Writing about carbon markets for a living: Interview with Peter Sainsbury

Remember the days of home cooking and video workouts back in 2021? Peter Sainsubury doesn't. He was already busy crafting carbon markets wisdom. Meet the original carbon markets guru - an expert economist who writes about carbon markets for a living at Carbon Risk (carbonrisk.substack.com). 

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Why buying physical EUAs outperforms ESG-themed products when it comes to having a direct climate impact. 

European carbon prices grew by 30% per year on average over the last ten years. Yet they flatlined this year. Learn what happened, and what comes next.

Why there is still a lot of upside price potential, driven by regulatory tailwinds. 

Why this is the biggest deal you’ve never heard of, and why meeting net zero targets depends on your understanding of how it works. 

This, and much more, below.

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Homaio: Nobody knows about carbon markets. Why are you dedicating your career to them?

Peter Sainsbury: I started my work in the energy sector as an oil supply analyst. Then I spent most of my career as a commodities markets economist - I was advising governments on environmental policy. I published 4 books while doing this job, but my goal was to be able to write for a living. 

Back in 2021, the EU carbon market was gaining attention but there was nobody who could offer a nuanced and rational approach to the analysis. Discovering this knowledge gap, I decided to devote my career to them. 

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H: Why allocate my daily reading time on a carbon article, instead of keeping up with cryptocurrencies or the Barbie movie? 

PS: Carbon markets are our last hope of meeting the net zero target! First, even if carbon markets are a huge deal ($920bn in 2022!) they remain deeply misunderstood. One particular issue is the distinction between emission allowances (the compliance market) and carbon credits (commonly known as the voluntary carbon market, or VCM). There were several media scandals in the VCM world that have brought bad reputation to carbon credits. This has cast a bad light on compliance markets too, even though they are two very different things. That goes back to one of the reasons why I started Carbon Risk, to help educate those who still hold outdated viewpoints. 

Second, despite covering almost 1/4 of global emissions, the overall global average price is far too low. To get global emissions on track towards net zero, the global average carbon price will need to reach north of $80 per tonne. That’s way above the ~$5 per tonne it is now. The scale and the urgency of those matters is important. 

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H: What is the main message that you want to convey? 

PS: Carbon price is ‘The Currency of Decarbonisation’. Trust in individual ordinary currencies supports investment, innovation and trade. In the same way, trust in the carbon market helps to bring about the capital, skills and long term planning that is required to help meet decarbonisation goals. A strong carbon price is a signal that investors, businesspeople and citizens trust their government’s commitment to combat climate change. However, if market participants lose trust in the EU’s carbon market, that trust may never be won back, and with it any chance of meeting net zero targets will be gone.

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H: What are the greatest strengths of compliance carbon markets? What are the potential downsides? 

PS: Carbon prices set by the market deliver an incentive to decarbonize in the most effective way possible. An ETS involves the government or another institution imposing a cap on emissions and then letting the market decide the price of emissions. It recognizes that governments (or some other central body) are unlikely to be able to allocate capital (via infrastructure, innovation, etc.) as well as the private sector. In contrast, many governments think that a carbon tax is the best approach to tackling emissions. However, the regulators cannot be sure that the tax is set sufficiently high enough to be sure of cutting emissions. A tax can also be lowered or abandoned entirely when a new government comes to power. 

On the other hand, looking forward, the challenge for every ETS will be navigating the period when emissions are approaching zero. Realistically governments recognise that carbon removals are going to be required to meet net zero. Providing an incentive to cut emissions while also investing in removal requires delicate positioning by policymakers.

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H: Are you a carbon investor yourself? 

PS: Yes, I am - I hold assets that allow me to make financial profits as European carbon prices rise. 

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H: What is the role of investors like you and me in all of this?

PS: There has been increasing interest in the EU carbon market from non-compliance entities over the past few years. Individual investors, financial institutions and investment funds increase liquidity and improve market efficiency. Their presence also helps the compliance actors’ actions - it is easier for them to plan ahead and have the market confidence they need to invest in decarbonization. 

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H: Do I have any environmental impact by buying and holding EUAs? 

PS: Definitely! In contrast to claims made by ESG-themed financial products, purchasing physical EUAs is one of the few ways that investors can have a high degree of confidence that their actions are having a direct impact on the climate. By buying one EUA, investors are withdrawing a carbon allowance from the market. This reduces the supply available to obligated emitters, preventing them from using it to emit one tonne of carbon into the atmosphere. At the margin, buying one EUA helps to drive up the cost of the remaining allowances, increasing the incentive to invest in decarbonisation.

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H: Better days to come? Are you optimistic regarding the EUA prices in 2024?  

PS: Yes! Over the past months, the EUA prices have been falling. The market has been hit by strong growth in renewable generation, the return of French nuclear capacity, the comeback to pre-energy crisis natural gas prices, and a slump in European industrial production - particularly the energy intensive chemical sector. Even if these trends continue through 2024 they are unlikely to continue at the speed at which they have unfolded in 2023. That presents an opportunity for investors looking for an entry point into the market. Remember that the EU ETS emissions cap continues to decline year after year, and on the present course will hit zero in the late 2030’s. That effectively means not a single tonne of CO2 can be emitted. Over the longer term then industrial decarbonisation will become the focus. That is much more expensive and much more challenging that decarbonising the power sector. Carbon prices will need to be much higher than current levels (€70 per tonne) to bring about that change.