CERAWeek: Navigating the evolving landscape of carbon markets with Trafigura

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Eklavya Gupte:

Welcome to Energy Evolution. I'm Eklavya Gupte, and we've just wrapped up an exciting few days from CERAWeek in Houston, Texas. And my co-host, Taylor Kuykendall, still has a few more interviews to share from the event.

Taylor Kuykendall:

That's right, Eklavya. CERAWeek is one of the largest and most influential energy conferences in the world. It brings together world leaders from various sectors and across the world of politics. And we still have some more interviews to share with you.

I'm here at CERAWeek with Hannah Hauman, global head of Carbon Trading at Trafigura. Trafigura is a leading global commodities trading group that sources, stores, transports, delivers a wide range of raw materials that includes oil, refined petroleum products, metals and minerals to clients worldwide. Is that a pretty good description?

Hannah Hauman:

Absolutely. I always describe a trader's role as managing risk. So we don't produce. We don't consume, but we take care of all the risk and the inefficiencies in the middle to make sure that goods make it to market.

Taylor Kuykendall:

Excellent. And thank you so much for joining us here on Energy Evolution today.

Hannah Hauman:

Super. Really glad to be here.

Taylor Kuykendall:

Awesome. So we're going to be talking about carbon markets. Just tell us what that means for the people out there that don't even know. I think a lot of people out there don't even know carbon market exists.

Hannah Hauman:

No, of course. So carbon markets are, in effect, regulatory markets where governments are now trying to put a price on an externality, in this case, carbon, to basically incentivize capital to go to emission reductions or emission removals. So, because it is a regulated market, it's really driven by policy and therefore by individual jurisdictions. So each market looks a little bit different depending on how that domestic regulation is taking shape.

So, in some markets, we have pure penalty markets, i.e., if you emit, you now need to pay for that emission. Other markets are credit-based, i.e., you are incentivized or provided a subsidy to produce a reduction or a removal. And some markets are actually a hybrid of both of those things, but all of them have the same goal. How can government direct private capital towards investments or areas where it otherwise would not go?

Taylor Kuykendall:

Gotcha. Can [inaudible 00:02:08]... Is there advantages, disadvantages you could speak to each of those markets? Again, like is there... is whether it's a penalty market [inaudible 00:02:14]-

Hannah Hauman:

Yeah, of course. So it's a little bit of horses for courses, and it's also a temporal element. So, for example, the EU ETS, which is one of the largest and most mature schemes on the planet, is a pure penalty-based market today. And it's very much based on if you emit, you now need to pay for that emission and the supply is actually provided by the government. So you have daily auctions, you have daily emissions, which is your demand, and over time the government will reduce the supply of those allowances that you now need to pay for.

So what that now forces is efficiencies in operation that can look like carbon capture projects, that can look like energy efficiency. It can look like fuel switching to lower carbon-intensity fuels. And what that does is, I would say, a hyper-efficient way to look on a long-term basis and say, "What is the price of this operation, and how can I now underpin an investment and actually potentially improve the bottom line, not just necessarily manage cost to the bottom line?"

Whereas, in a credit-based market, that tends to be for programs outside of industrial activities. So Australia is a great example of a market that has a lot of industrial activity for obligated parties that are buyers in the carbon market. But for supply, they really want to look at things like savanna fire management. They want to look at human-induced regeneration.

So these are outside the scope of those industrial processes. You are still pricing the emission per se in terms of the obligated party that now needs to buy, but the supply is coming from outside of that facility or installation. So that's where credits work very well to really point and direct capital on what's underpinning a price for decarbonization firstly. But equally, how do you direct capital that's outside of a particular industrial facility?

Taylor Kuykendall:

Excellent. [inaudible 00:03:55] last year was a huge year for elections, so it seems like geopolitics have changed all over the place, and that's obviously going to have some big impacts for energy and climate. How is it changing the way you're looking at carbon markets, and what... how is it impacting what the future of that looks like?

Hannah Hauman:

No, of course. So there's a few different layers to this, as with all things, and obviously very different depending on the market that we're looking at. So, on one hand, when we look at the political policy cycles for carbon markets and regulatory markets, you typically have about a five-year gestation between when the government begins versus when a market actually operationalizes.

So in the short term, there's actually not a lot of changes to the markets that we see, as most of the trajectories are pre-programmed. And we're now, I would say, still in the midst of that gestation where most of the schemes in which we operate, most of the markets already have a plan out to 2030. So those are actually quite, quite straightforward.

What is changing, however, is how we are seeing governments prepare for, I would say, increased areas of trade, collaboration and cooperation, or potentially lack thereof. So a big topic this week at CERA has been around CBAM, which is a carbon border tax and is really reflective of when countries are doing a domestic pricing regime on carbon that they are now also implementing a carbon border tax for imported goods that also meet the specifications of the scheme.

