Editorial: Smoke signals [NGW Magazine]

Over the last four months the European Union (EU)’s emissions trading scheme (ETS) certificate has risen by about €15/metric ton (mt) and at time of press was above €40/mt – an all-time high and double the price last April when the pandemic hit.

The rise in the price paid per metric ton of carbon dioxide emitted in Europe was to be expected: the supply of certificates is continually being reduced, as planned, relative to the amount of emissions produced. Industrial prospects are brighter now as the vaccine does its work – admittedly not at a uniform pace. But while the direction of travel was pre-ordained, the gradient of the price curve is much steeper than envisaged

Adding to the excitement, there is a lot of new money around the world looking for a new instrument to speculate in – look at Bitcoin, to take an extreme case.

Like many other instruments, ETS prices are volatile. But the medicine is working: coal to gas switching is continuing. While it would be risky to assume the price cannot decline just as rapidly, the rise does mirror the mood music in large areas of the EU and elsewhere around the world.

Last December the bloc significantly raised its emissions reduction target for 2030. Its Green Deal puts more urgency on efficiency, electrons and abatement measures than ever.

There are quite a few moving parts to the ETS price. And on top of that is the fact that the ETS is a political construct, with an inherent moral hazard. What will the EC do if the price ends up making goods, that are made in Europe, uncompetitive?

That has happened before, creating carbon leakage while allowing politicians to celebrate the cleaning up of Europe. It cannot happen again, if the bloc is able to introduce a carbon adjustment tax at the border so imported goods cost more. But the EU is made up of consumers who vote.

The disruption that the pandemic caused upstream logistics and working patterns has incidentally also meant that there is now a greater chance of a gas and oil supply tightness by mid-decade as final investment decisions have been kicked down the road. This will further drive up the cost of burning hydrocarbons.

Only 3mn mt/yr of the expected 60mn mt/yr liquefaction capacity was committed last year, although that gap is now much narrower, with Qatar’s giant LNG expansion project approved. Projects already operational meanwhile have not had the expected money spent on maintaining production and lining up back-filling for LNG projects. A global shortage of LNG will be felt first in Europe, according to Anglo-Dutch major Shell.

All things being equal, the more that energy and carbon prices rise, the cleaner power generation and industry will have to become. Preparing for this, utilities such as Centrica in the UK, Engie in France and Uniper in Germany have been making more noise about electric vehicles, heat-pump installation, biomethane grid connections and major hydrogen storage projects.

Upstream, producers are electrifying their platforms: Norway seems to do this almost routinely using onshore hydro while in the UK offshore producers are looking at their own sector’s self-imposed 2035 net-zero carbon target and devising floating wind and carbon offset programmes to avoid being in breach. Pipeline operators are adapting their grids to carry hydrogen either on its own or in a blend with methane.

Elsewhere LNG producers are planting acres of forestry or developing carbon capture and storage schemes; and so the list of expensive remediation measures goes on. It is only a question of time perhaps before the carbon content of LNG and pipeline gas, and any methane leakage all along the value chain, is part of its specification and hence price. How long this will take will depend on how long it takes to agree on measurement standards: the potential for misreporting to make a profit is colossal.

Like CCS, hydrogen is only being experimentally introduced, with two show-homes being open in the UK so that the normally incurious public – which so far has shown almost no interest even in smart meters, which were meant to have been fully installed in the UK last year – can see for itself how easy it is to operate a hydrogen boiler, hob and so on. Ammonia is also among the next steps, reliant on a much higher carbon price than today’s.

So far the price rise has been manageable and it has had the encouraging effect of accelerating switching from coal to gas in power generation. And as the certificates are given freely for governments to auction off in a series of rounds, they might find this sharp price rise a straightforward way to get their hands on cash at a difficult time. They can trade or hedge against future rises to ensure popularity chimes with the electoral cycle, where applicable.

Meanwhile those same countries that are reliant on coal and lignite for power generation and had seen gas as the affordable, reliable and healthy solution to their carbon problem are up in arms now about draft new financing rules. The taxonomy regulation comes down hard, even on combined-cycle gas turbines – once the darlings of the environmentalists.

Turning off the tap for sustainable financing is a recipe for political disaster: the EU cannot risk losing the support of over a third of its member states on a matter of dogma, if it is serious about a just transition. It will surely have to revise the taxonomy regulation.