ZEUS: How the next 12 weeks before COP26 could set the stage for a global carbon market

COP26 pledge rush will overwhelm available offsets, creating immediate need for dynamic pricing

The power plant with the highest greenhouse gas emissions is the 27-year-old Bełchatów plant in Poland. Poland plans to shut down Bełchatów by 2036. Photo: b3tarev3/flickr.

(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) — In the next 12 weeks, the nations of the world will dramatically raise their commitments to achieving “net-zero” greenhouse gas emissions by 2050. That’s a problem.

Ahead of the COP26 global climate summit in Glasgow, Scotland, many governments, companies, foundations are all furiously preparing their big announcements to grab some limelight that first week of November. The result will be a perfect storm, if you will, of financial and regulatory action items to create international momentum coming out of the summit and hedge against geo-political gridlock.

Many of these net-zero commitments will involve setting aside trees, forest preserves, and other environmental lands to “offset” polluting industries such as oil, gas, and construction to achieve net zero. An accounting trick. The trouble is, there is nowhere near enough pristine natural land in the world to cover all of the promises that have been made, much less will be made.

A new report this week from Oxfam lays out the supply problem in dramatic detail. The world’s current commitments would require more than four billion acres of new forests, more than five times the landmass of India. Switzerland alone would need land the size of Puerto Rico to meet its commitments.

The four largest oil companies would need land twice the size of the UK, while Shell alone would require land the size of Honduras.

The report calls, correctly, for nations to ratchet up programs to reduce carbon emissions rather than offset them, something that most would agree is not going to happen in time to meet the Paris Accord target to keep the rise in average global temperatures to 1.5°C. above pre-industrial levels. At present, we are moving toward about 2.9°C. in 2050, with all the devastation that will bring.

Oxfam goes further, saying that the setting aside of available lands will cause a spike in global food prices of close to 80% by 2050, throwing hundreds of more people into starvation and threatening the smaller countries even more as the richer countries offset their polluting ways.

What Oxfam doesn’t discuss in this frightening report is the demand side of the equation.

The cost of polluting has gone up in the past three years. A lot. Based on carbon prices on the European Trading System, the largest carbon market, the cost of emitting greenhouse gases for oil and gas, chemical and construction companies and airlines and automakers, is up more than 60%.

Carbon prices, which have soared to above €50 ($59.2) a ton in Europe, are on track to top €100 in the next year, according to some of the big investment houses. China is opening what it hopes will be the largest carbon market this summer, and in the U.S., California has one of the more established markets, where prices are also rising. When the cost of polluting rises, companies look for ways to reduce it.

The existential question is at what price do carbon markets really start to make a difference. We don’t know. Some economists argue above $200 a ton. Some say much higher. All agree right now they are too low to make drilling for oil unprofitable.

My colleague Mark Hulbert writes this week about a new study that shows markets are drastically underestimating the risk of global warming to the world’s financial system. (Read Markets are missing climate risk; that’s an opportunity.) He wonders why if the majority of financial professionals in the market think they are missing it, why the markets don’t correct.

The answer may be that the climate reset is still to come. Jeff Gitterman, of Gitterman Wealth Management, calls it “the Great Repricing.” He’s even got an entire event on it next month in New York.

(For details and to register for The Great Repricing: Financial Advice in the Age of Climate Change, click here. Early bird tickets are $499 through Aug. 15, rising to $749 thereafter. Use coupon code DavidC100 for an additional $100 off the early bird price.)

. . . And while that might hurt some securities, it almost certainly will benefit those who are long the price of carbon.

It might seem absurd to rely on market mechanisms to force real change in human and business activity with regards to the climate and fossil fuels. But given where we are at this point — with COP26 looming — with government bickering and general recalcitrance about cutting back fossil fuel production just as energy demands are rising, economic pressures may be our best hope.

Markets are the best way to enforce that. They don’t care if we live or die. But they can certainly make us care.