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The Sustainability Story
Roman Kramarchuk: Navigating Carbon Markets—Insights from COP29 and Beyond
00:31:48
In this episode of "The Sustainability Story," host Deborah Kidd, CFA, and Roman Kramarchuk, Head of Climate Markets and Policy Analytics at S&P Global Commodity Insights, delve into the significance of Article 6 adoption at COP29 and its...
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It's a new year. It's time to invest in you. CFA Institute's Annual Conference Live 2025 is your opportunity to ignite your professional growth. This may join us in Chicago to connect with industry leaders like Daniel Gamba, CFA and renowned finance expert Professor Steven Kaplan. If you need approval to attend, we've got you covered with a helpful template on our website. Start your year strong. Reserve your spot@cfainstitute.org Foreign.
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B
Welcome to the Sustainability Story. I'm Debra Kidd, your host for today's episode. Today we'll be talking about the future of carbon markets in the wake of COP 29 and the role they may play in getting the world to net zero. And I'm so pleased to have with me Roman Kramarczyk, who is head of Climate Markets and Policy analytics at S and P Global Commodity Insights. Roman has a long history of working in the sustainability field in various capacities and particularly in emissions and environmental markets. So welcome Roman. Thank you for joining us.
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A
Thank you, Deborah.
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B
Before we get started, we always like to ask our guests to tell us about their sustainability story. So can you tell us what led to your interest in sustainability and how you came to work in your field and your current role?
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A
Yes. Thank you Deborah. Thank you for the opportunity to be here. My own personal journey has been, you know, has, has been a bit of an intersection of economics, environment, public sector, private sector over the years, you know, even back in and that spans 30 years of experience but also, you know, prior to that and interest in all the different facets of sustainability work wise, a lot of what I've worked on, both domestically in the US but also internationally was around developing the capacity around energy markets and essentially the tie to of energy and development. But quickly I kind of recognized the importance of how energy and sustainability in the environment all intersect which, you know, that's a space that's very much dictated by the intersection of government and private sector. So had the opportunity of working for the US EPA on clean air markets. Some of the innovative work I think you know, before carbon markets, one of the more innovative initial applications of emissions markets was that of SO2 markets to regulate acid rain and also NOX markets. So it was part of those efforts of creating markets and honing markets around the those pieces. And since then I've kind of moved back into the private sector working with industry, advising industry to essentially devise strategies. Think, think about the risks and opportunities in the sustainability space. Very a big portion of that has been around the use of market based instruments in, in Driving good environmental outcomes, recognizing that having giving entities the flexibility to respond to price signals is, you know, can be much more efficient and much lower cost than for example, having command and control pieces. Another part of my journey has also been working. I worked for PG&E, they're unregulated subsidiary. So you know, I've worked from the merchant power side as well.
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B
Thank you for sharing that story and again, so happy to have you here given all of your expertise in this area. Let's talk about the adoption of Article 6 at COP 29. It's been heralded as groundbreaking and a key outcome of the conference. I've seen a number of headlines proclaiming that its passage is going to be transformational in achieving net zero goals. And I'd love to hear your thoughts on it.
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You know, with the Paris Agreement, most of the articles were approved pretty early on Article 6. And just to give a background, Article 6 is the international carbon trading part of the Paris Agreement. If you think about what, what countries agree to in the Paris Agreement, they agree to nationally determined contribution NDC targets where they agree to hitting particular levels of emissions, achieving certain levels of emissions reductions. The idea, like with most trade, is that there's opportunities for getting those reductions in a more efficient, cost effective way. If there are opportunities for arbitrage, it's an argument of why goods traded and in the same way why not trade the opportunity for emission reductions? In the sense that perhaps in one jurisdiction it's gotten very expensive to get those emission reductions. In another jurisdiction those reductions can be gotten cheaper. That's one whole side of it is the efficiency and lower cost side of things. The other part of it is the concept of climate finance, of carbon finance. It's the fact that for the developing world to really be able to commit to more aggressive climate targets, there's a need for capital, there's, there's an appreciation that when, when you're asking quickly growing developing countries to shift to more sustainable pathways, they're going to need capital for that. They don't necessarily have the right opportunities in terms of either capital sources or, or even at the right