0:02 I um I've been working on this piece
0:04 about Hamlet and climate change and
0:06 >> Oh, really? really really going into it
0:08 really going into it in a lot of depth
0:10 and I keep finding all these
0:12 similarities. It's quite extraordinary
0:15 when you really uh dig deep.
0:15 >> So, uh
0:18 >> Oh, fantastic. History repeating itself. >> Yeah,
0:19 >> Yeah,
0:20 >> I think I bet if you looked into the
0:22 Mayans, you'd also find similar similar parallels.
0:24 parallels.
0:26 >> Maybe that's my next project. I'm off to
0:27 Mexico next week, so
0:28 >> Oh, really?
0:31 >> Yeah. Yeah, I got a mangrove project in
0:32 Verarac Cruz. So
0:34 >> Oh, cool, cool, cool, cool. Um, Mexico
0:37 is epic as well. Fantastic.
0:40 >> I used to live there many years ago, so
0:42 it's one of my favorite places.
0:44 >> Oh, wow. Did not know that. There you go.
0:44 go. >> Yeah.
0:46 >> Yeah.
0:47 >> What what took you to Mexico?
0:49 >> Well, I to after I graduated, I didn't
0:51 know what I wanted to do, so somebody
0:52 said, why don't you go teach English in
0:55 Mexico? So, that's what I did. And uh
0:56 but that was very different world in
0:59 those days. That was 1988.
0:59 Oh wow.
1:02 >> So there was no no concerns about oh I
1:04 have to worry about my career or my CV.
1:06 Just okay I'll do whatever and then I'll
1:07 come back and we'll see what happens and
1:08 we'll just figure it out.
1:10 >> The nonlinear path to carbon market.
1:38 All right, welcome back to this week in
1:40 carbon. I'm your host Eddie Smith
1:42 alongside Renee Velasquez. And today
1:45 we're thrilled to have on Mark Lewis.
1:47 Mark, thanks for joining us. Really
1:50 looking forward to today's discussion.
1:52 And before we dive into this week's
1:54 topics, I would love to introduce you to
1:55 the audience
1:57 >> and maybe ask if you could share a bit
1:59 about your background and your career
2:02 path and maybe what you've been up to uh
2:04 in in the recent months.
2:06 >> Sure. Uh well, first of all, thanks very
2:08 much Eddie and thanks very much Renee
2:10 for the invitation to uh to be on the
2:12 show today. Um it's it's a real pleasure
2:17 to be uh on on this uh leading carbon
2:19 market podcast. think you guys do great
2:22 work. So, uh it's fantastic to be with
2:24 you again. Um just briefly on my
2:26 background. So, I've been covering uh
2:29 carbon markets since 2005. At that time,
2:31 I was with Deutsche Bank. I broke into
2:35 carbon markets because I was previously
2:37 a uh utility analyst on the sell side
2:41 doing equities. And um when the ETS
2:44 started in 2005, I did this deep piece
2:47 of work on the impact of uh carbon
2:49 pricing on the profitability of the
2:51 European generation sector. And
2:53 unbeknown to me at the time, but it was
2:56 a wonderful uh boon in my career. Um
2:58 Deutsche Bank was in the process of
3:00 setting up a commodities team and a
3:03 carbon trading team. So they asked me to
3:05 move over from equity research into
3:07 commodities research. I think in fact I
3:09 was the first full-time dedicated
3:11 sellside analyst of carbon on the
3:14 street. So um that was uh amazing. We
3:17 rode the wave of the first uh carbon
3:20 market boom uh carbon markets 1.0. That
3:23 would be between 2005 and I would say
3:26 2012. A lot of the banks then pulled
3:30 out. Um I I uh left Deutsche, reinvented
3:33 myself as an ESG analyst uh for a few
3:34 years and then when the European
3:36 Commission came out with the idea for
3:38 the market stability reserve, I thought
3:41 okay in 2017 this is really going to
3:44 drive carbon pricing back to where it
3:46 needs to be if we're to achieve the
3:49 climate change targets. So uh I ended up
3:50 moving on to the buy side of the
3:52 industry, spent some time at BMP and
3:55 then most recently at Anderan Capital as
3:59 the carbon research specialist there and
4:02 um I just left I left at the end of May.
4:04 Um, I wanted to take some time out and
4:08 think about uh what comes next. And uh
4:10 what I do know is I want it to be 100%
4:12 carbon focused because I think the
4:14 outlook for both compliance markets and
4:18 what I call quasi compliance markets uh
4:19 voluntary credits that have
4:20 corresponding adjustments, so-called
4:22 article six credits, is extremely
4:25 exciting over the next 5 years. And I'm
4:27 sure we'll be getting into that in the
4:29 course of this conversation. So, uh
4:31 that's how I came to it. uh to where I
4:33 am now and looking forward to explaining
4:35 how I think this all shakes out over the
4:38 next five years with uh with you guys.
4:41 >> Yeah. Yeah. Well, thank you so much for
4:43 you know for the brief uh you know
4:45 explanation. You've had amazing career
4:48 in the space and congrats on exiting on recently.
4:49 recently.
4:50 >> Yeah. Thank you.
4:53 >> So the first topic will be on EUAs and
4:55 the outlook for EUAs. And I read a
4:58 couple of different uh articles with
4:59 differing opinions,
5:01 >> right? So
5:04 currently EUA is trading around 70 to 75
5:07 a ton and analysts are widely
5:10 anticipating rising prices through 2025
5:12 and beyond. So there's some bullish
5:15 optimism underpinned by uh tightening
5:18 supply and sustained demand growth
5:21 driven by you know recent EU climate
5:23 policy reforms. And you know, you have
5:25 Mcquaryy Bank uh their latest outlook
5:30 sees average UA prices of €75 in 2025
5:34 and 95 by 2026. So a notable upward
5:35 revision, but >> yeah.
5:36 >> yeah. >> Yeah,
5:36 >> Yeah,
5:39 >> I also read that a lot of investors have
5:42 been increasing their bearish bets on EU
5:44 carbon allowances last week amid the
5:47 looming threat uh by US President Trump
5:50 to impose import duties on the economic
5:53 block uh from August. So I saw that
5:54 money managers were increasing the
5:56 number of short positions during the the
5:59 weekend of July by the end of uh you
6:01 know equivalent of 2.2 million
6:04 allowances. So their large largest
6:07 weekly increase uh since early April. So
6:10 given this uh you know landscape I I
6:11 would love to ask and hear your thoughts
6:14 on the key drivers behind uh the bullish
6:17 outlook for EU carbon allowances and
6:18 maybe some of the reasons that folks
6:22 have some bearish sentiment.
6:25 >> Sure. Um well I I think the main bullish
6:27 argument is is very simple to
6:29 articulate, right? I mean, uh, there's
6:31 two things you I always I always tell
6:33 anybody who's new to the carbon market,
6:35 to the to the European cap and trade
6:37 market, the EU ETSs one as we're now
6:39 calling it, and we'll get on to ETSs2
6:43 later, but um, is it it has two uh,
6:45 distinguishing features from any other
6:48 commodity market, right? Number one, the
6:50 supply of the commodity in question is
6:53 fixed and declining, and it's on a
6:56 visible trajectory. We know what happens
6:58 to the supply over time. There's there's
6:59 no other commodity market where that's
7:00 the case. If you think about the oil
7:02 market, I don't know what the supply of
7:04 oil is going to be next week, never mind
7:06 next year uh or in 10 years. Here you
7:09 have almost or certainly as close to
7:11 perfect visibility as you're ever going
7:13 to get in a commodity market in terms of
7:15 the supply. So that's the first
7:17 distinguishing feature. But the second
7:20 one is the one I think that really makes
7:22 for the long-term structural bull
7:25 argument. And that is this. There are no
7:28 natural sellers in this market, right?
7:29 You think of any normal commodity
7:32 market, somebody is producing it and
7:34 somebody is buying it. There's a natural
7:37 seller and there's a natural buyer. Here
7:40 there is no um natural producer as it
7:43 were. what you have is a regulator who
7:45 auctions allowances or makes them freely
7:47 available albeit in declining amounts
7:49 going forward because um we're moving
7:51 away from free allocation to industry
7:55 towards uh full auctioning by 2034.
7:58 Um but the key point here is um if you
8:00 want to stay in business as a power
8:03 company or a steel company or a cement
8:04 company any of the industries that are
8:07 covered by the scheme um you have to buy
8:09 these allowances. So there are only
8:12 natural buyers, no natural sellers. So
8:15 you put those two uh dimensions of the
8:17 equation together. On the one hand, a
8:19 declining supply now we know it's
8:23 declining to zero by 2040 and the fact
8:27 that there are no natural uh sellers.
8:31 Then what you have here is a market set
8:33 for long-term bullish momentum. Right?
8:35 That that that's what that tells you.
8:39 Now um timing is everything in markets
8:41 right? You know Einstein said that uh
8:44 physics is the search for truth in space
8:46 and time and John Maynard Kane said that
8:49 speculation is the search for truth in
8:52 price and time. Okay. So timing is
8:56 everything and um undoubtedly per your
9:00 question on the intro there Eddie um
9:03 there will be moments where uh prices
9:07 can fall, fluctuate, decline and clearly
9:10 President Trump's um continuing dance
9:12 around tariff levels not only with
9:13 Europe but with the rest of the world
9:14 because there's the impact on the rest
9:16 of the world to be considered as well.
9:18 It's a secondary order effect on the
9:20 European economy. Germany, don't forget,
9:22 is the world's largest industrial
9:24 exporter. So, particularly sensitive to
9:28 global export uh trends. Um undoubtedly
9:32 this is a concern, but um uh we've seen
9:36 before that that um the concern around
9:37 the tariffs has perhaps been a little
9:40 bit overdone and and there is normally
9:43 some kind of deal done. So, I think
9:45 notwithstanding the fact that prices can
9:48 can suffer short-term uh volatility and
9:50 short-term fallbacks, I think the setup
9:53 over the next 18 months to two years, if
9:56 that's your kind of investment horizon,
9:59 is is very bullish in the sense that we
10:01 we are entering a period now on the
10:04 numbers that I model in my model where
10:07 we're into five years of consecutive
10:10 annual deficits and in particular for
10:13 2026 In 2027, you're looking at
10:15 tripledigit deficits, which means that
10:18 the um demand will outweigh supply
10:22 significantly. That will reduce the uh
10:24 level of allowances in the market, the
10:26 so-called T-ac, the total number of
10:29 allowances in circulation. And in any
10:33 market where the inventory is declining,
10:34 because that's what the TAC is. It's
10:37 it's the inventory of carbon allowances,
10:40 um prices go up. So um one has to be
10:43 aware of of the threat of recession. Uh
10:44 we have to keep following the news
10:48 regarding tariffs and so on. But the underlying
10:49 underlying signal
10:51 signal
10:53 for all the short-term noise about
10:56 tariffs and so on is that um this market
11:00 is going to get a lot tighter between
11:03 now and 2030. Um that's the first thing.
11:06 And I would make one other point um in
11:07 terms of being structurally bullish on
11:09 this market over the next three, four,
11:12 five years. Um industry that we have to
11:15 take into account behavioral
11:18 uh psychology. And what we have in this
11:21 in this market is two kinds of players really.
11:23 really.
11:24 You have the utility companies or the
11:27 generation companies who ever since 2008
11:29 have had to pay for all of their
11:31 allowances. Right? So they they've been
11:34 auctioned uh since 2008. What that means
11:36 is they've typically hedged their uh
11:38 buying requirement on a rolling
11:40 three-year basis and they have been the
11:42 main driver of pricing in this market
11:46 which is why um the the fuel switch between
11:47 between
11:51 um coal and gas has been the proxy the
11:53 kind of shorthand way in which traders
11:55 have looked at where the price quote
11:58 unquote should be at any given moment.
