Celebrating one year of Carbon Risk 🎂

Dear Carbon Risk subscribers,

In the summer of 2021 I left my job as an economist, a position I had worked in for over a decade, with the dream of writing for a living.

Full of optimism and brimming with ideas, I spent the next couple of months attempting to write a second edition of my book, ‘Commodities: 50 Things You Really Need To Know’. However, one particular chapter was three times longer than any other. This particular chapter kept getting stick in my head. The title of that chapter was simply, 'Carbon markets'.

It hit me that the price of carbon underpinned everything I had discussed throughout the rest of the book. It influences the speed with which companies divest from fossil fuels, the investment case for renewables and nuclear power, and the demand for copper to upgrade the power grid. It influences the speed at which commodities are transported around the globe and the investment plans of the ship owners. Carbon also determines the economics of hydrogen, the environmental trade-offs from palm oil plantations, and the demand for lithium from the battery industry.

Fundamentally though I could see that the price of carbon would start to have wider, profound changes on the macroeconomic landscape and the incentives for investors. Inflationary pressures would begin to build as the cost of decarbonisation would be passed through supply chains. Whole industries would see their business plans disrupted by new competitive pressures. High carbon prices would bring forward innovation and ideas previously thought unviable, opening up new opportunities for investors in commodities, technology and other industries.

Rather than carry on with writing the book, only for readers to see the fruits of my labour several months or more later, I decided to experiment and launch a Substack newsletter instead. With a newsletter I would have a platform to tell readers about carbon markets place in the world, how I envisaged it in the future, and how investors and other market participants could benefit.

With that, the idea for Carbon Risk was born. One year ago today I posted my first article (see Investors have a new way to help the environment). Twelve months on, and almost 150 articles later, the total number of subscribers to Carbon Risk is closing in on 1,600.

I am immensely grateful for all of those subscribers who knew of my writing in the past and have continued to follow me on Carbon Risk. Substack has also been a great place for new readers to discover my writing. It's recommendation feature (launched in April 2022) was vital in turbocharging the growth in subscriber numbers. Special thanks go out to

Doomberg

,

Energy Flux

,

Commodity Context

,

Haymaker

for recommending Carbon Risk.

Here’s a look at some of my favourite articles from the past 12 months

In The impossible trinity at the heart of net zero, I ventured that governments wishing to meet net zero face an impossible trinity trying to balance energy security, affordable energy and environmental sustainability. The article was published three months before Russia’s invasion of Ukraine, and now in the aftermath, the energy transition can be seen as pulling in the same direction as energy security, reducing our dependence on fossil fuels. However, as my article goes onto mention there is really no free lunch. Energy transition commodities are much more geographically concentrated than fossil fuels, opening up new sources of geopolitical rivalries.

In Carbon is an emerging asset class, but what is it? I pick apart the conventional narrative that carbon markets should be thought of as a commodity market. I argue that instead of thinking of it as a commodity, it should really be thought of as a currency, “In the same way that trust in individual currencies supports investment, innovation and trade, trust in carbon market helps to bring about the capital, skills and long term planning that is required to help meet decarbonisation goals.” A strong carbon price is a signal that investors, businesspeople and citizens trust their government’s commitment to combat climate change.

In January I published an article called, The great sulphur dioxide allowance bull market. The piece highlights how cap-and-trade systems have helped tackle serious environmental problem before. The United States sulphur dioxide (SO2) allowance trading system was a major factor encouraging power generators switch to low sulphur thermal coal. The article also demonstrates what happens when trust in an environmental market is lost. A timely reminder of what could happen to ‘The Currency of Decarbonisation’.

An asymmetric bet on a phase transition outlines how compliance carbon markets typically go through a number of distinct phases in their development. I argue that there is a sweet spot in this phase transition where the strength of policy support is such that the market has to dramatically revise its view on prices to reflect the potential improvement in the underlying fundamentals.

High energy prices could provoke an exodus of energy intensive industries, reducing demand for carbon allowances is the opening argument to The battle for Europe's industrial sovereignty. Sunk cost fallacy could leave Europe’s manufacturers at the mercy of competitors abroad that have access to cheap and plentiful energy. The other side to this argument is that Europe’s policymakers will try to do anything to ensure that Europe is not dependent on overseas suppliers. This could mean reshoring some of Europe’s lost industrial base. The battle lines are drawn and it will be fascinating to see who makes the first move.