cost of capital to be able to execute on those. So this is. Carbon markets are seen as another form of also climate finance. So you know, two angles there. One of them is really to facilitate gains from trade and the other one is really to drive the capital where it typically has not gone. So that's the inspiration for Article 6. It took a while to get to where we were in Baku back in November, but that journey had Already seen some progress. Article 6.2 is more of a entity, you know, a government to government set of trading of carbon where essentially there are actions, mitigation opportunities that are agreed to, that are executed upon and then certain amount of carbon credits are essentially transferred from one country to another. So if you think about a set of ledgers about countries meeting their targets, you're essentially taking the ability, a certain amount of mitigation away from one country and trading it to another. And that's agreed to on a sort of on a bilateral basis through Article 6.2. And that's a generalization, but I think it's a useful one. Article 6.4 is really more of what we would think of as the carbon credit market. Historically that had been part of the Kyoto agreement with the Clean Development Mechanism. It's part of the voluntary carbon markets now in the sense that there's project based based credits that are, that are approved, that have approved methodologies that are verified and those credits are issued and then traded. The idea was that there would be a, According to Article 6.4 is to have that sort of structure where you have approved methodologies, where you have the ability to create credit and that is done more broadly in a market sense and not just as bespoke country to country deals. And there would then be the opportunity to take those reductions. You have to make sure that you take the emissions and the reductions off of again, you still have to make sure that they are adjusted in different country ledgers for that trade to be registered and count towards targets. But it's much less bespoken, much more of a market structure that, with more entry points, with more potential participants, with more standardization. So what we had is actually at Baku we, we have gotten agreement on the operationalization of, of particularly Article 6.4, because 6.2 has already been in, in place, there's been agreement on that and there's actually been already activity in that market. So Article 6.2 is where the market is now. But the opportunity to have that operationalized through Article 6.4, allowing for common methodologies, allowing for broader participation, not just bespoke country to country deals, is what is the promise for this market.
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B
Okay, to summarize, the significance of the Article 6 adoption really lies with agreement around Article 6.4 and the operationalization of carbon credit markets. How would you compare the importance of the Article 6 markets with the compliance markets of today and the challenges of the current voluntary markets?
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Yeah, I guess I would just want to step back a little bit because I Think, when people think about the carbon markets, there are these Article 6 markets which are very early stages and are showing promise. There's the voluntary carbon markets which have been around for a while and you know, we can get back to the challenges that you've noted because they're, they're, they've made an impact on the market. But the by far, by far the largest marked carbon markets in the world that we cover and that we track, we kind of do price assessments around them, we do market analysis around them are the compliance carbon markets. The that, you know, in the EU, for example, the EU ETS has been in place since 2005. The Chinese compliance carbon market ETS has been in place since the start of, you know, since 2020. These are very large markets. They cover massive portions of the emission space, essentially applying a price of carbon to covered entities. And if we, if you look at more established in deeper markets like the EU ets, there's been an entire system of not just physical markets but financial markets developing around them to the point where a lot of most of the trading is actually, you know, through the form of futures and options and a lot of sort of standard commodity market type instruments, both physical and financial are also being applied to these carbon markets. So we've seen major parts of the world have taken on carbon markets as a tool for decarbonization. And what we're also seeing is that major parts of the world that haven't done so are moving in that direction. And I'm thinking of some of the largest and fastest growing economies of the world, economies like India's or Brazil's, they're both in pretty serious stages of advancing their carbon market. And, and again, those are going to be, in terms of size and scope are going to be very large relative to what let's say the voluntary carbon market shows. And again, the Paris agreement market's certainly exciting, but really we're really just starting that. I think if we, you know, if we think of a few billion in the voluntary carbon market, we're talking hundreds of billions up, you know, up to a trillion in the compliance markets. And the Paris markets are really, really tiny at this point.
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Just following up on the challenges in the voluntary carbon markets, we hear a lot about promises that weren't delivered, emissions reductions that didn't happen, or projects that weren't properly presented. So what I hear you saying is these issues pertain to just a very small percentage of the overall carbon markets.
