Insider's Guide to Energy

58 - Recent developments on the carbon markets with Lawson Steele

February 13, 2022 Chris Sass Season 3 Episode 58
Insider's Guide to Energy
58 - Recent developments on the carbon markets with Lawson Steele
Show Notes Transcript Chapter Markers

Given the interesting developments on the carbon market in the last months and the evolving policy regulations it is high time to have Lawson Steele on the program again. He shares his expertise on the European emission trading system and the trends and factors driving the carbon price. Listen in to hear Lawson’s take on ESG-investments and why April the 30th is a critical date for participators of the EU emission trading system. 

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https://www.berenberg.de/en/

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 | Timestamp | Speaker | Transcript

| 03:13.19 | chrissass | welcome to insider's guide to energy I'm your host chris sass and with me is co-host Johann Oberg yo on how's it going this week
| 03:21.60 | Johan | It's another great week Chris just realized I'm starting to follow the Olympics which has now you know we're halfway through it at least a bit through it and I'm always surprised when we when we look at the olympics because suddenly we'll now start tracking things that I've never watched apart from every fourth year so it's an interesting part being a big sports fan watching the olympics having the tv on in the background and watching sports that I never heard of before but and getting excited not excited as the inside is guide to energy but still.
| 03:51.10 | chrissass | So I've been watching the olympics too. The the problem with Insider's guide to energy and even like the show we're about to jump into is I look at that and look at all the energy consumed and all the folks flying over there to be in the Olympic games. A fantastic thing I am certainly a fan I Certainly watch it So I'm not speaking out of both sides of my mouth. But if you're blowing snow and creating snow where there's no snow and you're building all these facilities for a very limited use and athletes are flying in from all over the world I kind of wonder what the carbon impact of this event is um.
| 04:21.34 | Johan | It's probably a difficult thing to say it's it's the green green events or the green olympics. It's probably a bit harsh to push. But maybe we can get 1 of them on the show later on to to explain it was yeah.
| 04:27.51 | chrissass | Yeah I just kind of curious kind of curious about how you make that green. But yeah, it's kind of fun. This is a first for the show. We're bringing back a guest. We had a guest who is very popular with the audience. He made some bold predictions last year I think it was last june when we had lost in steel on um, and and I recall him saying that although he may be right? He may be wrong, but end of year he was hoping for 110 carbon prices. Um, not particularly far off but not quite there. Um, so I'm really excited to to see what's happened because I think we met before the cop conference last time so we expected the Eu Eu to do some things to change the market there as well. If I'm not mistaken. What are you thinking.
| 05:11.40 | Johan | Now but I agree I think it's you know we we have the discussion will it hit hundred or not and when which I thought was quite interesting for me the the whole thing was fairly new. But since then I've been tracking. As much as I can around this followed laws and also on on social media where's quite active and and kind of starting to getting quite into this one and and I have plenty of question for me. There's also a lot of this where do we draw the line with politics and we've seen a few things with with France for example, lately that um. Interesting to hear his views on.
| 05:44.63 | chrissass | Well, we'll see how politics plays plays a role in the pricing of carbon but rather than speculating let's bring loss and still the program Lawson welcome back to insider's guide energy.
| 05:53.86 | Lawson Steele | Hey guys good to see you. Thank you for having me back. Um, first of all I have not a clue what the carbon emissions are of the olympics by this? Yeah yeah, my expertise isn't quite stretched that far.
| 06:03.19 | Johan | We were hoping for you that Lawson. Um.
| 06:10.18 | chrissass | Yeah I didn't I didn't figure you would I just kind of in the back of my mind up and watching that and I see all this thing and and been sitting with my son each evening watching the skiing and the Ski jumping and really being getting into it but the back of my mind I'm like I don't think that snow looks natural and therefore there's probably a fair amount of energy to make all this happen. That's.
| 06:28.64 | Lawson Steele | Suddenly.
| 06:28.94 | chrissass | That's what happens when you work in energy but let's let's talk about carbon. Um, so much is happening I read an article I think in the last twenty four hours about shipping now being counted into carbon. Um in the eu as well. Um, tell us what's going on.
| 06:42.92 | Lawson Steele | Ah, yeah I mean as you're saying in your intro carbon's now nibbling on 198 today as we speak. Um, and I got a forecast of 110 for for April um, and again just to sort of put into context of what I said before. That is a base case. But in reality I think it could well blow through that and since we talked last year. Um I put up my forecast now 150 by sort of beginning or next year um so again, you know that's a base case you know carbon needs to need to. And in reality has to be much higher than that in order to incentivize industry to to make it worthwhile financially for them to actually invest and reduce their carbon footage. So yeah I mean it's it's all go. We're getting to some interesting levels now. Um. People thought we'd never ever get here. But here we are kind of thing.
