The US – a growing market for European carbon companies

European companies have journeyed across the Atlantic to participate in US carbon markets, with Norwegian state-owned utility Statkraft one of the latest joiners – and more firms considering taking the plunge.

ICIS examines what opportunities and barriers exist for European companies in North America.

The EU currently has the most established emissions trading system (ETS) in the world, but companies there are looking to expand their horizons to US systems such as California and the Regional Greenhouse Gas Initiative (RGGI).

Statkraft started trading on US carbon markets in the past few months. This can be taken as a “sign that there should be some opportunities to add liquidity,” Patrick Pfeiffer, managing director at Statkraft US LLC, said on Tuesday.

It is not just Statkraft, however. One European-based carbon trader at a large EU ETS market participant, who wished to remain anonymous, told ICIS last week that his firm was considering joining the US markets.

Growing carbon trading

The policy framework for climate action in the country is looking increasingly stringent. US President Barack Obama announced in August the Clean Power Plan to tackle emissions from the electricity sector nationwide.

The plan, which comes into effect in 2022, has a target to reduce power emissions by 32% by 2030 from 2005 levels.

Such targets to reduce emissions could “drive more and more regions and states to come into the fold,” Pfeiffer said. States which do not currently participate in a cap-and-trade scheme could join California or RGGI, which would boost activity.

Of course, companies already operating in the US are keen for additional participants to get involved as this would increase the number of potential counterparties.

“I think it’s always a good thing for the market,” a source from a company already trading Californian and RGGI emissions allowances said on Friday.

California AND RGGI

Sources told ICIS that if they joined the US carbon market, it would be to take part in both the California and RGGI schemes. RGGI covers the power sector in nine states in the northeast US.

California is the most mature market, with 146m carbon permits traded in H1 2015, compared to 59m for RGGI over the same period.

However, RGGI “feels more like a European market – in trade, behaviour, policy,” the trader at the company considering joining the US markets said.

RGGI prices have been rising since lawmakers cut the trading scheme’s cap to fix the ailing system. RGGI allowance prices have jumped from $2/tCO2e in 2013 to the Dec ’15 Vintage 2015 contract trading at $6.31/tCO2e by Tuesday’s close, according to platform Intercontinental Exchange – and market participants do not see the bullish trend stopping any time soon.

EUA prices have also risen after politicians agreed on measures to tackle oversupply in the EU carbon market.

Barriers

However, there are also obstacles for firms wishing to join the US markets.

Tight rules around participation in the market can deter potential joiners. In California, speculators are only allowed to purchase 4% of the allowances available at auction and there are limits on how many allowances of each vintage one entity can hold.

“I think it is over-regulated,” managing director Jan Fousek of Czech-headquartered trading house Virtuse, said on Tuesday.

In addition, it is trickier for companies, which are not large organisations in key western European markets, to be recognised in the US and get established there, Fousek added.

Virtuse is instead looking towards the Chinese ETSs for new opportunities.

Meanwhile, there is a comparative lack of liquidity in US markets, which can also deter new market participants. The California cap-and-trade scheme had only 7.3% of the trade of the EU ETS in H1 2015.

“The market is not too big, which will maybe change in the future when more states join,” the source already active on the market said.

Nevertheless, European companies will be keen to get involved in US ETSs if there is scope to make money.

However, “it needs to fall into the company’s rationale,” the trader considering joining the market said. European organisations will need to be convinced that there is a compelling business case to embark on these new ventures abroad. “If you have very low prices, there’s no incentive to make a business case,” the trader said. ben.lee@icis.com