ZEUS: Expanding cap and trade with ICE's Gordon Bennett

Why carbon markets offer the best shot at fighting climate change

(David Callaway is founder and Editor-in-Chief of Callaway Climate Insights. He is the former president of the World Editors Forum, Editor-in-Chief of USA Today and MarketWatch, and CEO of TheStreet Inc.)

SAN FRANCISCO (Callaway Climate Insights) — “Energy transition is constant,” wrote Gordon Bennett, managing director of utility markets at the Intercontinental Exchange (ICE), in a recent treatise on energy trading. While that may seem obvious, it struck me as an important phrase to remember as we head into the final throes of coal and the demise of oil over the next several years.

The fossil fuels we’re all used to have only really been around since the Industrial Revolution. Before that it was steam that powered things. Before that, wood burning and other biomass. As we move toward renewable forms of energy like green hydrogen, wind and solar, in the scheme of things, it’s just another shift.

What’s key is how we manage that transition, which needs to be done in hybrid stages to avoid painful disorder. That is where markets come in. Specifically, carbon markets.

ICE, which offers trading in all three of the world’s major carbon markets, in the European Union, California, and the U.S. Northeast, reported last month that trading hit a record number of contracts in a single day, and that the number of participants trading had grown by more than 40% in the past three years. Open interest contracts have set several records since and today stand at about 2.8 million.

Bennett said in an interview with Callaway Climate Insights that California is the fastest growing carbon trading market, or cap-and-trade scheme, and that liquidity in all three is expected to grow as carbon trading becomes more important.

Like the natural gas business a decade ago, carbon trading is regionalized, and sometimes subject to the differing objectives of governments from country to country. The liberalization of the markets, driven by the sale of American shale gas widely to anyone who wanted it, helped disrupt the old ways.

That disruption could be coming to the carbon markets, as the new Biden Administration rebuilds ties with Europe and Asia and retakes a seat at the global climate table. Bennett said he hopes that the UK government commits to a new cap-and-trade program soon, possibly even this weekend at the global climate summit in Britain, ahead of Cop26 in Glasgow next year.

“Cap-and-trade is the only way to manage the quantity of carbon emissions,” Bennett said. “Carbon tax doesn’t do that.”

In Europe and the U.S., more and more senior financial officials are coming around to the idea of an international carbon price, set by markets, vs. the regional prices that exist now. Former central bankers from Janet Yellen to Mark Carney are pushing for it, and a recent report by the Commodity Futures Trading Commission drew a huge line under it for Wall Street.

Without the liquidity of trading to smooth the transition, you’ll get a disorderly move from country to country, with individuals losing out as energy prices rise to reflect shortages of all forms of energy. The move to green hydrogen in Europe, for example, can’t be done by just shutting off coal and natural gas. It has to be gradual. So Bennett has little time for those who advocate going cold turkey.

“If you demonize the existing energy mix, that’s not going to end well for people. Because prices are going to go up,” he said.

I expect more days of record trading on ICE as we move into the New Year, and more companies and countries make pledges to cut emissions. The transparency that public markets offer on pricing is the best way for political and corporate leader to gauge the impact of their efforts to reduce, and store harmful greenhouse gases.

While an international carbon price and/or carbon market might seem far off right now, in the scheme of ever-changing energy markets, it’s really just around the corner.