero-carbon-supremacy/
Last updated: 2025-08-21T10:38:55.000Z
War in Europe has pushed its governments to pursue any measure necessary to extricate itself from Russia’s geopolitical sphere of influence.

In the short term that has meant sourcing natural gas from other suppliers (e.g. from the US and Qatar), and overriding, at least temporarily, long standing political commitments to phasing out nuclear and thermal coal power.

The longer term aim to increase the percentage of energy from renewable sources and decarbonise its economy remains. Indeed, it’s political leaders have sought to accelerate this process as it is seen as being completely aligned with cutting Europe’s exposure to Russia’s fossil fuel exports and the geopolitical vulnerability that dependence entails.

However, reducing dependence on fossil fuels does not mean that geopolitical risk simply goes away. The zero carbon energy transition means that countries will still seek to exert geopolitical influence.

One way to do this is by controlling the flow of energy, e.g. the high voltage power lines exporting zero carbon electricity. Another is to control access to the raw materials essential to the zero carbon energy transition, e.g. lithium, cobalt, copper, etc.

The third and arguably the most important way in which countries may seek to exert geopolitical influence is by gaining an edge in zero carbon technology. Just as the US ascent to global supremacy in the 20th century was inseparable from oil, countries are now vying to control the key energy technologies of the future: not just hydrogen, but also solar, batteries, digital networks, electric vehicles, and so on. Countries have a strategic interest in being technology makers, not technology takers in these critical areas (see [*The impossible trinity at the heart of net zero*](https://www.carbonrisk.world/the-impossible-trinity-at-the-heart/)).

Leaders in North America and Europe do not want their economies to be left to be the latter, as China takes the lead role of technology maker. The risk of a green industrial arms race to take back and secure a lead in zero-carbon technology is increasing. The battle could have important implications for market based approaches to tackling climate change, both in Europe and elsewhere.

The first salvo in this race for zero carbon supremacy comes from America’s Inflation Reduction Act (IRA), which came into force from 1st January 2023\. Signed into law in mid-August 2022 and coming into effect at the beginning of 2023, the IRA includes almost $370 billion of funding aimed at unleashing a boom in clean energy deployment and related technologies. The IRA employs generous subsidies and tax credits while also restricting competition to domestic US companies - the so-called “Buy American” clauses.

Although the impact on carbon emissions from the second largest global emitter is welcome, the IRA could have adverse unintended consequences elsewhere. As I outline in *[A 'green' unicorn](https://www.carbonrisk.world/a-green-unicorn/)*, investment in European climate tech could suffer unless its governments unleash similar levels of government support. European climate tech start-ups could be starved of capital relative to their North American peers - many of the former might now be lured across the Atlantic.[1](#footnote-1)

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**How might Europe respond to this threat?**

The EU do not want to repeat the mistakes of the past, relying on a limited number of countries to supply them with green energy and technology. It is not enough to simply achieve their climate targets if the cost is relying on a limited number of external suppliers - however reliable they might appear right now.

The carbon price is the cornerstone of the EU’s climate policy. But in the race for zero carbon supremacy some may see price signals as being unable to deliver progress until its too late, or only after other economic powerhouses have already achieved a commanding lead.

That’s why Europe might pivot to a much more interventionist industrial policy. Before the Christmas break, German and French economy ministers, Bruno Le Maire and Robert Habeck, extolled the virtues of a green industrial policy enabling Europe to lead the climate transition, calling on the continents political leaders to match US subsidies for green industry:

> “We Europeans seek leadership when it comes to climate transition. We have come a long way in changing our regulations to comply with the Paris Agreement. We reaffirm our political ambition to boost all instruments to retain leadership in this major shift. In the difficult situation of the Russian War against Ukraine, we have to pursue European efforts to **secure the industrial base in Europe**, in particular **critical green industries**. Markets of the future are green and we all need to invest heavily in the development and roll-out of the technologies needed for the transition towards a climate neutral society.”

In terms of regulatory momentum, the greatest step-up in incentives from the IRA has come for hydrogen, carbon capture, energy storage and energy efficiency technologies. If Europe responds in kind then it’s likely that those sectors will also receive special attention (see [*Carbon's shifting anchor*](https://www.carbonrisk.world/carbons-shifting-anchor/), [*The carbon capture superpower*](https://www.carbonrisk.world/the-carbon-capture-superpower/), AND [*Money to burn*](https://www.carbonrisk.world/money-to-burn/)*)*.

**Chart 1: US IRA tax credits and other incentives as a % of coverage of the average total cost of each clean technology (%)**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c2d9c6e4-e650-4160-b450-8f3ca7685b20_860x563-1.png)

Nevertheless, there are two main obstacles preventing Europe from competing with the US on tax subsidies. First, fiscal policy remains a responsibility of individual member states, one that many member states are struggling to contain given the cost of the pandemic and now the energy crisis. Secondly, European Union member states are constrained by state aid rules. This prevent individual member states from supporting their domestic companies gaining a competitive advantage at the expense of companies located elsewhere in the EU.

The European Commission has indicated that it may look to loosen the rules as early as the beginning of 2023\. However, given the parlous state of some EU states fiscal budgets, only the ones with the deepest pockets will be able to benefit anyway. That may open up the prospect of an expansion in the EU’s €300 billion [RepowerEU](https://ec.europa.eu/commission/presscorner/detail/en/ip%5F22%5F3131?ref=carbonrisk.world) plan. Published in mid-May 2022, RePowerEU outlines how the EU will rapidly reduce dependence on Russian fossil fuels and fast forward the green transition.

Any agreement on expanding the scope and size of the budget would require agreement on how funds could be allocated to parts of the EU unable to fund supporting climate technology out of their domestic fiscal budgets. Investors may then start to wonder where the funding will come from. For example, will some of it come from raiding the Market Stability Reserve (see [*Is the MSR sale really a 'win-win'? Calls grow for sale of emission allowances to fund Europe's energy transition*](https://www.carbonrisk.world/raiding-the-piggy-bank/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-213.png)

Read Carbon Risk in the Substack appAvailable for iOS and Android[Get the app](https://substack.com/app/app-store-redirect?utm%5Fcampaign=app-marketing&utm%5Fcontent=author-post-insert&ref=carbonrisk.world)

**Short sighted response raises the long term cost**

State intervention became common after the First World War as European governments first directed the reconstruction of their countries, and then later as economies prepared for and responded to the threat of another war that was to emerge in the 1930’s.

However, the heyday of interventionist industrial policy in Europe was during the 1970’s and 1980’s. Back then many governments took large stakes or even completely nationalised companies deemed to be of future strategic importance. Industries such as steel, chemicals, communications and technology, aviation and nuclear power all experienced strong intervention by governments worried that they were being let behind by the USA and Japan.

However, history tells us that state directed industrial policy tends to result in capital misallocation on a grand scale. Governments typically over subsidise, incentivised by seeing to be doing something quickly. They pick winners, national champions that can be a source of national pride irrespective, rather than asymmetric bets on innovation. Once under government purview and isolated from domestic competition firms become flaccid, only responding to political signals, rather than those of the market.

History also tells us that it can be several years or more before the impact of that malinvestment comes to light. For politicians wishing to be seen to be doing something to protect Europe’s green industrial sovereignty, the risk that investments might not be efficient is a problem they hope to kick down the road for someone else to have to worry about (see [*The battle for Europe's industrial sovereignty*](https://www.carbonrisk.world/the-battle-for-europes-industrial/)).

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**Let the carbon market do its job**

Over the past year I have argued that investors should think about the carbon price as ‘The Currency of Decarbonisation’. A strong carbon price is a signal that investors, businesspeople and citizens trust their government’s commitment to combat climate change (see [*Carbon is an emerging asset class, but what is it?*](https://www.carbonrisk.world/the-carbon-price-is-the-currency/)).

High carbon prices signal a strong commitment to combating climate change, but it also signals whether emissions are declining fast enough to meet the target. The carbon price is also technology agnostic. It is irrelevant as to where investment is directed, only that it does.

An interventionist green industrial policy response can be seen in the context of politicians being unconvinced that the carbon market left to itself will deliver the correct signal as to what investment is required. Instead, investment is directed and channelled to whatever the government deems appropriate.

The experience in other carbon markets - California in particular - is that excessive reliance on other measures (e.g. mandates, subsidies, etc.) risks dulling the signal provided by the carbon price (see [*California's carbon market left to "fill the gap" in revised climate strategy*](https://www.carbonrisk.world/californias-carbon-market-sidelined/)). Undermining that price signal increases the cost of mitigating climate change. It also raises the prospect of further interventions in the future.

Instead of picking winners in the green energy transition, governments should focus their attention on enabling the carbon market to do its job. This may mean correcting those market failures that prevent emission reductions or investment in decarbonisation from responding to high carbon prices.

One of the defining themes of 2023 is likely to be a pivot towards a more interventionist approach to industrial policy. Governments, particularly in Europe, are likely to adopt more direct support for those industries seen as vital to securing their zero carbon energy transition while also securing their green industrial sovereignty.

Those industries receiving extra capital from government could see a strong tailwind as capital is directed at supporting research and infrastructure development. On the flipside investors need to be watchful for any sign that policymakers are undermining the carbon price.

---

1. Overall, the bill is likely to result in US emissions declining by between 7 and 9 percentage points by 2030 than the pre-existing policies would have enabled, according to Rhodium Group. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
### In the shade
URL: https://www.carbonrisk.world/under-the-shade/
Last updated: 2025-08-21T10:38:56.000Z
*This is the last Carbon Risk article for 2022\. I will be back in the first week in January. Thanks again for your support and I wish you all a merry Christmas and a happy New Year.*

Europe’s energy crisis would have been much worse were it not for solar power.

Solar PV installations generated 153 TWh of electricity across the EU in the seven months after the Russian invasion of Ukraine, up 31 TWh from the same period in 2021 (Chart 1).

The increase in solar powered generation helped offset lower electricity output due to maintenance issues across France’s nuclear fleet and low reservoir levels hitting hydropower output. All the while, solar helped reduce the amount of natural gas and thermal coal that needed to be burnt.

**Chart 1: Change in EU-27 electricity generation for March–September 2022 compared to 2021, TWh**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/87b5b4da-2f7d-4879-a93a-03ed249430e0_948x474-1.png)

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The EU27 installed and connected 41.4 GW of new solar PV capacity in 2022, according to estimates from SolarPower Europe (Chart 2). Total EU27 solar PV capacity is estimated to be 208.9 GW, an increase of one-quarter on 2021 levels. Annual additions to capacity increased by 47% versus 2021 with Germany, Spain, Poland, the Netherlands and France accounting for two-thirds of the extra capacity.

The disparate latitudes of the growth markets shows that solar capacity growth isn’t simply a function of the strength of the sun’s rays. Policy support and economics matter too. For example, Poland’s boom was initially driven by an increase in rooftop installations supported by subsidy. More recently, high gas and coal prices and concerns over energy security have led to an increase in utility scale installations.

**Chart 2: EU27 annual solar PV installed capacity 2000-2022**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a6b59625-5a7a-458c-819a-d722a34a6277_941x654.png)

Solar may have to put in another strong performance in 2023.

French nuclear giant EDF continues to put back the expected restart date for when many of its reactors will return to service. Some may not return until June 2023 (see [*France's nuclear winter of discontent*](https://www.carbonrisk.world/frances-nuclear-winter-of-discontent/)).

Rainfall has helped to refill reservoirs in central and northern Europe, and a warmer winter may see further reservoir fill over the next few months. But the risk of another long drought in the summer of 2023 will remain a concern, especially as climate science points to there being an increased risk of a severe drought lasting several years. (see [*Long-term drought puts Europe's hydroelectric generation at risk*](https://www.carbonrisk.world/megadrought/)).

The good news is that solar PV capacity is likely to see another bumper year of growth in 2023\. SolarPower’s central outlook is for EU27 solar PV capacity to hit 53.6 GW in 2023\. That assumes a continuation of current policy support and other factors. In the event that policymakers row back on their commitments and halt support for solar and other adverse issues arise, capacity should still increase by 42.8 GW. Their most optimistic case, one in which policy support, financial conditions and other factors are enhanced should see solar PV capacity rising by 67.8 GW (Chart 3).

**Chart 3: EU27 annual solar PV market scenarios 2023-2026**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/d3416a15-57ef-438d-b6c3-1239d4348a45_945x495.png)

Other forecasters also agree that capacity will grow. However, the IEA’s baseline expectation for 2023 is much more conservative than SolarPower Europe’s. The IEA project EU solar PV capacity will rise by \~35-40 GW in 2023 (Chart 4). However, the global energy watchdog believes that only by accelerating the deployment of rooftop solar PV systems could annual capacity additions reach the levels (\~55-60 GW) outlined by SolarPower Europe.[1](#footnote-1)

A number of EU Member States have either proposed or implemented a higher threshold for rooftop PV system requiring permitting. For example, Italy raised the threshold for shorter permitting processes from 50 kW to 200 kW. Meanwhile, Poland is proposing to increase the capacity limit for PV projects not requiring building permits from 50 kW to 150 kW.

If it is achieved, a 60 GW expansion in solar PV capacity would add \~95 TWh of electricity generation. Assuming solar power displaces natural gas from the generation mix it could cut carbon emissions by up to 42 Mt CO2, and up to 84 Mt CO2 if it is displacing unabated coal (i.e. thermal coal generation that does not include any carbon capture).[2](#footnote-2)

Recall that the EU doesn’t simply need solar and other renewables to push out coal and natural gas. It needs them to help power the development of all the green hydrogen required to decarbonise industry (see [*Carbon's shifting anchor: The growth in electrolyser capacity is pivotal to Europe's decarbonisation ambitions*](https://www.carbonrisk.world/carbons-shifting-anchor/)).

**Chart 4: IEA projection of EU wind and solar PV additions**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/278cda77-4f43-4968-bf96-d4ffabb36dd3_762x412.png)

The EU does not appear to be short of the solar PV panels necessary to buildout the capacity. EU27 imports of solar PV panels from China (the dominant supplier to the EU) had been accelerating since mid-2021, however the start of the war marked a step change in the pace of imports. Note that the price of PV panels gradually declined during 2022 but the volume growth more than compensated.

![Image](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/defac1df-0629-4c6c-b0c5-ea798b22c1a2_1493x1136-jpeg.jpg)

Next year could be even better than the forecasters most optimistic scenarios if permitting bottlenecks are broken.

Although rooftop solar PV capacity expansions tend to be limited by the amount of work that the installers can handle, utility scale PV capacity installation often gets bogged down by permitting issues.

Some 150 GW of utility scale solar PV projects under various stages of permitting in the EU, according to a recent [report ](https://iea.blob.core.windows.net/assets/96ce64c5-1061-4e0c-998d-fd679990653b/HowtoAvoidGasShortagesintheEuropeanUnionin2023.pdf?ref=carbonrisk.world)from the International Energy Agency (IEA). Although the IEA don’t put numbers to it, they suggest that “a significant share \[of solar PV projects\] is waiting final approval to begin construction.”

The 2018 Renewable Energy Directive (RED) states that the granting of permits should take no more than 24 months. Of the 12 countries shown in the chart (collectively they account for 91% of 2022 EU27 installed solar capacity), only three had permitting times less than the required 24 months (Chart 5).

**Chart 5: Permitting times in selected countries (months)**[3](#footnote-3)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a101f5a9-4a20-4f1c-86c6-6ee94bf03b6e_538x398.png)

Source: Ember

This week the EU agreed on a dynamic gas price cap. The cap comes into force on 15th February and will be triggered once two conditions are met. First, if the TTF front-month contract exceeds €180 per MWH for three days. Second, the TTF price must also be €35 per MWh higher than a reference price based on existing liquefied natural gas (LNG) price assessments for three days.

Lost amidst the understandable scepticism of introducing a price cap when there is an energy shortage is that Germany only agreed to the cap if other Member States agreed to regulatory changes which accelerated the renewable energy permitting process.

The [emergency permitting measures](https://www.consilium.europa.eu/en/press/press-releases/2022/12/19/repowereu-council-agrees-on-accelerated-permitting-rules-for-renewables/?ref=carbonrisk.world) come into force at the start of January and last for 18 months. For solar it means that three months is the new deadline for permitting procedures for solar on ‘artificial surfaces’, i.e. buildings, industrial sites, and transport infrastructure. Each EU Member States will offer their own definition of what an ‘artificial surfaces’ is. The emergency measures can be applied to projects already in the pipeline, as well as additional projects proposed before June 2024.

The move could help to unlock the GW’s of utility scale capacity currently locked in permitting, while also bringing forward new plans which had previously been put off by onerous planning delays. The new renewable permitting rules point towards an acceleration in solar PV capacity over the next two years, perhaps over an above the best case scenarios envisaged by SolarPower Europe or the IEA.

At the same meeting, EU ministers decided to support a 2030 renewables target of 40%. Recall that the original [REpowerEU package ](https://ec.europa.eu/commission/presscorner/detail/en/ip%5F22%5F3131?ref=carbonrisk.world)included a proposal to increase the share of renewables to at least 45% by 2030, up from a 32.5% target in the 2018 renewable energy directive. The downgrade in the 2030 target by 5 percentage points means that European renewable generation would fail to grow in line with what is required to meet 1.5 degrees. That may not be the end of it though. There is still time for further negotiations early in 2023 to reinstate the 45% target.

Solar power provided a valuable buffer against the loss of electricity generation elsewhere in Europe during 2022\. Without solar carbon emissions would have been significantly higher. Incentives and debottlenecking of the supply chain means solar will probably take another big step in 2023.

---

1. Rooftop solar installations accounted for 25 GW, or 60% of new capacity in 2022, and some two-thirds of overall solar capacity in the EU27\. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. Based on IEA estimate of 0.7 Mt CO2 per GW when displacing natural gas and 1.4 Mt CO2 per GW when displacing unabated coal https://www.iea.org/data-and-statistics/charts/annual-direct-co2-emissions-avoided-per-1-gw-of-installed-capacity-by-technology-and-displaced-fuel [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. The 12 countries account for 91% of 2022 EU27 installed solar capacity. [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
### A 'green' unicorn
URL: https://www.carbonrisk.world/a-green-unicorn/
Last updated: 2025-08-21T10:38:57.000Z
> *“It is my belief that the next 1,000 unicorns — companies that have a market valuation over a billion dollars — won’t be a search engine, won’t be a media company, they’ll be businesses developing green hydrogen, green agriculture, green steel and green cement,” - Larry Fink, CEO and Chairman of Blackrock, 25th October 2021*

Climate tech accounted for more than one quarter of all venture dollars invested in 2022, according to recent data analysed by PwC. Compared to the period 2018-20, the share of venture capital (VC) being channelled to climate tech has more than doubled.

Climate tech is defined as technologies that either directly mitigate or remove emissions, help society to adapt to the impacts of climate change, or enhance our understanding of the climate. Examples include mobility and transport (e.g. electric vehicles), sustainable food (e.g. lab grown meat or drought resistant seedlings), carbon capture utilisation & storage, and climate data intelligence (e.g. monitoring forests with satellites and drones).

Although climate tech’s share of VC funding has gone up, it hasn’t been immune to the decline in sentiment towards VC seen elsewhere in the sector during 2022\. Indeed, when Larry Fink declared that “the next 1,000 unicorns” will be in climate tech, investment in the sector had already peaked.

_This post is for paying subscribers only._
### No level playing field
URL: https://www.carbonrisk.world/no-level-playing-field/
Last updated: 2025-12-05T10:43:01.000Z
Earlier this week, the European Parliament reached a preliminary agreement with the Council to impose the world’s first levy on carbon intensive products entering the EU.

The policy is likely to accelerate the global adoption of carbon pricing as an instrument of decarbonisation. However, as this article demonstrates, there will be winners and losers. Those countries able and willing to expend the political capital to implement an explicit price on carbon are likely to benefit from those that cannot.

The levy, otherwise known as the Carbon Border Adjustment Mechanism (CBAM) seeks to address the problem of ‘carbon leakage’. This is whereby firms located in the EU might lose market share to more carbon intensive products exported into the EU by firms located elsewhere in the world.

This might prompt a carbon intensive firm (or even a whole industry) based in the EU to move its operations to a jurisdiction where power generation is more carbon intensive and / or where there is less onerous environmental regulations (see [*The battle for Europe's industrial sovereignty*](https://www.carbonrisk.world/the-battle-for-europes-industrial/)).

Carbon leakage hasn’t really been an issue so far, but as carbon prices increase the more likely it is that it will be factored into corporate decision making. The CBAM should put EU firms obligated under the EU ETS on a level playing field with firms outside the EU. In turn, the CBAM removes uncertainty over the competitive position of EU based companies, thereby increasing the incentive to invest in climate mitigation.

The implication of this is that there would no longer be any need to protect industries vulnerable to ‘carbon leakage’ with free allowances. Indeed, as the CBAM is introduced, free allowances will be gradually withdrawn (see [*Europe's steel industry yet to feel the full force of the carbon market*](https://www.carbonrisk.world/how-have-higher-carbon-prices-affected/)).

Originally expected to cover imports of iron and steel, cement, fertiliser, aluminium and electricity, the CBAM will now also extend to cover imports of hydrogen, indirect emissions (those caused by the production of the energy used in the manufacturing process) under certain conditions, certain precursors, as well as some processed products including screws and bolts and similar articles made from iron or steel.

A transition period will begin on 1st October 2023 in which only reporting obligations apply. Originally expected to begin in full in 2026, a final decision on when the CBAM will start is expected to take place later in December, but there is likely to be an implementation period of at least three years before carbon intensive imports into the EU first face a charge.

A decision on whether to add other processed products as well as organic compounds and plastics will be made before the end of the transition period. Nevertheless, the plan is that all sectors covered by the EU ETS will also be subject to the CBAM by 2030.

Businesses that export products covered by the CBAM into the EU will need to purchase CBAM certificates based on the volume of goods brought in and the independently-verified emissions content of those goods. The price of CBAM certificates will closely mirror the prices of an allowance in the EU ETS (see [*Hedging the CBAM*](https://www.carbonrisk.world/hedging-the-cbam/)).

**Raising their game**

The only way to avoid buying a CBAM certificate is if the country of origin has the same climate ambition as the EU. It follows that the CBAM should act as an accelerant for global climate ambition and the adoption of carbon markets as an instrument for decarbonisation.

_This post is for paying subscribers only._
### ESG investment backlash hits nature-based carbon credit prices
URL: https://www.carbonrisk.world/esg-investment-backlash-hits-nature/
Last updated: 2025-08-21T10:38:58.000Z
Vanguard’s sudden exit from the [Net Zero Asset Managers (NZAM) initiative](https://www.netzeroassetmanagers.org/?ref=carbonrisk.world) appears to be behind a sharp drop in the price of carbon credit futures.

The Nature-Based Global Emissions Offset (N-GEO) futures contract fell to an all-time low of close to $3 per tonne on Wednesday, down some 40% on the week and 80% below the all-time high early in 2022.

The $7.1 trillion passive investment giant, the second largest global money manager after Blackrock, [announced ](https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/update-on-nzam-engagement.html?ref=carbonrisk.world)on Wednesday 7th December that it was pulling out of the NZAM initiative.

The alliance of financial institutions was launched in December 2020 and aims to “galvanise the asset management industry to commit to a goal of net zero emissions.” Consistent with this goal, NZAM signatories agreed to the following commitments:

1. Set interim targets for 2030, consistent with a fair share of the 50% global reduction in CO2 identified as a requirement in the IPCC special report on global warming of 1.5°C
2. Take account of portfolio Scope 1 & 2 emissions and, to the extent possible, material portfolio Scope 3 emissions
3. Prioritise the achievement of real economy emissions reductions within the sectors and companies in which we invest
4. If using offsets, invest in long-term carbon removal, where there are no technologically and/or financially viable alternatives to eliminate emissions
5. As required, create investment products aligned with net zero emissions by 2050 and facilitate increased investment in climate solutions

The decision has dealt a major blow to the global alliance who, up until this week at least, had 291 signatories and $66 trillion of assets under management (AUM). The move may well prompt further departures, particularly from other US based institutions eager to distance themselves from the current anti-ESG investment backlash.

[Subscribe now](#/portal/signup)

The Vanguard announcement coincided with one of the worst trading periods in the relatively short history of the carbon credit futures market. The N-GEO futures contract began last week trading at $5.20 per tonne, however over the following few days the price crashed \~40%.

**Chart 1: Carbon offset futures, continuous front-month contracts**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/cceb1fe2-fc44-4a36-83be-e6e874604423_1819x847-1.png)

The Global Emissions Offset (GEO) and N-GEO futures contracts were launched in August 2021, and up until the end of September last year they both traded around the same price level. Beginning in October, the N-GEO contract subsequently went on to double in value, reaching a peak in late January 2022 of almost $16 per tonne, almost twice the value of the GEO contract.

The premium for N-GEO over GEO reflected the perception that nature based offsets are of a higher quality than the offsets underpinning the GEO contract, while also reflecting buyer preferences for a visible signal that they are offsetting their emissions through carbon removal. However, the premium for nature based offsets - which had remained close to 100% even as both contracts declined in value - fell to \~25% last week as the N-GEO futures price collapsed (see [*GEO versus N-GEO: Investing in the VCM futures market*](https://www.carbonrisk.world/investing-in-vcm-futures-contracts/)).

The nature-based carbon credit market is particularly sensitive to the strength of net zero commitment (or lack of it) shown by the financial sector. To see why sentiment in the sector is so important to the N-GEO price, you only have to look at where the demand for nature based carbon credits is coming from.

The financial sector accounted for a quarter of all credits retired in 2019, according to analysis by Trove Research. Chemicals and petrochemicals (including oil and gas) were responsible for one-fifth of credits retired, while the power generation and biotech sectors accounted for between 5% and 10%. All other sectors, including manufacturing, aviation and utilities accounted for less than 5% of carbon credit retirements.

Although the data represents retirements in 2019, and the demand for carbon credits has grown rapidly since then, the share of financial services is thought to have remained broadly unchanged.

While most sectors use a range of carbon credit types, nature-based solutions account for \~85% of those used by financial services. Overall, around half of all nature based carbon credits are used by the financial services sector.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8ab0adda-d0e2-44a4-b420-9e3f9820237f_873x748.png)

Given that the financial services sector are by far the largest users of carbon credits and that their favoured carbon credit is nature-based, any sign that demand from this sector is slowing is likely to be immediately felt in the N-GEO contract price.

In March 2021, Vanguard and it’s passive investment competitor Blackrock joined the NZAM initiative. Managing over $15 trillion in assets between them, the decision by the investment giants to join the growing list of NZAM signatories was seen as a pivotal point for meaningful net zero action within the asset management sector. In turn, pressure from shareholders and the potential for dirty industries to face higher capital costs would help move the global economy on a faster decarbonisation trajectory (see [*The emerging marginal buyer of carbon*](https://www.carbonrisk.world/the-marginal-buyer-of-carbon/)).

Vanguard’s decision at least partly reflects increased scrutiny by financial authorities, on both sides of the Atlantic. In March, the Securities and Exchange Commission (SEC) announced that it was going to prioritise uncovering exaggerated ESG advertising and performance claims made by financial institutions. Meanwhile, at the end of May, German authorities raided the offices of DWS, a fund manager owned by Deutsche Bank as part of an investigation into greenwashing by the finance industry.

Some analysts have suggested that Vanguard was never serious about addressing climate change anyway, and that their continued membership of NZAM was blocking other signatories from pushing for stronger progress towards net zero. For their part, Blackrock have reaffirmed their committed to the NZAM initiative in light of Vanguard’s decision.

This whole episode demonstrates why monitoring changing net zero sentiment is critical to understanding the voluntary carbon market. The price of nature-based carbon credits are inextricably linked to the markets perception of commitment from the financial services sector to net zero.

Carbon Risk is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
### Everything you need to know about Washington State's "Cap-and-Invest" carbon market
URL: https://www.carbonrisk.world/everything-you-need-to-know-about-1b9/
Last updated: 2025-08-21T10:38:58.000Z
The second state-wide carbon trading scheme in the United States is scheduled to start on 1st January 2023.

California was the first state-wide carbon trading scheme, launched in 2013 it covers \~85% of the states emissions. Although the Regional Greenhouse Gas Initiative (RGGI) was the first emissions trading scheme in the US, it only covers the power sector (see [*The green light from the Golden State*](https://www.carbonrisk.world/the-green-light-from-the-golden-state/) AND [*Everything you need to know about the RGGI carbon market*](https://www.carbonrisk.world/everything-you-need-to-know-about/)*)*.

At $600bn, Washington State’s economy is one-fifth the size of California, and with almost 100 Mt CO2e it emits around one-quarter of California’s GHG emissions. Around 45% of Washington’s emissions arise from transportation, 25% from buildings and industry, the electricity generation sector contributes 15%, and 15% are nonenergy/non-CO2 emissions.

The carbon trading scheme is the cornerstone of the 2021 Climate Commitment Act. Under the Act, Washington State is legally required to reduce its greenhouse gas (GHG) emissions by 45% by 2030, 70% by 2040 and 95% by 2050 compared with 1990 levels. The state is required to eliminate the last 5% through carbon reduction or removal, resulting in net zero.

_This post is for paying subscribers only._
### Putting a cap on European shipping emissions
URL: https://www.carbonrisk.world/putting-a-cap-on-european-shipping/
Last updated: 2025-08-21T10:38:59.000Z
> *“God must have been a shipowner. He placed the raw materials far from where they were needed and covered two thirds of the earth with water." - Erling Naess, Norwegian shipping tycoon*

Responsible for sending around 3% of global greenhouse gases into the atmosphere, the shipping sector emits more than the aviation industry, and about the same as the Japanese economy.

Shipping is yet another very hard to decarbonise sector of the global economy.

Maritime emissions are forecast to increase over the next few decades as global trade in energy, commodities and goods continues to grow. Seaborne trade in tonne-miles is projected to increase by almost 30% between 2022 and 2050, according to risk management and assurance firm DNV.[1](#footnote-1) 

Most of this growth is expected to come this decade, after which global seaborne trade growth is likely to gradually stabilise. Growth will probably come from LNG (up 160%) and container shipping (up 77%). In the longer term, DNV expects peak demand for coal and oil, and declining associated seaborne trade for these commodities, to mean that overall shipping volumes stabilise by 2050.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/92ac0cf1-007c-4e2f-9fd1-8637e88a3b94_537x521.png)

However, there is considerable uncertainty as to how global maritime trade will play out. DNV’s forecast is on the extreme low side compared with other recent forecasts. For example, the International Maritime Organization’s (IMO) Fourth GHG study 2020 projects that by 2050 seaborne trade could increase by between 40% and 115%, while the OECD International Transport Forum (ITF) forecasts that trade could rise by 150% by 2050.

**Shipping to face EU carbon market from 2024**

Beginning in 2024, the shipping sector will be subject to carbon pricing for the first time.

In the last couple of weeks a preliminary agreement has been reached on how the EU ETS would be extended to the maritime sector. Vessel operators will need to purchase EUAs amounting to 40% of their emissions in 2024 (payable by April the following year), 70% in 2025, and reaching 100% of 2026 emissions, according to the announcement by the European Parliament.

_This post is for paying subscribers only._
### Witching hour returns
URL: https://www.carbonrisk.world/witching-hour-returns/
Last updated: 2025-08-21T10:39:00.000Z
> *“History does not repeat itself, but it often rhymes” - often attributed to Mark Twain*

Options activity was a powerful force propelling EU carbon prices to €90 per tonne late in 2021.

Carbon traders had accumulated a huge numbers of call option contracts that gave them the right to buy carbon at a particular price and time: €70, €80, €90 per tonne and so on.

Bullish fundamentals underpinned a tight energy complex: below average temperatures in Northern Europe supported heating demand, coupled with unseasonably low wind generation and it meant there was increased demand for thermal coal generation.

As carbon futures prices rose toward the value of the call option contracts, banks and other financial institutions that sold them found themselves on the wrong side of the trade. The only way to protect themselves was by going long and buying the underlying futures contracts.

As they did, they created a vicious circle where carbon prices rose, banks in turn had to buy more futures contracts, which then triggered fresh price rises, which then commanded more buying. The options ‘tail’ was wagging the futures ‘dog’.

Could the same phenomenon be happening this year?

_This post is for paying subscribers only._
### Gone is the wind
URL: https://www.carbonrisk.world/gone-is-the-wind/
Last updated: 2025-08-21T10:39:01.000Z
Wind turbines typically start to generate electricity when the wind speed hits 10 mph, reaching maximum power output at around 35 mph. But if the wind speed reaches 56 mph, it’s too dangerous for the turbine to continue spinning.

Power generated via a wind turbine is proportional to the cube of near-surface wind speed. And so even a modest slowdown in wind speed can have a significant impact on electricity generation.

Wind turbines generate the majority of their annual output during the first and fourth quarters of the year, typically the winter months when the wind blows strongest. Over the course of a year, an onshore wind turbine typically generates about 24% of the theoretical maximum output, also known as the load or capacity factor. In comparison the load factor of conventional thermal generation unit is around 50%-60%.

The impact of a prolonged drop in wind speed is felt the most during the winter months, especially when the supply of electricity from other renewables and nuclear are constrained, and low temperatures mean the demand for power is high. Over the past week we have had just such a situation play out in Europe.

_This post is for paying subscribers only._
### Blending in
URL: https://www.carbonrisk.world/come-fly-with-me/
Last updated: 2025-08-21T10:39:02.000Z
![global co2 emissions_fullres](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/f6a024fc-ca17-4400-9d23-2167f2546537_16793x8885-1.png)

Source: Visual Capitalist

The aviation industry is probably the most difficult sector to decarbonise.

Apart from the scorching colour representing regions of high emission intensity, the most notable thing about the map above is the web of flight paths circling the globe with greenhouse gas emissions.

The prevailing narrative from many commentators is that by replacing the existing global airline fleet with a combination of hydrogen and battery powered planes, we will dramatically cut emissions from air travel.

No matter the energy density, the end of *flygskam* is nigh.

The reality is likely to be much more mundane. Instead of re-engineering airplanes, the ground support, and the rest of the global airline infrastructure, synthetic jet fuels that can be blended with jet fuel and used to power conventional aircraft are expected to make the biggest dent in the industry’s carbon emissions.

Before we get to how they can play a role, and the interaction with the carbon market, lets first focus on the background and specifically where the airline industry has traditionally focused it’s cost cutting zeal.

_This post is for paying subscribers only._
### The convergence trade
URL: https://www.carbonrisk.world/spread-betting/
Last updated: 2025-08-21T10:39:03.000Z
The UKA-EUA carbon market spread has dwindled from €32.80 per tonne (\~42%) in early September to less than €2 per tonne by late November.

Two factors have contributed to the narrowing in the spread: political uncertainty over the UK governments commitment to its 2050 net zero goal, and an increase in UKAs available to meet hedging demand from UK power generators.

Why is this important? Well, many carbon market investors are likely to be exposed to the UK market. For example, the KraneShares Global Carbon Allowance ETF (KRBN) has approximately 5% exposure to the UK carbon market. Meanwhile, around one-quarter of AUM in the Ninepoint Carbon Credit ETF (CBON) are allocated to the UK.

The UK had been one of the standout performers among compliance carbon markets. In the twelve months to mid-August this year, UK carbon prices more than doubled, compared with an 80% increase for the EU carbon market.

Let’s start off with the political uncertainty. A little under halfway through the Liz Truss Premiership (20 days to be precise), the UK government announced that it would commission an [independent review ](https://www.gov.uk/government/publications/review-of-net-zero?ref=carbonrisk.world#:~:text=The%20government%20is%20committed%20to,burdens%20on%20businesses%20or%20consumers.)of the country’s 2050 net zero delivery goals.

Justifying the decision, the government cited how “the Russian invasion of Ukraine and other global factors have fundamentally changed the economic landscape in the UK, placing huge pressure on households and business through high energy prices.” The overarching aim of the review was to ensure that the governments net zero approach is “pro-business and pro-growth”.

The first stage of the three-month review - [a public consultation ](https://www.gov.uk/government/consultations/review-of-net-zero-call-for-evidence/net-zero-review-call-for-evidence?ref=carbonrisk.world#the-call-for-evidence)\- closed on 27th October. The review, including a set of recommendations, is expected to be published by the end of the year.

Although politicians have not mentioned the UK ETS, it is no secret that the UK’s largest carbon emitters have been paying significantly more than their competitors in the EU. Since the UK ETS launched in mid-May 2021 UK obligated emitters have been paying approximately 13% more than EU firms, although as I noted above that has narrowed significantly in the past couple months.

Remember, the UK also has an additional domestic top-up carbon tax levied on power generators. This is on top of the UK ETS carbon price. The Carbon Price Support as its known was introduced in 2013 at £16 per tonne, and although it was set to rise to £30 by 2020, the government decided in 2018 to cap it at £18.08 per tonne (\~€21 per tonne), from where it has remained unchanged ever since (see [*Why carbon investors need to pay attention to the UK carbon market*](https://www.carbonrisk.world/why-carbon-investors-need-to-pay/)).

Up until the summer there was a high degree of confidence in the UK governments commitment to a strong carbon price. Recall, that the governments response to the recent UK ETS consultation indicated that they “intend to legislate to align the cap to a net zero trajectory in 2024.” To do so, many were expecting a large one-off downward adjustment in the emissions cap to take place in 2024 (see [*The UK carbon market continues to dodge political headwinds...but for how long?*](https://www.carbonrisk.world/the-uk-carbon-market-continues-to/)).

However, the UK carbon market is currently in a state of political uncertainty. In addition to doubts about the one-off adjustment, the government has still not specified how the emission cap will decline during the period 2024–30\. The government perhaps fearful that if they proceed with the original plan then UK carbon prices would rise sharply. That’s potentially problematic for businesses should they still be buffeted by high energy prices next winter and the one after that.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/3c82c799-857b-40b4-8f83-f1fad790647f_1080x533-1.png)

[Subscribe now](#/portal/signup)

The second factor contributing to the narrowing in the spread is the increase in availability of UKAs for hedging demand from the UK power sector. In the interim period between the UK leaving the EU and the launch of the UK ETS, UK utilities had to use EUAs to hedge their power generation carbon liabilities. It was far from perfect as a hedge, but the only one that was available at the time.

Now though, after a number of fortnightly auctions have taken place, the number of UKAs available in the market has increased, making it easier for UK utilities to hedge their requirements, in turn easing the pressure on the UKA-EUA spread. There should be sufficient UKAs in the market to meet hedging demand over the next couple of years, according to Energy Aspects.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a1a81239-ad17-477e-8a4f-1502b509b610_1392x606.png)

Even though hedging demand is likely to fall as the UK power sector decarbonises, the prospect of a one-off downward adjustment in the emissions cap in 2024, coupled with annual declines thereafter is expected to mean UKAs available for hedging are insufficient to meet demand. This might mean that the UKA-EUA spread balloons out again during the second half of this decade.

However, that all depends on whether the UK government determines that it’s Net Zero Strategy - including the UK ETS - is consistent with being “pro-business and pro-growth”.

In [*Commitment issues*](https://www.carbonrisk.world/commitment-issues/) I argue that once governments lose trust in one arena of policy they can quickly lose it in another. The UK’s massive fiscal splurge, made worse by the circumvention of the Treasury’s commitment device - The Office of Budget Responsibility (OBR) - undermined trust in the UK’s fiscal responsibility. The episode resulted in a sell-off in government bonds and a sharp rise in yields, increasing the interest rate by which the UK government and much of the rest of the economy could borrow at.

In that piece I concluded that once the market senses commitment issues extend to climate policy too then the cost of meeting targets will get even more expensive, and the chances of hitting them less likely. Key to that is a strong carbon price. As the UKA-EUA spread continues to narrow, the UK government may find that the costs to commitment issues extends far wider than just higher interest rates.

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### California's carbon market left to "fill the gap" in revised climate strategy
URL: https://www.carbonrisk.world/californias-carbon-market-sidelined/
Last updated: 2025-08-21T10:39:03.000Z
The tsunami of climate capital earmarked under the Inflation Reduction Act (IRA) is beginning to be felt in the Californian carbon market.

Signed into law in mid-August 2022, the IRA includes almost $370 billion of funding aimed at unleashing a boom in clean energy deployment and related technologies. In terms of regulatory momentum, the greatest step-up in incentives has come for hydrogen, carbon capture, energy storage and energy efficiency technologies (Chart 1).

As I outline in [*Post summer blues hit the Californian carbon market*](https://www.carbonrisk.world/post-summer-blues-hit-the-californian/), the infrastructure and capacity build-out is likely to start unfolding over the next 3-4 years with cuts to emissions only really likely to be felt from 2025 onwards. Overall, the bill is likely to result in US emissions declining by between 7 and 9 percentage points by 2030 than the pre-existing policies would have enabled, according to Rhodium Group.

**Chart 1: US IRA tax credits and other incentives as a % of coverage of the average total cost of each clean technology (%)**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c2d9c6e4-e650-4160-b450-8f3ca7685b20_860x563-2.png)

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### Does the stock market care about the carbon price?
URL: https://www.carbonrisk.world/does-the-stock-market-care-about/
Last updated: 2025-08-21T10:39:04.000Z
Consumer price inflation, government bond yields, exchange rates, commodity prices, freight rates….

The list of prices which investors must factor into their valuation of various asset prices is significant, volatile and prone to substantial uncertainty.

To that list of prices, investors are increasingly adding the price of carbon.

Almost one-quarter of global emissions are covered by some sort of carbon pricing (either via an emissions trading scheme or a carbon tax). As the prevalence of carbon pricing rises and the value of emissions increases over time, investors will have to factor in the cost of emission allowances into their valuation models (see [*"Don't touch my carbon revenue!"*](https://www.carbonrisk.world/dont-touch-my-carbon-revenue/)).

To understand what the future could hold, we first need to understand how the stock market has been incorporating developments in the carbon price up until recently.

_This post is for paying subscribers only._
### Decarbonising the oil sands
URL: https://www.carbonrisk.world/decarbonising-the-oil-sands/
Last updated: 2025-08-21T10:39:04.000Z
Blessed with the world’s third largest trove of oil, Canada is in a strong position to sooth global energy insecurities, particularly those of it’s southern neighbour. However, much of Canada’s oil production is highly carbon intensive at present, and a major contributor to the country’s overall carbon emissions.

Canada’s largest source of export revenue, contributing 7% of the country’s GDP, the oil and gas sector is also the largest source of emissions, accounting for approximately 179 Mt CO2e, or 27% of the country’s annual greenhouse gas emissions (GHG) in 2020.

Around 45% of the sector’s emissions (81 Mt CO2e), or \~12% of Canada’s total emissions arise from oil sands production. With the majority of Canada’s oil sands located in the province of Alberta, the region also accounts for the lions share (\~75%) of its oil and gas sector emissions.

Oil sands typically involves injecting steam deep underground in an effort to make the bitumen lying beneath more liquid and so it can then be pumped to the surface.

Alternatively, open-pit, or ‘in-situ’ mining (where 20% of Canada’s accessible oil sands reserves lie) involves large clumps of earth being scraped, crushed and then blasted with hot water to release the bitumen embedded within.

The final stage involves upgrading the bitumen into what’s known as synthetic crude oil, enabling it to be transported by pipeline and used as a feedstock by a refinery.

Canadian oil sands are far more emissions intensive to produce (known as Scope 1 emissions) than most other fossil fuels. In 2020 the average emissions intensity of Canadian heavy oil projects was estimated to be \~70 kgs CO2e per barrel (bbl) of oil. That compares with 15-50 kgs CO2e per barrel for most other crudes.

In contrast to lower carbon intensity crudes, Canadian oil sands exhibit a much wider range in their emissions intensity; ranging from 40 kgCO2e per bbl to 180 kgCO2e per bbl depending on the project.

Canada is targeting a cut in its carbon emissions of at least 40% by 2030, before achieving net zero emissions by 2050\. To do that the Canadian government is calling for the country’s oil and gas sector (both upstream and downstream) to cut emissions by 42% (85 Mt CO2e), by 2030 compared with 2019 levels. Oil sands production will be required to share in that burden, cutting emissions by 34% (28 Mt CO2e) by 2030.

**What options are available to oil and gas producers to cut emissions?**

There have been significant improvements in emissions intensity over the past decade. Around \~85 kg CO2e per bbl was emitted by Canadian oil sands production in 2010\. By 2020 this has fallen to 69 kg CO2e per bbl, a decline of 20%.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/d56733c8-1ba7-434b-b197-105443b147ab_925x492-2.png)

Existing mines have cut their emissions intensity through energy efficiency measures (upgrades to equipment, lead detection and repair technologies, etc.), fuel switching (replacing petroleum coke boilers with natural gas), and electrification (expanding the use of low-carbon or renewable fuels for heat and energy).