| 07:40.90 | chrissass | Ah, hundred and fifty midyear is that what you're saying when when was your when are you thinking q one next year and what factors are driving it on our previous episode. You kind of went through things that you thought were going to force it up to a hundred hundred and ten what
| 07:46.34 | Lawson Steele | At Q one next year
| 08:00.30 | chrissass | What are the the elements pushing it up making you predict this.
| 08:03.24 | Lawson Steele | The the biggest element is is the fact that you are massive supply cuts right? So you got this mechanism in place which is reducing the amount of emissions. Sorry the amount of allowances. Um, which are either company auction or through. Or through 3 allowances and they're being reduced by 300 to 350000000 per annum on a sort of 1000000000 level of emissions. So this is pretty radical and that means that we have a a supplyed deficit I supply being a shortful of demand of 25% for this last year which you which yeah you end up complying on the thirtieth of aprilor each year so when I say this year I'm talking about 2021 bizarrely because we're not yet at Thirtieth of April and so 25% short for that year then this year I'm getting I'm going to confuse a head out of people for 2021. That's 25% short for 2022, it's 35% short. But you're also having to buy the 25% which you couldn't deliver in 2021 so there's a cumative 60% and it gets worse and worse and worse. In fact, it goes through 100% shortfall cumulative. By 2024. That's the biggest thing but then you also have noise as always with a lot of noise. Um, even Edf had actually said electricity said to France this morning the big newke producer in Europe has cut its forecast for power yet again which of course means that's. Ah, yeah, that have to be replaced by thermal power which emits carbon which means there's more demand for carbon permits and so on so you've got that in the background. You've also had as we well know the huge increase in gas prices and not only the fact that they increased in price. Ah, but actually the physically are not available. You cannot buy as much gas as you need which means that the the gas producing electricity gas electricity producing plants will are not producing and therefore coal-fired electricity plants are producing and they of course produce twice as much carbon. As a gas fight kind of interesting. Um, you know it certainly is additional demand but at the end of the day. What's really really important is the supply.
| 10:27.28 | chrissass | How much does the recent news I think I read in this morning's news that Germany and the us were not totally aligned on the pipeline coming from Russia how how does that implement your forecasting is that just noise right now or is that actually into some of this consideration whether there's a pipeline or not to Germany for.
| 10:44.56 | Lawson Steele | Yeah I mean you know that that's that's about the whole supply equation of gas into Europe of course um the supply of gas into Europe comes from Russia comes from obviously and indigenous supply in the north sea.
| 10:44.99 | chrissass | Natural gas.
| 11:03.49 | Lawson Steele | It comes from nngg um now the nn g is mostly being siphoned off to Asia because simply yeah, there's shortages there as well and they're prepared to pay more but the us is obviously not keen for for. Russia to to be allowed to export its gas until it withdraws from more withdrawal hasn't penetrated but you know I and get away from the Ukrainian Border um and in turn Biden is talking about ah allowing more or pushing more gas into Europe from the from the nng. Um, so. But but to put it into perspective of what it means for carbon. Um, you know back in January Twenty Eighteen when I when I turned bullish at Eight Euros I said what's going to happen is that the co- plants in Europe are going to switch off because the carbon price is going to get to such an extent which is going to make that coal-ga switch. Ah happened and that's what happened in 192020 now we've had this retrenchment from gas back to coal because of the lack of gas availability. Um, and you know to put that into context. We're talking about 30000000 tons or so. Out of a total deficit for the year of 200 so yes it has an impact but it is really not the story. Ah so I'm assuming that we have that flow back towards gas I that the 30 minute income comes back and that gas produces and somehow you know. The the powers that be sought out the gas supply but it's not It's not the real driver by any stretch of imagination. But there's an awful lot of noise in the market about yeah, where is the gas coal abatement price and so on.
| 12:53.44 | Johan | So in terms of recently there's some tabled on the european union in terms of classifying nuclear and gas as renewable or as green I know so Sweden for example, has objected France is driving. It. Is this having an impact because it's obviously opening up and you mentioned Edf now reducing their nuclear if that's financial or not I'm not sure, but where do we see this because sooner or later this becomes a political game as well wouldn't it.
| 13:25.66 | Lawson Steele | Um, yeah I mean well first of all just to to nail the Edf issue the the issue with the edf with Edf and the nuclear parts at the moment is the fact that they do a 10 year maintenance rotating 10 year maintenance and there are 5 nuclear plants which were. Under that 10 year maintenance and they discovered cracks in the welding right? at a sort of critical juncture. So so they had to take those extend the outage and b look at all the other nuclear plants as well. So there's a rotating sort of issue. There. So to that's It's it's and and then the reason they're doing that of course is because you've got the french nuclear safety authority who comes and says right? We 1 thing is having electricity of not having an electricity but we yeah what we don't want is a blowup um, so so you know this is this is not unusual with Edf.
| 14:10.81 | Johan | Um, took.