11:59 you look at the carbon price say it's €7
12:01 a ton and then you look at the implied
12:02 fuel switch and you say that's maybe
12:04 that's 50 or maybe that's 100 and
12:05 therefore you say well the price should
12:07 be higher or lower as a function of
12:09 that. Um we're now moving into a very
12:12 different market where it will no longer
12:14 be the utilities that are driving uh
12:16 price but industry and that's for two
12:19 reasons. One uh the power sector is
12:21 decarbonizing very quickly anyway. you
12:23 know, the the the renewables revolution
12:26 means that there is uh no longer much of
12:29 a need for fuel switching per se in the
12:30 power sector. And there's there's not
12:32 much of it to be done. So much of the
12:33 coal has already been taken off the
12:35 grid. So you look at a market like the
12:37 UK, I know it's a separate market, but
12:39 it it's a a proxy for the European
12:40 market more broadly because this is
12:42 where the whole of Europe is going.
12:45 There's no more coal in that market. You
12:46 only have gas. You can't switch between
12:49 between coal and gas. That's the way
12:50 Europe is going. there's less and less
12:52 coal on the grid. So, fuel switching
12:55 much less important. Um, and what that
12:58 means is it's industry that will drive
13:00 pricing. And industry will drive pricing
13:02 for two reasons. One, because they're
13:03 losing their free allowances
13:06 progressively over the next five years.
13:07 So, they will have to be in the market
13:09 more actively. That's what I mean by
13:12 behavioral psychology. Their entire
13:15 behavior with regard to this market is
13:16 going to change. And of course, it's
13:18 going to change because if you get your
13:20 allowances free every year and and it
13:23 matches the number you need or in until
13:25 quite recently has been in excess of
13:27 what you need, you don't need to worry
13:29 about hedging. But now you have a
13:31 situation where they know two things.
13:33 The cap is declining. So the overall pie
13:37 is shrinking and the share of that pie
13:39 that they receive for free is also
13:42 shrinking and that falls to zero by
13:44 2034. Um and then the cap overall falls
13:48 to zero by 2040. So at some point I
13:51 expect over the next 18 to 24 months two
13:53 or three four or five of these big
13:55 industrial companies that have large
13:57 amounts of carbon to hedge will step
13:58 into the market and start doing that.
14:00 And once that happens the pricing
14:02 dynamic in this market changes very
14:04 significantly I think.
14:07 >> Yeah. Yeah. Certainly. And next month,
14:08 >> you know,
14:10 >> do you think that some of the key
14:13 changes under the fit for 55 package,
14:16 the 2023 revision, like you know, uh
14:18 sectors like maritime shipping and uh
14:21 intraEU aviation uh increasing demand
14:23 plays a significant role in this kind of
14:25 changing landscape.
14:29 >> Um also the re repower EU program maybe
14:33 wanted to touch on the policy. Yeah.
14:35 >> That's driving this uh driving this market
14:36 market
14:38 >> of course. Well, I think to take those
14:40 questions uh one by one. I mean first of
14:44 all the inclusion of uh maritime uh is
14:47 50% of maritime uh emissions as we know
14:51 from uh i.e the 50% of uh all emissions
14:54 from ships entering and leaving uh the
14:55 European Union which is different from
14:56 how they've done aviation and we can
14:59 maybe come back to that in a moment but
15:01 um in terms of shipping it helps at the
15:03 margin for sure you know because the cap
15:06 for aviation um sorry for maritime
15:11 emissions is um uh also declining uh
15:14 with the overall cap and um it started
15:17 actually uh at a tighter level than it
15:19 did for industry. many years ago
15:20 obviously because the European
15:23 Commission has learned a lot uh in the
15:25 interim. So it helps at the margin but I
15:27 don't think it's in and of itself the
15:30 maritime sector is big enough to make I
15:32 is so gamechanging but at at a point in
15:36 the cycle of this in um market where the
15:38 cap now is really declining very
15:40 aggressively every year if you tighten
15:42 it incrementally by adding new sectors
15:45 that are also short clearly at the
15:47 margin that that makes the outlook even
15:50 more bullish. So I think yes is is the
15:52 answer there in terms of the addition of
15:54 of maritime aviation is a trickier one
15:57 because you know in theory what the
15:59 directive says is that or in law what
16:02 the directive says is that all flights
16:05 entering and leaving the European Union
16:07 in addition to flights within the
16:09 European Union should be covered by the
16:11 scheme. Now what happened was uh at the
16:13 risk of telling your audience something
16:16 they're already very familiar with is
16:18 that in 2012 because of political
16:20 pressure from other countries like the
16:23 United States, India, uh Russia, China
16:26 and so forth um the the European Union
16:29 agreed to so to the so-called stop the
16:31 clock measure where they said okay we
16:35 will um suspend the idea that all
16:36 flights entering and leaving the
16:39 European Union uh have to be covered.
16:42 uh as long as the inter international
16:46 civil aviation or organization AO the UN
16:50 body that governs aviation agrees to um
16:52 some kind of voluntary effort that is
16:54 meaningful and substantial to reduce
16:57 emissions so that um they're not being
17:00 given uh a free pass as it were. Now
17:03 this is why we have Corsia
17:06 uh and of course that could become a
17:08 very interesting dimension to the the
17:11 broader global carbon market uh in the
17:13 next few years. I suspect it will do in
17:16 fact. Um but for the time being we now
17:18 await the key decision from the European
17:20 Union which I I guess we'll get next
17:22 year or the year after as to whether or
17:27 not it is satisfied that Corsia is
17:30 meaningful and substantial such that
17:32 they are happy for it to continue being
17:35 the way in which global or international
17:36 aviation that comes in and out of the
17:39 European Union u meets its carbon
17:42 obligations. Um, we'll have to wait and
17:44 see how that plays out. I don't think
17:45 the politics have changed. I think it is
17:48 going to be difficult for for Europe to
17:50 unstop the clock as it were or or or
17:52 start the clock running again because um
17:53 there will be political pressure
17:55 undoubtedly from all these other major
17:58 jurisdictions. Um so we'll we'll wait
18:02 and see on that. What I would say is if
18:04 Europe said, "Sorry, we don't think
18:08 Corsier is is um meaningful enough and
18:09 we're going to start the clock running
18:11 again and every flight coming in and
18:15 leaving the huge shift countries, then
18:17 um that would have a a major impact on
18:19 the tightness of the market. That would
18:22 be very bullish indeed." So um let's
18:24 wait and see. That's not my base case
18:27 because I think the politics of that are
18:32 very complicated. Um, so, um, I think
18:34 everything that was in the FIFA 55 package
18:35 package
18:37 is supporting this idea of the upward
18:40 trend in in prices because and and
18:41 that's not surprising. I mean, this is
18:45 the the the EU ETS one is the
18:47 cornerstone of the European Union's
18:49 climate change policy. So uh to the
18:51 extent that they are banking on carbon
18:53 prices being the way in which European
18:56 industry de decarbonizes and helps
19:00 Europe meet its um its ultimate net zero
19:04 challenge by 2050. Um prices do need to
19:09 go higher. So um that's that's kind of
19:10 what the market is there to do or they
19:13 need to go to the level that that that
19:15 >> the price discovery needs to reach a
19:19 level where industry is incentivized to
19:22 reduce emissions. Um I don't think 50 a
19:25 ton is where that happens.
19:29 >> The question is is it 100 100 120 150
19:32 200 that's what we're going to find out
19:35 over the next five years.
19:37 Yeah, certainly. Renee, did you have any
19:39 uh thoughts that you wanted to jump in
19:41 on? I see you. Uh
19:43 >> yeah, I'm just nodding very um very
19:44 aggressively here in the background. I'm
19:45 really enjoying this. Mark, again,
19:47 thanks for coming back. I I said before
19:51 we started rolling uh and recording how
19:52 uh how great the episode was on the
19:54 carbon exposure project, the other the
19:56 other podcast, and how many requests
19:58 I've had for you to come back.
19:59 really grateful that you're here and
20:01 providing once again a masterass on
20:04 everything uh from EUS all the way
20:06 through to Corsia.
20:07 >> Look, I just I just have some
20:09 observations. I think
20:10 >> you you gave us and and you walked us
20:12 through this very complex landscape and
20:14 you you you did so really eloquently. So
20:15 So you know the I think the audience
20:17 will really get essentially what what
20:18 everything you're saying here around
20:21 this this bullish case that you've built
20:23 in in terms of reflection and and and
20:25 obviously you know you mentioned it from
20:27 the outset. you're you were the first
20:29 analyst carbon carbon specific analyst
20:30 and carbon focused analyst in in the
20:34 city of London back in the day and you
20:37 know to me the EUS is really has evolved
20:40 from a policy uh sorry a clunky policy
20:42 tool essentially you know to one of the
20:44 most sophisticated commodity markets and
20:46 you you intimated that right when you
20:48 said that now there's a visibility
20:50 around fundamentals around the direction
20:52 of travel because of the tightening of
20:54 these various different systems so
20:56 market stability reserve the MSR in
20:58 particular, you know, you talked about
21:01 um fit for 55 and and the and the
21:02 direction right there and and it's
21:04 essentially now we're seeing this true
21:06 price discovery and you mentioned that
21:07 earlier, right, driven by these
21:08 fundamentals and it's not just Brussels
21:10 edicts, right, that that are driving
21:12 that, right? The the the structural
21:14 tightening piece between the MSR, the
21:16 cap reduction, you've got sexual
21:19 expansion into maritime and you kind of,
21:21 you know, the sort of democ over over
21:23 aviation. uh you know but but
21:25 effectively we're witnessing this most
21:27 aggressive sort of supply side reform
21:29 since the system began is kind of how I
21:31 see it and and I liken it to kind of
21:33 like quantitative easing easing but in
21:35 reverse. It's essentially every year
21:37 there's less and less supply as you said
21:40 or less oxygen in the system and so that
21:41 has an inflationary effect with regards
21:43 to prices and and as you as you
21:44 correctly just said in your last kind of
21:47 point is you know the the price band has
21:50 been fairly I mean it's been in the last
21:51 couple years I was just looking at the
21:53 ice futures you know somewhere between 80
21:55 80
21:59 a ton you know per EUA in January of 24
22:03 and a and a low of you know 55 what is
22:04 it in in that time frame and it's been
22:08 somewhere between this 80 85 to 85 and
22:10 60 sort of range. Yeah. Yeah. and and
22:13 and it's been kind of up and down, but
22:15 now it seems that this this is kind of a
22:17 really interesting inflection point as a
22:21 result of of this run towards 2030. Um,
22:22 and and I think that you're you know,
22:25 when we certainly speak to hedge funds,
22:27 you know, that they're treating EUAs
22:29 essentially as a macro trade,
22:31 >> right? They look at, as you said, a a
22:33 proxy for energy policy and industrial demand.
22:34 demand.
22:36 >> And now you've got this coupling around
22:38 this geopolitical volatility. So
22:40 carbon's no longer niche. That's the
22:41 that's the take-home message that I want
22:44 people to take away. It's no longer this
22:47 obscure little corner of of commodity
22:49 markets. It's a real commodity market
22:51 that is ubiquitous and it touches on
22:53 every single industry. Um, so, so
22:55 they're just some observations based on
22:56 on what you what you
22:57 >> I mean, and it's a great point, Renee,
22:59 because I think the other thing that
23:00 people will have to start bearing in
23:03 mind more going forward is is not just
23:04 in the commodity space, but in the
23:06 equity space. What's the impact of
23:09 higher carbon prices um for fund
23:11 managers who hold, you know, European
23:14 equities in industrial sectors? You
23:16 know, there's there's going to be a lot
23:19 of uh analysis needed. I mean, one thing
23:21 that strikes me is
23:23 >> sort of stranded asset sort of test.
23:25 >> Well, yeah. And and just the fact that
23:27 the sellside and and I can say this as
23:29 an exelside guy. I was on the sell side
23:32 for 20 years. You know, I would never
23:34 say that sellside analysts are lazy
23:35 because it's what it's the hardest job I
23:36 ever had, right? You you have to be on
23:38 top of everything and so on. But but
23:40 what does tend to happen on the sell
23:43 side, particularly on the equity sell
23:46 side, is that the analysts focus on the
23:48 areas that the companies themselves
23:50 focus on. And um this is why you've not
23:52 really seen even now when this market
23:56 has been up and running for 20 years um
23:58 analysts of the steel sector or the
24:02 cement sector or uh you know oil and gas
24:04 sector focusing on refineries uh
24:09 chemicals. um detailed research reports
24:11 from these guys saying what's the impact
24:13 of higher carbon prices on our sector
24:14 over the next few years as we lose free
24:18 allowances and so on. Um so over the
24:21 next three or four years there's a huge
24:24 amount of learning to be done by the
24:26 sellside analysts of these sectors
24:28 because once the behavioral psychology
24:30 of the companies they cover changes
24:33 their coverage will have to change and
24:35 ditto for the fund managers who manage
24:40 equities um in these sectors. So um
24:41 figuring out who are the winners and
24:43 losers at an individual company level
24:45 across these different sectors as carbon
24:48 prices start to rise, who's hedging
24:50 well, who's not hedging well, etc.
