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🛫 Note that I’m taking a break from carbon markets for a couple of weeks. I will be back at my desk in late August 🛬

A devastating picture is starting to emerge of Europe’s petrochemical industry as several firms announce that their production facilities are due to close. High input costs, more competitive imports, and lacklustre demand have forced a rationalisation of assets and the closure of several crackers so far, with more on the horizon.

In the past few weeks, Saudi petrochemical giant, SABIC announced that it is shutting down its 865 kt Olefins 6 ethylene cracker at Wilton in northeast England. Meanwhile, Dow Chemical has confirmed that its 560 kt Böhlen ethylene cracker in Germany will shutdown by the end of 2027. In total, almost 4 Mt of ethylene closures have been announced since late 2024, along with 1.7 Mt of propylene capacity (see Hot and bothered).

Primary petrochemical materials such as ethylene and propylene are the building blocks for plastics, pharmaceuticals, and countless other industrial goods, many of which are strategically important. If Europe is unable to manufacture these materials economically then it will increasingly become dependent on imports to satisfy demand. Other European petrochemical plants, including those manufacturing intermediate and finished products, have also been served their last rites, or are under increasing threat of closure.

European crackers tend to be old (many began operating in the 1970’s), typically use more expensive naphtha as a raw material, and are often energy inefficient. It’s a big problem given that industrial gas prices in Europe are around 5-times higher than in America, and European industry is beginning to feel the full impact of EU carbon prices.

Many of Europe’s chemical plants are small and mid-sized facilities, and with utilisation rate having dropped below 80% since early 2022, a level widely considered to be uneconomical, further closures are inevitable. Wood Mackenzie estimates that an additional 20 Mt (~one-third) of the EU’s ethylene capacity is at high or medium risk of closure.

The precarious short-term financial position is making it much more difficult to focus on the longer-term challenges facing the industry, such as investing in the low-carbon economy. The European petrochemical industry faces a €365 billion decarbonisation funding gap between 2021 and 2050, according to Accenture. It means that if producers are going to move towards net zero, they will need to increase their capital expenditure by €12 billion, and maintain this level of investment every year until 2050.1

Retrofitting the EU’s fossil fuel-based steam cracker furnaces with electric furnaces is one approach to closing this gap. Accenture estimates that it will cost €200 billion (plus €100 billion in foregone profits), and result in additional energy demand of 200 TWh, roughly one-fifth of Europe’s renewable electricity generation. In reality, we’re not even at the stage where the concept is proven, yet alone ready to be rolled out across Europe. For example, it was only last year that BASF, SABIC and Linde inaugurated the world’s first large-scale demonstration plant to use electricity in its cracker furnace. There are no plans to electrify an existing fossil-fuel based cracker in Europe.

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The UK ETS could be the first regulated compliance carbon market to include greenhouse gas removals (GGRs) after the UK government announced that they will be eligible to receive UK ETS allowances (UKAs) by the end of the decade. Here are my 16 observations on the consultation response, where UK-based GGR is right now, the market reaction on the UK ETS, and the international context:12

1. The gross cap (i.e., the total number of allowances that can are available each year) as well as the cap trajectory will be maintained for initial integration of GGRs. Emission allowances (UKAs) will be replaced with GGR allowances on a one-for-one basis, maintaining the incentive to decarbonise. However, given that the cap is declining the incentive to build GGR capacity will also fall over time, and so in the longer-term the Authority recognises that there will need to be a new ‘net cap’, enabling “an economically efficient approach to net zero.”

2. Standards for monitoring, reporting and verification (MRV) for GGR operators under the UK ETS will be aligned with the UK GGR Standard currently being developed. The British Standards Institute have now launched two new standards - covering BECCS and DACCS - for public consultation.3

3. Only GGRs that have taken place in the UK will be eligible to receive UK ETS allowances during the initial integration. It’s unclear when this ‘initial integration’ period will last for, nor what the considerations will be for expanding the scope of GGRs to include non-UK based removal.

