As the world continues to deal with the geopolitical events that rocked markets in 2022, we are on an increasingly clearer path toward a decarbonised future forged by three key developments – better defined energy and environmental policy in the US, Europe and Asia, a global corporate push toward net zero goals and environmental markets that are expanding and innovating to finance and accelerate solutions.
The two most important changes in the last 6 months have been the Fit for 55 legislation passed by the European Parliament (focusing on the EU ETS) and The Integrity Council For the Voluntary Carbon Market’s (IC-VCM) Core Carbon principles, which offer a defined roadmap for carbon markets and transition plans. Whilst voluntary carbon markets are still hitting the headlines for their lack of rigour, these projects will continue to evolve and improve as new ratings, standards and auditing processes are implemented and they must be because public entities with net zero targets are increasingly encountering regulatory and shareholder scrutiny. Beyond that, companies will also struggle to find financing and insurance without a rock-solid net-zero transition plan.
The Fit For 55 in 2030 package, passed by the EU Parliament in mid-April, is another key policy driver for companies and markets. With the goal of reducing greenhouse gas emissions 55% by 2030, this legislation brings the maritime shipping industry into the EU ETS for the first time starting in 2024 and will phase out free carbon allowances for the aviation sector in 2026. There is much more to this landmark legislation but shipping and aviation will soon be active participants in the EU Emissions Trading Scheme, the largest carbon market in the world today. The US’s passage of the Inflation Reduction Act, is touted as the most important climate and renewable energy law ever passed, and is spurring research, investment and production of renewables, a sector likely to be bigger than fossil fuels.
Environmental markets are needed to enable this transition because they facilitate the deployment of capital in strategic investments that will deliver emissions reduction solutions, renewable power or investments in projects or listed funds to scale investments in biodiversity. They will increasingly act as a means for capital markets and insurers to play to scale access to finance or to manage climate risk and to invest products which enable transition. Markets serve a variety of purposes, from transparent price discovery to capital efficiency via ultra-fast clearing and settlement of transactions. This allows capital to be put back to work and eliminate costly frictions in the system. Futures markets, where EUAs are most traded, are also key platforms whereby companies can hedge their risks by locking in a price on a known cost or risk in their operations.
Among the top risks companies are focused on today is in climate risk. The World Economic Forum’s latest “Global Risks Report 2023” showed that “Failure to mitigate climate change” ranked at the number one global risk in the next decade from those surveyed. Five of the top 10 risks were environmental. While the results of the survey are new, the idea of marketplace solutions to address environmental challenges isn’t. These markets are now proven and resilient over decades. Environmental markets are poised to provide governments, board rooms and individuals with the financial products that are needed to meet these challenging goals.
IncubEx has been a big part of these markets, led by a team of executives who were there for the very first environmental markets – sulphur dioxide and NO2 auctions on the Chicago Board of Trade, as part of the US EPAs Acid Rain program in the 1990s. What that program proved is that cap-and-trade models, with clear rules and targets, are the cheapest and most efficient way to lower emissions. They then went on to create the Chicago Climate Exchange, proving that voluntary and compliance carbon markets work. Following that, they created contracts based on renewable energy certificates, which allow customers to purchase wind and solar power attributes that are measured at the source. They also created new renewable fuel credit products that aim to incentivize renewable fuel production.
IncubEx’s experience in developing all of these markets, has provided the market with a growing menu of financial products that directly address the global challenges we face. Environmental products are offered with our partners on neutral, fair and transparent futures and OTC markets. As energy and climate events continue to roil markets, the need for financial instruments that allow companies to hedge that risk is critical.
Director of Sales and Marketing