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the Homing Bird #5

Read our opinion piece on why carbon prices show how committed governments are to fight climate change. Discover the exclusive interview with a cement industry representative, shredding the real-life effect of the EU ETS on the sectorial decarbonization efforts.

the Homing Bird #5
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The Homing Bird

February 2024

Climate finance made easy by Homaio.

In this edition :

🔥 The Story: Carbon prices: the measure of political commitment to climate action

🎙️ Chronicles from the frontlines: How does carbon pricing accelerate decarbonization in the cement industry? An exclusive interview with Cem'In'Eu Managing Director Fabien Charbonnel.

The Story : Carbon markets as a proxy of government commitment to climate action

Carbon prices show how committed governments are to fight climate change.

Thomas Quinn says that “Everything is politics”. Etymologically, the word refers to  the management of the affairs of the city. And what greater affair than global warming ?
Carbon prices are political creations. They are the normative representation of greenhouse gases. Cap-and-trade systems are designed by  institutions, and in turn affect individual citizens on a daily basis.
In short, carbon prices indicate the strength of political intent in tackling our greatest common challenge, global warming.

As such, price levels depend on and reflect sustained political support. While regulators are not the ones who set the price of carbon, their decisions are scrutinized by market participants. When participants believe the political support to high prices will remain, they take long positions. And when the political support wanes and fades, participants lose trust in the market. Essentially, carbon prices are the currency of decarbonization, and so like a currency, they reflect the market's trust in the solidity of the institutions.

Carbon prices are a proxy of political commitment to combat climate change. The higher the prices, the more dedicated the government is to handling the environmental crisis. And when governments weaken their resolves, carbon prices drop.

This has been visible in the historical price in the European Union Emissions Trading Scheme (EU ETS). There is a relationship between the price of European Union Allowances (EUAs) and announcements by European institutions.

In simple terms, it works as follows - regulators make a statement and EU ETS market participants judge on how much this news shows that the institutions are dedicated to their climate policies. This is because these policies can be more or less challenging to maintain depending on economic or geopolitical context (inflation, energy crisis, land war at the door of Europe...). Should the announcements be received as climate ambitious, the free market brings European Union Allowances (EUAs) prices up.

A series of academic papers also testify on the existing correlation between political decisions and EUA prices. Both studies The political economy of the development of the European Union Emissions Trading System and Politics matters: Regulatory events as catalysts for price formation under cap-and-trade mention this.

As a reminder, EUAs are issued by the European Commission through daily auctions. So, whenever there is a possible alteration of the timing or volume of auctions, there is a reaction in the market. If the potential modification of the EU ETS mechanisms is perceived as climate ambitious, prices go up.

Beyond reforms specific to the cap-and-trade system, market participants seek to identify a broader regulatory mindset on climate. Carbon prices react to possible changes of market engineering, but they also reflect the general commitment of regulators to those topics. The second academic paper mentioned above describes exactly this - EUA prices have reacted to the upside when the EU demonstrated higher climate ambition when announcing their climate goals for 2020 and 2030.

This logic goes both ways - whenever a government seems to be flaky in regards to its environmental promises, carbon prices tend to go lower. For example, this is what occurred when Rishi Sunak's announced a weakening of the UK's net-zero policies and led to a considerable 6.3% drop in UK carbon allowance prices within just two days.

Another example of this is what is going on in New Zealand - in the summer of 2023, their carbon price fell to near 2-year low on policy uncertainty. Market participants were destabilized by exceptions of a market reform that had the potential to lower its effectiveness.

The good news is that this phenomenon has been beneficial for the EU ETS’ stability and effectiveness. The EU political system, with a balance of power between 27 member states and 3 institutions - has consistently supported and reinforced its climate policies. The EU ETS is the oldest (created in 2005) and the largest (87% of global cap-and-trade trading volumes) carbon market in the world and has regularly been reinforced by the authorities.

The EU regulatory support is not perfect however. It is the outcome of a complex balance of powers. And until now, electors have mostly ignored the existence of the EU ETS. Some major events drifting the bloc away from its fight against climate change have been largely ignored and fast forgotten, for example when Poland called upon the suspension of the EU ETS. Votes during the upcoming EU parliamentary and commission elections will be key. EU climate action can weather the coming election storm as the emergence of far right movements across the union can be a threat to climate ambitions.

It will be important for you to do your part and go vote this upcoming summer. Ahead of the elections and as we have opened up our new subscription period, contribute to the fight by becoming a carbon investor with Homaio.

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Chronicles from the battlefield : How does carbon pricing accelerate decarbonization in the cement industry?

We came across an open letter to the European Commission advocating for the strengthening of the  EU ETS. Signatories included the usual suspects: WWF, Carbon Markets Watch, the European Environmental Bureau

What was surprising, however, was the presence of Cem' In' Eu', a cement producer. Traditionally, the cement industry is among the most polluting sectors. It represents 7% of the world's direct CO2 emissions. Why does a cement company advocate for higher carbon prices?

