The Derivatives Trading Department, International Trading Business Unit, PTT Plc., is preparing for carbon credit trading, a mega trend in the energy industry.
In 1997, the Kyoto Protocol mirrored the first commitment to climate change action, targeting 5% greenhouse gas (GHG) reduction compared with 1990 emissions. In 2015, at the 21st Conference of the Parties (COP21) in Paris, the Agreement on climate change was adopted, having its goal to limit global warming to well below 2 degrees Celsius, and preferably 1.5 degrees Celsius, compared to pre-industrial levels. To achieve this long-term temperature goal, countries aim to achieve net zero greenhouse gas emissions by 2050. Net zero emissions refers to achieving an overall balance between GHG emissions produced and GHG emissions taken out of the atmosphere.
To reach net zero carbon emissions, many developed countries announced their timeframe targets. For example, Scandinavian Peninsula’s countries aim for net zero during 2030-2045. Other countries such as EU, UK, USA, South Korea, Japan and New Zealand target net zero in 2050 while China plans for 2060. (the targets for Thailand and many other countries remain under consideration.)
List of countries that have announced net zero targets (Source: https://eciu.net/netzerotracker)
For efficient implementation of GHG emissions, several countries have issued rules, regulations and measures such as carbon taxes where the government sets a price that emitters must pay for each ton of GHG emissions they emit. In some countries where compliance markets are established, Emission Trading System (ETS) or ‘Cap and Trade’ is exercised. It is a government regulatory system designed to give companies an incentive to reduce their carbon emissions. The government sets an emissions cap and allows the entities whose emissions are less than ‘cap’ to trade emissions permits, or ‘carbon credits’. Companies with high GHG emissions can buy emissions allowances from those with fewer emissions. The unit of measure is assessed as one ton of carbon dioxide equivalent (CO2e). The largest and most stringent market is the European Union (EU) where ETS is effective in 27 nations covering more than 10,000 companies. Participants in EU Allowance (EUA) can enrol in three forms of trading. The first is auctioning which involves bidding for carbon credits from regulators. The second is bilateral agreement between buyer and seller, or over the counter (OTC). The third is exchange-traded where the major market is the European Energy Exchange (EEX). In addition, carbon credits can be traded on the International Continental Exchange (ICE), a familiar platform for oil traders. In 2020, carbon credit traded volume in EUA was as high as 8,090 million tons CO2e. As of 12 July 2021, the price of 1 EUA was traded at 52.86 Euro/ton CO2e.
EU ETS Cap and Trade system (Source: Investigate Europe)
To encourage other countries that have not yet decided on their net zero emission plans, the voluntary carbon market is developed to enhance projects that enable carbon reduction or carbon sink. These include renewable energy projects such as Agriculture, Forestry and Other Land Use (AFOLU) projects. Those projects have to be certified by international standard organisations such as Verra (Verified Carbon Standard) Gold Standard.
Validation, monitoring and verification processes are essential for carbon credit certification. The certification can be traded in over-the-counter markets. Most buyers are organisations or companies committed to sustainable principles in conformity with environment, social, and governance (ESG) principles. World class companies such as Microsoft, Apple and Google purchase carbon credits to promote their organisation’s environmental awareness image. Airlines under the supervision of the International Civil Aviation Organization (ICAO)and committed to the Carbon Offsetting & Reduction Scheme for International Aviation (CORSIA) are also interested in purchasing carbon credits from voluntary markets to offset their GHG emissions.
Early this year, S&P Global Platts, a major house for energy price assessment, initiated a carbon credit price assessment for CORSIA. In June 2021, Platts announced two types of carbon credit price assessment, Nature-Based Carbon Credits and Carbon Neutral LNG, signalling wider carbon credit trading and significantly higher volumes on the way.
Now the eyes of the world are on the COP 26 meeting in Glasgow, Scotland, in November 2021. Further negotiation of Article 6 of the Paris Agreement, which mainly relates to carbon markets, is planned at the conference. Reaching an agreement will level up international commitments on climate change.
COP26 press release announces that all member countries will accelerate their NDC (Nationally Determined Contribution) or GHG reduction. (Source:https://www.spc.int/fr/a-l-agenda/un-climate-change-conference-unfccc-cop-26)
“PTT Public Co., Ltd. fully supports national policies and PTT Group’s net zero emission roadmap,” comments Mr. Disathat Panyarachun, Senior Executive Vice President, International Trading Business Unit (TBU). “TBU has been closely monitoring the carbon credit market in preparation for enrolling in carbon credit trading via the Intercontinental Exchange (ICE) on which we are already registered. Carbon credits can also be traded in over-the-counter markets and PTT is networked with these all around the world. In particular, our London office, PTT International Trading London Ltd., is at the centre of derivatives trading in Europe which can be a great support for carbon credit trading to meet growing demand in the near future.”