Carbon Webinar Session 2-4: Mandatory Carbon Markets

Datin Seri Sunita Rajakumar, the Chair of Climate Governance Malaysia (CGM), welcomed the participants to our ERCST Carbon Webinar series – the second session in a four-webinar series focused on the crucial topic of carbon pricing. The series was jointly curated with Andrei Marcu, the founder and executive director of the European Roundtable on Climate Change and Sustainable Transition (ERCST), a renowned think tank analysing and promoting climate policies within the European Union. The discussion centered around the effectiveness and importance of carbon pricing as an economically efficient market-based approach to reducing emissions and potentially generating government revenue. Sunita emphasized the need for carefully designed and implemented carbon pricing policies to ensure fairness, mitigate impacts on vulnerable populations, prevent carbon leakage, and facilitate a just transition for affected industries and communities.

The event's moderator, Dr. Gary Theseira, council member of CGM, warmly introduced the three esteemed speakers with his opening remarks, before setting the stage for the first of our list of speakers - Andrei Marcu.

Andrei Marcu - Founder & Executive Director of ERCST, kicked off the session by sharing valuable insights on emission trading systems (ETS) and their significance in the global context. ETS is a cap-and-trade system with a fixed cap on emissions, where covered businesses can emit as long as they possess sufficient allowances. The initial global ETS was under the Kyoto Protocol, with developed countries trading emissions among themselves and developing countries participating through offsets. The EU ETS, covering 40% of its emissions, evolved from free allocation to carbon border adjustment mechanisms to push industries towards decarbonization. As a result, the power sector has made considerable progress in decarbonization, but industries like steel and aluminium

face challenges in adapting to the rising carbon prices. The discussion shed light on the ETS's evolution, its impact on industries, and the importance of market flexibility to maintain environmental objectives.

Following Andre, Julia Michalak - the EU Policy Director at International Emissions Trading Association (IETA) began her presentation by introducing IETA as a nonprofit business association with over 300 member companies operating across compliance and voluntary carbon markets. Julia highlighted the key differences between these markets, emphasizing that compliance markets are the end goal for many jurisdictions. The EU Emissions Trading System (ETS) and the upcoming ETS 2 were discussed, with the latter set to cover a significant portion of EU emissions by 2027. She also pointed out the positive impact of carbon pricing in the EU, leading to increasing carbon prices and substantial auction revenues projected to reach almost 410 million euros between 2023-2030. Overall, Julia's presentation shed light on the current state and future prospects of carbon markets, providing valuable insights for the audience.

The session’s third and final speaker, Philippe Chauveua, Head of Climate Strategy at Solvay, shared his experience from their industry's participation in compliance markets since 2015. Solvay, a specialty chemicals and performance materials company with a long history of over 160 years, operates in more than 60 countries, with a significant presence in Europe. Their emissions in 2022 amounted to around 10 million tons of CO2 equivalent, and they are actively participating in various compliance markets worldwide. The company's ambitious goal is to achieve carbon neutrality by 2040 for all businesses except one, which is targeted for 2050 due to specific complexities. To accomplish this, Solvay plans substantial capital investments of around 2 billion euros by 2041. They have already achieved a 15% reduction in emissions since 2018, and they are determined to reach a 31% reduction milestone by 2030. Philippe emphasized the importance of compliance markets in driving low-carbon investments and innovation, particularly in scaling up new technologies for a sustainable future.

Q&A Session:

Q: What is the compliance rate in the EU ETS, and is there a mechanism to disincentivize players from just paying off the penalty if the market stability reserve (MSR) reserves are too low or empty?

A: The compliance rate in the EU ETS is approximately 97%, showing a high level of adherence to emissions regulations. In the case of penalties, they are applicable on top of the purchase of emissions allowances, ensuring that companies must cover their emissions before paying the fine. Some companies also set internal carbon prices, like Solvay's €100 per ton, to drive emissions reductions irrespective of market prices. This approach aligns with the current cost of technologies such as Carbon Capture and Storage (CCS) and motivates reductions even before reaching the penalty threshold.

Q: What lessons can be learned from some Asian emissions trading schemes where companies may only buy enough credits for compliance without investing in emission reduction technologies? How can such a situation be addressed to ensure companies move towards creating credits rather than relying solely on purchasing them?

A: Discussions pertaining to this issue highlighted the importance of market-driven decisions and allowing corporations to exercise fiduciary responsibility. Intervening

in the market may lead to a loss of efficiency; market size and liquidity are crucial for effective emissions trading systems. The EU ETS is considered more favourable due to its larger scale and market-based approach. However, smaller markets, like the UK ETS, also face challenges in ensuring liquidity and functionality. Linking with larger systems, like the EU ETS, can be a viable option for smaller markets to enhance liquidity and market dynamics. Therefore, the success of an emissions trading system depends on the governance, design, and political feasibility within each jurisdiction.

Q: How can companies convert their emission reduction projects, such as investing in gas steam turbines or NGR recycling, into carbon credits?

A: Converting emission reduction projects into carbon credits can be done through various means. In the compliance market, this can be achieved by seeking recognition under Article 6 of the Paris Agreement, which involves cooperation with the government and potential linkage with other countries. However, the demand for voluntary carbon credits is still emerging, and recognition of their value in corporate accounting is limited. Voluntary markets lack regulation and have a multitude of schemes, making it challenging for buyers and sellers to navigate and find suitable markets. As such, while offset markets are an option for some projects, they may not be suitable for all. The forthcoming developments in Article 6.2 may offer new opportunities and change the landscape of the carbon market.

Click here for the recordings