Carbon Markets in Uncertain Times: Insights from Michael Berends at ClearBlue Markets
This week, our guest is Michael Berends, Chief Executive Officer and Co-Founder of ClearBlue Markets.
ClearBlue Markets helps clients harness carbon markets to meet their climate objectives.
Here are some questions Peter and Jackie asked Michael: What is the overall sentiment toward carbon markets, especially after the Trump Administration’s retreat from ESG initiatives? Are recent recommendations for new quality standards improving trust in voluntary carbon credits? Will COP29’s global carbon market mechanism endorsement encourage more international trading? Why are Alberta TIER carbon market offsets discounted by 50%, and why do California LCFS and BC credit markets also have low prices? What are your expectations for Canadian Clean Fuel Regulation (CFR) credit prices, and could the Conservative Party of Canada (CPC) repeal the regulation if elected? Why does Canada have 11 carbon markets? Can industrial emitters trade carbon offsets in Ontario?
Content referenced in this podcast:
- ICE has two futures markets for Alberta Carbon Credits: Alberta Emission Offset and Alberta Emission Performance Credits
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Episode 268 transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast, with Peter Tertzakian and Jackie Forrest, exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the Arc Energy Ideas podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian. Welcome back! Jackie, I understand you’ve got some really exciting news.
Jackie Forrest:
I do, Peter. So when I got my solar panels more than two years ago, I wanted to get my carbon credits and it was difficult because I applied for them with one company and then after a year they decided they weren’t going to do them anymore, so that I had to switch to another company. So now, just before Christmas, I finally got my first payment from September of 2022, which is about when I put the panels on to December of 2023. I got my first payment for all the solar credits. Now remember I talked about this before, I’m paying a lot of fees and then they’re taking a commission, so there’s a bunch of money being swept away here from me. But what do you think I got?
Peter Tertzakian:
So I mean… Yeah. I was going to ask if you were willing to share how much you actually got, and I was going to divide it by the number of hours you put into it to see what your time is worth.
Jackie Forrest:
Yeah.
Peter Tertzakian:
How much did you get? I’m going to guess $70.
Jackie Forrest:
I got $157.
Peter Tertzakian:
Okay.
Jackie Forrest:
So that’s a bit over a year.
Peter Tertzakian:
I’m not-
Jackie Forrest:
A little bit over a year.
Peter Tertzakian:
Okay.
Jackie Forrest:
And remember, though, I put in a… At the time it was a $30,000 system, but I got a $5,000 credit. So $25,000 system. It’s 14 kilowatts in a place that has very good solar utility in terms of the capacity factors. So it’s a bit small and I think actually carbon credits are getting cheaper in Alberta. We’re going to talk about that today.
Peter Tertzakian:
Yeah, we’re going to talk about that.
Jackie Forrest:
So maybe next time my check will even be smaller, but-
Peter Tertzakian:
Right. Well, I always admire your determinism in doing… I think, I personally, I’m not as determined to do it, so I have no carbon credits coming to me.
Jackie Forrest:
That’s right. I can buy you lunch with my carbon credits.
Peter Tertzakian:
You can buy me lunch. And I have to say, on one hand-
Jackie Forrest:
A few lunches.
Peter Tertzakian:
… I feel excited for you. On the other hand, I can’t help but be a little bit cynical given the whole subject of carbon credits that we’ve discussed in the past. But, well, let’s discuss it today and let’s see what the state of the carbon credits are. As you just mentioned, there’s been some devaluation of these credits. Let’s understand why. So we’ve got a special guest, Michael Berends, Chief Executive Officer and Co-Founder of ClearBlue Markets. Welcome, Michael.
Michael Berends:
Hi, Jackie. Hi, Peter. Thank you very much for having me on the podcast. Looking forward to it.
Jackie Forrest:
Michael, we have lots of questions around the carbon markets, but I know what’s on a lot of people’s minds listening to the podcast right now. We’re recording this before inauguration of Donald Trump, and I know there’ll be lots of news flow about the things he’s planning to do or things he’s already signing executive actions for. So we will talk about those on the next podcast, but just recognize that we’re not aware of that information right now. So…
Peter Tertzakian:
Right. But we certainly will acknowledge all the different exciting things that are likely to happen upon inauguration and after. But, for now, Michael, maybe give us a sense of your background, ClearBlue Markets, and what you do.
