Carbon markets are in focus ahead of the UN Climate Change Conference, or COP28. Carbon prices are of particular interest in the UK and Europe after British Prime Minister Rishi Sunak's U-turn on key climate policies. Meanwhile, coal prices are getting a boost from China's move to promote safety measures at its mining areas.
1. Voluntary carbon market credits demand expected to fall from summer volumes; integrity timelines likely to limit growth before Q1 2024
What's happening? Credit retirements over the summer plummeted by 26% compared to the same period in 2022, totaling 27.6 million mt. This decline can be attributed to buyers holding off until integrity initiatives kick off for labeling high-quality credits and registries release them. Year-to-date volumes continue to lag 2022 levels by 8%. Demand has been on a downward trend since February, rebounding swiftly after a bout of negative press in January. Retirements surged in June, reaching 11 million mt, marking a 25% increase from the previous month, consistent with historical patterns despite remaining 9% below June 2022 levels. Nature-based avoidance credits led in retirements at 3.4 million mt, followed by renewable energy at 2.5 million mt and household devices credits at 2 million mt. August retirements deviated from historical patterns, coinciding with the final release of ICVCM CCPs in late July, which introduced category-level requirements in addition to the crediting program requirements issued in March.
What's next? Based on historical demand trends observed since 2018 and considering retirement patterns by category in 2023, we anticipate a 7% decline in demand from September to November compared to the summer, resulting in a total of 27 million mt. Consequently, year-to-date retirements are projected to decrease by 4% compared to the previous year by end-November. Considering current credit availability and historical patterns, the dominant shares of retirements are expected to be held by renewable energy and nature-based avoidance credits. In addition, S&P Global analysts anticipate that ongoing integrity concerns among buyers will exert additional bearish pressures on anticipated demand in the lead-up to COP28. This cautious sentiment is likely to influence the retirement landscape in the coming months.
Related content: Voluntary carbon market scorecard
2. UK carbon prices slump after government rows back on key climate policies
What's happening? UK carbon permits under the country's Emissions Trading Scheme plunged to record lows after Prime Minister Rishi Sunak rowed back on some key climate policies. UK Allowances fell to an all-time low of GBP33.50/mtCO2e ($40.98/mtCO2e) on Sept. 21 amid concerns over the government's climate commitments. On Sept. 20, Sunak scrapped proposals to ban the installation of gas boilers in new homes from 2025 and dropped plans to force landlords to carry out energy efficiency refits on properties. His government also announced a five-year delay to the country's 2030 ban on the sale of on new conventional cars. These policy U-turns were seen as a further sign that the UK is not doing enough to spur the growth of its clean energy industry. UKA prices had recovered slightly since then and were trading around GBP35-37/mtCO2e on Sept. 25, according to data from Platts, part of S&P Global.
What's next? Some UK-based renewable energy companies have already written to the government about concerns over the price direction of the country's compliance carbon market. Reduced gas-for-power burn, a higher share of renewables in the energy mix and shaky manufacturing data are also contributing to the bearishness. The slump has seen UK exports of electricity to continental Europe pick up, due to higher carbon costs in the EU ETS. But some traders and analysts remain pessimistic on the short-term outlook on EUA prices due to weak fundamentals.
3. China looks to strengthen mine safety, boosting coal prices
What's happening? China has taken significant steps to enhance mining safety regulations in response to a series of accidents in coal mines in 2023. It includes stringent safety checks and the establishment of a monitoring and pre-warning network overseen by the national mine safety administration. This network collects real-time data from over 600,000 sensors and 390,000 video monitors in operational coal mines across the country.
What's next? The new safety measures are likely to have a better control over mines in China, possibly preventing accidents and help the country increase its domestic production in long run. However, recent mine inspections have already caused domestic supply constraints in China leading to prices at the ports to rally and the new measures could escalate this further. The rise in prices will likely to drop once Chinese utilities have replenished their stocks.
4. Thailand tapioca starch export fall 40% in Q2
What's happening? Thailand saw the exports of its tapioca starch, mainly used in the food and beverage industry as a thickener, drop 40% year on year to 487,159 mt in Q2, according to data from S&P Global Market Intelligence's Global Trade Atlas. The decline was attributed to droughts, which pushed export prices up to $575/mt as of September, 15% higher than year-ago levels, as well as crop disease that caused damage in plantations. Big floods in late-2022 also affected output.
What's next? Thai tapioca starch prices are likely to remain relatively high throughout the year, supported by consistent demand from the food and beverage industries. Favorable prices could prompt some farmers to switch back to planting tapioca. There are concerns, however, that tapioca farmers are rushing to harvest small cassava roots that are unsuitable for sale during periods of high prices.
Reporting and analysis from Abhijeet Thakkar, Eklavya Gupte, Srija Basu Roy, Shriparna Saha, Mark Chooi