Carbon, capture and storage is starting to play a major role in cutting emissions from the oil sands, receiving additional support in the form of investment tax credits. The Pathways Alliance, a consortium of Canada's six largest oil sands companies, announced in October that they will spend $16.5 billion before 2030 on the world’s most ambitious CCS facility (see *[Everything carbon investors really need to know about carbon capture, use and storage (CCUS)](https://www.carbonrisk.world/everything-carbon-investors-really/)*).[1](#footnote-1) 

The project will capture emissions from more than 20 oil sands facilities in northern Alberta, storing an estimated 10 Mt CO2e underground per year. If the consortium achieve this it will go a long way towards meeting the 34% (28 Mt CO2e) cut in emissions targeted for the oil sands by 2030.

One of the more recent factors driving improvements comes from a mining project process known as paraffinic froth treatment (PFT). This is where parts of the oil sands that are most energy intensive to treat are removed, reducing the need for upgrading and so avoiding additional carbon emissions. About 12% of oil sands production currently involves the exploitation of PFT, and the resulting product has a similar emissions intensity to the average crude refined in the US. However, clearly more needs to be done.

**Canada’s approach to pricing carbon**

That’s where carbon pricing comes into play.

The Canadian government already has a national carbon tax. The federal Greenhouse Gas Pollution Pricing Act sets a minimum national standard on GHG emissions pricing.

In November 2020, Prime Minister Trudeau announced that the carbon tax will increase by C$15 per tonne each year, rising from C$50 per tonne in 2022 (equivalent to US$37 per tonne) to C$170 ($125) per tonne in 2030\. The national carbon tax allows the governments of Canada’s provinces and territories to set their own carbon taxation as long as it meets the minimum federal standard.

Two [potential approaches ](https://www.canada.ca/en/services/environment/weather/climatechange/climate-plan/oil-gas-emissions-cap/options-discussion-paper.html?ref=carbonrisk.world)to capping emissions from the oil and gas sector have recently been outlined as part of a public consultation. Both options involve building on the existing national carbon tax, increasing the incentive for oil and gas firms to find ways to curtail their emissions.

Option 1 involves a cap-and-trade system that sets regulated limits on emissions from the oil and gas sector. Option 2 involves modifying the current national carbon tax to provide an additional incentive for heavy emitters to drive down their emissions. Both options would apply to direct emissions from upstream oil and gas production only and involve setting an emissions cap trajectory.

- Option 1: The cap-and-trade system would apply specifically to Canada’s upstream oil and gas industry and would be additional to the national carbon tax and other federal environmental regulations. The industry’s total emissions would be divided into allowances and allocated to individual companies - either fully or partially through auction process. As the emissions cap is tightened, companies that fail to cut their emissions fast enough would have to buy emission allowances from other companies operating in the sector who have successfully cut their own carbon emissions.
- Option 2: The government will modify the existing carbon tax to ensure that the oil and gas sector achieves the emissions cap trajectory. This oil and gas-specific carbon price would be set by the government at a level thought necessary to incentivise the sector to meet the emissions cap trajectory and would be evaluated at five year intervals.

The consultation period closed on 30th September. A decision is currently expected to be made by the spring, with any change to the regulations expected to be implemented by the end of 2023.

**Crude’s low carbon differentials**

Today, crude price differentials typically reflect the value that the refiner expects to achieve from processing various grades of crude oil. The density of the crude, the sulphur content, its acidity, the cost of transportation and refining all influence the price that a refiner is willing to pay for a particular crude.

Canada's benchmark heavy crude, Western Canada Select (WCS), typically trades at a discount to West Texas Intermediate (WTI). However, during the first three quarters of 2022 the discount widened significantly to an average of \~$16.67 per barrel, although it has widened to \~$30 per barrel more recently. Increased competition from discounted Russian crude, outages at US refineries as well as a significant release from the US Strategic Petroleum Reserve (SPR) have led to a sharp widening in the differential.

Under a carbon constrained world, high carbon intensity crudes will be at a big disadvantage compared with lower carbon intensity crudes. Crudes with relatively high carbon intensities, as WCS is currently, could see their price discounts widen even further if they don’t reduce their emissions intensity significantly (see [*Carbon risk dulls allure of gold miners*](https://www.carbonrisk.world/carbon-risk-dulls-allure-of-gold/)).

For upstream oil producers in Canada, the introduction of carbon pricing should accelerate action to decarbonise their upstream operations. The top producers will be able to close the gap, or even overtake, their low carbon global competitors. Establishing a secure, sustainable and marketable low carbon crude stream is the big prize for Canada’s oil sands producers.

Technological change and carbon pricing may be able to target one form of pollution, carbon emissions, but doing so should not be license to neglect other forms of environmental neglect. That should be the case whatever the industry.

In-situ mining of oil sands in particular is especially damaging to the environment, polluting waterways, stripping down vast areas of forest, and spewing nitrogen and sulphur dioxides into the atmosphere.

Decarbonising the oil sands is just the beginning.

International pressure from environmentalists, politicians and capital markets have pushed many oil and gas majors to exit the Canadian fossil fuel sector entirely (see [*Carbonomics returns: The past, present and future cost of decarbonisation*](https://www.carbonrisk.world/carbonomics/)). Since 2017, Shell, BP and Total have all sold, their remaining Canadian projects, citing carbon emissions and other environmental impacts, and unattractive returns as the justification.

The irony of course is that it is the departing oil and gas majors who wield the financial firepower and technical expertise necessary to deliver significant reductions in the sectors emissions intensity. In their place, several independent, and significantly smaller companies have entered or expanded into the void left by the departing majors. As Canadian oil sands decarbonises the majors may rue the day they divested of their oil sands assets, only for smaller more nimble competitors to capture the carbon premium.

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---

1. The Pathways Alliance includes Cenovus Energy, Canadian Natural Resources, Imperial, MEG Energy, Suncor Energy, and most recently ConocoPhillips Canada. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
### Carbonomics returns
URL: https://www.carbonrisk.world/carbonomics/
Last updated: 2025-08-21T10:39:07.000Z
The marginal abatement cost (MAC) curve is an important tool for carbon market investors.

Sloping upwards from left to right, the MAC curve gradually steepens as additional tonnes of carbon emissions get increasingly more difficult, and hence more costly, to abate.

The marginal carbon abatement cost, the cost of abating the last tonne of emissions required to meet a target, is one way that investors can get a fix on where carbon prices need to be in the future. I’ve argued in recent articles that the marginal cost is dynamic, and one of the main factors that influences it is technological progress (see [*Carbon's shifting anchor*](https://www.carbonrisk.world/carbons-shifting-anchor/)).

However, innovation does not simply occur, by itself, in a vacuum. Technological progress is only made if there are the right incentives, and the economic conditions are such that the innovation is commercially viable to exploit.

In this article I review how the global MAC curve for carbon has changed over the past few years and why, and then consider what current incentives and macroeconomic conditions mean for the future of the curve.

_This post is for paying subscribers only._
### Celebrating one year of Carbon Risk 🎂
URL: https://www.carbonrisk.world/celebrating-one-year-of-carbon-risk/
Last updated: 2025-08-21T10:39:07.000Z
Dear Carbon Risk subscribers,

In the summer of 2021 I left my job as an economist, a position I had worked in for over a decade, with the dream of writing for a living.

Full of optimism and brimming with ideas, I spent the next couple of months attempting to write a second edition of my book, ‘[Commodities: 50 Things You Really Need To Know](https://www.amazon.co.uk/Commodities-Things-You-Need-Know/dp/1539131688/ref=sr%5F1%5F1?crid=2NLHD5NF7V60M&keywords=commodities+50&qid=1668495509&sprefix=commodities+50%2Caps%2C61&sr=8-1&ref=carbonrisk.world)’. However, one particular chapter was three times longer than any other. This particular chapter kept getting stick in my head. The title of that chapter was simply, 'Carbon markets'.

It hit me that the price of carbon underpinned everything I had discussed throughout the rest of the book. It influences the speed with which companies divest from fossil fuels, the investment case for renewables and nuclear power, and the demand for copper to upgrade the power grid. It influences the speed at which commodities are transported around the globe and the investment plans of the ship owners. Carbon also determines the economics of hydrogen, the environmental trade-offs from palm oil plantations, and the demand for lithium from the battery industry.

Fundamentally though I could see that the price of carbon would start to have wider, profound changes on the macroeconomic landscape and the incentives for investors. Inflationary pressures would begin to build as the cost of decarbonisation would be passed through supply chains. Whole industries would see their business plans disrupted by new competitive pressures. High carbon prices would bring forward innovation and ideas previously thought unviable, opening up new opportunities for investors in commodities, technology and other industries.

Rather than carry on with writing the book, only for readers to see the fruits of my labour several months or more later, I decided to experiment and launch a Substack newsletter instead. With a newsletter I would have a platform to tell readers about carbon markets place in the world, how I envisaged it in the future, and how investors and other market participants could benefit.

With that, the idea for Carbon Risk was born. One year ago today I posted my first article (see [*Investors have a new way to help the environment*](https://www.carbonrisk.world/investors-have-a-new-way-to-help/)*)*. Twelve months on, and almost 150 articles later, the total number of subscribers to Carbon Risk is closing in on 1,600.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/3a98e623-97b9-4a04-9726-3c3af5eb34a7_682x400-1.png)

I am immensely grateful for all of those subscribers who knew of my writing in the past and have continued to follow me on Carbon Risk. Substack has also been a great place for new readers to discover my writing. It's recommendation feature (launched in April 2022) was vital in turbocharging the growth in subscriber numbers. Special thanks go out to , , , for recommending Carbon Risk.

## Here’s a look at some of my favourite articles from the past 12 months

In [*The impossible trinity at the heart of net zero*](https://www.carbonrisk.world/the-impossible-trinity-at-the-heart/), I ventured that governments wishing to meet net zero face an impossible trinity trying to balance energy security, affordable energy and environmental sustainability. The article was published three months before Russia’s invasion of Ukraine, and now in the aftermath, the energy transition can be seen as pulling in the same direction as energy security, reducing our dependence on fossil fuels. However, as my article goes onto mention there is really no free lunch. Energy transition commodities are much more geographically concentrated than fossil fuels, opening up new sources of geopolitical rivalries.

In [*Carbon is an emerging asset class, but what is it?*](https://www.carbonrisk.world/the-carbon-price-is-the-currency/) I pick apart the conventional narrative that carbon markets should be thought of as a commodity market. I argue that instead of thinking of it as a commodity, it should really be thought of as a currency, “In the same way that trust in individual currencies supports investment, innovation and trade, trust in carbon market helps to bring about the capital, skills and long term planning that is required to help meet decarbonisation goals.” A strong carbon price is a signal that investors, businesspeople and citizens trust their government’s commitment to combat climate change.

In January I published an article called, [*The great sulphur dioxide allowance bull market*](https://www.carbonrisk.world/hero-to-zero/). The piece highlights how cap-and-trade systems have helped tackle serious environmental problem before. The United States sulphur dioxide (SO2) allowance trading system was a major factor encouraging power generators switch to low sulphur thermal coal. The article also demonstrates what happens when trust in an environmental market is lost. A timely reminder of what could happen to ‘The Currency of Decarbonisation’.

[*An asymmetric bet on a phase transition*](https://www.carbonrisk.world/an-asymmetric-bet-on-carbon/) outlines how compliance carbon markets typically go through a number of distinct phases in their development. I argue that there is a sweet spot in this phase transition where the strength of policy support is such that the market has to dramatically revise its view on prices to reflect the potential improvement in the underlying fundamentals.

High energy prices could provoke an exodus of energy intensive industries, reducing demand for carbon allowances is the opening argument to [*The battle for Europe's industrial sovereignty*](https://www.carbonrisk.world/the-battle-for-europes-industrial/)*.* Sunk cost fallacy could leave Europe’s manufacturers at the mercy of competitors abroad that have access to cheap and plentiful energy. The other side to this argument is that Europe’s policymakers will try to do anything to ensure that Europe is not dependent on overseas suppliers. This could mean reshoring some of Europe’s lost industrial base. The battle lines are drawn and it will be fascinating to see who makes the first move.

Last, but not least [Whatever it takes: Why forward guidance in the EU carbon market is here, and is set to stay](https://www.carbonrisk.world/whatever-it-takes/) expands on my thesis that carbon should be viewed as ‘The Currency of Decarbonisation’. I start by explaining how central bank use of forward guidance meant that financial markets increasingly became a political utility. Forward guidance artificially suppressed price volatility, this lowered the cost of capital, which spurred further capital investment. After a number of verbal market interventions by EU policymakers designed to guide price expectations I argue that the era of unabated price discovery in the EU carbon market is coming to an end, and with it emerges a new era in which the EU’s climate politicians will wield much more control over the direction of the carbon price.

In between I have published a number of chart based articles explaining what I’m observing in the EU carbon market (focusing on positioning, sentiment and options activity), several posts beginning with “Everything you need to know about…” designed to bring readers up to speed, guiding investors through the burgeoning voluntary carbon market and associated technologies, and finally a major focus on the industrial and macroeconomic impact from carbon markets.

## Who subscribes to Carbon Risk?

Subscribers to Carbon Risk include hedge funds, investment banks, family offices, and individual private investors. Carbon Risk helps these subscribers gain an alternative perspective on the complex, ever evolving carbon markets.

Investors are the main audience for my writing at Carbon Risk, but that doesn’t mean other people with an interest in carbon don’t benefit from my insights.

Physical buyers of carbon allowances and voluntary carbon credits also subscribe to Carbon Risk. For many carbon is something to think about once a year when it comes to meeting compliance demands, while for others its an integral part of their everyday work. Carbon Risk helps both of these subscribers gain an edge in meeting their procurement and investment needs.

Policymakers from Europe, the UK, North America and beyond receive updates from Carbon Risk to understand how markets could react to policy changes. From my previous career I know there can often be unintended consequences to policy announcements. Governments and thinktanks follow Carbon Risk to help tailor policies before they are announced.

Several financial media organisations have also signed up as subscribers to Carbon Risk. Carbon Risk helps these organisations understand what is driving developments in carbon markets. If you work for a media company and are interested in hearing my perspective on a recent development in the carbon market then please get in touch.

## What do you get by subscribing to Carbon Risk?

**Free subscribers:** All free subscribers get full access to 2-3 articles each month. In addition, free subscribers see a preview of the articles sent to paid subscribers.

[Subscribe now](#/portal/signup)

**Paid subscribers:** If you decide to become a paid subscriber you are joining a community of like minded market professionals who are excited about this new asset class, the potential impact that environmental markets can bring to the world and the opportunity for wealth creation and diversification.

As a paid subscriber you will receive around 10 articles per month. The articles usually arrive in your inbox at 12pm UK time. Being a paid subscriber also means you can comment on articles, ask questions and suggest areas that you would like to hear more about.

[Upgrade to paid](#/portal/signup)

Group subscriptions to Carbon Risk are also available. Get a discount of 20% if you purchase two or more annual subscriptions.

[Get 20% off a group subscription](#/portal/signup)

**Founding subscribers:** Finally, there is a higher-priced Founding member subscription tier available if you are interested in providing extra support for the newsletter. Founding member subscribers get the same benefits as regular paid subscribers—this is simply a voluntary way to donate money to support the development of Carbon Risk.

Finally, please consider talking to your employer about expensing Carbon Risk. The insights from this newsletter should help you with your job, and having your organisation pay should be cheaper for all parties than if you paid out of your own pocket.

## Looking forward to year two of Carbon Risk

I’m immensely grateful to all my subscribers for the support they have shown over the past year, and particularly those that have taken out a paid or founding member subscription. Without you Carbon Risk would not be possible.

If you haven’t already upgraded to a paid Carbon Risk subscription, hopefully I’ve done enough persuade you. If not now then you will of course continue to receive free articles.

I have been really encouraged by the growth in the newsletter and the positive feedback I’ve received. For year two of Carbon Risk I plan to build on the success of the past twelve months. That being said, if there is anything that you’d like to see more of please let me know in the comments or send me an email. I’m always open to content suggestions from subscribers.

All the best,

Peter

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-222.png)

Read Carbon Risk in the Substack appAvailable for iOS and Android[Get the app](https://substack.com/app/app-store-redirect?utm%5Fcampaign=app-marketing&utm%5Fcontent=author-post-insert&ref=carbonrisk.world)
### Concrete returns
URL: https://www.carbonrisk.world/concrete-returns/
Last updated: 2025-08-21T10:39:09.000Z
> *“The most important material in terms of sheer mass in our civilization.” - Vaclav Smil*

![aerial photography of white high-rise concrete building](https://images.unsplash.com/photo-1531431057391-da7a1aabd412?ixlib=rb-4.0.3&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)

Photo by [Ivan Bandura](https://unsplash.com/@unstable%5Faffliction?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/s/photos/cement?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

Concrete is the second most commonly used product in the world, after potable water. It is used in almost everything we build, from bridges to skyscrapers and from wind turbines to hydroelectric dams. It is both the past, and the future.

Cement is the vital ingredient in concrete, acting as a binder between aggregates. While cement makes up only a small percentage of the concrete mix (\~12% by volume), it is almost exclusively responsible for the resulting carbon emissions.

Unfortunately, cement is one of the largest global sources of carbon emissions. The cement industry is responsible for emitting some 2.6 billion tonnes of carbon each year, accounting for some 6-8% of global CO2 emissions.

_This post is for paying subscribers only._
### Still betting on black?
URL: https://www.carbonrisk.world/still-betting-on-black/
Last updated: 2025-08-21T10:39:11.000Z
> “The economy is not the market, and the market is not the economy.” - anonymous

In theory at least, the EU carbon futures market is a forward looking mechanism whose participants collectively attempt to price in future demand and supply of emission allowances. However, sometimes markets anticipate something happening in the real economy, which then never really materialises, or at least not as soon or as bad as first feared (see [*What price King Coal's return to Europe?*](https://www.carbonrisk.world/what-price-king-coals-return-to-europe/)).

In this article I delve into recent developments in EUA futures positioning, what’s been happening in the options market, why futures market liquidity is still a big problem, the demand for EUAs at auction and finally look back at what has actually happened to EU carbon emissions.

First, lets start with positioning in the EU carbon futures market. In the last week of October, EUA prices posted their largest weekly gain in five years, surging 22% during intra-day activity to over €80, before retracing slightly to \~€76 by the end of last week. In [*Return to the 70's*](https://www.carbonrisk.world/return-to-the-70s/) I speculated that the speed of the rebound in prices suggested plenty of short covering by investment funds.

_This post is for paying subscribers only._
### Under the hammer
URL: https://www.carbonrisk.world/blue-carbon-under-the-hammer/
Last updated: 2025-08-21T10:39:12.000Z
As corporate demand for nature-based carbon offsets grows, project developers are beginning to use transaction mechanisms more commonly associated with conventional commodity markets, moving away from bilateral trading and towards more exchange based trading.

Auctions mark another departure from the usual way in which carbon credits are traded. Last week, Climate Impact X (CIX), a global carbon credit exchange, and Respira International, a carbon finance business, announced the successful auction of 250,000 carbon credits tied to the Delta Blue Carbon Project (DBC-1) in Pakistan, the world’s largest mangrove restoration project.

The mangrove ecosystem along Pakistan’s Sindh Province coast has been devastated by large-scale deforestation. The mangroves were cut down and used as wood fuel with further damage caused by livestock grazing. This type of ecosystem is incredibly fragile. Disturbing a single hectare of mangroves releases as much carbon as cutting down between 3 and 5 hectares of tropical forest.

‘Blue carbon’ projects include mangrove forests, tidal marshes and seagrass meadows. According to UNESCO, blue carbon assets are among Earth’s most efficient absorbers and long-term repositories of carbon. For example, mangrove forests can store more than 1,000 tonnes of carbon per hectare, more than four times the amount sequestered by terrestrial forests (see [*Banking on 'blue carbon': Everything you need to know about carbon credits sourced from the ocean*](https://www.carbonrisk.world/banking-on-blue-carbon/)).

DBC-1 focuses on protecting and restoring 350,000 hectares of mangrove forests, and tidal wetlands in the region. The project developer, Indus Delta Capital has helped re-plant tens of millions of mangrove seedlings over the past six years, gradually restoring more than 73,000 hectares of the fragile ecosystem to it’s natural state. Over an expected project lifetime of 60 years, DBC-1 is expected to sequester 142 million tonnes of carbon from the atmosphere and generate 128 million carbon credits.

**What can we learn from the DBC-1 auction?**

A uniform price auction was used to allocate the DBC-1 carbon credits. In this type of auction each prospective buyer bids for a particular number of credits, offering a price they are willing to pay. The buyer that offers the most is given priority, with subsequent allocations to other buyers also given according to how much they have offered.

_This post is for paying subscribers only._
### Keeping their powder dry
URL: https://www.carbonrisk.world/keeping-their-powder-dry/
Last updated: 2025-08-21T10:39:13.000Z
Where should investors direct their capital if they wish to make the biggest impact to cutting global carbon emissions?

It’s an important question for investors to understand if we are to avoid a climate-driven "Minsky Moment". This could occur if rapid climate change, coupled with a lack of action by politicians dealing with other pressing issues, means that governments are forced to “stamp on the brakes” and force carbon prices much higher (see [*A climate-driven "Minsky Moment": Revisiting the impact of a sudden repricing of carbon prices*](https://www.carbonrisk.world/a-climate-driven-minsky-moment/)).

A starting point for investors is gauging just how much capital needs to be invested.

Forecasting the amount of capital investment required to hit net zero by 2050 is fraught with uncertainty. We can guess at the pace of technological innovation and the speed at which costs decline, but we cannot know for sure. Even the definition of what constitutes ‘green’ investment is subject to debate. Different assumptions and various definitions mean that estimates of the global capital investment required to hit net zero tend to be pretty wide.

A [joint report ](https://www.bnymellonim.com/uploads/2022/10/199282df7040ecf5ac02b1e950e7ffa0/bny-mellon-investment-management-fathom-consulting-net-zero-report-oct-2022.pdf?ref=carbonrisk.world)from BNY Mellon (BNYM) and Fathom Consulting (FC) has entered that debate, estimating that $100 trillion will need to be invested to achieve net zero by 2050\. They indicate that over 80% would need to be invested in replacing the ‘dirty’ capital stock with ‘green’ alternatives once it has naturally depreciated, while the remaining 20% will need to replace ‘dirty’ capital before the end of it’s usable life, effectively leaving what’s known as “stranded assets” (see [*Stranded asset, or last mover advantage?*](https://www.carbonrisk.world/stranded-asset-or-last-mover-advantage/)).

If it is half as big or twice a large, it is still a huge capital investment. Rather than focus on the whether the estimate is broadly correct, far better to consider the implications and challenges involved with raising and then directing those funds to achieve the best return (in terms of carbon emissions avoided) per dollar invested.

BNYM/FC estimate that more than half of the $100 trillion invested must take place in emerging markets (EMs) if the net zero target is to be met. First, EMs are likely to grow faster than developed economies over the next decade, and will need to grow their capital stock (including green capital) faster to support this growth. Second, EMs are typically lagging behind developed economies in the energy transition and so require more investment to green their existing capital stock.

The carbon reduction bang per buck argument in favour of funding EMs is strong. To see why consider the scatterplot below. It shows the share of current global carbon emissions and the share of the $100 trillion in global green investment needed by each of the 24 countries in the MSCI EM index.

Countries that sit on the 45-degree line have net zero investment needs roughly proportional to their current contribution to annual emissions. Countries above the 45-degree line currently emit a larger share of global carbon emissions than the share of green investment they need to make, and vice versa for those countries that sit below the 45-degree line. Investing in those above the line would potentially achieve more bang per buck in reducing emissions than in the countries below the line.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/4e385eaa-62d9-43b7-8838-c5148e4c2cf7_673x641-4.png)

[Subscribe now](#/portal/signup)

Remember that the scatter graph only shows current emissions, not expected future carbon emissions. For many EMs emissions are likely to continue to increase as the population grows and urbanisation and development accelerates. For example, energy related carbon emissions from Sub-Saharan Africa (that includes big emitters such as Nigeria and South Africa) are projected to rise by 61% by 2050, according to [DNV](https://www.dnv.com/energy-transition-outlook/index.html?ref=carbonrisk.world). That’s a challenge but it also increases the opportunity from deploying energy transition technologies at speed in the right places (see [*Carbon risk dulls allure of gold miners*](https://www.carbonrisk.world/carbon-risk-dulls-allure-of-gold/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/ecab57d6-1d77-4cff-b0f1-200b7433e9b6_511x465.png)

Despite the potential carbon rewards from investing in emerging economies, the investment gap between developed and emerging economies has widened, according to analysis by [BNEF](https://about.bnef.com/blog/mobilizing-capital-into-emerging-markets-and-developing-economies/?utm%5Fmedium=Twitter%5FBNEF&utm%5Fcampaign=BNEF&utm%5Fsource=Social-o&utm%5Fcontent=organic&tactic=431831&linkId=188001169). Global investment in low-carbon energy technologies hit a high of $785 billion in 2021, up 24% from the previous year as investment in developed economies surged.

In contrast, energy transition investment in emerging markets & developing economies (EM&DEs) was broadly unchanged in 2021 below $67 billion. All told, the share of global energy transition asset finance flowing into EM&DEs fell below 8% in 2021, its lowest level in 10 years, and far below the 20% peak reached in 2012.[1](#footnote-1) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8d374f5d-8ed3-49be-b020-970ee3aebb47_1277x546.png)

Even when finance is being directed towards EM&DEs, it is increasingly being directed at the largest economies. For example, the top 10 EM&DEs (such as India, Brazil and Vietnam) attracted $50.4 billion, or 76% of the EM&DE total.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/5807de46-3459-4d63-9901-19f020086e7b_889x454.png)

Energy transition capital is not being allocated between countries according to decarbonisation needs. The top 20 EM&DEs together account for 29.5% of global energy sector emissions. During 2017-2021 they attracted just $28.8 million of energy transition investment for each Mt CO2e of energy emissions. Developed nations meanwhile attracted on average $121 million per Mt CO2e of energy emissions, more than four times higher.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e3398b85-03e2-4c3f-b412-6c8b371140ba_800x708.png)

One major obstacle to capital investment outside of developed economies is the cost and availability of finance. Energy transition investments in particular are typically very capital intensive, requiring significant sunk costs. This means that the absolute and relative cost of capital can make or break the commercial viability of a project. High interest rates could serve to delay the energy transition, especially for emerging markets and other less developed economies unable to borrow at competitive rates.

The problem of higher capital costs in EMs is very real. For example, in developed economies (non-EM&DEs in the chart), the benchmark weighted average cost of capital (WACC) for solar PV projects in 1H 2022 ranged from 1.7-5.8% according to BNEF. In EM&DEs, the benchmark ranged from 4.7-14.4%. The higher cost of capital can put emerging markets and developing economies at a significant disadvantage compared to developed economies.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c06f1f2e-3ec5-45ba-84f3-aa4c0841eaf0_801x701.png)

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The problem could get even more acute as central banks continue to normalise monetary policy and interest rates increase. The Bloomberg Global Emerging Markets Sovereign Index, which tracks the performance of major sovereign bonds in EM&DEs, has declined by 18.7% since 2019, pushing up the yield on government bonds. In turn this has increased the cost of funding all investments, not only those involved with the energy transition.

In a [recent poll ](https://www.reuters.com/business/environment/rising-interest-rates-only-mild-snag-climate-battle-2022-09-28/?ref=carbonrisk.world)carried out by Reuters, 68 climate economists were asked what impact higher borrowing costs would have on the transition to net zero by 2050? Nearly 75% of them believed the impact would be mild or very mild. One-quarter said it would be severe, or very severe. Just one climate economist said that it would have no impact. Unfortunately, the questions posed did not distinguish between developed and emerging economies, otherwise the economists may have responded with a more nuanced answer.

There are other ways in which developed economies may inadvertently be making it more expensive for emerging and developing economies to decarbonise, increasing the incentive to continue to invest in fossil fuel generation. For example, America’s Inflation Reduction Act (IRA), signed into law in August commits more than $369bn of government support in the form of subsidies and tax credits. Ground breaking in many respects for the US, but it’s impact will reverberate down energy transition supply chains.

Subsidies may mean that suppliers of PV cells and wind turbines will be much more inclined to sell to buyers in the US, rather than Brazil, India or South Africa. Meanwhile, by encouraging the growth in domestic production in a bid to diversify the supply chain away from China it may also serve to undercut other producer countries such as Malaysia.

Emerging markets and other developing economies offer the best bet for investors looking to get the biggest cut in carbon emissions per dollar invested. Even more so since carbon emissions are expected to increase across many of these economies over the next decade as urbanisation accelerates.

However, the challenge is much greater for these countries. A combination of relatively high (and rising) interest rates, coupled with “crowding out” effects across the energy transition supply chain as developed economies increase demand for raw materials and manufacturing capacity.

In part II of this article I will look at the role that stable climate policy has on decarbonisation investment decisions, in particular the benefits that carbon pricing could have in reducing the cost of financing the energy transition for less developed economies.

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[Commitment issues“It takes many good deeds to build a good reputation, and only one bad one to lose it.” - Benjamin Franklin When a government begins to lose economic credibility, the market will punish it by selling government bonds, forcing up interest rates and washing itself of it’s currency.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-226.png)Carbon Risk](https://www.carbonrisk.world/commitment-issues/)

---

1. BNEF define EM&DEs as non-OECD countries minus China but plus Mexico, Colombia, Chile and Costa Rica. This is consistent with the definition used by the IEA. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
### Seasonal shifts in the EU carbon market? Don't bet on it.
URL: https://www.carbonrisk.world/beware-seasonal-shifts-in-the-eu/
Last updated: 2025-08-21T10:39:14.000Z
> “Never cross a river that is *on average* 4 feet deep” - Nicholas Nassim Taleb

A strong tailwind could be about to give the EU carbon market a lift into year end - if seasonal price trends are to be believed.

The performance of the EU carbon market over the past ten months has broadly followed the seasonal trend observed since the start of Phase III of the EU ETS, beginning in 2013\. Based on past performance this suggests that after 3-4 volatile weeks, EUA’s *could* see strong returns during the first 2-3 weeks of December.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/be2e255b-797e-4f55-8f38-1842d7380525_892x520-1.png)

Seasonal trends are often used to give an indication of where particular asset prices may move next. Talk of a consistent seasonal pattern should always be viewed with suspicion though. Seasonal tendencies are just that – tendencies. The existence of such a pattern (at least where the price swing is substantial) would imply that the market is so inefficient that some participants would be able to profit at the expense of others simply by following the calendar.

The most important factor though is that seasonality is simply a statistical characterisation of what has happened in the past. Averages hide all kinds of sins. In the case of financial markets the average performance in any particular week of the year masks wild gyrations around that average. For example, the average EUA performance during week 45 of the year (next week) is -4%, however returns have varied from -12% in 2016 to 7% in 2021.

Seasonality, as well as positioning and sentiment are important factors in timing short term trades in any market, including the EU carbon market. However, for long term investors it is vital that they not miss the forest for the tress. It is much more important to focus on the fundamentals and the long-term trend.

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### How the other half cooks
URL: https://www.carbonrisk.world/how-the-other-half-cooks/
Last updated: 2025-08-21T10:39:14.000Z
Across much of the developing world, open fires fuelled by wood, dung or other biomass are used to cook inside the house.

These stoves have adverse health consequences for households, accelerate local deforestation, and emit significant quantities of carbon dioxide. The World Health Organisation (WHO) estimates that smoke from traditional cookstoves is equivalent to smoking 2 packets of cigarettes a day and is responsible for 4 million excess deaths per year.

Some 128 countries currently lack universal access to clean cooking. Almost 2.5 billion people, around 30% of the worlds population can only cook with heavily polluting stoves, 40% of them are in sub‐Saharan Africa and 55% in developing Asia.

There have been improvements over the past decade. The number of people with no access to clean cooking technologies has declined by 0.5 billion since 2010, an annual rate of improvement of 1.7%. A rapid improvement in access to clean cooking technologies in developing Asia (in particular China, India and Indonesia) outweighed a deterioration in sub‐Saharan Africa.

**How big could the cookstove market be?**

The IEA estimates that only 39 of the 128 countries without universal access have clean cooking targets in place, and fewer than half of these are targeting achieving it by 2030.

Under the IEA’s Announced Pledges Scenario (APS), it is assumed that all clean cooking targets are met on time and in full. If all the targets are achieved it would still leave 780 million people without access to clean cooking technologies by 2030.

In order to meet the IEA’s Net Zero Emissions by 2050 (NZE) Scenario, the annual rate of improvement needs to increase from 1.7% to 4.6% - 2.7 times faster. To make progress as rapidly as projected in the NZE Scenario, investment needs to be focused on sub‐Saharan Africa where countries need to improve their historical rate of progress by 15 times.

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### Repricing deforestation risk in the wake of Brazil's presidential election
URL: https://www.carbonrisk.world/repricing-deforestation-risk-in-the/
Last updated: 2025-08-21T10:39:15.000Z
> “I think you’re going to see a very significant amount of money flow into natural capital as people figure out that nature is a very large proportion of the answer to decarbonisation. There is no route to net zero without biodiversity.” - Peter Harrison, chief executive of Schroders

Forest, land, and agriculture industries account for over a fifth of global carbon emissions. However, half of these emissions (\~3.9 Gt CO2e) arise from deforestation and land conversion. One-fifth of the emissions from clearing forests occur in Brazil, a major factor in the country being the world’s sixth-largest emitter of greenhouse gases.

The rate of deforestation in Brazil has slowed since the 1990’s and early 2000’s. The rate of land clearance fell from 28 thousand km2 in 2004 to less than 5 thousand km2 in 2012\. The Brazilian government sought to slow down the pace at which land owners and illegal operators exploit the forest by introducing restrictions on the clearing of private lands, coupled with punitive fines or property seizures.

However, over the past decade, and particularly since 2018, deforestation has begun to rise rapidly again. The latest satellite data for 2021 shows that over 13 thousand km2 of land was cleared, an almost three-fold rise in deforestation. Meanwhile, data covering the first nine months of 2022 reveals that deforestation is up 23% on the same period in 2021.

**Brazilian deforestation rates, km2**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/bd49168a-8687-4d95-bb73-c9455b7275f3_716x505-1.png)

Ever since the election of president Jair Bolsonaro in 2018, restrictions on the exploitation of the forest have been relaxed. For example, Bolsonaro threw his support behind the nation’s agricultural sector, weakened existing environmental protections and legitimised the illegal use of the forest. The payoff from cutting down trees looked much more favourable under his government.

Anecdotal evidence suggests that illegal operators stepped up their clearance of the forests ahead of this October presidential election, anticipating the possibility of tighter restrictions under his opponent who campaigned on a platform of vowing to end the deforestation of the Amazon.

The popular narrative is that the rate at which Brazil’s forests are cleared is closely correlated with the politics of deforestation. However, evidence suggests that macroeconomic factors may be the biggest driver.

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### Weighing the value of carbon price predictions
URL: https://www.carbonrisk.world/how-accurate-are-commodity-price/
Last updated: 2025-08-21T10:39:16.000Z
Power generators and major industrial emitters rely on carbon price forecasts to understand whether it is worth pursuing investments that could decarbonise their businesses.

If carbon forecasts prove to be too high then investors may pay too high a price, bringing forward investments when other opportunities could have made better returns on capital. On the flipside if carbon forecasts prove to be too low then investments may be delayed, and obligated emitters may find themselves paying a high price to meet future compliance needs.

Carbon price forecasts also influence the actions of individual investors. Bullish predictions may encourage investors to buy carbon futures in anticipation of higher prices. For example, in late 2021 a number of analysts were making very bullish calls as to how high carbon prices could go.

That begs the question: How accurate are carbon price forecasts?

Asset management group DWS sought to provide an answer by comparing analyst forecasts made at the start of each calendar year between 2010 and 2021 and comparing their predictions with the outturn at end of the year. According to [DWS](https://www.dws.com/AssetDownload/Index?assetGuid=1e60b404-b0d9-4a1b-919d-7cc11bd1045e&consumer=E-Library&ref=carbonrisk.world) carbon price predictions looking out 12 months typically have an average absolute error rate of 35.5%.

DWS then compared carbon analyst prediction performance against gold, copper, corn, Brent crude and US natural gas forecasts. No surprise that high price volatility tends to increase the likelihood that the forecasting error rate is also high. That being said, carbon prices exhibit similar levels of volatility to US natural gas prices, yet carbon’s forecast error rate is almost double that of US natural gas.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/5884bd1f-0abe-441f-ab71-b43c98293ba0_1018x520-2.png)

In 2017 I published my second book [Crude Forecasts: Predictions, Pundits & Profits in the Commodity Casino](https://www.amazon.co.uk/Crude-Forecasts-Predictions-Pundits-Commodity/dp/1976241022/ref=sr%5F1%5F1?crid=38GI9SEG9AEP7&keywords=Crude+Forecasts%3A+Predictions%2C+Pundits+%26+Profits+in+the+Commodity+Casino&qid=1666589183&qu=eyJxc2MiOiIwLjY1IiwicXNhIjoiMC4wMCIsInFzcCI6IjAuMDAifQ%3D%3D&sprefix=crude+forecasts+predictions+pundits+%26+profits+in+the+commodity+casino%2Caps%2C78&sr=8-1&ref=carbonrisk.world). After reviewing forecasts between mid-2007 and 2016 I found that the average 6-month consensus forecast for WTI crude oil had an error rate of 27%. Oil price forecasts looking twelve months out were only slightly worse, off by an average of 30%.[1](#footnote-1)

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Incentive structures, operating at both the firm and the individual analyst level are often dismissed and discounted by ‘consumers’ of forecasts. In my book I argue that incentives are the true driver of forecasting performance. As Warren Buffetsays,“Forecasts usually tell us more of the forecaster than the future.”

**Incentive #1: Safety in numbers**

As commodity prices soared late in the first decade of the 21st Century the investment plans of major commodity companies were increasingly based on the assumption that high prices would be sustained indefinitely. When prices have been high and rising for some time, it becomes an entrenched assumption that these high prices will persist for the foreseeable future.

In market conditions such as these there is an institutional inertia among forecasters. Analyst’s update their view of the world slowly and iteratively, not wanting to appear too far from the pack or consensus.

The exception to this appears to be when markets reach a peak or a trough. Then investment banks and commentators, etc, all want to come up with an even more extreme prediction of where prices could go - they seek safety in bullish or bearish sentiment. For example, towards the peak in the early 2000’s commodity super-cycle, forecasters came up with ever more bullish projections of how high prices could go. This was mirrored in early 2016 as forecasters sought safety in ever more bearish projections for crude oil prices.

Diversity of opinion often breaks down when beliefs (often also reflected in commodity prices) become too stretched. Seasoned investors might take a back seat while novices push prices to more extreme levels. When this happens, there is no countervailing force to cancel out the irrationality of one individual or group.

**Incentive #2: Anti-herding**

Researchers at the European University Viadrina Frankfurt (EUVF) analysed over 20,000 forecasts of nine different metal prices over different forecasting horizons, during the fifteen years between 1995 and 2011\. Instead of finding the institutional inertia and forecasting herding that we might expect, they found strong evidence of “anti-herding”.

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### Return to the 70's
URL: https://www.carbonrisk.world/return-to-the-70s/
Last updated: 2025-08-21T10:39:17.000Z
EU carbon prices have surged by around 15% over the past three trading days to \~€77 per tonne.

€76-€78 per tonne was a key support level during Jan-Feb, and then again from mid-March through to the end of August. The rebound in prices marks a return to this level, and for the moment at least represents resistance to higher prices.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/22b18732-ca9c-4f2d-bf56-6e79a83dfc6b_1270x815-1.png)

**The big short gets squeezed**

Recall that investment funds have been sitting on a record short position on EU carbon prices. That bet has paid off as carbon prices plummeted from near €100 per tonne in late August to the mid-60’s. However, the speed of the rebound in prices over the past few days points to plenty of short covering.

The latest Commitment of Traders (CoT) report is due to be published today (Wednesday 26th Oct), but we’ll probably have to wait until next weeks report to find out the real extent to which funds have unwound their short positions (see [*The big short: Record net short position underlines the extreme negative sentiment towards carbon*](https://www.carbonrisk.world/the-big-short/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/16db5e83-1374-4bb8-8281-19cdc3f7cf6b_979x502.png)

The carbon market is no different from any other, it moves in the path of least resistance.

What then do the fundamentals indicate?

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### The carbon capture superpower
URL: https://www.carbonrisk.world/the-carbon-capture-superpower/
Last updated: 2025-08-21T10:39:18.000Z
Global carbon capture capacity is projected to rise more than six-fold by the end of the decade.

The United States is likely to dominate this nascent but growing industry, supported by generous government support and a bounty of natural geological and industrial tailwinds.

Recall that carbon capture, use and storage (CCUS) involves catching concentrated industrial emissions at their source, preventing them from entering the atmosphere (see [*Everything carbon investors really need to know about CCUS*](https://www.carbonrisk.world/everything-carbon-investors-really/)).

Despite the concern by environmentalists that carbon capture represents a license for oil and gas firms to maintain the status quo, their share of the market is likely to shrink. In their place, power generators, ammonia & hydrogen industries, and hard to decarbonise industrial sectors are set to capture and store more of their carbon emissions.

Lets dive in.

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### France's nuclear winter of discontent
URL: https://www.carbonrisk.world/frances-nuclear-winter-of-discontent/
Last updated: 2025-08-21T10:39:19.000Z
Nuclear generation tends to be uncorrelated with carbon prices. The exception is when high power prices coincide with a period of tight carbon allowance supply.

This August’s surge in European power prices coincided with a sharp increase in EU carbon prices towards €100 per tonne as utilities looked to hedge their power generation, while the supply of allowances via auction was limited.

With renewed concern over the outlook for France’s nuclear generation, tight power supplies could result in a repeat scenario developing as we move into 2023.

Before considering the outlook lets recap why France is in this mess.

In late 2021 France’s state owned energy giant EDF, announced that following a regular ten-year inspection, it’s engineers had uncovered faults at one its nuclear reactors. The discovery prompted EDF to close it and three other similar reactors for unplanned maintenance.

Things were to get much worse in early 2022\. EDF announced it had found similar problems at yet another reactor, prompting its closure for repairs, and that it was now extending the maintenance outage period at the earlier four problem reactors.

As a result of its maintenance woes, EDF announced that it was lowering its 2022 nuclear power output forecast from 330-360 terawatt-hours (TWh) to 300-330 TWh.

The EU-27 generated 1,404 TWh of electricity from nuclear facilities during the period Mar-Sep 2022, down 75 TWh (5%) from the same period in 2021\. Generation restrictions as a result of low water levels during the summer drought contributed to the decline. However, it was persistent technical and maintenance issues affecting more than half of France’s nuclear reactors that has dogged nuclear generation.

Remember that France accounts for around 52% of EU-27 nuclear generation. In 2021, nuclear represented 44% of France’s installed electricity generation capacity (61 GW across 56 nuclear reactors), and 69% of its power generation (581 TWh).

EDF’s ability to maintain its nuclear fleet is crucial, not simply for France’s own power needs, but also that of neighbouring countries. When Europe really needed a source of reliable, clean power generation, many of France’s nuclear plants were missing in action.

The drop in nuclear generation could not have come at a worse time for Europe’s energy markets given concerns over natural gas supplies in the aftermath of Russia’s invasion of Ukraine. Hydropower generation (another form of baseload power generation) also proved far from reliable as water levels dropped (see [*The forgotten giant of clean energy*](https://www.carbonrisk.world/the-forgotten-giant-of-clean-energy/)). To fill the gap Europe has had to burn more coal and lignite, import more LNG to fuel gas powered generators and expand it’s solar generation.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/0ac23add-c838-4df0-89f5-7bd94854aa2e_900x504-2.png)

As I explain in [*The sword of inelastic supply cuts BOTH ways*](https://www.carbonrisk.world/the-sword-of-inelastic-supply-cuts/), the late summer surge in power prices (French power prices climbed to a record €1,100 per MWh) also coincided with a sharp increase in EU carbon prices to \~€100 per tonne as utilities looked to hedge their power generation while the supply of allowances via auction was limited:

> The supply of EUA’s is essentially fixed in the short-term…In August auction volumes are cut by 50%, reducing the primary supply of EUA’s onto the market. Overall then the supply of EUA’s is likely to be highly price inelastic, and especially so during August.  
>  
> If you combine this with parabolic increases in natural gas and power prices then even a small increase in demand can result in a sharp rise in the price of carbon. Utilities seek to hedge their future power generation by either purchasing allowances, or by hedging that requirement using the carbon futures market.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-230.png)

Read Carbon Risk in the Substack appAvailable for iOS and Android[Get the app](https://substack.com/app/app-store-redirect?utm%5Fcampaign=app-marketing&utm%5Fcontent=author-post-insert&ref=carbonrisk.world)

As we near the end of 2022, what chance is there of a similar scenario occurring in 2023? Again, it may come down to the weakest link in Europe’s energy generation - France’s aging nuclear fleet.