Michael Berends:
Yeah, sure. No. Thank you. I’ve been fortunate to be in carbon markets for almost two decades now, along with my two other co-founders. It’s been very exciting. Looking forward to talking about all the history and what we’re seeing going forward. Here at ClearBlue, we’re a global leader in carbon markets, helping organizations navigate the complexities of compliance and voluntary markets either in the EU, in Canada, in WCI. There’s all these different complex markets and one thing that I think is important that we’ve learned over the years is not just a burden or a cost. It can be an opportunity, like your rebate that you received, Jackie. So there’s lots of things in the bigger picture as well for industrial emitters. And I think that’s the shift in the narrative that we’ve seen over the last few years. And what we do there is we provide our best in class market intelligence, position management, really understanding your costs and your forecast going forward and actually accessing the market. So market access.
At the end of the day, these are markets and transactions and acting in the markets or actually investing in making reductions and understanding what that looks like is a big part of what carbon pricing is all about. So, in short, that’s what we do. We do it at a global level. Of course, Canada is a major place for us and we see this again as an opportunity. Not necessarily as a burden for everyone.
Jackie Forrest:
Okay. Well, and my credits were sold to the compliance markets. I do want to say, Peter, actually… Just I don’t want people to think that’s the only money I’m making off my panels. The big driver of the economics is I’m not having to pay for power anymore.
Peter Tertzakian:
Yeah.
Jackie Forrest:
For the last two years, pretty much have not paid for power. So that’s really… This is just icing on the cake.
Peter Tertzakian:
Okay. There you go.
Jackie Forrest:
The cake is the economics of the power prices.
Peter Tertzakian:
It’s lunch money as you said. Yeah.
Michael Berends:
That’s exactly it though. That’s what carbon credits are. They’re that extra incentive to get you to do that thing you were almost going to do. But now that incentive helps you overcome that extra cost that, “Should I do it or not?” And the carbon pricing or the carbon benefit gets you over that lump, that heap, and that’s really a big part of what carbon prices is exactly about.
Jackie Forrest:
Right. And when I started this whole economic analysis, I thought carbon markets were going to go up over time, so the value would go up. I’m starting to doubt that assumption. So that’s what we’re going to talk about. So the voluntary carbon markets, that’s not where I sold my credits, because it’s actually even lower priced today than the Alberta compliance market. But let’s start with that. First of all, maybe just describe what the voluntary carbon markets are and just tell us a bit about what the sentiment is. They’ve taken some big hits with a few high profile articles, questioning whether the emission savings are real. Would you go buy a nature-based credit or a voluntary credit, for instance, if you’re going to take a flight and it gives you that option? There’s been a lot of doubts that you’re actually making a real reduction in emissions by doing that.
Michael Berends:
Yeah, indeed. The sentiment, I’ll come back to that. That’s clearly the most important topic these days and what is the benefits of being in the voluntary carbon market, but what is the market? It’s exactly that. It’s voluntary. It’s your choice to purchase in that, but it’s also a developer or who’s developing a project are saying, “I’m going to develop this project on my own. I’m not forced to do this and I’m going to develop this project in a system that’s rigid.” There is a program behind it. As much as voluntary, there are processes and rules around that, and you’re looking to then bring that to market. So no one’s been forced to do this project and no one’s been forced to buy it. But the overall aim there is to help us reduce global warming and fight this thing called climate change, especially in regions where we don’t have compliance markets.
And that’s the key part of what we’ll talk about later on. So it truly is voluntary. Now, on the aspect of the sentiment, it is unfortunate. We’ve seen some articles in the past couple of years. I almost want to call them hit pieces. They’re very sensationalized and they’re often outliers. And those attacks… Yes, the market’s not perfect, it’s far from perfect, but the attacks were very high profile. And, overall, it really hurt the voluntary market as a whole. And the problem being that the voluntary market is there for good and I believe it’s doing that. It’s far from perfect and that looking for perfection slowed down progress. And that was the biggest issue that we saw in the voluntary market in the last couple of years.
Jackie Forrest:
And has there been a fall-off in the demand and the revenue associated with voluntary credit purchasing as a result?
Michael Berends:
Indeed. Indeed. So what happened there was it almost became you were attacked for using these credits. You’re trying to do good. You may have had the right intention. You may have purchased something that maybe wasn’t perfect, and that was really the issue because those players were being called out rather than those that were doing nothing, which is a bit of a problem because I don’t believe the majority of those that were buying voluntary carbons had any bad intent, whereas those that were not buying at all were not trying to do good. And what happened was those that were doing something were getting called out rather than those that were doing nothing. And what you see now in the last year or so are those just sitting back and waiting for it to play out. And, overall, that didn’t help the fight against climate change.
Peter Tertzakian:
Yeah. So I mean you’re pointing to a few articles that affected the veracity or I’ll call it the trust in these sort of voluntary markets. But I would argue that there’s a higher level sentiment that’s forming here or potentially already has formed and does relate to the inauguration of the 47th President, Donald Trump. That there’s a shift in attitudes towards carbon policy as evidenced by all the way from big companies going back on their carbon commitments to banks one by one coming out of the… Or what do you call it?