Last, but not least Whatever it takes: Why forward guidance in the EU carbon market is here, and is set to stay expands on my thesis that carbon should be viewed as ‘The Currency of Decarbonisation’. I start by explaining how central bank use of forward guidance meant that financial markets increasingly became a political utility. Forward guidance artificially suppressed price volatility, this lowered the cost of capital, which spurred further capital investment. After a number of verbal market interventions by EU policymakers designed to guide price expectations I argue that the era of unabated price discovery in the EU carbon market is coming to an end, and with it emerges a new era in which the EU’s climate politicians will wield much more control over the direction of the carbon price.

In between I have published a number of chart based articles explaining what I’m observing in the EU carbon market (focusing on positioning, sentiment and options activity), several posts beginning with “Everything you need to know about…” designed to bring readers up to speed, guiding investors through the burgeoning voluntary carbon market and associated technologies, and finally a major focus on the industrial and macroeconomic impact from carbon markets.

Who subscribes to Carbon Risk?

Subscribers to Carbon Risk include hedge funds, investment banks, family offices, and individual private investors. Carbon Risk helps these subscribers gain an alternative perspective on the complex, ever evolving carbon markets.

Investors are the main audience for my writing at Carbon Risk, but that doesn’t mean other people with an interest in carbon don’t benefit from my insights.

Physical buyers of carbon allowances and voluntary carbon credits also subscribe to Carbon Risk. For many carbon is something to think about once a year when it comes to meeting compliance demands, while for others its an integral part of their everyday work. Carbon Risk helps both of these subscribers gain an edge in meeting their procurement and investment needs.

Policymakers from Europe, the UK, North America and beyond receive updates from Carbon Risk to understand how markets could react to policy changes. From my previous career I know there can often be unintended consequences to policy announcements. Governments and thinktanks follow Carbon Risk to help tailor policies before they are announced.

Several financial media organisations have also signed up as subscribers to Carbon Risk. Carbon Risk helps these organisations understand what is driving developments in carbon markets. If you work for a media company and are interested in hearing my perspective on a recent development in the carbon market then please get in touch.

What do you get by subscribing to Carbon Risk?

Free subscribers: All free subscribers get full access to 2-3 articles each month. In addition, free subscribers see a preview of the articles sent to paid subscribers.

Paid subscribers: If you decide to become a paid subscriber you are joining a community of like minded market professionals who are excited about this new asset class, the potential impact that environmental markets can bring to the world and the opportunity for wealth creation and diversification.

As a paid subscriber you will receive around 10 articles per month. The articles usually arrive in your inbox at 12pm UK time. Being a paid subscriber also means you can comment on articles, ask questions and suggest areas that you would like to hear more about.

Group subscriptions to Carbon Risk are also available. Get a discount of 20% if you purchase two or more annual subscriptions.

Founding subscribers: Finally, there is a higher-priced Founding member subscription tier available if you are interested in providing extra support for the newsletter. Founding member subscribers get the same benefits as regular paid subscribers—this is simply a voluntary way to donate money to support the development of Carbon Risk.

Finally, please consider talking to your employer about expensing Carbon Risk. The insights from this newsletter should help you with your job, and having your organisation pay should be cheaper for all parties than if you paid out of your own pocket.

Looking forward to year two of Carbon Risk

I’m immensely grateful to all my subscribers for the support they have shown over the past year, and particularly those that have taken out a paid or founding member subscription. Without you Carbon Risk would not be possible.

If you haven’t already upgraded to a paid Carbon Risk subscription, hopefully I’ve done enough persuade you. If not now then you will of course continue to receive free articles.

I have been really encouraged by the growth in the newsletter and the positive feedback I’ve received. For year two of Carbon Risk I plan to build on the success of the past twelve months. That being said, if there is anything that you’d like to see more of please let me know in the comments or send me an email. I’m always open to content suggestions from subscribers.

All the best,

Peter