Daily Update: Carbon Markets — Now Comes the Difficult Part
Today is?Thursday, July 27, 2023, and here’s your?curated selection of essential intelligence on financial markets and the global economy?from?S&P Global . Subscribe?to be notified of each new?Daily?Update.?
As anyone who has gone on a summer road trip can attest, agreeing on a destination is only half the battle. The other half is figuring out how to get there.
This is also true for private sector companies, which are increasingly pledging to work toward a carbon-neutral future. In response to factors such as financial and reputational risks, legislation, and pressure from stakeholders, many companies — even in some of the most challenging sectors — have made public commitments to reduce their greenhouse gas emissions.
The Science Based Targets initiative invites companies to make a commitment consistent with the 2015 Paris Agreement on climate change, through which governments agreed to limit mean global temperature rises to below 2 degrees C compared with preindustrial levels. The number of companies committed to the initiative has?about doubled in each of the past four years , according to a June report by S&P Global Ratings.
There are different ways of traveling from A to B. Which route companies take is likely dependent on the nature of their business, the report noted. For some industries, the path to decarbonization may be more obvious — for example, switching from conventionally generated power to renewable electricity. For others, the road ahead is less clear and may involve greater reliance on carbon credits, carbon capture and storage technology, and capturing CO2 from the environment.
However, these approaches are evolving and carry risks. Companies could also face uncertainty about financial costs and future regulation. “Studies by global stakeholders generally recognize that these solutions have a role to play in decarbonizing the economy. Such solutions also carry technological, financial, policy and stakeholder perception risks,” the S&P Global Ratings report said.
Voluntary carbon markets, which allow companies to purchase credits that represent a reduction or avoidance of emissions elsewhere, have been playing an increasing role. Ecosystem Marketplace, a nonprofit organization, estimated the value of voluntary carbon markets at $2 billion in 2021, and the demand for credits is expected to increase.
Proponents of voluntary carbon markets argue they have the power to?drive transformational change ?across economic sectors. Critics are skeptical about the credits’ ability to deliver real reductions in emissions.
Speaking to S&P Global Commodity Insights in June, Andrea Bonzanni, international policy director at the International Emissions Trading Association, said the?criticism was unfortunate . “Our view is that [carbon] markets are necessary to reach net-zero. And it's unfortunate that these criticisms only look at the negatives and do not propose an alternative,” Bonzanni said.
Bonzanni added that carbon markets and Article 6 of the Paris climate accord, which lays out rules for international trade in emissions reductions, are necessary in the fight against climate change.
For companies looking to use voluntary carbon markets to achieve lower emissions, the credibility of the underlying projects is critical, the report by S&P Global Ratings emphasized. Credits based on avoided deforestation in one area, for example, would need to show that deforestation wouldn’t simply occur elsewhere.
In an analysis of 25 of the largest global oil and gas companies by revenue, S&P Global Ratings found that all the companies planned to use either carbon capture and storage, CO2 removal or carbon credits to meet their decarbonization goals. However, there was uncertainty about implementation plans, and the companies often failed to disclose the risks of their approaches.
The solution? Companies should be more open — not just about their destination, but also about how they planned to get there. “We believe disclosure and transparency by companies about their chosen emissions-reduction solutions, and how they are planning for the associated risks, will better enable analysis of how companies might meet their decarbonization commitments,” the report concluded.
It’s not just companies. Many investors are also looking to chart a course consistent with the Paris climate pact. With demand for climate and sustainability-themed indexes stretching beyond traditional equities, S&P Dow Jones Indices recently expanded its range of S&P Paris-Aligned & Climate Transition Indices to cover European investment-grade corporate bonds.
In addition to its sustainability credentials, the index offers a?low tracking error ?compared with the iBoxx benchmark, so investors can cut carbon without changing course.
Today is?Thursday, July 27, 2023, and here is today’s essential intelligence.
Written by Mark Pengelly.