Jackie Forrest:
The G Funds?
Peter Tertzakian:
Leaving the Glasgow Alliance for whatever it’s called. F financial net-zero. So I mean to me there’s a broader sentiment dynamic, I’ll call it, that’s forming, which is a shift away from carbon policy as a driver of energy transition to more of a focus of fiscal policy, things like tariffs and economic trade wars and battle for trade routes, et cetera, et cetera. Carbon policy is sort of taking a backseat to much bigger picture issues and that, in turn, therefore affects the interest in carbon markets. Is that fair to say? What would you say to that?
Michael Berends:
Yeah, I think it’s really important to separate the voluntary carbon market from compliance markets. One thing I will say that at ClearBlue and the team, we focus on the compliance markets and always have. And maybe part of the problem was this: Everyone was super excited about voluntary carbon markets two years ago, and the hype was probably bigger than the reality. And what you’re seeing right now is the blow back of that. And I think, yes, many companies and corporates felt that they needed to be part of something. They didn’t really think it up properly and now they’re taking a step back because there’s some other priorities there. I don’t believe that the same problem is necessarily true in the compliance markets where there is a compliance markets. You’re seeing the EU market as strong as ever. Maybe the price not the highest, but it’s quite high overall. You’re seeing similar pricing in California where there’s strong compliance markets.
So I think that is true in the voluntary perspective where you’re not forced to do something. What I can say now, which I probably couldn’t have said 10 years ago, is carbon pricing is here to stay. What it looks like, that’s what we’re seeing play out and some of the negotiations will have a role in that as well.
Peter Tertzakian:
Yeah. I guess my view would be that there’s some risk in that statement given the shifts to the right in many governments. And the fact that Donald Trump has clearly said, along with his appointments that he’s made, that effectively climate policy is dead almost like an ESG is dead. I mean, that’s basically what they’re saying. And so how is it that the rest of the Western free market world is going to compete with all their different industries in an environment, in a country, that already doesn’t have carbon pricing and is also reneging on regulations and policy? To me that says that countries are likely to question their compliance markets, particularly those that shift more to the right.
Michael Berends:
Really great questions and it’s actually something we’re dealing with on a regular basis with our clients when they’re wondering what’s happening here. The good news is we’ve seen a Trump presidency in the past already, and these were really questions that were being raised at the time. And we saw the result of that, which was, yes, he actually did try to break apart the California carbon market. Actually tried to break apart the linkage between California and Quebec, and he failed in doing so. And what you tend to see, and we’re really getting into it now, it’s quite exciting, is you see in the past… Because carbon pricing, especially in the US, is really regulated by the states themselves, you almost see sort of a backlash like, “Okay, president Trump, you’re going to do this. Well, we’re going to do that because we believe in this.” And we saw that happen in the last presidency for the four years. The California carbon market came out as strong as ever it was at the end of that.
And we didn’t see less carbon markets, we didn’t see necessarily more carbon markets, but we saw the same amount. And something maybe quite interesting was in the last election, November 7th, on the ballot in Washington, which had a cap and trade market for one year was actually a referendum to either say yes or no to the cap and trade program to keep it or not, which actually has a plan to link to California. And the referendum, I think the results were 70% said, “Yes, let’s keep cap and trade in Washington state.” So you’re seeing those types of things come through as well. So, yes, on the international level, it might be harder between nations. But at the jurisdictional level you do see these carbon markets remain rather strong.
Jackie Forrest:
Okay, well, I think we are going to move on. This could be a whole podcast to itself. But I did want to ask you one of the responses to the criticism around voluntary markets has been coming up with more of a uniform way of assuring quality. So I think there’s a group called Core Carbon Principles, and the idea is that you have these CCP, they’re called labeled credits, and there’s a new standard. Is that taking off and do you think that’s going to start to solve the problem and bring more people back into the markets? Now I know Peter’s saying that maybe they’re more skeptical about doing things, but the ones that do want to buy credits, is that going to get rid of the problem in terms of not believing in the qualities there?
Michael Berends:
Maybe Peter and I will agree on this one. I don’t think so. I’ll be honest, being in the market for so long, all these different standards and labels that were coming out, it was rather confusing. I have a hard time keeping track of them and what’s a good project to buy? What’s not a good project to buy? Am I doing something wrong? Am I not doing something wrong? We’re talking about the voluntary market here. The compliance, we can talk about later why that’s a non-issue. And I think even with all these different labels, what ends up happening is you have all these different layers of what’s good or bad and we’re losing the core of what’s good or not. And I’m a big believer that these registries, like the Verras, like the gold centers, they’re the ones that put their stamp saying, “This is a carbon offset.”