4. GGR projects must demonstrate a carbon storage period of at least 200 years before they are eligible for entry into the UK ETS. This is consistent with the requirement under the EU Carbon Removal and Carbon Farming regulations (CRCF).

5. GGR allowances will only be awarded ex-post, i.e. only once carbon sequestration has taken place and been verified. It’s unclear whether operators must demonstrate that the carbon has been removed and remained in-situ for a certain time period before receiving a GGR allowance, nor what the process is for verifying that this has taken place.

6. Initially at least, only engineered GGRs will be eligible to be included in the UK ETS. The consultation response only refers to two examples of engineered GGRs: direct air carbon capture and storage (DACCS) and bioenergy with carbon capture and storage (BECCS).

7. It’s unclear whether other methods such as enhanced weathering and biochar will be eligible. For that we may have to wait until later in the autumn. In March the government launched an independent review into how GHG removals can help the UK meet its net zero targets, including technologies not reliant on CCS infrastructure. It is expected to be published in October.

8. The Authority states that there is a strong case for nature-based (woodland) carbon removals to be included in the UK ETS, but a final decision will only be made only after an additional round of evidence gathering takes place. Given the problems that the New Zealand ETS has had with forestry (over-supply of credits, mono-culture planting, etc.) it’s quite right to be cautious. The report proposes strict limits on the amount of GGR allowances that can be generated this way.

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Estimated reading time ~ 5 mins

It has been a tumultuous 12-18 months for California’s cap-and-trade program.

To recap, the Californian Carbon Allowance (CCA) price hit an all-time high of $41.91 per tonne CO2 in early 2024 as the market anticipated that reforms would result in substantial cuts to future supply. However, delayed rulemaking and uncertainty over the schemes future beyond 2030 sent the CCA price down to $26 per tonne, close to the auction floor price (see here and here).

More recently, California’s carbon market has been under siege from President Trump. In early April 2025 he issued an executive order blocking the enforcement of state laws that reduce the consumption of fossil fuels. Other cap-and-trade programs not beset by regulatory uncertainty, such as RGGI and Washington State, have seen the price of their emission allowances rise, suggesting that delayed reforms and the debate surrounding the reauthorisation are the main price drivers in California (see America's state carbon markets are under siege).

The regulatory befuddlement has not been without cost. The state of California has missed out on nearly $3 billion in revenue from its carbon market due to the tumbling carbon price since February 2024, according to a new report by non-profit Clean & Prosperous California. The missing revenue could have been used to lower household energy bills, help local communities adapt to climate change, reduce the barriers people face switching to lower carbon technologies, or indeed plug some of the states ballooning budget gap.1

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In early April, Governor Newsom signalled his intention to extend authorisation for the cap-and-trade program through to 2045. However, it was his proposal for how future revenue will be spent, published one month later in mid-May, that got the attention of lawmakers. The decision to reauthorise the program beyond 2030 is now on hold pending a debate on how future revenues should be spent.2

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Estimated reading time ~ 7 mins

Understanding the relationship between the price of carbon and investment in decarbonisation is important for anyone with a stake in climate policy: from policymakers keen to understand what level the carbon price needs to be, to obligated emitters and the companies developing low-carbon technologies, and of course, anyone wanting to take a long-term punt on the carbon price.

As I’ve discussed previously, I believe that a strong carbon price is a signal that investors, businesspeople, and citizens trust their government’s commitment to combat climate change. In the same way that trust in individual currencies supports investment, innovation and trade, trust in the carbon market helps to bring about the capital, skills and long-term planning that is required to help meet long-term climate targets. A weak carbon price delivers the opposite signal.

A recent report by the UK’s National Audit Office (NAO), an independent public-spending watchdog, casts doubt on whether there is sufficient evidence to support this theory, and openly questions whether the UK carbon market is really delivering on its promise to curb emissions, more than four years after it launched in early 2021.