We reached out to Fabien Charbonnel, Cem’ In’ Eu’s managing director. We are truly grateful for the time he spent responding to our questions and the thought-provoking insights that he shared.

Homaio: What does Cem’ In’ Eu’ do?
Fabien Charbonnel:
Cem’ In’ Eu’ specializes in the production of cement. The company buys raw materials, processes them, and manufactures cement having the lowest carbon footprint possible. Finally, it distributes the finished product to its clients.

H: How is Cem’ In’ Eu’ different from other cement manufacturers?
Traditionally, the cement industry is among the most polluting sectors. It represents 7% of the world's direct CO2 emissions - 6 times more than the average in the materials sectors.

Clinker is used to produce cement - this raw material requires a lot of energy to be heated at 1.450°C. This releases of large quantities of CO2. The cement production process also involves calcium, a material that is naturally very carbon-intensive.

Cem’ In’ Eu’ has an innovative concept - through small production units and low-carbon technologies, it aims at offering cement that is as sustainable as possible.

H: Why does Cem’ In’ Eu’ specialize in lower-carbon intensive cement production?
First, there is increasing demand for more sustainable cement. Builders have the legal obligation to account for the carbon intensity of their construction. As per the Construction Carbon Regulations in Europe Report, numerous programs make it mandatory for the building sector to reduce its carbon footprint.

In France, some initiatives are Bâtiments Bas Carbone (BBCA), Haute Qualité Environnementale (HQE), Bâtiment à Énergie Positive & Réduction Carbone (E+C-), The regional variants of Effinergie, Quartiers et bâtiments durables.
In Germany, there is the DGNB, the BREEAM DE, or the Nachhaltiger Wohnungsbau.

So, Cem’ In’ Eu’ helps those constructors find lower carbon solutions and helps them comply with their local regulatory requirements.

Second, Cem’ In’ Eu’ is adopting more sustainable practices as a response to the European Union Emissions Trading Scheme (EU ETS).

H: Have you been incurring costs for carbon until now?
So far, Cem’In’Eu’ has not been facing costs for carbon allowances. Indeed, in the cement industry, what falls under the scope of the EU ETS is the production of the abovementioned primary material - clinker. Since Cem’ In’ Eu’ is buying clinker from abroad and processing it to make cement (instead of producing clinker themselves), we have not been required to purchase carbon allowances.

H: Why then did you mention the need to start adopting more sustainable practices as a response to the European Union Emissions Trading Scheme (EU ETS)?
In 2023, the EU regulators introduced the Carbon Border Adjustment Mechanism (CBAM). The idea is to make industries pay for the carbon emitted during the production of materials that they are importing. In other words, Cem’ In’ Eu’ has been buying clinker from outside of the EU without incurring carbon costs so far. After the introduction of the CBAM after 2026, we will need to buy carbon allowances to match the CO2 produced during the production process of the clinker in question.

H: You will only need to start paying for carbon allowances after 2026. Is it already a relevant topic for you?
Cem’ In’ Eu’ is anticipating the cost that they will need to face to buy European Union Allowances (EUAs) after 2026 to match the carbon relative to the clinker needed for our operations. We are already incorporating the cost of carbon in our financial models and projections.

For a 2026 -2028 horizon, we are foresseing a cost of carbon of €140 rising up to €160, representing 20% of our business turnover by 2032.

H: At what level are the strategic decisions on how to tackle EUA prices taken within the company?
The decisions regarding the levels and how exactly to take into account the future costs of carbon are taken by Cem’ In’ Eu’ s executive committee and board of directors - it is a key strategic element discussed at a centralized level.

H: Do you see the introduction of the CBAM and the EU ETS more broadly seen as beneficial for the cement industry?
The CBAM goes alongside with the phasing out of free allowances. Companies like us who will need to buy allowances to match the CO2 of imported goods will have to match an increasing percentage of the carbon intensity of what we are buying. At first, we will only have to match 2.5% of the CO2 in 2026, then 5% in 2027 and so on to reach 100% in 2034. In parallel, our competitors who have been already paying for carbon allowances to match the CO2 released during the production processes, have been receiving a proportion of their EUAs for free. As the CBAM is kicking in, they will receive less and less free allowances. This is great news for the sustainability of the cement industry - everyone will see their costs for carbon increased at the same time. In a level-playing field environment, we are all going to be incentivized to adopt more environmentally friendly practices.

H: Would you personally invest in carbon allowances?
I am convinced that the EUA price will rise in the near future - all of our business models incorporate prices on the rise. Yet, I do not want to discuss my investment decisions and risk tolerance publicly :)

In this edition, we saw that it is a universal and common responsibility to fight against global warming. And supporting carbon markets by participating in them is one of the best options you've got to make your contribution.

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