Unlike last year, EDF is now being afflicted by strike action. As of late last week, around one-third of EDF’s 18 French nuclear sites were being affected by strike action. The action by workers has served to delay the completion of maintenance at some facilities by 2-3 weeks, according to some estimates.

Fortunately, there is a way we can get a realistic picture of what the next few months is likely to look like that doesn’t involve trusting the claims made by EDF or France’s politicians.

The next three charts are from [Energy Graph](http://www.energygraph.info/?ref=carbonrisk.world). Click on the source link under each chart to go direct to the live data.

The first chart shows French nuclear generation between 2016 and 2021\. The purple line at the bottom of the chart shows output during 2022 up until the 18th October (the vertical dotted red line).

You can clearly see that the country’s nuclear generation during 2022 has been significantly below levels seen during the previous six years. Nuclear power output hit a low at the end of August, and although it has rebounded since then, it remains significantly below even year earlier levels.

The stepped purple line past this date shows EDF’s forecast of nuclear plant availability. This is based on their expectation of when plants currently in maintenance will resume generation. However, simply because EDF plan to bring plants back at that rate doesn’t mean that they will.

**French nuclear generation 2016-22, MW**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8f77e46d-5add-4da6-bfae-570aa95c7db6_1847x797.png)

Source: Energy Graph [energygraph.info](https://energygraph.info/d/vJYZk6MVk/french-nuclear-yearly-availability?orgId=1&from=1640998800000&to=1672527599999&viewPanel=2&ref=carbonrisk.world)

You can see the outlook more clearly in the chart below. The stepped line (this time in green) shows EDF’s plan for nuclear availability over the next five months. The line you need to keep an eye on is the yellow one, labelled RTE. RTE is France’s transmission system operator. Every day RTE publish a probabilistic forecast of French nuclear generation.

**French nuclear generation forecast, GW**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/8f6351d3-9b32-41a0-ad43-39be1b84760d_1839x830.png)

Source: Energy Graph [energygraph.info](https://energygraph.info/d/uMjgqrW4z/french-nuclear-availability?orgId=1&var-update=422&from=1660863600000&to=1679270399999&ref=carbonrisk.world)

French nuclear generation typically peaks around early February each year. Based on EDF planned availability the country could generate up to 59 GW by February 2023\. However, based on RTE’s projection, France is more likely to generate 46.2 GW, putting it around 3 GW lower it was able to generate at the same point in 2022.

Based on EDF’s schedule, 24 out of EDF's 56 reactors are due to return before the end of the year, while 5 reactors are scheduled to return in early-2023\. However, as the chart below shows, from late January onwards, some 14 units are scheduled to come offline for early 2023 maintenance.

**French nuclear reactor unavailability timeline**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/43e92490-956d-4b98-82f1-085aa01e0ea7_1896x795.png)

Source: Energy Graph [energygraph.info](https://energygraph.info/d/cM9gMNZ4k/french-nuclear-availability-timeline?orgId=1&kiosk=&from=1603062000000&to=1681945199999&viewPanel=2&ref=carbonrisk.world)

However, RTE believe the situation is likely to become precarious if France heads into peak demand season and EDF fail to resolve the strike action quickly: "A prolonged social movement would have heavy consequences for the key part of the winter."

France’s nuclear reactors have generated about 215 TWh so far this year. Overall, EDF estimate that annual 2022 output is likely to be toward the lower end of the 280-300 TWh range.

France’s nuclear winter of discontent is likely to mean Europe will need to rely on more coal or gas power generation.

In the event that there is a cold snap during late 2022 and into early 2023 (also a time of low EUA auction supply), carbon prices may see another spike as utilities demand for carbon allowances rises.

Carbon Risk is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

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### The big sovereign carbon trade
URL: https://www.carbonrisk.world/the-big-sovereign-carbon-trade/
Last updated: 2025-08-21T10:39:19.000Z
The single largest monetisation of natural capital is expected to take place later in October.

The government of Gabon is expected to issue 90 million carbon credits as it seeks funds to finance the conservation of it’s carbon absorbing forests, and help diversify the country’s income stream away from oil.

Around 85% of Gabon’s land is covered in rainforest, an area about the size of the UK. The ‘natural capital’ locked up in Gabon’s forests are likely to be vital to the growth in nature-based carbon credits, with the imminent sale expected to be a test case for the market in sovereign carbon credits.[1](#footnote-1)

_This post is for paying subscribers only._
### Europe's industrial slump
URL: https://www.carbonrisk.world/what-does-europes-industrial-slump/
Last updated: 2025-08-21T10:39:20.000Z
The outlook for industrial activity in Europe is important to carbon market investors, in part as it signals potential demand for emission allowances. Recall, that industry accounts for around half of EU ETS covered carbon emissions.

It’s also vital to understand how it may influence the behaviour of industrial emitters. For example, one way industry may look to alleviate short term credit constraints is by selling off some of the free carbon allowances they have been allocated.

Lets first look at the latest trends in Eurozone manufacturing activity, before considering how the energy crisis industrial recession compares with previous slumps.

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### Carbon's shifting anchor
URL: https://www.carbonrisk.world/carbons-shifting-anchor/
Last updated: 2025-08-21T10:39:21.000Z
The argument for a slow rate of industrial decarbonisation in Europe hinges on the need for the carbon price to rise beyond an industry’s estimated carbon abatement cost, and crucially remaining higher than that level for an extended period of time such that high carbon prices become embedded in expectations.

Only then, so the argument goes, will industrial companies begin to invest in decarbonisation technologies.

Large industrial companies and consultants typically place their abatement cost estimates anywhere in the region of €60-€230 per tonne, depending on the technology, industry, etc. With the current EU carbon price not even one-third of this upper range, difficult to decarbonise industries appear to have someway to go before they have sufficient incentive to invest (see [*The long term price of emission*](https://www.carbonrisk.world/the-industrial-decarbonisation-bottleneck/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/324da810-9001-4312-b9a2-d98fafa4331d_963x630-2.png)

However, there’s a good case to be made that the cost to decarbonise is likely to come down fast, and perhaps to levels significantly lower than these estimates from 2020 suggest.

The anchor by which major industrial emitters judge future investments in decarbonisation is shifting.

It all comes down to the role green hydrogen is likely to play in Europe’s decarbonisation. According to research by Agora Energiewende and the Wuppertal Institute for Climate, green hydrogen could provide one-fifth of the industrial emission reduction required by 2030 under the EU ETS.

This is likely to be an underestimate. As the cost of green hydrogen comes down, other use cases are likely to become apparent, enabling and accelerating the last mile of decarbonisation.

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### What RWE's 2030 coal burn phase out means for carbon prices
URL: https://www.carbonrisk.world/what-rwes-2030-coal-burn-phase-out/
Last updated: 2025-08-21T10:39:22.000Z
Last week German energy giant [RWE announced ](https://www.rwe.com/en/press/rwe-ag/2022-10-04-agreement-on-coal-phase-out-2030-and-strengthening-security-of-supply-in-the-energy-crisis?ref=carbonrisk.world)that it will phase out the burning of coal by 2030, eight years earlier than agreed under Germany’s Coal Phase-Out-Act. The move to bring forward the phaseout means that \~280 million tonnes of CO2 will not now be emitted.

The Act, passed in 2020, outlined a trajectory for phasing out coal-fired power generation in Germany. Hard coal-fired power plant capacity would be cut from \~18 GW in 2020 to zero by 2035\. Meanwhile, lignite-fired capacity would see a more gradual decline, falling from \~18 GW in 2020 to \~6 GW around 2035-37 before finally closing before the end of 2038.

Bringing that timetable forward eight years has to be bearish for carbon prices, right?

**Proposed coal-fired generation capacity phase-out path (Coal Phase-Out-Act)**

![Infographic on the coal phase-out](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b6609326-1c32-4b3e-b8d4-261709eef677_976x629-jpeg-1.jpg)

Source: [BMUV](https://www.bmuv.de/en/topics/climate-adaptation/climate-protection/national-climate-policy/translate-to-english-fragen-und-antworten-zum-kohleausstieg-in-deutschland?ref=carbonrisk.world#:~:text=Germany%20will%20phase%2Dout%20coal,coal%20power%20plants%20were%20held.)

Despite the governments best laid plans, coal-fired emissions will still rise in the short-term as Germany burns coal for energy security reasons (see [*Back to black?*](https://www.carbonrisk.world/back-to-black/)). Two of RWE’s lignite-fired power plant units - previously scheduled to go offline at the end of 2022 - have been granted permission to continue to operate until the end of March 2024.

LEAG is the largest power plant operator in eastern Germany and the other major coal plant operator in the country. Unlike RWE, LEAG has not committed to exiting from coal earlier than 2038\. The structural economic challenges in eastern Germany are much greater, meaning that bringing forward the phaseout could bring significant social issues.

Both utilities have announced plans to invest in Germany’s green energy transition, including boosting it’s solar and wind generation capacity and investing in gas-fired power plants capable of burning hydrogen. The pivot to green energy by German utilities will hopefully mean that a greater percentage of the EU’s energy needs are generated by renewable sources and serve to accelerate the decarbonisation of industry.

**What impact will Germany’s coal phaseout have on carbon prices?**

The impact of bringing forward the closure of Germany’s coal fired generation plants on the overall supply-demand balance for EU carbon allowances is more nuanced than it first appears.

First, the move to phase out coal by 2030 is likely to have a bearing on RWE’s carbon hedging strategy. Given it’s huge carbon footprint, RWE has been one of the most active utilities in hedging it’s future EU ETS compliance needs. Beginning in 2014, RWE began shifting its procurement strategy to buying EUAs in advance of the year that they were required. Recent figures suggested that the company had hedged its carbon exposure all the way out to 2030 (see [*Hedging carbon risk*](https://www.carbonrisk.world/the-big-hedge/)).

Yes, there will be more emissions over the next couple of years as some lignite-fired generation helps to negate the loss of Russian natural gas. However, moving forward RWE’s hedging strategy is likely to mean it will wind down it’s purchase of physical EUAs. Afterall, if everything goes to plan, it won’t need to hedge any carbon emissions post 2030\. That points to a bearish headwind for EU carbon prices.

However, an amendment to Germany's emissions trading law, which translates the EU ETS into national provisions, stipulates that the German government will cancel the amount of EUA’s corresponding to the additional emissions reductions caused by the shutdown of coal power capacities, insofar as they are not withdrawn by the Market Stability Reserve (MSR). This means that the supply of emission allowances available will be reduced by an amount corresponding to the shuttered power plants.

In short, the loss of EUA demand for hedging purposes is negated by a corresponding withdrawal in the supply of EUAs. Overall then, what at first appears to be a bearish headwind for EU carbon prices is actually more likely to be broadly neutral.

[What price King Coal's return to Europe?"There are no taboos in this situation" - EU climate chief, Frans Timmermans EU ETS emissions are estimated to have increased by 8.7% in 2021, according to a recent poll of analysts by Refinitiv. Exceptionally high natural gas prices resulted in generators switching to thermal coal, significantly increasing the carbon intensity of power generation. The sh…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-236.png)Carbon Risk](https://www.carbonrisk.world/what-price-king-coals-return-to-europe/)
### Carbon risk dulls allure of gold miners
URL: https://www.carbonrisk.world/carbon-risk-dulls-allure-of-gold/
Last updated: 2025-08-21T10:39:23.000Z
Gold miners have an image problem.

The global metals and mining business is responsible for around 8% of global carbon emissions. In contrast to their compatriots mining copper, silver, tin, nickel and a whole host of other metals and minerals essential to driving the energy transition, gold miners have no such compelling narrative.

The gold mining sector is facing increasing pressure from institutional investors to cut emissions. Arguably they are having to work much harder to earn their place among investors than other metal miners with an energy transition story to tale. If they fail to cut emissions, gold miners risk becoming outcasts, tainted with the same brush as coal.

The average emissions intensity of the top 16 gold miners was 0.81 tons of CO2e per oz in 2021, according to Metals Focus’ Gold ESG Focus 2022\. This includes both Scope 1 (on-site activities) and Scope 2 emissions (such as power purchased from the grid).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/ea5c2e47-8e60-4ab9-985e-4796d9827886_1000x1318-jpeg.jpg)

The top 16 gold miners account for \~30% of global gold production, estimated to be 3,577 oz in 2021\. Assuming the emissions intensity of the top 16 gold miners is representative of the rest of the sector that means gold mining is responsible for 93 million tons CO2e of direct emissions in 2021, equivalent to 0.3% of global emissions.

A [study ](https://www.sciencedirect.com/science/article/pii/S0959652622004899?ref=carbonrisk.world#!)by the Centre for Exploration Targeting (CET), based in Western Australia examined the impact of a carbon tax ($50 and $100 per tonne) on gold miners production costs across 35 different gold producing countries.

Although we are many years away from ever realising a global carbon price that doesn’t mean individual gold producers aren’t preparing for greater scrutiny. As in other sectors of the economy, some gold producers are employing shadow carbon prices to help them make decisions in the event that their operations are subject to carbon pricing in the future. (see [*In the shadows: Everything you need to know about internal carbon pricing*](https://www.carbonrisk.world/in-the-shadows/)).

Analysis of 194 different gold mines revealed that the emissions intensity of the energy source used onsite is the main factor driving differences in overall mining emissions intensity between gold mining countries.

For example, over 80% of Canada’s electricity generation comes from low carbon energy, mainly hydroelectric. In contrast, nearly 85% of Australia’s power comes from fossil fuel sources, while South African mines tend to be powered by electricity generated from burning dirty brown coal.

Previous [research ](https://www.sciencedirect.com/science/article/abs/pii/S095965262032165X?ref=carbonrisk.world)by CET found that the grade of gold (i.e., grams of gold per tonne of ore), and the type of mine (i.e., open vs underground) are also key factors. Higher grade gold mines have a lower emissions intensity than lower grade gold mines. Meanwhile, underground mines in Australia and North America tend to have an average emission intensity 40-50% lower than open pit mines.

Although underground mines tend to have a lower emissions intensity than open-pit, very deep mines tend to be extremely carbon intensive. For example, South Africa's underground gold mines are much deeper (many over 2km deep) than underground mines in other countries. These ultra-deep gold mines require considerable energy to cool and ventilate.

**Gold producer emissions intensity curve, kg CO2e per oz**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/59b3b2bc-289f-4ff5-a625-683118ec4d03_3059x1733-jpeg.jpg)

Notes: 1\. Finland, 2\. Bulgaria, 3\. Canada, 4\. Armenia, 5\. Argentina, 6\. Brazil, 7\. New Zealand, 8\. DRC, 9\. Tanzania, 10\. Chile, 11\. Indonesia, 12\. Senegal, 13\. Peru, 14\. Laos, 15\. Suriname, 16\. Ghana, 17\. Turkey, 18\. Philippines, 19\. Guinea, 20\. Côte d’Ivoire, 21\. USA, 22\. Mali, 23\. Mexico, 24\. Burkina Faso, 25\. Australia, 26\. Papua New Guinea, 27\. Kyrgyz Republic, 28\. Namibia, 29\. Egypt, 30\. Russian Federation, 31\. Dominican Republic, 32\. Mauritania, 33\. Greece, 34\. Kazakhstan, 35\. South Africa

The emissions intensity among the top 16 gold miners has increased by around one-third since 2014, rising from \~0.6 tons of CO2 per oz in 2014 to 0.81 tons of CO2 per oz in 2021\. A decline in the grade of gold appears to be the main factor behind the increase, and further declines are likely to push emissions intensity higher.

Despite pumping record amounts of cash into exploration in the early 2010’s, the size of new gold reserve discoveries has slowed. The average grade of new gold deposits has declined from 10 grams per tonne in the early 1970’s to around 1.4 grams per tonne today. Gold grades are expected to get worse as gold miners must exploit ever more difficult seams in order to maintain output.

In Australia the average gold grade is projected to fall by 44% between 2018 and 2029\. [CET warn ](https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/landmark-australian-gold-mine-emissions-study-warns-on-impact-of-falling-grades-59247681?ref=carbonrisk.world)that without adapting, the emissions footprint per ounce for open pit and underground mines is likely to increase by 49% and 34% respectively.

**What does this mean for investors in gold miners?**

The current cost-competitive position of a gold producer does not guarantee its competitiveness in the event that it is subject to a global carbon price. The change in the relative cost positioning of gold mining in different countries is key to assessing financial risks in a climate constrained world. Of the large gold producers only Canada becomes more competitive after a carbon tax is introduced. Australia, Russia and the USA become less competitive.

**Change in country gold production cost positioning assuming $100 per tonne CO2e carbon price, % change versus total all-in production costs**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/baab5ae1-30ba-4818-b338-6b7cb6baa801_3059x1626-jpeg.jpg)

Notes: 1\. Tanzania, 2\. Laos, 3\. Argentina, 4\. New Zealand, 5\. Brazil, 6\. Bulgaria, 7\. DRC, 8\. Côte d'Ivoire, 9\. Canada, 10\. Mauritania, 11\. Peru, 12\. Indonesia, 13\. Suriname, 14\. Finland, 15\. Senegal, 16\. Namibia, 17\. Philippines, 18\. Kyrgyz Republic, 19\. Mexico, 20\. Guinea, 21\. Greece, 22\. Armenia, 23\. South Africa, 24\. Turkey, 25\. Russian Federation, 26\. Dominican Republic, 27\. Australia, 28\. Egypt, 29\. Chile, 30\. USA, 31\. Burkina Faso, 32 Papua New Guinea, 33\. Mali, 34\. Ghana, 35\. Kazakhstan.

Gold extracted from mines with relatively low emissions intensity may start to extract a premium versus gold mined with much higher emissions. Investors may start to incorporate this into their assessment of the value of the gold producer. In particular it may pay to start focusing on those countries on the left hand side of the chart above.

Gold producers have very little control over the grade of the gold, nor whether it is open-pit or underground. However, mining companies and the jurisdictions they operate in can make a big difference to their emissions profile by increasing the proportion of low or zero carbon electricity. Those gold producers that can demonstrate they are able to cut their Scope 2 emissions intensity are likely to be looked on more favourably by investors.

Miners that have implemented a shadow carbon price are likely to be ahead of the game. Almost half (225) of the 500 biggest global companies by market cap either have, or are planning to introduce, an internal price of carbon. Adoption of a shadow carbon price by gold producers appears to be lower.

Two gold miners that have introduced an internal carbon price are Newcrest (mines located in Australia, Canada and Papua New Guinea) and Newmont (North and South America, West Africa and Australia). Both miners have adopted a carbon price of £25-$50 per tonne.

[Wood Mackenzie](https://www.woodmac.com/press-releases/gold-miners-on-track-to-align-with-2c-climate-target-by-2030/?ref=carbonrisk.world) analysed gold miners plans for energy efficiency, changes in their asset mix, other emission abatement actions and forecast changes in the carbon intensity of the grid. Their conclusion is that the global gold industry needs to do much more if it is to align with net zero targets limiting temperature increases to 1.5°C.

**Projected carbon emissions intensity of gold industry, 2019 - 2030**

![Carbon emissions intensity of gold mines, 2019 - 2030](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/df8caf97-6df4-4c94-836a-6b075ef7d291_1800x1354.png)

*Gold industry reviewed covered 60% of total gold mine supply. Gold production originating from primarily copper, zinc and nickel mines was excluded from this analysis. Additionally, this does not include an assumption for small-scale, informal, artisanal or illegal mining due to the opaque nature of supply.*

For those gold producers unable to change their emissions intensity, the other thing they can do is try a makeover. One way that some gold miners can do this is by transitioning to mining more copper and silver, in turn burgeoning their green credentials. Although pure gold deposits can be found in nature, it is much more likely to found in association with ores of copper. As well as lowering the overall cost profile of the mine, the ability to sell both a precious and an industrial metal can reduce the revenue risk since they typically (but not always) move in opposite directions.

**What does it mean for the price of gold?**

The prospect of gold mining divestment holds some similarities with coal’s recent history, but it’s not the whole story, and here investors need to careful about drawing the same connection regarding the potential impact on the gold price.

Unlike consumable commodities such copper and coal, gold exhibits a large discrepancy between the total available supply and annual additions from miners. The relationship between total supply available from inventories and annual production is known as the stock-to-flow ratio.

While the entire amount of gold ever mined totals approximately 190,000 tonnes (the stock), annual production is about 3,500 tonnes or 1.8% (the flow). If you divide the stock by the flow you get a stock-to-flow ratio of \~ 55 years.

According to the US Geological Survey, the largest annual increase in gold production occurred in 1923, which when compared with the stock of gold at the time equates to a 1.5% increase in the gold stock. The largest percentage increase in the stock of gold was in 1940 when it rose by 2.6%, and since 1942 it has never exceeded 2%.

Gold miners are powerless to change the stock-to-flow. According to Fergal O’Connor, Lecturer In Finance at Cork University Business School, “The low flow-stock \[high stock-flow\] ratio of gold implies low market power of gold mining firms and thus an inability to significantly influence gold prices.”

Gold miners are price takers, not price setters. And so, even if ESG mandates, high carbon prices or divestment pressure did result in a sharp decline in annual gold production (as has been seen to an extent with thermal coal), gold’s high stock-flow ratio means it will have very little impact on the price of gold.

Carbon Risk is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

[Why metal mining investors should support a global carbon priceThe global metals and mining business is one of the dirtiest industries around, contributing around 8% of global carbon emissions. A high carbon price is surely the last thing that mining company executives and their investors would wish for. Yet many of the commodities brought to the surface and refined are essential if we are to accelerate the ‘green’ energy transition and decarbonise our economies.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-237.png)Carbon Risk](https://www.carbonrisk.world/debottlenecking-the-energy-transition/)
### Climate engineering
URL: https://www.carbonrisk.world/engineering-the-climate-to-hit-net/
Last updated: 2025-08-21T10:39:23.000Z
165 billion tonnes of carbon will need to be removed from the atmosphere by 2050 in order to limit climate change to 1.5°C, according to the [Energy Transitions Commission](https://www.energy-transitions.org/wp-content/uploads/2022/04/Mind-the-Gap-How-Carbon-Dioxide-Removals-Must-Complement-Deep-Decarbonisation-to-Keep-1.5C-Alive-1.pdf?ref=carbonrisk.world). That’s equivalent to 10 billion tonnes of carbon each, and every year.

Carbon removal technology is essential if we are to meet net zero targets.

First, nature-based carbon credit projects will have to compete with other demands on the land. The Intergovernmental Panel on Climate Change (IPCC) estimates that land-based carbon removal methods, including afforestation and reforestation could yield a maximum of about 19 billion tonnes of CO2 per year, requiring 1 billion hectares of land. In comparison, 1.5 billion hectares of land are currently devoted to growing crops worldwide (see [*The 'green lairds': How carbon and natural capital investors are driving demand for land*](https://www.carbonrisk.world/the-green-lairds/)).

Secondly, the crucial distinction between nature and technology based carbon removal offset projects is the degree of permanence and requirement for ongoing monitoring. For example, the benefits of nature based projects accrue over several decades or more and risk being undone due to fire or illegal logging. Technology based removal projects sequester carbon immediately and with much less risk of subsequent release (see [*Technology-based carbon removal credits crucial if net-zero targets are to be met*](https://www.carbonrisk.world/technology-based-carbon-removal-credits/) and and [*Banking on 'blue carbon': Everything you need to know about carbon credits sourced from the ocean*](https://www.carbonrisk.world/banking-on-blue-carbon/)).

Finally, carbon removals are likely to become a feature of regulated compliance schemes. For example, the original “Fit for 55” trajectory for the EU ETS cap implies EU ETS-regulated emissions must hit zero emissions by 2040\. Carbon removals - either nature or technology based solutions - will become essential if the EU is to meet its net zero target (see [*The zero lower bound: What happens when EU ETS emissions approach zero?*](https://www.carbonrisk.world/the-zero-lower-bound/)). Other compliance markets including the UK ETS and many in Asia are also exploring the potential for carbon removal to meet compliance (see [*Why Asia is pivotal to future carbon market growth*](https://www.carbonrisk.world/why-asia-is-pivotal-to-future-carbon/)).

In short, technology-based removals must scale up, and quickly.

_This post is for paying subscribers only._
### EU member states ditch MSR sale proposal
URL: https://www.carbonrisk.world/eu-member-states-ditch-msr-sale-proposal/
Last updated: 2025-08-21T10:39:23.000Z
EU member states appear to have finally torpedoed the European Commission’s (EC) proposal to raid the Market Stability Reserve (MSR).

I wasn’t alone in saying that this was a particularly bad idea, one that would threaten the long-term integrity of the EU ETS and make it very difficult for carbon prices to reach the levels required for industrial decarbonisation.

Instead, EU member states are proposing to raise 75% of the €20bn from the EU Innovation Fund and the remaining portion from the frontloaded auction of carbon allowances.

The European Parliament is likely to put up stiff resistance to the use of the Innovation Fund when MEP’s meet on 9th November to vote. Recall that the aim of the Innovation Fund is the “commercial demonstration of innovative low-carbon technologies, aiming to bring to the market industrial solutions to decarbonise Europe and support its transition to climate neutrality”.

Instead, many MEP’s appear to prefer that 100% of the €20bn comes from frontloading of auction revenue. I don’t think it matters a great deal what proportion comes from the Innovation Fund, but what does really matter is that raiding the MSR is now off the table.

As I noted in a previous article when discussing the MSR sale proposal, any suggestion that this was anything but a one-off will be a serious red flag for investors, and will forever compromise the single most important policy tool the EU has in fighting climate change (see [*Is the MSR sale really a 'win-win'?*](https://www.carbonrisk.world/raiding-the-piggy-bank/)).

Analysis by Refinitiv conducted before this week’s meeting considered four different scenarios and what they would mean for the EU ETS market balance and the outlook for the EU carbon price.

_This post is for paying subscribers only._
### Commitment issues
URL: https://www.carbonrisk.world/commitment-issues/
Last updated: 2025-08-21T10:39:24.000Z
> “It takes many good deeds to build a good reputation, and only one bad one to lose it.” - Benjamin Franklin

When a government begins to lose economic credibility, the market will punish it by selling government bonds, forcing up interest rates and washing itself of it’s currency.

As I’ve outlined in previous posts, I believe that one way of framing carbon markets is through the lens of a currency - ‘The Currency of Decarbonisation’.

If a government introduces a carbon price and commits itself to this policy for the foreseeable future, then obligated emitters, investors and other market participants will react by incorporating the expected carbon price into their investment decisions.

However, the market will judge the governments commitment as somewhere between zero and absolute. The greater the perception is that a government might not stick to its self-imposed commitment, the larger the discount the market will factor in to the carbon price.

A loss of climate policy credibility means that businesses will either postpone investing until the policy uncertainty is resolved, or they will demand higher rates of return. Either way, the total level of emissions abatement achieved is likely to be reduced.

Knowing the ‘commitment issues’ signs to watch out for is going to be more important over the next few years. Commitment perceptions will influence the future direction of compliance carbon markets such as the EU emissions trading scheme (ETS), voluntary demand for carbon credits from the corporate sector, and individual nation demand for carbon credits with which to meet their commitments under the Paris Agreement.

**How strong carbon markets show commitment**

Assuming that the government or institution responsible for carbon markets acts in its self-interest, the more the observable gains from compliance with the ETS outweigh the observable gains from reneging, the more credible a policy is. Reputation and commitment devices are central to determining the credibility of a government, or an institution responsible for climate policy.

A long history of policy support is a strong reputational indicator of commitment. As I outline above, this creates a virtuous circle whereby emission abatement is achieved at lower cost. Even better if the policy has been gradually tightened over time. That kind of political support is difficult to achieve, and even harder to achieve over a long period of time.

A commitment device is often used by the government or institution responsible for implementing policy to demonstrate commitment. By deliberately restricting the option to deviate from the policy, other stakeholders become more confident that it will not be revoked.

There are three distinct types of commitment device used in carbon markets: legislation, delegation and securitisation.

_This post is for paying subscribers only._
### The big short
URL: https://www.carbonrisk.world/the-big-short/
Last updated: 2025-08-21T10:39:25.000Z
> “Everyone, deep in their hearts, is waiting for the end of the world to come.” - Haruki Murakami

Carbon market sentiment is extremely negative right now. Let’s take a look at some of the key charts that matter to the EU carbon market.

The latest Commitment of Traders data reveals that investment funds (IFs) have built a record net short position in the EUA futures market, betting that carbon prices will fall further. The previous record net short position occurred in May 2020, shortly after the pandemic got into full swing.

Based on the last couple of years it’s rare for IFs to hold a net short position for too long. In May 2020 the subsequent switch to net length positioning coincided with EU carbon prices jumping 50% to \~€30 per tonne over the following two months. However, we are in a very different economic and political environment now.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/16db5e83-1374-4bb8-8281-19cdc3f7cf6b_979x502-2.png)

The options market for the Dec-22 futures contract, the most heavily traded contract is balanced with an overall put-call ratio of \~1.00\. There has been very little change during the past few weeks with the most significant put call volumes around the €60 per tonne mark.

_This post is for paying subscribers only._
### The sky's the limit
URL: https://www.carbonrisk.world/the-skys-the-limit/
Last updated: 2025-08-21T10:39:26.000Z
Carbon markets are only having a negligible impact on the international airline industry.

That’s a problem given the expected growth in global air travel, and the damage that emissions have from so high up in the atmosphere.

The global airline industry is expected to emit around 810 Mt CO2 in 2022, according to the International Air Transport Association (IATA), accounting for approximately 2.5% of global energy-related CO2 emissions.[1](#footnote-1)

Aviation emissions fell during 2020 due to restrictions associated with the pandemic, but have since rebounded, and in 2022 are expected recover to around 100 Mt CO2 below 2019 levels. The IATA forecast passenger numbers will surpass 2019 numbers by 2024 with 4 billion trips expected to take place.[2](#footnote-2)

However, the impact of airline industry on the global carbon budget is likely to grow. If projections made before 2020 hold true then passenger numbers could double by 2037 to 8.2 billion in 2037\. Aviation could consume one-sixth of the global carbon budget for limiting global temperature rise to 1.5C by 2050, should the sectors pre-COVID growth resume.[3](#footnote-3)

Domestic aviation emissions are covered by the Paris Agreement under individual countries Nationally Determined Contributions (NDCs). International flights, which account for around two-thirds of the aviation industry’s CO2 emissions, are covered by the UN’s International Civil Aviation Organisation (ICAO).

**What is CORSIA?**

In 2016, more than 190 governments agreed to introduce the first global market-based mechanism designed to curtail the growth of emissions in a particular industry. CORSIA as it’s known is short for Carbon Offsetting and Reduction Scheme for International Aviation. The UN agency, ICAO is responsible for its implementation.

CORSIA aims to ensure that any rise in international aviation emissions above 2019/20 levels are offset elsewhere. Another way of stating this is ensuring that any growth in international flights after 2020 is carbon neutral.

CORSIA has applied to international aviation since 1st January 2019 when all airlines were required to report their CO2 emissions on an annual basis. This applied to all ICAO countries, even if they did not participate in the voluntary stages of CORSIA.

The voluntary pilot phase begins began on 1st January 2021 when international flights became subject to offsetting obligations. From the start of 2024 the voluntary first compliance phase begins. It’s only from 2027 that compliance with CORSIA becomes mandatory. The scheme is currently scheduled to come to an end in 2035.

IATA estimates that without CORSIA, net CO2 emissions from international flights would rise to almost 900 Mt CO2 by 2035, approximately 70% above 2022 levels. CORSIA does not apply to the owners of private jets. Meanwhile, some countries with very little air travel are exempt from meeting its obligations.

_This post is for paying subscribers only._
### VCM futures no refuge from equity market malaise
URL: https://www.carbonrisk.world/vcm-futures-are-no-refuge-from-market/
Last updated: 2025-08-21T10:39:27.000Z
The voluntary carbon market (VCM) has all the features of being an ideal asset for investors seeking uncorrelated returns.

Climate change is a long-term issue that will require a fundamental reorganisation of the global economy. Emissions may ebb and flow, but the longer term trend does not pay much regard to the business cycle, changes in financial liquidity, nor trends in energy and commodity prices.

The carbon credit market must grow if the world is going to meet it’s net zero targets. According to recent analysis from EY the volume of carbon credits supplied will need to grow 30-40 times by 2035 if the world is going to meet scenarios consistent with the Paris Agreement on climate change (see [*The planet's carbon removal scarcity problem*](https://www.carbonrisk.world/scaling-up-a-scare-resource/)).

By the end of Q1 2022, almost 3,000 companies had either approved or committed to setting net-zero targets in line with the Science Based Targets Initiative (SBTi), according to Trove Research. The six-fold increase in commitments over the past two years points towards a strong increase in demand for carbon credits from the corporate sector.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/988ac95a-7173-4794-a511-f32b175665bb_753x495.png)

Over the long-term you would expect the price of carbon credits in the VCM to be determined by the marginal abatement cost of various offset projects - nature-based offsets being towards the lower end of the cost curve, while lower volume, often unproven technology-based offsets located towards the steep end of the curve (see [*Technology-based carbon removal credits crucial if net-zero targets are to be met*](https://www.carbonrisk.world/technology-based-carbon-removal-credits/)).

In addition to buyers preferences for certain types of carbon offset projects (i.e. nature versus technological, abatement versus removal, the degree of co-benefits, etc.), the outlook for credit prices should depend on degree to which there exists a pipeline of high quality projects to meet the anticipated strong demand growth.

In short, VCM futures contracts should reflect market participants expectations of how these underlying fundamentals will evolve (see [*GEO versus N-GEO: Investing in the VCM futures market*](https://www.carbonrisk.world/investing-in-vcm-futures-contracts/)).

However, that’s not what the data shows.

The Nature-Based Global Emissions Offset (N-GEO) futures contract has tracked equity markets step-by-step since the contract was launched towards the end of 2021\. Apart from a period of relative weakness in early August, the N-GEO contract has closely followed the risk-on, risk-off nature of global equity markets. Much like the broader equity market, it’s been the outlook for inflation, real interest rates and global liquidity that have been the key driver of carbon credit futures prices.

**Chart: N-GEO futures contract versus Euro Stoxx 50**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/91509a8f-b6eb-4798-b4d6-8e3691d72b0a_1810x814.png)

Why is the VCM market behaving like this? Isn’t it supposed to be an uncorrelated asset?

Although declining stock prices reflect a deteriorating outlook for the economy and declining earnings prospects, a fall in an individual company’s stock price can adversely affect the behaviour of its management. Lower stock prices may make it more difficult for a company to fund investments, especially those that drive longer term returns or look to mitigate emerging risks. To the extent that the equity market is a mirror on social mood, a bear market paints a dark picture for the corporate voluntary carbon market.

According to Trove Research, the carbon credit purchasing behaviour of most corporates is akin to them buying a luxury good, not a necessity. In short, buyers are very price sensitive and will pushback at shelling out more cash than they feel they need to.

As economic pressure increases, corporate budgets will come under more pressure. Short-term survival trumps long-term commitments to tackle climate change. Price sensitive purchasing behaviour was hidden when the economy was motoring along, only emerging when things start to look bleaker.

Demand growth from the corporate sector may be strong, but the market needs to reckon with willingness to pay. And right now that’s looking weak.

As long as investors have their eyes wide open to current market dynamics, and that equity bear markets can go on for much longer than seems possible, then recent low carbon credit futures prices represent an opportunity for long term investors.

EY project that carbon credit prices could rise from under $25 per tonne to $80-150 per tonne in 2035, and continue to rise to $150-200 per tonne in 2050 (in real 2020 dollars).

This assumes that countries and companies move reasonably quickly to implement on-ground actions and policies that are consistent in aggregate with the Paris Agreement to limit climate change to well below 2°C.

However, EY contend that even higher carbon credit prices are likely if “delayed or disorderly action requires greater ‘catch-up’ effort after 2035 (to achieve the same budget), or if market friction is more significant and persistent.”

As energy security, geopolitical and macroeconomic concerns push worries about the climate down the agenda, it feels very much like we are moving towards a path of “delayed or disorderly action”.

That may be a precursor to much higher VCM futures prices in the years ahead. In the meantime, corporate buyer sentiment towards carbon credits at least is more than likely to be determined by the direction of the stock market than anything else.

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[Plumbing the depths of the VCMCarbon credit futures prices have fallen by almost half since the start of 2022, amid worries over excess supply and that recession will kill-off a recovery in demand for carbon credits. In this article I highlight some of the developments in nature and non-nature based carbon credit futures, how the market relates to the stock prices of listed carbon credit companies, and why investors should watch the calendar spreads for evidence of a bottoming in the market.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-244.png)Carbon Risk](https://www.carbonrisk.world/plumbing-the-depths-of-the-vcm/)
### Is the MSR sale really a 'win-win'?
URL: https://www.carbonrisk.world/raiding-the-piggy-bank/
Last updated: 2025-08-21T10:39:28.000Z
On 18th May the European Commission (EC) published their [REpowerEU package ](https://ec.europa.eu/commission/presscorner/detail/en/ip%5F22%5F3131?ref=carbonrisk.world)detailing how the EU will secure energy independence from Russia and accelerate the decarbonisation of the EU economy.

The package included a proposal to sell €20 billion worth of EUA’s held in the Market Stability Reserve (MSR) in order to help fund the transition (see MSR explainer at the bottom of this article).

The EU carbon price fell sharply after the package of measures was announced, falling from €92.60 per tonne to €77.90 per tonne over the course of four trading days.

The initial EC proposal allowed for the auctions to last until end-2026 at the latest until the revenue amounts to €20 billion, reasoning that the sale should not have a significant impact on the carbon price.

The selloff sparked by concerns that the MSR had moved from being a “non-discretionary” mechanism perceived to be outside of the whims of EU politicians, to one that can be tapped when the circumstances suit. What if the EU decides to raid the MSR in the future should carbon prices rise too high, or further funding is required over and above the €20 billion earmarked?

The proposal coupled with comments from key political figures involved with the EU ETS gave me the inspiration to write [*Whatever it takes: Why forward guidance in the EU carbon market is here, and is set to stay*](https://www.carbonrisk.world/whatever-it-takes/). In short, my argument was that the era of unabated carbon price discovery is coming to an end, and with it emerges a new era in which the EU’s climate politicians will wield much more control over the direction of the carbon price.

Over the next few months there was little in the way of noise coming out of the EU regarding the MSR sale. However, as carbon prices rebounded towards the high €90 per tonne mark and inflationary and energy security pressures built across Europe, the MSR sale appears to be firmly back on the table.

_This post is for paying subscribers only._
### The zero lower bound
URL: https://www.carbonrisk.world/the-zero-lower-bound/
Last updated: 2025-08-21T10:39:28.000Z
Strange things start to happen when you approach zero.

In nature the obvious example is when the temperature of water approaches zero degrees centigrade.

Most liquids contract as they are cooled. Water is one of the few exceptions. When liquid water is cooled, it contracts until a temperature of approximately 4 degrees centigrade is reached. As its cooled further it expands slightly, until it reaches zero when it expands by about 9%.

Strange things happen in macroeconomics too as zero nears.

The “zero lower bound” problem occurs when the short term nominal rate of interest approaches zero. At this point the central bank has little in the way of tools to stimulate economic growth - it cannot cut interest rates any further.

The end result, and the reason why many central bankers fear deflation, is a liquidity trap. When this happens everyone prefers to hold cash rather than assets. A negative spiral can develop whereby real interest rates increase, causing a contraction in investment and lower economic growth.

The only way out of it is to flood the economy with liquidity: quantitative easing, higher government spending, and direct cash handouts to individuals. The prospect of a liquidity trap forces government and the central bank to resort to extreme policies, less they become frozen.

This article explores what it may mean to approach net-zero emissions focusing on the EU carbon market. In the same way that zero interest rates result in a change in how market participants behave, the same could be true when we approach the zero bound on EU ETS emissions.

_This post is for paying subscribers only._
### Everything you need to know about the Social Cost of Carbon (SCC)
URL: https://www.carbonrisk.world/weighing-the-future/
Last updated: 2025-08-21T10:39:29.000Z
The Social Cost of Carbon (SCC) is an estimate of the net economic damage resulting from the addition of an incremental tonne of carbon dioxide (CO₂) into the atmosphere.

The SCC is often used by policymakers when assessing the cost-benefit impact of climate related policies. For example, the SCC is used in the United States when analysing the impact of vehicle fuel economy standards, power plant regulations, tax credits for carbon capture technologies, carbon taxes, and many more.

Not all countries use the SCC approach. In the UK and the European Union policymakers work back from an agreed upper limit on warming (such as the 2015 Paris Agreement backed a long-term goal of “well below 2°C), setting an emissions pathway consistent with this warming limit, and then determining the carbon price that would be needed to move onto that path.

This “target consistent” approach to weighing different policy options can only really be used in countries or blocs that have an agreed, legally defined emissions reduction target. It’s for that reason that the SCC approach is more commonly used in the United States.

Given the long lead time involved in climate policies the SCC needs to factor in what the world could look like decades into the future. If the SCC estimate is too low then governments may not put adequate support in place to encourage investment and incentivise changes in behaviour. A low SCC may even represent an excuse to rollback climate legislation. If the SCC estimate is too high then economic resources are diverted to combating climate change when they could have been more efficiently employed elsewhere.

It’s important to note that the degree of uncertainty underpinning the SCC assumptions are significant. The SCC must account for the potential impact of global warming on the environment (e.g. agricultural yields, extreme weather, etc.), and uncertainty in the climate’s warming response to carbon dioxide (e.g. climate tipping points).

Although carbon dioxide levels have been gradually building up in the atmosphere, current economic damage from climate change may reflect emissions from several decades ago. In the future a number of tipping points may be reached, such as the melting of giant ice sheets and permafrost and changes in ocean currents. These non-linear impacts are difficult to quantify and make an assessment on their probability.[1](#footnote-1)

The SCC must also consider the long-term outlook for economic growth and changes in population. Both of these factors have a reflexive relationship with the environment and climate change more broadly. Finally, the modelling must use an appropriate discount rate.

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**Weighing the future**

Discount rates are particularly contentious.

People tend to value benefits more when those benefits are received sooner rather than later. This “social time preference” approach reflects the value placed on the future benefits of lower carbon emissions. The discount rate translates the value of the future benefit of climate mitigation into equivalent values experienced today.

The second way of applying a discount rate is that the returns to climate mitigation should be compared against other investments. Everything involves opportunity costs, including mitigating climate change. The upshot of this “social opportunity cost” approach is that the discount rate should reflect the long-term risk free real interest rate.

The third way of calculating the discount rate is one based on ethics. A high discount rate on climate damage implies that the wellbeing of those alive today is worth more than future generations. The geographical inequality of climate change is also relevant as those countries less exposed to climate change are more likely to have alternative investments that can generate a high return and will be less exposed to the negative impacts of climate change. Some analysts suggest that this calls for a very low, or even zero discount rate.

The Stern Review Report on the [Economics of Climate Change](https://webarchive.nationalarchives.gov.uk/ukgwa/20100407172811/https:/www.hm-treasury.gov.uk/stern%5Freview%5Freport.htm?ref=carbonrisk.world), published in 2006 and widely considered to be instrumental in moving forward our thinking on valuing climate change, adopted a discount rate of 1.4%, emphasising the ethical approach to weighing the future. Meanwhile, a [2015 survey ](http://piketty.pse.ens.fr/files/DruppFreeman2015.pdf?ref=carbonrisk.world)of almost 200 economists provided a a mean (median) recommended long-term social time preference discount rate of 2.25% (2%). Over 9 out of 10 of the experts were comfortable with the discount rate being between 1% and 3%.

The discount factor can have an outsized impact on the SCC estimate, making or breaking the case for tighter climate regulations and investments in renewables and decarbonisation. For example, under the Trump administration the SCC estimate was a meagre $1-$7 per ton of CO₂.