That’s where the trust needs to lie. And that’s where the effort needs to go to say, “I have trust in this offset.” We don’t need these extra labels because then what’s the truth? And then that’s the problem here. So we have seen many turn to these labels and, yes, it’s helped, but I don’t think it’s going to provide for extensive liquidity because it just adds more layers of complexity. And what also ends up happening is I think a lot of the problem in the voluntary carbon market, which again we could talk about for a long time, was I think we lost the focus on CO2 and what we’re trying to do. These are carbon markets. They’re not sustainable development markets. So all these projects that had co-benefits like increased jobs or protecting water, et cetera. Those are great things, but that’s not carbon markets. And what ended up happening was these labels started saying, “A good project has all these other extra things,” which in my view is not CO2.
So we lost the plot here. And, funny enough, you’re seeing some of these groups realize in this is… The rating agencies in carbon offsets very interesting. I’m a big believer in one of them called Calyx and they call these the ugly ducklings where actually you can get projects that are not as interesting maybe from a co-benefit, but actually have higher CO2 impact. I think that’s where the focus needs to lie and getting the best value for your dollar. And we can come back to that as well when you talk about DAC and other things that we may want to talk about and where money is going.
Jackie Forrest:
Let’s move on to the UN and COP 29. COP 29 made some new announcements around endorsing high level details on a mechanism for global carbon markets and endorsing some elements of the article six. From your perspective, what were the big changes and do you think they’re going to result in any additional carbon market trading? And then, back to what Peter’s point was, how do we square with the fact that some countries are sort of moving away from having carbon and reducing emissions as sort of a high priority?
Michael Berends:
This is where Peter and I definitely agree. So when it comes to this, I think this is the issues that, politically… The international trading and understanding and agreement. So, I’ll start off with COP has always had high expectations and the results almost every year have been a rather disappointment including the negotiations to the long-term results. That’s just something that those of us in the market for so long kind of accept. Overall, there’s momentum that these conferences and these agreements help get us somewhere. But if you think about what policy or market requires every nation in the world to agree on, it’s impossible. It’s impossible. So these articles and these rules that come out of there, they’re good. They’re great. But they’re not the end all to solving this carbon market trading. And I do believe that with these different players in place, politically, it’s hard to get everyone to agree.
And you start seeing companies bilaterally start using these mechanisms to trade amongst themselves, using the framework from COP. So we have the approval of article VI mechanism, so inter-country carbon trading, these things are happening. There’s a framework. We’re going to see certain countries utilize those. We’ve seen the Singapore, for example, and Switzerland using these mechanisms to start providing funding for projects in other countries. But I don’t see or we don’t expect this to ramp up significantly, including with the election in the US and the result of that, there’s potential for the US to step out of the Paris Agreement. They did that last time. They were brought back in with the Biden administration. So I do see COP results not being very tangible anytime soon.
Peter Tertzakian:
Yeah. I mean it’s not just COP, which is a offshoot of the UN and really calls into question the forward effectiveness of the UN, broadly speaking, let alone just on climate. And when I think of, for example, article VI, which was a Paris Agreement article, which now, in this year, will be 10 years later. And we’re still debating and talking about this. And I think we can all agree the geopolitical environment we live in this world is hyper-polarized and very tense. So, again, I mean I just can’t see how anybody’s going to agree to anything. If anything, if you look at the global trade situation and my comment about shifting from carbon policy to fiscal policy… Every day we hear about sanctions on everything from semiconductors to social media and TikTok to oil volumes. I mean, given all that, why would we ever assume we’re going to agree on carbon market trading?
Michael Berends:
Agreed. And this is where we go back to the jurisdictional approach where jurisdictions that have provided market certainty have done it for a long time. That’s where you’re going to see carbon pricing be effective and stay. A lot of this international level… It takes a lot of effort to get on-
Peter Tertzakian:
But, Michael, do you think these jurisdictions are consequential to mitigating CO2? I mean, Singapore and Switzerland probably don’t generate more emissions than, I’m just guessing, half of California. Probably less.
Michael Berends:
Exactly. So they’re very showcase-y. It’s easy for Singapore to do this compared to other countries, for example. I do agree with that. But when I refer to the jurisdiction, I’m thinking more of the compliance pricing like California has, like the EU has, which has been ingrained in their policy for decades. And I don’t see that just disappearing anytime soon because of a… Well, the good news, again, we’ve seen a Trump presidency, we’ve seen those markets stay and we’ve seen all the battles go around them and it will be interesting to see things play out. CORSIA is a very interesting one, the aviation carbon market, which is an international carbon market which is coming on board. So we’ll see where that lands. That will be a very interesting one to follow more so than the Paris Agreements.
Jackie Forrest:
And just not all our listeners are going to be familiar with that. So just it’s the aviation companies, globally, have voluntarily agreed to that?