The NAO conclude that while emissions for those sectors covered by the UK emissions trading scheme dropped by 11 Mt CO2 during the first few years of the scheme, it is “difficult to conclude whether this reduction can be attributed” to the UK carbon market, and furthermore, that incentives for future decarbonisation by the more than 1,000 organisations covered by the UK ETS are uncertain.1

Two key factors need special attention according to the watchdog: the low UK carbon price relative to the cost of decarbonisation measures in the traded sectors (e.g. steel, petrochemicals, etc.) as well as compared to the EU ETS, and uncertainty around the availability and take-up of low-carbon technologies (e.g., carbon capture and storage, and sustainable aviation fuel) given that it could take several years before they start having a significant impact on emissions (see Britain's green credibility gap: UK carbon price slumps to record low, 50% below the EU).

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Estimated reading time ~ 6 mins

China’s CO2 emissions have probably peaked, or are very close to doing so.

Analysis published by Carbon Brief and prepared by the Centre for Research on Energy and Clean Air (CREA) suggests that China’s emissions from fossil fuels and cement declined by 1.6% year-on-year in Q1 2025, and by 1% over the past year. While emissions from the power sector fell by 5.8% versus 12 months ago, elsewhere in the economy they rose by 3.5%, with the coal-to-chemical sector the largest driver of emissions growth (more on that later).1

Whether this turns out to be a structural break in the upward trajectory in emissions from the second largest economy remains to be seen. China has experienced false dawns before. In 2015/16 authorities attempted to rebalance the economy away from investment and towards consumption causing a shallow drop in emissions. More recently, in 2022, draconian pandemic lockdowns and a sluggish property sector weighed more heavily on emissions.

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Intrigued by the prospect of an imminent reversal in Chinese emissions, Ben McNeil of Emmi and developed a regression model based on the past quarter of a century of data to test whether China (and the world at large) is close to a historic turning point in emissions. Projecting through to 2030, his forecast suggests that Chinese emissions have essentially plateaued at around 12 Gt CO2 per year. Check out his latest article where he outlines his projections for other regions - Europe, America, India, the rest of the world - and what it all means for global emissions (see The Kaya identity).2

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Estimated reading time ~ 9 mins

Over the past 18 months the EU carbon price has been anchored close to the €70 mark. Whenever the EUA price has dropped towards €60, buyers have quickly stepped in and bid the market back up. Barring the odd natural gas fuelled price spike, few are willing to push the price beyond the late €70 mark, with investment funds quick to reposition for lower prices.

If the carbon price reflects Europe’s citizens concern over climate change, and trust in their governments commitment to do something about it, then it’s lukewarm at best at the moment. That’s very different from the continents weather right now, where many are about to swelter through the third heatwave of the summer.

In this post I highlight why a late summer return to recent highs may not be on the cards this year, how rising solar power generation capacity is affecting market dynamics, the potential for an exchange traded product supply squeeze, the disgruntled chemical industry bosses that could scupper it, and finally, whether we’re all really just frogs boiling away.

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Estimated reading time ~ 7 mins

The Global Methane Pledge (GMP) was launched by the United States and the European Union in November 2021 at COP26. GMP signatories, of which there are now 159 countries plus the European Commission, have committed to cutting global anthropogenic methane emissions by 30% by 2030, compared to 2020 levels. Earth observation technologies, and satellites in particular, have been foundational to the GMP due to the spotlight they have cast on the problem — quantifying overall methane emissions while also tracing them back to the source.

Earlier this week the Environmental Defense Fund (EDF) revealed that it lost contact with its MethaneSAT satellite, widely considered to be the gold standard in methane emission tracking technology, able to produce high precision, high resolution data over wide areas that are largely invisible to other satellites. Despite persistent attempts to restore communications with MethaneSAT, EDF now believe that it has lost power and is unlikely to be recoverable.1

Launched in June 2024, MethaneSAT circled the Earth 15 times a day at an altitude of 590 kilometres, collecting data in a 200 kilometre swathe. It’s mission was to monitor at least 80% of global oil and gas production, detecting both distinct point sources and dispersed area emissions. With a resolution of around 140 metres, it’s instruments were able to monitor even the smallest methane leaks (i.e. those that emit less than 500 kg of methane per hour), revealing that when combined they make up a large portion of the overall methane released in major oil and gas producing basins.