| 14:23.77 | Lawson Steele | Um, yeah, there have been issues in the past and here we are yet again. Um, as far as putting gas and nuclear into the eu taxonomy ah sort of umbrella. In other words, they're allowed to be considered to be renewables. Um. The reason fundamentally is that power cannot just switch off thermal power and nuclear power because renewables power today. Although it's utopian does not deliver the baseload electricity level which you require. So in other words because it's intermittent because either the sun is shining or it's not or the wind is blowing or it's not you can't rely on that renewable technology. So you you can. You can only operate that renewable technology if you have the backup behind it like a gas plant or a new plant. Um, to actually yeah, allow that to so essentially operate so alone with the current technology. We have today of batteries essentially which is the backup or the way that you convert that renewable energy into it into more stable ah sort of a base load. And that technology is not available today. It's good for peak and super peak but not for the the lower end and therefore you need to have your you know more investments in gas and more investments in nuclear particularly as ah, you know the the coal plants are are switching off the germans are closing. Their nuclears. Um, you know so so the renewable element is not there today to be able to absorb that will technology change at some point probably I hope so um, but it's not there today. So what does that mean for carbon. Ah. It doesn't really change the equation right? because we have the capacity we have today I'm assuming that we have more renewable penetration in my in my demand or mission forecasts I assume the nuclear closures in Germany and I have the tabled lignite closures as well. Um, so it's it's it's it's more I think the the fact that including in taxonomy means that actually investors can now put money towards that whereas if it wasn't green. Just no way Jose.
| 16:45.17 | chrissass | And you mentioned in your earlier conversation and if I recall from our previous interview a little bit how the carbon market works April thirtieth is kind of a magic date. Um, how big is surprise. Do you expect an April thirtieth or is it pretty transparent based on just understanding.
| 16:55.11 | Lawson Steele | Um, now can.
| 17:05.22 | chrissass | Who's burned coal this year who's burning oil. What's what's happened to supplies for energy production or could there be a surprise when when the companies come to the table and and clear the slate for the year
| 17:16.14 | Lawson Steele | Um, yeah, let me let me just recap that April Thirtieth first so so April so the way the Eu scheme works is that every thirtieth of April you have to go to your government's cap and hand and say right forgive me I've emitted ten million tons to which you then. Have 2 options you either deliver 10000000 allowances to clean the slates and move on to the next year um or if you don't have the permit you have to pay a penalty of one hundred and Eleven Euros per permit and still deliver the shortfall. The following year on top of next year's normal sort of emission level. Um, so so that's that's really key to to the whole thesis because um, you know if you're going into that thirtieth of April if you are. 25% short which is kind of what I think is is a shortage that's what my numbers say um then what you're going to do in The first instance is to say okay, what I need to do here is to buy these allowances to void in the first instance that penalty price of 111 so you keep on trying to buy the permits. There aren't enough to go around the price goes up against to hundred and eleven when it gets to 111 you then realize that you still haven't bought the permits because there is a ¢25 squeeze and now you realize that not only do you face a penalty of one hundred and Eleven ah you also have to still buy the underlying allowance for delivery the following year and that of course is now trading also at a hundred and eleven so actually your opportunity cost is 222 so therefore knowing that in advance you will try and buy permits. There aren't enough to go around the price goes up to 222 it gets there. You think hang on a minute I now don't have the permit still I now have to pay a penalty price for 111 and I got to buy the underlying just trading at 222 so actually it's 333 my opportunity cost. So it's come from 111 to 20002 to 333 and you can take that off to infinity. So so that's that's the whole April thirtieth this year and the pricing but in order to ask your question Chris I mean the as we get to the thirtieth of April there are compliance players. Who who are still clearly short because it's 25% squeeze. There are compliance players out there who don't hedge who are only allowed to buy or only bother buying an a just-in time. Basis. Ah, there are others who will begin to awaken slightly earlier and there'll be others which have hedged.
| 20:01.88 | Lawson Steele | Already. Um, they're probably within the 75% bracket. But there's going to be a 25% squeeze. So so we we will see volatility as we get to the thirtieth of April as ever as I've said before judging the exact timing of that is is never yeah, particularly easy. But. Health you know we're now February and April we've got what's at three months less than three months
| 20:24.87 | chrissass | Have the energy traders gotten better at hedging or understanding this process I believe that there is probably still a learning curve going on for many um, are they tightening their systems that they figure this out is it less less surprising at the end of the year as as years go on.
| 20:28.87 | Lawson Steele | But I.
| 20:42.67 | Lawson Steele | Um I think it's my sense is it's getting a bit better. Ah better in terms of more educated. Um, but I still think but there's a massive amount of poor knowledge. Um, um, um, part of understandable because yeah, there are industries the industry as a whole is still getting 85% free allowances so they're only having to buy 15% of their pollution and for many companies a lot of companies. The carbon prices are relevant today or that carbon cost is irrelevant because. They're paying 15% times. Yeah, today's price of call it hundred there's 15 years not hundred years they're having to pay so for a lot of companies. It's irrelevant. Um, and it's ah yeah, so so I think it's improving but but I still think this is.