One of the reasons for the low SCC was the high discount rate assumption. The Trump administration placed a low value on future emission costs by setting the discount rate at 7%, more than double that used by the earlier Obama and subsequent Biden administrations.[2](#footnote-2)

**What is the latest SCC estimate?**

The US federal government’s current interim estimate of the SCC is $51 per ton of CO₂ and assumes a 3% constant discount rate. However, a landmark 2017 report by the [National Academies of Sciences, Engineering, and Medicine (NASEM)](https://www.nap.edu/catalog/24651/valuing-climate-damages-updating-estimation-of-the-social-cost-of?ref=carbonrisk.world) pointed out that prior SCC estimates by the US government, up to and including the current interim $51 per ton value, uses dated research and an overly simplistic methodology.

More recent estimates from US federal agencies have moved towards a higher SCC estimate. For example, the cumulative climate related benefits of the Inflation Reduction Act (IRA), recently passed into law in America, could be up to $1.9 trillion, according to estimates from the [Office of Management and Budget (OMB)](https://www.whitehouse.gov/wp-content/uploads/2021/02/TechnicalSupportDocument%5FSocialCostofCarbonMethaneNitrousOxide.pdf?ref=carbonrisk.world). To get to this number OMB estimate the SCC in 2022 to be much higher, around $80 per ton and assumes a lower discount rate of 2.5%.

However, as the OMB report notes, “the interim social cost of carbon estimates are currently significantly underestimated because they do not account for many important climate damage categories, such as ocean acidification, and because of such omitted damages and other limitations and assumptions, these values are likely significant underestimates of the full public benefits of reducing greenhouse gas emissions. These results also do not capture benefits that passing the Inflation Reduction Act will have on other sectors of the economy outside of the impacts that the bill will have on GHG emissions.”

It’s with this backdrop that [Resources for the Future (RFF)](https://www.resources.org/archives/the-social-cost-of-carbon-reaching-a-new-estimate/?ref=carbonrisk.world), an independent, non-profit research institution based in Washington, DC. has been working on a comprehensive new SCC estimate since 2017.

Building on the NASEM report recommendations, RFF recently published an updated SCC estimate in the journal [Nature](https://www.nature.com/articles/s41586-022-05224-9?ref=carbonrisk.world). According to RFF the SCC is $185 per ton, 3.6 times larger than the $51 per ton used by the US federal government, and more than double that used by OMB.

The main reason for the difference is the lower discount rate used by RFF in their analysis. RFF use a discount rate of 2% on the basis that interest rates have declined persistently in the long-run, while also suggesting that lower discount rates are appropriate, particularly for long-lived impacts like climate change.

It’s important to note that the SCC is not a single point estimate. As noted above there are significant uncertainties in modelling the long term economic damage involved with climate change.

Researchers attempt to take account of these uncertainties by using Monte Carlo simulations. The SCC is estimated thousands of times using taking account of the estimated probabilities of the model inputs. The smoothed curves in the chart below reflect the frequency distributions of the SCC estimates made by RFF under different discount rates. The vertical dotted line represents the average, or expected value for the SCC.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/317e8eca-cf3d-4023-81f3-55ee9071ac8a_781x441.png)

According to RFF, dropping the discount rate from 3% to 2% has an outsized effect, more than doubling the SCC estimate. Nonetheless, even absent any change to the discount rate, their analysis still shows a substantial increase in the average SCC (from $51 per ton to $80 per ton), as a result of an updated socioeconomic projection, improved climate model, as well as a better understanding of the damage caused by climate change.

**What are the implications of a higher SCC?**

Economic theory recommends that an optimal price on CO₂ emissions should be set at a level where the SCC is equal to the marginal cost of emission abatement. In reality, it is impossible for any single government to know where that price should be set. Nor should it. Arguably, it should be left up to the market - within certain boundaries - to uncover that equilibrium price as it will change day by day (see [*Does a stable carbon market equilibrium exist?*](https://www.carbonrisk.world/does-a-stable-carbon-market-equilibrium/)).

The updated SCC estimate from RFF suggests that the US government is not placing a high enough value on climate change damage as it should be. This means that vehicle fuel economy standards, power plant regulations and tax credits for renewables need to be much more generous.

Inadequate support for investment and behaviour change risks a situation where climate change impacts go under-priced. The government may then find it is ill-equipped to tackle sooner than expected adverse climate impacts. A climate driven “Minsky Moment” would represent a tipping point from a period of stability, to one of instability, one that forces policymakers into more and more aggressive action (see [*A climate-driven "Minsky Moment"*](https://www.carbonrisk.world/a-climate-driven-minsky-moment/)).

Unless the government moves towards a higher SCC estimate (and ramp up government support accordingly), then the implication has to be that carbon prices must move higher do more of the heavy lifting involved in tackling climate change.

Carbon Risk is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

[A reintroduction to Carbon RiskThe past year has been a period of rapid growth for Carbon Risk. Carbon Risk is the only newsletter dedicated to carbon markets - helping investors navigate 'The Currency of Decarbonisation'! My first post (see Investors have a new way to help the environment![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-248.png)Carbon Risk](https://www.carbonrisk.world/a-reintroduction-to-carbon-risk/)

---

1. https://www.theguardian.com/environment/2022/sep/08/world-on-brink-five-climate-tipping-points-study-finds [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. The other key reason is that the SCC estimate only considered the domestic costs from climate change. Calculating the SCC based on domestic costs alone would significantly decrease the value, since the majority of the impacts of climate change will not be felt within US borders. [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
### Pricing methane emissions out of the atmosphere
URL: https://www.carbonrisk.world/pricing-methane-emissions-out-of/
Last updated: 2025-08-21T10:39:29.000Z
Methane traps \~30 times as much heat in the atmosphere over a 100 year period than carbon dioxide. However, over 20 years methane’s global warming potential is estimated to be \~85 times greater than that of CO2.[1](#footnote-1) 

In short, methane (CH4) is a potent greenhouse gas.

It’s potency is why governments are increasingly focusing on abating methane emissions wherever possible. Cutting methane emissions represents one of the best opportunities for reducing near term global warming.

The most recent data in the [Global Methane Budget](https://essd.copernicus.org/articles/12/1561/2020/?ref=carbonrisk.world) suggests that annual global methane emissions are around 570 Mt. Natural sources, for example wetlands, accounts for 194Mt or around 40% of global methane emissions. This leaves human activity responsible for the remaining 60%. On a global basis the largest human source of methane emissions is thought to be agriculture (145 Mt, 25%), followed closely by the energy sector (129Mt, 23%) and then waste (68Mt, 12%).

Chemical “sinks” in the Earth’s atmosphere and to a smaller degree in the soil act to remove methane emitted from both natural and human sources. Overall though the increase in methane in the atmosphere appears to be accelerating, piling the pressure on policymakers to act.[2](#footnote-2) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/809c5d47-5e02-40c2-8192-23df55a2d4c8_780x462-1.png)

At the UN COP26 in Glasgow last year, over 100 other governments committed to cutting methane emissions by 30% by 2030, compared with 2020 levels. The commitment is known as the [Global Methane Pledge](https://www.globalmethanepledge.org/?ref=carbonrisk.world).[3](#footnote-3) 

Despite the good intentions, methane emissions from the oil and gas sector will need to be cut much deeper than 30% if global warming is to be limited to 1.5°C.

_This post is for paying subscribers only._
### The UK carbon market continues to dodge political headwinds...but for how long?
URL: https://www.carbonrisk.world/the-uk-carbon-market-continues-to/
Last updated: 2025-08-21T10:39:30.000Z
The UK carbon market is making a convincing case for being the strongest ‘Currency of Decarbonisation’.

UK emission allocation (UKA) prices continue to trade over €90 per tonne, even despite experiencing a sharp sell-off in recent weeks.[1](#footnote-1) 

After hitting a daily settlement record of over €115 per tonne on the 19th August, UKA prices dropped €27 per tonne, shedding almost one-quarter of their value over the next 13 trading days. In comparison EUA prices experienced a decline of over one-third, falling to below €70 per tonne.

Despite both carbon contracts rebounding slightly over the past week the UKA premium versus the EUA contract remains close to 30%.

As I have highlighted before, there are two main reasons why the price of carbon in the UK should naturally trade higher than in the EU carbon market: low levels of liquidity on the UK ETS and energy market, and a fundamentally tighter market for UK emission allowances (see [*Majestic performance*](https://www.carbonrisk.world/happy-birthday-uka/)).

_This post is for paying subscribers only._
### The battle for Europe's industrial sovereignty
URL: https://www.carbonrisk.world/the-battle-for-europes-industrial/
Last updated: 2025-08-21T10:39:30.000Z
Energy molecules are moved by pipeline or tanker, from whence they came, to the point at which it is consumed.

The modern global economy was built on this premise. Industrialisation led to greater demands on resources, which led to the exploitation of faraway fields, which helped fuel further development, which in turn led to demands for even more resources. Germany in particular, stands out as an economy whose comparative advantage was built on access to cheap Russian fossil fuel molecules, securely transported thousands of miles.

"Germany built up a business model that relied on cheap Russian gas," said Economy Minister Robert Habeck during a speech in mid-August. "This model has failed and it's not coming back."

Does it still make sense to transport coal, natural gas and oil thousands of miles across the globe - crisscrossing oceans, navigating rivers and traversing mountains and farmland - only to convert that energy into products? Why not move the energy intensive manufacturing base close to the source of cheap energy and ship the high value product instead?

Politicians in Europe have always been concerned that carbon intensive industries would rebel against ever more onerous environmental regulations, and decide to move production elsewhere.

‘Carbon leakage’ as its known, occurs when firms located in the EU might lose market share to more carbon intensive products imported into the EU. This might prompt a carbon intensive firm (or even a whole industry) based in the EU to move their operations to jurisdictions where power generation is more carbon intensive and / or where there is less onerous environmental regulations.

In response the EU plan to introduce the Carbon Border Adjustment Mechanism (CBAM), an import levy on carbon intensive products imported into the EU. Scheduled to come into force in 2026 the CBAM should put EU firms on a level playing field with firms outside the EU that are not subject to the same carbon price (see [*Hedging the CBAM: What the EU's carbon border tax might means for carbon investors*](https://www.carbonrisk.world/hedging-the-cbam/)).

The CBAM idea was conceived when energy prices were much lower and the risk was that higher carbon prices would be the tipping point for European industry to up sticks as free emission allocations were cut. Now though it is high energy prices that may result in the gradual deindustrialisation of Europe.

For some industries the process could be quite quick. For others though the idea of moving production outside of the EU and closer to cheaper sources of energy are considered a non-starter.

Commodities derive a significant part of their value from network effects. For example, the value of oil is, at least in part, derived from the transportation and refining network that serves it (the pipelines, tankers, refineries and so on), which in turn enables end consumers to derive value from it.

The greater the value proposition of the incumbent energy network to its participants, and the higher the switching costs involved in moving to an alternative network, the higher the value of the incumbent network. Any new energy network must present a sufficiently high value proposition to justify the switching costs.

Energy intensive industries may have spent decades and billions of Euros building their network. The Ludwigshafen Verbund site, 100km south of Frankfurt is the world’s largest integrated chemical complex. The facility is a highly optimised agglomeration of chemical facilities, held together by nearly 2,850km of pipes. Those kinds of economies of scale are impossible to replicate elsewhere.

However, by only focusing on past investments instead of our present and future costs and benefits, many industries may be committing to decisions that are no longer in their long-term best interests. Indeed, strong, reliable gas supply from Russia - the basis on which the initial investments were made - is unlikely to come back.

In economics this is known as ‘the sunk cost fallacy’. Being wedded to past investment decisions becomes increasingly irrational, leading to suboptimal outcomes. For much of Europe’s heavy industry this could mean being undercut by fleet-footed domestic competitors not encumbered by such a fallacy.

European industry is already mitigating some of the impact of high energy prices through import substitution. For example, as aluminium smelters have closed due to high energy prices, imports from as afar as China have surged. That could turn into a torrent if industry fails to respond and reduce its energy costs.

Energy intensive industries producing highly-tradable products are more vulnerable to the risk of energy leakage. Indeed, industries initially expected to be caught by the CBAM including cement, iron and steel, aluminium, fertiliser and electricity generation are also ones where firms may seek to relocate production. This is more likely if they have plant that is near the end of its lifecycle, and the decision to invest in a new, more efficient facility is drawing near (see [*Stranded asset, or last mover advantage?*](https://www.carbonrisk.world/stranded-asset-or-last-mover-advantage/))

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However, industrial energy migration is more likely to occur downstream, at least at first, in the manufacturing activities that depend on a range of raw materials, yet are also highly energy intensive.

An example of industrial energy migration beginning to happen is Germany’s expanded partnership with Morocco. The bedrock of the German-Moroccan economic partnership are the automotive manufacturing value chains. Automotive products comprise Morocco’s largest category of exports to Germany, constituting about one-fifth of overall exports to Germany prior to Russia’s invasion Ukraine. Manufacturers benefit from cheaper energy and labour costs and a network of manufacturing facilities, especially electrical wiring.

Longer-term, a stable cheap supply of ‘green’ hydrogen could be enough to incentivise heavy industry (steel, cement, etc.) to relocate. Here Morocco may also have an advantage over other regions close to the centre of demand in Europe. According to recent analysis from the [International Renewable Energy Agency (Irena)](https://www.irena.org/publications/2022/May/Global-hydrogen-trade-Cost?ref=carbonrisk.world), Morocco could deliver green hydrogen at a levelised cost (LCOH) of just over $0.65 per kg by 2050, supported by an expansion in solar power generation.

That’s comparable to Chinese expected production costs - China is likely to be the cheapest place in the world to produce green hydrogen. In contrast, the cost of producing green hydrogen in Europe is projected to cost around 50% more, at close to $1 per kg by 2050.

While there is a ‘last mover advantage’ in waiting to see which decarbonisation technology has the highest chance of success, it is no good if by waiting you are put of business by high energy costs. High energy prices in Europe coupled with worries over long term security of supply may force industry to relocate. First mover advantage may enable them to retain market share, rather than being undercut by cheap imports.

A loss of industry from Europe would be a blow to European energy demand, cutting demand for carbon allowances. Some of the emissions will have been offshored elsewhere, but some will also have been abated, if for example many industries can take advantage of the growth in ‘green’ hydrogen in Morocco and other countries with have access to cheap and plentiful energy.

[Europe's hydrogen economy and what it means for carbon pricesCentral to the decarbonisation of many sectors under the EU ETS is the widespread rollout of green hydrogen as an industrial feedstock. Up until very recently estimates have suggested that Europe requires very high carbon prices to incentivise the switch away from hydrogen manufactured using fossil fuels, known as grey hydrogen.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-250.png)Carbon Risk](https://www.carbonrisk.world/europes-hydrogen-economy-and-what/)

But, lets stop there for a moment.

All of this assumes that energy and carbon intensive industries operate in a vacuum, one where they are able to act on their interests without the intervention of the state. In reality governments will do everything in their power to avoid the hollowing out of their industrial base. On the contrary, with Europe at war and the potential for conflict elsewhere in the world, government policy is likely to pivot to the reshoring of industrial and manufacturing supply chains.

Our industrial sovereignty depends on it.

Two recent articles by respected economic thinkers seek to outline what an economy dominated by concerns over war could look like. The first article, ‘[War and Industrial Policy](https://drive.google.com/file/d/1V7lQkq0Jd1pkCOsnJg5KFu7L9%5FdM11hM/view?usp=sharing&ref=carbonrisk.world)’ by Credit Suisse strategist Zoltan Pozsar first outlines what he believes the global economic order has been built upon for the last three decades:

> “The low inflation world had three pillars: cheap immigrant labor keeping nominal wage growth “stagnant” in the U.S., cheap Chinese goods raising real wages amid stagnant nominal wages, and cheap Russian natural gas fueling German industry and Europe more broadly.”

That economic order is now gone, possibly forever. And the reason? A loss of trust. Referencing Dale Copeland’s book, [*Economic Interdependence and War*](https://www.amazon.co.uk/Economic-Interdependence-Princeton-International-Politics/dp/0691161593?ref=carbonrisk.world), Poszar outlines the ‘theory of trade expectations’:

> “when great powers have positive expectations of the future trade environment, they want to remain at peace in order to secure the economic benefits that enhance long-term economic power. When, however, these expectations turn negative, leaders are likely to fear a loss of access to raw materials and markets, giving them an incentive to initiate crises to protect their commercial interests”

In simple terms, trade only works if there is trust.

To negate this mistrust the West will have to pour trillions into four types of projects according to Pszar: re-arm (to defend the world order), re-shore (to get around blockades), re-stock and invest (ensure the supply of commodities, especially energy), and re-wire the grid (the impetus behind the energy transition grows stronger).

In the second article, ‘[The War Economy](https://noahpinion.substack.com/p/the-war-economy)’ Noah Smith outlines why governments are likely to intervene in energy markets and industrial policy to a much greater extent than they have done for several decades:

> “We are in a technological, economic, and arms-race competition with enemies with highly advanced tech capabilities, tons of production potential, and far fewer scruples than we have regarding the use of government power. We are not going to be able to deal with that problem by cutting taxes and opening our markets to more Chinese-made products and twiddling our thumbs and intoning quotes from Milton Friedman. Everyone except a few die-hard ideologues and vested interests realizes that on some level by now.  
>  
> We are going to need to increase planning for one reason: National defense is a public good. Indeed, it is the most classic, most fundamental public good. Private individuals, left to their own devices, will simply not contract with each other to provide effective defense against Russian rockets or Chinese drones; we need a strong government to handle the threat from other strong governments. And since defense requires a huge technological and industrial supply chain in this day and age — you can’t just have a bunch of minutemen pick up their muskets and walk off to defend the country — the public good of defense-oriented planning is going to reach deep into many sectors of the economy.”

More fossil fuel investment in Europe, longer term contracts with reliable suppliers, the resumption of critical raw material mining on Europe’s soil, the reshoring of industrial supply chains including those vital for the buildout of renewable energy. These developments are likely to outweigh any movement by industry to move to places where energy is cheap and plentiful. In short, industrial sovereignty beats industrial energy migration.

In the long-term that means energy demand in Europe could be set to increase. That means that investment in low carbon power generation and industrial decarbonisation needs to accelerate. If not then carbon emissions could be set to rise, increasing demand for carbon allowances while also putting EU emission reduction targets in jeopardy.

[Get 20% off a group subscription](#/portal/signup)

[The impossible trinity at the heart of net zeroGovernments face an impossible trinity if they wish to meet the net zero carbon energy transition - how to balance energy security, affordable energy and environmental sustainability. There have been five energy transitions in the modern age. Each transition involves the transformation of energy sources into economically useful applications as a result of technological improvements. First coal, then electrification, followed by crude oil and natural gas, and then most recently the development of renewable energy alternatives. Energy transitions typically take place over a period of decades - 50 years or more based on historical evidence.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-251.png)Carbon Risk](https://www.carbonrisk.world/the-impossible-trinity-at-the-heart/)
### A reintroduction to Carbon Risk
URL: https://www.carbonrisk.world/a-reintroduction-to-carbon-risk/
Last updated: 2025-08-21T10:39:31.000Z
The past year has been a period of rapid growth for Carbon Risk. Carbon Risk is the only newsletter dedicated to carbon markets - helping investors navigate 'The Currency of Decarbonisation'!

My first post (see [*Investors have a new way to help the environment*](https://www.carbonrisk.world/investors-have-a-new-way-to-help/)) was published on 16th November 2021 to around 20 subscribers. Ten months later, and over 100 articles later, the total number of subscribers is about to breach the 1,200 level. Many of you will have found Carbon Risk after being recommended by my good friends at [Doomberg](https://doomberg.substack.com/), [Energy Flux](https://www.energyflux.news/?ref=carbonrisk.world), and [Commodity Context](https://www.commoditycontext.com/?ref=carbonrisk.world).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/3d1748d4-239e-4b30-89e8-b455df383034_699x393-1.png)

Before the summer I promised that one of my next posts would be to reintroduce Carbon Risk to my readers, both old and new. I felt that I needed to tell you a little bit more about why Carbon Risk is important to me, the value I hope to impart on my readers, and why I think you should consider joining me for the ride.

# Who is Peter Sainsbury?

My name is Peter Sainsbury and I’m a full-time Substack writer.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c1b09cf7-1345-44fb-b8f3-f8c726a44812_200x200-jpeg.jpg)

Across two decades I have spent most of my career working in commodity and environmental markets. Before launching Carbon Risk in November 2021 I was chief economist at WRAP, the global environmental NGO .

My role was to help governments and other clients understand the market dynamics in secondary commodity markets, work on the economics underpinning various resource policies and tradeable environmental markets, and deliver the economic insights necessary for other parts of WRAP to maximise their impact.[1](#footnote-1) 

I am also the author of four books that cover topics as diverse as commodity markets, and the perils of forecasting, betting on motor racing and being a smarter media consumer. If you’d like to check them out they are available in Kindle, paperback and audio versions on [Amazon](https://www.amazon.co.uk/Peter-Sainsbury/e/B017V3RMZO?ref=sr%5Fntt%5Fsrch%5Flnk%5F3&qid=1659590772&sr=8-3).

Writing is one of my passions, especially when I can focus on markets and economics. The process of writing and editing helps to clarify my thinking. That process has been helpful to me in the past, and I want to share that thinking with my subscribers.

# Why subscribe to Carbon Risk?

As the impact of climate change becomes more acute the call to do something about it are likely to grow ever louder. One of the most effective ways that governments and businesses can incentivise decarbonisation is by putting a price on carbon. I call it ‘The Currency of Decarbonisation’.

Governments are gradually following Europe’s lead and launching their own carbon trading schemes. As of 2022, around one-quarter of global emissions are subject to a carbon price. Meanwhile, businesses looking to meet net-zero commitments are turning to the non-compliance carbon market to remove carbon from the atmosphere. Carbon markets are likely to continue to grow, both in scope and value and begin to rival the global energy market.

As investors become educated in the opportunities available attention will inevitably turn to how we use that edge as other carbon markets develop. Carbon represents an asset market in its own right, and as it’s price increases it will begin to affect a broader part of the economy. This includes commodities, industries and economies - some negatively, but some will benefit too.

I believe that market based approaches including carbon trading are vitally important in driving better outcomes for the environment, the economy, and society at large.

Leveraging my experience in environmental markets, working with both public and private sectors, and my background in commodity markets I am able to deliver a unique, non-obvious perspective into what is going on in carbon markets.

I’m not beholden to the conventional mental models of how carbon market analysis should be done. By taking a different approach to carbon markets I am able to consistently deliver value to Carbon Market subscribers.

Carbon Risk is the only newsletter dedicated to carbon markets - helping investors navigate ‘The Currency of Decarbonisation’!

# Who subscribes to Carbon Risk?

Subscribers to Carbon Risk include hedge funds, investment banks, family offices, and individual private investors. Carbon Risk helps these subscribers gain an alternative perspective on the complex, ever evolving carbon markets.

Physical buyers of carbon allowances and voluntary carbon credits also subscribe to Carbon Risk. For many carbon is something to think about once a year when it comes to meeting compliance demands, while for others its an integral part of their everyday work. Carbon Risk helps both of these subscribers gain an edge in meeting their procurement and investment needs.

Several financial media organisations also subscribe to Carbon Risk. Carbon Risk helps these subscribers understand what is driving developments in carbon markets. If you work for a media company and are interested in hearing my perspective on a recent development in the carbon market then please get in touch.

# What do you get?

**Free tier:** All free subscribers get full access to at least one article each fortnight. In addition, free subscribers see a preview of the articles sent to paid tier subscribers.

**Paid tier:** If you decide to become a fully paid-up member for £100 per year, you will receive around 2-3 articles per week. Being a paid member enables you to comment on articles, ask questions and suggest areas that you would like to hear more about. The articles usually arrive in your inbox at 12pm UK time. Here are a few examples of the articles I have published.

[Carbon is an emerging asset class, but what is it?](https://www.carbonrisk.world/the-carbon-price-is-the-currency/) (27th January 2022)

[The great sulphur dioxide allowance bull market: What lessons can we learn from the first cap-and-trade system?](https://www.carbonrisk.world/hero-to-zero/) (31st January 2022)

[The Day After: Reflections on the carbon market liquidation](https://www.carbonrisk.world/the-day-after/) (2nd March 2022)

[The UK carbon market looks like a smarter 'risk-adjusted' bet for investors ](https://www.carbonrisk.world/the-uk-carbon-market-is-a-more-attractive/)(27th April 2022)

[Which industries benefit from a high carbon price?](https://www.carbonrisk.world/which-industries-benefit-from-a-high/) (3rd May 2022)

['Greenflationary' expectations](https://www.carbonrisk.world/greenflationary-expectations/) (10th May 2022)

[Whatever it takes: Why forward guidance in the EU carbon market is here, and is set to stay](https://www.carbonrisk.world/whatever-it-takes/) (19th May 2022)

Carbon Risk is the only newsletter dedicated to carbon markets - helping investors navigate ‘The Currency of Decarbonisation’!

Group subscriptions to Carbon Risk are also available. Get a discount of 20% if you purchase four or more subscriptions as a group. Click the button below to set up your group subscription.

[Get 20% off a group subscription](#/portal/signup)

# What else can Carbon Risk offer?

If you like Carbon Risk then you might be interested in me writing a carbon market focused article or related content for your company. I have written for a number of organisations, delivering both by-lined and white label content.

If you are interested in finding out about how I can deliver non-obvious thought leadership writing to your audience please email sainsburypeter@hotmail.com.

# Where else can you find me?

You can follow Carbon Risk on Twitter [@CarbonRisk\_](https://twitter.com/CarbonRisk%5F?ref=carbonrisk.world) and LinkedIn [@petersainsbury](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world)

---

1. You can check out more on what I did before that on my [LinkedIn profile](https://www.linkedin.com/in/petersainsbury/?ref=carbonrisk.world). [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
### Watch out for €60
URL: https://www.carbonrisk.world/watch-out-for-60/
Last updated: 2025-08-21T10:39:31.000Z
It’s often worth looking behind the scenes and trying to unpick how financial participants in the EU carbon market are behaving. Despite claims to the contrary, the actions of financial market participants are an important driver of carbon prices.

In this article I review recent movements in carbon futures positioning and activity in the options market to try to understand what occurred during the August spike in carbon prices, and what it might mean going forward.

The most closely watched category of trader in the weekly Commitment of Trader (COT) report is IF - investment funds - which encompasses hedge funds and asset managers (see *Carbon Commitment Of Traders (COT) 101* at the bottom of this article).

In the immediate aftermath of the Russian invasion of Ukraine, IF’s cut their net length in the market considerably, and then only adding to their net long position gradually. However, by late July net length had reverted right back to levels seen most recently in March 2022, and before that in October 2021\. In short, there was plenty of dry powder ready for a renewed assault on the all-time high carbon price.

As power prices went parabolic during August and primary allowance auction supply halved, traders turned to the futures market to hedge the carbon component of their power generation. At the same time investment funds quickly built on their long positions

The fraught margin call situation affecting European energy traders (estimated to be around $1.5 trillion), increased signs of industrial demand destruction and political uncertainty related to the energy and carbon market have accelerated the pull back in prices (see [Hibernation: How the EU carbon market is adapting to a long geopolitical winter](https://www.carbonrisk.world/hibernation/)).[1](#footnote-1)

It’s probably best to think about the August carbon trade as a dramatic short squeeze that has now unwound (see [The sword of inelastic supply cuts BOTH ways](https://www.carbonrisk.world/the-sword-of-inelastic-supply-cuts/)). The speed of the subsequent decline makes the return to prices below €70 per tonne seem more dramatic than it first appears. Afterall, the carbon price was only around the €75 per tonne level as recently as the last week in July.

Net positioning among investment funds is now back in line with where its been for most of the summer.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/bbb357b6-73fe-4c15-a9d4-e9ff1a5c68cc_993x527-1.png)

What clues can we learn from the options market?The main area of option contract activity for end Q3 is around the €60 per tonne mark. That could be a target over the next couple of weeks as the September contract nears expiry. An overall put-call ratio of 1.22 is also quite bearish.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/21819c84-cb64-4334-a8c8-7a155968288e_960x530.png)

Meanwhile, the options market for the Dec-22 futures price, the most heavily traded contract is more balanced. The overall put-call ratio is 0.98\. However, as with the Q3 contract there are significant put call volumes around the €60 per tonne mark, but this time there is also large volumes going all the way down to the €30 per tonne level. EUA futures need to rebound to the upper reaches of the 90’s before options market activity really provides a bullish tailwind.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c7ef3f54-881a-4e81-96d1-05ebbb3fb10e_963x537.png)

In my most recent article I concluded that the carbon market “remains essential to the bloc meeting its carbon emission reduction targets. I think that we’re more likely in a period of hibernation, one where the EU ETS can preserve and build on its strength, ready for when the bleak winter finally ends.”

The key thing to watch out for over the next couple of weeks is the €60 per tonne level. As I mentioned in the earlier article there has been little public mention of €60 per tonne being an implicit floor for carbon since the German government first raised it when they came to power in November 2021.

Things have clearly moved on since then.

€60 will be a key test of political resolve and the EU’s commitment that the carbon price is ‘The Currency of Decarbonisation’.

Carbon Risk is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

[Charting carbon's courseI wanted to update you all on some of the 6 main charts I’ve been highlighting over the past few months. Paid subscribers in particular, will be familiar with many of them. It’s important to revisit them occasionally for clues as to how underlying trends are evolving and what they might mean for both the carbon market, and related investments.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-252.png)Carbon Risk](https://www.carbonrisk.world/charting-carbons-course/)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-253.png)

Read Carbon Risk in the Substack appAvailable for iOS and Android[Get the app](https://substack.com/app/app-store-redirect?utm%5Fcampaign=app-marketing&utm%5Fcontent=author-post-insert&ref=carbonrisk.world)

---

**Carbon Commitment Of Traders (COT) 101**

Positioning analysis allows a carbon trader or longer term investor to understand how market participants behave under different circumstances in the market - fundamental, technical and sentiment. If you can predict behaviour, and be able to correctly anticipate the risk that capital flows will move one way or another, then you have an edge over other traders in the market.

Positioning data is probably the most underutilised tool in commodity markets. It breaks down open interest (the number of open contracts) during a particular period, split between different types of market participants, and according to whether they were long or short. Remember that futures markets are zero-sum - for every buyer of a particular commodity futures contract (a ‘long’ position), there must be a seller on the other side (a ‘short’ position).

Commodity futures exchanges tend to publish data on the hedging and speculative activity of participants on a weekly basis. This publication is known as the Commitment Of Traders (COT) report. The Intercontinental Continental Exchange (ICE) COT reports breaks down futures market participants into the following five categories:

IFCI: Investment firms or credit institutions

IF: Investment funds

OFI: Other financial institutions

CU: Commercial undertakings

Other: Operations with compliance obligations under directive

There are four challenges carbon investors have about using positioning analysis: the time lag between when open interest data is collected and published, how traders are classified, the challenge in disentangling the motivations of traders, and the ‘age’ of the positions.

The ICE typically publishes the COT report on the same day each week. Although there is a small lag in the positioning information, its important to remember that this data is still very much real-time compared with almost all other data that is reported in the market. Importantly, everyone in the market gets the same report, at the same time.

The second concern relates to how traders are classified. For example, simply because a CU and Other are compliance buyers does not preclude them from using commodity futures markets for speculation, in addition to hedging. Meanwhile, some of the activity in the IFCI and OFI category will also involve hedging on behalf of compliance buyers. This muddies the water to some extent in interpreting the motivations of the various participants in the market.

The third challenge that investors raise about positioning data supplied by the COT report is closely related to the second concern above. How to disentangle the motivations of traders? For example, IF’s are a broad church and include macro funds trading equities, a commodity fund speculating on the shape of the futures curve, an index or ETF management firm. This can mean that positions are placed that do not solely reflect participants view on the price direction of carbon.

The ‘age’ of the positions is also a concern. For example, long-term investment positions - for example, positions that underpin carbon ETFs and long-term hedging positions - can make certain positioning profiles difficult to interpret.

**Investment fund (IF) behaviour**

The most closely watched category of trader is IF - investment funds - which encompasses hedge funds and asset managers. Despite the concerns over categories expressed above, market participants must, in the main, behave according to the category that they have been assigned.

One factor here is crucial, market participants in the IF category have to close out their positions, i.e. they can’t go to delivery. If they are playing in the physical market they would have to have been assigned to a different category. And so when you see a very large short position in the IF category they are going to have to close that position out.

This can get interesting when prices are at an extreme. For example, it can often be a very interesting buying opportunity when you see that money managers have made a nice paper profit by building up a large short position, especially if prices are at the lowest level for some period of time.

[Are investment funds buying the rebound in carbon?“If everyone is thinking the same thing, someone is not thinking.” - General George Patton, U.S. Army Futures markets are not simply full of speculators trying to anticipate what other speculators are going to do, although it might feel like that sometimes. Commodity futures markets involve a vast array of different participants, each with very different means and motivations.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-254.png)Carbon Risk](https://www.carbonrisk.world/reading-the-tea-leaves/)

[Get 20% off a group subscription](#/portal/signup)

---

1. In the past week more than 40 CEOs of European metal groups have warned of an “existential threat” to the industry due to high energy prices. According to the letter, "50% of the EU’s aluminium and zinc capacity has already been forced offline due to the power crisis.” [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
### Post summer blues hit the Californian carbon market
URL: https://www.carbonrisk.world/post-summer-blues-hit-the-californian/
Last updated: 2025-08-21T10:39:32.000Z
Not wanting to be outdone by Europe, a flurry of ‘bearish’ news hit the Californian carbon market during late August.

Four factors are behind the recent change in sentiment: the extension of the Diablo Canyon nuclear facility (flagged previously on Carbon Risk as a risk [here](https://www.carbonrisk.world/the-green-light-from-the-golden-state/), [here ](https://www.carbonrisk.world/californias-carbon-market-the-5-factors/)and [here](https://www.carbonrisk.world/diablo-canyon-resurrected/)), the state’s decision to ban gasoline powered vehicles by 2035, failing to agree on a more aggressive 2030 emission reduction target, and finally the sign-off of the Inflation Reduction Act (IRA).

The latest quarterly [auction data](https://ww2.arb.ca.gov/sites/default/files/2020-08/results%5Fsummary.pdf?ref=carbonrisk.world) shows that CCA prices settled at $27 per tonne, the second largest discount to the secondary market on record. The poor performance partly a factor of the aforementioned factors looming large, but also a decline in involvement from investment institutions and an increase in the cost of collateral.

Lets dive into each of the four factors and where this leaves the Californian carbon market versus the EU ETS.

_This post is for paying subscribers only._
### Hibernation
URL: https://www.carbonrisk.world/hibernation/
Last updated: 2025-08-21T10:39:32.000Z
In [*Whatever it takes*](https://www.carbonrisk.world/whatever-it-takes/) (published 19th May 2022) I outlined why I believe the EU carbon market is, at least for now, moving towards a market whereby politicians have significantly more say in what is politically and economically acceptable, and (even more importantly) what isn’t:

> “The EU carbon market regulations do not prescribe a price floor for carbon, nor a ceiling. That has now changed, albeit implicitly in the manner of the central banker. The era of unabated price discovery is coming to an end, and with it emerges a new era in which the EU’s climate politicians will wield much more control over the direction of the carbon price.”

In this world, forward guidance by EU politicians and policymakers would become the de-facto utterances of central bank governors. It’s in this vein that comments from a key architect of the EU ETS are important.

Jos Delbeke, professor at the European University Institute in Florence has appeared to revise down his assessment as to what is an acceptable level for the EU carbon price. In an interview with [Politico](https://pro.politico.eu/news/153550?ref=carbonrisk.world) Delbeke suggests that €70 per tonne is the new implicit ceiling:

> “The zone beyond €70 up to €100 is, I think, a critical level that deserves quite a bit of reflection”

This represents a significant retrenchment in ambition compared with what he expressed only a few months ago. In an [interview ](https://www.energyconnects.com/news/renewables/2022/april/war-requires-rethink-of-eu-carbon-reform-market-architect-says/?ref=carbonrisk.world)with Bloomberg in April, Delbeke called for carbon prices to continue “within the range of 60-90 euros, without much volatility outside this range”.

The focus on €70 per tonne is less about the right price to drive decarbonisation. We know that carbon prices need to be significantly in excess of €100 per tonne to drive industrial decarbonisation (see [*The long term price of emission*](https://www.carbonrisk.world/the-industrial-decarbonisation-bottleneck/) & [*What price decarbonised shipping?*](https://www.carbonrisk.world/what-price-decarbonised-shipping/)).

It’s about survival. This winter, and the next. Political pressure in the leadup to the upcoming elections in Italy (25th Sept) and Poland (autumn 2023), etc. will inevitably focus on the energy crisis (see [*How to think about political risk in carbon markets*](https://www.carbonrisk.world/how-to-think-about-political-risk/)).

In that environment, the EU carbon price is an easy target.

[Subscribe now](#/portal/signup)

_This post is for paying subscribers only._
### The sword of inelastic supply cuts BOTH ways
URL: https://www.carbonrisk.world/the-sword-of-inelastic-supply-cuts/
Last updated: 2025-08-21T10:39:33.000Z
The EU carbon market is no stranger to volatile prices.

Compared with other commodity markets EU carbon market volatility is broadly comparable with crude oil or coal, but tends to be significantly less volatile than natural gas (see [*The changing fortunes of the EU carbon market*](https://www.carbonrisk.world/the-changing-fortunes-of-the-eu-carbon/)).

Over the past four weeks EU carbon prices have surged by almost one-third, hitting a new record high just shy of €100 per tonne. However, over the past two days carbon has dropped €10 per tonne to around €90 per tonne.

What explains the current bout of volatility?

The supply of EUA’s is essentially fixed in the short-term. Auctions take place daily according to a predetermined [calendar](https://www.eex.com/fileadmin/EEX/Downloads/Trading/Calendar/Auction%5FCalendar/EEX%5FAuction%5FCalendar%5F02.03.2022.pdf?ref=carbonrisk.world). Auctions are paused between 21st December and 10th January but otherwise they continue throughout the year. In August auction volumes are cut by 50%, reducing the primary supply of EUA’s onto the market. Overall then the supply of EUA’s is likely to be highly price inelastic, and especially so during August.

If you combine this with parabolic increases in natural gas and power prices then even a small increase in demand can result in a sharp rise in the price of carbon. Utilities seek to hedge their future power generation by either purchasing allowances, or by hedging that requirement using the carbon futures market (D1 to D2 in the chart below).

Up until recently the focus was on natural gas, but over the past few weeks its been European power prices that have stepped into the limelight, but for all the wrong reasons. A combination of low hydro generation, nuclear plant maintenance in France, logistical issues related to the River Rhine and strong demand due to high temperatures have supported electricity prices.

Nothing we didn’t know before the summer break. What has changed though is that the whole of the forward curve - both for power and natural gas - has jumped sharply higher. This means that utilities need to consider their hedging requirements for next winter and the winter beyond, especially if they may need to burn more thermal coal in order to meet demand.

The EU carbon market has also been in somewhat of a political vacuum with policymakers having long since downed tools for the summer. Without any new news on the “Fit for 55” package or the RepowerEU proposal, and in the absence of ‘forward guidance’ from EC politicians, carbon prices have been left with only one way to go.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/22bc7d75-ee4f-4000-bbf5-92c4e0fc6ce7_457x398-4.png)

However, as former Goldman Sachs commodity trader, [Michael Kao ](https://twitter.com/UrbanKaoboy/status/1526311922185871361?ref=carbonrisk.world)likes to say, “The sword of inelastic supply is very sharp and it cuts BOTH ways”.

If compliance buyers or other market participants (e.g., financial institutions) are constrained in some way then carbon prices may reach a point at which only a small amount needs to be sold for the market to quickly move sharply down (D2 to D1).

For example, an extended shutdown by industrial emitters could result in them offloading EUA’s or closing their hedges. Industrials may also seek to cash in their allowances if they are capital constrained.

Compliance entities have also been caught out by the high collateral requirements involved with hedging. As the price of carbon goes higher, the more collateral needs to be put down in order to hedge any position. If utilities are capital constrained in some way then there may be no way for them to hedge their forward generation.

EUA auctions resume in September, albeit the fortnightly volume will drop from 22.25 million EUAs to 21.89 million EUAs. That will improve the supply situation for EUA’s, while also reducing the angle of the supply curve (S1 to S2), which could reduce price volatility.

In the end it is the European energy market that will ultimately determine where on the inelastic supply curve the demand curve will intersect.

European energy prices are exhibiting these parabolic movements due to extreme scarcity, and the perception that it is going to become even more acute. As the price moves along the parabola it holds very little in the way of signal, only noise.

And so the message is buyer beware. The sword of inelastic supply is very sharp and it cuts BOTH ways.

[Subscribe now](#/portal/signup)

[Whatever it takes“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Perhaps the most infamous remarks from a central banker came in the summer of 2012 when, in the midst of the Eurozone debt crisis, President of the European Central Bank (ECB) Mario Draghi delivered a![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-257.png)Carbon Risk](https://www.carbonrisk.world/whatever-it-takes/)
### Summer break 🌞
URL: https://www.carbonrisk.world/summer-break-/
Last updated: 2022-07-20T11:57:11.000Z
Carbon Risk will be taking an extended break this summer.

Today I will hit the “[pause button](https://support.substack.com/hc/en-us/articles/360041618252-Can-I-pause-my-publication-)” on subscriptions which means that the billing cycle for paid subscribers will be frozen.

During the next 5-6 weeks paid subscribers will not be charged for renewals, but you will still be able to access my content. Any time remaining on your subscriptions will automatically roll over when I return and press un-pause. New readers will not be able to take out paid subscriptions, but you can still read free to access material and previews of paid subscriber only posts.

Normal service will resume w/c 5th September. As luck would have it the carbon markets will probably erupt from their summer lull the moment I send this email :) In the meantime I think it would be worth catching up with some of the recent articles you may have missed.

[High and dry: Drought threatens Germany's plan to burn more coal](https://www.carbonrisk.world/high-and-dry/) (£)

[Carbon's 'diamond hands' about to get tested once more](https://www.carbonrisk.world/carbons-diamond-hands-about-to-get/) (£)

[Whatever it takes: Why forward guidance in the EU carbon market is here, and is set to stay](https://www.carbonrisk.world/whatever-it-takes/) (£)

[In search of a new narrative](https://www.carbonrisk.world/in-search-of-a-new-narrative/)

[Diablo Canyon Resurrected?](https://www.carbonrisk.world/diablo-canyon-resurrected/)

[Stranded asset, or last mover advantage?](http://Stranded asset, or last mover advantage?)

If you fancy some longer form content, perhaps travelling, sitting on beach, and you don’t want to leave commodity markets too far behind then check out some of my books on [Amazon](https://www.amazon.co.uk/Peter-Sainsbury/e/B017V3RMZO/ref=aufs%5Fdp%5Ffta%5Fdsk?ref=carbonrisk.world).

When I return one of my first posts will be re-introducing myself and Carbon Risk to my readers, both old and new. The past several months have been a period of rapid growth for the newsletter. I’m keen to build on that success and ensure that investors know and understand Carbon Risk’s unique value proposition.

Have a fantastic summer.

Peter
### Everything you need to know about China's national carbon market
URL: https://www.carbonrisk.world/everything-you-need-to-know-about-e31/
Last updated: 2025-08-21T10:39:34.000Z
China hosts the world’s largest carbon market by emissions. One year ago, almost to the day, trading in carbon allowances began changing hands.

Over 2,100 liable coal and gas power stations participate in the compliance scheme, covering about 4.5 billion tonnes carbon dioxide (CO2e) per year - around 40% of China’s total annual emissions.

China’s allocation of emissions allowances is based on emissions intensity - each allowance represents the right to emit one tonne of CO2e. Allowances are allocated according to actual production levels of coal and gas fired power plants (e.g. kWh of electricity generated) and predetermined emissions intensity benchmarks (e.g. CO2/kWh).[1](#footnote-1) 

This is very different from the approach taken by other emissions trading schemes (ETS) such as the EU’s where there is an absolute emissions cap. The design of the ETS is in line with China’s decarbonisation ambitions under its Nationally Determined Contribution (NDC), which includes a 65% reduction in carbon emission intensity (carbon emitted per yuan of GDP) by 2030, versus 2005 levels.