A few months prior to the launch, EDF’s senior vice-president, Mark Brownstein, outlined how he saw MethaneSAT’s role in the cutting global methane emissions: “MethaneSAT is a tool for accountability. I’m sure many people think this could be used to name and shame companies who are poor emissions performers, and that’s true. But [it] can [also] help document progress that leading companies are making in reducing their emissions.”

MethaneSAT isn’t the only satellite that can provide insights on methane emissions. There are more than 25 in orbit tracking both distinct point sources and dispersed emissions. Other recently launched satellites include Tanager-1, EMIT, and EnMap and are also fitted with sensitive detection thresholds and provide high resolution data on methane emissions. They join the Sentinel 5P satellite which can map methane across hundreds of kilometres, and has identified huge plumes of methane from oil and gas facilities in places such as Turkmenistan, and the GHGSat constellation of 14 satellites dedicated to tracking GHG emissions including methane from individual industrial facilities (see The carbon tracking opportunity: Real time tracking of GHG emissions and carbon sinks is a huge growth market).

MethaneSAT’s unique capabilities mean that its loss is a significant setback towards achieving the GMP. It will make it much more difficult to track methane emissions from the oil and gas sector and other major methane emission sources (e.g., coal mining, landfills, livestock and agriculture), while also making it more challenging to identify and implement measures that curb methane releases from emitters — whether large or small, infrequent or repeat offenders. That’s a problem for the individual industries, but it’s becoming an issue for the banks and other financial institutions that fund them, and are now looking at how they can curb their financed emissions.

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Estimated reading time ~ 9 mins

Launched 20 years ago, the EU emissions trading system is the worlds most advanced compliance carbon market. As so often happens, regulation first introduced in the European Union tends to influence global standards and policies - known as ‘the Brussels effect’. The EU ETS is one of the most successful examples of that phenomenon in action.

The latest World Bank State and Trends of Carbon Pricing report reveals an increasing share of global GHG emissions are now subject to direct carbon pricing. That’s good news — carbon pricing enables scarce resources to be allocated more efficiently, reducing the cost of cutting emissions (see It's the carbon price, stupid!)

The issue now is that carbon pricing is becoming ever more fragmented, and that poses a problem as countries seek to prevent competitors, who might not have a comparable carbon price, from undercutting them.1

Here’s some of the key facts from the World Bank report.

Direct carbon pricing covers approximately 28% of global GHG emissions, up from 24% in 2024. There are now 80 direct carbon pricing instruments in operation around the world; 37 emissions trading systems and 43 carbon taxes.

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Two sectors have the highest level of direct carbon pricing coverage: the power sector (51% of emissions covered) and industry (43%). Most other sectors languish at around 5-15%, with waste, agriculture, and land-use, land-use change, and forestry (LULUCF) at or near zero.

Rate-based ETSs (also known as intensity-based ETS) are becoming increasingly popular due to the low cost and the flexibility they give obligated emitters. This type of approach is used in Australia, China, Indonesia, and several provinces in Canada. Other jurisdictions such as Turkey are considering introducing a rate-based ETS.2

Almost two-thirds of ETSs and almost one-fifth of carbon taxes allow eligible carbon credits as a compliance option according to the World Bank. While most instruments limit carbon credits to ~5% of compliance, others such as Australia’s Safeguard Mechanism and Vietnam’s proposed ETS allow much higher levels, of up to 30% (see Everything you need to know about Australian Carbon Credit Units (ACCUs)).

The global average price for carbon pricing instruments was $19 per tonne CO2 in 2025, a doubling in real terms since 2015. However, given that over 70% of global GHG emissions are without a direct carbon price, the global emissions-weighted average carbon price is a mere $5 per tonne CO2.