Michael Berends:
So they’ve agreed to that. It actually stemmed from the EU and their compliance market saying, “We’re going to impose the EU carbon price on a certain level of mileage for any flights flying into the EU and also domestic flights.” And what that meant was EU is now creating an international carbon market on their own saying, “If you’re going to fight the EU, even if you’re not based in the EU, you’re going to have to pay a carbon price.” And that became kind of burdensome. So then there was an agreement from the aviation industry to say, “Okay, let’s fund our own market,” probably cheaper, “where we could say we’re taking care of carbon,” and they developed the CORSIA market and that meant a global carbon market for all aviation.
Jackie Forrest:
Okay. Well, let’s talk about these compliance markets here in Canada. You talk about that California survived the Trump administration last time. We’re not so sure if Canadian carbon markets are going to survive a Poilievre government. But let’s talk about the Alberta TIER market, which itself has been around for more than a decade and lived through multiple different types of governments of different stripes, whether provincially or federally. So we understand that the TIER credits are actually trading at a big discount to the headline carbon pricing. While there’s no transparent place to actually see all the trades and get a sense of exactly what the price is, as we talked about last April, the ICE has introduced two future markets for Alberta carbon credits. I’ll put a link to them in the show notes and they show that in futures market trading, even though it’s quite small volumes, that there’s about a 50% discount right now. They’re trading at about $40 per ton when the headline price in Canada is $80 per ton.
See, this is why my carbon credits were worth less than I would’ve expected. So tell us, Michael, why are these credits trading down and is the market going to tighten here?
Michael Berends:
That was a great podcast, by the way. I listened to it on my way home a few months ago and I was really into that one. And I heard the conversation, Peter, about no transparency in the TIER market and I almost wanted to call you. It’s not that bad actually. There is transparency. So, one, I’ll show off a bit. Our platform has TIER pricing, but if you really want to know, you could pick up the phone and it is traded and a trader will be happy to give you a pricing if you’re in the market on a daily basis. So, it is available. And more interestingly, the carbon price itself is really transparent. It’s $80. And every year it’d go up. There’s a set price. And these credits are only the alternative if you don’t want to pay that $80 and you have a limitation on how many of those credits you can buy in the program. It’s all about the design and all these programs have that sort of design. But there is a clear price in Alberta for the emitters. $80 for the year in question.
And then there’s these credits that you can use if you want, and they trade at a discount because otherwise why would you buy them? And those are the ones that actually have drastically dropped in price. And that was relatively recently in the last six months or so. And that’s just because of an oversupply of these credits. And that’s where these markets are always very important to have the right policy in place and to understand the dynamics. And often you’ll see markets adjust for such things that happen. So we do see the highest ever discount. Normally speaking, it was 10% or so. And we can talk about other markets where offsets or other credits trade at a discount and generally it’s at that 10% range. And the fact is that this discount that we’re seeing now is just an oversupply of the market. And I think that was just an expected amount of supply that wasn’t planned. The other side of that is maybe a loosening of the regulations and not being as intense on the emitter side. On compliance, and that was the result of that.
Peter Tertzakian:
So doesn’t oversupply the market imply more decarbonization than was expected?
Michael Berends:
Yes, on the one side. So something to keep in mind that Alberta is a bit of a unique one because, generally speaking, if you reduce your emissions as an emitter under the program, it means you owe less. It doesn’t necessarily mean you produce credits. Alberta, there is availability to produce credits and also these things offsets from outside the system. So it can be a combination of that. So in one way you can look at it and say, “Wow, we’re decarbonizing faster than we expected.” But there can also be a situation where, “You know what? It wasn’t so tight and your expectation to decarbonize was rather low and you’ve got these credits.” And sometimes you see that in new markets where you use historical baselines or the way you actually get the levels of how much you owe can be historical numbers where on day one you’re producing credits and you haven’t done anything yet. And that’s just the complexities of these programs.
Jackie Forrest:
Well, I think there’s a couple of factors. One, that we stopped producing electricity with coal this year. So I think a major buyer may have disappeared from the market. And then I think the anticipation of all these carbon capture storage projects is an issue too, because people were maybe banking credits and thinking they’re going up in value. But if you think that the market’s going to be oversupplied because all these carbon capture storage projects are going to come online. Like Pathways, alone, is talking about more than 20 million tons per year. That’s about 10% of all of the oil and gas and upstream refining emissions. So if you think that’s coming on, you may just sell your credits today because it might be worth more now than in the future.
Peter Tertzakian:
Yeah. Well, what do you think about the psychology that I actually think the carbon markets are going to be shut down, therefore I want to get rid of my credits today?