24:53 That's going to be uh a major source of
24:56 uh alpha I think for fund managers
24:58 whether it's in the long only space or
25:01 in the hedge fund space. So um it's it's
25:04 kind of the underappreciated aspect of
25:06 of this carbon market. It's of course
25:09 it's an it's an asset in and of itself,
25:11 but it's an asset that will affect
25:13 increasingly the profitability of
25:15 industrial Europe over the next well
25:18 until the market ends now in 2040.
25:19 >> Yeah. And I want to touch on
25:22 >> interesting. Can I just double can I
25:24 double click on that one? I mean that
25:26 that that to me is really interesting
25:29 because essentially it's you know you've
25:33 got carbon as you said it's not just or
25:34 the sellside coverage is essentially
25:35 finally waking up is what you're saying
25:37 right it's not just as carbon as a trade
25:39 so the alpha is not just in the EUAs
25:41 themselves but it's in anticipating
25:43 which sectors are the most exposed and
25:44 essentially who's position to the arbitrage
25:46 arbitrage
25:48 >> like to that transition right or to
25:49 arbitrage that transition more
25:51 >> absolutely yeah
25:52 >> um and so I'm just I'm just wondering
25:54 like you know
25:56 you what's that headline risk right for
25:58 for for those analysts you mentioned
26:00 cement steel and and chemicals like the
26:03 EU EUA curve is is essentially the new
26:06 cost of capital effectively right for
26:08 them because essentially
26:11 >> that hasn't been faced in what 30 you
26:13 know an EUA wasn't really a pain point
26:15 but once we hit triple digits again it's
26:17 it's going to be material right like it
26:19 it could it could actually be material
26:21 to the to the balance sheet and to capex
26:23 right so so where is capex going to to
26:25 kind of hedge for that risk. Exactly.
26:26 >> The direction of travel's clear like
26:29 decarbonize or or don't exist, right?
26:31 And then you got CBAM on top of it which
26:34 which reduces the leakage piece. So the
26:36 EU is not going away in terms of
26:38 population, in terms of demand. So it's
26:41 a very very significant policy direction
26:42 and and it's and it's kind of like baked in.
26:43 in.
26:45 >> Well, I the way you said that there is
26:48 very true that Renee the decarbonize or
26:50 don't exist. I prefer to call it comply
26:54 or die. and comply or die and um that's
26:55 that's what industry is going to have to
26:57 wake up to. It's comply or die time, right?
26:58 right?
27:01 >> And and that means they have to be much
27:04 more active hedging. Uh again, the risk
27:05 of sounding like a broken record. It's
27:08 all about behavioral psychology now. And
27:10 that will drive um so we we've got this
27:12 backdrop of very supportive fundamentals
27:15 in terms of supply. What what changes on
27:18 demand is a change in behavior. It's not
27:20 that that there's going to be an
27:24 increase demand per se for allowances.
27:26 It's that the way they behave in seeking
27:29 those allowances is going to change. >> Yeah.
27:30 >> Yeah.
27:31 >> Yeah. It's kind It's kind of funny
27:32 because in 2020, sorry I didn't
27:34 candleize this whole thing. I know I
27:35 know you've got other topics to get to,
27:37 but I'm just a nerd out here with M is a
27:38 person that I admire immensely and I
27:41 just love talking to. Um so so you know
27:43 in 2020 a lot of folks came in as the
27:45 voluntary market was kind of getting
27:47 getting you know it its feet uh sort of
27:49 set and and we started to see the first
27:51 futures contracts and you know started
27:52 seeing increasing liquidity etc. And a
27:55 lot of folks kind of just overly overly
27:57 bullish and they said oh you know carbon
27:59 is the new oil and I remember that quote
28:01 at that time thinking guys no no no
28:04 please don't jinx us. Um but but
28:07 essentially you know what I what I liken
28:10 it now to to what you're saying is essentially
28:11 essentially
28:13 you know the smartest analysts are
28:16 treating carbon in particular EUAs as a
28:20 leading indicator much in the way that
28:23 if you you know essentially if you read
28:26 oil like carbon's kind of like oil in
28:27 that it's not just a trade but it's a
28:29 macro variable that it moves those
28:31 industrial margins those share prices
28:33 you talked about equities and
28:36 essentially capital flows. So if you
28:38 know if you're still modeling the EU ETS
28:40 exposure as a footnote in an industrials
28:42 report, essentially you're missing the
28:44 plot. Carbon's become the effectively
28:47 the fulcrum and the smartest analysts
28:48 are treating it like that leading
28:49 indicator. And I think that that's a
28:51 really interesting kind of position for
28:53 for it to break out from this kind of
28:55 tight band of you said between 55 and 80
28:57 and essentially just bust out of that
29:00 and then and then fundamentals kind of
29:02 drive that that direction and as you
29:03 said it's just going to be harder and
29:05 harder to get
29:08 >> ready supply on a forward basis and and
29:10 to lock that up for the big industrials
29:12 and that's what will move the market
29:14 where the bids start chasing
29:16 >> the you know the market up and up and up
29:18 and up and then the smart could just
29:19 load up on this stuff.
29:21 >> Well, that's what that was that is
29:22 exactly right. That was the point I was
29:24 going to make. And if if if we're
29:25 probably not going to have to wait for
29:27 the first industrial to do that because
29:29 hedge funds will anticipate that, >> right?
29:29 >> right?
29:31 >> Hence the comment about, you know,
29:33 >> and so it's a natural it's a naturally
29:34 long market. So that's an interesting
29:37 kind of supporting your bullish like
29:38 sentiment. So
29:41 >> exactly. Exactly. Yeah. Yeah.
29:45 >> Yeah. And I think like touching on
29:48 more of a macro perspective, you know, >> obviously
29:50 >> obviously
29:52 high carbon price is intended to
29:54 intended to incentivize deep emission
29:56 cuts in EU power and industry and
29:59 maritime and that impacts like you said
30:03 all different angles of the economy. And
30:04 you know I would say there has been
30:08 quite some pessimism about Europe uh
30:11 recently due to regulatory constraints
30:13 and overall lower lower growth rates
30:16 compared to other nations. you know,
30:20 we're seeing GDP uh in in large European
30:22 nations fall behind and a lot of
30:25 industry exe executives are increasingly
30:28 voicing their concerns about
30:30 further climate policy and f further
30:33 regulatory constraints and I I would
30:35 like to ask you Mark since you've
30:38 obviously seen this market um through
30:41 multiple cycles and from your experience
30:43 >> you know how significant is the
30:45 correlation between you
30:49 high carbon prices and lower economic
30:51 growth and output and what is your kind
30:53 of forwardlooking
30:57 perspective on on this topic because it
30:59 you know there there is a lot of voiced
31:03 concerns uh from European uh execs on on
31:05 further climate policy. Yeah, I would
31:06 love to to hear your thoughts.
31:08 >> Right. Yeah. So this is obviously a very
31:11 uh controversial and and uh difficult
31:14 topic you know technically uh lots of
31:17 layers to it. The the big picture way I
31:19 would answer this is to say look what
31:24 happened in uh the summer of 2022
31:27 when we had those record uh power and
31:30 gas prices. you know, European gas 5
31:32 years ago,
31:35 >> um, before the before the
31:37 troubles with Russian gas supply into
31:40 Europe, European gas was trading at 15 a
31:42 megawatt hour all the way down the
31:44 curve, right? That was, let's say, the
31:47 old normal was 15 a TTF. >> Yeah.
31:48 >> Yeah.
31:52 >> And German power had never once traded
31:55 above €100 a megawatt hour, German base
31:59 load power. And in the summer of 2022,
32:03 we saw TTF reach 350 euros a megawatt
32:05 hour. And German base load power very
32:09 briefly, but it did trade there. €1,000
32:12 per megawatt hour. But European carbon
32:15 never went above 100. Well, it got it
32:17 got to 100. It didn't go higher than 100
32:19 or not much higher. I think the all-time
32:21 high is 101
32:24 euros25, right? Um, what does that tell
32:29 you? It kind of tells you that um Europe
32:30 has been and and of course prices have
32:33 come down but we're still back at what
32:35 are historically
32:37 high prices very high prices for
32:41 European power and gas right um and
32:43 European industry is suffering under
32:44 that. So I think the first thing to say
32:47 is that for all of these energyintensive
32:50 industries, it's the price of power and
32:52 especially the price of gas which in any
32:54 case determines the price of power um
32:57 that is more significant than the price
32:59 of carbon. That's the the first thing I
33:03 would say. Um and it was very
33:06 interesting to me that you know
33:08 it's kind of the way human psychology
33:11 works. If if we'd had European carbon at
33:13 €100 a ton
33:18 with power at kind of 50 and TTF at 30,
33:19 I think there would have been huge
33:23 outcroes over over carbon prices, right?
33:24 But because
33:26 power went so much higher and because
33:29 gas went so much higher and if you were
33:30 doing the fuel switch, I worked out at
33:33 the peak in summer 22. I remember doing
33:36 this calculation at the time. If if we
33:38 traded on the fuel switch in the carbon
33:40 market, the price of carbon would not
33:43 been would not have been €100 uh euros a
33:46 ton. It would have been €500 a ton
33:47 because that would have been the price
33:50 needed to switch from coal to gas
33:52 because gas was so expensive at the
33:55 time. And yet carbon just stuck around
33:57 that 100 level while the other
33:59 commodities were having their uh crazy
34:02 moment. And um that kind of tells you actually
34:02 actually
34:04 >> so no elasticity with regards to that
34:06 volatility. That's interesting.
34:08 >> Yeah. Yeah. Yeah. Yeah. Exactly. So I I
34:10 I think the thing about carbon on its
34:13 own having such a major impact on you
34:15 know the macro level for the European
34:18 economy and for European GDP. It it's
34:21 possible to overexaggerate it. I'm not
34:22 going to underplay it and I'll come back
34:25 to this point in a moment. But I'm
34:27 saying power and gas are actually more
34:28 important right in the grand scheme of
34:32 things. Now that being said, we are
34:34 moving as I said earlier and you've
34:37 heard me make this bullish case now for
34:42 for EUAS. Um, I think that, um, if if
34:45 I'm right and we see prices of maybe
34:49 €150 a ton for EUAs within two years,
34:53 which I think is perfectly possible, um,
34:55 that is going to cause definitely
34:59 problems for for some of the uh very
35:02 heavily uh energyintensive industries.