So this is now governments thinking about this not just from a, "Okay, how do I maintain my own domestic market? But how do I now maintain my competitiveness on the international market by imposing those same barriers to trade on those imported goods?" So that's a big change, and I would say more of a maturation of what was already planned.

But naturally in a world that right now is dominated by deglobalization, by trade tariffs, by all of these things, we're seeing CBAMs pop up in a number of countries as people are really kind of building what is, I would say, an offensive but also a defensive strategy with this. And then I think the final piece of this puzzle is as we are looking at how we are now marching towards the end of the decade, we have a lot of corporate commitments in terms of what net-zero achievement looks like.

That's really taking the form of things like product carbon footprints, which is becoming increasingly important as companies look to understand the product footprint of their goods for a regulated purpose or even for showing their customers, and equally how they're thinking about removals in light of their ability to meet their own climate targets.

So if they are not able to meet reductions in-house in terms of their decarbonization, we're increasingly seeing them turn towards the removals market to be able to negate or net out that emission and thinking about it on a more long-term structured strategic pathway.

Taylor Kuykendall:

Yeah. I'm wondering, in this space, what's big and new that you're watching this year that's different from last year? Maybe what's the thing that maybe either keeps you up at night or that you're most excited about in terms of carbon markets?

Hannah Hauman:

That's a big question. The thing with carbon markets is we trade about 14 markets day in, day out. So there is always something somewhere, whether it's a new policy design, whether it's a change in terms of fundamentals, or even if it's in terms of how a new political party is coming in and potentially thinking about changing the fundamentals of the markets that we trade. So there's always lots of news. It's more of a challenge of, I think, picking apart the signal. But if we look at 2025 in particular, we see a few things looming.

A big one for the voluntary markets is SBTI is launching its new guidance. Actually, it's meant to be in the coming days in fact, and specifically around the decision to allow for interim removals to be able to meet targets, which will be a big boost for the voluntary carbon markets potentially. Similarly, we actually see the European Union rolling out new legislation around what's called the CRCF, which is basically the EU removals guide and specifically about EU removals credits that will now be tradable into the ETS.

That is also announced this year and comes out later this summer. And then, finally, just to... we go on for a dozen examples, but another large advancement is in China. So China already has the largest ETS on the planet and is actually expanding the scope of its ETS to include CBAM-affected sectors. So what we're seeing is as CBAMs are increasing in relevance, it's actually spurring on a lot of new market activities in origin countries that might otherwise be exposed to these border taxes.

So places like China is now increasing to over 6 billion tons covered within their domestic market to really include sectors like steel, like aluminium, cement. These are all customers that we serve that are now really engaging with us trying to understand how they navigate this new market, trying to understand how they manage their obligations, and how they plan to competitively comply in the long run.

Taylor Kuykendall:

With so many moving pieces, I mean, what advice do you give people that are trying to keep up with this? Like, if you're a company that needs to know this, how do you do it? Do you... Trafigura is everywhere, right?

Hannah Hauman:

Yeah, it's a great question. And I think our job, and I described at the beginning that our job is to absorb risk and how do we facilitate transactions? How do we produce and rather deliver things reliably, responsibly, and exactly as the customer intends? Within the carbon markets, we don't necessarily ship, blend, or store as we do with other commodities, but then we're providing other services and installations.

So things like policy changes, things like technical changes, methodology changes. Honestly, just the eyes and ears and kind of seeing around corners in some respects to really help guide customers and really allow them to plan long-term to be competitive. I think the one most challenging thing in my background was always in oil trading. So the most challenging thing with carbon markets is because it's regulated, it's now government designed, and government, of course, is created by humans, and humans can change and their minds can change.

So I think a feature of the carbon market's not a bug is that they are designed to change. They are designed to evolve. They will look very different this decade than they will in two decades, and that's only natural. But I think a big part of the service that we provide to our customers is helping them understand and navigate these changes, navigate these risks, and really insulate them to best allow their business to function and compete and also comply.

Taylor Kuykendall:

Yeah, I remember at one point one of the challenges was always like, how do you measure carbon impact while I lead into scope one, scope two, scope three? I'm wondering to what degree is that matured now? Have we figured it out or are we still working on it?

Hannah Hauman:

Oh, it's a great question. So, scope one and two, yes, that's fairly straightforward, to be fair. And to be honest, actually gets more advanced by the day to the point where you now have sensor technology that will actually measure direct flue stack emissions and report exactly the emissions live in addition to the more traditional kind of calculations. Scope three is an entirely different challenge, and actually we're talking about that a lot this week here at CERA on how to think about scope three from a global accounting framework. I.e., for those of you who aren't familiar, scope one and two is very much about your own operations.