The report also shines a light on the disparity in implied carbon pricing; the fuel excise duties, fossil fuel subsidies, and other incentives that alter consumption behaviour. The World Bank focus on Latin America to make their point. The total carbon price in 2024 had strengthened to $37.50 per tonne CO2, as governments in the region introduced fiscal reform. In contrast, over the past five years direct carbon pricing only accounts for 13% of the total carbon price (see A uniform global carbon price is unworkable, and unnecessary).

As I remarked at the beginning of this article, it’s encouraging news, but there’s very little in the way of a standard template being applied from one country to another. A recent report by Oxford Economics suggests that the fragmented nature of global carbon pricing instruments increases the risk of carbon leakage.3

The average global carbon leakage rate is estimated to be between 5% and 30%, with small open economies typically more exposed to the phenomenon than larger ones. Emissions-intensive trade-exposed (EITE) industries such as chemicals, cement, steel, and aluminium face high carbon leakage rates of between 47% and 55% if high income countries introduce a carbon price consistent with their nationally determined contributions (NDCs). In comparison, localised industries such as aggregates face much lower carbon leakage rates (12%).4

The other Brussels effect

Carbon border levies such as Europe’s Carbon Border Adjustment Mechanism (CBAM) seek to mitigate the risk of carbon leakage, ensuring that direct carbon pricing isn’t undermined. Indeed, one of the key motivating factors for countries seeking to introduce a carbon price recently has been to reduce their exposure to the CBAMs emerging in Europe and elsewhere.

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Estimated reading time ~ 8 mins

According to Gary Becker’s theory of rational crime, a profit-maximising firm will comply with an environmental regulation, but only as long as the expected penalty of violating it exceeds the compliance cost.

Economists have long been puzzled by evidence that seems to contradict Becker’s theory. The economist Winston Harrington first documented this in a paper published in 1988 based on research into compliance with environmental regulations in the United States, during the late 1970’s and into the 1980’s. The upshot is that firms appear to comply with environmental regulations to a much higher degree than that predicted by ‘rational crime’.

Harrington’s Paradox is the notion that firms in general comply with environmental regulations, in spite of the fact that they tend to be subject to infrequent environmental monitoring, discretions are rarely punished, and the expected fine is minimal compared to the cost of meeting compliance.

Subsequent researchers have questioned Harrington’s findings, often struggling to uncover data that supports the existence of a paradox. However, a recently published paper by researchers at Georgetown University and the Grantham Research Institute, examined historical trends in compliance with the EU ETS with the data appearing to support the existence of Harrington’s Paradox.

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Estimated reading time ~ 7 mins

“I had always tried to focus on macro, and that had been good for me - but when I look back, I realise how much everything was politically driven.”

- Russell Clark

One of the first pushbacks I get from investors nervous about allocating to carbon markets is the risk of political interference.

Environmental markets such as compliance carbon pricing are a political construction in which scarcity is created through regulation. An emissions trading scheme typically involves the government or another institution imposing a cap on emissions, and then issuing allowances denominated in tonnes of carbon. The emissions cap is then reduced by a fixed percentage each year to move those covered by the scheme towards a long-term target, i.e., net-zero emissions.

Alas, the response from many prospective investors is that well, the rules of the game were set by politicians, and so the rules can also be changed, if and when the whim takes them. A quick step back and you can see that politics is often the driving force behind many of the biggest moves in global asset markets, whether that be commodities, equities, or bonds. The rules of these games are also often rewritten to serve their political masters.

The inspiration to write this post was sparked by a recent article by , in which the hedge fund manager laments articulates how everything is a “political trade”:

“I like having a strategy to attack markets with. When you have a strategy, you can makes adjustments to improve it as you get new information. In my career as an analyst and fund manager from 2004 to 2021, I was very heavily macro focused, because that was what worked. But from 2016 onwards, it stopped working. Currency moves, and asset moves that I expected rarely followed through….

