Top Oil Traders Say Emissions Market Could Challenge Crude

The world’s largest oil traders are gearing up to profit from buying and selling pollution permits, a market that could become bigger than crude as global leaders seek to limit the impact of climate change.

The global carbon market has the potential to be 10 times the size of crude oil trading, said Hannah Hauman, global head of carbon trading at Trafigura Group, the second-largest oil and metals trader. Hedge fund Andurand Capital LLP -- historically known for its fossil fuel bets -- expects the cost of polluting to double before some new emissions-cutting technologies kick in.

Oil traders including Vitol and Trafigura, as well as a host of hedge funds have been building up trading desks to profit from one of the hottest commodities trades of the year. Traders are bracing for tighter supplies as the European Union is preparing for the markets biggest reform to date to align emissions trading with a stricter climate goal for the next decade.

“Carbon is already the largest commodity in the world, with the potential to be 10 times the size of the global crude markets,” Hauman said the FT Commodities Global Summit on Wednesday. “We see a massive potential here.”

Carbon prices in the European market, the world’s largest, have surged almost 60 this year to over 50 euros a metric ton. Costs could still rise further as EU reforms, expected to be announced next month, are set to accelerate the pace of emissions reductions in the system, boosting the scarcity of permits.

Europe wants to reduce greenhouse gases by at least 55% by 2030 from 1990 levels as part of the Green Deal, an ambitious strategy to reach climate neutrality by the middle of the century. Carbon prices will need to be over 100 euros to boots the incentive for new emissions-cutting technologies, said Mark Lewis, head of climate research at Andurand.

Michael Curran, head of emissions trading at Vitol, said that he expects spikes in carbon prices during summer, with futures reaching 75 euros a ton in the third quarter.

Such high prices were unthinkable just a couple of years ago, but the perception has now changed as Europe steps up its climate ambition, according to Ulf Ek, founder and chief investment officer at Northlander Commodity Advisors LLP. And traders are not expecting EU regulators to intervene.

“Today 50 euros is comfortable and EU regulators are signaling to the market that prices are still too low,” Ek said. “That’s a big change.”

Political Will

Before the last reform of the EU carbon market in 2017, prices had traded at around 5 euros per metric ton for several years amid oversupply. It was the political willingness to shore up the market and then the EU’s resolve to step up its efforts to fight climate change that helped boost the cost of emissions.

Yet unlike regulators in other markets, the EU doesn’t have any tools to quickly intervene to limit carbon price volatility. Existing legislation gives policy makers an option to boost the supply of permits if gains are deemed too fast, but the bureaucracy of such a move takes makes it ineffective.

Earlier this year, the EU’s climate chief Frans Timmermans said the carbon price would need to be much higher to realize the bloc’s goals to reach net zero emissions by the middle of the century.

About 11 billion tons of carbon are currently covered by regulated traded markets, Trafigura’s Hauman said. That compares with total emissions with 50 billion tons per year, providing a glimpse into the scale of the opportunity.

©2021 Bloomberg L.P.

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