There have been some disappointing headlines out of the UN climate meeting this week, which is intended to pave the way for some of the COP26 discussions and come up with proposals that are likely to be agreed upon at the meeting. Most of the issues are around who is paying for what and whether developed nations are investing enough to help developing nations, using the guidelines put forward when the Paris Agreement was signed. In the US, the climate agenda and the Biden plan are bogged down in Congress and the plan is unlikely to pass in its current form.
In our view, these are great examples of government intervention getting in the way of progress, in both cases. Many of the articles in today's report talk about carbon values, carbon trading schemes, and carbon offsets. If we want to stop CO2 emissions the answer is very simple, we have to make CO2 emissions very expensive! While there are unfathomable objections to a carbon tax in too many countries, it remains the most logical way to make CO2 expensive and to raise revenue in the developed world that can be redeployed to help those particularly harmed by the carbon tax locally and to fund emerging market commitments. Someone has to pay, and schemes that create pools of capital that can fund what governments need to fund make the most sense.
Government stalemate, inaction, or the wrong action will cause two things, it will almost guarantee that climate change goals are missed and it will continue to cede oversight to investment managers and banks, none of whom have the “bigger picture” at the core of their process and all of whom are managing what they can – which is to put pressure on the specific emitters that they can influence. We are already concerned that the capital spending slowdown of the western oil majors will help create another peak in oil prices, but if governments around the world cannot agree on a carbon policy or set of carbon policies we might not get the investments we need to encourage alternate fuel or low carbon fuel investment.
The exhibit below shows the carbon trading mechanisms that are in place today – and contrasts the regulated markets with the voluntary markets. As offset demand rises and/or as regulatory caps decline, these prices should rise, but they are trades between those who have too much CO2 and those that can generate the credits – they do not create a pool of money (as a carbon tax would do) that could be redistributed at a national level to manage inequality and support global initiatives.
Source: Globalclimateiniatitives.com, June 2021