35:04 We already know that the aluminium
35:05 industry suffers with high carbon
35:08 prices. anything that uses uh a lot of
35:14 electricity um will suffer. Um and uh
35:15 but this is exactly why we've brought in
35:19 CBAM right so uh the point about CBAM is
35:23 that CBAM is there uh to try and
35:25 mitigate try and offset in fact
35:28 neutralize the impact on European
35:30 industrial competitiveness of higher
35:31 carbon prices because it will it will
35:34 require that foreign companies pay the
35:36 same carbon price at the border
35:38 effectively even though you know it's
35:42 it's a pass through to the importer But
35:45 nonetheless, what's happening is um
35:47 effectively the carbon price at the
35:49 border is being adjusted upward. So
35:51 foreign exporters into Europe are paying
35:54 the same carbon price effectively. Now
35:57 the problem with that is that um it only
36:00 solves one side of the equation because
36:02 uh European exporters
36:05 who are exporting to other jurisdictions
36:06 outside of Europe, they're not getting
36:08 any help, you know. So they're losing
36:10 free allowances and they're exporting
36:12 into jurisdictions that have much lower
36:16 if if if any at all carbon prices. So I
36:18 think that is where it will become
36:20 tricky and there will be for every
36:21 industry and for every company within
36:24 each industry different
36:27 price levels of carbon that cause them
36:30 pain. But ultimately this market is
36:32 about price discovery and getting them
36:35 to find new ways to to produce things uh
36:37 more cost effectively. So look,
36:38 summarizing all of that, I said it was a
36:40 technical issue. There's lots of layers
36:41 to it. It's difficult to run through it
36:43 in in a very short period of time and
36:45 got other stuff to get through. But to
36:48 summarize it, I would say um Europe
36:51 should be very alive to the risk on
36:53 industrial competitiveness of higher
36:56 carbon prices as we move towards 2030 uh
37:00 and beyond. Um particularly for European exporters
37:02 exporters
37:05 uh in these sectors. Um and that's why
37:08 in my view um one of the tricks they
37:10 have missed perhaps the biggest trick
37:14 they have missed is uh allowing I I'm
37:15 sure they'll have to revisit this by the
37:18 way I I just don't think this can stand
37:19 but you know two weeks ago when they
37:20 came out with the proposal the
37:22 commission came out with the proposal
37:26 for a 90% reduction in emissions by 20
37:30 uh 2040 for the EU overall right for the
37:32 EU overall
37:38 >> um they said we will only allow uh 3% of
37:42 the entire cap to be um
37:46 to be in terms of volume. That's the
37:49 that's the cap on the amount of offsets
37:52 we will allow into Europe into Europe,
37:55 not into the EUTS. In fact, what they've
37:58 said is we will not allow at this stage um
38:00 um
38:04 article 6 credits into the EU ETS beyond
38:08 2030. And even for the nonet or at least
38:11 nonet1, so you're looking at ETSs 2 and
38:14 then the agricultural sectors, I guess,
38:17 um you're looking at 150 million tons in
38:21 total over 5 years from 2036 to 2040.
38:24 That's 30 million tons a year. That's 1
38:27 million tons per member state per year
38:31 for five years. It's absolutely nothing.
38:36 It's not even peanuts. Um, and so, uh, I
38:37 think they're going to have to revisit
38:41 that because I I I just think that, um,
38:43 European industrial competitiveness,
38:46 particularly if gas prices have not come
38:48 down more by then, and one would hope
38:50 that with all the LNG that is meant to
38:53 be coming online over the next uh, 2,
38:55 three years, European gas prices will
38:58 fall back. Um, but nonetheless, there is
39:00 a risk clearly to European industrial
39:01 competitiveness here. And I think the
39:02 way you solve that, you square the
39:04 circle is by allowing article six
39:07 credits with with um corresponding
39:11 adjustments into the market beyond 2030.
39:13 >> But in a gradual manner, right?
39:14 >> Yeah. Right.
39:16 >> It's like a release valve essentially.
39:18 >> Totally. Totally. Totally. Yeah.
39:20 >> I mean, if you think about some easy
39:21 maths on this. >> Yeah.
39:22 >> Yeah.
39:25 >> Um between 2008 and 2020,
39:28 the EU allowed 1.6 6 billion tons worth
39:34 of Kyoto credits, so CERS and uh ERUS
39:36 into the market, that 1.6 billion
39:40 represented 7% of the total cap uh the
39:43 total EU ETS cap over that period. So um
39:47 if you did uh a similar thing here,
39:49 you'd be look I'm doing this very much
39:51 off the top of my head here. So let's
39:54 say the cap between 2031 and 2040 is is
39:56 4 billion. is going to average about 400
40:00 million a year over that period. Um 4
40:03 billion times 0.07 million.
40:05 >> Yeah, you'd be looking about 300 million
40:09 300 million uh
40:11 volunt uh uh article 6 credits with
40:13 corresponding adjustments
40:16 >> at a minimum I would say. Um and and so
40:18 I just think the European Commission at
40:22 the moment frankly is um uh has got its
40:24 head in the clouds. I mean, it's just
40:27 not it's just not thinking this through
40:31 properly yet. And um uh let's put it
40:33 this way. If if carbon prices were
40:36 already trading at
40:39 12, I think there would have been a much
40:42 greater readiness two weeks ago when
40:44 they published that document to allow
40:46 for uh article six credits to come into
40:50 the ETSs beyond 23.
40:52 >> Certainly. Yeah. And there's there's a
40:55 lot to unpack there. Um
40:58 so you know maybe I would love to ask
41:00 you know which which
41:02 segue would you want to take this in? We
41:05 can discuss the EU you know UK ETS
41:07 linkage. we can discuss the outlook for
41:10 EUTS2 or we can go
41:12 >> can I can we click on EUTS2 because Mark
41:15 you've mentioned it in in kind of in in
41:16 your intros a couple of times where you
41:19 said you know the old EUS was is now
41:22 ETS1 and now we've got ETS2 that's a
41:26 that's another um kind of quirky quirky duck
41:27 duck
41:29 >> right love to
41:31 >> you know it's yeah so I'd love to hear
41:34 more more what you think about it
41:37 because um you It's kind of like
41:38 >> Yeah, it's just it's just it's just an
41:40 odd one. It's effectively, you know, the
41:42 UES was just is it wasn't just
41:44 tightening like you said, right? It was
41:46 a it was this kind of uh structural >> Yeah.
41:47 >> Yeah.
41:49 >> kind of industrial piece, but it but
41:53 effectively so like you know ETS1 was
41:54 cleaning up the cleanup proof of the
41:56 smoke stacks, but ETS2 is essentially
41:58 the front line of this climate policy,
42:00 but in everyday life.
42:03 >> That's right. Um, and so that's the bit
42:06 that I think will make it, you know,
42:10 >> very politically hot hot button
42:12 >> because it's carbon pricing in people's
42:13 living rooms and on their fuel receipts
42:16 and we've seen situations in particular
42:18 with regards to fuel pricing etc where
42:20 where it's governments in in certain
42:23 parts of the world or or created a lot
42:25 of social unease and unrest. Um I
42:28 remember the mayo in uh in France you
42:31 know you know kicked off by by this. So
42:33 it it you know just give us a little bit
42:36 of an overview about ETS2 and where you
42:38 see it kind of tra you know walking this
42:41 fine line between you know uh let's
42:43 acknowledge its ambition but exposing a
42:44 little bit of its vulnerabilities if we can.
42:45 can.
42:47 >> Yeah totally. Well um so just what is it
42:50 and when does it start and so forth. So
42:54 um from 2027 1st of January 2027 the
42:56 heating and transportation sectors will
43:01 be uh covered um uh under a separate
43:04 market called ETS2. Uh that doesn't have
43:07 a formal link with uh ETS1.
43:09 Um that may or may not transpire in the
43:11 future but for the for the foreseeable
43:13 future there's no intended link between
43:16 the two. Now, um the the curiosity about
43:18 this market and this is to your point
43:22 Renee is that um this has a much more
43:27 direct impact on retail um or to put it
43:29 in even simpler political terms on
43:33 voters, right? I mean, um, it will be
43:37 your everyday, uh, mom and dad who are
43:41 filling up their their car with petrol
43:45 or, um, putting on the boiler in the
43:47 winter because they need the central
43:48 heating cranked up because it's a cold
43:51 winter. Um, there will be a carbon price
43:55 on those activities from the 1st of
43:57 January 2027.
43:58 And there will be no free.
43:59 >> You're not not just pricing emissions
44:01 here. You're essentially pricing behavior.
44:02 behavior.
44:02 >> Yeah. Exactly.
44:04 >> Yeah. And and when you do that kind of
44:05 you need political armor because you're
44:06 not just it's not just economic theory
44:08 anymore. It's it's affecting people's
44:10 personal balance sheets.
44:12 >> Totally. This is visible. This is
44:14 visible. Whereas you know your average
44:16 consumer is not seeing certainly hasn't
44:18 seen at all until now except in the
44:19 realm of electricity prices where the
44:22 carbon price has been passed on but you
44:24 haven't really seen it in steel prices
44:25 or because there've been free
44:27 allowances. And as those free allowances
44:29 are phased out over as we discussed
44:31 earlier you know that those prices will
44:33 start coming through more as well. But
44:36 here from day one the there will be a
44:39 pass through into petrol prices, gas
44:41 prices, all the fuels we need for
44:44 transportation and heating. Um now
44:45 there's a couple of things to say about
44:48 this. That being said, it will not be
44:50 levied at the individual consumer level.
44:52 It will be levied at the wholesale
44:54 level. In other words, it's the
44:57 suppliers of fuels who will have to pay
45:01 uh the who are responsible for buying
45:03 the carbon allowances that go with the
45:06 emissions, what will be their scope 3
45:10 emissions. Um but obviously they will
45:11 pass that through to the end consumer.
45:13 So the end consumer will see it. They
45:15 won't have then they'll pay it. They
45:17 won't have the administrative burden of
45:18 having to purchase the actual carbon
45:21 credits. Um but they're going to but
45:22 they're going to see it. So that's just
45:24 on the mechanics of how it works. Now I
45:26 think to your point Renee, this is
45:28 politically highly combustible. We saw
45:30 with the Gileon as you mentioned in
45:35 France 5 years ago a tremendous backlash
45:38 against um higher petrol prices as it
45:41 was at that time. Um and I do worry that
45:44 this uh we are setting ourselves up for
45:45 a similar political backlash
45:48 particularly in a climate today where
45:54 populism has only grown in uh in frankly
45:55 even in the governments that are not
45:57 nominally populist there are more
46:02 populist measures being taken. Um and uh
46:05 I I I think you know if if carbon prices
46:09 in ETS2 were to go above 100 it would be extremely
46:10 extremely
46:12 uh tricky. Now let's talk about some of
46:14 the safety mechanisms here that are in
46:16 place. Number one they're going to
46:18 auction 30% more supply in the first
46:20 year so that there is a soft start so
46:23 that um you know you you don't notice a
46:26 huge difference uh from day one.
46:29 Secondly, uh there is a specific mandate
46:33 in the legislation to protect the most
46:35 uh fuel,
46:37 you know, citizens who are already in
46:39 fuel poverty
46:42 um will not pay the price or they will
46:44 pay it and then they will be reimbursed.
46:46 But of course that's administratively
46:48 burdensome and you know there is a cash flow
46:50 flow
46:52 >> notion climate fund. Exactly. you know,
46:54 but there there's there's always winners
46:56 and losers there at the margin and it's
46:59 it's tricky to demarcate and it takes
47:02 time to reimburse and so on. So, you
47:03 will get the
47:06 >> you will get the flames of indignation
47:09 first before the fire brigade of uh
47:12 reimbursement comes along to put out the
47:14 fire. And so, it's a risk. But the other
47:15 thing is there is a price.
47:16 >> I like that.
47:18 >> I like that analogy. It's it's a really
47:19 good one. Essentially, you're saying
47:21 that there's no energy transition
47:23 >> without the demand side reform. And
47:25 effectively, ETS2 is that reform and
47:27 it's bold, essential, and politically
47:30 flammable to totally
47:33 totally right. Totally right. Um, but
47:37 there's a price cap uh initially of
47:38 >> what's that at 45.
47:43 >> It's 45 uh in real terms adjusted. So,
47:47 uh inflation adjusted against uh 2020.
47:50 So I don't know 45 if you assume 2%
47:52 inflation overflation.
47:55 Let's assume let's assume you know 3%
47:58 inflation over the last five years even
48:00 that might be too low.
48:03 >> It gets you to sort of 55 something like
48:09 that. Um I I think to be honest um
48:11 55 is probably
48:16 >> yeah 45 to 55 a ton and said um
48:17 additional allowances will be
48:20 automatically uh released from a reserve
48:22 to cool down the price if
48:23 >> yeah so they're starting
48:25 >> got the MSR functionality as well.
48:27 >> Yeah they're starting with a with a
48:29 market stability reserve where they will
48:31 be able to inject. So I think they they
48:34 are desperate to avoid a rerun of the
48:36 Gileon saga that we had in France.