| 21:25.13 | Johan | Are.
| 21:38.22 | Lawson Steele | An awful lot of yeah misunderstanding and not misunderstanding just just not bothering.
| 21:43.71 | Johan | So so if if we look at that a little bit which I think is quite interesting. 1 is hedging of course, especially from from from a trading perspective but you mentioned this is also a cumulative year by year for for some of the organizations and even if it's. Definitely not in the past. Maybe it's getting a little bit more relevant now because the cost is going up but what what are they going to do what what are organizations the ones who haven't done anything now. Is it going to hit them hard or is it are they hoping for other decisions to to to kind of make this. Disappear.
| 22:19.57 | Lawson Steele | Um I don't know what they're thinking to be honest, um, ah what I what I can tell you is I spoke to um, the last couple months I spoke to over 50 companies industrial companies from all spectrums from a.
| 22:24.43 | Johan | That's a good That's a good.
| 22:36.51 | Lawson Steele | Cor manufacturer to a drinks to cements. Yeah, you, you name it kind of thing even to gaming um and these guys and I spoke to them more about um, what well getting them to understand what the ets car scheme is about. And to make them realize that actually it is and a much better alternative for them if they want to reach the net 0 targets and what was interesting is that normally when you speak to the number of investors or or whatever somebody says I what are people saying and and they kind of want a summary right? ah. You know and it's difficult to summarize because everybody has a completely different point of view and everything else, but with these guys ah unanimously part from one I guess that's not unanimous, but virtually all of them. We're saying okay, we're thinking about our net 0 targets but we haven't set them yet with. Thinking and trying to measure our scope one 2 3 emissions but we haven't quite got them yet and we know that once we reduce our emission levels to whatever that is going to be either the residual level beyond which you cannot reduce your emissions any further. Then for those for that we know that we can offset with volunteer carbon offsets. So by the time I then finished speaking to them. They realized that actually there is an alternative option which is far better which is the euets carbon permit which is regulate to the. Voluntary carbon offsets are unregulated full of I mean people making huge amounts of money in this which is why everyone flocking to them making an awful of noise but you've got six and a half thousand projects plus which are unregulated ah often fall down on esg compliance. Mean yeah, bottom line without rabbiting on a lot I think that there's going to be some very nasty shocks for those companies which invest in volunteer carbon schemes thinking that's going to offset my carbon because the project may well not deliver what it's going to deliver what it's supposed to deliver um, and of course a tree takes 15 years to grow by which time the guy who put you into has probably long disappeared into the sunset on his yacht whereas the the ee test scheme is is fully regulated fully. Esg compliant? Um, okay I'll give you 1 1 1 final point on this is that there's a. Ah, group of pension firms called the ii gcc which is a terrible acronym. But anyway, you'd have thought that the top 250 pensions in the world would come up with a better acronym there I've even given up thinking what it means but the ii gcc is is 250 top pension funds in the world together. They got.
| 25:09.77 | Johan | It.
| 25:19.35 | Lawson Steele | $33000000000000 under Management. So This is huge you know and they have decided that in their quest to reach Net zero. They will not recognize voluntary carbon offsets because they're unregulated but they will recognize emission trading schemes. Which of course are regulated and of course the Eu completely dominates that I can't remember what your question was but I hope I've answered it. Ah.
| 25:47.64 | chrissass | Um I hope so I I wonder what learnings you've had since either we last spoke or in the last year I'd imagine your models are continuing to evolve. You just gave an example of you know, maybe a better mouse trap or a better place to put your bat. Um. What have you learned or what what kind of things can you share that maybe have changed in your thinking in the last six to twelve months based on current market conditions or just overall changes in carbon.
| 26:14.39 | Lawson Steele | You know the the thing is that since 2018 because I spent six weeks thinking about it but not much has changed because as I said the the real dynamic behind this market is the fact that the eu decided to tighten up. Ah, the the auction level to create a deficit. Um, that is mechanical. So the only thing which really happened I guess the major thing which happened was course covid when demand emissions fell through the floor which left a a surplus. For the year um but the the interesting thing about this scheme is that ah whenever you if you get a surplus that means that the withdrawals and the subsequent years are that much greater. So it's like a counterballancing mechanism. So it's. Yeah, what's changed is is just all the noise. The noise about gas and coal. And yeah that we got an extra thirty forty million tons of demand for this for 2021 spinning into 2022 then that reverses in 2023? Um I guess I mean the yeah, the big thing I guess I'm missing is is this whole fit for 55 package either green deal which I think I think was murmuring and bubbling away a couple remember of it actually being published a not by the time we spoke um, but certainly it's already been discussed. Um. And and that now has been the proposals been tabled There's the the big debate flying around about it for me. It's it's kind of interesting. Um. But it's not going to change anything over the next three four years it could make things worse in the next three three years because I've assumed it starts in 2024 and it could start in 2023 but all the discussion is about you know how are we going to tighten the system to achieve the 55% goal instead of the 40% reduction on on 9090 levels and interestingly although the 55% target is the eu overall target they and and and the ee scheme only covers 40% of emissions. They put the brunt on the ee scheme that the e scheme has to deliver a 61% reduction to achieve the overall european level of 55 which means obviously the rest of the the other 60% has a less is it 40%. Whatever the the number is um so so they're putting a lot of bonus on that. So yeah, what's changed. Um, but the price has gone up.
