Carbon offsets, trading can overcome the looming green-tax challenge

Carbon offsets and trading are an effective and quick way to contend with a future global ecosystem of green taxes, or the "green taxonomy," a sustainability consultancy said

“Companies need to realize that states are very actively preparing tax and duties plans to favor green products, and this will result in new barriers to entry,” carbon specialist and Keops Consulting founder Milena López told Fastmarkets.

This is likely to play a central role in companies’ overall business models regardless of the industries in which they operate but it is even more relevant for the metals and mining industry given that steelmakers and smelters emit pollution in their production processes.

“There is an increasing pressure to deliver low-carbon products and meet carbon neutral targets. Steel mills cannot reduce all their emissions from steel production with the existing technology because it is either not yet available or is not financially viable,” López said.

For example, a steel mill could choose to use technologies such as green hydrogen for steel production, but the current cost does not make it economically viable. The few projects that have implemented green hydrogen are subsidized by governments.

Developing carbon price floors
An alternative is for producers to buy carbon offsets for an amount equivalent to the residual emissions generated from steel production or smelting. During the period when research and development for future technological solutions is still ongoing, this is approach is more cost-efficient than using new technology such as green hydrogen.

“Carbon offsets are a fast solution, part of a long-term target to reduce emissions and an effective way to support climate action beyond the steel mill or smelting business,” López said.

One unit of carbon offset represents one tonne of CO2 emissions generated by an industrial plant, as opposed to a carbon allowance traded in a cap-and-trade system.

Carbon hedging also allows companies to lock in the prices of carbon offsets that have already been fixed into low-carbon products.

“This can help steelmakers lock in carbon prices and be more competitive in delivering green steel,” López said. “It can also be used by end users, like automotive producers, to buy green steel which has already built in carbon prices, and [that way] avoid any carbon price risks.”

But the complexity of the carbon markets means that market participants need help achieving their net-zero targets, especially in identifying the type of carbon credits that can be traded and hedged via exchanges, López said.

“Platforms such as HedgeTutor, which can help market participants learn and practice carbon trading and hedging, are also crucial for the industry’s development,” she said.

The carbon markets provide a price signal to foster private investments, enable transfer of technology, promote technological innovation and raise funds fast for climate action and the protection of natural ecosystems.

But this is hindered by a global carbon price floor, which is challenging to develop due to the nascent industry and the fluid environment in which regulations are being negotiated.

How will carbon markets in Asia develop further?
There are already regional carbon markets operational in China, South Korea, Kazakhstan, New Zealand, Australia and several Asian cities. Other countries such as Japan, Thailand, Vietnam, Indonesia, the Philippines and Russia are considering or are in the process of implementing carbon markets.

“Nevertheless, the coverage of emissions by compliance markets is well below the net-zero targets required to meet with the Paris Agreement and keep global warming below 1.5 degrees Celsius,” López said.

This underscores the importance of voluntary carbon markets, which have a broad coverage and can be traded in exchanges, as well as offsets which can be used voluntarily.

“Voluntary carbon markets and the private sector have an essential role to play in meeting net-zero targets, be it buying offsets for pre-compliant markets, which do not have mandatory regulations yet, or companies taking it upon themselves to offset their own emissions in sectors which have not started regulating emissions,” López added.

Emerging market trend
A newly emerging market trend is low-carbon products with an embedded green premium offered as a way to contribute to climate action.

The co-existence of both a mandatory and a voluntary carbon market will complement this, given that together they can provide even more flexibility in using carbon offsets and methodologies. This will be especially true with opportunities arising to provide tailor-made solutions to end users through carbon trading.

“The market is evolving toward local regulations for emission reductions aligned with the Nationally Determined Contributions under the Paris Agreement, but also toward developing a variety of products outside the mandatory regulations,” López said.

This is crucial to achieving net-zero targets and meeting the increasing demand for green products across supply chains. It will also help market participants meet their financing needs and increase their chances of satisfying financial investors’ appetite for ESG products.

Read more from our steel decarbonization series

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