INTERVIEW: Carbon markets ineffective without global compliance system: Jeff Currie

Carbon markets will not be effective without a global compliance pricing system, Jeff Currie, chief strategy officer of energy pathways at Carlyle Group, told S&P Global Commodity Insights in an interview, highlighting the difficulties in establishing such a system.

"It [a carbon pricing system] works if everybody does it, but if you do it by yourself, you have priced yourself out of the market," said Currie, a well-known economist specializing in energy and commodity markets. "I have been talking about this [global compliance system] for 20 years. I was ideological and believed it could be done until I gave up about five years ago. It is just too hard."

Wealthier individuals can afford to build carbon capture solutions for society, as carbon capture is a progressive measure. However, a compliance carbon market acts as a regressive tax on low-income groups, and they are unwilling to shoulder this cost.

"Therein lies the core problem. Who is going to pay for it?" he said.

Existing systems

When asked about the impact of existing unilateral carbon prices on global commodity markets, Currie said, in some markets, such as utilities, trading activities are confined to certain regions. So, if a carbon price is imposed, only stakeholders that operate within those regional markets will bear the costs.

However, for commodities like oil products that can be traded globally, a local price on carbon is likely to have a worldwide impact, he said.

Regarding the EU's Carbon Border Adjustment Mechanism (CBAM), Currie said it is still a local solution attempting to solve a global problem, which may not be effective. CBAM is a system under which the EU imposes a carbon tax on other countries that export carbon-intensive commodities to the region.

Currie also expressed concerns about the efficacy of the voluntary carbon market operating globally.

The 2022 energy crisis has taught us that "when it costs something, people will not pay it," he said. "If they got the choice to put food on the table or pay the voluntary carbon tax, they're not going to pay."

"I like to point out we solved the war on acid rain and got the aerosols out of the sky. We did it because the sticks were big, the punishment," Currie said. "But the problem with carbon is that, unlike with acid rain where you can isolate the person violating it and you can hit him with a multibillion-dollar punishment, it is harder here [to prove the externality costs]."

Externality costs refer to costs incurred by one party but borne by another party. For pollutants like sulfur oxides, it is usually easier to identify the polluters, penalize them and compensate people who suffer from the pollution. For greenhouse gases, however, it is much harder to identify liable parties and justify punishments. Everyone is a carbon emitter.

Effective decarbonization drivers

Considering the existing carbon markets may be ineffective, and a global compliance system is hardly feasible, Currie said the effective drivers for decarbonization are energy security and lower costs of clean energy technologies.

"It is working for China," he said. "When you look at China's motivation, it is clearly energy independence. And that is why China is doing it faster than the US. The US is energy independent with oil, while China is not."

Currie said China has effectively scaled up production and lowered the costs of batteries, electric vehicles and renewables, driven by the government's fast decision-making and strong support.

It is the US and the EU's turn to be concerned about energy security and accelerate domestic manufacturing capacity building.

"That [trade disputes between the EU and China on batteries] is one of the reasons why people are negative on China right now," Currie said. "With the local nature of battery investment, it is beginning to become an issue, and I think it will increasingly become an issue. Is it disabling to the entire EV effort? Absolutely not. But it is going to slow it down."

China can produce 50 million cars a year, currently. But it will be a political challenge for China to access the European and US markets.

"Both Trump and Harris want to see manufacturing back in America," he said, adding that the Inflation Reduction Act will continue to incentivize domestic investments in clean technologies, regardless of the upcoming election results.

On the face of it, you could argue that Trump would slow the US energy transition. But consider this: "Given that most of the IRA money goes to red states [such as Texas and Louisiana], does he have an incentive to slow it?" said Currie.