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      Our latest Women in Energy forum considered a key issue in the energy landscape today – carbon markets. 

      Carbon markets are reshaping energy economics, as both compliance-driven and voluntary markets become more widespread. But what impact is all of this having on energy producers and wider industry players, and what is the future direction of travel? This was the topic we came together to discuss in the KPMG Women in Energy Network recently.

      Chairing the panel discussion, Sinead Obeng, Co-Founder of the Women in Carbon Network, observed that there is huge amount happening in terms of carbon regulation and market dynamics, which has also become a very politicised topic. “It is going to be an interesting next couple of years as policymakers and industry strive to balance social impacts, decarbonisation imperatives and the need for competitiveness all at the same time,” she said.

      Fast evolving regulatory environment

      Wafa Jafri - Associate Director of Power & Utilities and Deal Advisory - KPMG UK
      Wafa Jafri

      Partner, Energy Deal Advisory

      KPMG in the UK

      The panel began by reflecting on the regulatory landscape. The EU has recently advanced implementation of CBAM, introducing some clarifications and exploring potential extensions to cover downstream projects. There may also be more consideration of whether the carbon price in a third country can be recognised. The second iteration of the EU’s ETS (ETS2) is expected to cover transport and building– although there is debate here, with the affordability of carbon measures under scrutiny due to rising energy prices and consumer cost of living challenges.

      There is also a lot happening in the UK, including the potential for GHG removals to be integrated into the UK ETS, and for the domestic maritime and waste sectors to come into scope. A positive recent development was the recent UK-EU summit which resulted in a Common Understanding, including both sides potentially working towards linkage of schemes and mutual CBAM exemptions.

      Cost has become an important part of the regulatory debate: is there a danger that carbon taxes will push prices up for hard-pressed consumers? Agnieszka Kloskowska, Manager, Carbon Markets at Norwegian energy producer Equinor, reflected on this when she said: “There is a growing realisation that carbon taxation and other measures will impact prices. Some flexibility may be needed. For example, there is a lot of debate right now about the EU’s Carbon 40 target and whether international credits should be allowed to meet part of it. We’ll have to see how things shape up.”

      Carbon pricing driving renewables push

      One of the core aims of carbon markets regulation is to promote investment into clean energy – and on that front, it certainly appears to be working. The panellists were agreed that carbon taxation is influencing business strategy and driving more investment into renewables. This creates further business opportunities in itself, including helping corporate customers to decarbonise through new models such as carbon capture and storage (CCS). It’s about finding the balance between regulatory obligations and ways to create new business.

      Another area of strong agreement was that Contracts for Difference (CfD) are a positive thing – and are still needed. Many low carbon models remain very reliant on government support, and that is likely to be the case for some while ahead.

      The importance of industry engagement

      With so much happening and so many moving parts, there is no doubt that the energy industry has to be actively involved in the debate, helping to shape policy and regulation as far as possible.

      This was something that Ekaterina Shillina, Regulatory Lead, Carbon Markets at German energy giant RWE described as moving from “rule takers” to “co-creators”, adding: “Engaging with regulators and industry groups, trying to anticipate political shifts, maintaining diversified generation portfolios, and actively advocating for harmonisation of rules and regulatory regimes have all become critical features.”

      Using data and digitisation

      Another essential feature is to be able to use data, not only to ensure regulatory compliance, but to inform strategic decision-making. It is no longer just about compliance with ETS or CBAM. Many of our clients are taking a much more strategic approach using data to understand trends, assess exposure, and inform investment decisions. At the same time, regional divergence in both carbon markets and renewables means businesses need to build flexibility into their plans.

      There was agreement amongst our panellists that greater digitisation of carbon markets is needed. Digital functionality is currently low – increasing digitisation would help make carbon markets more functional and traceable. Finding ways to digitise systems and processes should be a priority for authorities moving forward.

      Voluntary carbon markets

      There was also consideration of voluntary carbon markets (VCM). These currently present quite a mixed picture with significant divergence – some jurisdictions recognising voluntary carbon credits and others not.

      Opinions were mixed as to whether voluntary markets, which have dropped somewhat in recent times, could make a comeback. One view was that greater convergence between compliance-led and voluntary markets was likely. This is an instance were having a ‘Carbon Management Office’ could be helpful, so that a view could be taken across all the different streams. However, the credibility and governance of voluntary markets remain key areas of focus.

      Opportunity and challenge

      Looking ahead, at a macro level the challenge is about the energy ‘trilemma’ of balancing sustainability, security and affordability, which is what every country and region must do. Countries effectively have the next couple of years to decide where growth is going to come from. Investment in low carbon technologies could be an important lever for economic growth – but not without paying attention to resilience and affordability.

      From an industry point of view, priorities on the wish list include harmonisation of regulatory standards, linkage of carbon markets, and the integration of credits into compliance frameworks. All of these items would make requirements and processes simpler and more interoperable.

      Closing a fascinating discussion, Sinead Obeng summed it up: “This is an incredibly live area, with so much for all parties to navigate. However, it’s clear that the energy industry is committed to playing an active role and supporting governments to ensure that carbon policies are as successful as possible – there is both opportunity and challenge ahead.”

      Our energy insights

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