...For me, I had always tried to focus on macro, and that had been good for me - but when I look back, I realise how much everything was politically driven.”

In his post, Clark highlights shorting Chinese tech (political impetus to prevent firms getting too powerful), buying Irish bonds at 10% (political will not to see a fellow EU Member State default), as two of his most notable trades where politics was the underlying factor. He goes on to explain what might be behind recent market moves in oil (political pressure to keep prices low in the event of a US or Israeli strike on Iran), and gold (political pressure for higher wages which could fuel inflation, noting the comparisons with the 1970’s) as evidence that politics drives markets.1

You just need to know where to look.

Politics is the driving force in both short-term and long-term moves in asset markets. Trump’s tantrums with Europe or Elon and the risk-off sentiment across asset classes on the one hand. Globalisation, de-unionisation, and the decade long bull market in bonds on the other. Politicians also have their tools of market manipulation. From the US government selling crude from the Strategic Petroleum Reserve (SPR) to keep oil prices low, to the Chinese plunge protection team, buying equites to push share prices higher.

Carbon markets are no different.

As the cornerstone to achieving Europe’s climate targets, a strong EU carbon market was essential. However, in the early 2010’s Europe faced a problem. Launched in 2005, an influx of cheap international credits had weakened the EU ETS; the price of carbon plunged to below €5 per tonne CO2. The politics of nuclear power generation contributed to the selloff. Japan’s retreat from its climate targets following the Fukushima nuclear accident of 2011 added to the surplus as the government stopped buying credits.

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Spurred on against the backdrop of the 2015 Paris Agreement, Europe’s climate policymakers were about to get serious about reform.

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Estimated reading time ~ 9 mins

Almost 38 million people are expected to go on an ocean-going cruise in 2025, according to the Cruise Lines International Association (CLIA). That’s up 7 million (almost 20%) from 2023, the first year to see passenger numbers surpass pre-pandemic levels.

Today there are around 515 cruise ships dotted around the globe, more than double the number that traversed the oceans in 2000. There are more ships now, but they are also much larger than ever before. The biggest cruise ships are typically twice as big as those that sailed 25 years ago. The largest cruise ship, the Icon of the Seas, weighs in at 248,700 gross tonnes and carries 7,600 people.

More passengers, and more big ships, means more emissions. Analysis by Transport & Environment (T&E) found that cruise ships operating within European sovereign waters emitted 8.1 Mt CO2 in 2022, an increase of 17% from 2019. It’s not just CO2 though. Harmful pollutants such as sulphur oxides (SOX), nitrogen oxides (NOX), and fine particles (PM2.5) have also increased sharply, up 9%, 18%, and 25%, respectively (see Blue sky thinking: As climate policy splutters, governments should sell the benefits of clean air).1

Up until recently the cruise liners have operated without fear of paying a price for their pollution.

Indeed, they barely pay any tax at all, utilising old-loopholes that shelter them as foreign entities. They are exempt from paying tax on marine fuel and avoid paying anything more than a notional amount of corporation tax. Operating out of the purview of any one nation, the cruise liners are masters at minimising their tax burden.

Nevertheless, things may now start to change as both European and international climate regulations begin to bite.

For example, the maritime sector has been included in the EU emissions trading scheme since 2024. Ships travelling within the EU are required to pay for all of their emissions, while for voyages to or from a non-EU destination, half of the emissions are covered. Vessel operators including owners of cruise ships need to purchase EUAs amounting to 70% of their emissions in 2025 (up from 40% in 2024), and then cover 100% of their emissions in 2026 (see Putting a cap on European shipping emissions: The maritime sector is beginning to price in EU carbon prices).2

The EU ETS only covers emissions from the last port of call with passenger movement before entering European waters. So for long-haul cruises such as those crossing the Atlantic from the Caribbean to Europe, liners will try and minimise their emissions reporting exposure by including intermediate stops at nearby ports such as Southampton in the UK, or Casablanca in Morocco.

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