Economy
United Kingdom Flash PMI Data Point To Cooler Inflation As Economy Stalls
The UK economy has come close to stalling in July which, combined with gloomy forward-looking indicators, reignites recession worries. July's flash PMI survey data revealed a deepening manufacturing downturn accompanied by a further cooling of the recent resurgence of growth in the service sector. Rising interest rates and the higher cost of living appear to be taking an increased toll on households, dampening a post-pandemic rebound in spending on leisure activities. Meanwhile, manufacturers are cutting production in response to a worryingly severe downturn in orders, both from domestic and export markets.
—Read the article from?S&P Global Market Intelligence
Capital Markets
Credit Trends: Risky Credits: Refinancing Struggles Keep Emerging Markets On Their Toes
The number of issuers rated 'CCC+' and lower decreased between the first and second quarter of 2023, with risky credits accounting for 12% of the speculative-grade universe. Downward transition risk is still very pronounced. 79% of issuers rated 'CCC+' and lower either had a negative outlook or were on CreditWatch negative. All negative outlooks are focused on Latin America. A higher-for-longer interest rate scenario means issuance remains subdued and refinancing risk increases. Yet, the maturity wall will only peak in 2025, with the utilities and oil and gas sectors most exposed.
—Read the report from?S&P Global Ratings
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Global Trade
Rotterdam Bunker Sales Volumes Down 10% In Q2, HSFO Gains Market Share
Total Rotterdam bunker sales volumes (excluding lubes) fell by 10% in Q2 2023, according to new data from the Port Authority. VLSFO sales fell by 8% on the quarter to 906,368 mt, a level 15% lower than the previous year. The fuel type continued to account for the majority of demand in Q2 (excluding lubes), comprising 38% of total sales. In contrast, HSFO sales were up 5% on the quarter, and the fuel grade's market share increased from 30% to 35%. The total sales volume was also up on the year, sitting 18% higher than 2021 levels.
—Read the article from?S&P Global Commodity Insights
Sustainability
Listen: Grid Operator PJM Navigates Surge In Renewables And Rapid Fossil Retirements In The US
The PJM Interconnection, the nation's largest electricity grid operator, is working to alleviate a logjam of renewable projects waiting to be connected to its system, while also warning in a recent analysis that thermal generation retirements could outpace these new intermittent resource replacements. Darren Sweeney, a senior reporter at S&P Global Commodity Insights, joined Energy Evolution for this episode to share interviews with James Wilson, an economist who has critiqued PJM's energy transition analysis, along with Sierra Club senior attorney Casey Roberts and Todd Snitchler, president and CEO of the Electric Power Supply Association.
—Listen and subscribe to Energy Evolution, a podcast from?S&P Global Commodity Insights
Energy & Commodities
US Power Sector Coal Stockpiles Reach Over 2-Year High At 127.5 Mil St In May: EIA
US power sector coal stockpiles reached a 29-month high of 127.5 million st in May, according to Energy Information Administration data released July 25. Stockpiles were 7.1% higher on the month and up 37% on the year. The stockpile build was 8.4 million st, more than triple the five-year average build for May. Bituminous stocks rose 7.7% on the month and 35.3% on the year to 44.9 million st. Compared with the five-year average, bituminous coal stockpiles were at a 7.4% deficit in May. Days of bituminous coal burn rose 2.6% on the month and 55.3% on the year to 118 days in May. Days of coal burn in May were at a 33.2% gain to the five-year average.
—Read the article from?S&P Global Commodity Insights
Technology & Media
July US Auto Inventory Trends You Should Know
Dealer advertised inventories in the US took an expected dip following the July 4 weekend, but have quickly recovered, according to new analysis from S&P Global Mobility. And while July 4 sales events received their typical promotions, the pattern for the long weekend was consistent to recent months-end in terms of sold inventory. The July 4 weekend also represented a trifecta of the end of the month, end of the quarter and a holiday.
—Read the article from?S&P Global Mobility
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