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A
Yeah, yeah. I mean, I'd say the voluntary carbon markets are relatively, is Much smaller than the compliance markets. At the same time, the issues that you've raised are very important issues because if you think about, you know, there's government actors which set up the compliance markets. What drives the voluntary markets is corporate participation. It's, it's, corporations have set their own targets apart and aside from what governments have, have, have imposed and they have their own carbon goals or net zero goals or, or emissions or clean energy goals. So they want to be able to demonstrate that and they can demonstrate that through the voluntary carbon markets. Now what we have seen over the past two years, I'd say two and a half years, is those markets had been growing very strongly. There's a lot of interest in them. But what started happening is that partially is the press, partially its researchers have been pointing out and finding that, that not all of the reductions that were claimed were necessarily fully high quality reductions. You know, there, there are cases of when you have let's say avoided nature based, avoided claims, those are often set up against baselines and set up and set up in ways that, that are not necessarily obviously intuitive and require an understanding of what an alternative scenario might be. So there, there's, there's been, there's a lot more focus particularly on the nature based side, but also through other methodologies that, on the supply side the quality of the credits that the reductions were perhaps not what they were claimed to be. And that's, you know, it's, this is in some ways to be expected of many markets. You know, markets, when they start developing, they, they go through growing stages. There's certainly also improvements that have gone on relative to, even where we were a few years ago in terms of the ability to measure and quantify a lot of, you know, technologies that are now available, other approaches that are now available that can actually give much more granular and accurate measurement of what we're seeing on the ground and what the emissions implications are. So the stakeholders themselves have kind of realized that there's a problem here and they've set up two sides to stakeholder groups to try to address these problems. One of them is on the supply side, which is an effort called the icvcm, where there are, is now a sort of stamp of approval to particular types of projects and methodologies that meet certain requirements of, that demonstrate quality. So there's a, there's also providers out there that also seek to essentially offer ratings of project quality so that there's a market infrastructure developing to be able, able to better assess that quality. And there's also an industry stakeholder group that's trying to put that stamp of approval on the quality. The flip side of that is the demand side of the voluntary market, where you have an organization called the VCM which has essentially been looking to set standards for what kind of claims a company can make when utilizing credits. Are these claims of facilitating carbon reductions? Is that actually a claim of offsetting? And can they make claims like this if the corporations are not actually taking actions to reduce their own actions internally? So let's just say there's been a lot of infrastructure being developed over the last few years to address what had been identified as concerns about the quality and the claims issues. It's a market that's still developing, waiting to see. And I think one of the things to look out for in 2025 is waiting to see whether these initiatives actually increase the faith and quality in the faith in these markets. I mean, we've seen retirements of credits essentially plateau year on year, which compared to the dramatic growth that we've seen in prior years, it's definitely not that. But it's also not a massive drop off either. So we do regular data analysis of all of the issuances by different project types. We do a lot of the data analysis on retirements, who's retiring, what types of credits are being retired, what kind of credits are being issued. So these dynamics are changing over time. You have entities that have come in and decided they no longer want to have carbon credits as part of their carbon mitigation strategies, and there's new people coming in that are, that are using it and looking to use it. So there's definitely, it's a very dynamic period right now in the voluntary market and there's a lot of policy initiatives around them. And the question is whether it gets to the point where the market regains confidence and in using these tools for their decarbonization strategies.
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B
So overall, Article 6 can be an important climate finance mechanism to help countries move toward their net zero goals.
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A
It is, because, I mean, as I noted, there's two pieces to it. It's the ability for countries to drive financial flows in other countries and at the same time meet their reduction targets. Yeah, that is a key part of the story. The other part of it that I think is actually related to what we just talked about on, on quality is that, you know, there is a desire and there's a belief that if the UN comes and decides on a certain set of methodologies and, and, and approaches through Article 6.4, that there's sort of an implicit stamp of approval that, that there's going to be an, that if the UN has decided that certain approaches are or more acceptable, that there's a sort of follow on effect in the voluntary markets and in other markets the companies would feel more comfortable in using UN sanctioned approaches. So that's a piece of it as well.
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B
How would you compare the role of carbon taxes with carbon markets in helping countries meet their climate finance goals?
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A
Yeah, you know, it's interesting because you know, carbon markets are form of carbon pricing and carbon taxation is another form of carbon taxation. And in a very simplified way, what carbon markets often give, particularly if it's a cap and trade program, is you're given certainty on emissions levels, but you don't have certainty on price like you know what the cap is. Because in a cap and trade system that's ultimately limiting your, your region's ability to, or an entity's ability to emit. In a traded market that price changes, you know, every minute of every day. In a very liquid traded market with the tax, you kind of have the opposite where you have certainty around pricing. You know what that is and there's benefits to that as well because then that can be built in. But what you don't have certainty on is on the emission reductions. And there's also not that much flexibility. Let's say, for example, if there's a, if there's a recession and emissions go down a lot, then you don't really need as high a price to reach any particular target. But if the tax was set, then you wouldn't have that tax adjust. You would basically have that tax stay in place. So, you know, it's that really policymakers have to decide where they want the uncertainty to sit and where, where they feel more comfortable with that uncertainty sitting. Do they feel more uncomfortable with having a price move around and knowing that they're going to get a certain amount of reductions or do they more feel more comfortable with having a fixed price? Now, just a caveat to that is a lot of carbon programs, even compliance, carbon markets have, tend to be hybrids of the two. So they have things like floor prices, ceiling prices. So you know, while we can say that there's a full freedom in terms of where the prices can end up, there's often controls either on the pricing side or on the supply and demand side that end up constraining the volatility of those prices. At least you know, that's the intention. So you know, I think we, we often, I think policymakers kind of choose what they want to achieve. But they look to take the benefits of both oftentimes to make sure that there's buy into the program, there's flexibility for compliance entities and there's actually achievement of the targets.
