Tighter climate policies are changing the landscape for emitters in Europe. Marc Falguera and Gauthier Bily from Vertis Environmental Finance, consider how companies are responding

Environmental Finance: What is your verdict on Glasgow?

Marc Falguera: The outcomes are positive. There is will for change and tangible actions to continue in the right direction. This COP, however, made it clear what we have seen in the market in the past years: it is the private sector and individuals who will lead the transformation to net zero, filling the gap not covered by environmental legislation. The greatest achievement of COP26 was the finalisation of the Article 6 rules, which had been stuck for almost three years. The new rules are reasonable and will ensure environmental integrity in the Paris Agreement-aligned market.

For example, new rules on corresponding adjustments require countries to make such adjustments when it comes to emission reductions authorised for compliance use under the Paris Agreement outside of the host country. However, they also provide flexibility to keep emission reductions achieved in the host country under the national inventory. This might mean that there will be a lot of power in the hands of buyers of voluntary emissions reductions. But there is still lots of work to be done, particularly on best practices around claims.

EF: How are near-term pressures on companies interacting with the longer term imperative to reach net-zero?

Marc Falguera: The push for net zero has accelerated significantly in the last couple of years. Approximately one third of the largest publicly traded companies in the world have set emissions reduction targets of some kind, and many are bringing them forward.

However, in 2021 it became clear that it's not enough anymore to publish bold statements about becoming net zero by 2050. There is a lot of public pressure for demonstration, that companies have a solid short-term roadmap to achieve their goals. Voluntary carbon offsetting is being frequently incorporated into companies' decarbonisation strategies this year, and we have seen a particular trend towards short- and mid-term initiatives using carbon removals to offset emissions.

At Strive, our new brand for climate action services, we offer a one-stop service t o help clients achieve their net-zero commitments over the short, medium and long term. We believe that carbon insetting, offsetting and carbon removals will continue to grow in importance.

EF: How has the dramatic rise in carbon prices in the EU affected your clients' engagement with the EU ETS?

Gauthier Bily: The tightening of the market makes the price trend inevitably bullish and this raises concerns among market participants. Reaction to the record high carbon prices in the EU ETS has been different from country to country and sector to sector, and even from company to company.

Western European power companies are used to purchasing carbon on a regular basis in smaller tranches, rather than risk buying at the compliance year-end. Power companies in Eastern Europe are in a more difficult situation as many are state- or municipality-owned and, by the time budget approval processes are complete, they are often behind the market curve.

The spectacular rally in gas and electricity prices presented an additional challenge to compliance entities this year, especially to those particularly exposed to those costs, like fertilizer producers, steel companies and district heating providers. In some cases, companies prioritised purchasing fuels, leaving carbon as a secondary concern. In a carbon market with high volatility, this risks their profits and their core business.

There is a third type of company finally emerging: those that recognise the risk of being exposed to carbon prices, and which are implementing a carbon management strategy involving senior management. These companies are either putting in place long-term allowance purchase plans, or are searching for opportunities to implement new technologies and reduce emissions over the long run. Either approach allows them to reduce their exposure to rising carbon prices.

EF: How are you expecting the EU ETS to evolve? 

GB: According to the proposals of the Commission, the system will become even stricter. It takes the lion's share of the overall EU 2030 emission reduction target of at least 55%. Companies in the ETS have to reduce their emissions by 61% from 2005 levels. The quantity of the available allowances will fall significantly, forcing companies to decarbonise. The free allocation will be phased out for sectors covered by the carbon border adjustment mechanism and also for aircraft operators.

The maritime sector, joining the system from 2023, will not receive any free allowances, but has to purchase them in the market.

As the EU ETS proved an efficient decarbonisation tool in the past, it will also serve as an example for a new adjacent scheme for buildings and road transport.

EF: What do you anticipate for carbon markets linked to transport fuels?

GB: The road to net zero will affect every industry at all levels. Market-based mechanisms have proved to be an effective tool to drive change, and we think they can play a significant role in reducing emissions from fuel for transport. The EU Commission, in its latest Fit-for-55 package, is pushing strongly for the deployment of zero- and low-emission vehicles. However, oil and gas firms should s till focus on taking near-term measures to reduce emissions from the current fuels mix.

Upstream Emission Reduction (UER) certificates serve exactly that purpose, by ensuring a decrease in the carbon intensity of transport fuels' production. We are active in sourcing UER projects globally and placing them in the EU to comply with different domestic legislative schemes. We see it as a part of the market with significant potential to deliver emission reduction.