| 28:55.79 | Lawson Steele | But sense about it. Ah.
| 28:56.46 | Johan | Um, so it was one of the things we we touched on last time, especially with with China but but but also now with the Uk is that we were seeing more and more different schemes in different countries where the european has its own and and now the u k. Is it starting on the on the carbon trading which somehow is is it does it level out or does it create different competitive competitiveness between the countries which then goes back to this kind of not fair. Kind of a thing from a corporate or how does this work. Especially now maybe between we we discussed China but but maybe even more now with the Uk and and Europe.
| 29:39.46 | Lawson Steele | Yeah I mean I think if first of all I don't believe we'll ever get a ah global carbon price. So I just think there's too much politics and blah blah blah um this car I'm being sound likeretaran I um. But what I do think is going to happen is that you're going to get more and more countries coming out coming up with their own carbon schemes now first of all within Uk versus Eu I think that once all the brexit divorce toys are thrown out of the pram. Um, eventually, we'll get a relinking because ultimately the Uk wants to trade to the Eu and the Eu wants to trade with the Uk and they need to be on the same carbon footing to do that. The carbon schemes are virtually mirrors of each other the Uk helps set up the european one so you know it just makes sense for those prices to to. Converge and the schemes to to in other words to be able to allow uk allowances to be utilized in Europe and european allows it to be utilized in the Uk. so so I think that we'll you'll end up with a ah pretty close or if not identical price. Um, so. The other schemes is kind of interesting so I'll just talk about what we call the carbon board adjustment mechanism cbam for sure. So the carbon board adjustment mechanism is is put in place precisely for these issues where if you have a non-european. Entity which wants to export into the Eu and of course it'd be fool hardly to allow them just to come in without paying a similar carbon cost. So the cbam is all about that saying look if you want to come and sell your goods in the that's fine, not the usual. Stipulations but on top of that you need to be on the same carbon footing. So therefore this is a proposal which is saying you will have to account for your emissions in the same way as a european company does. So you know you would have to buy carbon purpose. In this case, it's going to be notional carbon permits and deliver accordingly based on the carbon output of or emissions of your of your widget. Um, so it's going to be a It's not going to be part of the euits scheme but the price of the carbon permits is going to be the same. Um, so that's the the idea behind it. Ah, in reality. There's a few sort of ah repercussions or or both additional sort of a corrollaries of that one is that if you're doing that then you can't also give free allowances to.
| 32:26.70 | Lawson Steele | Eu industry because then that becomes protectionism so that needs to be wound down the current proposal which is the first proposal is that free allowances were produced by 10 percent pranum from 2026 Onwards. So by 2035 twenty thirty six there'll be 0 free allowances that to me. Is just way too slow. That's that is still going to be protectionism. But anyway I guess it's the first proposal so they need to get people on board before they sort of accelerate that um then the or the other thing. Um. The other. The other thing I guess is is not carbon water adjustment mechanism per se. But for those industries which can like asel mial decide. You know what? I'm off I'm going to go do this in Morocco and I'll export into the eu those those guys that the eu looks at those guys. Like the term is carbon leakage and they don't want those industries to go and do that because from a planet's point of view. They're going to produce the same widget. Ah as the same carbon intensity if not higher because of more lax rules. So it's done the planet no favors possibly worse. And they've lost an industry. So those guys is getting 100% free allowances so they don't have a carbon cost to those.
| 33:48.70 | chrissass | But I think I've read as well about those plans that it's viewed poorly by both China and the Biden administration in the us because they see it bad for trade is that something that you hear or feel a.
| 34:03.28 | Lawson Steele | Well, they so that's I knew there's on the outside I said so good. Thanks for the question. Um, but 1 of the the interesting reaction of countries to this seabound proposal is not. You must be joking is actually.
| 34:05.65 | chrissass | Recall reading things like that.
| 34:21.96 | Lawson Steele | What can we do to ameliorate that cost and the answer is to set up your own scheme and by the way if you set up your own scheme. You're going to get amazing revenues.
| 34:31.35 | chrissass | Okay, so so it's actually seen as a plus. It's It's a tax revenue potential or revenue potential for for the governments that might be objecting to it.
| 34:31.67 | Johan | But in order to.
| 34:33.69 | Lawson Steele | Well, the first thing is that it's a catalyst right? So so it's it's perfectly. You can't really argue against it if I'm paying my carbon cost and you're not and we're in the same market. Come on. That's not fair. Um, so so so so that's what it's you know so it's it's difficult to argue against but then the the soft or sell or the or the dollar sell to them is to say you set up your own emission trading scheme we today the Eu. Today's prices are getting sixty Billion Euros from sales of the allowances which to put into context the uk Brexit bills 40000000000 so this is sixty on a recurring basis. Not a one-off so as far is huge and put indeed.