Scope three is about everything outside of your operations, but that you touch, i.e., supply chain emissions. So that's where I mentioned before. There's a big focus now on talking about product carbon footprints. That's really in response to new regulation that is coming that is specifically looking at the carbon intensity of materials and products and putting a price on carbon or, at minimum, a declaration of those items, but also now customer requests and responses to be able to understand what is the carbon content of the goods that they're consuming and how can they potentially reduce the carbon intensity of those goods.

So that feels like a very dominant theme in the form of carbon accounting, which normally is not such an exciting subject for a trader. But frankly, we see it as really pivotal in terms of not just how the carbon markets behave, but really how our broader businesses and how our broader physical commodities trading business behaves now that we're thinking about each delivery that we make now actually has a carbon intensity attestation attached to it, and in the future will be covered under a form of regulation, under a form of pricing, is a point of customer interest. So that's rapidly changing and I think will be a big development this year.

Taylor Kuykendall:

To what degree do these accounting measures look similar to each other when you go to different jurisdictions? Are you trying to always reconcile constant change? And I'm guessing the answer is they're all different or they're very different. How do you navigate that? And also do you see a potential for like any kind of maybe global... more global agreement around how you even measure this stuff?

Hannah Hauman:

Yeah, so when it comes to fossil-based emissions, that is actually I would say gap accounting-type standards. So globally, the world knows how to account for scope one and two emissions and really has a systematic standardized form of how they communicate that product. Carbon footprints are a little bit more challenging, mainly because there's a lot of debate on what are the boundaries that you take into account.

So, for example, if we think about a barrel of jet fuel, there might be some debate of, "Okay, if you go upstream and you include the refinery, you include the pipelines, the ship, you include the oil field, well, do you also include the steel that was used for the oil field production?" And that's the concept of boundaries is where do you limit within the supply chain, how you are really defining what that scope one and two impact is of that product. So that is actually now evolving.

There's a lot of sectoral and industry standards that are developing in order to standardize this, but we think that's going to be progressing relatively quickly, really in response due to, again, new regulation where the regulators have a strong opinion of how they want to see you applying that methodology and reporting into them. On the other side of the equation, we talked about credits earlier. Credits are a little bit more challenging in some respects, especially when we're talking about removal of emissions, and removal is when it comes in the form of nature-based.

So that's when we're really looking at what is the biomass that is now storing carbon. How do you measure that? How do you measure it more accurately? And that looks like things like digital monitoring, so flyovers, drones, planes, et cetera. You have LiDAR, which is basically looking at the forest from the side and really trying to assess what is the density of that forest. You have things like eDNA metrics now, which is actually testing the DNA of soils to understand the microbiome as well as things like the DNA content in streams to understand what wildlife and biodiversity is going through those types of projects.

So there's a lot of, I would say, still rapidly evolving measurement technology that's developing more so in the credits and the removal side. But then, if we think about carbon product footprints, that's more methodology-based, and scope one and two is now frankly just more calculation-based. So all progressing in time, but it's all a part of this global fundamental balance in terms of how we look at positive emissions as well as negative emissions.

Taylor Kuykendall:

Yeah, and I'm wondering too, because one of the things that's been everywhere at this conference, and people... my listeners have to be sick of hearing about artificial intelligence. But I'm just wondering, is that playing a role in any of these projects? Is that helping you guys assess projects or watch markets? Or how are you using AI or looking at AI?

Hannah Hauman:

Yeah, so it's a great question. So AI is, I would say, in the models that we look at to be able to estimate and quantify, especially when we're looking at very large land masses. But I think actually a lot more interestingly for our market, AI has a lot of impacts on our demand.

So naturally, a big part of the demand of the market, especially in removals, is actually from the technology sector. So these are companies that have relatively small emissions compared to their overall footprint. But these emissions are now rapidly growing in response to AI, and these also tend to be the ones with the most ambitious climate targets and removals procurement targets.

So we're really seeing the demand in the market grow substantially in response to the demand actually generated from AI data centers, AI computing, and we're also seeing that knock-on effect, of course, in other businesses like our power business as well.

Taylor Kuykendall:

Yeah. When you think about a carbon project, just kind of generally speaking, what's the sort of lenses you look for in a good project? What makes a good project? What makes a bad project? Which ones are, I don't know, easier to get on board with, and what makes something maybe a little trickier to...

Hannah Hauman:

Yeah, so it's... And I'm going to turn it on you a little bit where I don't like words like good or bad, but we like eligibility. So when we think about what makes a good or bad carbon project or an interesting one for us to own, for us to invest in, for us to trade, it's really down to what is the trading optionality that's within that project? So when we think about oil markets, we tend to think about specifications like API, sulfur, flash point, pour point. When we think about carbon projects, we're thinking about different types of specifications.

