Introduction

On 14 June 2024, and as part of Norton Rose Fulbright’s ongoing work in the environmental sector, we attended the UK Environmental Law Association (UKELA) Conference hosted in Manchester. Amongst the various interesting sessions during the conference was a discussion on carbon markets, hosted and moderated by Caroline May. The session focused both on the regulated market, encompassing both the EU and UK emissions trading schemes and the unregulated market which focused on the use of voluntary carbon credits. We set out below our key takeaways from the event as well as our ongoing work in this area:

Key takeaways

  1. Asset management and carbon
    A key discussion during the session was how investment can be used to grow the carbon sector and allow capital to flow into carbon projects. There is growing demand by investors, activists and greater corporate sustainability regulations (such as the introduction of the UK Sustainable Disclosure Rules which requires asset managers to ensure they suitably market climate and sustainability-related funds) to invest and focus on nature-based solutions and climate funds. During the session, the panellists also discussed the key pressures faced by fund raising and investor expectations on the quality and integrity of carbon credits.
  2. Challenges in the EU ETS and UK ETS
    The panellists referred to the current issues impacting the regulated market, namely the EU emissions trading system (EU ETS) and UK emissions trading schemes (UK ETS). Competitiveness was highlighted as a key problem within both the EU ETS and UK ETS, as entities within scope of the regulated carbon markets are subject to reporting and purchasing obligations which their competitors outside of the regulated market are not required to undertake. The EU and UK have tried to negate these issues through the use of free allowances and ‘cushioning’ the price of emission allowances under both schemes, however this puts into question the effectiveness of the schemes and their role in reducing emissions, as it eliminates the financial pressure to decarbonise. Additionally, the carbon border adjustment mechanism (CBAM), has also been marked as a way to further remove these issues as it pulls non-EU companies who have activities in the EU into the scope, as further discussed below. There were also interesting points raised on the potential divergence of the EU and UK ETS and whether there will be enough political will to align the schemes following the UK general election.
  3. CBAM
    The introduction of CBAM was addressed at the session, in particular the potential issue of carbon leakage, which is the movement of production of activities, and therefore associated carbon emissions, from one country to another, in order to avoid higher levels of carbon pricing and more stringent regulation. The CBAM is scheduled to be brought into force by 2027 and will apply to scope 1 and scope 2 emissions, and certain precursor product emissions (similar to the UK ETS). Importers in the aluminium, cement, fertiliser, hydrogen, iron and steel, ceramics and glass sectors will be required to gather data on the emissions embedded in their imports and surrender the corresponding number of CBAM certificates.

What we do at NRF
NRF brings together its wealth of experience across financial services, environment and energy to best advise clients on the complexities and challenges across the carbon market. We have worked on a wide range of work advising clients from the project development stage to trading carbon and all the processes in between.