| 35:24.73 | Johan | Um.
| 35:31.14 | Lawson Steele | Another context the the eu spent 750000000000 in in sort of ah rescuing covid if they're rescueing the congress from covid right? Ah so so it's a tenth of that give or take and if if I'm writing my price forecast this is going to sort double or triple. And that money is is collected by the Eu and distributed to 27 financed ministries. So even though the likes of Poland make an awful not noise against this. These guys are getting the biggest share seventeen and a half percent of that which is you know around the sort of 10000000000 level much more than that isn't it. Um, so no, as far right? 10000000000 so so you know this is this is a huge source of revenues new source of revenues.
| 36:18.94 | Johan | So in terms of that's one market I can understand the european market where you can control it be that even subsidies to Poland etc. But as you mentioned before if you move your your organization to Morocco or or just borderline outside of Europe then suddenly you'd be able. Is there maybe a stupid question but are there any plans or maybe already existing ah some kind of carbon tax. So if it's produced somewhere else. It's going into Europe and you know what? you're not part of the scheme this goes against competitive rules. So if you're going to do this outside and you want to sell in Europe. You know we're going to hit you with a 10% carbon tax.
| 36:56.34 | Lawson Steele | But that's not yeah, not not a carbon tax. But that's what the carbon border adjust mechanism is to you know if you are yeah so ah if you call it a tax. You can't do it because then you contra in article 20 of of the w.
| 37:03.82 | Johan | Um, so it becomes of okay, it's it.
| 37:14.42 | Lawson Steele | Ah, but it's an adjustment mechanism and for that it does work. Yes I.
| 37:18.77 | Johan | So in a layman's work is attacks.
| 37:25.20 | chrissass | Are volumes significantly increasing are there more instruments and tools now for carbon markets that you're seeing in the last year or 2 is is there the trending up I mean we see the price going up but is is volume going up of the the carbon industry as well or trading.
| 37:40.83 | Lawson Steele | Trading volumes? Yeah, they're definitely going up. Yeah, yeah, yeah, on track with the.
| 37:45.15 | chrissass | And is it mostly speculative or who's driving this volume or is it the users that suddenly realize they need to be buying carbon offsets.
| 37:52.76 | Lawson Steele | I think it's difficult. But I think it's everyone right? Um, but the current um the the current value of of the global carbon market and there's obviously there's countries which are quoted and the eu takes the lion share. Um, is around nine hundred billion at the moment right? So it's getting on for $1000000000000 is big now you know to to try and you know it's it's very difficult to say how much of that is speculative how much is corporate because. Corpus play with futures too. All right? So you can't you can't distinguish but I did think you can sort of attribute. Yeah nine hundred billion to just speculators which is what some people like to do.
| 38:45.60 | chrissass | And then the the price points that you're talking about um that I guess insight is just based on the trends you're seeing So you're basically what I've heard you say is your formulas really haven't changed but the percentages changed that the rules have changed slightly but the formula stays the same. Are there any other indicators that are driving this while you're so bullish on this.
| 39:06.46 | Lawson Steele | Yeah I mean ah you know ultimately demand of supply don't intersect right? That's the 25% to 35% 100% so you can't do your air economics one um one where you draw your demand your supply and you get your price. Um, nor is it correct. To say well the abatement price the average abatement price I price of which which carbon makes it worthwhile to so to invest and reduce your emissions. You can't say the average abatement price in 2028 is 100 sake of argument and we'll do a present value of that today and that's the carbon price today. That's just bullshit because the carbon. Yeah, the the demand supply just don't in to say so you need to look at it in my view. Ah from ah from a top down way and I looked at it three ways. politically corporate and some analysis we did so politically first um you know in at about just before may last year I was beginning to hear that some european meps understood that the. Abatement price or the carbon price required for industry to do something was 2 to 3 times higher than where it was which was 50 at the time so it needed to be one hundred to hundred and fifty um so I'd heard that through the sort of Rumor Mill kind of thing. Um, but then we had fraz timmermans who's in charge of climate change. Also upon delyon's right-hand man publicly state that the carbon price needed to be well north of Fifty Euros so that was quite surprising then um, you have ah Germany with the greens now as part of the. Ah, the government they're talking about ah having a full of carbon of 60 euros not obviously near where we are today. But it's kind of interesting because these numbers were just unheard of when I kicked off and excuse him in January Twenty Eighteen um ah then you got the european greens talking about 150 you got the bank of England talking about 150 you got Norway talking about 200 all right? So big. Big numbers way north of where we are um, secondly from a corporate point of view. Um, you've got one of the most efficient chemical companies in Europe b asf. Ah, stating that they need to see carbon at 140 before it's economically worthwhile to invest in abatement technologies which means really they need to see carbon above 140 and consistently so ah to to make it worthwhile. You got hyderburg of cement talking about 120.
