The race to limit global warming by reducing emissions of greenhouse gases has created new dynamics in markets of all kinds. Commodity markets may be among the most profoundly affected, but they also have a crucial role to play in the transition to a lower-carbon economy. And it is time for commodity traders to help make that happen - using market forces, risk management skills and our unique insight and expertise in managing global commodity supply chains - to reduce carbon emissions.
This may seem a surprising statement from the head of one of the world’s leading oil and metals trading firms. But we recognise that the energy transition is already having a far-reaching impact on our business and that commodity traders have an important part to play.
The core function of our industry - supplying the commodities the world needs from where they are produced to where they are needed most, as efficiently as possible - will be more important than ever in facilitating the energy transition. Many commentators have noted the additional volatility in supply, demand and prices for oil, gas and coal created by uncertainties related to decarbonisation. And as a recent report from the International Energy Agency and our own research make clear, the shift to a clean energy system is set to drive an exponential increase in demand for metals such as copper, aluminium, nickel and cobalt, raising concerns over the resilience of global supply chains, price volatility and uninterrupted access to energy.
Right now, another change is underway which could have just as much impact: the increasing focus on carbon emissions generated from global supply chains. Just as the shift from hydrocarbons to electrification and renewable energy is changing the fundamentals of the commodities we will need, how those commodities are produced, processed and transported along supply chains needs to change too.
Companies of all sizes and in all sectors now report emissions and set targets for reducing them –
not just the emissions for which they are directly responsible in their operations, and from the use of the products they make - but also those generated in their upstream supply chain, from the manufacture, processing and transportation of inputs.
Trafigura is no exception: we have set targets for reducing our Scope 1 and 2 emissions - those from our own operations and from the consumption of energy in running them – and we are working to quantify and reduce upstream Scope 3 emissions for the products we trade and transport. Our call for a global carbon levy on maritime fuels to decarbonise shipping is an important element of this work. From our daily interactions with customers, it is increasingly clear that accurate, reliable information about the carbon footprint of products and services has itself now become a vital but scarce commodity.
Reducing supply chain emissions has been identified as one of the key levers to bring about a net-zero economy. But doing so is hard: as the World Economic Forum acknowledged in a recent report, supply chains are fragmented and companies struggle to muster the data they need to manage emissions outside their control. Fortunately, the market can bring a solution to this conundrum, by enabling greater transparency about emissions as part of the trading process.
The key is to consider carbon as another specification for commodities - just as today, we deliver commodities to meet customer specifications of quality and grade. By providing a carbon value for the commodities we supply, encompassing emissions from ‘cradle’ to the customer gate, producers, traders, financiers and customers can identify opportunities to reduce carbon in global supply chains. Opportunities that range from incentivising lower-carbon production, to choosing lower-carbon transportation, to offsetting residual emissions with credits generated from projects that remove or sustainably reduce carbon in the atmosphere.
At Trafigura we saw how this can work when we established a low-carbon aluminium trading desk two years ago and a financing facility to support it with two of our banking partners. The facility enabled us to access financing at a preferential interest rate and, in turn, to pay a premium to low-carbon aluminium producers. And through establishing a carbon trading desk, and a Power and Renewables division, we are leveraging our skills in managing risks, providing financing and liquidity and connecting producers and buyers in rapidly growing markets that will play a fundamental role in accelerating the transition to a net zero world.
Unless supply chain emissions can be quantified to a far greater degree of accuracy, with a consistent, transparent and standardised approach, it will be a challenge to prioritise, or incentivise, the lowest carbon intensity options and to reduce 'hot spots' that have the greatest impact. And reducing emissions, to as close to zero as possible, must be the primary goal.
Even so, if it is widely accepted that, removing – as well as avoiding and reducing - carbon emissions from the atmosphere will be required to achieve net zero.
Carbon markets – whether regulated or voluntary – can help to channel investment from emitters into the technologies and projects needed to do this. Trading carbon is an opportunity for our industry - to participate in high-growth markets, extend the services we offer to customers and benefit from finding and removing inefficiencies in new markets. But it is also an opportunity to contribute to price discovery, increase liquidity and drive transparency to accelerate the flow of capital into abatement measures. In voluntary carbon markets, greater regulation, established standards and verification of projects’ claims will be pre-requisites to achieving these aims.
Providing transparency and greater accuracy of supply chain emissions across each stage of complex value chains on a global scale is a gargantuan task and one no company can hope to achieve alone. It will require co-operation between producers, logistics providers, traders and customers across multiple industries and companies, on an unprecedented scale. Trafigura is committed to playing its full part, and believes that transparent emissions specifications paired with a liquid carbon market could offer one of the more effective ways of driving the climate transition.
A shortened version of this opinion editorial was first published
as a FT Commodities Note on 16 June 2021 here.