_This post is for paying subscribers only._
### Putting a price on H₂O
URL: https://www.carbonrisk.world/putting-a-price-on-ho/
Last updated: 2025-08-21T10:39:34.000Z
> ”When a well is dry, we know the worth of water” - Benjamin Franklin

Energy is life. We price it. We trade it.

Carbon emissions are an externality of life. One that we increasingly price and trade.

Water is also essential to life. Yet we fail to put a price on it or trade. Instead it is close to free, or heavily subsidised, even to consumers who could pay more.

Putting a price on the first two in the ‘energy-carbon-water’ nexus enables scarce resources to be allocated more efficiently. Putting a price on them provides the incentive to ensure supply and demand move towards a stable balance. Not to do so would result in persistent surpluses and deficits - harming those in need of affordable energy and polluting our atmosphere with carbon dioxide. Yet despite the benefits we have yet to really begin to recognise the benefits of putting a price on water - the scarcest, most precious of the three.

According to the UN, agriculture accounts for 70% of global water use compared with 22% for industry and just 8% for domestic users. These proportions vary by region with agriculture even more important in Asia, Latin America, and Africa. Meanwhile, in Europe and North America, industry dominates demand for water.

Everything we eat, whether it is your eggs and toast you had for breakfast, the salad you had for lunch and the steak you had for dinner indirectly consumes massive quantities of water in its production. For example it takes 547 litres of water to produce a kg of potatoes, 1534 litres per kg of corn and 2,191 litres to produce a kg of soybeans. But those numbers pale into insignificance once you consider the amount of water needed to produce meat. To produce just one kg of beef requires 109,671 litres of water.

Energy runs on water. In fact, among industries, the global energy sector is the world’s largest water user. Almost all forms of energy production and power generation (whether it be nuclear, oil, coal, gas and of course hydroelectric) depend upon water for their operations, including the transportation of fuels, cooling generators and used to extract oil from beneath the ground. It takes 38 litres of water to power one house for one month from gas (\~1000 kWh), up to 2,100 litres of water from coal and up to 31,000 litres of water to power one house for one month from oil (see [*The forgotten giant of clean energy*](https://www.carbonrisk.world/the-forgotten-giant-of-clean-energy/) and [*High and dry: Drought threatens Germany's plan to burn more coal*](https://www.carbonrisk.world/high-and-dry/)*)*.

Metal supply runs on water. At a basic level drinking quality water is required to support towns that have developed in remote areas, home to mining staff. Water is also favoured in mineral processing because it is a low cost and energy efficient way of transporting materials between processes – including disposing of, or storing, waste materials. Water is also a very efficient medium for supplying chemicals and mixing materials and it is an essential ingredient for some chemical processes. It is also the most convenient medium for gravitational and centrifugal separation of minerals from host rocks.[1](#footnote-1)

Other essential industrial processes are also big consumers of water. For example, in Taiwan water reserves were so low in the summer of 2021 that water restrictions were placed on the semiconductor chip industry. The world’s largest chip manufacturer, Taiwan Semiconductor Manufacturing Co Ltd uses more than 150,000 tonnes of water per day, equivalent to approximately 80 standard swimming pools. Other areas where chipmakers are setting up, such as the US state of Arizona are also suffering from acute water shortages that threaten the production of chips.

![bridge between islands](https://images.unsplash.com/photo-1545641203-7d072a14e3b2?ixlib=rb-1.2.1&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)

Photo by [matthew Feeney](https://unsplash.com/@matt%5F%5Ffeeney?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/s/photos/river?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

This reliance is often most acute in areas already afflicted by water shortages, often making the problem even more acute. This is especially problematic for agriculture where water consumption is especially high and water is permanently withdrawn from its source. This can occur either because the water has been evaporated, transpired by plants, incorporated into products or crops, or consumed by people or by livestock. The majority of the water used in agriculture involves water consumption and so is otherwise removed from the immediate water environment.

Nearly 93% of the Middle East’s onshore oil reserves are exposed to medium to extremely high overall water quantity risk according to the World Resources Institute (WRI). For energy companies operating in the Middle East, inadequate desalination or other water infrastructure can disrupt ongoing projects, delaying oil drilling, production, and processing extraction and production.

Mines can also have a negative impact on the quality and availability of local water supplies. Mines that go beneath the water table are dewatered by pumping, which draws-down the water table in the surrounding landscape. This can reduce the water available to other users and reduce the discharge to streams and other groundwater-dependent ecosystems. Finally, the water from dewatering must be discharged safely to rivers, lakes, or storages and may need to be treated to remove acidity or high metal concentrations.

Energy generation and to a lesser extent, industrial processes tend to take the form of water withdrawals. Water withdrawals are defined as water that is diverted or withdrawn from surface or groundwater, but where some of this water can return back to the water system as return flows. Unfortunately the water that returns to the local environment is not always to the same quality as that first consumed.

![brown and green mountains under white clouds and blue sky during daytime](https://images.unsplash.com/photo-1615957148446-6a1647193298?ixlib=rb-1.2.1&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)

Photo by [Shravan K Acharya](https://unsplash.com/@shravankacharya?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/s/photos/drought?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

The water demand-supply deficit is projected to reach 40% by 2030 if current practices continue, according to the WEF. Population growth, economic development including increased urbanisation, and volatile weather patterns is likely to mean that water stress escalates over the next decade. The competition between agriculture, industry and people for the scarce water supplies is going to become more intense. [2](#footnote-2)

Unfortunately, there is a spatial mismatch between the demand for water and the ability of the Earth’s geography to supply it. Water covers approximately 71% of the earth’s surface; however, 97% of it is too salty for productive use. Of the 2.5% that is usable freshwater, 70% is in icecaps, and much of the rest is in the ground. This leaves just 0.007% of the earth’s water supply in the form of readily accessible freshwater.

Much like arable land, that freshwater is not evenly distributed with some regions experiencing surpluses relative to demands from their population, while others experience extreme scarcity. For example, \~5% of the global population live in North America and it is blessed with 29% of freshwater. Asia also has around one-third of the world’s supply of freshwater, but it has to support 60% of the world’s human population.[3](#footnote-3)

The supply of water is governed by the flow, rather than the stock. This means there is also a temporal mismatch between demand and supply. There are exceptions like reservoirs which can store water for extended periods of time. In the main though, consumers of water are concerned whether the rains will return and that the river will continue to flow. For the majority of water consumed, the weather and seasonal factors are especially important.

**The ‘commodification’ of water challenge**

A number of factors typically complicate ascribing value to water as a commodity. For instance, the implicit value of water itself is arguably delinked from its price in that the value of water in sustaining life may be so much greater than a market price can truly capture.

Governments often deem that access to water is a basic human right for which they attempt to ensure access is equitable, no matter how rich or poor you are. In economic terminology it is known as a ‘merit good’. The historical position that water should be free at the point of consumption is very difficult to row back from.

Water assets generally do not have clear and transferable ownership title – rarely can one individual claim rights to a specific reservoir or lake – thus making it difficult to trade water assets, as opposed to more conventional commodities. To be traded on the global commodities exchanges, a resource has to be transferable (even if you are selling future rights to it) and transparently priced.

_This post is for paying subscribers only._
### Diablo Canyon Resurrected?
URL: https://www.carbonrisk.world/diablo-canyon-resurrected/
Last updated: 2025-08-21T10:39:35.000Z
For many years, nuclear power met a sceptical pushback in the US and in Europe. Keeping aging reactors online no longer made economic sense in an energy climate increasingly dominated by solar and other renewable sources. In the aftermath of the Fukushima nuclear disaster in Japan in 2011, many governments in Europe sought to bring forward closures. Energy security concerns were something to worry about tomorrow, not today.

As the global energy crisis has intensified over the past few months, and especially in the aftermath of Russia’s invasion of Ukraine and more frequent power blackouts, all options are now back on the table. For many countries that includes the nuclear option.

Earlier this month, Pacific Gas & Electric (PG&E), the operator of the Diablo Canyon nuclear facility in California, announced that it would apply for a share in the $6 billion Civil Nuclear Credit (CNC) program. The program was launched on 19th April 2022 and aims to keep financially strapped nuclear facilities across the US open (see *[California's carbon market: The 6 factors to pay attention to right now](https://www.carbonrisk.world/californias-carbon-market-the-5-factors/)*).[1](#footnote-1) 

Diablo Canyon’s two reactors are currently scheduled to close completely in November 2025 and August 2025 when the plants federal 40 year license expires. The facility accounts for almost 9% of in-state electricity generation, but crucially 15% of California’s zero carbon power generation.

PG&E had been one of the voices eager to shutdown the facility, concerned that it no longer made economic sense to keep it open. But now with fears over power blackouts in the state becoming ever more acute and under pressure from California’s governor, PG&E’s management have changed their tune.

If the plant does close on schedule then campaigners warn that California’s energy security will be under threat as renewable energy is insufficient to meet base load capacity (see [*Parched: How California's drought impacts the carbon market*](https://www.carbonrisk.world/what-does-drought-in-california-have/)). To compensate the state would have to import more power from outside the state. This is likely to have been generated through the burning of thermal coal and natural gas, thereby pumping even more carbon into the atmosphere.

More fossil fuel generation means more demand for California’s carbon allowances (CCAs). However, if PG&E’s application is successful and the facility remains in operation beyond 2025 then there would be less demand for emission allowances, a headwind for the longer term CCA price outlook.

The CCN news initially proved bearish for CCA prices, but with an initial end date for applications of 5th July, it looked increasingly unlikely that California would submit in time. Note that I’ve used data from the KCCA carbon ETF as a proxy for CCA price developments (see [*How to invest in North America's carbon markets*](https://www.carbonrisk.world/how-to-invest-in-north-americas-carbon/)).

CCA prices subsequently rebounded, only for the application deadline to be extended until 6th September. Coupled with PG&E’s stated intention to apply for funding, CCA prices then retreated as the likelihood of Diablo Canyon being resurrected from imminent closure appears to have increased.[2](#footnote-2)

According to the Office of Nuclear Energy, the body which runs the CCN scheme, preliminary credit award decisions are likely to be made “as soon as 30 days following the deadline for submission of certification applications and sealed bids”.[3](#footnote-3) 

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/9e795de1-9c84-45d8-8d80-78e24e0c194e_947x581-1.png)

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---

1. In the program’s first phase, grants are restricted to plants that had publicly announced they would close down prior to end September 2026\. Of the 93 operating nuclear reactors in the US, just three meet that qualification. The Palisades reactor in Michigan, which is scheduled to close in May 2022, and the Diablo Canyon reactors 1 and 2 in California, with planned closing dates of November 2024 and August 2025, respectively. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. https://www.energy.gov/sites/default/files/2022-06/US%20DOE%20CNC%20Guidance-Revision%201-June%202022.pdf [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. https://www.energy.gov/ne/frequently-asked-questions-civil-nuclear-credit-program [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
### A climate-driven "Minsky Moment"
URL: https://www.carbonrisk.world/a-climate-driven-minsky-moment/
Last updated: 2025-08-21T10:39:36.000Z
In an earlier article I looked at the ‘extreme’ situation whereby policymakers are forced to push the price of carbon significantly higher and much sooner than everyone expects.

Instead of expecting (or hoping) that a gradual rise in the carbon price would be sufficient to accelerate the energy transition and decarbonise the economy, rapid climate change coupled with a lack of action by governments dealing with other pressing issues may mean that a significantly higher carbon price is required.

No longer the “slow policy ramp”. In this scenario time compression means extreme measures are required. Governments will have to “stamp on the brakes” and force carbon prices higher.

Analysis by Kempen Capital Management estimated that in the event of a sudden carbon tax of $150 per tonne, global financial markets could fall by as much as 41% with US equities likely to experience even greater losses.

[What happens if policymakers are forced to "stamp on the brakes" and force carbon prices higher?Financial markets have typically worked on the assumption that climate policy would be gradually tightened over a period of several years, if not decades. This is known as the “slow policy ramp”. Too high a carbon price at the outset for example, many reason, will be politically untenable. Instead the assumption is that carbon prices will gradually rise…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-264.png)Carbon Risk](https://www.carbonrisk.world/what-happens-if-policymakers-are/)

Although it’s impossible to know how and under what circumstance policymakers may be forced to ramp up climate policy action, one way of thinking about it is the probability that the climate reaches a “Minsky Moment”.

The term “Minsky Moment” was named after Hyman Minsky, an economist who argued that markets have innate characteristics of being unstable. Periods of stability are only ever transitory since households, governments and investors become complacent. This then sets the stage for a sudden increase in volatility as risks that had gone unnoticed or ignored suddenly become important.

A climate driven “Minsky Moment” would represent a tipping point from a period of stability, to one of instability, one that forces policymakers into more and more aggressive action including a rapid upward trajectory for carbon prices.

A recent report examined the impact of a sudden repricing of carbon prices including the impact on energy consumption, economic growth, government’s fiscal position and finally the implications for financial markets. Not simply focusing on the first order consequences, investors should always be on the look-out for the knock-on impacts.

_This post is for paying subscribers only._
### High and dry
URL: https://www.carbonrisk.world/high-and-dry/
Last updated: 2025-08-21T10:39:37.000Z
Climate change and energy geopolitics are set to collide in Europe this summer as an energy drought “doom loop” threatens to leave the continent high and dry.

Over the past few months I’ve highlighted how severe drought across much of Europe has led to a sharp decline in reservoir levels, in turn resulting in a fall in hydroelectric generation (see [*The forgotten giant of clean energy: Why carbon market investors need to keep an eye on Europe's drought*](https://www.carbonrisk.world/the-forgotten-giant-of-clean-energy/)).

Less power generation from Europe’s hydroelectric dams increases the call on natural gas, thermal coal and other forms of power generation to make up the difference. In addition, hot weather also increases power demand from households and businesses running air-conditioning units.

Recall that in mid-June the German government announced that it would reopen mothballed thermal coal power plants in a bid to curb natural gas demand and help build up inventories ahead of winter. A number of other European governments followed suit. Austria announced that it would convert a gas fired power plant, currently kept on stand-by so that it can burn thermal coal. Last but not least, the Netherlands removed a limit on coal fired generation in a bid to conserve natural gas stocks for the winter ([*Back to black?: There's more to Germany's energy security plan than burning more coal*](https://www.carbonrisk.world/back-to-black/)).

As yet Europe has not fired up it’s coal generation to the extent that the media portrays. German thermal coal generation fell to 5,345 MW during w/e 10th July, similar to levels seen in July 2021 (Chart 1). Other European countries with coal generation assets are showing similar thermal coal generation trends.

**Chart 1: German thermal coal power generation**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/0fc3e7aa-fcfb-48fa-b66d-f9754701d597_1570x843-1.png)

Despite their best laid plans to burn more coal this winter, the strategy could well be scuppered by the same drought that has been affecting the continent’s hydroelectric dams.

_This post is for paying subscribers only._
### Why metal mining investors should support a global carbon price
URL: https://www.carbonrisk.world/debottlenecking-the-energy-transition/
Last updated: 2025-08-21T10:39:38.000Z
The global metals and mining business is one of the dirtiest industries around, contributing around 8% of global carbon emissions. A high carbon price is surely the last thing that mining company executives and their investors would wish for.

Yet many of the commodities brought to the surface and refined are essential if we are to accelerate the ‘green’ energy transition and decarbonise our economies.

In an earlier article I highlighted the 7 industries that Credit Suisse thought most likely to benefit from high carbon prices. What was missing from that list were the industries that provide the raw materials, without which industries such as renewable energy simply could not happen (see [*Which industries benefit from a high carbon price?*](https://www.carbonrisk.world/which-industries-benefit-from-a-high/)).

Rather than fear the impact of the higher costs brought by carbon pricing, miners of metals such as tin, copper, and nickel should support high carbon prices since it will increase demand for those metals, while also resulting in higher metal prices.

_This post is for paying subscribers only._
### Beware the algorithms ‘robo-herding’ the EU carbon market
URL: https://www.carbonrisk.world/beware-the-algorithms-robo-herding/
Last updated: 2025-08-21T10:39:38.000Z
> “People no longer are responsible for what happens in the market, because computers make all the decisions.”  
>  
> \- Michael Lewis, Flash Boys

It is easy to ascribe human logic to daily, or even intra-day movements in financial markets - especially for financial journalists, since that is their job.

However, much of the movement we see may actually be the result of bots - automated programs designed to buy or sell based on pre-determined criteria. Increased complexity means that it is no longer possible for humans (at least on a very short time horizon) to compete with automated programs designed to make split second decisions.

In 2019, the US Commodity Futures Trading Commission (CFTC) published a [report](https://www.cftc.gov/sites/default/files/2019-03/automatedordersreport032719.pdf?ref=carbonrisk.world) outlining the extent of automated orders across eight of the CME’s futures markets including currencies, equities, financials and commodities. The percentage of automated orders as a share of the US futures market had increased across all eight markets between 2013 and 2018, but it was especially pronounced in the energy and commodity markets. The average percentage point increase in automation was 19% over the 5 years, resulting in between 65% (livestock, oilseeds and grains) to 80% (energy and metals).

![photo of gray building](https://images.unsplash.com/photo-1571786256017-aee7a0c009b6?ixlib=rb-1.2.1&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)

Photo by [Ian Battaglia](https://unsplash.com/es/@ianjbattaglia?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/s/photos/computer-servers?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

The need for rapid decision making is even more acute in those commodity markets that require real time balancing and involve numerous intra-day markets, such as the European power market. By extension this affects pricing in the natural gas, thermal coal and carbon allowance markets.

Although it’s difficult to be precise about their share, algorithmic trading has also been aggressively deployed across Europe’s energy markets. As of 2020 some of the continents power spot markets reported that over 65% of trades are performed by algorithms - up from less than 10% at the end of 2015\. That share is likely to have increased in the past couple of years as the degree of complexity has risen.

_This post is for paying subscribers only._
### Banking on 'blue carbon'
URL: https://www.carbonrisk.world/banking-on-blue-carbon/
Last updated: 2025-08-21T10:39:39.000Z
In previous articles I’ve written about the planet’s carbon removal scarcity problem, why competition for land and commodities means that nature based carbon credits need to rise, and why technological solutions may ultimately be required to meet net-zero targets.

We can push the envelope of carbon removal options even further. Just off the coast, and deep beneath the water lie other sources of natural capital that can be exploited to sequester carbon from the atmosphere.

‘Blue carbon’ as it’s known includes mangrove forests, tidal marshes and seagrass meadows.

According to the United Nations Educational, Scientific and Cultural Organization (UNESCO), blue carbon assets are among Earth’s most efficient absorbers and long-term repositories of carbon.

For example, mangrove forests can store more than 1,000 tonnes of carbon per hectare, more than four times the amount sequestered by terrestrial forests. Seagrass can suck up even more, ingesting 15 times as much carbon per year for the same area of forest.

Alongside seaweed farming, protecting and restoring these marine ecosystems could reduce global carbon emissions by as much as 1.4 billion tonnes of CO2-equivalent emissions annually by 2050, according to the World Resources Institute (WRI).[1](#footnote-1)

![green grass under water during daytime](https://images.unsplash.com/photo-1629215833475-7d88001b7448?ixlib=rb-1.2.1&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)

Photo by [Benjamin L. Jones](https://unsplash.com/es/@boardshortsben?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/s/photos/seagrass-meadow?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

**Underwater blues**

These coastal and marine ecosystems store more carbon than terrestrial ecosystems. However, they are just as vulnerable to damage as land-based natural capital assets. Infrastructure development, land-use conversion and poor waste management are all factors that can damage blue carbon assets.

Disturbing a hectare of mangroves releases as much carbon as cutting down between 3 and 5 hectares of tropical forest. Mangroves are thought to be eroding at about 2% per annum, while seagrasses are estimated to be disappearing at a rate of between 2% and 7% per year.

Unlike other blue carbon assets, much less is known about changes in tidal marsh acreage. Whist tidal marshes have been mapped on a local and national level, no attempt has been made to map the distribution and extent of tidal marshes on a global level, preventing any accurate estimate of overall decline rates.

![winding river across plains under downcast ssky](https://images.unsplash.com/photo-1550498178-466f87328eaa?ixlib=rb-1.2.1&ixid=MnwxMjA3fDB8MHxwaG90by1wYWdlfHx8fGVufDB8fHx8&auto=format&fit=crop&w=1000&q=80)

Photo by [Brian Sumner](https://unsplash.com/@bmsumner?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/s/photos/salt-marsh?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-274.png)

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**The blue carbon wealth of nations**

Seagrass beds are found in all regions, from cold polar waters to the heat of the tropics. Tidal marshes are also found across the globe, but are most commonly located in temperate areas including North West Europe and Australia. In contrast, mangroves are typically confined to tropical and sub-tropical areas.

The three countries generating the largest positive net blue carbon contribution for the world are Australia, Indonesia and Cuba (see [*Africa's "green superpower"*](https://www.carbonrisk.world/africas-green-superpower/)). However, not all countries are in the same position to benefit from this blue carbon wealth, reflecting the different stages in project development of the three blue carbon assets.

_This post is for paying subscribers only._
### The next domino to fall
URL: https://www.carbonrisk.world/the-next-domino-to-fall/
Last updated: 2025-08-21T10:39:39.000Z
Echoes of the Great Financial Crisis are beginning to show up as the energy crisis continues to exact its toll.

Last night Uniper, the giant German utility [issued ](https://irpages2.eqs.com/websites/newsfeed/English/99/detail-page.html?newsID=2290961&companyToken=2cd63ab0-8545-4550-bc3c-1bd192038a71&ref=carbonrisk.world)a profits warning and withdrew its annual forecast. Germany’s largest buyer of Russian natural gas also announced that it was in talks with the government over a possible bailout after only receiving 40% of its contractual volumes from Russia.

The upshot of the supply shortfall is that Uniper has to buy natural gas from the spot market at a significant premium in order to make up the difference. Meanwhile the utility is unable to pass on those higher costs to its customers, squeezing its ability to generate cash and keep operating.

_This post is for paying subscribers only._
### Plumbing the depths of the VCM
URL: https://www.carbonrisk.world/plumbing-the-depths-of-the-vcm/
Last updated: 2025-08-21T10:39:40.000Z
Carbon credit futures prices have fallen by almost half since the start of 2022, amid worries over excess supply and that recession will kill-off a recovery in demand for carbon credits.

In this article I highlight some of the developments in nature and non-nature based carbon credit futures, how the market relates to the stock prices of listed carbon credit companies, and why investors should watch the calendar spreads for evidence of a bottoming in the market.

_This post is for paying subscribers only._
### Stranded asset, or last mover advantage?
URL: https://www.carbonrisk.world/stranded-asset-or-last-mover-advantage/
Last updated: 2025-08-21T10:39:41.000Z
“Stranded assets” are those left unexploited or experience a decline in value due to changing in market conditions and regulations adopted to decarbonise the economy.

The energy supply and generation business is particularly familiar with the concept of stranded assets. The total embedded emissions of known fossil fuel reserves is estimated to be around 3,700 Gt CO2, according to [Carbon Tracker](https://carbontracker.org/reports/unburnable-carbon-ten-years-on/?ref=carbonrisk.world). If all reserves were produced this would lead to global temperatures rising in excess of 3°C. To limit warming to 1.5°C, 90% of fossil fuel reserves must remain in the ground, thus becoming a “stranded asset”.

Stranding is a function of changed consumption and expectations influenced by changes in policy, pricing, technology and behaviour. One or a combination of these factors could make it relatively more expensive to produce and consume than the alternatives, e.g. via carbon pricing and taxes, regulation, etc. These factors could make it uneconomical to invest in increasing supply, or face adverse reputational effects if they do. The technologies available to asset owners influence the timing of investment decisions, e.g. infrastructure investment involves long lead times, long lifetimes, and new technology especially, involves uncertain payoffs.

And finally, the behaviour of asset owners cannot be considered in isolation, since their behaviour operates in an environment where the incentives are not always clear and consistent, e.g. while publicly traded companies are subject to the criticism of their shareholders, state run companies may also have to consider the impact of their actions on employment and social stability.

However, as the the energy crisis of 2022 demonstrates, it’s not as easy as simply leaving fossil fuels in the ground and letting the energy transition take care of itself. Timing the inflexion point between traditional energy sources (natural gas, coal and to a lesser extent oil) and renewables, allied with deciding the role of nuclear is fraught with difficult political, economic and technological decisions.

In the rush forward, governments underestimated the risks to their own energy security. That decision gave rise to renewed geopolitical risks and concerns that people - not only those living in poor developing countries - would have the energy and food to survive.

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[The impossible trinity at the heart of net zeroGovernments face an impossible trinity if they wish to meet the net zero carbon energy transition - how to balance energy security, affordable energy and environmental sustainability. There have been five energy transitions in the modern age. Each transition involves the transformation of energy sources into economically useful applications as a result of technological improvements. First coal, then electrification, followed by crude oil and natural gas, and then most recently the development of renewable energy alternatives. Energy transitions typically take place over a period of decades - 50 years or more based on historical evidence.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-279.png)Carbon Risk](https://www.carbonrisk.world/the-impossible-trinity-at-the-heart/)

**Steel faces its own stranding risks**

It’s not only fossil fuels that face the risk of becoming stranded assets in a carbon constrained future. The steel industry, responsible for 7-9% of all direct emissions from fossil fuels is another.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/e7fffa6f-8626-473a-813d-81d14a96985d_640x800-jpeg-1.jpg)

Photo by [Forsaken Films](https://unsplash.com/@forsakenfilmslimited?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/s/photos/blast-furnace?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-280.png)

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According to the [Global Steel Plant Tracker ](https://globalenergymonitor.org/report/pedal-to-the-metal-2022/?ref=carbonrisk.world)(GSPT), approximately 69% of known global crude steel capacity currently uses the basic oxygen furnace (BF) route, 31% uses electric arc furnace (EAF) steelmaking, and less than 1% uses open hearth furnace (OHF) steelmaking.

In 2019 the global steel industry emitted over 3.6 Gt CO2 emissions, including 2.6 Gt of direct CO2 emissions per year and nearly 1.1 Gt of indirect CO2 emissions from the power sector and combustion of steel off-gases. Approximately 86% of these emissions came from BF steel production, despite accounting for around two-thirds of production, while 14% came from EAF steel production.

Producing one tonne of steel via BF emits around 2.2 tonnes of CO2 and requires roughly 20.8 GJ of energy, assuming global average electricity carbon intensity. In comparison, scrap-based EAF production results in approximately 0.3 tonnes of CO2 per tonne of crude steel (not including embodied emissions), and requires 9.0 GJ of energy. Hydrogen, natural gas and coal can also be used in EAF, but this increases average emissions to around 0.7, 1.4 and 1.8 tonnes of CO2 respectively.

Crude steel manufacturing capacity is largely concentrated in Asia, with China accounting for 49% (1083 Mt) of operating steelmaking capacity. However, when considering only BF steelmaking, China accounts for 60% (804 Mt) of global operating capacity.

**Map 1: Global steelmaking capacity by type - operating**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/72be26ba-2ae2-4b49-8107-2c2c713d32fa_1902x932.png)

**Fold, check or raise?**

There is no single silver bullet to decarbonise steel production, not yet at least. That means the decision to invest in new technology, or stick with what they already have is far from an easy one. Options include shifting completely to electrification and increased use of recycled steel (via an EAF), or progressing to more technologically advanced solutions such as direct reduction with hydrogen and smelting in the EAF, alkaline iron electrolysis, the HIsarna smelting reduction process, or CO2 capture and utilisation of waste gases from integrated blast furnaces.

By 2030, 1090 Mt of existing coal-based blast furnaces (77% of the BF fleet in the GSPT) will reach the end of their working life and the start of their next reinvestment cycle. The average investment cycle for BF under typical operation and maintenance is approximately 15-20 years. China alone accounts for 730 Mt of this BF capacity requiring reinvestment.

Over the next decade, steel plant owners will need to decide whether to refurbish their BFs (which involves relining the furnace), or shut them down. The cost to refurbish a typical BF is around one-third to one-half of a new blast furnace and results in substantial revenue loss during refurbishment. Overall, the cost of a BF refurb including lost earnings is estimated to be around $1.3 billion and last three months. However, the reinvestment cycle for blast furnaces typically decreases with each subsequent relining, and so this isn’t something operators can do more than a couple of times, at least not economically.

As the end of a BF’s lifecycle approaches, plant owners face a quandary. Do they close the facility, refurbish it to extend it’s life, or invest in new low-emission steel making technology.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/05d0638f-e98f-4565-a995-889e932c464a_640x427-jpeg.jpg)

Photo by [Forsaken Films](https://unsplash.com/@forsakenfilmslimited?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText) on [Unsplash](https://unsplash.com/s/photos/blast-furnace?utm%5Fsource=unsplash&utm%5Fmedium=referral&utm%5Fcontent=creditCopyText)

**Global steel sector likely to miss net-zero target**

The share of EAF steelmaking capacity needs to reach 37% by 2030 and 53% by 2050 in order to meet the IEA’s Net-zero by 2050 scenario. This compares with the current mix of operating steelmaking capacity which uses 69% BF and 31% EAF. Taking account of the projected 12% increase in demand for steel by 2050, an additional 576 Mt of EAF capacity needs to be added, while 419 Mt of BF capacity needs to be cancelled or retired.

However, of the 600 Mt + steelmaking capacity under development, 67% of the known steelmaking processes uses high carbon BF technology, and only 33% uses low carbon EAF steelmaking. However, of those steel projects under construction with known processes the BF share jumps to 72%, while only 28% is EAF. If the global steel sector is serious about decarbonising, they are not showing it in their investment intentions.

China and India account for over two-thirds of new steel plants proposed and under construction. Despite both countries committing to Net-zero by 2060 and 2070 respectively, 80% of new BF capacity is expected to be built in China and India.

**Map 2: Global steelmaking capacity by type - proposed and under construction**

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/d368edb9-d31e-4753-9384-bffff824fd69_1900x929.png)

**Stranded asset, or last mover advantage?**

GSPT estimates that around 132 Mt of existing BF capacity is at risk of being stranded by 2030, rising to 514 Mt by 2050\. The capital cost at risk of being stranded is in the region of $500-$770 billion, with much of this hit being taken by China and India.

Despite the risk of stranded assets, both China and India have an incentive to continue to use BF technology for as long as possible. Both countries have significant thermal and coking coal reserves, to power and supply feedstock to their steel plants. That gives them an economic advantage compared with other major producers who may need to import supplies from elsewhere in the world. They both have vast domestic markets that are likely to see further strong demand growth for steel.

The steel manufacturing sector also supports hundreds of thousands of jobs across China and India. As in other parts of the world, steel manufacturing often dominates employments for whole regions meaning that plant closures can have adverse social and political consequences. BF plants typically employ far more people than EAF steel plants. Switching to lower carbon steel manufacturing would inevitably result in job losses. State owned and managed steel plants also tilts the incentives to prolong the life of BFs even longer.

The final and most important factor in pushing China, India and other countries with substantial BF capacity is “last mover advantage”.

Last mover advantage in this example means that steel manufacturers decide to wait as long as possible before choosing a low carbon steel technology. As I mentioned earlier, BF steel plants can retrofit their plants a number of times before having to make a final decision on their future investment.

While other countries may go straight to EAF, those who wait can benefit from the experience of those that went before them, avoiding their mistakes. When it comes to infrastructure that lasts twenty or more years it’s important not to jump at the only technology available.

I’ve written previously about Wright’s Law (see [*The long term price of emission*](https://www.carbonrisk.world/the-industrial-decarbonisation-bottleneck/)). Predating Moore’s Law by almost thirty years, it forecasts cost as a function of the number of units produced. Essentially, learning by doing results in cost efficiencies and improvements.

The EU and other regions forced to move quickly to decarbonise their steel sector are unlikely to benefit from this process. Each firm has to pursue their own strategy simultaneously, under high pressure to meet targets, but what this means is that they cannot benefit from the experience of others in the process.

For China and India, rather than left holding stranded assets, may actually hold a crucial last mover advantage. They can continue to produce low cost steel in the meantime but will then switch to low carbon steel when the opportunity is right and the optimal technological solution becomes clearer.

Steel is a significant emitter of carbon dioxide, but it is also a crucial ingredient in the infrastructure the world needs to decarbonise. Each new MW of solar power requires 35-45 tonnes of steel, and 120-180 tonnes for each MW of wind power. The decision to wait could give China and India a crucial increase in market share as demand for steel continues to grows.

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[Leave a comment](#ghost-comments-root)

[Europe's steel industry yet to feel the full force of the carbon market Critics of the EU carbon market contend that Europe’s policymakers are fools for indulging in such virtue signalling at a time when society, especially the poorest, are hurting under intense inflationary pressures. Regular readers will know that revenue from auctioned EU carbon allowances (EUAs) can be redirected by member states to support low-income households. In addition, the longer that decarbonisation is delayed, the higher the overall cost to society, adding to future inflationary pressures felt by all.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-281.png)Carbon Risk](https://www.carbonrisk.world/how-have-higher-carbon-prices-affected/)
### Carbon's 'diamond hands' about to get tested once more
URL: https://www.carbonrisk.world/carbons-diamond-hands-about-to-get/
Last updated: 2025-08-21T10:39:42.000Z
Long-term investors in the EU carbon market have developed a strong conviction that carbon prices must rise if the EU is to meet its decarbonisation targets. Over the past 18 months that conviction was rewarded as prices rose 3-fold towards the €80-€90 per tonne range we sit at currently.

Diamonds are borne out of carbon after being placed under intense heat and pressure for long periods of time. The ‘diamond hands’ of the carbon market remain of a strong conviction but have been noticeably quieter of late as carbon prices have settled towards the high range of what is ‘politically acceptable’ - and not marched higher towards, and beyond the €100 per tonne mark.

However, it’s an altogether different diamond that could dictate the direction of the EU carbon market over the next few months.

_This post is for paying subscribers only._
### Mind the decarbonisation gap
URL: https://www.carbonrisk.world/mind-the-decarbonisation-gap/
Last updated: 2025-08-21T10:39:43.000Z
Industrial assets have long lifetimes - 40 years on average - and with investment lead times stretching several years into the future, there is little opportunity for them to decarbonise in the timetable required to make a difference to climate change.

In that context, carbon capture is a vital tool to accelerate industrial decarbonisation.

For businesses involved in accelerating the adoption of this technology it is important that carbon prices remain high and stable, thus ensuring industry has a strong incentive to capture the carbon. The rapid removal of free carbon allowances for industry - which muffle the impact of high carbon prices - is also vitally important.

However, for CCUS to be commercially viable you need two additional things. First, infrastructure that enables the utilisation of the carbon if there is a suitable application. Second, sufficient storage for the carbon to be permanently locked away.

[Everything carbon investors really need to know about carbon capture, use and storage (CCUS)Carbon capture, use and storage (CCUS) involves catching concentrated industrial emissions at their source, preventing them from entering the atmosphere. CCUS has been seen as controversial, particularly by environmentalists who see it as a get-out-of-jail-free-card enabling fossil fuel producers and consumers to carry on extracting coal, gas and oil and burning it, much the same way they have done for decades.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-285.png)Carbon Risk](https://www.carbonrisk.world/everything-carbon-investors-really/)

It’s this final letter in the CCUS acronym - ‘S’ for storage - that poses the biggest challenge to the industry’s success, and is by far the most important stage in the process. Afterall, there’s no point in capturing the carbon if there’s nowhere to store it.

_This post is for paying subscribers only._
### Back to black?
URL: https://www.carbonrisk.world/back-to-black/
Last updated: 2025-08-21T10:39:43.000Z
The German government announced at the weekend that it would reopen mothballed thermal coal power plants in order to curb natural gas demand used in electricity generation.

German economics and climate minister [Robert Habeck outlined ](https://www-bmwk-de.translate.goog/Redaktion/DE/Pressemitteilungen/2022/06/20220619-habeck-wir-starken-die-vorsorge-weiter.html?%5Fx%5Ftr%5Fsl=de&%5Fx%5Ftr%5Ftl=en&%5Fx%5Ftr%5Fhl=en&%5Fx%5Ftr%5Fpto=wapp&ref=carbonrisk.world)this and other measures aimed at curbing gas use amid concern that the country will not have sufficient natural gas stocks to see it through the winter. This follows a sharp fall in gas supplies from Russia in recent weeks which has sparked fears that pipeline flows could be cut-off completely:

> “The situation on the gas market has deteriorated in recent days. The missing quantities can still be replaced, and the gas storage tanks are still being filled, albeit at high prices. Security of supply is currently guaranteed. But the situation is serious.”

Germany’s natural gas storage is currently around 56% full, and although in a better position than in previous years the objective is to get to at least 90% by the start of December. Even if this is achieved though Germany may still only be able to cover 2-3 months of normal consumption in the event that Russian supplies are cut completely.

That’s where coal comes in. The announcement suggests that Germany hopes to restart some 10 GW of thermal coal capacity as soon as possible. This is slightly higher than the 8 GW of capacity I’d previously indicated could come on-stream - although this might reflect subsequent decommissioning of coal plants since the end of 2019 (see [*What price King Coal's return to Europe?*](https://www.carbonrisk.world/what-price-king-coals-return-to-europe/)).

> “With the Replacement Power Plant Availability Act, the gas replacement reserve will be set up for a limited period until March 31, 2024\. To this end, power plants that are already available to the electricity system as a reserve are being upgraded in order to be able to return to the market in the short term. In view of the price structure, this means that gas-fired power plants are being squeezed out of the market. Gas contributed around 15 percent to public electricity generation in 2021, but the share is likely to be lower in the first few months of 2022\. Measures to reduce gas consumption can increase the power generation capacity by up to 10 GW in a critical gas supply situation, which substantially reduces gas consumption for power generation.”

Now that Germany has dispelled the last coal burning taboo, other European countries also appear to be following in Germany’s path. Neighbouring country Austria also announced that it would convert a gas fired power plant, currently kept on stand-by so that it can burn thermal coal. EU carbon price jumped almost €2 per tonne when the market opened on Monday, but gradually fell back later on in the morning since the details of the thermal coal announcement contained little in the way of surprises. A case of buy the rumour, sell the fact? [1](#footnote-1) 

Despite the focus on cutting natural gas use in electricity generation, it’s worth remembering that the power sector only accounts for around 13% of Germany’s natural gas demand. Industrial demand accounts for almost 37% of the country’s natural gas consumption, household heating follows with 31% of demand, trade and services 13%, with the remainder taken up by district heating and transportation.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/eec55faf-51c8-4003-a375-0f053d955cbb_710x395-1.png)

Notably, the other main announcement from the Germany government is its plan to introduce incentives aimed at cutting gas demand from the industrial sector. Specifically, Germany plans to launch a gas auction model later in the summer aimed at cutting natural gas consumption and incentivising storage:

> “Trading Hub Europe ( THE ), the Federal Network Agency ( BNetzA ) and the BMWK are developing a gas balancing energy product that industrial customers can use together with their suppliers to reduce their consumption in bottleneck situations and make gas available to the market in exchange for remuneration based purely on the energy price.”

The auction plans are currently being finalised so it’s unclear exactly how the program will work. However, it’s likely to take the form of a payment whereby industrial consumers of natural gas are paid to cut demand when prices go over a certain level, or gas storage volumes fall below a certain pre-determined threshold. The upshot is that it should incentivise industrial consumers to increase efficiency so that they can then then take advantage of ‘demand management’ payments when they occur.

Although using thermal coal in power generation results in around double the amount of carbon emissions per unit of energy produced compared with natural gas, the efficiency measures incentivised by the auction could (given the relative importance of natural gas to industry) more than offset the extra emissions from burning coal (see [*Money to burn: How investors should think about the 'invisible fuel'*](https://www.carbonrisk.world/money-to-burn/)).

It’s understandable that everyone simply focuses on the easily visible sign that Germany plans to burn more coal. But there’s a deeper story there that may mean the impact on carbon emissions, and the resulting demand for carbon allowances is not the one-sided picture it first appears.

[What is the long-term impact of Ukraine-Russia conflict on European carbon emissions?Europe’s pivot towards energy security, sparked by Russia’s invasion of Ukraine, will not come at the cost of decarbonisation. That’s the message from a recently published report by a risk management advisory firm. Gauging the often conflicting effects of higher energy prices, fuel generation switches and investment in renewables is vital if we are to understand the likely short term impact on demand for EU carbon allowances.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-287.png)Carbon Risk](https://www.carbonrisk.world/what-is-the-long-term-impact-of-ukraine/)

---

1. https://www.reuters.com/business/energy/austria-revives-coal-fired-power-option-russia-cuts-gas-supply-2022-06-19/ [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
### Africa's "green superpower"
URL: https://www.carbonrisk.world/africas-green-superpower/
Last updated: 2025-08-21T10:39:44.000Z
The central African country of Gabon is one of only a few countries that are net sequesters of carbon.[1](#footnote-1) 

Around 85% of Gabon’s land is covered in carbon-absorbing rainforest, an area about the size of the UK. It’s tropical forests are part of the Congo Basin rainforest. Known as the “lungs of Africa” the region is thought to be the planet’s most important forest ecosystem after the Amazon.

The ‘natural capital’ locked up in Gabon’s its forests are likely to be vital to the growth in nature-based carbon credits, “carbon neutral” energy, and a driver of the country’s prosperity (see [*Natural capital markets: Putting a price on nature*](https://www.carbonrisk.world/natural-capital-markets-putting-a/)).

Lets dive in.

_This post is for paying subscribers only._
### Charting carbon's course
URL: https://www.carbonrisk.world/charting-carbons-course/
Last updated: 2025-08-21T10:39:46.000Z
I wanted to update you all on some of the 6 main charts I’ve been highlighting over the past few months. Paid subscribers in particular, will be familiar with many of them. It’s important to revisit them occasionally for clues as to how underlying trends are evolving and what they might mean for both the carbon market, and related investments.

Together they show a mixed picture across the EU carbon market, one that is gradually adapting to a new market environment following the Russian invasion of Ukraine and subsequent political and economic uncertainty. Some of the charts offer some surprising grounds for optimism, especially given the short shift that many investors now appear to be giving to ‘ESG’ related investments.

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_This post is for paying subscribers only._
### In search of a new narrative
URL: https://www.carbonrisk.world/in-search-of-a-new-narrative/
Last updated: 2025-08-21T10:39:46.000Z
> “\[The\] human brain has always been highly tuned towards narratives, whether factual or not…Stories motivate and connect activities to deeply felt values and needs. Narratives “go viral” and spread far, even worldwide, with economic impact.” - Robert Shiller

Narratives are a powerful force that can sway people, industries and even whole countries into action. However, up until recently economists have dismissed the power of narratives to move economies and markets, taking the attitude that if it can’t be measured then it doesn’t exist. Unfortunately, data doesn’t tell the whole story.

Narratives operate in a reflexive environment, and none more evident than in financial markets. Bullish narratives influence asset prices, which in turn support increased economic activity, resulting in an even stronger narrative, and so on, etc.

The narratives we are told about the economy and markets have the power to drive booms, but they can also lead to busts as well if bearish narratives take hold. Here’s economist Robert Shiller describing how the process unfolds in his book, *Narrative Economics*:

> “In a bubble, the contagion is altered by the public attention to price increases: rapid price increases boost the contagion rate of popular stories justifying that increase, heightening demand and more price increases. In a stock market bubble, these might be stories of the companies with glamorous new technology and of the people who created the technology…There can also be price-to-GDP-to-price feedback, if speculative price increases stimulate purchases and hence more increases, price-to-corporate profits-to-price feedback, and price-to-regulatory laxity-to-price feedback, all mediated by changing narratives.”

Narratives can be relatively short such as the length of time for a boom to develop. For example, in 2001, the UK television show “Property Ladder” was launched. It depicted individuals buying homes, doing them up a little and then reselling them at a large profit. The concept was copied by other countries, e.g. the US TV show “Flip that House”. These TV shows, as well as magazines and other media fed the narrative that you too could become a property millionaire with very little effort. More recently, the narrative among many commentators was that you too could simply buy meme stocks or crypto and you would be wealthy too.

Economic and financial narratives can also be very sticky often lasting decades, especially if they are enshrined in an important financial institution’s identity. One long term narrative from economic history is that of Germany’s central bank, the Bundesbank. It had a stored set of memories directly linked to the traumatic economic experience of the hyper-inflationary Weimar Republic. Investors believed that the Bundesbank would continue with its hawkish inflation narrative even though several decades had past.