Jackie Forrest:
Yeah, yeah. Exactly. Poilievre’s claiming to axe the tax, so maybe we should sell them. So I don’t know-
Peter Tertzakian:
Yeah, I agree with you. There are a lot of credits that have been bought that at much lower prices, historically, and that have been put in inventory. And it could be companies are just unloading them because they sort of see this shift as… Call it this mega-trend of the shift away from carbon policy to more fiscal policy. And that’s a whole separate podcast for sure. But I think that there’s more going on here in terms of the political side of this than meets the eye.
Michael Berends:
100%. We believe it’s this: I’m going to try to summarize it in short. When these new leaders are talking about axe the tax, we are confident what that means is actually axe the tax for consumers, for voters, for what you and I pay at the gas pump and our natural gas bill. That’s the carbon tax. We don’t believe that’s industrial carbon pricing. As you mentioned, Jackie, carbon pricing in Alberta has been there since 2007. Industrial carbon pricing. I don’t believe it’s going anywhere anytime soon. They’ve had conservative governments in place for a long time. What will change, we believe, is the actual price because today in Alberta, the price that you pay, including for the retail side but also for emitters is set by the federal government. We’ve been through court cases and the Supreme Court decided the federal government has the right to impose the price level in a province.
And that price today in Alberta is set by the federal government of that $80 we’re talking about now going up by $15 every year to hitting 160 by 2030. That, we believe, will change. Not the system itself. And I think to your point, Peter, if you have these credits that were bought at $10, $20, $30, $40 and you believe the price will go down, irrespective of long or short, you’re going to sell them at the highest price you can get. So I think that’s what we’re seeing happening. Not so much the program itself will disappear, but the price levels will not be the same.
Peter Tertzakian:
Yeah. I agree with that.
Jackie Forrest:
Okay. Well let’s move on to… We’re going to just quickly hit some of these compliance markets because I think there’s been a lot of volatility in them. California is another one and they have a low carbon fuel standard, which is actually impactful here in Canada because some companies can do things here in Canada and if they can argue that they’re reducing emissions in California or some of the other states that are tied into them, then they can use that to sell the credits. So it’s kind of dropped quite a bit. Back in early 2022 when I put in my solar panels, the credits there were $150 a ton. They’re currently trading in the mid-70s. Why did they drop? And of course they’ve had some implications here and we’ll get into BC but they’ve dropped here as well in BC.
Michael Berends:
This is where I would love to have our head of our market intelligence division, Jennifer MacIsaac, who’s an expert in this market. And we speak about this often. I think all this is true. We’re seeing the prices move down from the levels you mentioned. I think a lot of this is also that these markets from California and BC… we’ll probably talk about that as well… these are front-runners, these are early movers trying to create these markets and be leaders in these markets. So they’re developing policy and they don’t always get it right. They have right intention, and in this case we believe there was more supply. So, in a good way, more renewable fuels being put into the system than what was expected. So what that result was more supply, prices are suppressed. And what needs to be done is a different look at the regulation to keep the prices to the levels they need to be to keep on bringing more supply.
So, that was the main issue there. The market’s gone through a lot of re-vamps and re-looks. California is confident in that market. They want to keep that market for a long time. And I think as you mentioned, Jackie, the fact is that you can supply these markets into California from all over North America. So the supply is, I don’t want to say unlimited, but it’s a vast supply that can go into that market. You saw that happening. And then we will talk about other markets in Canada along the same line of clean fuels. It’s that that component where you’re a jurisdiction, you’ve created a market, but you can’t necessarily influence what’s outside your state. And that’s the part, what you’re dealing with on a regular basis.
Jackie Forrest:
Right. So all these different suppliers of biofuels ramped up, created all this renewable diesel, and it was too much for the California market to absorb. Now, I understand they are making some changes in California to tighten that market. They’ve announced that as well. So…
Michael Berends:
Some would say it did what it was supposed to do, right? It brought volume in and maybe faster than we expected. So that’s probably a good thing if your aim is to bring these low carbon fuels into the market.
Peter Tertzakian:
So, at ClearBlue markets, you have a global lens on markets and trading. What’s your view of Canada having 11 carbon markets, potentially a 12th with the emissions cap trading system?
Michael Berends:
I’m pausing. Need to take a deep breath. I think others have heard me say this. I’m Canadian. I moved to Europe. I thought I’d be there for a year, and I ended up being there for 15 years or so doing carbon markets and they have one carbon price in the EU. Of course, all these different countries, some of them hate each other. And I came home to Canada, which I was always very proud of how we all get along in Canada. And I was blown away that we had not one carbon price or we were looking to develop carbon and we couldn’t get along and get one carbon price and it’s chaos. It’s really this sort of complexity of markets that don’t allow for punch-ability, don’t allow for liquidity, and don’t allow for good decision making. And that’s a big problem. And you see that even within companies.
