A tale of two markets: What are carbon emission trading schemes and how do they affect us?
In April this year, European Commission President, Ursula von der Leyen confirmed that the EU Emissions Trading Scheme (ETS) – the world’s largest carbon market – will extend to transport and buildings.
In other words, the construction industry needs to reduce its carbon usage or face an increase in tax.
Around the same time, the UK launched its own ETS, a near-replica of the EU version. And China officially opened its carbon market too, which has been simmering on the radar since 2011.
We’re now entering an era where the cost of carbon emissions is becoming regulated, and not before time. But according to experts, it’s still a Wild West out there.
To uncover more about how the contrasting carbon markets will affect property, I spoke to industry experts, Toby Green and Ian Corder. I dug into how bridging and property lenders could be affected now and in the future.
Regulated markets tighten
There’s a sharp divide between the regulated and unregulated markets. When it comes to the tight-lipped, government-backed regulated ones, they’re stringent and organised.
“The EU Emissions Trading Scheme is probably one of the best known ones”, explains Managing Director of My Carbon, Toby Green. “And they can work in lots of different ways. Generally, these schemes have a pretty good level of guarantee because they are following the same principles that countries have to follow”.
Most regulated markets follow a clear “cap and reduce” scheme, where participants are allocated a maximum amount of greenhouse gas, they can emit each year. If they go over, they must pay extra.
Currently, it’s about €60 per tonne. If participants succeed in using less carbon than allocated, they can sell their allowance back to the ETS. This helps their profits, profile and best of all… the planet.
“It incentivises further reductions”, Green elaborates. “And every year the cap is lowered. Any new companies have a cap of zero. They must buy their carbon credits to offset their emissions”.
The regulated markets are for public companies, those listed on the stock exchange. However, it does not include all industries.
Surprisingly, although the construction sector accounts for 40% of the global carbon emissions, the UK ETS does not yet include it. – It’s likely this will change, as the UK follows in the footsteps of the EU.
But for the time being, the UK’s construction companies can only volunteer to reduce and off-set emissions via the unregulated market.
While unregulated markets boom
Compared to the EU ETS, the unregulated markets look like a spaghetti junction of carbon carnage. Or as Director of Standards and Operations at ESI Monitor, Ian Corder, prefers to put it, “The voluntary market? Some say it’s like the Wild West!”. This unregulated market is the fast-moving, untamed, and slightly manic cousin of its stringent and slow-moving counterpart.
Green agrees. “At the moment the voluntary carbon market is unregulated”, he expands. “And it can be difficult to navigate – even for experts!” “There’s not an awful lot of regulation”, Corder continues. “But there are some good sheriffs out there. It’s a tricky place to navigate”.
These voluntary, unregulated carbon markets include many of the dubious off-setting and tree-planting campaigns we might see on social media.
But they also encompass some good initiatives too. Being able to pick apart the good from the bad is crucial for all firms looking to green-up their processes.
“There’s a range of qualities out there”, stresses Corder. “So, it’s important to know what you’re talking about when you talk off-sets in a particular market”.
Lenders must be wary of dodgy off-setting promises
Off-setting schemes – which fall into the unchartered and swashbuckling world of unregulated carbon markets – seem to be everywhere these days.
It feels like you can hardly check the (climate-catastrophic) weather without some company claiming to be carbon-neutral, or another showing off about trees.
But how can you sift the impact from the impact washing? How can you make sure that you’re not buying into something fake?
“Something like one in every five of these off-setting projects are meaningless”, reveals Green. “There are a lot of questionable companies out there”.
As the name suggests, unregulated markets do not have any carbon police checking up on schemes or companies. But that doesn’t mean that we should be complacent.
In fact, for the sake of our planet, we should probably start stepping things up.
One solution is for property and bridging lenders to scrutinise the off-setting promises of their clients, as part of the underwriting process.
“It wouldn’t be difficult to calculate the emissions of a property being built”, stresses Green. “Calculate all emissions. We can then start reducing emissions and off-setting those that can’t be avoided”.
As financiers, there are questions we can ask of our partners and construction firms. “Have they set an internal carbon price which will increase each year?”, Green suggests. “Or are they just paying to pollute?”
As well as protecting the climate, asking these tough questions can also help to reduce reputational risks, as well as future revenue-drains.
As a quick guide, Green recommends looking at the carbon accounting in detail. And pay extra close attention to the offsetting claims.
“Would the emission reduction have occurred without the project? Is there any double counting? How accurate is the carbon accounting? Has the carbon already been sucked up, or is it yet to happen? Has any harm been done along the way?”… are some of the many carbon-related questions compliance teams should be considering.
To keep it light, I quizzed Green about his favourite voluntary scheme and quick as a flash he replied, “Yarra Yarra Biodiversity Project. It’s an excellent example of the Gold Standard methodology”.
He also encouraged firms to look at other Gold Standard schemes too, and read through the Oxford Off-setting Principles.
A carbon tax is coming
Whether it’s a regulated or unregulated market, all evidence is pointing to a tax on carbon emissions. As a heavy emitter, the construction industry looks to be next on the list … even for a gung ho, Tory-led, pro-property nation like Great Britain.
What’s more, carbon-intensive materials from elsewhere are set to be taxed with the upcoming EU 2026 Carbon Border Tariff. Making it even harder to avoid paying up.
“If you import carbon-intensive materials into the EU, you’ll have to pay a tariff”, Corder explains. “So, you couldn’t import for example, carbon intensive steel in the EU without paying a tariff.
In the same way that an EU steel producer would have to pay extra for that pollution. So that would affect construction hugely because obviously lots of construction materials come from outside the EU or outside the UK, and that will have a really big impact”.
And, if it’s not the tax man who’ll be slashing away at carbon-related profits… it will surely be the customers.
“The E in ESG is becoming much more important, and its impacting share prices. Consumers want sustainability”, stresses Green. “The public are becoming more aware. And when your competitors go net zero, you’ll lose customers”.
It may be a tale of two markets, but it’s a story that ends in one direction. We need to get serious about eliminating carbon emissions. Not only by scrutinising ourselves as lenders, but also our suppliers, partners, and borrowers. After all, can we really afford not to?
Hannah Duncan is a freelance writer with a passion for finance, sustainable investing and fintech. She loves writing engaging content for industry magazines and investment services, as well as keeping a personal blog at www.hdinvestmentcontent.com