48:37 >> Yeah. Well, it's it's to it's to
48:39 mitigate the volatility in that market
48:41 because if it runs on its own
48:43 fundamentals, that market could be just
48:44 Yeah. Like you said, it's it's a
48:46 naturally long market on the allowances
48:48 and and effectively
48:50 it's a short squeeze. And so so the the
48:52 and the utilities and and you know the
48:54 fuel companies, etc., they'll pass on
48:58 those costs to to the to to the um the
48:59 eventual consumers. And then that's
49:01 that's the that's the politically, you
49:03 know, um, flammable kind of component
49:05 there. So, um, you know, it could it
49:06 could be really one of the most
49:08 transformative carbon pricing tools
49:10 we've seen or it could just become, like
49:12 you said, Europe's next political
49:13 punching bag effectively. Oh,
49:15 >> completely. Uh, so so kind of keeping it
49:18 within within a tight range and kind of
49:20 uh, let's say, let's call it training
49:22 wheels would would I think pragmatic,
49:23 >> right? And you know what's interesting
49:24 is that ICE have already developed a
49:28 contract on ETS2 and it hardly any
49:30 volume at all but it has traded and it's
49:34 traded to my surprise at levels close to
49:38 um you know ETS1. Um I I think the strip
49:40 starts at 2028 though on ICE. I don't
49:42 think they have a 2027 contract. I may
49:46 be wrong. Um but in any case that's not
49:48 really a meaningful price signal yet
49:50 because the volumes have been so low
49:52 that you can't really read anything into
49:55 it. Um I
49:57 you know the other dimension to this in
50:00 terms of political flammability is if if
50:02 hedge funds were and speculators were to
50:04 start playing aggressively in that
50:06 market and forcing prices up. I mean,
50:08 there would be an absolute
50:13 um hail storm of uh political
50:18 heat in Brussels. Um so >> yeah.
50:18 >> yeah. >> Yeah.
50:19 >> Yeah.
50:20 >> Yeah. It's very interesting.
50:24 >> The contract launched July 8th, so I I
50:25 have not I haven't looked at it on the
50:27 screen um where where the price is at,
50:28 but that's an interesting one.
50:31 >> Yeah. It seems that um a lot of folks
50:34 foresee delays or adjustments to the
50:38 ETS2 launch. Um you know there were
50:41 there were signs of delay um plans were
50:44 due by June 2025 for the you know member
50:46 states drawing up social climate plans
50:51 but 26 out of 27 uh EU countries missed
50:54 that deadline. So, you know, people
50:56 think that this highlights uh there's
50:58 ongoing coordination issues and risk that
50:59 that
51:00 >> there's a fragmentation as well.
51:02 >> Yeah, the consumer compensation.
51:03 >> So, Poland's probably not too
51:05 >> may not be fully ready. Yeah.
51:06 >> Right. Right.
51:09 >> I would love is it any take on delays or
51:11 adjustments to the launch? Um,
51:14 >> yeah, I think they they will do they
51:16 will try their best to avoid that
51:19 because I think uh you know the problem
51:21 here is that the legislation allows for
51:24 a one-year delay. Um I'm not sure what
51:26 happens if if you know they delay it for
51:29 a year and then energy prices generally
51:30 go even higher than they were in the
51:32 year that they delayed it from and and
51:34 then all of a sudden you know you have
51:35 to start worrying about delaying it
51:37 again. I think you don't want to set
51:39 that precedent as a policy maker because
51:41 it undermines the credibility of your
51:44 new market from day one. Um that being
51:48 good that being said um
51:53 sorry that being said if um
51:57 if uh they're forced to do it I think I
51:58 think they will have to politically and
51:59 there will be certainly some member
52:01 states who would want to do that almost
52:04 regardless of what what's happening uh
52:09 with energy markets more generally. Um I
52:12 think again as you know the one has to
52:14 be conscious of the shifting political
52:16 sands uh in Europe and the drift towards
52:18 what we might call the the populist
52:23 right um who are not fans of of climate
52:26 uh climate change policy in many cases
52:29 don't believe in climate change or at
52:32 least claim not to believe in it. Um
52:34 you're seeing for example a breakdown in
52:37 the UK of the uh cross party consensus
52:38 between Labor and Conservative that
52:40 we've had for the last 20 years ever
52:42 since the EUETS was up and running. That
52:44 has now broken down. Clearly the
52:46 Conservative party think that there is
52:49 more political mileage to be had in
52:52 backtracking or backpedaling on the net
52:54 zero target. And Nigel Farage
52:56 uh the reform party leader has come out
52:59 and said that quote unquote net zero is
53:01 the next Brexit. I mean, he thinks that
53:03 there's so much political mileage for
53:08 him in this that he can uh run for the
53:10 next election, run to be prime minister
53:14 of the UK on a ticket saying we will um
53:16 get rid of the net zero targets. We
53:18 don't think climate change is a problem,
53:21 you know. So, which coming at a time
53:23 when the UK is about to experience its
53:26 fourth official heat wave of the summer
53:29 next week is paradoxical timing. But the
53:32 cognitive dissonance on climate change
53:35 is only growing. You know, climate is
53:37 getting much worse, much more quickly
53:39 than anybody thought even 5 years ago,
53:40 never mind 20 years ago when I first
53:46 started uh looking at this. And um but
53:48 unfortunately the political response to
53:51 it is becoming more and more diluted. >> Yeah,
53:52 >> Yeah,
53:54 >> it reminds me of the cognitive
53:56 dissonance. I love that. of um that
53:59 movie with Leonardo DiCaprio uh and uh
54:01 Jennifer Lawrence, Don't Look Up.
54:02 >> Oh yeah, exactly.
54:04 >> Yeah. Where this imminent asteroid uh
54:06 you know collision and it's like just
54:07 don't look up. Everyone just kept
54:10 looking down in the in the sky. >> Exactly.
54:10 >> Exactly.
54:11 >> It's inevitable, but it's just like no
54:13 no don't look up.
54:15 >> But but maybe this is a good transition,
54:17 Eddie, to to talk about the kind of EU
54:20 UK linkage in carbon markets. I mean
54:23 Mark to to kind of help set it up. Um
54:25 >> Yeah. and and for Eddie to kind of get
54:27 you to give us the context here, but
54:29 like essentially this market linkage
54:33 between EU and UK is like carbon market
54:35 diplomacy effectively, right? So if
54:37 Brussels and London can pull this off,
54:39 especially post Brexit, you talked about
54:40 Nigel Farage, it really sends a strong
54:43 signal to the rest of the world. So, you
54:45 know, um there'll be cheerleaders us in
54:48 and I want sorry for that visual to our
54:51 listeners um um who who will want that
54:54 to to to be the case, right? But like
54:55 you said, it's it's it's a difficult one
54:58 given the kind of the populous kind of
54:59 undertones that we're seeing in in in
55:02 the political realm. And do you want to
55:04 kind of queue us up around um the the
55:06 linking piece?
55:09 >> Yeah, certainly. I mean on the topic of
55:12 uh Brexit after Brexit the UK launched
55:16 its own uh carbon ETS separate EU and now
55:17 now
55:19 >> now the EU and the UK have agreed in
55:21 principle to link their emissions
55:24 trading systems uh creating a unified
55:26 carbon market across both jurisdictions
55:31 in May 2025 uh at the first UK EU since
55:34 Brexit leaders announced his plans for
55:36 closer cooperation on emissions. through
55:39 linking our respective ETSs. Now, it's
55:43 not legally binding, but it shows strong
55:45 intent on both sides
55:48 >> to negotiate the technical linkage in
55:50 the next couple of years. And you know,
55:53 if achieved, this would be a significant
55:54 reintegration of climate policy between
55:57 the UK and the EU with implications for
56:00 carbon prices and market liquidity and
56:01 regulated companies in both regions.
56:03 There there are some important
56:06 conditions um attached to the plan such
56:09 as you know there would be a mutual
56:13 exemption from CBAM um on each other's
56:16 goods and that makes sense uh
56:18 >> and you know a government arrangement
56:21 must be set up uh arbitration based
56:23 dispute resolution there's a lot of
56:26 different things uh at play here but
56:30 >> you know setting up for for you Mark um
56:32 you know what do you think this ETS
56:35 linking entails and what do you think
56:37 are the main benefits of of the linkage
56:41 of the UK and EU carbon markets from
56:43 from both sides maybe from a liquidity
56:46 perspective cost efficiency you know
56:49 avoiding double carbon uh uh charges
56:51 like like
56:53 >> um would love to hear your your
56:55 >> Yeah sure well the first thing to say is
56:57 of course that until 5 years ago the UK
57:00 was part of the EU ETS so linking them
57:02 shouldn't wouldn't be that technically
57:04 complicated. I think they can do this if
57:05 the will is there. I think they can do
57:08 this easily by 2027 or certainly no
57:11 later than 2028 because I I say that
57:12 because I hear a lot of people saying,
57:13 "Oh, well, you know, it took Switzerland
57:16 forever to link with Yeah, Switzerland
57:19 is was never a member of the EU and its
57:21 carbon market was never literally part
57:24 of the EU ETS." So, um that's the first
57:25 thing to say. The second thing to say is
57:27 that it makes total sense for both
57:29 parties but more sense for the UK than
57:31 for the EU because the EU remains the
57:33 UK's largest trading partner despite
57:37 Brexit and um
57:39 with CBAM coming in in Europe you know
57:40 there's an incentive for European
57:44 industry for UK industry to uh avoid
57:47 that charge and this is how you do it by
57:49 linking your carbon markets and then uh
57:52 definitely for all UK participants
57:57 having um a effectively a deeper market
58:00 uh which is what linking provides you
58:02 know that the the
58:04 UKAS would become fungeible effectively
58:06 with EUAs
58:10 um it just gives you uh more of a uh uh
58:12 gives you more confidence in the
58:13 integrity of the market that you won't
58:15 get big price swings or they'll be
58:16 smaller than that you would get in the
58:20 UK in in the UK's market um so
58:21 definitely makes sense from the UK side
58:24 and I think from the European side um it
58:26 makes sense for the same reasons. Uh
58:28 it's less compelling because you know
58:30 the EU market is much bigger than the
58:34 the UK market. There's a minor again
58:36 similar to what we said about maritime
58:39 emissions earlier. It it increases the
58:40 tightness of the market overall at the
58:43 margin because the UK target is slightly
58:46 more ambitious than the European uh uh
58:50 target. So, so you end up with uh extra
58:53 demand on the system on the EU system by
58:59 including uh UK operators. Um so I think
59:02 for in all senses it makes sense. It's
59:04 economically efficient and you know
59:05 we're trying to reduce emissions
59:07 globally and in Europe in the most
59:09 efficient way. So the bigger the market
59:13 the easier it is to do that. Um,
59:16 >> and and I think that uh there's an extra
59:17 political benefit here to to your point
59:21 Eddie in your intro there in that um if
59:26 the EU can show globally that uh any
59:28 country that links its carbon market to
59:31 the EU will be exempt from CBAM and I
59:33 think this is particularly significant
59:35 going to Brazil for the COP in uh November.
59:37 November.
59:40 um you can you can say well this is how
59:43 we globally join up to fight climate
59:46 change. So I think there's a there's a
59:47 on top of all the economic arguments
59:49 which are the main arguments for doing
59:53 this there is a compelling uh
59:55 geopolitical dimension to it from a
59:58 European perspective.