So we work with many large industrials that have sites, for example, in Quebec and they have sites in Ontario. And the problem you see is one is long carbon, one is short. And they can’t even work together to solve that problem. They got to sell in one side and buy in another side. And it’s just so inefficient and I think it doesn’t allow for these markets to really get to where they need to go. So my thoughts are, it’s a shame. I don’t think that will improve anytime soon, especially the politics of Canada that you see here. And I think a lot of it has to do with each province wanting to have control over what goes in and what goes out money-wise. And it’s a challenge. And, unfortunately, we had linkage in Canada with Ontario and Quebec at one point. That fell apart. I will say that the best market, the most efficient market… When I say best, I mean that market that reduces emissions, the purpose for it, the highest uptake from hitters is the Quebec market and that’s linked to California.
So linkage does help. So, unfortunately, in Canada we’re not seeing that linkage happen anytime soon. And all these different markets, as you mentioned, even the oil and gas cap and trade market, it doesn’t provide for efficiency.
Peter Tertzakian:
No. It’s very inefficient. We’ve talked about that, Jackie, ad nauseam on this podcast. And thanks for validating what we’ve been conjecturing and saying and discussing for others because I think it has to be a high priority for the next government of this country to sort this out because it is a major impediment to any sort of decarbonization and indeed a drag on our competitiveness.
Jackie Forrest:
Yeah. Yeah. That decision long ago to have a patchwork of policies is, well, that’s what we have and it’s not efficient or doing things at lowest cost. Well, we do have one federal carbon market, which is this Canadian Clean Fuel reg, and we talked about it before, but the report came out. We had some transparency in terms of the carbon price. Initially it was trading at about $130 per ton. Now, it’s still a very illiquid market, and the existing biofuels we have are more than enough to meet the requirements today. So I’d be interested in your expectations of how the carbon price changes for that. That’s actually quite low relative to some other low carbon fuel standards. And then thoughts of the durability of this under the conservative party of Canada. They haven’t said much on it, but it does increase the price of gasoline for consumers. And I know affordability is a big issue.
Michael Berends:
Indeed. So, starting off with the second part of the question, our team has put together sort of a green light, yellow light, red light of what policies in Canada we think will drop or change with the potential new government. And CFR is in the middle there. We’ve heard things about it going away. We’ve heard things being ignored. We’ll see where that falls. Again, going back, industrial carbon pricing, we don’t expect to be dropped across the provinces, at least most of the major provinces. But CFR, being a federal regulation, has the potential to be dropped. So we’re really watching that one closely. Of course, BC has their own CFR. We may see jurisdictions grab their own as well going forward. But we are watching closely how long these programs will last or not. And I started with that on purpose because that concern, and I think market certainty, policy certainty is the most important aspect of all these markets.
That concern is why we believe that the prices are dropping to where they are because there’s just a lack of certainty and what will be the future. So you have, yes, enough supply, which is interesting. That’s a good thing. But you don’t have the long-term views, you don’t have long-term hedging. So you’re not seeing players enter the market to provide that certainty along with policy certainty on a market certainty. Most markets that have certainty, you see the actors taking long positions, either the developers or the off-takers. So you’re not really seeing that today in the CFR. You’re seeing more reaction to, “Okay, I need to comply and get ready for the next year ahead of me.” But not longer than that for most of them. So I think that’s what we’re seeing now. So if we see that market certainty and I think the election and what happens after that will be a big player in this, then I think we’ll see where the prices go up or not and if the program even exists longer.
Jackie Forrest:
Right. Well, and if you don’t believe in the future, you’re also not making investments because the whole point of these things is that people invest in emissions reduction projects. So they’re not making those decisions either.
Michael Berends:
Exactly. And this is… Truly, we could do a whole podcast on just this market certainty. What we try to provide to our clients… and what I mean there is the large emitters… is that forecast of what is that carbon cost going to be for you? And then you sit back and say, “Okay, do I trade in this market or do I make an actual investment to reduce my emissions knowing that this is what my cost is going to be?” And we have a great example of a client of ours who was in a very large industry looking at carbon pricing at their site in Quebec and at their site in Ontario. And we provided a market forecast for them. And I was at a meeting and someone came up to me and said, “How good is your price forecast?” And the answer I gave was, “Well, it’s as good as anyone in this market. Of course, no one can predict the future, but this is the strongest view we have and the best view we have in this market.”
He said, “Great. We made a decision to invest in this program because of your price forecast and because of the certainty in the market rather than the other province.” And when the Ontario cap and trade market was removed, what we were trying to say to the new government was, “Providing uncertainty and policy regulation means less investment in your province. Groups want to make reductions.” To your point as well, Jackie, you got the sorrow panel because you’re reducing your costs for electricity as well. And then the carbon was a bonus part of that. Well, that’s what these markets are for. But if you can’t get that certainty on the carbon part, you’re going to go to where there is certainty. So I think maybe it goes back also to Peter with your conversation about the tariffs and such. If there’s a carbon price and it has more value for you to invest, that’s where the money will flow.