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B
There's a wide range in carbon prices from the single digits to triple digits. Can you shed a bit of light on what is driving this kind of variation?
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A
Oof. I'm not going to go into any carbon price. The question is ultimately the question isn't the price. The question is your decarbonization goal. And if we think about what entities and what countries and what regions are trying to do, they're trying to get emissions down and they're trying to create a set of market instruments to do so. Yes, there is a massive variety in carbon pricing. And this is again these are price, we track these and publish price assessments around the markets around the globe on a daily basis. You know, you've got prices in the Reggie region of North America or in California and then you have prices in Europe which are multiples higher. You have the Chinese carbon price which is considerably lower. And then you've got prices in Australia, New Zealand, you know, so as you mentioned, I mean anything from you know, single digits, single, single digit dollars for compliance prices, the EUA prices, the European ETS prices have reached, you know, have reached triple digit. They have fallen back since then. But so it really depends on the jurisdiction and what they want to accomplish because then the, the price drives the, you know, drives what is desired in terms of the accomplishment. The on the voluntary side we've seen some voluntary credits like you mentioned, you know, be below a dollar but then for very particular types of voluntary credits, some of the technology based removals credits we regularly price, we see priced at, at over a hundred dollars. So I mean on, on a, you know, every day we, we, we change and adjust those prices. So for yeah, tech based removals and if we look for entities that want to buy, let's say removal credits that are tied to direct air capture or biomass carbon capture, you know, some of the more technology oriented types of projects that remove carbon from the atmosphere, it's not just avoiding carbon, but removing carbon. There's been a market appetite for those that have led to prices, you know, in a hundred to hundreds of dollars. Yes, I guess the thing is when we talk about carbon market, we need to talk about carbon markets because anytime you can have certain prices in the hundreds and certain prices below a dollar, it, it really reflects both the appetite of the buyers but also in the compliance world whether how much pressure is to meet the goals that the governments have set for each other. The one, the one thing that is pretty clear that if you, to hit a, a net zero world, if you look to a sort of Paris Agreement 1.5 degree, that you would need significantly higher prices to carbon than, than the sort of averages that we're seeing across jurisdictions currently.
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B
It sounds like you don't really see a global carbon price coming in the near future.
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A
I, no, no, that, that, that's something that, you know, it, it, it's an economist, you know, they, you can do economic modeling with things like that and we've done that as well. But they're all ultimately, if you think about entities and countries want to be able to control often both the industrial policy and the environmental policy and they each have different NDC targets, even from the Paris Agreement. So I think in the early days of, let's say the Kyoto Protocol, there were some hopes and expectations that we'd be moving closer towards global carbon price. But there's very little for quite a while that would suggest to us that that's, that's the direction things, things are going. I mean, to a degree what Article 6 can do is potentially give those types of signals for the, for the markets that Article 6 can represent. But then, you know, that is going to be the people that participate in Article 6. That's not that, that's going to be perhaps a country like you know, Singapore or Switzerland looking to buy credits and then, you know, essentially work with other countries that are selling them. It's not if you think about what actually what, what a, what the bulk of carbon prices around the world are going to be. It's what the carbon price is in China, what it's what the European carbon price is. One interesting development I'd want to note is the European CBAM effort, the carbon border adjustment mechanism, because in some ways that's what Europe is facing the highest traded carbon prices in the world amongst the big markets, which definitely impacts their industries. So what the carbon border adjustment mechanism does is try to place an equivalent carbon price on imports into the European Union and thus kind of level the playing field for their industries. What they do allow is if a country has a domestic carbon price that can count against that border adjustment. So for example, you know, Canada has currently a carbon tax that can be counted where that carbon price from the carbon tax can be adjusted against the EUA price in calculating that carbon border adjustment. So part of the incentives globally around setting up domestic carbon prices is, you know, I think Europe is driving some of this because they are essentially saying if you want to trade with us on for these particular goods, you have to either pay us the difference based on your carbon intensity at the border, or you can demonstrate that you have an equivalent, that you have a carbon price, and we'll give you credit for that. So there's a lot of different interesting drivers that are leading to more uptake of carbon pricing.