60:01 >> Yeah I really like that Mark. Thanks for that. C can I chime in Eddie just with
60:02 that. C can I chime in Eddie just with some with some kind of views and I and
60:04 some with some kind of views and I and look I
60:06 look I >> our firm we're not a we're not trading
60:08 >> our firm we're not a we're not trading UK or or UA futures but just you know as
60:11 UK or or UA futures but just you know as a trader I can't help myself always ask
60:13 a trader I can't help myself always ask that question to myself like where's the
60:15 that question to myself like where's the trade uh some some some kind of thoughts
60:18 trade uh some some some kind of thoughts around what you've said to help to
60:19 around what you've said to help to unpack it
60:21 unpack it >> and then and then kind of my kind of
60:23 >> and then and then kind of my kind of naive let's say view like a non-expert
60:25 naive let's say view like a non-expert view let's put it this way uh around the
60:28 view let's put it this way uh around the the kind of where's the trade and I'd
60:30 the kind of where's the trade and I'd love for your correction and or
60:32 love for your correction and or agreement in terms of thoughts but but
60:33 agreement in terms of thoughts but but effectively what you said is essentially
60:35 effectively what you said is essentially correct me if I'm wrong here right but
60:36 correct me if I'm wrong here right but linking the ETSs is like connecting
60:38 linking the ETSs is like connecting essentially two pools of of capital um
60:41 essentially two pools of of capital um and it it helps to deepen the liquidity
60:43 and it it helps to deepen the liquidity and it helps to sharpen essentially that
60:45 and it helps to sharpen essentially that price discovery and it reduces the
60:46 price discovery and it reduces the market friction we talked about
60:48 market friction we talked about >> Cband
60:49 >> Cband so so that that's that point there and
60:51 so so that that's that point there and then and then in terms of the like the
60:55 then and then in terms of the like the the the trading side essentially
61:00 the the trading side essentially Essentially, you know, UK have been
61:02 Essentially, you know, UK have been trading at a discount to EUAS, which is
61:04 trading at a discount to EUAS, which is having a look on the ICE futures and you
61:07 having a look on the ICE futures and you know, the last price is at 5110
61:11 know, the last price is at 5110 >> and it's kind of been in this t fairly
61:13 >> and it's kind of been in this t fairly tight band the last well since the
61:15 tight band the last well since the beginning of the year since between 35,
61:17 beginning of the year since between 35, let's call it tight band between 40 and
61:18 let's call it tight band between 40 and 50,
61:19 50, >> right? And um and that's it's at a it's
61:22 >> right? And um and that's it's at a it's at a discount to let's call it 10 to 15
61:25 at a discount to let's call it 10 to 15 um euros or around there. um 10 let's
61:31 um euros or around there. um 10 let's say 10 right depending on policy cycles
61:33 say 10 right depending on policy cycles and energy demand and a bunch of other
61:35 and energy demand and a bunch of other stuff at auction volumes so so
61:37 stuff at auction volumes so so essentially when when linking happens
61:40 essentially when when linking happens the allowances and correct me if I'm
61:41 the allowances and correct me if I'm wrong here but essentially the
61:42 wrong here but essentially the allowances become fungeible across the
61:44 allowances become fungeible across the systems UKAS and EUAS so essentially you
61:47 systems UKAS and EUAS so essentially you see this direction of travel towards
61:49 see this direction of travel towards convergence and so essentially UKAS will
61:51 convergence and so essentially UKAS will likely rise towards the EUA levels as
61:54 likely rise towards the EUA levels as demand increases from EU buyers and
61:56 demand increases from EU buyers and effectively UK aligns its emissions cap
61:58 effectively UK aligns its emissions cap more tightly with the UK EU ambition,
62:00 more tightly with the UK EU ambition, sorry. And essentially creates a
62:02 sorry. And essentially creates a directional arbitrage, right? Long UKAS
62:04 directional arbitrage, right? Long UKAS now short EUAs
62:07 now short EUAs maybe over the short period of term um
62:09 maybe over the short period of term um or you know buy UK out on the forward
62:12 or you know buy UK out on the forward curve and and there's that arbitrage
62:13 curve and and there's that arbitrage split. Maybe maybe you know coming back
62:16 split. Maybe maybe you know coming back to an egg that that Eddie kind of
62:17 to an egg that that Eddie kind of planted earlier is may maybe that
62:20 planted earlier is may maybe that supports the thesis that that some of
62:21 supports the thesis that that some of the hedge funds have that are shorting
62:23 the hedge funds have that are shorting EUAs right now. Could do you think that
62:25 EUAs right now. Could do you think that that's part of it? Yeah, I think
62:27 that's part of it? Yeah, I think actually that's a great point and um I I
62:31 actually that's a great point and um I I was saying when I was still at and I
62:32 was saying when I was still at and I mean there was a Bloomberg article
62:34 mean there was a Bloomberg article written in October last year where I
62:37 written in October last year where I came out very bullish on UKAS saying at
62:39 came out very bullish on UKAS saying at the time the the gap was 30 35 euros to
62:44 the time the the gap was 30 35 euros to uh between UKAS and EUAS. I said this is
62:48 uh between UKAS and EUAS. I said this is this is insane. Even if you um even if
62:51 this is insane. Even if you um even if you don't believe linking will ever
62:52 you don't believe linking will ever happen because the UK market
62:54 happen because the UK market intrinsically is tighter uh than the
62:58 intrinsically is tighter uh than the than the EU market, right? Because the
63:00 than the EU market, right? Because the the UK climate target is more ambitious.
63:03 the UK climate target is more ambitious. That's the first point. So uh but if you
63:05 That's the first point. So uh but if you then add in the the possibility of
63:07 then add in the the possibility of linking which which is now kind of
63:10 linking which which is now kind of coming to fruition, right? um that was
63:13 coming to fruition, right? um that was always a huge arbitrage opportunity and
63:17 always a huge arbitrage opportunity and I think you know from the beginning of
63:19 I think you know from the beginning of this year when the political debate on
63:21 this year when the political debate on this really got serious and and you had
63:23 this really got serious and and you had this FT article in January saying is
63:25 this FT article in January saying is going to happen um you've seen that
63:27 going to happen um you've seen that discount narrowed from 35 to 10 u and I
63:32 discount narrowed from 35 to 10 u and I think probably it's going to trade in a
63:35 think probably it's going to trade in a discount between 5 and 10 euros uh uh
63:38 discount between 5 and 10 euros uh uh until uh until everything is done. But I
63:43 until uh until everything is done. But I I I think 10 is probably still a little
63:47 I I think 10 is probably still a little too high. I I think 5 for any sort of,
63:50 too high. I I think 5 for any sort of, you know, transactional things. But but
63:54 you know, transactional things. But but yeah, I think it makes sense for some uh
63:57 yeah, I think it makes sense for some uh some hedge funds may have been shorting
63:59 some hedge funds may have been shorting EUAs, buying UKAS on this arbitrage
64:03 EUAs, buying UKAS on this arbitrage idea.
64:04 idea. Effectively what will happen in this
64:06 Effectively what will happen in this kind of interim period while when we
64:10 kind of interim period while when we know that linking is going to happen but
64:12 know that linking is going to happen but we don't know exactly when it will take
64:14 we don't know exactly when it will take effect is that a trading range will be
64:19 effect is that a trading range will be established and I guess 5 to 10 is the
64:22 established and I guess 5 to 10 is the range. So, you're not playing for much
64:24 range. So, you're not playing for much at the moment, but every time it drops
64:26 at the moment, but every time it drops to 10, uh, people will want to buy UKAS,
64:29 to 10, uh, people will want to buy UKAS, sell EUAs, and every time it hits five,
64:32 sell EUAs, and every time it hits five, you know, do the reverse. Uh, buy EUAs,
64:34 you know, do the reverse. Uh, buy EUAs, sell UKAS. I I think that's going to be
64:37 sell UKAS. I I think that's going to be the trade, uh, for as long as we're in
64:39 the trade, uh, for as long as we're in this holding pattern um, until the
64:41 this holding pattern um, until the formal linking itself happens.
64:44 formal linking itself happens. >> Do we have a date in terms of of when
64:46 >> Do we have a date in terms of of when that formal linking happens?
64:47 that formal linking happens? >> No, we don't have a date. I think I
64:49 >> No, we don't have a date. I think I think that will be a function of all the
64:51 think that will be a function of all the kind of bureaucratic things that have to
64:53 kind of bureaucratic things that have to be figured out. But coming back to what
64:55 be figured out. But coming back to what we said earlier, I mean um UK politics
64:59 we said earlier, I mean um UK politics and European politics uh would certainly
65:02 and European politics uh would certainly favor an expeditious
65:06 favor an expeditious um
65:07 um an expeditious move on this because um
65:12 an expeditious move on this because um if if the link is already established
65:15 if if the link is already established where let's assume worst case scenario
65:17 where let's assume worst case scenario we have Nigel Farage coming in as UK PM
65:19 we have Nigel Farage coming in as UK PM in 2029 and he says I'm going to tear it
65:21 in 2029 and he says I'm going to tear it all up. um that might sound great
65:26 all up. um that might sound great uh when you're running for election, but
65:28 uh when you're running for election, but once it's all bedded down um you've got
65:32 once it's all bedded down um you've got European and UK industry, UK industry
65:35 European and UK industry, UK industry part of the system and then you're
65:37 part of the system and then you're changing the rules on UK industry again.
65:39 changing the rules on UK industry again. >> Corporates hate that.
65:40 >> Corporates hate that. >> You hate it. So yeah,
65:42 >> You hate it. So yeah, >> so you know, um I think I'm certainly
65:46 >> so you know, um I think I'm certainly not underplaying the risk of of of the
65:48 not underplaying the risk of of of the populism that we're seeing across
65:49 populism that we're seeing across Europe, but
65:50 Europe, but >> well, it could it could actually be you,
65:51 >> well, it could it could actually be you, like you said, it could be fuel for them
65:53 like you said, it could be fuel for them to to run on that platform. But it's
65:55 to to run on that platform. But it's interesting and it's a cheeky question,
65:56 interesting and it's a cheeky question, right? But essentially ultimately comes
65:58 right? But essentially ultimately comes to this kind of thesis that if you
65:59 to this kind of thesis that if you believe in the convergence, the trade's
66:01 believe in the convergence, the trade's clear like you said, right? long UK
66:02 clear like you said, right? long UK ahead of the linkage and and ultimately
66:04 ahead of the linkage and and ultimately once that date becomes apparent it's
66:06 once that date becomes apparent it's kind it's kind of an interesting one as
66:08 kind it's kind of an interesting one as a trader because it's not every day you
66:09 a trader because it's not every day you get a event with with a calendar on it
66:12 get a event with with a calendar on it right so you know that that trade is
66:15 right so you know that that trade is kind of placed and then it's like cool
66:16 kind of placed and then it's like cool comes into
66:17 comes into >> Exactly right exactly right
66:20 >> Exactly right exactly right >> thanks Eddie for letting me indulge on
66:22 >> thanks Eddie for letting me indulge on >> yeah no that's great nerdy trader trader
66:23 >> yeah no that's great nerdy trader trader talk
66:24 talk >> great discussion there and I think you
66:26 >> great discussion there and I think you know shifting gears to our last segment
66:29 know shifting gears to our last segment on kind of what we touched on earlier
66:30 on kind of what we touched on earlier with uh article six and corsa and the
66:34 with uh article six and corsa and the impact on voluntary markets. Um, you
66:38 impact on voluntary markets. Um, you know, like like you said before, Mark,
66:39 know, like like you said before, Mark, the European Commission uh announced its
66:42 the European Commission uh announced its proposal for the European 2040 climate
66:45 proposal for the European 2040 climate targets, aiming for a 90% reduction in
66:47 targets, aiming for a 90% reduction in greenhouse gas,
66:49 greenhouse gas, >> right? And we're seeing the carbon
66:51 >> right? And we're seeing the carbon removals industry
66:53 removals industry >> really calling um on the EU to integrate
66:56 >> really calling um on the EU to integrate more CDR credits Yeah. into the ETSs
66:59 more CDR credits Yeah. into the ETSs starting in 2030. like as you said there
67:03 starting in 2030. like as you said there have allowed for the international use
67:04 have allowed for the international use of article 6 credits to meet up to 3% of
67:07 of article 6 credits to meet up to 3% of the EU's 1990 uh emissions
67:11 the EU's 1990 uh emissions >> right
67:11 >> right >> and you know
67:14 >> and you know we're seeing the global architecture of
67:16 we're seeing the global architecture of carbon markets evolving fast between
67:18 carbon markets evolving fast between article six of the Paris agreement and
67:20 article six of the Paris agreement and corsa and this is moving from you know
67:24 corsa and this is moving from you know theory into real world imp
67:26 theory into real world imp implementation right and yeah
67:28 implementation right and yeah >> you have article 6.2 two, the ITMOS
67:30 >> you have article 6.2 two, the ITMOS article 6.4 um you know the the UN
67:33 article 6.4 um you know the the UN supervised PACM and Corsia is now fully
67:36 supervised PACM and Corsia is now fully operational with six crediting programs
67:39 operational with six crediting programs approved. I think looking forward, do
67:42 approved. I think looking forward, do you see article six carbon markets
67:46 you see article six carbon markets scaling up to potentially,
67:48 scaling up to potentially, you know, dwarf the the current
67:50 you know, dwarf the the current voluntary carbon market or will will
67:53 voluntary carbon market or will will they more likely complement each other?