Peter Tertzakian:
Well, yeah. I mean, it’s all about investment in terms of energy transition, decarbonization and so on. So it’s a huge issue. The uncertainty surrounding carbon policy in this country was one of the biggest problems. Now we layer on top of that uncertainty around fiscal policy and tariffs and what have you and we’ve just got complete paralysis.
Jackie Forrest:
Okay. Michael, one last question that I have for you is around provinces like Ontario and Manitoba where they don’t have markets like TIER, where there’s a market where they’re validating what a credit is worth and that it’s legitimate and that people can trade it… What’s happening in those provinces? Like Peter says, we have 11 different carbon markets, but is there even a carbon market? How do large emitters comply in some of these provinces without the carbon system?
Michael Berends:
I’m really glad you asked that question. We were actually quite busy in the Ontario market last year. I want to say last year, but it was only a month ago because their compliance deadline was mid-December. So these markets, as much as they are smaller in size, not really considered to be tradable markets, they actually do allow for generation of credits. And there are a number of emitters that generate credits. And then there’s buyers that have a choice to say, “Okay, I want to buy those credits or just pay the carbon price to the government.” Of course, you buy those credits if they’re at discount to that carbon price. And I would say we did dozens of transactions last year in this market. Again, very bilateral. Very… What is the price? I would say to Peter’s question about transparency, Ontario market was quite interesting. We almost had to make the market with our clients and see, even volumes, was it worth the time and effort to do the trade or not? And some are big volumes, some are small. So we were quite active in that.
But I think the main issue there, again, goes back to it’s really let’s deal with this year. We won’t look at next year or the year after. We’re dealing one by one. Is it worthwhile for me to do this transaction this year and we’ll worry about next year next year.
Jackie Forrest:
Okay. So there’s the ability, if you reduced your emissions more than the federal requirement, to go and get someone to pay you for that. That mechanism exists bilaterally, but not like in Alberta. How would you describe the difference with Alberta, where we have a more transparent system?
Michael Berends:
Yeah. So one thing I think is quite different… So it’s actually the Ontario EPS. They have their own rules. So the federal government said to Ontario, “You can make your own program with its own rules with some guidelines around the Feds that we put a stamp on yes or no.” So they have their own unique market driven by the Ontario government, but with some guidelines like the price levels from the federal government. The one big difference I would say between Ontario and Alberta is there’s no offsets, meaning there’s no credits that are outside the emitter program that can enter the program. For example, generally speaking, offsets can be forestry projects or landfill. So the only way you can generate credits is if you are an emitter in that program and you go above and beyond the expectations that the baseline you have. So that’s where these credits have been generated by some of these emitters who’ve gone past the baseline and generated credits because they’ve been very efficient.
When they have those, they’re long use credits, and then those that are short, that are most likely going to go pay this price of the government into the carbon fund, they say, “You know what? I’ll rather pay for this cheaper credit and have lower costs.” So that’s really, in short, how that functions.
Jackie Forrest:
Okay, good. And in Alberta renewables projects, right? They can generate credits that the large emitters can buy. But that’s not allowed in some of these provinces.
Michael Berends:
Exactly.
Peter Tertzakian:
Right. Right. Well, maybe we can conclude by saying credits are only generated with investment and if there’s no investment, there’s no credits, there’s no decarbonization, and investment is based on some sense of certainty in these markets. Sense of transparency, liquidity, and a whole bunch of other factors that makes for a really well-oiled, functioning market. So I think we have to work hard in this age of greater uncertainty, in this age of policy shifts, as I said, probably from carbon policy to more fiscal policy in trying to do as much as we can to reduce the uncertainties so that it does not impair investment.
Jackie Forrest:
That’s right. But I don’t know how much we can do. We really have to, I guess, ask our political leaders. If they want to see investment in reducing emissions, then they have to create certainty in some of these policies. And I think here in Canada, as we talked about in our last podcast, we don’t really know much about the Conservative Party of Canada in terms of their climate policy or their view on many of these policies. And that’s just kind of putting all investments sort of on hold.
Peter Tertzakian:
Well, amidst that, I feel like I’ve been educated more in this session. So thank you so much, Michael Berends, Chief Executive Officer and Co-founder of ClearBlue Markets. Thanks so much for joining us.
Michael Berends:
Thank you for having me.
Jackie Forrest:
Thank you. And thanks to our listeners. If you enjoyed this podcast, please write us on the app that you listen to and tell someone else about us.
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