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**Carbon market narratives**

The strongest narratives in the EU carbon market over the past few years include a) that there was a scarcity of allowances that would mean carbon prices would be driven higher and higher, b) that carbon prices needed to be very high and stay at that level to bring about an acceleration in industrial decarbonisation, and c) that political will was rock solid and that would perpetuate both ‘a’ and ‘b’ until, at some point there would be a political reaction to stem any adverse economic or social effects .

I originally published the chart below in the middle of March, a few weeks after the Russian invasion of Ukraine sent carbon prices into a tailspin. It shows several of the most prominent articles about the European carbon market published in the FT newspaper since the beginning of 2000 set against the EU carbon price (see [*Carbon market sentiment check*](https://www.carbonrisk.world/carbon-market-sentiment-check/)).

You can see some of these three narratives play out as the carbon prices rose from €20 per tonne towards €100 per tonne in late 2021\. The two major bullish trends (Nov-2020 to May-2021 and the period Oct-2021 to Jan-2022) occurred after the FT had published articles with the words “higher carbon prices” and “emissions credit boom”.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/6e23356c-2fbf-4210-afad-19c01ddc246b_796x502-1.png)

The peak in EU carbon prices coincided with the FT shining a light on the risk of political disunity over high energy prices, leading with “political blowback” and “EU leaders battle”. In mid-March sentiment appeared to be warming up with “Investing in a lower-carbon future” and “This crisis could be the making of Europe’s carbon market” the most recent articles referring to the EU carbon market. That last FT article in particular alludes to the challenges that the EU carbon market is now confronting.

**Crafting a stable narrative**

A bit like the Roman god, Janus, politicians often have to look both ways at once, playing both sides of an argument to ensure their survival. It was on show during the early June EU Parliament debate on EU ETS reform. Members of the European Parliament (MEPs) voted to to reject a deal that was both seen as too ambitious, but also too weak in delivery on its mandate. Pascal Canfin, the EU Parliament’s environment committee chair summed up the challenge facing MEPs:

> “But you can have two different conclusions: on one side, you have to refrain from putting additional burden \[on companies\], and on the other side, you have to speed up the green transition. And actually, both are true.”

MEP’s are to reconvene on the 22nd June to vote on an amended proposal. The risk that they face is that they could end up settling on an agreement that pleases no one. That would leave the EU carbon market awash, struggling for direction, and unclear as to the political behind future price direction.[1](#footnote-1)

I argued in an earlier article that the EU carbon market is likely to evolve towards one where forward guidance is key to price formation, ideally where the price remains within a ‘politically acceptable’ band of €60-€90 (see [*Whatever it takes: Why forward guidance in the EU carbon market is here, and is set to stay*](https://www.carbonrisk.world/whatever-it-takes/)*)*.

> Much like central bankers, the EU’s politicians want a Goldilocks scenario: not too hot so that the carbon price reaches socially unacceptable levels, nor too cold that decarbonisation technology isn’t incentivised.  
>  
> By providing forward guidance, the EU hope to conjure up the magic of the central banks: suppressing carbon price volatility, lowering the cost of net-zero capital, and spurring the investment required to pivot away from Russia and achieve its climate change ambitions.

Three strong narratives got the EU carbon price to where it is today - allowance scarcity, high enough to incentivise decarbonisation and political will. However, much like a central bank that loses its inflation fighting credibility, all that hard work can easily be undone if the narrative is broken.

Many carbon market investors appear to be focusing on the EU carbon markets attraction as an uncorrelated asset class, remaining broadly stable in the face of spiralling equity, bond and crypto markets.

The EU carbon market needs a new narrative, one that emphasis stability. The ball is now squarely in the politicians court to make that happen. To succeed though they need to craft a narrative about what the future holds, and crucially why it is important that the market should continue to place their trust in them. As behavioural economist, Daniel Kahneman said, “No one ever made a decision because of a number. They need a story.”

If they come up short then the EU carbon market is likely to punish them by forcing the carbon price lower. The next 10 days are critical.

[Leave a comment](#ghost-comments-root)

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[The great sulphur dioxide allowance bull marketThe EU’s carbon market was not the worlds first cap-and-trade system to tackle a serious environmental problem. That honour goes to the United States sulphur dioxide (SO2) allowance trading system. Flue gas emissions from coal-fired power generation released huge quantities of sulphur dioxide (SO2) and nitrogen oxides (NOx) emissions high into the atmos…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-289.png)Carbon Risk](https://www.carbonrisk.world/hero-to-zero/)

---

1. As luck would have it, 22nd June also happens to be options expiry for the June EUA futures contract. Combine that with political news headlines and there is a high risk of carbon prices being whipsawed around. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
### Why Asia is pivotal to future carbon market growth
URL: https://www.carbonrisk.world/why-asia-is-pivotal-to-future-carbon/
Last updated: 2025-08-21T10:39:48.000Z
Sometime it’s can be difficult for investors to see the potential in a market beyond their own immediate borders.

Investors in Europe, North America and other developed economies appear to be hardening their stance to investing in anything that feels like ‘ESG’. The proportion of company earnings calls mentioning ESG looks like it may have topped out earlier this year at 20-25%.

Carbon credits, by definition, sit under the ‘E’ in ESG. Like their ‘ESG’ brethren, the valuations of companies involved in the carbon credit sector have also been shaken to the core in recent weeks.

In recent articles I’ve highlighted some of the specific headwinds currently affecting the carbon credit sector. In particular, signs of resource nationalism as countries with bountiful natural capital understand the implications of global commitments ([here](https://www.carbonrisk.world/the-first-signs-of-carbon-credit/)), the impact of higher agricultural commodity prices ([here](https://www.carbonrisk.world/nature-based-carbon-credit-prices/)), and concerns over energy security costs trumping those of energy transition ([here](https://www.carbonrisk.world/carbon-neutral-lng-faces-its-toughest/)).

It’s important to recognise the difference between short term and long term factors. And in the context of the current malaise over 'ESG’, its even more important than ever to take a broader, world-view of the problem carbon offset projects and the credits they generate are trying to fix, and the opportunity they may present.

Asia is particularly vulnerable to climate change. Asia is also blessed with significant natural capital. Protecting forests, peatlands and coastal zones at risk of deforestation help to conserve carbon stocks. Asia is experiencing the downside to climate change now.

Policies to support decarbonisation in the region are at a relatively early stage. However, there are no signs yet that investors are wavering, while funds exposure to ‘ESG’ remains low relative to Western levels. Commitment to climate action among Asia’s governments, corporates and consumers remains high, even though they are being buffeted by many of the same economic forces hitting elsewhere.

As carbon investors we need to recognise when shorter term factors make the long-term opportunity more attractive. Lets dive in.

_This post is for paying subscribers only._
### Majestic performance
URL: https://www.carbonrisk.world/happy-birthday-uka/
Last updated: 2025-08-21T10:39:48.000Z
Over the past couple of weeks we have been celebrating the anniversary of a British institution. Approaching their late 90’s and showing formidable strength despite its diminutive size, she continues to provide a bedrock of quiet, reserved stability.

That’s right, we’re talking about the UK carbon market, which is now one year old.

The market began trading on 19th May 2021, and over the past twelve months, UKA prices have almost doubled to €96 per tonne, reaching an all-time intraday high of €105.82 per tonne on 18th February. They currently trade at a 15% premium to EU carbon prices.

_This post is for paying subscribers only._
### In the shadows
URL: https://www.carbonrisk.world/in-the-shadows/
Last updated: 2025-08-21T10:39:49.000Z
More and more companies are voluntarily factoring in an internal cost of carbon into their business.

According to [CDP](https://cdn.cdp.net/cdp-production/cms/reports/documents/000/005/651/original/CDP%5FGlobal%5FCarbon%5FPrice%5Freport%5F2021.pdf?1618938446&ref=carbonrisk.world), the not-for-profit charity that runs the global environmental disclosure system, the main 3 reasons for introducing an internal carbon price are driving low carbon investment, encouraging energy efficiency and changing internal behaviour.

Surprisingly, navigating climate change regulations (e.g. being prepared for a future emissions trading scheme), stakeholder expectations, and stress testing investments (e.g. not wanting their capital to become stranded) feature further down the list of objectives.

The number of companies applying an internal price of carbon has increased from 150 in 2014 to 853 in 2020\. A further 1,159 companies are planning to do so within the next two years. **Almost half (225) of the 500 biggest global companies by market cap either have, or are planning to introduce, an internal price of carbon**.

Around two-thirds of fossil fuel and power companies have introduced or are planning on implementing an internal carbon price. That makes sense given their emissions are more likely to be under scrutiny and / or subject to a formal compliance carbon market.

However, the biggest source of growth since 2018 has been the financial services sector, where the share of companies who have either introduced or plan an internal carbon price has increased by 9 percentage points to 52.4%. In [*Short selling is a poor hedge against carbon risk*](https://www.carbonrisk.world/short-selling-is-a-poor-hedge-against/) I outline the various ways that investment institutions and asset allocators are under pressure to align their portfolios with net-zero targets.

Meanwhile, the manufacturing sector has seen the lowest interest in an internal carbon price, despite it being a significant contributor to overall carbon emissions. You could argue that industry are being complacent given that free allowances are going to be gradually reduced in the EU while other compliance schemes will look to cover the sector (see [*Europe's steel industry yet to feel the full force of the carbon market*](https://www.carbonrisk.world/how-have-higher-carbon-prices-affected/)).

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/a5f8a44a-95fa-4f12-b1cd-94e3a0467225_936x507-1.png)

The most common way companies apply an internal carbon price (accounting for almost 51% of companies with an internal carbon price in 2020), is through a process known as ‘shadow carbon pricing’. For example, a copper miner might assume a certain carbon price into its capital spending plans, perhaps to ensure that it remains profitable in the event that they are subject to a carbon price, or that there will be a market for the copper as the EV transition gathers pace. Importantly, no actual financial flows occur when companies use shadow carbon pricing.

An alternative approach, known as an ‘internal fee carbon price’ (\~15 of companies) does result in actual financial flows. This imposes an internal fee on carbon emissions which can be applied to operational decisions. The revenue from the internal fee is sometimes used to establish a low-carbon fund or is simply re-distributed in the company.

Other methods used by companies include using an implicit price (calculated retroactively and is based on how much it costs a company to implement projects linked to emissions reductions), an internal carbon trading (trading carbon allowances between divisions in the similar way to a country-wide cap-and-trade scheme), and the use of carbon offsets.

CDP’s analysis found that **the median internal carbon price reported in 2020 was $25 (\~€22) per tonne.** That compares favourably to the average carbon price in the EU ETS during 2020 of €25.5 per tonne. What we don’t know yet is whether companies have increased their internal carbon prices in line with the surge in EU carbon prices - which averaged €54 per tonne in 2021 and \~€85 per tonne so far in 2022 (see [*The path to a global carbon price: Why carbon markets will converge and become increasingly correlated*](https://www.carbonrisk.world/why-carbon-markets-will-converge/)*)*.

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The carbon price used varies significantly across different internal carbon price approaches with shadow carbon pricing typically using the highest value. Firms often use a uniform carbon price, but many also use a different (often much higher) carbon price for other parts of their business operations.

Companies based in Europe and Asia reported the highest median price ($28), followed in third place by North America ($23). The internal carbon price was lowest in Africa and Latin America ($8). At $82, apparel companies reported by far the highest median carbon price of all the sectors applying an internal carbon price.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/71b232fd-ee04-46e0-a081-478dbc1f65a5_922x437.png)

Finally, it’s not so much the approach or the price that is important but the scope of the emissions covered that drives change, and enables companies to properly manage risk. While Scope 1 emissions are relatively straightforward to measure and report on, it is much more challenging to measure and report on indirect emissions under Scope 2 and 3.

Those same challenges means that it is easier for firms to subject Scope 1 to an internal carbon price. In 2020, over 89% of companies disclosing data on their internal carbon price to CDP identified Scope 1 emissions as being covered. There has been an increase in companies accounting for Scope 2 and 3 emissions but they remain in the minority. That will have to change as companies come under pressure to account for their entire carbon impact.

[Leave a comment](#ghost-comments-root)

[Owning up to carbonThe US like many jurisdictions across the globe are in the process of tightening up the rules around what climate related information companies should make public. Many companies are releasing data on a voluntary basis, but it can be difficult to compare one firms data to another. Standardised data on climate related risks should help accelerate the exp…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-292.png)Carbon Risk](https://www.carbonrisk.world/owning-up-to-climate-risk/)
### The planet's carbon removal scarcity problem
URL: https://www.carbonrisk.world/scaling-up-a-scare-resource/
Last updated: 2025-08-21T10:39:50.000Z
The UNFCCC Paris Agreement commits 196 countries to limit climate change to “well below 2°C” and establishes an aspiration of limiting warming to around 1.5°C.

Assuming those countries most able to pay for emission reductions shoulder the burden then achieving the Paris Agreement implies that OECD and EU countries need to cut their net emissions by almost 90% by 2050.

Simply focusing on cutting emissions is not going to be enough. Many of the most important sectors of the economy (steel and aluminium manufacturing, and producers of chemicals and cement) are highly energy and emission intensive and are not going to be able to abate their emissions in the timeframe required.

Carbon removals will need to be ramped up significantly if the world is going to have any chance of meeting this goal.

There must be no room for ‘greenwashing’, not even a hint. High quality carbon credits have a pivotal role to play, and that means that all credits must represent additional permanent reductions in emissions.

What does that imply for future supply and price of carbon credits? How does the carbon credit industry need to evolve if credits are going to be 100% effective? Recently published analysis notes the stark challenge ahead for the world if it is to meet, and even go beyond this goal. It also highlights the opportunity for investors who can position for the significant growth required over the next decade and beyond.

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### California's carbon rush
URL: https://www.carbonrisk.world/how-the-next-wave-of-speculation/
Last updated: 2025-08-21T10:39:51.000Z
In a report published in February, Canada-based carbon market analysts, ClearBlue outlined their expectations for Californian carbon allowance (CCA) prices between 2022 and 2030.

All three scenarios assumed investors would be the main driver of price over the next three years before they begin to sell off their holdings during the period 2025-30 with compliance entities becoming net CCA buyers.

_This post is for paying subscribers only._
### Long-term drought puts Europe's hydroelectric generation at risk
URL: https://www.carbonrisk.world/megadrought/
Last updated: 2025-08-21T10:39:51.000Z
The risk of a severe and prolonged drought across much of Europe continues to rise.

This is important for the EU carbon market because low reservoir levels mean less power can be generated from the continents hydroelectric dams. That means more power will need to come from the burning of natural gas and thermal coal. European utilities will look to hedge this risk by buying EU carbon allowances.

European hydroelectric generation in May was estimated at around 28GW, close to the 5-year low.

_This post is for paying subscribers only._
### "Don't touch my carbon revenue!"
URL: https://www.carbonrisk.world/dont-touch-my-carbon-revenue/
Last updated: 2025-08-21T10:39:52.000Z
> "What at first was plunder assumed the softer name of revenue." - Thomas Paine

It didn’t take long before many EU governments began to rebel against the European Commission (EC) proposal to sell €20 billion of EUA’s from the Market Stability Reserve (MSR).

Once governments get a taste for a new and growing source of tax revenue, its very hard for them to see it go down.

_This post is for paying subscribers only._
### Nature-based carbon credit prices need to rise
URL: https://www.carbonrisk.world/nature-based-carbon-credit-prices/
Last updated: 2025-08-21T10:39:52.000Z
Nature-based carbon credit projects will increasingly have to compete with other demands on the land. Nowhere is the issue more stark than in South East Asia where high agricultural commodity prices means land owners have little incentive to move away from growing palm oil.

Almost all oil palm is grown on lands that were once tropical forests. Clearing the land to make way for planting inevitably results in biodiversity loss, but it’s the impact on what lies beneath the surface that is particularly damaging. Tropical forests stand above a rich bed of peat, a dense, soil-like material made up of partially decomposed organic matter.

Peat lying beneath the tropical forest stays moist, preventing the carbon from drying out and being released into the atmosphere. The problem is that oil palm prefers dry land. As tropical forests made way for plantations, canals were built to drain the land. This results in the peat drying out, leading them to rapidly degrade and release their carbon into the atmosphere.

But that’s only the start. The problem becomes even more acute should the remains of the forest catch fire.

In late summer 2015 a number of huge forest fires erupted across Indonesia, the biggest global producer accounting for more than half of the global supply of palm oil. More than 2.6 million hectares (10,000 square miles) had burned by the time the fires subsided a month later. The inferno meant Indonesia was the fourth largest greenhouse emitter in 2015, after China, the US and India despite it only being the 16th largest economy.

Forests don’t always catch fire by accident of course. In the race to capture already scarce land to expand plantations, fire is deliberately used to clear forest, known as slash and burn. According to Greenpeace 4.4 million hectares of land was burnt between 2015 and 2019, with 1.3 million hectares of that lying in concession areas, marked for the cultivation of palm oil and pulp.

**What’s the opportunity cost of a cleared forest?**

The price of a nature-based carbon credit should reflect the opportunity cost for each tonne of carbon emission averted. The directly observable costs involved with assessing a forest preservation project include the timber and non-timber forest products and the revenue that could be generated by planting crops.

_This post is for paying subscribers only._
### Money to burn
URL: https://www.carbonrisk.world/money-to-burn/
Last updated: 2025-08-21T10:39:53.000Z
> "We consider energy efficiency to be the ‘first fuel’ as it still represents the cleanest and, in most cases, the cheapest way to meet our energy needs" -Fatih Birol, IEA executive director

Energy efficiency is often known as the ‘fifth fuel’ - after coal, petroleum, nuclear power and renewables. However, as the IEA’s executive director suggests, it really should be considered the ‘first fuel’ since it offers some of the fastest and most cost-effective actions to reduce emissions.

Across the globe, around $250-300 billion is invested every year on energy efficiency and electrification measures. In contrast, $350-375 billion is spent each year on renewable energy generation capital investment.

_This post is for paying subscribers only._
### What are Carbon Contracts for Difference (CCfD)?
URL: https://www.carbonrisk.world/what-are-carbon-contracts-for-difference/
Last updated: 2025-08-21T10:39:53.000Z
We are going to be hearing a lot more about Carbon Contract for Differences (CCfDs) over the next few months.

As Europe looks to wean itself off Russian gas and accelerate its timetable for decarbonisation, CCfDs could be a powerful tool for unlocking investment in industrial decarbonisation, and in particular the uptake of green hydrogen technologies.

The revised [REPowerEU plan](https://ec.europa.eu/commission/presscorner/detail/en/ip%5F22%5F3131?ref=carbonrisk.world), launched last week, sets a target for 10Mt of green hydrogen to be produced in the EU by 2030, with plans for a further 10Mt to be imported. The combined 20Mt would require approximately 600GW of new wind and solar power, and 200GW of electrolysers. To support hydrogen uptake and electrification in industrial sectors, the Commission:

> “will roll out carbon contracts for difference and dedicated REPowerEU windows under the Innovation Fund to support a full switch of the existing hydrogen production in industrial processes from natural gas to renewables and the transition to hydrogen-based production processes in new industrial sectors, such as steel production.”

**What are Carbon Contract for Differences (CCfDs)?**

A Carbon Contract for Differences **(**CCfD) works by setting an effective guaranteed or “strike price” for CO2\. The strike price would be set at a level that covers the incremental capital (“capex”) and operating (“opex”) cost of the technology.

For example, assume a project developer (say a chemical producer looking to adopt green hydrogen) agrees on a CCfD with the government where the strike price is €90 per tonne. If at the end of the year the average annual EU carbon price was €70 per tonne the project investor would be guaranteed that for each tonne of avoided CO2 from the project, the government would provide the difference (i.e. €20 per tonne). If the average annual ETS price was at or above €90 per tonne, the project owner would not receive any payment in that year.

That’s an example of a one-way payment mechanism. Alternatively, the government could offer a two-way mechanism whereby the project owner would also be required to pay the government the difference in the event that the average annual ETS price is above the €90 per tonne strike price.

**Why do we need CCfDs?**

The carbon price is the ‘Currency of Decarbonisation’. Jurisdictions need to keep it high enough to incentivise investment in low carbon technology, but not too high that it becomes socially unacceptable.

Achieving a stable high price of carbon is one thing, but without the ability to hedge against future carbon prices it is very difficult to leverage the investment necessary to build-out the required capacity.

Carbon prices can be very volatile due to the fixed allowance supply and volatile demand. The supply of allowances is highly price inelastic which means that small changes in demand can result in large swings in the price of carbon.

That’s fine if you are able to trade it, but not so great for businesses that rely on the carbon price as a source of revenue (for example, by selling excess allowances), or to make their business commercially viable against more carbon intensive competitors. This is vitally important when investing in industrial decarbonisation since the level of funding required is enormous and given the lifetime of the assets involved, the investment is irreversible.

Currently, there is very little in the way of futures hedging in Europe further than three years. CCfDs enables very long-term carbon price hedges to be put in place, i.e. one that covers several years or more. The CCfD also allows the agent to hedge against adverse regulatory risk, of the kind that could occur in the event that a new government was elected and decided to rip up the entire existing climate change legislation. Unlikely perhaps, but not impossible. Being protected from carbon price volatility over the long-term means that the investment becomes a lot more bankable in the eyes of investors.

A secondary benefit of CCfDs is that they can be used by the government or institution to support and incentivise innovative, but untested technologies. For example, one technology might need higher levels of support in the early years, but less later on in the contract period. This is especially important as the variable costs of novel technologies cannot be known in advance. This could take the form of the government or institution offering a higher strike price early in the contract in return for public investment in the project, giving rights to a share of the profits in the longer term.

CCfDs also act as commitment devices for governments and institutions to keep the price of carbon high and stable. If it were to fall then that represents a cost which the government will need to pick up and recompense the project developer as part of the contract. Equally, the government have an incentive to ensure carbon prices are broadly stable, as otherwise the potential future cost to the government is more difficult to predict and budget for.

**Potential downsides to CCfDs**

One argument against CCfDs is that they could interfere in the functioning of the carbon market. The argument being that the existence of CCfDs would result in less trading in the longer dated carbon futures market and existing forward markets, damaging price discovery and making it more costly for other market participants to hedge their risks.

The risk of that occurring is probably overstated. CCfDs exist to enable hedging over periods of several years or more. As I mention earlier, the private sector does not currently offer the ability to do that, apart from isolated deals by large utilities hedging the future compliance related carbon exposure of their power generation (see, [*Hedging carbon risk*](https://www.carbonrisk.world/the-big-hedge/)).

Another argument is the existence of information asymmetries. This could make it difficult for governments to gauge the true cost of bidding technologies and the required carbon strike price. In theory the private sector - perhaps as part of a competitive bidding processes - will arrive at a more realistic price estimation of the true cost. However, the private sector may not be in a position to stump up the initial capital required to accelerate ‘learning-by-doing’ efficiencies - which can rapidly lower costs as markets becomes more established (see, [*The long term price of emission*](https://www.carbonrisk.world/the-industrial-decarbonisation-bottleneck/)).

CCfDs are a powerful tool. By leveraging and reinforcing existing regulations and the powerful signal that high carbon prices provides, CCfDs should accelerate industrial decarbonisation. Their adoption will create opportunities for investors, eager to benefit from investing in the decarbonisation of steel, chemicals, cement and other large emitting sectors of the economy.

[Everything carbon investors really need to know about carbon capture, use and storage (CCUS)Carbon capture, use and storage (CCUS) involves catching concentrated industrial emissions at their source, preventing them from entering the atmosphere. CCUS has been seen as controversial, particularly by environmentalists who see it as a get-out-of-jail-free-card enabling fossil fuel producers and consumers to carry on extracting coal, gas and oil and burning it, much the same way they have done for decades.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-296.png)Carbon Risk](https://www.carbonrisk.world/everything-carbon-investors-really/)
### Whatever it takes
URL: https://www.carbonrisk.world/whatever-it-takes/
Last updated: 2025-08-21T10:39:53.000Z
> “Within our mandate, the ECB is ready to do ***whatever it takes*** to preserve the euro. And believe me, it will be enough.”

Perhaps the most infamous remarks from a central banker came in the summer of 2012 when, in the midst of the Eurozone debt crisis, President of the European Central Bank (ECB) Mario Draghi delivered a [speech ](https://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html?ref=carbonrisk.world)at the Global Investment Conference in London.

Three words was all it took to fundamentally change the course of the debt crisis. Only 3 words, but it was enough to give investors confidence that Draghi had the resolve to bring down bond yields across the euro zone.

Forward guidance attempts to influence the decisions of investors, businesses and households by providing a series of guideposts for the expected future path of monetary policy.

For example, instead of simply cutting interest rates to stimulate economic activity, central bankers would communicate their policy intentions, suggesting that they expected rates to remain low in the future.

Central bankers resorted to forward guidance when they found their existing monetary tool box to be inadequate at influencing medium and long term interest rates. Stable long term expectations of low interest rates give people the confidence to bring forward major purchases or investments, such property.

Monetary policy forward guidance was first used in earnest by the then Federal Reserve Chairman, Alan Greenspan in the early 2000’s. Investors scrutinised every word and body language cue for hints as to what was really going on inside the mind of Greenspan. Any edge, however small could be extremely valuable to an investor if it told them what the central bankers next move was likely to be.

However, it was in the period after the Great Financial Crisis (GFC) of 2008/09 that forward guidance went on steroids and became a recurring feature of central bank activity. As economies and markets became more and more hooked on leverage, even very small changes in monetary policy could have outsized impacts on financial markets. Forward guidance after the GFC attempted to prevent surprises that might disrupt the markets and result in an eruption in asset price volatility.

Words matter, but actions matter too.

_This post is for paying subscribers only._
### Demand destruction averted, or simply a matter of time?
URL: https://www.carbonrisk.world/whats-happening-to-european-industrial/
Last updated: 2025-08-21T10:39:53.000Z
Over the past few months demand for EU carbon allowances has been supported by utilities hedging against increased thermal coal generation, lower than expected output at France’s nuclear facilities, and the prospect of a long hot summer that has already curtailed Europe’s hydroelectric generation.

However, in the wake of Russia’s invasion of Ukraine and the surge in energy prices there was a real fear that demand destruction would lay waste to much of Europe’s industrial heartland. Recall, that industry accounts for around 620Mt CO2e (45%) of EU ETS covered carbon emissions, only 110Mt CO2e below the 730Mt CO2e (53%) emitted by the power and heat sector. A dramatic slowdown in industrial production could see demand for carbon allowances weaken, even in the face of bullish demand from utilities.

Almost three months after the invasion, how is Europe’s industry performing and what does the outlook for the rest of the year look like?

_This post is for paying subscribers only._
### MAC curve steepening
URL: https://www.carbonrisk.world/mac-curve-steepening/
Last updated: 2025-08-21T10:39:54.000Z
The Californian carbon market has the broadest scope of any emissions trading scheme anywhere in the world. Covering around 80-85% of the state’s emissions it includes emissions from power generation, industrial production, and transportation fuels.

Economic theory suggests that the high coverage should result in a carbon price that reflects California’s marginal supplier of abatement. However, this is not how things have turned out. Since the outset of the scheme, carbon prices have typically settled at or near the floor price.

The problem is that the Californian carbon market is characterised by emission abatement supply that is highly price inelastic. Three factors are especially important in influencing this lack of responsiveness: the electricity generation capacity mix, the role of complementary policies and the use of free allocations to protect industry.

_This post is for paying subscribers only._
### Funding REPowerEU - What impact would frontloading EUA sales have on carbon prices?
URL: https://www.carbonrisk.world/funding-repowereu-what-impact-would/
Last updated: 2025-08-21T10:39:55.000Z
The EU must invest an extra €200bn over the next 5 years if it is to secure energy independence from Russia and accelerate the decarbonisation of the EU economy.

That’s according to a leaked draft of the REpower EU package, due to be presented on Wednesday 18th May, and seen by news organisations including the [Financial Times](https://www.ft.com/content/2aef066b-3cdb-49c2-9258-38575b4ad799?ref=carbonrisk.world).

Funding Europe’s energy transition does not come cheap, and it’s about to get even more expensive. The EU does have a piggy bank set up to help finance low carbon investments. Known as the Innovation Fund its funded through sales of EU carbon allowances. But how to ramp up that funding without distorting the carbon market?

_This post is for paying subscribers only._
### The first signs of carbon credit nationalism?
URL: https://www.carbonrisk.world/the-first-signs-of-carbon-credit/
Last updated: 2025-08-21T10:39:55.000Z
Countries blessed with thousands of hectares of tropical rainforest are ideally placed to benefit from the expected future growth in demand for nature-based carbon credits.

However, the governments of major carbon credit producing countries, such as Indonesia and Papua New Guinea face a dilemma.

_This post is for paying subscribers only._
### The forgotten giant of clean energy
URL: https://www.carbonrisk.world/the-forgotten-giant-of-clean-energy/
Last updated: 2025-08-21T10:39:56.000Z
The “wind drought” of 2021 could not have come at a worse time for Europe’s energy market.

Throughout the summer and early autumn, wind speeds were much slower than usual. The drought meant that the steady “whooshing” sound from wind turbines, normally responsible for 14% of European power generation began to fade. In response, generators turned to thermal coal and natural gas generation to meet demand.

The timing could not have been worse. Tight thermal coal and natural gas fundamentals resulted in surging costs for generators that they needed to pass onto consumers via high power prices.

_This post is for paying subscribers only._
### 'Greenflationary' expectations
URL: https://www.carbonrisk.world/greenflationary-expectations/
Last updated: 2025-08-21T10:39:56.000Z
The lumpy, unpredictable nature of climate change and the transition towards zero carbon is likely to mean that inflation will be higher, and more volatile in the future.

Much of this inflationary pressure relates to the impact that climate shocks have on the supply of essential commodities, especially agricultural and energy. However, the transition to a zero carbon economy (and the costs that implies) is likely to become an increasingly important contributor to high and volatile inflation.

Up until relatively recently, carbon prices were low and the impact on carbon abatement behaviour was limited. Over the longer term though, higher carbon prices provide the incentive to decarbonise power generation and industrial assets. However, these assets take time to come to fruition, which means that in the short-term capital is diverted away from high carbon sectors such as fossil fuels.

Higher carbon prices also represent a cost that business must either pass onto their consumers, or alternatively absorb it and see their margins cut. Uncertainty over short and long term carbon prices will become more and more important in determining inflationary expectations.

Volatile inflation is particularly pernicious due to the significant cost it imposes on economic activity resulting from the the uncertainty it introduces into decision making (see [*'Greenflation' fears are a twin threat to the EUs monetary and climate credibility*](https://www.carbonrisk.world/greenflation-fears-are-a-twin-threat/).

Central bankers should play a pivotal role in communicating the economic trade-offs involved in decarbonisation. They have the power to provide a stable foundation for the investment and behaviour change required. Without that foundation then carbon prices are likely to be higher, and for much longer.

**‘Greenflationary’ expectations**

The degree to which inflation will result from carbon pricing ultimately depends on where we are today.

Compliance carbon markets covered \~17% of global emissions in 2021 and posted a carbon market-weighted average price of \~$28 per tonne (\~€26.50). The low average price reflects the large share of emissions covered by China’s nascent carbon market and it’s relatively low carbon price; launched in July 2021 the scheme closed the year below $10 per tonne. Taking account of other countries where carbon taxes exist and carbon pricing of some sort (either taxes or carbon markets) covers around 22% of global emissions. The other 78% are starting from zero.

On a global basis this means the price of carbon is low, really low.

\~$2.50 per tonne.

We are so very early. Global carbon prices need to be well north of $75 per tonne if the world is to decarbonise in the timescales its leaders have committed to. The inflationary implications of higher carbon prices has barely begun.

**Impact of higher cost of carbon on energy prices**

[Credit Suisse](https://www.credit-suisse.com/about-us-news/en/articles/news-and-expertise/carbon-markets-invest-in-greenhouse-gas-emissions-202204.html?ref=carbonrisk.world) estimates that every $10 per tonne increase in the carbon price (equivalent to €9.50), will add \~$4 per barrel (bbl) to the oil price. At an oil price of $100 per bbl, this would imply a 21% and 42% increase in prices if carbon rose to $50 per tonne and $100 per tonne respectively.

When it comes to natural gas the bank estimates that every $10 per tonne increase in the carbon price would add \~$0.5 per MMBtu. At $8 per MMBtu, a $50 per tonne carbon price would raise natural gas prices by 34%, and 68% at a carbon price of $100 per tonne.

Crucially, the estimates here only account for Scope 3 emissions, i.e. those involved with the combustion of the fossil fuels. If Scope 1 and Scope 2 emissions are included then the impact on energy prices for every $10 increase in the carbon price could be some 25% higher.[1](#footnote-1)

Remember that higher carbon prices could be introduced through the compliance markets (e.g. via steeper floor price or expanding the coverage, etc.), or through direct carbon taxes, or some combination of the two (e.g. several countries in Europe have a separate carbon tax and are also part of the EU ETS).

**Impact on inflation across economies**

The impact of higher carbon prices on inflation will vary significantly across different economies. There are 3 main factors that are likely to influence this path.

1. The starting point matters - If an economy has a long history of relatively high carbon prices, covering a broad section of activity then additional hikes in the carbon price are unlikely to have the same inflationary impact as those countries that start from a low carbon price base.
2. The share of energy production from renewable sources - Economies with a high share of renewable power generation have a lower exposure to carbon intensive fossil fuels and are more able to respond to higher carbon prices, a process that will accelerate as renewable generation costs come down. They are also able to lever this to accelerate decarbonisation in other, more difficult to decarbonise sectors, e.g. the use of hydrogen in steel making and other industry’s.
3. The carbon intensity of GDP - High carbon prices are likely to be more inflationary in jurisdictions where a large share of economic activity comprises fossil fuel extraction and carbon intensive heavy industry. Higher carbon prices represent a larger shock to costs than in less carbon intensive economies.

Analysis conducted by Credit Suisse using this framework suggests that Europe, the US and Japan are likely to experience relatively low inflationary impacts. They estimate that a $10 per tonne increase in carbon prices across all emissions would result in a 0.3-0.4 percentage point increase in inflation in these economies.

In contrast, China, Russia and India are likely to experience much higher levels of inflation. A later starting point, the lower share of renewables and high carbon intensity means that a $10 per tonne hike in carbon prices could lead to a 0.8-1.0 percentage point rise in inflation.

On a global basis Credit Suisse estimate that inflation would rise by 0.5 percentage points.

However, this analysis is too simplistic. What’s really important is how politicians, monetary authorities, and individuals respond to higher carbon prices. The pace of decarbonisation and the degree to which governments seek to protect their economy from the adverse impacts is key.

1. The speed of implementation - A gradual escalation in carbon prices (as well as a clear view as to future prices) gives an economy sufficient time to adjust, investing sufficient resources to decarbonise. However, a disorderly transition, one in which are forced to stamp on the brakes, is likely to be significantly more inflationary (see [*What happens if policymakers are forced to "stamp on the brakes" and force carbon prices higher?*](https://www.carbonrisk.world/what-happens-if-policymakers-are/)).
2. Redistributive policies - The degree to which governments choose (or are able) to respond to higher carbon prices and protect consumers, particularly those on low incomes, from the full brunt of the inflationary impact. Lower income households typically spend a greater proportion of their income on energy and commodities and so poorly designed redistributive policies (i.e. those where the incentive for conservation are destroyed), could make the inflationary impact of carbon prices worse.

**The CBAM accelerates the rollout of carbon pricing - and its inflationary impact**

In an earlier article I highlighted how the introduction of the EU’s carbon border adjustment mechanism (CBAM) is also likely to be inflationary. The CBAM is one mechanism by which global pricing for carbon can be extended to cover more countries and more industries, and at a faster pace than individual governments acting alone could introduce their own carbon pricing mechanisms.

The CBAM is a way for the bloc to protect EU producers subject to EU carbon pricing from rivals in countries with less ambitious emissions requirements. Importers to the EU will have to pay taxes unless they are already pay a price for carbon similar to that charged in the EU, through emissions trading or other systems in their own countries (see [*Hedging the CBAM: What the EU's carbon border tax might means for carbon investors*](https://www.carbonrisk.world/hedging-the-cbam/).

Currently set to be introduced at the start of 2026, the CBAM would cover highly energy intensive imports (e.g. cement, electricity, fertiliser, etc.), before being rolled out to other EU producers subject to carbon pricing. By introducing a CBAM, carbon costs will be passed through to end users for both European and imported goods, therein stimulating consumer price inflation.

**On a knife edge**

In the past, the typical central bankers playbook was to ‘look through’ price shocks emanating from energy and other commodity prices. If they didn’t and they responded in force to higher energy prices there was a risk that they would severely damage economic activity, all for the sake of a transitory shock.

As I outline in this article, the inflationary impact of carbon prices is likely to be more persistent, rolling out across the economy, and not simply affecting the most carbon intensive goods. It will mean inflation is higher, and more volatile.

The risk central bankers now face is that they can’t simply ‘look through’ the carbon shock. When, for example will the net-zero carbon shock be over? By 2030, 2040…or 2050? By not responding, central bankers risk sitting by as inflationary expectations gradually build and become ingrained.

Of course, central banks do not have the tools to speed up the decarbonisation. Raising or lowering interest rates does nothing to speed up innovation and the pace at which technology is adopted. Quantitative easing cannot help us find more lithium, copper, tin or any of the other commodities thought essential to decarbonisation.

The ECB and other central banks face a delicate balancing act, one that is going to become even more finely balanced in the years to come.

Higher inflation in the future means that central banks should respond by hiking interest rates, both short and long-term rates. However, by doing so the capital cost of decarbonisation will rise. On the flipside, failing to address the inflationary impacts - by keeping interest rates too low, for example - means the resource cost of decarbonisation including materials, labour, etc. could spiral out of control.

Stray too far from the edge and central banks risk delaying decarbonisation, prolonging the need for high carbon prices.

Many economic commentators, most notably former US secretary of the treasury, Larry Summers have criticised central bankers who stray too far from their day jobs and opine on issues including climate change.

This is a mistake, one that I believe carbon market investors should avoid. In fact, I believe that paying attention to what central bankers say on the subject, and what they don’t say is a vital piece of information.

Central banks face the most challenging economic environment they have ever encountered. The economies most likely to navigate decarbonisation successfully will be those whose monetary authorities can effectively communicate the inherent trade-offs required by decarbonisation.

Those that fail to do so are likely to see much higher carbon prices and higher, and more volatile inflation.

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[The carbon price is an inflation hedgeAs the price of carbon rises it will increasingly imbed itself in the economy, becoming an important driver of costs for business, and ultimately prices for consumers. The economy (including all the products and services we consume) currently holds a massive uncovered short position on carbon. Nearly every material good fails to account for the environme…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-305.png)Carbon Risk](https://www.carbonrisk.world/the-carbon-price-is-an-inflation/)

---

1. These combustion emission factor estimates assume that each barrel of oil generates \~0.42 ton of CO2 , while each MMBtu of natural gas produces 0.07 ton of CO2\. However, these estimates are likely to be an underestimate given that they don’t account for the Scope 1 and Scope 2 emissions. As CS explain, these estimates are \~20% below the IEA’s lifecycle emission intensity estimates for global oil & gas production, which include emissions generated during the production, process, and transport of hydrocarbons. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
### A market driven by illiquidity
URL: https://www.carbonrisk.world/a-market-driven-by-illiquidity/
Last updated: 2025-08-21T10:39:57.000Z
Commodity trading houses have always been prone to liquidity mismatches during times of stress. Physical commodities may take months to transport to the end user, while margin calls on futures contracts must be met immediately.

Russia’s invasion of Ukraine sparked the latest episode in a long history of managing periodic concerns over liquidity. The dramatic spike in volatility across commodity markets (the highest in 60 years), coupled with an increase in counterparty risk, created severe pressures across commodity financing and futures markets.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/cd38c108-f554-413d-82e8-17988b703da1_1005x567-2.png)

In a similar vein to ‘normal’ physical commodity markets, trading firms and financial institutions perform a wide variety of actions in the EU’s carbon market. Fundamentally though they help to provide liquidity to obligated emitters, typically small to medium sized utilities that are unable to operate their own sophisticated carbon trading desk. Larger energy firms tend to cover their own compliance needs while also carrying out some of the activities that non-obligated financial players provide.

For example, many firms conduct carry trades, providing liquidity and enhancing market efficiency. This can involve purchasing carbon allowances at auction and then selling them on in the secondary market or in support of different vintage (i.e. underpinning forward contracts). The degree to which financial players are involved in the market has varied over time, depending on overall market conditions and the development of the carbon price.

Over the past few months, the influence of financial players on the EU carbon market appears to have taken another turn as both regulatory and funding concerns have pushed them further away from the futures market, and towards the more opaque OTC market.

This could mean much less market transparency and significantly more volatility for carbon market investors, particularly in the event that it suffers its own liquidity mismatch.

_This post is for paying subscribers only._
### Pulling the rug out from 'Down Under'
URL: https://www.carbonrisk.world/pulling-the-rug-out-from-down-under/
Last updated: 2025-08-21T10:39:58.000Z
Carbon trading can enjoy a boom even when decarbonisation targets are far from ambitious.

That’s what happened in Australia where the price of carbon allowances rose 3-fold during the latter half of 2021\. From less than $20 per tonne in mid-2021 the price of carbon allowances increased to $57.50 per tonne in early January.

Unlike much more ambitious targets elsewhere in the world, Australia only plans to cut emissions by 26-28% compared with 2005 levels by 2030, much slower than the UK, the EU or the US. It’s government also reluctantly pledged to achieve net zero by 2050, but not at the expense of the country’s fossil fuel sector while also offering precious few details about how the target will be met. Australia has long dragged its heels on action to decarbonise its economy.

Perhaps that should have been a warning sign for carbon investors as to what came next. But first a quick primer as to how the carbon market works in Australia.

_This post is for paying subscribers only._
### Which industries benefit from a high carbon price?
URL: https://www.carbonrisk.world/which-industries-benefit-from-a-high/
Last updated: 2025-08-21T10:39:58.000Z
The carbon price is the currency of decarbonisation. A strong carbon price is a signal that investors, businesspeople and citizens trust their government’s commitment to combat climate change.

In the same way that trust in individual currencies supports investment, innovation and trade, trust in an economy’s carbon market helps bring about the capital, skills and long term planning that is required to help meet its decarbonisation goals.

For those businesses most adversely affected by high carbon prices, carbon may be seen as cost which must be absorbed into their margins, or if they are lucky, one to be passed onto consumers - at least in the short-term while they invest in ways to decarbonise.

But for many industries, high carbon prices are an essential signal that their businesses will be commercially viable. Some sectors gain directly as carbon prices make competing, more carbon intensive industries less competitive, while other sectors benefit indirectly through the strong signal that high carbon prices provide.

So which sectors are most likely to benefit and where do the best opportunities lie?

_This post is for paying subscribers only._
### GEO versus N-GEO: Investing in the VCM futures market
URL: https://www.carbonrisk.world/investing-in-vcm-futures-contracts/
Last updated: 2025-08-21T10:39:59.000Z
The voluntary carbon market (VCM) is expected to increase 9-fold by 2030 to around 900 MtCO2e.

But what’s the best way to play the VCM market opportunity? One option is to invest in the project developers, leveraging the growth in carbon tonnages and the potential increase in the price of carbon. That comes with high operational risks though related to the performance of the individual projects.

One other option is to speculate on the price of voluntary carbon credits. It’s been possible to do that in the carbon compliance markets for years, but up until recently investors have not been able to employ a similar strategy in the VCM.

In the last couple of years a number of exchange based futures instruments have been launched catering for the VCM. Well designed futures contracts should aid price discovery, risk management, and be an opportunity for investors wishing to speculate.

However, the fragmented, idiosyncratic nature of the VCM market means that futures contracts might mask many of the important underlying trends. This means that investors need to be very careful they are choosing the right way to play the potential growth in the VCM market.

In this article I look at the various types of futures contract, the exchanges they trade on, the fundamentals underpinning the VCM, and where the best opportunities are for higher prices.

_This post is for paying subscribers only._
### The UK carbon market looks like a smarter 'risk-adjusted' bet for investors
URL: https://www.carbonrisk.world/the-uk-carbon-market-is-a-more-attractive/
Last updated: 2025-08-21T10:40:00.000Z
The UK carbon market continues to trade at a hefty premium compared with the EU.

Four factors are contributing to the high price of carbon in the UK: lower natural gas prices versus the continent, greater political support for businesses suffering from high energy costs, increased speculative interest from hedge funds, and a fundamentally tighter market for allowances.

