Interview with Andrea Maggiani, by Emanuele Bompan
Originally published on Renewable Matter’s magazine Europe
The European Union’s Emissions Trading System is the world’s largest carbon market and a vital climate mitigation instrument. How is this sector evolving? We spoke with the founder of Carbonsink, a leading consultancy for carbon credits and climate strategy development.
The EU ETS, or Emissions Trading System, is an EU policy milestone in the fight against climate change and it is a key instrument for cost-effectively reducing greenhouse gas emissions. The ETS was the world’s first major carbon market and still remains the largest. To understand how this sector has evolved, Renewable Matter spoke to Andrea Maggiani, the founder of Carbonsink, a consultancy for the
development of climate strategies and projects that generate carbon credits, currently part of South Pole Group, where Maggiani is Global Tech Strategy Director.
What is the current state of the carbon market in Europe?
Last year, the price of CO2 reached the milestone of 100 euros per tonne, a target that economists like Stiglitz and Stern had predicted. Despite fluctuations in price, this has confirmed that the cost of CO2 can reach truly significant levels. This is an important signal for the market, even for the companies excluded from the ETS (see box, ed.). However, the war also brought turbulence to the market. With all the balancing mechanisms that have been created in recent years on the ETS, the market still holds up. Despite the war, we have not witnessed a collapse like in 2008, when the value dipped to 8 euros per tonne. We have entered a mature market, which can manage fluctuations, and the war provided clear confirmation of this. We are in a rallying phase and the price of CO2 will continue to grow.
How can the sector improve?
The more stakeholders operate in it, the better the market functions. The entry of the marine transport sector in 2024 is an excellent signal and there is already talk of including the entire transport sector. The more it widens, the more the market becomes functional and liquid, allowing it to operate ever more efficiently.
The other major theme will be Carbon Removal Credits (CRCs), new certifications for innovative carbon removal technologies and sustainable solutions useful for climate neutrality goals. We are seeing that these certifications could soon be launched in the agriculture sector (with soil carbon storage) before extending to other carbon dioxide removal technologies. It is yet to be understood how this will connect to the ETS. Currently, all auctions end in a dedicated fund for decarbonisation innovation. The question, however, is this: will companies be able to use these CO2 removal certificates in the ETS?
How are global carbon markets influenced by climate negotiations such as COP27?
Article 6 (the climate finance article of the Paris Agreement, relating in particular to carbon markets, whose implementation is still incomplete, ed.) has made some small steps forward, especially with regard to the rules of operation in bilateral agreements between countries (Art. 6.2) and in the new voluntary market (Art. 6.4) that should replace the CDM (Clean Development Mechanism). But it will take time before new development projects can be supported by this “new CDM”. In general, rules for the game at a global level are still lacking, even though the playing field is being demarcated. The reason for this struggle is that there are many economic interests at play. Therefore, determining whether a project can be supported by carbon credits or not can make a great difference. The road is still long and to reach a real turning point we will probably still have to wait for another couple of global climate conferences.
Could the use of the Art. 6.4 mechanism be an opportunity for European businesses?
Only through a review of the ETS itself, which would allow the use of market instruments for compliance. At the moment, this option does not exist. However, with the Carbon Removal Credits that the EU is creating, we are testing a sort of domestic credit system that can be connected to the ETS, which could pave the way for solutions connecting the new CDMs with the ETS. Nevertheless, European companies can benefit operationally from Article 6.4 in a voluntary context.
What impact will the Carbon Removal Credits have on agriculture in Europe?
A positive impact, as long as a market is created where there is a focus on additionality, in a context where the agricultural sector already receives a huge amount of subsidies and funding for converting from traditional classical agriculture to regenerative agriculture. Furthermore, the European market is not somewhere we carry out very intensive, highly polluting agriculture. However, if implemented correctly, the CRC system can offer additional emission reductions in certain sectors and undoubtedly be an extra source of income for the world of agriculture, as well as giving a tangible contribution to the climate. It will certainly be able to create important connections in the supply chain, with projects where, for example, a food processing company, alongside farmers, will generate CO2 removal strategies to be implemented to reach its decarbonisation targets. Thus, different classes of low-carbon food commodities will be developed based on the carbon intensity of the supply chain.
In the future, will it be possible to obtain credits for the regeneration of natural environments suited to being carbon sinks? For example, for actions such as the enhancement of soil and forest biodiversity or the conservation of peatlands?
Credits are typically generated retrospectively when reduction or removal has already occurred. However, there are companies that look more to the long term and want to invest in projects that will generate these certified credits in the future. They are essentially ‘forward contracts’: you are buying a position today for something that will be generated after x time, making it possible to fund natural regeneration, removal, or other projects. This will be vital for those companies that have set themselves net-zero emission targets by 2030 or 2050 and must thus start working today both to reduce emissions in their supply chain and to remove the residual emissions that will remain in 2030 or 2050.
Back to Europe. What else has the EU done in relation to carbon markets?
The Carbon Border Adjustment Mechanism touches upon the issue of the ‘green premium’. Due to the strict rules on emissions enforced by the European Union, many companies face emissions-related costs that impact their products’ competitiveness, as with ceramics, steel, or concrete. Now, thanks to the CBAM, which is nothing more than a customs tax, there is a mechanism that impacts products sold in Europe that have benefited from a favourable regulatory regime on emissions in their country of manufacture.
CO2 remains one of the most accurate ESG rating systems. How will this situation evolve?
CO2 is one of the parameters that, most of all, has allowed the world of ESG to be based on quantitative values. This is clear because quantitative data relating to ‘Social’ and ‘Governance’ matters is currently less prevalent. Historically, the main rating system used is CDP (the former Carbon Disclosure Project), which was the first – even before the start of ESG rankings – to implement disclosure of companies’ environmental impacts, calling on listed companies to measure their emissions and assess the maturity of their climate strategy. Rating instruments are valid, but should evolve – as they are already starting to do – toward measuring climate action, and not just ambition. In fact, the current risk is that companies in highly polluting sectors can have a climate rating of ‘A’, thanks to excellent reporting work and very ambitious targets, perhaps managed by a dedicated team, while companies with lower emissions and less ambition often do not meet the checklist’s requirements, receiving a lower rating despite their smaller climate impact.
How can we escape this paradox to ensure a real assessment of listed companies and support the financial market?
By using other metrics, focused primarily on climate impact, such as Science Based Targets. This can give us a picture of real action, helping us understand which companies are truly in line with targets, how many are decarbonising, and which investment values are linked to real commitments. It is a matter that must be tackled urgently.