| 41:53.48 | Lawson Steele | Ah, you've got um on let some of the shipping companies talking about 150? You've got swiss re talking about 200 so again, all these numbers way north of where we are and then the third element of of of of that is that. Ah, back in March last year I asked the one hundred and fifty anas at behrenberg to look at the 900 companies covered on the european side. Um, and say what happens if carbon goes to 110 this year which is my old forecast. And interesting. Well astonishingly actually of the 900 companies only 26 were significantly impacted all right? So that's the first thing a secondly said well what happens if you need to if you want to pass that through is a price increase to your customers. What price increased you need and it was remarkably low. Airlines of the was the biggest they needed 8 % ah you had chemicals needed 5 and cement needed 2 so clearly 110 was not going to cut the mustard. So whichever way you look at that politically corporate or or the analysis. We did ah carbon needs to weigh higher. So it's. What is difficult is actually giving you the precise number my head or getting my head to turn all the precise numbers. It's yeah, 150 I can easily see but I can also see it blowing through that quite happily.
| 43:20.94 | Johan | But if that's the case and some of the larger consumers or the the corporations looking somewhere between 41 even as you said swiss rate 200 if even an impact. Ah would you say that it works. Or is this just another income for for the the the for the countries and really has no major impact on on what I think is the the pure goal of this one is to drive towards a co 2 free um, 2050 or 2040. Whatever it is.
| 43:57.66 | Lawson Steele | Well, the reality is that for the last fifteen years or so it hasn't worked. Um, but since they put in the Msr we it it is working because under normalized coal gas conditions. We we did have that switch from coal to gas across the whole of Europe which I predicted back in 18 and that's and and power produces half the emissions of the eus industries. So that's twenty five fifty percent came down. Ah, significantly of course you've got a temporary retrenchment but that's as we discussed due to lack of gas supplies but that will sort itself out. Um and then you've got a gulf right? because because the the next level is way up here for industry to do something. Why is it that that high because they're getting 85% free allowances if they got 0 free allowances. Be way lower right? Um, so so I think um, but but yes, if you get the price up to that you know one 1 40 in the case of b af or or whatever. Ah.
| 44:51.29 | Johan | Um, yeah.
| 45:06.11 | Lawson Steele | Then that will trigger them to start thinking. Of course they need to as said they need to see it above that level sustainably so for them to actually say okay, okay, we can rely on this now. Um, so it takes time and of course it will take them 7 years to sort out. Yeah, the practices and and everybody else. So it did. Um, but but you need to get that carbon price up to a level. So first of all, yes, it does work. Yes, it has worked with power and yes it can work with industry but you need that price to be at that level which triggers that that behavioral change and there's no point at all. Saying oh we're going to have a nice gento increase in the carbon price to twenty thirty so they by thirty first December twenty thirty at Eleven Fifty Nine pm industry says hey I've just reduced measures by by 40 that's useless you need to get that price up now to trigger that behavioral change and hopefully. Getting that emission reduction happening you know sooner rather than month later because if it happens say in 3 years time 2025 at least you then have 5 years or lower emissions than if you wait to twenty thirty to so yeah I mean it it has not worked till 2019 or so 2020 but it is working and it but it needs to be hard to really kick in and don't forget this is what they call their cornerstone policy all right. The the actual is the prime weapon of even though it's only 40% even though only covers 40% of european emissions. It is their prime weapon to achieve.
| 46:23.52 | Johan | Are the.
| 46:36.45 | Lawson Steele | Ah, the twenty thirty targets is not the only weapon but its most important one and very lucrative too.
| 46:41.28 | chrissass | Well, it sounds like to me as a layperson or you mentioned a pension fund invested in this that there's there's certainly a ride up for a number of investors to to ride along this. It almost seems somewhat predictable. Um, obviously everything can vary and there's a lot of risk because you you talked about your 3 different elements that need no line to keep this going so assuming Lawson doesn't want to retire one day when does all this work and in Lawson no longer has a job talking carbon because I so I have to assume at 1 point. We've done what we wanted and we're no longer having to restrict carbon because it got so expensive that we had alternatives. So is that twenty fifty in your vision or when if you were gonna work forever when when is that retirement point because the market's gone away.
| 47:24.70 | Lawson Steele | Um, I guess once we get to net 0 right? So you know that requires not just a carbon price but technology technological change as well.
| 47:36.61 | chrissass | But this programs designed to do that So I would assume even at Net Zero you're still net zero and you you're you still have a carpet market right up till that point right? and so we're we're targeting that but been.
| 47:46.70 | Lawson Steele | Yeah, yeah, know no we know that? yeah, so in other words, it's going to take a long time. Um, you know in theory the scheme at the moment runs to twenty thirty but in practice. Yeah, they would extend it other moments near the other moment they're worried about making sure that this phase. This decade delivers what it's meant to do um but you know if you're reducing your emissions by 55% by 2030. That's not enough to solve the climate issue so you know I think it's I think it's going to take longer than that. Well, it's definitely gonna take longer.