_This post is for paying subscribers only._
### The 'green lairds'
URL: https://www.carbonrisk.world/the-green-lairds/
Last updated: 2025-08-21T10:40:00.000Z
Carbon markets are beginning to have impacts across other asset markets, some not with entirely good consequences.

In an earlier article I highlighted how high carbon prices in Europe are beginning to be felt in the price of steel (see [Europe's steel industry yet to feel the full force of the carbon market](https://www.carbonrisk.world/how-have-higher-carbon-prices-affected/)). Now, strong demand for carbon offsets in order to meet net-zero commitments is starting to have an impact on land values - and potentially, the area available for agriculture.

To begin we need to visit Scotland, where carbon credits and government targets are driving a new investment boom. It involves investors purchasing thousands of acres of land with the intention of planting tree plantations, and then harvesting carbon credits.

The investors and businesses operating in these markets are known as ‘green lairds’.

_This post is for paying subscribers only._
### California's carbon market: The 6 factors to pay attention to right now
URL: https://www.carbonrisk.world/californias-carbon-market-the-5-factors/
Last updated: 2025-08-21T10:40:01.000Z
The price of carbon allowances in California has increased by around one-third since early March, rebounding from the Ukraine-Russia induced sell-off to trade near $30-32 per tonne.

So where do we go from here? Here are the 5 factors you need to pay attention to: rainfall levels and the potential for hydroelectric generation, Diablo Canyon’s future, gas-coal fuel switching, the impact on gasoline demand from high prices, progress on policy reform, and investor appetite for an inflation hedge.

#### **1) Wet weather increases the amount of hydroelectric power available, reducing demand for carbon allowances**

Hydroelectric power generation is one of the most important factors influencing Californian power generation emissions. Historical data shows that when California is clear of drought and water levels are high, hydro’s share of state power generation rises to 20-25%. However, when its dry and water levels are low, hydro’s share of the generation mix drops to 5%. Lower hydro generation increases the call on gas and coal fired power generators, increasing emissions and the demand for CCAs.

Warmer temperatures in spring and summer melt the snowpack on the Sierra Nevada mountain range helping to replenish reservoirs. Snowpack was well above average by late December 2021 but a dry January has meant snowpack levels have dropped, reducing water availability for hydroelectric generation.

California is experiencing plenty of wet weather at the moment which might make up for some of that shortfall. The state is forecast to see plenty of rainfall through to the end of April with snowfall in the mountains. Crucially it is the north that is getting deluged as that is where most of the state’s reservoirs are located.

Most of the state’s precipitation comes between December and April. The end of that period is a significant time of year because that’s when accumulated snow is typically at its peak. It’s also when utilities know for sure how much water will melt from the snow over spring and summer and be available for power generation. If its low then they will have to turn to fossil fuels to meet the gap.

[Parched: How California's drought impacts the carbon market“When the well is dry, we know the worth of water.” ―Benjamin Franklin California’s emissions trading scheme (ETS) accounts for roughly 85% of all emissions in the state and covers large electric power plants including power imports, large industrial plants, and natural gas and petroleum distributors.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-318.png)Carbon Risk](https://www.carbonrisk.world/what-does-drought-in-california-have/)

#### **2\. Diablo Canyon nuclear power station closure gets a potential reprieve**

In early December I highlighted why investors in California’s carbon market should monitor for any sign of indecision over the Diablo Canyon nuclear plant. Diablo Canyon’s two reactors are currently scheduled to close completely in 2025 when its federal 40 year license expires.

The facility accounts for 15% of the states zero carbon power generation. If the plant remains in operation beyond 2025 then there would be less demand for emission allowances, and would be bearish for the longer term price outlook.

In the past week Diablo Canyon and other nuclear plants in America nearing closure have been tossed a $6bn lifeline. In the program’s first phase, grants are restricted to plants that had publicly announced they would close down prior to end September 2026\. Of the 93 operating nuclear reactors in the US, just three meet that qualification. The Palisades reactor in Michigan, which is scheduled to close in May 2022, and the Diablo Canyon reactors 1 and 2 in California, with planned closing dates of November 2024 and August 2025, respectively.

It’s not clear at the moment whether the grant will ultimately change the course of Diablo Canyon’s future. The decision to close was not simply a matter of finances. It also relates to the environmental objectives of the state - the state’s politicians reason that the continued reliance on nuclear may serve to back out the required investment in renewables.

[The green light from the Golden StateCalifornia operates one the most established major carbon trading schemes after the EU ETS. Carbon emissions from the state may be around one-sixth of the EU’s but as the fifth largest economy - ahead of India but behind Germany - its carbon market is still a big carbon market, an important case study for other countries emission trading schemes, and al…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-319.png)Carbon Risk](https://www.carbonrisk.world/the-green-light-from-the-golden-state/)

#### **3\. Fuel switching by power generators unlikely given coal availability**

The relative price and availability of natural gas and coal influence the degree of fuel switching between the two fossil fuels, and hence affects the demand for California’s carbon allowances.

One of the reasons why CCA prices have been supported in recent weeks relates to the spike in natural gas prices, and expectations that this would translate into significantly higher thermal coal burn and hence demand for carbon allowances.

Last week US natural gas prices hit $8 per million British thermal units (MMBtu), the highest since September 2008 and the fifth straight week of gains. Natural gas prices typically rise in the winter as cold weather and supply disruptions tighten the market. However, record high natural gas prices in Europe, unseasonal cold weather in the North East and strong LNG demand are pulling US prices higher.

Normally this would result in an increase in thermal coal burn. However, US models for coal-to-gas switching have broken down over the last 18 months as gas-fired power generation has proven to be very inelastic, partly due to limited thermal coal supplies.

A lot can happen in a week. Natural gas prices have since plummeted to 6.5 per MMBtu. This reduces demand for thermal coal as an alternative generation fuel.

#### **4\. Impact of higher gasoline prices on transportation demand**

A key feature of the Californian carbon market is that suppliers of transportation fuels are obligated emitters. Cap-and-trade obligations for California’s transportation fuel suppliers took effect from 2015\. Transportation accounts for around 40% of the state’s annual emissions. Gasoline sales can have a significant impact on demand for carbon allowances (CCAs).[1](#footnote-1) 

Californian gasoline prices rose to over $6 per gallon in late March, supported by high crude prices in the aftermath of Russia’s invasion of Ukraine. Drivers in the state are use to paying more than the average American (the area west of the Rocky Mountains operates as an almost separate market from the rest of the US), but at $6 they were paying almost 50% more than the US average.

High gasoline prices - combined with inflationary pressures elsewhere - could see drivers reducing the number of miles travelled. This would cut into gasoline demand and mean that fuel suppliers carbon obligation is less.

In response to the hike in gasoline, California’s governor announced $9 billion would be distributed to residents in the form of tax refunds: $400 for each vehicle they own, with a limit of two. If approved by the state legislature residents could receive stimulus checks starting in July. Even if approved its unlikely that this would result in an increase in fuel consumption. It’s more likely that it will be saved or spent on other non-transport related products or services.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-320.png)

Read Carbon Risk in the Substack appAvailable for iOS and Android[Get the app](https://substack.com/app/app-store-redirect?utm%5Fcampaign=app-marketing&utm%5Fcontent=author-post-insert&ref=carbonrisk.world)

#### **5\. Pessimism about carbon market reform**

The demand for allowances is vital, but the supply side is also vitally important. And here investors have been focusing on the potential for reform of California’s carbon market. Carbon allowance prices have risen in recent weeks as investors bet on reform, especially policies that could result in a reduction in the the overhang of excess allowances.

However, the state’s environment regulator, ARB has proposed sticking to its existing current carbon neutrality target, rejecting other emissions pathways that could have sped up abatement. The lack of ambition perhaps a signal that carbon prices do not need to increase as rapidly as some had hoped.

[An asymmetric bet on a phase transitionCompliance carbon markets typically go through a number of distinct phases in their development. Each phase sets the stage for the evolution of subsequent phases. There is a sweet spot in the development of an individual carbon market where the strength of policy support is such that the market has to dramatically revise its view on prices to reflect the potential improvement in the underlying fundamentals.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-321.png)Carbon Risk](https://www.carbonrisk.world/an-asymmetric-bet-on-carbon/)

#### **6\. Speculative inflation hedge**

The surge in prices has also been driven by increased interest from investors seeking refuge in an asset that gives some protection from inflation.

Recall that the Californian carbon market includes an Auction Reserve Price (ARP) which increases at 5% annually plus inflation (CPI). The ARP started at $10 per tonne in 2012 and has since increased to $19.70 per tonne in 2022\. The ARP acts as a ‘floor price’ gradually increasing over time.

Investors need to be aware that there is a significant annual roll yield - around 6% - that eats into the potential returns. Although prices were attractive early in March, that is not the case now, especially if CPI starts to roll over in coming months. And so while CCAs offer some inflation protection, they are far from safe - prices could fall by 40% and still remain above the inflation protected floor price.

[How to invest in North America's carbon marketsCarbon investors are increasingly looking at other compliance markets outside of the EU. The attraction for many is that as these markets are reformed then the price of emission allowances could stage a similar upward price trajectory as the EU experienced, particularly in the period since 2018 when the price of EUAs have risen 8-fold.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-322.png)Carbon Risk](https://www.carbonrisk.world/how-to-invest-in-north-americas-carbon/)

[Subscribe now](#/portal/signup)

---

1. California’s Air Resources Board (CARB) defines a fuel supplier as “a supplier of petroleum products, a supplier of biomass-derived transportation fuels, a supplier of natural gas including operators of interstate and intrastate pipelines, a supplier of liquefied natural gas, or a supplier of liquefied petroleum gas.”  
Fuel suppliers are subject to cap and trade obligations if they “hold inventory position of fuel in the bulk transfer/terminal system, or import fuel into California outside the bulk transfer terminal system”. As with other sectors of the California economy covered by the carbon market, sources that account for 25,000 MT CO2e or more of annual emissions are obligated under the scheme. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
### Does a stable carbon market equilibrium exist?
URL: https://www.carbonrisk.world/does-a-stable-carbon-market-equilibrium/
Last updated: 2025-08-21T10:40:02.000Z
EU carbon prices rose 4-fold between late 2020 and early 2022 to almost €100 per tonne, only to then crash 40% in the aftermath of Russia’s invasion of Ukraine to less than €60 per tonne. Following its subsequent rebound, the price of carbon has settled in a narrow trading range close to €80 per tonne for some five weeks.

It’s been a remarkable period of tranquillity given historical carbon market volatility, and the tumultuous geopolitical, economic and financial conditions that serve as the backdrop.

Is €80 a new stable market equilibrium for the EU carbon price, or is this a mere pause before the market finds new direction?

To understand what might be going on we turn to the world of ants.

_This post is for paying subscribers only._
### Europe's steel industry yet to feel the full force of the carbon market
URL: https://www.carbonrisk.world/how-have-higher-carbon-prices-affected/
Last updated: 2025-08-21T10:40:03.000Z
Critics of the EU carbon market contend that Europe’s policymakers are fools for indulging in such virtue signalling at a time when society, especially the poorest, are hurting under intense inflationary pressures.

Regular readers will know that revenue from auctioned EU carbon allowances (EUAs) can be redirected by member states to support low-income households. In addition, the longer that decarbonisation is delayed, the higher the overall cost to society, adding to future inflationary pressures felt by all.

Nevertheless, one of the frequent criticisms is that high carbon prices are responsible for the increase in energy costs seen over the past couple of years. However, data shows that carbon only accounts for around 10-15% of the increase in the cost of electricity. The massive hike in natural gas prices over the same period the dominant factor driving higher power prices.

![Image](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/ef5c4c8d-8c41-427b-ba53-057a763c3e11_2236x1300-jpeg-1.jpg)

Given it involves a highly energy intensive production process, another recent criticism of the EU carbon market is that it is also causing inflationary pressures in the steel market.

Higher steel prices are an additional cost for consumers of cars, household appliances and other products of course, but they also present an additional burden for governments wanting to build out the infrastructure required to decarbonise our economy - whether that is wind turbines or low emission maritime transport, for example.

So is it true that the steel market has been supported by high carbon prices, and if not, when will the impact be felt?

_This post is for paying subscribers only._
### The EU carbon market and its stock-to-flow ratio
URL: https://www.carbonrisk.world/the-eu-carbon-market-through-the/
Last updated: 2025-08-21T10:40:04.000Z
Commodity markets are typically interpreted through the lens of changes in supply and demand, and the impact on inventories in any particular year.

Inventories of ‘consumable’ commodities (e.g. crude oil, wheat, etc.) typically only cover consumption demand for a few months. If there were no inventories at all, supply would have to correspond exactly to production and demand exactly to consumption.

However, if there are inventories, consumption can temporarily exceed production. Since inventories of consumable commodities are as a rule very low, their price will rise quickly in anticipation of a future supply shortage and bring consumption into balance with production.

This model works for most commodities that are consumed, but is useless to understand the value of those commodities used for investment purposes.

While the economic utility of a consumable commodity is created when it is destroyed or used up, the utility of investment commodity lies in its possession and later resale. Investors should be very careful about interpreting short term demand supply balances in the same way that they would for consumable commodities.

So how should we interpret the market for carbon allowances, and what can we learn from different types of commodities?

_This post is for paying subscribers only._
### How to invest in North America's carbon markets
URL: https://www.carbonrisk.world/how-to-invest-in-north-americas-carbon/
Last updated: 2025-08-21T10:40:04.000Z
Carbon investors are increasingly looking at other compliance markets outside of the EU. The attraction for many is that as these markets are reformed then the price of emission allowances could stage a similar upward price trajectory as the EU experienced, particularly in the period since 2018 when the price of EUAs have risen 8-fold.

As I outlined in [*An asymmetric bet on a phase transition*](https://www.carbonrisk.world/an-asymmetric-bet-on-carbon/), compliance carbon markets typically go through a number of distinct phases in their development. Each phase sets the stage for the evolution of subsequent phases. There is a sweet spot in the development of an individual carbon market where the strength of policy support is such that the market has to dramatically revise its view on prices to reflect the potential improvement in the underlying fundamentals.

The key questions for carbon market investors looking to invest is how to identify when this switch is likely to occur, what factors should you be looking out for, and when are they likely to occur? North American carbon markets appear to be at an early stage in that phase transition.

_This post is for paying subscribers only._
### Everything carbon investors really need to know about carbon capture, use and storage (CCUS)
URL: https://www.carbonrisk.world/everything-carbon-investors-really/
Last updated: 2025-08-21T10:40:05.000Z
Carbon capture, use and storage (CCUS) involves catching concentrated industrial emissions at their source, preventing them from entering the atmosphere.

CCUS has been seen as controversial, particularly by environmentalists who see it as a get-out-of-jail-free-card enabling fossil fuel producers and consumers to carry on extracting coal, gas and oil and burning it, much the same way they have done for decades.

The ‘U’ component of CCUS can mean that the CO2 is used as a feedstock for another industrial process. Depending on the actual use it may lock the CO2 up for a considerable period. The ‘S’ component of CCUS may involve permanently storing the carbon dioxide deep underground where it will mineralise, i.e. turn into rock.

CCUS is one of many tools that power generators and industrial plants have to accelerate decarbonisation. As climate science suggests we are moving ever closer to a point where emissions *must* peak and start to decline, expect policymakers to push CCS as a tool to cut emissions.

The evolution of CCS will have important implications for carbon market investors, but it will also throw up opportunities for investors to direct capital to where it is needed.

_This post is for paying subscribers only._
### What is the long-term impact of Ukraine-Russia conflict on European carbon emissions?
URL: https://www.carbonrisk.world/what-is-the-long-term-impact-of-ukraine/
Last updated: 2025-08-21T10:40:06.000Z
Europe’s pivot towards energy security, sparked by Russia’s invasion of Ukraine, will not come at the cost of decarbonisation. That’s the message from a recently published report by a risk management advisory firm.

Gauging the often conflicting effects of higher energy prices, fuel generation switches and investment in renewables is vital if we are to understand the likely short term impact on demand for EU carbon allowances.

_This post is for paying subscribers only._
### EU vote to extend 24% MSR withdrawal rate signals commitment to carbon market
URL: https://www.carbonrisk.world/eu-vote-to-extend-24-msr-withdrawal/
Last updated: 2022-04-07T11:00:34.000Z
The EU Parliament has voted through an extension of the Market Stability Reserve (MSR) annual 24% withdrawal rate until 2030\. The vote signals the EU’s commitment to the EU ETS as part of it’s ‘Fit for 55’ package. It also ensures that the EU carbon market can continue to weather economic shocks and maintain a carbon price sufficiently high that decarbonisation targets are met.

The MSR, which began on 1st January 2019 has a uniform 2% monthly withdrawal rate (24% per annum) from the total number of allowances in circulation (TNAC). Under existing legislation the withdrawal rate would have dropped to 12% from 2024\. The vote also confirms that the minimum number of EUAs to be placed in the MSR should continue to be 200 million.

The [announcement ](https://www.europarl.europa.eu/doceo/document/TA-9-2022-0101%5FEN.pdf?ref=carbonrisk.world)of the vote outcome (which was supported by 95% of MEPs), was broadly expected by the EU carbon market. EUA futures barely budged on the news, anchored close to the €78 per tonne mark.

In the period 2019-2023 the MSR threshold levels are set at 833 million and 400 million allowances (EUAs). Recall that the MSR works by reducing new supply entering the market, via government auctions, until the TNAC falls below 833 million. Allowances in the MSR will only be added back into the market if the TNAC falls below 400 million.

Attention will now turn to the publication of the latest TNAC estimate by the EU.

_This post is for paying subscribers only._
### New Zealand's carbon market
URL: https://www.carbonrisk.world/the-new-zealand-carbon-market/
Last updated: 2025-08-21T10:40:06.000Z
The New Zealand emissions trading scheme was launched in 2008 as part of the Kyoto Protocol. In a similar vein to the EU’s emissions trading scheme, it has seen some significant changes over that time.

In 2015 the New Zealand scheme transitioned to a domestic only market. However, it has only been since 2020 that the scheme has moved towards something that investors in Europe or California would recognise.

Every emissions trading scheme as a different name for their carbon allowances. Here, allowances are known as New Zealand Units (NZUs), and equate to 1 tonne of carbon dioxide equivalent. NZUs have specific vintages that relate to emissions in a particular year.

As in other carbon markets, the price of allowances in New Zealand have rocketed. Since the start of 2020, the price of NZUs has increased 3-fold to NZ$75, equivalent to almost €50.

_This post is for paying subscribers only._
### What happens if policymakers are forced to "stamp on the brakes" and force carbon prices higher?
URL: https://www.carbonrisk.world/what-happens-if-policymakers-are/
Last updated: 2025-08-21T10:40:07.000Z
Financial markets have typically worked on the assumption that climate policy would be gradually tightened over a period of several years, if not decades. This is known as the “slow policy ramp”.

Too high a carbon price at the outset for example, many reason, will be politically untenable. Instead the assumption is that carbon prices will gradually rise over several years. This is the familiar playbook seen across carbon trading schemes and carbon taxes where free allocations and numerous exemptions are the initial conditions.

But what if a more extreme scenario occurs, one in which climate change occurs much faster than people expect with more extreme adverse consequences? The risk in putting off action in the face of economic and geopolitical concerns is that we only put off the required reductions but leave us even less time to achieve it. Time compression may mean that the policy response required is much more extreme than the “slow policy ramp” built into many financial models.

What if, instead of a gradual ramping up in the pressure, policymakers are forced to “stamp on the brakes”?

[Subscribe now](#/portal/signup)

Analysis published last year by [Kempen Capital Management ](https://www.kempen.com/en/news-and-knowledge/persberichten-2021/carbon-risk-being-underappreciated-by-markets?ref=carbonrisk.world)estimated that global equity market valuations would fall by about 4% if scope 1 and 2 emissions were suddenly hit by a $75 per tonne carbon tax (equivalent to €68 per tonne as of today).[1](#footnote-1) 

Not so bad you might think.

It gets worse if indirect emissions, known as scope 3, were included in the $75 per tonne tax. In that event global equity markets would potentially suffer a 20% drop. European equities would suffer less than their US counterparts.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/c7a1bcc8-452b-4ba6-8111-875807b3d5ea_927x351-2.png)

But what if policymakers are forced to “stamp on the brakes” and impose a much higher carbon tax? Kempen’s analysis found that if a carbon tax of $150 per tonne global markets could fall by as much as 41%.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/eafeb0cf-f9cb-4f83-92a5-9d663c3d3138_921x319.png)

Low carbon equities would still see a hit to their valuations in all scenarios, but significantly less than the global and regional (Europe and the US) averages. According to Kempen the risk of policymakers stamping on the brakes has not been priced in, estimating that adopting a climate-positive portfolio could add 20% to returns over the next ten years, even compared to a lower carbon / sustainable equity approaches.   
  
Kempen suggests that investors could achieve this by reallocating existing equity exposure to lower carbon or climate transition tilted equities and seeking out opportunities to benefit directly from the transition economy such as clean energy, clean water, food supply and farmland.

One asset Kempen does not mention is carbon markets. That seems like a mistake, especially if governments pursue geopolitical and economic ambitions at the expense of climate policy.

It is difficult to know how and when. But later this decade that could set up a situation where everyone is even more short carbon than they are now. That may bring about the exact situation Kempen outlines in their modelling where carbon taxes and carbon prices are forced to increase very fast and to much higher levels than would be considered economically and politically acceptable today.

[Subscribe now](#/portal/signup)

[The carbon price is an inflation hedgeAs the price of carbon rises it will increasingly imbed itself in the economy, becoming an important driver of costs for business, and ultimately prices for consumers. The economy (including all the products and services we consume) currently holds a massive uncovered short position on carbon. Nearly every material good fails to account for the environme…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-335.png)Carbon Risk](https://www.carbonrisk.world/the-carbon-price-is-an-inflation/)

---

1. This assumes that firms balance sheets take the hit and nothing is passed onto consumers. In reality, much of the burden will be shifted to consumers which through inflationary pressures creates its own headwind to equity market performance. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
### Carbon neutral LNG faces its toughest test yet
URL: https://www.carbonrisk.world/carbon-neutral-lng-faces-its-toughest/
Last updated: 2025-08-21T10:40:07.000Z
Japan’s top business newspaper, The Nikkei published an article this week detailing the results of its investigation into ‘carbon neutral’ LNG. The article suggests that many of the claims around carbon neutral LNG are false, with offsets often originating from carbon projects where environmental benefits have been significantly inflated.

This is important as it could be pivotal point in the development of carbon neutral commodities more broadly, not only the growth in carbon neutral LNG. If carbon neutral LNG is seen as mere ‘greenwashing’ then it may stunt development in the sector. Carbon neutral LNG has been one of the fastest growing sources of demand for carbon credits.

_This post is for paying subscribers only._
### 'Winner takes all' in the VCM
URL: https://www.carbonrisk.world/winner-takes-all-in-the-vcm/
Last updated: 2025-08-21T10:40:08.000Z
The voluntary carbon market (VCM) cannot be measured simply looking at the current value of various carbon credits. The VCM is a growth sector where everything is up for grabs.

It is an unregulated sector where there are no hard and fast rules as to how things must be done. For sure, it is the Wild West in certain areas, but that also means the opportunity for those businesses that can set the standard by which others must then follow is high.

According to Trove Research a realistic base case scenario is that the primary market for carbon credits grows 9 fold between 2020 ad 2030 to around 900Mt. With carbon credit prices of $20-50 per tonne required by 2030, the total size of the VCM market is likely to be in the range of $18-$45bn.

As with other growth markets there really could be a ‘winner takes all’ effect whereby a small number of companies serve to carve up the VCM market.

[Subscribe now](#/portal/signup)

_This post is for paying subscribers only._
### Carbon market tremors
URL: https://www.carbonrisk.world/carbon-market-tremors/
Last updated: 2025-08-21T10:40:08.000Z
> “History doesn’t repeat itself but it often rhymes”

Financial markets often exhibit similar patterns in the event of a significant shock to market confidence - anticipating the potential effects, the impact and then the recovery.

Even if the cause and effects vary between market shocks how prices behave can tell us something about how the market may respond should it be buffeted a shock in the future.

With that in mind, could 2020 offer us a template for how the EU carbon market could recover from the shock of the Russian invasion of Ukraine and the subsequent market dislocation?

_This post is for paying subscribers only._
### Buy and hold going physical
URL: https://www.carbonrisk.world/buy-and-hold/
Last updated: 2025-08-21T10:40:09.000Z
Up until recently, an investor wishing to gain exposure to the EU carbon market had to invest in an exchange traded futures product. That changed in November last year when the first physical carbon allowance investment product launched.

Unlike futures based products, investing in the physical allowance is not without controversy.

In one of the very first articles for Carbon Risk I highlighted the potential impact that a physical buy-and-hold EUA investment funds could have. In [*Investors have a new way to help the environment*](https://www.carbonrisk.world/investors-have-a-new-way-to-help/)[ ](https://www.carbonrisk.world/investors-have-a-new-way-to-help/)I outlined that unlike an investment in a futures based fund, purchasing the underlying physical allowances also contributes to the relative scarcity of EUAs:

> By buying the carbon fund investors are withdrawing carbon allowances from the market, reducing the supply available to obligated polluters. This should then help to drive up the cost of the remaining allowances, helping to stop emissions from occurring in the first place and incentivising the investment in new technology. Meanwhile, a physical carbon contract eliminates the basis risk from futures contract rollovers.

The fund in question, the SparkChange Physical Carbon EUA ETC (CO2), launched on the London Stock Exchange on Thursday 4th November. News on the fund’s progress has been relatively quiet in the meantime, at least compared with the [KraneShares Global Carbon Allowance ETF (KRBN)](https://www.carbonrisk.world/how-to-invest-in-the-eu-carbon-market/) which has captured the attention of carbon investors.

This week Europe’s independent authority tasked with promoting stable financial conditions published its final report on the EU ETS. It concludes that there are "no major deficiencies" in the role speculation plays in the EU carbon market. The report is a treasure trove of information on the EU ETS that you is very difficult to piece together alone. Included in the report is a section on the role that buy and hold physical investment products are having.

_This post is for paying subscribers only._
### What price King Coal's return to Europe?
URL: https://www.carbonrisk.world/what-price-king-coals-return-to-europe/
Last updated: 2025-08-21T10:40:09.000Z
> "There are no taboos in this situation"

EU ETS emissions are estimated to have increased by 8.7% in 2021, according to a recent poll of analysts by Refinitiv. Exceptionally high natural gas prices resulted in generators switching to thermal coal, significantly increasing the carbon intensity of power generation. The share of hard coal and lignite in the EU’s power mix rose from by 3 percentage points to 16% in 2021.

Europe will need to rely on thermal coal and lignite if it is to rapidly pivot away from Russian natural gas supplies.

What was once unthinkable now becomes accepted reality. But how much extra coal capacity is there, and what are the implications for carbon prices, especially if demand is supported by government subsidies?

First off, the EU has significant amounts of spare thermal coal capacity that could potentially be used for power generation. According to the [Centre for Research on Energy and Clean Air (Crea) and TransitionZero](http://the Ripe for Closure report, an assessment compiled by), excess thermal coal capacity across 8 EU countries plus Turkey was almost 38 GW at the end of 2019 (34 GW excl. Turkey).[2](#footnote-2) 

38 GW equates to approximately 14% of total fossil fuel operating capacity across the nine countries. Spain (10 GW) and Germany (8 GW) accounted for almost half of the thermal coal overcapacity. The report also estimates that these same countries retired 7.1 GW of coal capacity between 2019 and 2021, capacity that could potentially come back into service.[3](#footnote-3)

If all of the identified EU ETS based spare capacity was utilised, and retired units from the past few years brought back into operation (34 GW + 7.1 GW) it would lead to 240 MMT CO2e, based on the assumption that it all thermal coal based.

However, it’s thought that much of what Germany holds in reserve is fuelled by lignite, which is roughly 50% more carbon intensive than thermal coal. Assuming all 8 GW of German spare capacity is lignite then this adds an extra 25 MMT CO2e, 265 MMT CO2e overall.

Assuming that coal and lignite generation displaces natural gas generation one for one in terms of electricity output then it would result in a net addition of around 145 MMT CO2e, given relative carbon intensities.

That’s 145 million EUAs that would have to be purchased by power generators, and not factored into industry and independent modelling of EUA demand and supply, and the hedging strategies of utilities.[4](#footnote-4)

[Hedging carbon riskHedging by utilities is one of the principle drivers of carbon allowance demand, and in turn carbon market price discovery. Utilities are one of the most active participants in the EUA spot and futures markets, balancing both their current and expected future carbon risk. However, over the next few years the hedging activity of industrial emitters is l…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-342.png)Carbon Risk](https://www.carbonrisk.world/the-big-hedge/)

**How is Europe responding?**

[Thermal coal and lignite burn ](https://energy-charts.info/charts/energy/chart.htm?l=en&c=ALL&year=2021&stacking=grouped&chartColumnSorting=default&interval=quarter&source=all)for electricity generation across the EU during March 2022 is already over 10% higher than the same period in 2021\. However, it will need a radical change to existing coal trade routes if the EU is to utilise spare capacity and retired units.

Total European coal imports in 2021 amounted to 31.1 million tonnes, an increase of 16.2% versus 2020\. Russia accounts for around 70% of the coal coming into Europe, with Germany and Poland particularly reliant on Russian coal.

Other sources of supply are Colombia, US, South Africa, and Australia and Indonesia to a lower extent. Although not a completely seamless process, if India and China were to take more coal from Russia that would leave more thermal coal on the seaborne market from these five other sources, coal that could potentially be shipped to Europe.

It will come at a cost, but one that Europe seems increasingly willing to accept. Higher coal demand and more complex logistics will increase the cost of coal imports and might lead to temporary local disruptions. However, it looks like halting imports of Russian coal should still mean that spare capacity and previously retired units can be supplied.

European capitals are putting measures in place to prepare for increased thermal coal burn. The German coal importers association (Verein der Kohlenimporteure, VDKi), believes that Russian coal can be substituted with alternatives within a few months. Perhaps they would say that, but putting aside the caveats around logistics it does appear possible, albeit at a cost of higher coal prices and increased shipping costs.

The return of ‘King Coal’ to bolster Europe’s energy security is a significant departure from recent climate declarations. Germany is leading Europe’s 180 degree turn policy on coal. In last year’s coalition agreement the parties making up the government vowed to phase out coal by 203o. However, in light of Russia’s invasion of Ukraine it has pushed back on that decarbonisation timetable.

German vice-Chancellor Robert Habeck announced the creation of strategic coal reserves in a bid to cut down Germany’s reliance on Russian gas. The reserves will allow power plants to run for 30 days of winter without any deliveries. The government are reportedly putting in place measures to suspend the decommissioning of coal plants. 

Other major EU economies with coal generation capacity are also recognising the need to burn more coal. Italy’s Minister for Ecological Transition recently said that the country’s two active coal-fired power plants in the country would temporarily be “brought up to full capacity” if there is “an absolute lack of energy.” In Spain, the Los Barrios thermal power plant was recently reactivated after being closed three years ago - the plant had a capacity of 567 MW in 2014.

Meanwhile, Slovenia and the Czech Republic both that they would both end coal use by 2033\. According to the pledges of other European countries only Poland, Turkey, Serbia, Montenegro, Bulgaria, Bosnia and Herzegovina and Kosovo will burn coal after that date.

Elsewhere, Romania’s Minister of Environment, Water and Forests announced that his country would temporarily restart idle coal-fired power plants. Finally, the western Balkan nations have also vowed to delay the shutdown of their coal power units, pushing back on their coal phase out dates.

**Demand ‘construction’**

Rather than let higher energy prices do their job and incentivise consumers to become more efficient, European parliaments are under increasing pressure to cushion householders and businesses from the worst of the energy price spike.

High energy prices for citizens could result in a political backlash. Industry may need to shutdown vital parts of the supply chain (e.g. fertiliser, carbon dioxide manufacturing) should prices stay at levels that make their operations unviable.

Rather than implement policies that encourage energy efficiency (such as insultation), governments are turning to blanket, untargeted energy subsidies. Depending on the size of the subsidy this only serves to increase demand, putting all of the pressure on the supply side to respond.

Demand ‘construction’ means more pressure for retired coal plants to reopen and to max out the available capacity of existing plants. Until governments recognise the ill-thought out economic implications of these policies the demand for EUA’s from coal burning utilities is only likely to rise.

[Demand destructionEuropean natural gas prices rose more than 75% this morning, to over €345 per MWh. That’s equivalent to more than $600 of oil equivalent! Natural gas prices are spiking on concerns that Russian gas supplies could be disrupted either by the Russians, or due to self-sanctioning. Proposals by the European Commission (EC) to require higher gas storage levels going into next winter have also helped bid the market.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-343.png)Carbon Risk](https://www.carbonrisk.world/demand-destruction/)

---

1. In an interview with *BBC Radio Four’s* Today Programme *Timmermans* insisted that countries looking to burn more coal in the interim could do so in line with the EU climate goals if they then move to renewables. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. The report estimated fossil fuel overcapacity in nine European Union countries: Bulgaria, the Czech Republic, Germany, Italy, the Netherlands, Poland, Romania, Spain, and Turkey. [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
3. Over capacity is defined as the difference between the total firm capacity and the planning reserve. The planning reserve is the required capacity at which the electricity system can operate safely during peak demand and results from multiplying peak demand to an appropriate planning margin based on the country’s generation fleet and market structure. [↩](#footnote-anchor-3 "Jump back to footnote 3 in the text.")
4. Burning coal is clearly significantly more carbon intensive than natural gas: roughly double for every unit of energy produced from thermal coal compared and three times higher for lignite. [↩](#footnote-anchor-4 "Jump back to footnote 4 in the text.")
### Are investment funds buying the rebound in carbon?
URL: https://www.carbonrisk.world/reading-the-tea-leaves/
Last updated: 2025-08-21T10:40:10.000Z
> “If everyone is thinking the same thing, someone is not thinking.” - General George Patton, U.S. Army

Futures markets are not simply full of speculators trying to anticipate what other speculators are going to do, although it might feel like that sometimes. Commodity futures markets involve a vast array of different participants, each with very different means and motivations.

Positioning analysis allows a carbon trader or longer term investor to understand how market participants behave under different circumstances in the market - fundamental, technical and sentiment. If you can predict behaviour, and be able to correctly anticipate the risk that capital flows will move one way or another, then you have an edge over other traders in the market.

Positioning data is probably the most underutilised tool in commodity markets. It breaks down open interest (the number of open contracts) during a particular period, split between different types of market participants, and according to whether they were long or short. Remember that futures markets are zero-sum - for every buyer of a particular commodity futures contract (a ‘long’ position), there must be a seller on the other side (a ‘short’ position).

In this article I introduce carbon market positioning data and show how investment funds are approaching the carbon market.

_This post is for paying subscribers only._
### Volatile RGGI carbon prices as Virginia's Governor continues to push to leave the scheme
URL: https://www.carbonrisk.world/volatile-rggi-carbon-prices-as-virginias/
Last updated: 2025-08-21T10:40:10.000Z
Carbon prices on the Regional Greenhouse Gas Initiative (RGGI) fell by almost 10% yesterday after a report released by Virginia Governor Glenn Youngkin criticised the emissions trading scheme for being ineffective and forcing consumers to pay more for their electricity.

However, what appears to have unnerved the market and led to a flood of compliance selling is the inclusion of an emergency regulation blueprint detailing how the state would leave the 11-state carbon trading scheme. Recall that earlier in the year the Governor signed an order to leave RGGI, and despite being unable to unilaterally withdraw from RGGI without the support of lawmakers, the Governor continues to make claims that he can.

Virginia accounts for around 27% of current RGGI emissions and also has significant scope for reducing its emissions. Given its size and emissions profile it would be extremely negative for RGGI carbon prices should the state of Virginia succeed in extricating itself from the scheme.

Although the world’s largest [carbon futures fund (KRBN)](https://www.carbonrisk.world/how-to-invest-in-the-eu-carbon-market/) currently allocates some 5% to RGGI, other more recently launched [funds ](https://www.carbonrisk.world/carbon-credits-carbon-allowances/)hold a significantly larger allocation to the scheme. Negative sentiment in RGGI contributed to a sharp decline in California Carbon Allowance (CCA) prices.

It’s an important market for investors to follow.

_This post is for paying subscribers only._
### Hedging carbon risk
URL: https://www.carbonrisk.world/the-big-hedge/
Last updated: 2022-03-21T12:00:48.000Z
Hedging by utilities is one of the principle drivers of carbon allowance demand, and in turn carbon market price discovery.

Utilities are one of the most active participants in the EUA spot and futures markets, balancing both their current and expected future carbon risk. However, over the next few years the hedging activity of industrial emitters is likely to become a significant factor.

The tension between the two sectors is crucial to understand. On the one hand utilities may look to reduce their hedging activity as renewable generation increases, while on the other industrial hedging demand is likely to increase as free allocations are cut.

**What are the main ways emitters hedge their carbon risk?**

There are five broad categories by which a utility (or an industrial emitter) might look to hedge their carbon risk:

- It can buy EUAs at the same rate that it produces, buying on a spot basis based on actual emissions.
- It can wait until the EUAs are needed, purchasing them in the primary auction, putting them at the mercy of the market in the weeks before compliance. This is typically what smaller, less sophisticated industrial emitters might do.
- Buying EUAs/EUA futures based on expected emissions over the next 12 months.
- Buying EUAs/EUA futures based on long term (2-10 years +) expected generation. This might overlap with fuel and/or power contract agreements in the case of a utility.
- Strategic hedge against some part of their operation becoming a stranded asset due to climate change policies, e.g. fossil fuel generation assets.

In reality there will be a combination of strategies employed. Power generation companies will regularly re-optimise their carbon EUA purchases based on changing emissions profile, which might be influenced by changes in relative fuel and power prices, and their expectations for planned and unplanned maintenance.

**How does carbon hedging work in practice?**

Even if the utility has no knowledge about whether future EUA prices are going to increase or decrease, it might still choose to purchase the EUAs at the known futures cost in order to ‘lock in’ a price. This minimises its risk exposure and helps to get greater certainty over its future margins.

Obligated emitters can use a strategy that makes the most of differences between the price of EUAs and EUA futures. A ‘short carry’ involves selling an EUA and buying an EUA futures contract. The short carry enables an emitter with EU ETS compliance obligations to free up cash in the short term while still ensuring that it can secure access to EUAs when it comes to meeting compliance.

For example, consider an emitter that is currently holding 100 EUAs that it knows it will need to submit in one year’s time to cover its emissions. To complete the trade, the emitter sells its 100 EUAs for €7,500 (assumes that the EUA and futures prices are both €75 per tonne), while also purchasing 100 EUA futures expiring in one year’s time at a cost of €7,600 (assumes an indicative clearing and margin fee of €100).

In the year between undertaking the trade and the futures expiring, the emitter benefits from access to €7,500 in cash and it will receive 100 EUAs when its futures contracts expire. This may be an important cash flow management strategy for emitters that want to borrow but might otherwise be constrained by current credit conditions.

**RWE’s big carbon hedge**

Power companies represent the largest group participating in compliance carbon markets. Power generators sell a significant share of power one to four years ahead of delivery. To manage the price risk, they sign contracts for fuel and the associated allowances required for generating the power

Utilities need to take a view on the expected generation of their units (for which they hedge by selling their power forward) and the carbon intensity of the feedstock (more allowances need to bought if the generation mix includes more lignite than if nuclear was expected to fill the gap). Utilities typically look to hedge this carbon risk now, and adjust accordingly later, rather than wait for more information about their actual emissions.

Some European utilities have hedged their carbon exposure by buying enough carbon allowances when prices are low to cover their expected future emissions. RWE, the German utility and the largest obligated emitter in the EU ETS is perhaps the best example of this strategy.

Beginning in 2014, the company began shifting its procurement strategy to buying EUAs in advance of the year that they were required. Figures provided by the company indicate it’s average hedged carbon price during the period 2018-2021 was around €5-6 per tonne - around one-sixth of the actual average EU carbon price during that period. RWE has now reportedly hedged its carbon exposure all the way out to 2030.

Some industrials also copied RWE’s strategy. For example, German steel group Salzgitter reportedly stocked up on EUAs when the price was still just a few euros a tonne, and is now also sufficiently covered all the way through to 2030.

**Futures are more likely to be used for hedging**

Buying additional EUAs like RWE did, well in advance of when they will be needed, may look smart in hindsight if the price multiplies over the next few years. But in the interim it can tie up an awful lot of cash that could be more productively used elsewhere. That’s one reason why EUA futures markets are so useful.

In practice its not always possible to use carbon futures exchanges to hedge. Liquidity may be abundant in the near term March and December contracts, but as soon as you go beyond that, liquidity tends to drops significantly. That’s why the Over-The-Counter (OTC) markets tend to be used instead. Here a utility can also more accurately hedge its carbon exposure for the same period as its contracted fuel and power offtake agreements - something that is harder to do with exchange traded futures contracts.

It’s important to note that it is only the purchase of the underlying physical EUAs that can contribute to allowance scarcity. Using futures markets to hedge does not contribute to scarcity. Carbon futures contracts represent claims to EUAs to be delivered at a specified price and at a specified date and place in the future. But remember, buying a futures contract for carbon does not reduce the quantity of EUAs that are available for compliance.

A futures contract does not necessarily result in physical delivery. It could also be satisfied by a payment based on the current market price at the agreed time of maturity. For example, only around 5% of commodity futures with a delivery mechanism result in parties actually making or taking delivery of the underlying commodity. Delivery of the actual allowance only occurs if the holder fails to offload it or roll the contract over after the futures contract expiration date.

**The role of the Market Stability Reserve (MSR)**

The influence of the MSR in cutting the ‘free float’ potentially available to physical hedgers could be important. With threshold levels set at 833 million and 400 million allowances (EUAs), the MSR works by reducing new supply entering the market, via government auctions, until the calculated surplus falls below 833 million. Allowances in the MSR will only be added back into the market if the calculated surplus falls below 400 million.

Some surplus was thought to be required to allow for forward hedging of physical EUAs, and the threshold levels have been set to reflect this. However, there is the fear that the threshold levels are set too low to account for the potential hedging demand that could take place.

The fear is that this could place a massive scarcity premium on allowances as obligated emitters will not want to risk being non-compliant and facing a fine. Rather than wait for the compliance year to worry about securing sufficient allowances, companies may follow the example of RWE and secure sufficient numbers well in advance.

However, although successful for some companies it is very unlikely that the majority of companies under the EU ETS will pursue a procurement strategy of purchasing several years worth of EUAs well in advance of when they will be required.

It may have been the correct one when carbon prices were well below fundamental value but it’s much less attractive at current carbon market valuations. It worked well if the company purchasing the allowances had sufficient credit worthiness that the additional EUAs were but a small line item on their balance sheet, and had the ability to also forward sell their output, as is the case with utilities.

In the absence of those factors most obligated emitters are now likely to rely on the futures markets to hedge their carbon risk. This does not contribute to allowance scarcity.

**How hedging demand could evolve**

As this decade evolves the importance of long-term hedging activity is likely to grow. Two factors are especially important: the gradual decarbonisation of utilities and how that affects their hedging requirements, and the growing requirement for industrial emitters to start hedging as free allocations are withdrawn.

On the other hand, utilities may need to hedge less later in the decade as 2030 approaches as the sector decarbonises. This will put more allowances back onto the market, say for example if RWE’s lignite carbon hedges are reversed.

When asked in the Q2 2021 [earnings call ](https://seekingalpha.com/article/4449035-rwe-ag-rweoy-on-q2-2021-results-earnings-call-transcript?ref=carbonrisk.world)whether RWE could monetise the carbon allowances prior to 2030 if some of its coal fleet came to an early halt, Michael Muller, the groups CFO responded with a qualified, maybe:

> “The contract itself foresees coal closure by 2038, it has the option to bring that forward to 2035, that's what is in the contract. I mean, the contract doesn't say anything about our carbon certificates. So that's basically our topic. But bear in mind, I mean, the hedges we currently have in place are to match the implicit exposure we have from the fleet.  
>  
> So I mean, kind of in a nutshell, what I tried to say is, yes, we are obviously internally discussing what are potential options. But it's too early to say anything here, and we just need to wait what really happens.”

Carbon hedging strategies by utilities are a crucial piece of the puzzle in being able to understand how carbon prices could evolve over time.

However, moving forward hedging activity is likely to grow from a different sector. Industrials may turn out to be the dominant hedger in the market as their free allocations are cut and the carbon price begins to bite.