So things like registry, methodology, project type. Is it export grade? Is it legal under the Paris Agreement? And equally, what's the origin or the host country? And those things are really what determines what the eligibility of that credit is. Can it trade into a regulatory market? Can it trade into multiple? Is it valued by the voluntary market for potential corporate buyer? And what we really look at is what is the eligibility of that particular project? Where can it trade into? What's the relative value of that project?

And then, what is the underlying operational aspects and the governance that's really ensuring that this is investment grade, that it will achieve its outcomes? So that's where, again, you know, we talked about carbon not necessarily being a traditional physical commodity, but that actually changes when we look at the project space because the moment you have a project, you're now generally operating on the ground and with, I would say, high levels of operational risk. I.e., does that construction plan go in accordance with schedule, in accordance with cost overruns?

If you're operating in the Global South in particular, how are you impacted by things like local effects like indirect tax, like tax, like all of these wonderful things? And then you also have the policy overlay on top. So even within the carbon markets, when you are relying on a project to produce those units, you are now subject to all those physical operational performance risks that we see in any other market. So again, I mentioned some of the physical aspects, but then you also, of course, have credit risk, you have country risk, you have all these myriad of risk issues.

So what we really see our job is as risk managers, it's not that we are not taking risk, it's that we understand the risk that we're taking and we're qualifying each part of those things. And ultimately, if the economics make sense, if the governance, and I would say that investment grade status is there, we're really looking to invest in regulatory grade carbon that can then trade into a variety of different regulatory markets.

Taylor Kuykendall:

Excellent. And this kind of is the last question. I was wondering, when you talk to clients or when you're... whether it's clients, someone on the street, whatever it is, I'm just wondering, is there any misconception about carbon markets that you just wish that people understood more? There's a pet peeve of yours where it's like, "No, that's not how it works." Or like there's a misconception that it does that. Anything that you would just like to make sure that everybody out there understood?

Hannah Hauman:

Yeah, it's a great question, and I think I'm actually going to put in a plug for an amazing website at the moment called the Carbon Paradox Project. That's basically talking about all the paradoxes of the carbon market. So little things like, there's philosophical debates on things like who should pay for carbon. So some say that fossil companies shouldn't pay for carbon because they shouldn't be able to pay to pollute, but then if they aren't paying, who does? Are you penalizing the good actors? So on and so forth.

So there's a lot of great, I think, philosophical conversations that are within the Carbon Paradox that I would absolutely point people to. But then I think the second thing is, and we get asked strangely quite frequently, is that carbon is pure philanthropy. And I think people misunderstand that the reality is we have a market. So, as traders, we like large markets, we like liquid markets, and we like markets that have inefficiencies that need to be solved.

That is typically how we make our money, is we close inefficiencies in markets, we facilitate transactions, we qualify, and we absorb risk on behalf of clients, and that has a value. So carbon markets are very much... I think even despite the name and kind of despite the subject matter, people always assume this is a potentially philanthropic type mission. The reality is it's impacting companies balance sheets. So it looks on a long-term basis like any other type of raw material or natural resource.

"I now need to procure. I need to manage that risk. I need to manage changes in my supply and demand. I have volatility. How do I ensure that security of supply in the long run?" So I think the biggest difference we have as a desk versus any other desk in the company is, frankly, we sell to an entire market, right. We're not just selling to only energy companies or only utilities or only mining companies.

The whole world in some way, shape, or form is likely your customer in some affected sector. So that would be probably my bugbear, is that people don't always understand that this is just another market. There is very clear supply, demand fundamentals, and therefore, I think risk to be managed, but equally competitiveness to be gained by the companies that are really taking control of what this exposure means.

Taylor Kuykendall:

Excellent. Sounds like there's a whole lot to watch, a lot of different moving pieces. Good work following it all. Thank you so much for joining us on the podcast today.

Hannah Hauman:

Super. Thanks so much.

Taylor Kuykendall:

All right, listeners, thank you so much for listening to the latest episode of Energy Evolution. I want to give a special shout-out to our incredible podcast team members. I am, once again, Taylor Kuykendall but other people behind this podcast include Dan Testa, Camilla Naschert, Christopher Coats, Karen Willenbrecht, and our wonderful agency partner, The 199. To stay up to date with our upcoming episodes, be sure to subscribe to Energy Evolution on your favorite platform.

If you have any ideas for future themes or guests, we'd love to hear from you. All you have to do is shoot us an email at energyevolution@spglobal.com. And look, if you liked what you heard today, do consider sharing the podcast with others or leaving a review on your preferred podcast platform. We can't wait to bring you more fascinating discussions in the future. Until next time, take care and stay tuned for more from Energy Evolution.