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B
What role does the private sector have in the importance of using carbon markets for net zero? Are they a big part of the climate finance tool going forward?
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A
Yeah, there's a few different angles to answering this question. I think the first one is really that these markets are designed to give the private sector much more flexibility in reaching targets. I mean, it's not a command and control regulation that dictates technology. It gives the private sector flexibility in terms of the credits. There's also the ability. You know, I kind of mentioned the way the markets around carbon allowances have been treated as commodities. So in the same way that financial groups can either look to hedge or speculate or take part or facilitate client interactions in different commodity markets, this is part of the commodity market world. Now, if you're generating power and burning natural gas, to do so, you're generating emissions. So you may want to hedge by engaging in futures market transactions per carbon because that packaged in, in if you're in Europe, because that's all comes as a, as a package. The other part of it is, is, you know, I mentioned companies that have taken on their own targets in the same way as some investors have taken on targets around, amount around some emissions associated with their portfolios. Obviously they'd be interested in, in demonstrating that they are meeting targets. And then the question is, can you demonstrate that with the use of carbon market instruments? Can you do it with the usage of other environmental commodity instruments? So is, is this part of a demonstration by financial entities that their portfolio of investments is on a trajectory that's consistent with, let's say, a Paris agreement target or consistent with some other carbon reduction targets. So this is really an opportunity for, if entities, financial or otherwise, are taking on targets, this is an instrument they can use to demonstrate that. And the last way is just, you know, as an investment destination. It's, it's, you know, there are projects that can generate credits, there are partnerships that, that are peripheral around that whole ecosystem of monitoring, reporting, verification around this sort of mosaic of energy transition technologies. These are all opportunities. And these carbon markets are ways that they can be monetized to, you know, to an extent. So the scope of relevance for, you know, for financial entities, for private sector entities is a pretty broad one.
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B
Let's wrap up with your outlook on the carbon markets. Given the developments at COP 29.
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A
I mean, it's been a long journey to get to where we are with Article 6. I feel, you know, it's one that has gotten to a point where the pieces are in place. With Article 6 in particular, there's going to be additional operationalization issues. There's going to be a need to demonstrate that, particularly with Article 6.4, that the credits and method, the approved, you know, with an approved set of methodologies, some credits can be issued. The key issue for Article 6 is the same one that in some ways is the key issue for voluntary carbon markets. I think compliance carbon markets are in a bit of a different boat because the demand side is guaranteed. The government tells entities they have to participate. They have to demonstrate compliance with those markets. With the VCM and the Paris markets, it's a question of demand. Who wants to buy these credits to make the demonstrations? You know it. Which countries are falling short maybe of their NDC targets and would consider purchasing credit to help them with their compliance from other countries. So you know, I kind of gave a few examples earlier. You know, at this point there's a few countries that are being pioneers and countries like, you know, Japan and Singapore and Switzerland. The question really is one of scale whether other countries are going to be more active participants. I mean certain major groups like Europe is has they were once upon a time major participants in the Kyoto markets, but they decided not to do so and they're not inclined to really participate in these set of markets. The, you know, the interesting thing to watch for this year is that heading into the Brazil cop, we're going through a multi year cycle where all countries are supposed to be submitting their new round of NDC targets, which is essentially their new round of emission reduction targets. One thing we're definitely going to be looking for is the extent to which countries indicate a willingness or interest in using carbon markets to be setting their targets. That's going to be a very key indicator. In the prior set of NDCs, a number of countries were potentially willing, but a lot of that depended upon the ability in Article 6 to be finalized. In this case we've gotten to the point where our Article 6 is finalized. So it's really a question of who's going to play, whether the demand side steps up, which countries are willing to supply or interested in supplying and which countries want to use these markets. As part of their portfolio of decarbonization.
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B
It'll be really interesting to see how all that plays out next year. Raymond, thank you very much for your insights today. You've really demystified a lot of the complexity around the carbon markets for us, and we appreciate having you today.
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A
Yeah, thank you very much. It's a fascinating area to watch.