That sets the market up for a volatile period where perceptions of the pace of decarbonisation across different sectors (and hence the demand for physical and futures based hedges) will come into conflict.
### Carbon market sentiment check
URL: https://www.carbonrisk.world/carbon-market-sentiment-check/
Last updated: 2025-08-21T10:40:10.000Z
Every so often its worth stepping back and checking in on the prevailing sentiment underpinning an asset class. Carbon markets are no different, especially now that there is greater degree of retail investor participation.

There are a few ways of looking at this: Google search interest for related terms, whether headlines in the dominant business press are positive or negative, and Twitter sentiment.

_This post is for paying subscribers only._
### Europe's hydrogen economy and what it means for carbon prices
URL: https://www.carbonrisk.world/europes-hydrogen-economy-and-what/
Last updated: 2025-08-21T10:40:11.000Z
Central to the decarbonisation of many sectors under the EU ETS is the widespread rollout of green hydrogen as an industrial feedstock.

Up until very recently estimates have suggested that Europe requires very high carbon prices to incentivise the switch away from hydrogen manufactured using fossil fuels, known as grey hydrogen.

However, record high natural gas prices in Europe may accelerate hydrogen's role in industrial decarbonisation, without the need for significantly higher carbon prices.

Carbon traders may have looked to the ‘dark-spread’ as a tool for estimating carbon allowance demand, but they may increasingly be looking to ‘green-grey’ hydrogen spread instead as the long term driver of carbon prices.

_This post is for paying subscribers only._
### Splendid isolation
URL: https://www.carbonrisk.world/splendid-isolation/
Last updated: 2025-08-21T10:40:11.000Z
The UK carbon market launched in mid-May 2021\. During the first 10 months of trading the price of UK emission allocations (UKA’s) have typically traded at a 10% premium to EU carbon (EUA) futures prices, equivalent to around €7 per tonne.

Three factors - low liquidity, no historical surplus, and more ambitious cuts in emission allowance supply through to 2030 - mean UKA prices should trade at a premium to EUA’s over the long term.

However, during certain periods that premium has ballooned to over 40% - both in late September 2021, and more recently in early March this year.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7855a730-814e-41fb-9458-2e819decf4c3_1011x580-1.png)

Investors who hold the KraneShares Global Carbon Allowance ETF (KRBN) should know that they are already invested in the UK carbon market, albeit with less than 5% exposure.

So what’s going on with UK carbon prices?

_This post is for paying subscribers only._
### The pros and cons of carbon credit 'streaming'
URL: https://www.carbonrisk.world/the-pros-and-cons-of-carbon-credit/
Last updated: 2025-08-21T10:40:12.000Z
The voluntary carbon market has borrowed a concept from the gold mining sector known as ‘streaming’.

Companies that are active in the nascent carbon streaming industry suggest that they offer investors a way to get exposure to the underlying value of carbon credits, while also reducing the carbon credit generation risks to investors, since they are involved in a broad portfolio of carbon offset projects.

So first off, what are ‘streaming’ contracts?

Streaming contracts seek to monetise expected future production and assets from a venture. The best way to think of it is an agreement to provide finance but the capital and interest is paid in the underlying product generated, e.g. gold. This gives project financiers flexibility as they can then either sell the gold or store it to speculate on the price going up.[1](#footnote-1) 

Streaming can in theory be applied to anything that generates a predictable flow of assets. Although typically applied to commodities, it could equally be applied to carbon credits generated by offset projects, or intellectual property assets such as music rights.

**The origin of streaming**

Gold mining companies have turned to streaming contracts as an alternative source of finance. Banks and other financial institutions are often cautious about lending to the gold mining sector. Poor returns in the past and concerns over ESG issues has meant that many traditional forms of finance are not always available, especially to junior and mid-tier mining companies.

In the mining sector a streaming contract is an agreement to purchase all or part of a mine’s future production at a predetermined price, usually well below market value at the time of the contract. Streaming deals typically start off being well protected. Contracts are based on the streaming company paying only between 20% and 30% of the prevailing commodity price for the ‘stream’ as it is delivered – so that their product ‘cash cost’ provides a very large profit margin when re-sold to recoup their loan. However, any subsequent reduction in the commodity price will reduce the absolute value of that margin.

Streaming contracts were originally used against the by-products of a mine (e.g. gold is often a by-product from copper mining) but which tends to be undervalued by traditional sources of finance. Initially focused on the precious metals markets, streaming has expanded into base metals like copper, nickel and zinc; energy opportunities including oil, gas and coal; and even rare earth metals and diamonds.

Streams have traditionally been negotiated for the life of a mine, with the terms of the deal based on a mine’s proven reserves. That means streamers get a windfall when companies successfully develop new reserves. As competition in the market has heated up mining companies have had mor room for negotiation. Increasingly, mining companies are adding buyback options on the streams or caps on the metal deliverable to streamers. This helps the mining company preserve more of the upside potential.[2](#footnote-2)

**What is the value of streaming contracts?**

For the mining company, a streaming contract has both pros and cons. The upside is that the mining company has cash upfront which can mean the difference between the project being successful or not. The drawback is that the contract limits the potential upside in the commodity price, and it could reduce the perceived value of the mine to a prospective buyer somewhere down the line.

Afterall, the streaming contract reduces the incentive for the mine operator to invest in exploration since every additional ounce goes to the streaming company under strict conditions. Meanwhile the very nature of ‘streaming’ is that it only tends to be used by junior miners without access to better forms of financing. Otherwise they would not be using it.

The value to investors is that they get exposure to the underlying commodity but without the risks of developing and operating a single mine. Cost overruns hurt investors in precious metal miners. Cost overruns are irrelevant for stream holders; as long as the mine is producing then the streamers get their income stream.

**What does this mean for the voluntary carbon market (VCM)?**

In the same way that a gold streaming contract is an agreement to provide finance with the capital and interest paid in gold, a carbon streaming contract provides funds to a project develop in return for payment via a stream of carbon credits generated by a project.

These carbon credits can then be sold, or stored in anticipation of higher prices in the future. Nevertheless, there is a tension though in the storage of carbon credits that doesn’t exist in gold, and other commodities.

First, a carbon credit can only be said to have achieved its aim (see box below) once that credit has been retired, and can no longer be traded. In the meantime, the credit could be traded multiple times between various parties. An ounce of gold doesn’t need to do anything to provide value to the holder.

Second, the value of carbon credits tends to decay over time. Older vintages do not command the same value as credits generated today. In contrast, an ounce of gold extracted from a mine 100 years ago has the same value as one pulled out of the ground today.

Part of the reason for this decay relates to concerns over the quality of older offset projects. To go back to basics carbon offset projects, the value of a carbon credit depends on whether the carbon offset project is real, measurable, additional and its permanence. Older offsets may have been carried out under less rigorous accounting standards.

The carbon credits sector is also still going through a very early period of price discovery, much like other commodity markets evolved. For example, it took many years for the oil industry to accurately price various grades of crude oil following the breakup of the “Seven Sisters” oil company oligopoly which dominated global oil until the mid-1970’s.

Investors may also be getting the wrong idea that carbon credit prices can only go up. Back in February I [highlighted ](https://www.carbonrisk.world/technology-based-carbon-removal-credits/)the scenario analysis carried out by BNEF and published in their inaugural Long-Term Carbon Offset Outlook 2022\. According to BNEF the quality of carbon credits eligible to meet corporate net-zero goals will be the most important factor influencing future price evolution.

Their voluntary market scenario (**🟪** in the chart), assumes that all types of carbon offset supply are permitted, including offsets that avoid emissions rather than removing them. In that scenario the price of carbon offsets could remain anchored to current levels (of around $10 per tonne) throughout till 2040.

![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/7cddef68-31e3-413d-9216-a620f93690cb_852x354-1.png)

Carbon streaming companies are not without risk. They are competing against other project developers, often with little in the way of carbon offset project experience, and in jurisdictions where there is significant geopolitical risk. Depending on the terms of a deal the streamer may not have any significant influence over the management of the carbon offset project. It may take several years for an offset project to deliver carbon credits. In an extreme scenario the project might fail. No carbon abatement, no carbon credit stream, and no revenue.

Unlike ordinary companies with a stream of near-term revenue from what are usually predictable businesses and stable customers, carbon streaming companies own the future revenue from highly unpredictable activities and highly volatile carbon credit prices, both now and into the future. It is crucial for investors to understand how they have been valued on the balance sheet. For example, what carbon credit price has been assumed going forward, and why.

One of the few publicly traded carbon streaming companies, Carbon Streaming Corp. (NETZ) floated on the Canadian NEO exchange in July 2021 at around C$7.50\. In the second half of 2021 it soared to a peak of near C$17 in mid-December, but has since dropped almost 50% to C$9 in mid-March. The boom and bust mirroring the trend in nature based carbon credit prices.

Carbon streaming contracts are an innovative way to provide financing to offset projects. However, the future value of carbon credits underpins the entire value proposition. In short, carbon streaming companies looks like a very risky way of investing in future demand for carbon offsets.

---

**What are carbon credits?**

A carbon credit is issued by carbon crediting body and represents a unit of emission reduction or removal of greenhouse gases. The purchase of a carbon credit should offset a tonne of carbon emissions by the emitter. These credits are tagged and tracked and the holder or purchaser of the carbon credit can surrender it or retire it to meet carbon neutrality or their emission reduction goal. Verification bodies act to ensure that the carbon credits meet strict standards.

Projects approved for carbon offsets under the VCM can be grouped into the following four categories:

\- Avoided nature loss in which forests, grasslands, wetlands, peatlands, and other natural carbon sinks are protected.

\- Technology-based avoidance/reduction, for example, transition to renewable energy in jurisdictions where renewable energy is not yet mandated, capturing methane from landfills and dairy operations, deployment of efficient cookstoves in rural households, and recovery and destruction of fluorochemical refrigerants.

\- Nature-based removal which restores natural carbon sinks via, for example, reforestation, regenerative agriculture, and mangrove restoration.

\- Technology-based removal and sequestration in which CO2 is separated from industrial stack emissions and either injected into secure geologic formations or used in manufacture of durable materials such as carbon fibre and concrete.

[The voluntary carbon market (VCM): At the edge of the carbon market risk curveAt the edge of the carbon market risk curve you will find the voluntary carbon market (VCM). Up until this point I have only discussed carbon markets from the perspective of the formal carbon compliance markets, such as the ones active in Europe and California.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-348.png)Carbon Risk](https://www.carbonrisk.world/the-voluntary-carbon-market-vcm-a/)

---

1. In contrast, a royalty contract usually just gives holders a simple cut of the revenues from a mining operation. The royalty company never takes delivery of the gold but receives the proceeds from its sale. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. In 2004 the first streaming deal created the streaming company Silver Wheaton, now known as Wheaton Precious Metals. Wheaton and Franco Nevada are focused on silver and gold projects in North and South America. The other three major streaming companies are Royal Gold, Osisko Gold Royalties and Sandstorm Gold. These large streaming companies hold a portfolio of different streaming opportunities so the risk of any particular mine not performing is mitigated. [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
### Everything you need to know about EU emission allowance (EUA) auctions
URL: https://www.carbonrisk.world/everything-you-need-to-know-about-19c/
Last updated: 2025-08-21T10:40:12.000Z
The primary market for issuing EU emission allowances (EUAs) is via auction. The results of an individual auction is often interpreted by carbon market participants as being bullish or bearish for the carbon futures market - often erroneously.

So, what do the auctions involve, and how should we interpret them?

_This post is for paying subscribers only._
### An asymmetric bet on a phase transition
URL: https://www.carbonrisk.world/an-asymmetric-bet-on-carbon/
Last updated: 2025-08-21T10:40:13.000Z
Compliance carbon markets typically go through a number of distinct phases in their development. Each phase sets the stage for the evolution of subsequent phases.

There is a sweet spot in the development of an individual carbon market where the strength of policy support is such that the market has to dramatically revise its view on prices to reflect the potential improvement in the underlying fundamentals.

The key questions for carbon market investors looking to invest is how to identify when this switch is likely to occur, what factors should you be looking out for, and when are they likely to occur?

To begin to find out we need to look at how emission trading schemes have tended to evolve.

_This post is for paying subscribers only._
### Demand destruction
URL: https://www.carbonrisk.world/demand-destruction/
Last updated: 2025-08-21T10:40:13.000Z
European natural gas prices rose more than 75% this morning, to over €345 per MWh. That’s equivalent to more than $600 of oil equivalent!

Natural gas prices are spiking on concerns that Russian gas supplies could be disrupted either by the Russians, or due to self-sanctioning. Proposals by the European Commission (EC) to require higher gas storage levels going into next winter have also helped bid the market.

Very few industrial buyers will be willing and able to pay such high prices.

If they cannot, then the alternative is to bring their operations to a halt. That means less demand for natural gas (and power), reducing emissions and demand for emission allowances (EUAs).

_This post is for paying subscribers only._
### The unravelling
URL: https://www.carbonrisk.world/the-unravelling/
Last updated: 2025-08-21T10:40:14.000Z
One of the pillars of the European carbon bull market during 2021/22 was that emission allowances (EUAs) would become more and more scarce.

The thesis was pretty simple.

The Market Stability Reserve (MSR) acts to cut the TNAC by 24% per annum, reducing the free float available for obligated emitters to meet their annual compliance obligation. Meanwhile, the annual emissions cap declines by 2.2%, potentially accelerating to 4.2% based on ‘Fit for 55’ proposals. This means less EUAs available at auction each year going forward.

Banking as many allowances as you can became the correct strategy. Better to buy them now than risk paying a premium in the years ahead. If you were one of the lucky industrial emitters that received a free allocation of EUAs then hoard them. Don’t whatever you do use them as a short term cash cow.

The demand from obligated emitters would always be there of course. Failure not to provide sufficient EUAs based on your emissions would incur a fine. However, far from being a slap on the wrist, an obligated emitter would have to purchase the required EUAs in the next compliance year.

Then you add hedge funds, banks, other financial institutions and individual investors into the mix. Each could buy physical EUAs and hoard them. Self-reinforcing expectations among market participants would drive the market higher. Higher prices, more buying, compliance buyers get scared, more buying, prices move higher,…and so on. That’s what we saw in the carbon market in late 2021 and early this year as carbon prices neared €100 per tonne.

If a strong positive feedback loop developed, it was anyone’s guess as to where the carbon price could go.

[To infinity and beyond!Everything has its price, including avoiding a climate catastrophe. With that statement in mind, what does the price of carbon actually represent? Is it the price at which coal plants are forced offline. Is it a signal for investment in industrial carbon abatement or capture technology? Does it represent the price at which past and future negative climate externalities are internalised by consumers?![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-354.png)Carbon Risk](https://www.carbonrisk.world/to-infinity-and-beyond/)

**Positive feedback loops eventually collapse**

Feedback loops can either be positive (reinforcing), or negative (correcting). According to George Soros, positive feedback loops result in the views of participants diverging further and further away from objective reality. This can carry on for longer than many expect, until it reaches a point where it collapses in on itself:

> “It cannot go on forever because eventually the participants’ views would become so far removed from objective reality that the participants would have to recognize them as unrealistic. Nor can the iterative process occur without any change in the actual state of affairs, because it is in the nature of positive feedback that it reinforces whatever tendency prevails in the real world. Instead of equilibrium, we are faced with a dynamic disequilibrium or what may be described as far-from-equilibrium conditions. **Usually in far-from-equilibrium situations the divergence between perceptions and reality leads to a climax which sets in motion a positive feedback process in the opposite direction.”**

In order to show how this might be reflected in financial markets, Soros states that the price of an asset is determined by two factors, the underlying trend and prevailing bias, both of which are, in turn, also influenced by asset prices. According to Soros the interplay between asset prices, the underlying trend and the prevailing bias has no constant.

> “Typically, a self-reinforcing process undergoes orderly corrections in the early stages, and if it survives them, the bias tends to be reinforced, and is less easily shaken. **When the process is advanced, corrections become scarcer and the danger of a climatic reversal greater.”**

**The reversal**

As so often happens its an event with apparently little relationship to the market that snowballs into something very important. We are now experiencing that climatic reversal.

As Russian shells began to rain down on the streets of Ukraine suddenly carbon traders suddenly questioned the objective reality supporting the market at levels in excess of €80 per tonne.

As I outlined in [*Collateral damage*](https://www.carbonrisk.world/collateral-damage/), there are four channels through which the Ukraine-Russia war could impact EU carbon prices - financial, economic, political and social. Each channel would vary in its immediacy and ferocity of impact, and the potential legacy it may leave in its wake. Over the following 10 days the price of carbon fell by up to 40% as the market digested the implications.

It may not stop there.

If the underlying trend and the prevailing bias - as Soros describes them - now generate negative (i.e. correcting) feedback loops then the markets perception of EUA scarcity may start to evaporate.

Instead of holding onto their free allocations for subsequent years, industrial emitters may decide that better to cash out now and buy back at a cheaper price in the future. Afterall, many industrials emitters may be under significant financial stress, or anticipate that they will be soon. Instead of thinking that EU policy will keep to the prevailing trend on EU ETS reform as seen prior to the conflict, they may wonder whether the process will be delayed or watered down.

Financial institutions may also step back from the EU carbon market. Happy with the returns they have made over the past couple of years, concerned by proposals to tighten Article 29a, and wary that calls for greater transparency may open them up to even greater criticism. Financial institutions and investment funds have been a source of demand for EUAs. If much of that ends up back on the market then the perception of scarcity diminishes even further.

As long as the European Commission don’t tinker with the underlying fundamentals - outlined at the start of this article - then scarcity will, once again become an issue at some point. That will be the point when prices suddenly develop a strong positive feedback loop. But that’s a story for later.

[In the trigger zoneInitial indications suggest EU lawmakers are seeking to amend the EU ETS mechanism by which additional allowance supply could be made available, in the event that prices rise too high, too fast. Known as Article 29a of the EU ETS Directive, this is the mechanism by which the European Commission (EC) could intervene in the EU ETS to control prices should they be deemed not to be reflective of underlying fundamentals. As its currently written:![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-355.png)Carbon Risk](https://www.carbonrisk.world/in-the-trigger-zone/)
### The Day After
URL: https://www.carbonrisk.world/the-day-after/
Last updated: 2025-08-21T10:40:14.000Z
> Dr. Russell Oakes: “Do you understand what's going on in this world?”  
>  
> Dr. Landowska: “Yeah. Stupidity. Has a habit of getting its way.”  
>  
> **\- The Day After (1983)**

In less than one month the EU carbon price has collapsed from almost €98.50 per tonne to €55 per tonne, a drop of 44%. As I publish this note the price has rebounded slightly, to above €60 per tonne.

A wave of selling pressure apparently sparked by forced selling by Russian emission allowance holders, resulted in the triggering of margin calls and options market activity that led to a torrent of red.

This experience will scar many investors who only weeks ago were cheering the trade of the past twelve months. Whatever happens next the market will take some time to recover its poise.

In this article I look at some of the factors investors may have forgotten about over recent weeks. These are the fundamental factors that underpin the need for a strong carbon market, and one with a high enough price to drive decarbonisation.

_This post is for paying subscribers only._
### The emerging marginal buyer of carbon
URL: https://www.carbonrisk.world/the-marginal-buyer-of-carbon/
Last updated: 2025-08-21T10:40:14.000Z
Carbon markets will gradually evolve to a state in which liabilities, and not fundamentals drive prices.

To see how this could evolve you only need to look at the growth in investment products seeking to manage a specific liability for investors - whether that is retirement, risk management, ESG criteria, etc.

_This post is for paying subscribers only._
### Option market headwinds
URL: https://www.carbonrisk.world/option-market-headwinds/
Last updated: 2025-08-21T10:40:15.000Z
Every ships captain will know that a sudden change in wind direction can be enough to cause their vessel to crash into the rocks. The options market can also result in rapid, changeable and powerful gusts of a different kind, creating havoc in financial markets.

![Royal Charter (ship) - Wikipedia](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/0614f8ee-1b30-4dfa-adb6-f139ffdd7721_1000x633-jpeg-1.jpg)

_This post is for paying subscribers only._
### Collateral damage
URL: https://www.carbonrisk.world/collateral-damage/
Last updated: 2025-08-21T10:40:16.000Z
> “You may not be interested in war, but war is interested in you.”  
>  
> ―**Leon Trotsky**

The horrors of war are a tragedy for the innocent, caught up in the crossfire.

Nevertheless, as investors it is important to consider what the potential fallout from the crisis is for the EU carbon market. No market is immune from a crisis, no matter how compelling the underlying fundamentals may be.

Rather than closing your eyes and hoping for the best, it is my intention in writing this article to illustrate some of the risk factors to be aware of. Even the most unlikely scenarios have a non-zero chance of occurring. It would be foolish for investors not to consider them in their analysis. As things unfold I will return to cover each in detail to update you on where things stand.

There are four channels through which the Ukraine-Russia war could impact EU carbon prices - financial, economic, political and social. Each channel varies in its immediacy and ferocity of impact, and the potential legacy it may leave in its wake.

**Financial**

Within minutes of the EU carbon market opening up last Thursday morning, one single trading entity sold the equivalent of €700 million worth of carbon allowances. Those trades and subsequent selling was enough to bring about a near €10 per tonne swing in the carbon price in one day - albeit only reversing the gains seen over the previous several days.

> Someone sold 8 million spot EUAs this morning in a couple of trades cleared on @ICE\_Markets – that's c. €700 million to you and me. #EUETS #OCTT
> 
> — CarbonReporter (@CarbonReporter) [@ICE\_Markets](https://twitter.com/ICE%5FMarkets?ref%5Fsrc=twsrc%5Etfw&ref=carbonrisk.world) – that's c. €700 million to you and me. [#EUETS](https://twitter.com/hashtag/EUETS?src=hash&ref%5Fsrc=twsrc%5Etfw&ref=carbonrisk.world) [#OCTT](https://twitter.com/hashtag/OCTT?src=hash&ref%5Fsrc=twsrc%5Etfw&ref=carbonrisk.world)— CarbonReporter (@CarbonReporter) [February"> 10:38 AM ∙ Feb 24, 2022 ](https://twitter.com/CarbonReporter/status/1496796779865677828?ref%5Fsrc=twsrc%5Etfw&ref=carbonrisk.world)[](https://twitter.com/ICE%5FMarkets?ref=carbonrisk.world#39;s%20c.%20%E2%82%AC700%20million%20to%20you%20and%20me.%20%3Ca%20href=%22https://twitter.com/hashtag/EUETS?src=hash&ref%5Fsrc=twsrc%5Etfw%22%3E#EUETS%3C/a%3E%20%3Ca%20href=%22https://twitter.com/hashtag/OCTT?src=hash&ref%5Fsrc=twsrc%5Etfw%22%3E#OCTT%3C/a%3E%3C/p%3E%E2%80%94%20CarbonReporter%20%28@CarbonReporter%29%20%3Ca%20href=%22https://twitter.com/CarbonReporter/status/1496796779865677828?ref%5Fsrc=twsrc%5Etfw%22%3EFebruary)

Although the suspicion is that the trade was motivated by margin calls elsewhere in the energy complex (possibly by a hedge fund highly levered to European natural gas and power prices), we may never really know the underlying reason. If so then we know a similar event occurred in early October resulting in a 17% decline in carbon prices over 12-14 days. That proved to be an opportune time for carbon investors. This time may be different.

It comes down to credit, something that has been mispriced for some time. Although credit markets have sold off given expected future hikes in interest rates, they failed to account for increased credit risk. It only needed a major market dislocation for it to jump.

That spark may well be the decision to restrict certain parts of the Russian economy from the SWIFT payment messaging system. Rather than enabling energy and commodities to continue unencumbered, the measure is likely to result in commodity traders self-sanctioning in fear of future sanctions directed at them. In the absence of anyone willing to facilitate the trade, this could mean that energy supplies from Russia stop, very soon. Uncertainty over who has what exposure, and to whom is likely to lead to tighter conditions among those able to gain credit, leading to further margin calls.

If credit conditions tighten then we could also see non-energy holders of EUAs (e.g. financial institutions or even obligated industrial firms) seeking to offload them in order to raise collateral to cover losses and liabilities in other markets, whether related or not. The challenge is we really have little idea of who is holding what, and how motivated they will be to sell under the circumstances.

[The carbon market is not immune from equity market malaise It is a mistake to think that carbon prices are completely immune from equity markets. As the role of hedge funds, other investment institutions and private investors increase, it make sense that the carbon price should be less immune from the risk-on/risk-off sentiment in other financial markets.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-361.png)Carbon Risk](https://www.carbonrisk.world/the-carbon-market-is-not-immune-from/)

**Economic**

Energy intensive industries across Europe have already suffered from high energy prices in late 2021\. For example, chemical companies such as those that manufacture fertilisers have been particularly vulnerable, creating knock-on impacts on food supplies. Other energy intensive industries such as cement, steel and other metals now face similar decisions - whether to mothball their plants, or not.

As the cost of near term energy contracts soar (due to perceived or real cuts from Russia), and longer term contracts rise too (as a result of the high cost of pivoting to non-Russian fossil fuel supplies), the opposition to carbon prices may escalate further. This could become especially acute if, as I argue later in this article, that EU member states appear to recognise the need for more burning of natural gas and coal, at least in the short term.

The economic fallout from the Ukraine crisis has only begun.

As I argue in an earlier article while adverse economic conditions have always been negative for EU carbon prices, the impact on carbon prices has declined over time as the structure of the EU ETS has evolved. Central to this was the introduction of the Market Stability Reserve (MSR) at the start of 2019 which acts to automatically reduce excess allowances each year within certain bounds.

[What impact would a recession have on the EU carbon market?As fears grow that economic activity could slow sharply in the face of inflationary pressures, its natural to ask what impact a recession will have on the world’s largest carbon market. There have been three notable economic events during the history of the EU ETS: The Great Financial Crisis (GFC) of 2008/09, the European sovereign debt crisis of 2011/12, and most recently, the global Coronavirus induced lockdowns of 2020\. Each of them unique in their own right, but they hold valuable lessons for todays market.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-362.png)Carbon Risk](https://www.carbonrisk.world/the-eu-ets-and-its-recession-proof/)

The economic fallout may not stop there. It could have political consequences too. It has already.

**Political**

> “Everyone has a plan until they get punched in the face.”  
>  
> **\- Mike Tyson**

I’ve argued that rather than thinking about carbon as a commodity, investors should think about the carbon price as the currency of decarbonisation. A strong carbon price is a signal that investors, businesspeople and citizens trust their government’s commitment to combat climate change.

[Carbon is an emerging asset class, but what is it?“The best performing commodity in the world.” This is how most media stories about carbon markets start off, at least in recent years. Carbon, lumped together as part of the commodity markets. But is that really the right way to be thinking about carbon markets? And if not a commodity, then what is it? Is it even an entirely new asset class?![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-363.png)Carbon Risk](https://www.carbonrisk.world/the-carbon-price-is-the-currency/)

In the same way that trust in individual currencies supports investment, innovation and trade, trust in carbon market helps to bring about the capital, skills and long term planning that is required to help meet decarbonisation goals. The carbon market is a utility of the state by which it can influence the private sector case for decarbonisation.

It has taken many years, and lots of blood, sweat and tears for the European Commission (EC) and the EU’s member states to establish credibility in their carbon market. However, just as politicians are tempted to slash taxes and increase borrowing, or to lean on their ‘independent’ central bankers to lower interest rates or print money in order to avoid difficult economic situations, the same political temptation might apply to ETS schemes. Politicians might be tempted to grant more free allowances, or reduce the slope by which the supply of allowances is cut.

Reversing course on the rules of the carbon market devalues the carbon price, and with it the case for decarbonisation. If the EU carbon market loses credibility, the trust placed in it by utilities, industry and investors may never be won back.

Arguably then it will be the political decisions that are made over coming weeks and months that will have the largest and long lasting impact on the carbon market. They may be real, or ones driven by changing sentiment. Either way they could have lasting impacts.

To see how fast things are moving you only have to look at Germany. In only a few days we have seen such dramatic change few would have thought possible for generations. For example, the country had a longstanding practice of not permitting lethal weapons that it controlled to be transferred into a conflict zone. That changed on Saturday when it agreed to send weapons from its arsenal to Ukraine citing the threat to entire post-WWII order across Europe.

Germany’s economy minister announced at the weekend that his government is weighing up whether to extend the life of its remaining nuclear power plants, due to shut down at the end of 2022, in order to reduce Germany’s dependence on imported Russian natural gas. It appears unlikely given technical and safety considerations, but to even publicly consider it represents a major U-turn. What then of Belgium’s scheduled phasing out of nuclear by 2025, enshrined in law since 2003?

More nuclear power generation = lower carbon emissions = less demand for EUAs.

[Europe's nuclear falloutRecord high natural gas prices. Concerns over security of supply. Decarbonisation ambitions never been higher. Nuclear power should be showcasing its zero carbon credentials right now. But in Europe at least, it’s all gone a bit sour. Germany's 11-year nuclear phase-out plan entered its penultimate phase at the end of 2021 as the Gundremmingen, Brokdo…![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-364.png)Carbon Risk](https://www.carbonrisk.world/europes-nuclear-fallout/)

Meanwhile, in another remarkable turnaround the German government announced that they will construct two LNG import plants, enabling them to buy more gas from non-Russian sources - this may take a few years to build based on other projects. In the meantime they also plan to establish a natural gas strategic reserve, and a similar reserve for thermal coal. This from the government, elected only last autumn on a green, zero-carbon agenda.

Of course, Germany also announced a desire to accelerate the adoption of renewable energy generation. It is unclear what this would involve, but any acceleration in the timetable would, if delivered, result in lower than expected emissions in the future and in turn less demand for carbon allowances.

Other EU countries heavily dependent on Russian gas have also shown signs that they will now consider hiver-to controversial fossil fuel decisions. Italian premier, Mario Draghi suggested it may be necessary to reopen coal-fired power plants to meet the country’s energy needs in the short term. However, as I have argued before, the potential to restart previously closed coal plants is much more limited.

[What happens to carbon prices if Russia turns off the taps?The current geopolitical tension with Russia has focused investors attention on the potential implications for Europe’s natural gas supply. Any military conflict risks disrupting gas exports, whether intentionally or not, either limited in scope or in the extreme, all exports. In the event that a Russian invasion of Ukraine triggers stringent sanctions, Russia might react with a potential retaliatory halting of gas exports to Europe - either via Ukraine, or the Yamal pipeline through Poland, or in the extreme, both routes.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-365.png)Carbon Risk](https://www.carbonrisk.world/what-happens-to-carbon-prices-if/)

What other decisions could member states make a quick 180 on in in the interests of geopolitical and energy security? It is unclear whether recent events will have an impact on negotiations over the ‘Fit for 55 package’. The policies intended to facilitate a cut in EU emissions of 55% by 2030 compared to 1990, and which has, as its core mission to turn the 2020s into a transformative decade for climate action.

What impact will this have on the path of the MSR? Will member states allow it to continue to decline at 24% per annum? Will current events derail discussions over the Carbon Border Adjustment Mechanism (CBAM), scheduled to come into force in 2026? Russia was expected to see the largest adverse impact from its introduction given the huge volumes of carbon intensive commodities it exports to the EU.

We have some sense of how carbon prices have performed during periods of economic stress. We have no reference point as a guide as to what to expect when it comes to major geopolitical dislocations, especially one where energy markets play such a central role. That is where the reaction of the public, and the median voter in particular plays such an important role.

[How to think about political risk in carbon marketsAll commodity markets are political, you just need to understand the game that’s being played. Whether it is oil, sugar or rice or something else, government intervention isn’t too far away. Environmental markets such as carbon are a particular type of political construction in which artificial scarcity is created through regulation. And so the response …![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-366.png)Carbon Risk](https://www.carbonrisk.world/how-to-think-about-political-risk/)

**Social**

> “A strong European Union cannot be so reliant on an energy supplier that threatens to start a war on our continent”  
>  
> **\- European Commission President Ursula von der Leyen**

It is now common knowledge that Europe receives a significant share of its energy needs from Russia, and potentially at the whim of one man, President Putin. Turning its back on Russian energy will inevitably result in higher European energy prices. That will come at a cost, one which the European public may be unwilling to bear.

The real test will be changing public opinion.

Will EU member states be prepared to ramp up their support for households and businesses hit by high energy costs? In the long run, open ended subsidies by the state increases sovereign debt risks.

Will EU citizens recognise the impossible trinity at the heart of net zero, and now favour energy security and affordable energy versus net zero? The shock from recent geopolitical events are likely to reverberate long after the conflict comes to an end, whenever that may be.

[The impossible trinity at the heart of net zeroGovernments face an impossible trinity if they wish to meet the net zero carbon energy transition - how to balance energy security, affordable energy and environmental sustainability. There have been five energy transitions in the modern age. Each transition involves the transformation of energy sources into economically useful applications as a result of technological improvements. First coal, then electrification, followed by crude oil and natural gas, and then most recently the development of renewable energy alternatives. Energy transitions typically take place over a period of decades - 50 years or more based on historical evidence.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-367.png)Carbon Risk](https://www.carbonrisk.world/the-impossible-trinity-at-the-heart/)
### What impact would a recession have on the EU carbon market?
URL: https://www.carbonrisk.world/the-eu-ets-and-its-recession-proof/
Last updated: 2025-08-21T10:40:17.000Z
As fears grow that economic activity could slow sharply in the face of inflationary pressures, its natural to ask what impact a recession will have on the world’s largest carbon market.

There have been three notable economic events during the history of the EU ETS: The Great Financial Crisis (GFC) of 2008/09, the European sovereign debt crisis of 2011/12, and most recently, the global Coronavirus induced lockdowns of 2020\. Each of them unique in their own right, but they hold valuable lessons for todays market.

What can we learn from past economic turmoil and what it might mean should recession strike again in 2022 or beyond?

_This post is for paying subscribers only._
### Short selling is a poor hedge against carbon risk
URL: https://www.carbonrisk.world/short-selling-is-a-poor-hedge-against/
Last updated: 2022-02-23T12:00:46.000Z
Investment institutions and asset allocators are under pressure to align their portfolios with net-zero targets. In addition to security selection and the use of carbon allowances and credits, a third way to reach net-zero targets has been gaining attention - short selling carbon intensive stocks.

In a [submission document ](https://www.apra.gov.au/sites/default/files/2021-11/Submission%20AQR%20Capital%20Management%20July%202021%5FRedacted.pdf?ref=carbonrisk.world)to the Australian Prudential and Regulatory Authority (APRA), hedge fund titan AQR Capital Management outline three reasons why they believe that short selling helps meet net-zero targets. The first is to hedge the risks of any remaining carbon intensive investment exposures in a portfolio, the second is to impact the business operations directly, while the third channel is that “short positions are effectively ‘portfolio carbon offsets’ which can be counted against carbon exposures on the long side”.

_This post is for paying subscribers only._
### Carbon credits ≠ carbon allowances
URL: https://www.carbonrisk.world/carbon-credits-carbon-allowances/
Last updated: 2025-08-21T10:40:17.000Z
In the space of as many weeks, two carbon market funds targeted at retail investors have launched in Canada.

The first ETF to launch was the Horizons Carbon Credits ETF (CARB) and is listed on the Toronto Stock Exchange. A week later the Ninepoint Carbon Credits ETF (CBON) was floated on the NEO Exchange.

Without even delving into the prospectus, the alarm bells are ringing. Both funds make the same basic mistake of marketing themselves as ‘Carbon Credit’ ETFs.

Smart, educated readers of Carbon Risk that you are, you will no doubt be rolling your eyes in exasperation. For anyone in any doubt, scroll down the page for an explanation of the difference.

While it’s good to see carbon markets become more accessible for investors in different parts of the world, it’s bad if it’s done in an erroneous, and downright misleading way.

I published a detailed [article ](https://www.carbonrisk.world/how-to-invest-in-the-eu-carbon-market/)in January looking at the best ways for investors to gain exposure to the EU carbon market, either as a basket with other carbon markets or simply the EU ETS. How do these two funds compare?

_This post is for paying subscribers only._
### Owning up to carbon
URL: https://www.carbonrisk.world/owning-up-to-climate-risk/
Last updated: 2025-08-21T10:40:17.000Z
The US like many jurisdictions across the globe are in the process of tightening up the rules around what climate related information companies should make public.

Many companies are releasing data on a voluntary basis, but it can be difficult to compare one firms data to another. Standardised data on climate related risks should help accelerate the expansion of sustainable investing by making it clearer to investors and firms alike where the risks, and opportunities lie.

In January 2022 the UK became the first G20 country to enshrine in law mandatory climate related disclosure requirements for its largest companies and financial institutions. The[ Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021](https://www.legislation.gov.uk/uksi/2022/31/made?ref=carbonrisk.world) will apply to over 1,300 of the largest UK-registered companies and financial institutions for financial years commencing on or after 6 April 2022.[1](#footnote-1) 

Last year, the US Securities and Exchange Commission (SEC) began work on a new rule (a draft of which is expected later in 2022) also requiring listed companies provide investors with detailed climate related disclosures. The SEC has signalled that it will likely require companies to disclose both qualitative data (i.e., governance situation and strategies to address the physical and transition risks), and quantitative data (i.e., emissions, etc.).

While Scope 1 emissions are relatively straightforward to measure and report on, it is much more challenging to measure and report on indirect emissions under Scope 2 and 3\. Indirect emissions involve third parties after all which complicates the process of data gathering and calculation, while publication of the data potentially risks legal challenge. Many companies, particularly carbon intensive companies such as ExxonMobil have begun reporting Scope 3 emissions following pressure from investors and campaigners.[2](#footnote-2)

Mandating the publication of emissions data will increase pressure on companies to provide firm plans on how they will meet net-zero targets. It is also likely to mean increased demand for alternative means by which companies can show that they have offset their emissions in some way.

That could mean that demand for carbon offsets is about to increase significantly. However, greater calls for transparency will naturally mean even greater scope for critique of the use of offsets, whether by investors, environmental groups or obligated firms competitors.

In a [joint letter](https://www.sierraclub.org/sites/www.sierraclub.org/files/blog/Offsets%20Disclosures%20in%20Climate%20Risk%20Disclosure%20Rule.pdf?ref=carbonrisk.world) to the SEC published by Sierra Club, Public Citizen and Americans for Financial Reform Education Fund, the groups call for much greater clarity on obligated companies use of carbon offsets, casting doubt on the poor record of many which use the voluntary carbon market (VCM):

> “\[n\]one of the assessed companies demonstrate good practice with regards to the transparency set out in their \[beyond-value-chain\] climate contributions or offsetting claims. In many cases, information could not be found in the public domain to understand or assess the approaches. In other cases, disclosure is limited to marketing soundbites and superficial descriptions. Only in a small minority of cases is more detailed information identifiable, through the compilation of information from public project registries or third-party news outlets.”

The letter also highlights the risk that the continued lack of transparency in the VCM pose to the orderly, fair and efficient functioning of markets. This echoes a point raised by the Climate Risk Disclosure Lab of Duke Law’s Global Financial Markets Center, in a [September 2021 note ](https://sites.law.duke.edu/thefinregblog/2021/09/23/comments-to-the-commodity-futures-trading-commission-on-the-proposed-creation-of-a-carbon-markets-subcommittee-of-the-energy-and-environmental-markets-advisory-committee/?ref=carbonrisk.world)to the Commodity Futures Trading Commission (CFTC) where they are sceptical of non-compliance carbon markets:

> “…we believe that carbon markets, when properly designed, implemented and overseen by the Commission, can perform a useful function for companies with hard-to-abate emissions to satisfy statutorily-imposed emissions caps. However, we have major concerns about the global proliferation of offsets, particularly under any ‘voluntary’ (industry self-regulated) framework not subject to oversight by CFTC oversight or foreign regulators.”

The authors go on to highlight the opacity of the sector, and in particular the lack of widely accepted standards:

> “Carbon offsets in the voluntary markets suffer from a lack of scientific rigor and consistent methodology that would permit market participants to make informed decisions about the environmental benefits of various offset programs across multiple registries. This in turn makes it difficult for investors to assess the integrity of offset futures contracts and their susceptibility to manipulation.”

The note also highlights the risk of delaying action should the use of carbon offsets go unchallenged in climate disclosures and how this could result in a build-up of climate and financial risk:

> “Given the growing volume of corporate net-zero commitments that can only be achieved with a heavy reliance on offsets, it is only a matter of time before companies purchase large volumes of offset futures and declare that they have fulfilled their net-zero commitments. A powerful lobby will then emerge to resist any regulatory intervention that might expose the fundamental weaknesses of these commitments. As regulatory intervention is delayed, systemic financial risk builds.

There is clearly a need to ensure that the SEC and CFTC are aligned on the issue of mandatory climate disclosure reporting and use of carbon offsets. Indeed, hopefully that is part of the reason why the SEC climate disclosure draft has been delayed.

In the absence of regulatory clarity over the use of carbon offsets under climate reporting disclosure obligations, there is one carbon hedging option companies have at their disposal which can reduce regulatory uncertainty, and lower the risk of future scrutiny. Instead of purchasing carbon credits, buy carbon allowances in the regional market that is most relevant to their business operations.

One non-profit organisation in the US is already helping companies and individuals do just that. [Climate Vault ](https://climatevault.org/climate-vault-approach/?ref=carbonrisk.world)purchases emission allowances from regulated compliance markets including California and RGGI and stores them, preventing them from being used by obligated entities within those compliance markets. At some point in the future Climate Vault will then resell the allowances back into the compliance market to fund an equivalent carbon removal from the atmosphere using permanent carbon removal technology.

At present corporate commitments to net-zero and individual firms carbon compliance obligations are two separate markets - unregulated voluntary vs regulated compliance. That may be about to change as increased scrutiny by investors watchful of greenwashing result in corporates turning to the regulated compliance markets to hedge their carbon risk.

[The voluntary carbon market (VCM): At the edge of the carbon market risk curveAt the edge of the carbon market risk curve you will find the voluntary carbon market (VCM). Up until this point I have only discussed carbon markets from the perspective of the formal carbon compliance markets, such as the ones active in Europe and California.![](https://storage.ghost.io/c/88/00/88009094-3db7-425f-ac26-3f33555cefc8/content/images/2025/08/b8cbceec-d9b2-442d-a343-ec3b4ad08580_500x500-371.png)Carbon Risk](https://www.carbonrisk.world/the-voluntary-carbon-market-vcm-a/)

---

1. The EU Commission has proposed a [Corporate Sustainability Reporting Directive](https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0189&ref=carbonrisk.world) (CSRD) to extend the scope of the EU Non-Financial Reporting Directive (NFRD) already in force. The proposal extends the scope of the reporting requirements and the categories of companies subject to them. The CSRD is likely (pending review and agreement by the EU Parliament and Council) to apply from 2024 with companies reporting on the 2023 financial year. [↩](#footnote-anchor-1 "Jump back to footnote 1 in the text.")
2. There are three layers of emissions - 1, 2 and 3\. According to the UK’s Carbon Trust, “Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company's value chain.” [↩](#footnote-anchor-2 "Jump back to footnote 2 in the text.")
### Parched: How California's drought impacts the carbon market
URL: https://www.carbonrisk.world/what-does-drought-in-california-have/
Last updated: 2025-08-21T10:40:18.000Z
> “When the well is dry, we know the worth of water.”  
>  
> ―**Benjamin Franklin**

California’s emissions trading scheme (ETS) accounts for roughly 85% of all emissions in the state and covers large electric power plants including power imports, large industrial plants, and natural gas and petroleum distributors.

One of the most important factors affecting the demand for California’s carbon allowances (CCAs) is the proportion of power generation that comes from renewables, and hydroelectric in particular - and that’s why water levels and the existence of drought is so important.

_This post is for paying subscribers only._
### In the trigger zone
URL: https://www.carbonrisk.world/in-the-trigger-zone/
Last updated: 2025-08-21T10:40:19.000Z
Initial indications suggest EU lawmakers are seeking to amend the EU ETS mechanism by which additional allowance supply could be made available, in the event that prices rise too high, too fast. Known as Article 29a of the [EU ETS Directive](https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:02003L0087-20200101&from=EN&ref=carbonrisk.world#tocId62), this is the mechanism by which the European Commission (EC) could intervene in the EU ETS to control prices should they be deemed not to be reflective of underlying fundamentals. As its currently written:

“1\. If, for more than six consecutive months, the allowance price is more than three times the average price of allowances during the two preceding years on the European carbon market, the Commission shall immediately convene a meeting of the Committee established by Article 9 of Decision No 280/2004/EC.”

_This post is for paying subscribers only._

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