67:55 they more likely complement each other? And,
67:56 And, >> you know, how can how can market
67:57 >> you know, how can how can market participants best prepare to engage with
67:59 participants best prepare to engage with article six mechanisms?
68:01 article six mechanisms? >> Yeah. as well as Corsa because there is
68:03 >> Yeah. as well as Corsa because there is an argument uh people have about the
68:07 an argument uh people have about the relationship between the EUS and Corsa
68:10 relationship between the EUS and Corsa as well,
68:11 as well, >> right?
68:12 >> right? >> Collision.
68:13 >> Collision. >> Sure.
68:14 >> Sure. >> Yeah. Well, I I mean I think um Corsa is
68:17 >> Yeah. Well, I I mean I think um Corsa is key to all of this really because it's
68:19 key to all of this really because it's at the intersection between between the
68:23 at the intersection between between the two. Um I think in theory I would say
68:30 two. Um I think in theory I would say that in theory the article six market
68:35 that in theory the article six market should become bigger than the voluntary
68:36 should become bigger than the voluntary market over time. um because of course
68:41 market over time. um because of course >> um even voluntary PL so the there's
68:44 >> um even voluntary PL so the there's going to be a market for article six
68:46 going to be a market for article six credits right and the biggest market
68:49 credits right and the biggest market initially is going to be Corsier because
68:51 initially is going to be Corsier because you know they have to have article six
68:52 you know they have to have article six with corresponding adjustments right so
68:55 with corresponding adjustments right so that's the initial driver really in
68:57 that's the initial driver really in terms of a dedicated source of demand
69:00 terms of a dedicated source of demand that's where it's coming from um and and
69:02 that's where it's coming from um and and that those numbers obviously they've
69:04 that those numbers obviously they've they've ch they change a lot uh
69:07 they've ch they change a lot uh according to uh analyst estimates and
69:09 according to uh analyst estimates and the whole COVID thing completely changed
69:12 the whole COVID thing completely changed the baseline for but I think you're
69:15 the baseline for but I think you're still looking at uh potential corsa
69:18 still looking at uh potential corsa demand for artic article six credits
69:20 demand for artic article six credits with corresponding adjustments of of up
69:22 with corresponding adjustments of of up to let's say between one and a half
69:24 to let's say between one and a half billion and two billion tons
69:28 billion and two billion tons uh between uh now and 2040 okay um
69:34 uh between uh now and 2040 okay um that's very substantial right I mean
69:36 that's very substantial right I mean it's a
69:37 it's a very substantial. If on top of that you
69:40 very substantial. If on top of that you then say well uh some uh perhaps the
69:44 then say well uh some uh perhaps the European Union will end up allowing
69:46 European Union will end up allowing artic article 6 credits into the ETS1.
69:48 artic article 6 credits into the ETS1. Perhaps other jurisdictions might allow
69:50 Perhaps other jurisdictions might allow that. Um and perhaps also
69:55 that. Um and perhaps also anybody who's buying voluntary credits
69:57 anybody who's buying voluntary credits today will start to say to themselves,
70:01 today will start to say to themselves, we need a UN badge on the credits that
70:04 we need a UN badge on the credits that we're buying. It's not good enough
70:06 we're buying. It's not good enough anymore just to have a voluntary uh
70:08 anymore just to have a voluntary uh credit. Um it needs to have the seal of
70:11 credit. Um it needs to have the seal of approval of the United Nations because
70:12 approval of the United Nations because that's the gold standard effectively now
70:14 that's the gold standard effectively now for the for the global carbon market. So
70:17 for the for the global carbon market. So I think for all for all those reasons I
70:19 I think for all for all those reasons I think on a five-year view I would say
70:22 think on a five-year view I would say the article 6 market will probably be
70:24 the article 6 market will probably be bigger than the voluntary market maybe
70:26 bigger than the voluntary market maybe before that. But um a lot will depend on
70:30 before that. But um a lot will depend on what the coming back to what we said
70:31 what the coming back to what we said earlier what what the EU decides to do
70:33 earlier what what the EU decides to do in terms of keeping the clock stopped or
70:36 in terms of keeping the clock stopped or letting the clock start running again
70:37 letting the clock start running again which would effectively make Corsia much
70:39 which would effectively make Corsia much less uh compelling. Um
70:43 less uh compelling. Um as I said that's not my base case. So I
70:45 as I said that's not my base case. So I think Corsia will remain in place and I
70:47 think Corsia will remain in place and I think they will um there will be
70:50 think they will um there will be substantial demand and therefore it
70:52 substantial demand and therefore it becomes a market a really meaningful
70:56 becomes a market a really meaningful market
70:57 market um and and I think you know that will
70:59 um and and I think you know that will help encourage other players. One thing
71:01 help encourage other players. One thing we haven't mentioned on this podcast
71:02 we haven't mentioned on this podcast perhaps something for the next time is
71:05 perhaps something for the next time is uh China and uh China's carbon market
71:08 uh China and uh China's carbon market and how they are going to become a huge
71:11 and how they are going to become a huge player in global carbon markets and
71:14 player in global carbon markets and article six could be a very good way for
71:16 article six could be a very good way for them to uh to participate.
71:20 them to uh to participate. >> Yeah, exactly. So,
71:22 >> Yeah, exactly. So, >> lots to think about there, but
71:24 >> lots to think about there, but speculatively, yes, I would I would say
71:26 speculatively, yes, I would I would say I'm uh relatively confident that the
71:28 I'm uh relatively confident that the article 6 market will will overtake the
71:30 article 6 market will will overtake the voluntary market within 5 years.
71:33 voluntary market within 5 years. >> Yeah, Rene,
71:34 >> Yeah, Rene, >> I I Yeah, I I agree. I I I think it
71:37 >> I I Yeah, I I agree. I I I think it comes down to the drivers, right? And
71:38 comes down to the drivers, right? And the Achilles heel, the voluntary market
71:40 the Achilles heel, the voluntary market has always been, you know, how sticky is
71:42 has always been, you know, how sticky is that demand signal?
71:43 that demand signal? >> Yeah.
71:44 >> Yeah. >> I I I do think it's it's a little bit of
71:46 >> I I I do think it's it's a little bit of semantics in in so far as Yeah. just
71:48 semantics in in so far as Yeah. just because like there's so much
71:48 because like there's so much fungeability and so I just think the
71:51 fungeability and so I just think the voluntary market firstly my my sound by
71:54 voluntary market firstly my my sound by my view here is like the voluntary
71:55 my view here is like the voluntary market isn't going to isn't disappearing
71:56 market isn't going to isn't disappearing it's it's effectively being absorbed
71:58 it's it's effectively being absorbed right so article six is turning what
72:00 right so article six is turning what used to be good intentions essentially
72:02 used to be good intentions essentially into formal obligations and then you
72:04 into formal obligations and then you have this this fungeability into you
72:07 have this this fungeability into you know compliance systems
72:08 know compliance systems >> that are from sister agency in the case
72:10 >> that are from sister agency in the case of IO which is you know a sister agency
72:12 of IO which is you know a sister agency to the UNFC now imposing on a on a
72:15 to the UNFC now imposing on a on a sectoral basis uh here for international
72:18 sectoral basis uh here for international aviation and that fungeibility of of of
72:20 aviation and that fungeibility of of of instruments there. ultimately the
72:23 instruments there. ultimately the architecture or the infrastructure
72:24 architecture or the infrastructure that's been built over the last you know
72:26 that's been built over the last you know 25 um well 20 or so years let's just say
72:30 25 um well 20 or so years let's just say right since since the launch really um
72:33 right since since the launch really um of EUS kind of starting the clock there
72:36 of EUS kind of starting the clock there or you know first firing gun and and and
72:39 or you know first firing gun and and and um the CDM
72:42 um the CDM is that there's been so much learned
72:45 is that there's been so much learned right and so so much experience built in
72:48 right and so so much experience built in in and around project development.
72:50 in and around project development. >> Yeah. you know uh MRV so monitoring
72:53 >> Yeah. you know uh MRV so monitoring pointing verification the certification
72:55 pointing verification the certification outcomes and now the issues around
72:58 outcomes and now the issues around leakage right CBAN being one
73:01 leakage right CBAN being one corresponding adjustments being perhaps
73:03 corresponding adjustments being perhaps the most eloquent yet most complex
73:06 the most eloquent yet most complex version of it but effectively it leads
73:08 version of it but effectively it leads to this to this kind of transition and
73:12 to this to this kind of transition and you know there's been so much written
73:14 you know there's been so much written and so much said around you know
73:16 and so much said around you know integrity integrity integrity integrity
73:18 integrity integrity integrity integrity over the last couple of years so so I
73:19 over the last couple of years so so I think like If 2023 was the kind of the
73:22 think like If 2023 was the kind of the year about integrity, 2025 and beyond is
73:24 year about integrity, 2025 and beyond is about sovereignty and and now countries,
73:26 about sovereignty and and now countries, host countries really want their slice
73:28 host countries really want their slice of the pie and and CAS really are how
73:31 of the pie and and CAS really are how they claim it, right? And so so I think
73:33 they claim it, right? And so so I think that we'll start to see more
73:34 that we'll start to see more harmonization
73:36 harmonization >> between blocks between countries and me
73:39 >> between blocks between countries and me and and host host um countries
73:42 and and host host um countries essentially looking at carbon as a
73:45 essentially looking at carbon as a natural resource that they can then
73:47 natural resource that they can then utilize to exploit to to generate
73:48 utilize to exploit to to generate revenue for their countries. But also,
73:50 revenue for their countries. But also, you know, counteractive to that is their
73:52 you know, counteractive to that is their NDCs. And so, you know, overly selling
73:55 NDCs. And so, you know, overly selling um at the beginning may not be the the
73:57 um at the beginning may not be the the most astute. So, you you start to see
73:59 most astute. So, you you start to see that demand push and pull emerge. And I
74:02 that demand push and pull emerge. And I think the final thing that I'll say is
74:03 think the final thing that I'll say is you start to see broader participation
74:05 you start to see broader participation in a pure voluntary context. You have
74:08 in a pure voluntary context. You have very well-intentioned, you know, good
74:10 very well-intentioned, you know, good good intentioned kind of um corporates
74:12 good intentioned kind of um corporates doing it for CSR. That was the key
74:14 doing it for CSR. That was the key driver. That's what kind of kicked it.
74:16 driver. That's what kind of kicked it. And then and then we started to see more
74:18 And then and then we started to see more demand signals more and you know
74:20 demand signals more and you know alignment between the the boardroom and
74:21 alignment between the the boardroom and and and kind of civil society in 2020
74:24 and and kind of civil society in 2020 kind of drive it. That that was
74:26 kind of drive it. That that was effectively broken with a distrust or an
74:28 effectively broken with a distrust or an aversion to to risk and reputational
74:31 aversion to to risk and reputational risk in particular by corporates.
74:33 risk in particular by corporates. >> Yeah.
74:33 >> Yeah. >> That's not the case when it's a
74:35 >> That's not the case when it's a compliance market. That's not the case
74:36 compliance market. That's not the case when you have participation of those
74:38 when you have participation of those same corporates under compliance system
74:40 same corporates under compliance system or or airlines under a compliance
74:42 or or airlines under a compliance system. And more importantly, it's not
74:44 system. And more importantly, it's not just as corporates and you know, you
74:45 just as corporates and you know, you talked about EUS2 and and kind of
74:47 talked about EUS2 and and kind of retail, but now you actually have GG,
74:50 retail, but now you actually have GG, you have governments playing in the mix.
