Annual Market Rankings 2022

How emitters are responding to markets in flux

ClearBlue won a raft of categories in Environmental Finance's 2022 Market Rankings. Here, its advisory manager Adi Dunkelman and manager of origination Alejandro Alarcon Carrillo cast an eye over developments in their key markets

Environmental Finance: Although emissions trading systems are becoming increasingly mature across North America and Europe, there is considerable regulatory evolution underway. What are your clients' key concerns, and how are they responding?

Adi DunkelmanAdi Dunkelman: We are seeing regulatory reviews across the jurisdictions in which we work. For example, in the Canadian context, the federal government and the provinces are undertaking a review of their respective carbon pricing mechanisms for 2023 to 2030. That is leading regulated emitters to ask what the programme will look like, how various sectors will be treated, how will emissions intensity benchmarks be set, what will allowance allocations be, etc.

We encourage our clients to be proactive and get involved in the stakeholder engagement that regulatory authorities undertake, to set out why a proposed regulation might or might not make sense. Smaller entities might want to engage through their trade associations. It's also important they look at the cost scenarios around the various proposals, and how projects they have in the pipeline might be affected.

EF: In some jurisdictions, political risk is quite high. What advice are you giving your clients there?

AD: It's a major issue. We've seen programmes, funding and capacity disappear overnight. It makes for a very unattractive investment environment, especially for multinationals that face competing demands from their facilities in different jurisdictions that might be perceived as more stable.

So, for those of our clients who may be exploring opportunities to generate credits under an offset programme or a new clean fuels regulation, for example, we always encourage them to look for optionality. Is there another programme, regulation or jurisdiction this project could pivot into?

That said, even in jurisdictions where you might have an opposition party that has very anti-carbon pricing rhetoric, it's hard to imagine the carbon price going to zero, whether it's because of commitments under the Paris Agreement, or the EU's planned Carbon Border Adjustment Mechanism, which would penalise exporters to the bloc that don't face a domestic carbon price. And, in addition, lots of our clients are looking beyond compliance to their corporate net-zero strategies. That can offer a backstop.

EF: To what extent are regulations keeping pace with technological evolution – around carbon capture, for example?

Alejandro CarrilloAD: Businesses are moving way quicker than the regulators. We have a lot of clients that want to consider renewable natural gas, for example, where some programmes only recognise the benefit if the emitter takes physical delivery, which in many markets simply isn't possible. Otherwise, there's no consideration of the environmental attributes, at this time.

We're also seeing lots of interest in carbon capture, but in programmes across the EU and Canada, the technology is only recognised in a very limited way; they tend to have very specific storage requirements, requiring geologic sequestration. There's usually no recognition for utilisation, for using captured CO2 in cement, for example, currently. In a lot of cases, the regulation isn't dynamic enough to capture what they're trying to achieve.

EF: North American compliance regimes tend to be quite open to offset use by emitters. How is the supply side of the market evolving?

Alejandro Alarcon Carrillo: Across the North American market, we're seeing supply exceeding demand, and expected to be cumulatively long until past 2030. In Alberta, we are seeing proposed changes to the market that should address excessive oversupply concerns, but the market will remain long overall and, in the WCI [Western Climate Initiative] market, we expect to start seeing a yearly short balance by around 2024.

AD: Efforts have been underway to tighten up supply. For example, in Alberta you're seeing a lot of credits from big carbon capture projects, and the provincial government there is trying to address this by making the programme more stringent and creating more demand.

EF: Multinational companies are often faced with a patchwork of compliance regimes as well as corporate-wide net-zero targets. What's your advice as to how to integrate sometimes different approaches to emissions management?

AD: We're seeing a really big shift in the behaviour of emitters who are looking beyond compliance and towards their net-zero strategies. They are looking to leverage the carbon price to incentivise their decarbonisation pathways.

AC: Historically, the two approaches have been somewhat conflicting, with participants in the compliance markets looking to meet their targets at least cost, whereas the voluntary market was a bit more about the quality of the offset and the story the buyer could tell. However, there are some synergies that emitters can take advantage of.

Our advice is always that strategies for both net-zero and compliance should be dynamic and responsive to the market. Emitters should be cautious about committing to certain offset types, as prices can be highly variable. They should also keep in mind that projects can potentially qualify under both compliance and voluntary markets – that optionality can be valuable.

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