Back to black - putting a price on climate change

We look at the political changes driving the next big steps for carbon pricing.

20 September 2017

Sustainable Investment Team

Three months on from President Trump’s announcement of the US withdrawal from the Paris Climate Accord, progress in carbon markets points to renewed global resolve to tackle the challenge. We expect that progress will be reflected in part by the continued march towards placing a financial cost on carbon emissions through trading schemes and taxes1. Carbon trading schemes are a cornerstone of climate policy and are spreading to cover more of the world’s emissions, while many of those already up and running are becoming more onerous.

Carbon pricing is one of the most important ways climate change will impact industries, businesses and investments. Price rises on the scale needed to meet long term climate goals will reshape industry cost structures, opening competitive opportunities for better placed companies.  We explored those impacts in our recent Carbon VAR report.

China is forging ahead with a scheme which will cover close to 10% of the world’s greenhouse gas (GHG) emissions2. Whether it will initially cover the full range of 7-8 billion tonnes originally envisaged, or start with specific industries, remains unclear. However, even the 3.7 billion tonnes footprint of the country’s power sector would dwarf the 1.7 billion tonnes covered by the EU scheme.

In the US, the nine States behind the Regional Greenhouse Gas Initiative said in August that they plan to deepen cuts in carbon emissions to a 30% reduction between 2021 and 2030. As a State-led initiative, the scheme is relatively insulated from Federal decisions.

In Europe, which launched the largest scheme in 2005 but has struggled with excess supply of credits, politicians are working on tougher rules for phase IV of that scheme, which will start in 2020. In early September, France and Germany issued a joint press release stating they want an agreement on the European Emissions Trading System ahead of the UN-organised climate conference in Bonn in November. Our European Utilities analyst believes those negotiations are shaping up to deliver meaningful reform in the scheme, which will be supportive of significantly higher carbon prices. In particular the Council of Ministers’ proposals to reform the Market Stability Reserve are expected to reduce oversupply much more quickly than previously anticipated.

The next few months are likely to provide an important signal to the future of global climate policy and the strength of carbon pricing. Predictably, politics is a fraught exercise but the early signals are looking positive.


Source: Schroders, World Bank, March 2017

1. Carbon trading schemes limit the total emissions of participating companies and allow businesses to buy and sell emissions at prevailing market prices. Carbon taxes are simpler but considered less economically efficient: they impose a penalty proportionate to the emissions companies produce. Both have the effect of creating a financial penalty for emitting greenhouse gases.

2. That scheme is currently scheduled to come into force in November 2017, although recent press reports indicate full implementation may begin in 2018.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.