74:52 you have governments playing in the mix. So there is there is appetite on the buy
74:54 So there is there is appetite on the buy side across governments, corporates and
74:57 side across governments, corporates and other systems where where this is
74:58 other systems where where this is impacted. And I think that it really is
75:01 impacted. And I think that it really is a it helps to you know underwrite what
75:04 a it helps to you know underwrite what you've been saying around this very
75:05 you've been saying around this very bullish case about carbon over the next
75:08 bullish case about carbon over the next five and then 10 and 15 and 20 25 years
75:11 five and then 10 and 15 and 20 25 years ahead where we start to see this
75:13 ahead where we start to see this convergence and and market price
75:14 convergence and and market price signals. You see not a lot of noise and
75:16 signals. You see not a lot of noise and it'll be the the folks that are making a
75:17 it'll be the the folks that are making a lot of money out of this are the ones
75:18 lot of money out of this are the ones that can separate the the noise to to
75:21 that can separate the the noise to to signal ratios.
75:22 signal ratios. >> Exactly.
75:22 >> Exactly. >> That's kind of my my musings on on the
75:24 >> That's kind of my my musings on on the topic. What are your thoughts?
75:26 topic. What are your thoughts? Well, I I wouldn't disagree with with
75:28 Well, I I wouldn't disagree with with any of that, Renee. I mean, I think um
75:31 any of that, Renee. I mean, I think um th this tension between, you know, the
75:34 th this tension between, you know, the fundamental distinction as you
75:36 fundamental distinction as you articulated it there between compliance
75:37 articulated it there between compliance markets where you have no choice, you
75:39 markets where you have no choice, you have to buy um and voluntary markets. I
75:43 have to buy um and voluntary markets. I mean, the the clue is in the name,
75:44 mean, the the clue is in the name, right?
75:46 right? And you know we've seen some of the
75:48 And you know we've seen some of the large oil and gas companies row back
75:50 large oil and gas companies row back from the ambitious uh carbon offsetting
75:54 from the ambitious uh carbon offsetting plans they had previously um Shell BP uh
75:58 plans they had previously um Shell BP uh so forth. So um
76:07 that's part of the broader the broader political issue right
76:09 political issue right >> part of the broader political issue.
76:11 >> part of the broader political issue. >> Yeah. and and those musings at at the at
76:13 >> Yeah. and and those musings at at the at the board level, you know, like listen,
76:14 the board level, you know, like listen, I won't signal out, but we've spoken to
76:16 I won't signal out, but we've spoken to a number of large um you know, energy
76:19 a number of large um you know, energy companies and and and it's kind of it's
76:21 companies and and and it's kind of it's it's dependent on the performance of
76:23 it's dependent on the performance of their share price,
76:24 their share price, >> right? And and and the leadership at the
76:26 >> right? And and and the leadership at the seauite, but but they they acknowledge
76:28 seauite, but but they they acknowledge the ones that remain acknowledge that
76:30 the ones that remain acknowledge that >> this is still a very viable market and
76:31 >> this is still a very viable market and that they actually play a really
76:33 that they actually play a really significant role and they have expertise
76:34 significant role and they have expertise with regards to origination. building up
76:36 with regards to origination. building up those teams internally is really
76:38 those teams internally is really laborious and and costly and so maybe
76:41 laborious and and costly and so maybe they're not the highest performing teams
76:43 they're not the highest performing teams right now but longterm they don't want
76:45 right now but longterm they don't want to abandon that and then and other folks
76:47 to abandon that and then and other folks that are kind of moving away I think and
76:49 that are kind of moving away I think and we see this around commodity traders but
76:51 we see this around commodity traders but also energy companies that have kind of
76:53 also energy companies that have kind of they came in they lost some key talent
76:55 they came in they lost some key talent and now kind of find themselves
76:56 and now kind of find themselves rudderless I I I think that they'll
76:58 rudderless I I I think that they'll start they'll they'll come in in 28 29
77:00 start they'll they'll come in in 28 29 with you know big M&A splashes to try to
77:02 with you know big M&A splashes to try to bolster their expertise as the market
77:04 bolster their expertise as the market kind starts to grow. But but but that's
77:06 kind starts to grow. But but but that's just kind of an internal view and
77:08 just kind of an internal view and politics and Q&A. But but but kind of to
77:10 politics and Q&A. But but but kind of to to the point around what you were just
77:12 to the point around what you were just saying is like
77:13 saying is like >> and and to Eddie's earlier question is
77:15 >> and and to Eddie's earlier question is Corsia and article 6 are essentially
77:17 Corsia and article 6 are essentially injecting real and predictable demand.
77:20 injecting real and predictable demand. You you you looked out you know a table
77:22 You you you looked out you know a table effectively around the Corsier demand
77:24 effectively around the Corsier demand you know in in in CP1 the phase one and
77:26 you know in in in CP1 the phase one and now around a compliance phase that we're
77:28 now around a compliance phase that we're going to enter in 2027. And it's
77:30 going to enter in 2027. And it's essentially it's no longer just virtue
77:33 essentially it's no longer just virtue signaling. And that's the fundamental
77:34 signaling. And that's the fundamental difference between VCM and and and
77:36 difference between VCM and and and compliance. And that's going to shift
77:38 compliance. And that's going to shift the power effectively from the buyers to
77:41 the power effectively from the buyers to suppliers. So back a reversion back to
77:44 suppliers. So back a reversion back to to to a sellers market where today it is
77:47 to to a sellers market where today it is a purely a buyers marketing in in the
77:49 a purely a buyers marketing in in the carbon space certainly on on VCM
77:53 carbon space certainly on on VCM >> buyers in particular corporates take
77:55 >> buyers in particular corporates take their sweet time doing very extensive
77:58 their sweet time doing very extensive due diligence being very riskaverse from
78:00 due diligence being very riskaverse from a from a reputational perspective.
78:02 a from a reputational perspective. That's the story of the day. They have
78:04 That's the story of the day. They have very laborous RFP processes, really
78:07 very laborous RFP processes, really honorous um you know holds being placed
78:11 honorous um you know holds being placed on on on from the sellers, you know,
78:13 on on on from the sellers, you know, 90-day payment dates, etc. And that's
78:15 90-day payment dates, etc. And that's just the luxury of what they can do
78:16 just the luxury of what they can do today. But as that market inverts back
78:19 today. But as that market inverts back to a sellers market, that luxury goes
78:22 to a sellers market, that luxury goes away really, really quickly. And and
78:24 away really, really quickly. And and I've seen I've seen that occur, you
78:25 I've seen I've seen that occur, you know, in 2020 and 21 in particular. And
78:28 know, in 2020 and 21 in particular. And as you start to see the emergence of
78:29 as you start to see the emergence of futures contracts and greater liquidity
78:31 futures contracts and greater liquidity emerge and more kind of participation
78:33 emerge and more kind of participation from institutional and and speculative
78:35 from institutional and and speculative traders, they mop up that slack really
78:38 traders, they mop up that slack really quickly and it whips back. And I think
78:40 quickly and it whips back. And I think that that's that that's where we see it.
78:42 that that's that that's where we see it. And then when we talk just anecdotally I
78:44 And then when we talk just anecdotally I won't single out clients but when we
78:45 won't single out clients but when we talk to folks there's this very keen
78:48 talk to folks there's this very keen interest on corel eligible EUs article
78:51 interest on corel eligible EUs article six you know 62 um ITMOS and 64 ERS and
78:56 six you know 62 um ITMOS and 64 ERS and essentially wanting to get ahead of of
78:59 essentially wanting to get ahead of of that effectively it's a very long bias
79:01 that effectively it's a very long bias on carbon in the 2030s certainly mid
79:03 on carbon in the 2030s certainly mid 2030s very long bias and the focus there
79:06 2030s very long bias and the focus there is how can I firm up that supply on a on
79:09 is how can I firm up that supply on a on a riskadjusted basis how can I face a
79:11 a riskadjusted basis how can I face a credible counterparty indeed risk the
79:14 credible counterparty indeed risk the the um the risks that are associated
79:16 the um the risks that are associated with with project development,
79:18 with with project development, counterparty risk, delivery risk,
79:19 counterparty risk, delivery risk, certification risk, timing risk,
79:21 certification risk, timing risk, political risk, etc., etc. And the
79:22 political risk, etc., etc. And the answer's been, you know, really, you
79:24 answer's been, you know, really, you know, working with experts,
79:26 know, working with experts, understanding the kind of the nuances of
79:27 understanding the kind of the nuances of the market and then insurance quite
79:29 the market and then insurance quite frankly, right? and and then now
79:31 frankly, right? and and then now emergence of more sophisticated
79:33 emergence of more sophisticated developers that can actually you know
79:36 developers that can actually you know bring that experience but help to
79:37 bring that experience but help to underwrite and mitigate those those
79:39 underwrite and mitigate those those issues as opposed to kind of the
79:40 issues as opposed to kind of the boutique operators and that's if we're
79:42 boutique operators and that's if we're going to do it at scale. So um yeah
79:45 going to do it at scale. So um yeah basically I think the market's growing
79:46 basically I think the market's growing up you know and it's an interesting it's
79:48 up you know and it's an interesting it's it's time to be in the space. I think
79:49 it's time to be in the space. I think that's
79:50 that's >> certainly certainly I mean there is
79:52 >> certainly certainly I mean there is conviction that this market will be
79:55 conviction that this market will be short right in the 2030s that's our our
79:58 short right in the 2030s that's our our thesis and um I mean there is inherent
80:00 thesis and um I mean there is inherent risk that uh companies both in
80:04 risk that uh companies both in compliance and voluntary corporates have
80:07 compliance and voluntary corporates have to pay attention to because you know it
80:09 to pay attention to because you know it may be costs in the in the near term but
80:12 may be costs in the in the near term but the costs are much greater in the long
80:14 the costs are much greater in the long term at the end of the day from the
80:16 term at the end of the day from the transitions but
80:18 transitions but >> look I think that's a Great way to wrap
80:20 >> look I think that's a Great way to wrap things up. You know, been a fantastic uh
80:22 things up. You know, been a fantastic uh deep dive and thank you so much for
80:24 deep dive and thank you so much for sharing. Uh
80:25 sharing. Uh >> please come back.
80:27 >> please come back. >> Yeah, absolutely.
80:28 >> Yeah, absolutely. >> Please come back. You're welcome back
80:29 >> Please come back. You're welcome back anytime. I
80:31 anytime. I before we started recording that you're
80:33 before we started recording that you're you're heading across to to Mexico, but
80:35 you're heading across to to Mexico, but maybe when you're back, give us an
80:36 maybe when you're back, give us an overview in terms of what you're seeing
80:37 overview in terms of what you're seeing on the ground there. And
80:38 on the ground there. And >> definitely we'll do news on other other
80:40 >> definitely we'll do news on other other things that that are close and near and
80:42 things that that are close and near and dear to your heart, especially ahead of
80:43 dear to your heart, especially ahead of where where you end up uh in the next
80:45 where where you end up uh in the next challenge.
80:46 challenge. >> Fantastic. Well, thanks guys. It's been
80:47 >> Fantastic. Well, thanks guys. It's been a pleasure as always. And uh when do you
80:49 a pleasure as always. And uh when do you expect to put this out?
80:51 expect to put this out? >> Next week.
80:52 >> Next week. >> All right. Okay. Fantastic.
80:53 >> All right. Okay. Fantastic. >> Monday.
80:54 >> Monday. >> Great. All right. Well, I'll be t tuning
80:56 >> Great. All right. Well, I'll be t tuning in from Mexico then.
80:58 in from Mexico then. >> Okay. Terrific.
80:59 >> Okay. Terrific. >> All right.
81:00 >> All right. >> All right. Take care, guys. See you
81:01 >> All right. Take care, guys. See you soon.
81:02 soon. >> Cheers.
81:02 >> Cheers. >> Thank you. See you.
81:06 >> Thank you. See you. And uh yeah, thanks for tuning in to
81:09 And uh yeah, thanks for tuning in to This Week in Gin.
81:11 This Week in Gin. Be sure to follow the show. Ah I
81:14 Be sure to follow the show. Ah I forgot to ask him about the or get him
81:16 forgot to ask him about the or get him to do a Hamlet or a Shakespeare quote. I
81:19 to do a Hamlet or a Shakespeare quote. I >> think he was so good when he did it. He
81:21 >> think he was so good when he did it. He can't He's an amazing guest and I'm so
81:23 can't He's an amazing guest and I'm so glad that we had him on
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