Now that the COP26 is over, it is time for an evaluation of all the above assumptions and analysis we’ve made in previous articles. As awareness towards the environment strengthened throughout COVID-19, multiple countries, such as the United Kingdom as hosts, the European Union, and the United States seemed to have been more enthusiastic about the environment in reaching the 10-year mark to 2030. The following article discusses our satisfactions and disappointments towards this COP and our expectations looking forward towards the carbon market.

As we mentioned in our previous article, we cannot assume the perfect idea of a global carbon price at COP26. It is still a big leap for countries to agree with each other. As a compensation for that, we are pretty satisfied with the trading system between countries in Article 6, where countries who find it difficult to cut greenhouse gas can purchase credit representing emission reduction from countries who do better than required goals. One of the key struggles of a global carbon market is to avoid double counting of credits. This solution provides a method to internationally control standards and avoids situations where same emission reductions are claimed by multiple companies or countries[1]. In addition to this United Nations carbon market mechanism, under the deal, 2% of newly issued carbon credits will be canceled, which reduces the supply and increases the price of credits. Credits become a trading medium, a way of finance for countries. There may not be a global carbon price, but there is a global carbon mechanism, which is also an important milestone for Article 6.

Another upside, public institutions, and private companies can now trade carbon voluntarily through investing in projects that cut emissions in less developed countries. We predicted more collaboration between countries at COP26, but Article 6’s successful attempt to engage companies is an amazing surprise. Prior to COP26, the carbon market scene was messy and unaccountable[2]. Credits are countable according to the number of green projects. The new system provides a platform where industrial giants who do not cut enough carbon can purchase carbon credits from green project developers. Green projects include such as forest restoration, trapping CO2, and forestry protection.

The breakthrough of companies being able to invest in developing countries may bring a lot of financial support for renewables for developing countries in the coming years. Billions of investment dollars are expected to flow to recovery and conservation work, mostly for reforestation and lower cost new energy projects[3]. What companies can potentially benefit from this and what themes should we be looking at for this? Companies related to forestry work and with more new energy projects overseas in less developed countries will benefit from this carbon market trading scene. Geographically, we feel that Biden’s apology on behalf of the United States in the first week was a significant moment. It shows that the country has to remedy past climate actions the previous white house did not take. From the conversations and meetings at COP26, there is yet to see any formal approach and solidified rules for the carbon market, or how this will work exactly. The way political leaders help impose these rules will be crucial for this scheme to actually work[4].

After COP26, carbon prices have risen since. Demand for offsets are also surging. According to BloombergNEF, corporations and governments are spending billions of dollars to meet their net-zero targets, buying carbon offsets[5]. As demand for carbon credits are rising but supply is shrinking regularly, a rise in price for carbon is likely to affect the cost of most industrial giants and companies. Steel made using hydrogen will be more economic if carbon prices rise to approximately 71 euros a ton, meaning that steel made using blue or green hydrogen will be cheaper that how steel is made right now (methanation, gasification etc.). The carbon market gives a big hint for investors that it is ever more crucial to look at renewable energy stocks, particularly those who provide industrial and utility scale energy. Investors should always keep in mind that the carbon credit market has a tight relationship with renewable investments. In future articles and content, we will have the chance to talk about the intrinsic relationship between the two.

Figure 1: United Nations Carbon Market Mechanism

Figure 2: Voluntary Carbon Market Trading System