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by Ryan Smith (pictured)

Since the start of 2017 to end August 18, the LME spot cobalt price has approximately doubled (at the top, in March 2018, it was 290% higher than in January 17)! But wait, there’s another ‘green’ commodity which has offered even better returns. Carbon… or more specifically the carbon permits that are traded under the EU Emission Trading Scheme (ETS), are up 390% since the start of 2017. Boom!

EUA price (€/t) – Jan 2017 to end August 2018

Source – Factset

The ETS is a cornerstone of the EU’s policy to combat climate change. It limits the emissions of more than 11,000 energy intensive operations and the airlines flying between the 31 countries it covers. It works by setting an overall cap on the amount of greenhouse gases (GHG’s) that participants can emit and each year participants must surrender enough allowances to cover their activity, or face being fined. If they need more (or less) permits, they can trade with other participants and this allows them to choose between actually cutting their emissions (via investing in cleaner technology) or buying allowances, whichever is cheaper.

So, why the big ramp up in the price? A squeeze is coming! From January 2019, the number of carbon allowances under the scheme is being significantly reduced. Hence the excitement; if you want to continue to emit post 2019, it will cost you more.

Although the ETS is the largest component, the global carbon ‘market’ is growing. Various regional, national and subnational carbon pricing initiatives now exist across the globe, with an aggregate value of US$8.1bn. A lot of money, yes, but still covering only 11 gigatonnes of CO2 – or to look at it another way, 20% of global GHG emissions. However, even where companies are not participating formally in carbon markets, increasingly they are anticipating their financial impact. The number of companies disclosing to CDP (Carbon Disclosure Project) that they embed an internal carbon price into their business strategies has quadrupled from 150 global companies in 2014 to over 600 companies in 2017.

It’s worth noting that EU ETS prices reflect the abatement cost of one tonne of carbon and not the estimated ‘social cost of carbon’. The latter is a more holistic estimate of the impact of climate change involving complex sums combining long time spans, economics and ethics. The EU ETS price is still some way short of the estimated social cost, but at least it’s going in the right direction. Meanwhile, in the US, President Trump just cut estimates for the social cost from $50 (the Obama administration’s central estimate which underpins the Clean Power Plan) to between $1 and $7….which (as Arnie says here) very much looks like just another way to try to prop up the ‘Blockbuster of the fuel industry’. You gotta love Arnie…..

Pictures © Kames Capital

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