| 48:24.69 | Johan | Um, cool I think.
| 48:25.65 | Lawson Steele | Ah, probably up to be I Probably dead let alone retired. But.
| 48:31.37 | Johan | No I think it's great I think we're running up. Ah, for time I just have 1 final question that I'm interested I'm always going back to the corporates. so so I have another thing I saw that our ah ah Larry Fink of blackrock came out again. With a Ceo letter that he comes out. He's very foolish on on sustainability in terms of how we and where they invest you mentioned the pension funds that's holding a lot of stake or a stake in this especially with their capital. Do you see. Do you see more of an active approach also from from the likes of Blackrock and also from the pension funds to push this even further and not just looking at the specific co 2 price in in order for for organization. The ones who hasn't started to actually get going because it feels like it's a little bit of a play around with the numbers now. Before they actually start doing this transition. We start thinking differently.
| 49:27.68 | Lawson Steele | In terms of ah, forcing forcing industrials to change differently. You mean? Yeah absolutely I mean you know it's you know if you look at cop 26 it is ah pretty much a disaster right? but but an expected disaster achieving nothing.
| 49:31.21 | Johan | Um, correct.
| 49:42.60 | Johan | Um, yeah.
| 49:46.78 | Lawson Steele | Ah, and so ultimately it's it's not the politicians are going to get this done. It's going to be investors and and and corporates and you know going back to the iig gcc mouthful of 250 pension funds when they got $33000000000000 under management on the say to. I'm only going to invest in you if you reduce your emissions then you've got to sit up and listen right? And that's that's all part of yeah esg investing so it's not a fad. it's it's yeah every conversation I have now with investors and corporates is is esg has mentioned.
| 50:06.79 | Johan | Um, that yeah, are.
| 50:22.91 | Lawson Steele | And disgusted. So yeah and undoubtedly. There's there's more and more push and of course as you get more and more push to do that corporates will realize that let me let me let me just go to tangent. So if you're a corporate I mentioned before they're all sort of trying to work out there. Ah, their targets and so on. But if if you're producing. Ah yeah, your missions are 100% today 100% of whatever you choose. It's called a number hundred and you know that you can reduce your missions by 70% by 2030 and then that remaining 30% is your residual emission then what a lot of cors are thinking about is that okay they will ah they'll publish their net 0 targets saying yeah, they're going to reduce their emiss by 70% by 2030 say then they're thinking that they can then offset. That 30% residual and in 2030 and I'm saying to them. Absolutely you can do that you will get no recognition for that at all in your share price and actually probably while others are doing more you get penalized if funds will flow away from you your your best strategy actually. Is to offset that 30% today. Buy eus carbon allowances. You can try the the voluntary carbon market but good luck with that. But at least this one was is does what it says on the tin and is recognized by the igcc which are the guys are going to invest money in you. And also while you're on that trajectory from 100 down to seventy. The best thing you could do is to actually be carbon neutral on that trajectory and by carbon purpose toff set that on the way down as well. So if you did that right up front. You would be have a massive inflow of funds. So. Instinct dynamics flying around.
| 52:14.74 | chrissass | Well, it's been an amazing conversation today I really enjoyed this last tangent that that's kind of eye openingening to see where where the strategy would be for business. Any final thoughts you want to share with our audience. You've you've made some predictions but anything else you want to share today.
| 52:30.82 | Lawson Steele | Yeah I mean yeah, where am I but I've I've got 110 for April Thirtieth I think we can blow through that. Um I've got 130 for the year end which is probably conservative 150 into next year um but as I said all of that is is very much out there. Ah, the conservative end I think we're probably going to go exceed that and then yeah come back at some point from there. So so yeah anyway, but ah, you know I have stuff on Linkedin and twitters so everybody wants to call that stuff happen do that or or of course here.
| 53:06.59 | Johan | The last 2 seconds if you were not conservative but very bullish q one next year. What would what would you say.
| 53:14.40 | Lawson Steele | No I mean you know we could be in 200 plus out of thought.
| 53:19.80 | chrissass | Awesome! Well thank you so much. It's been a pleasure as always. We appreciate you coming back in the program and sharing with the audience. Thank you Lawson and for audience you've listened to another episode.
| 53:20.40 | Johan | Cool. Well thanks, having you.
| 53:27.33 | Lawson Steele | Sure my pleasure. Thanks for having me.
| 53:33.98 | chrissass | Insider's guide to energy I hope you've enjoyed this conversation as much as we have if you have share it with your friends. Don't forget to like it and certainly follow us and give us thumbs up wherever you get your podcasts. We'll talk to you again next week

Introduction
Factors driving the carbon price
Mechanics of the market
Changes in the market
Does the EUETS work?
The role of large investors