There's no better way to gain an understanding of the types of conversations that took place at COP26 than to talk to someone who was there. Gordon Bennett, Managing Director of Utility Markets for ICE, was in Glasgow and he joins the show to talk about the role financial markets can play in achieving some of the goals that were laid out at the conference. And unlike so many of the concepts discussed in Glasgow, Gordon says the tools financial markets can offer already exist.
Net zero was a huge topic at the COP and Gordon explains why carbonomics and the pricing of externalities -- both negative and positive externalities -- are essential to the energy transition.
With carbon pricing being lauded in Glasgow by the likes of German Chancellor Angela Merkel and HRH Prince Charles, Gordon says global carbon trading markets -- like those addressed in the final text of Article 6 at COP26 -- are an example of ways markets and data can help companies and economies establish the necessary pricing mechanisms to accelerate the transition to a more sustainable future.
Article 6 text on global carbon markets finalized at COP26
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(Note: This transcript was created using artificial intelligence. It has not been edited verbatim)
Colin Hogan 00:12
Hello everyone and welcome to this episode of The Modern Money SmartPod. I'm Colin Hogan.
Sean McMahon 00:18
And I'm Sean McMahon.
Colin Hogan 00:20
COP26 generated a lot of news, which we've been following closely. And that's why we're excited to bring in our guests today who was there at the conference in Glasgow and took part in some of those discussions.
Sean McMahon 00:33
Gordon Bennett is Managing Director for Utility Markets at ICE. With so much emphasis at COP26 on finance, it's important to get insights from an expert like Gordon, who knows how the markets function.
Colin Hogan 00:44
Gordon is also uniquely positioned to tell us what markets need from the negotiators at COP26 to help optimize the energy transition, because it's not really a question of whether markets will play a role in the energy transition, but rather how big that role will be.
Sean McMahon 01:00
One important note for our listeners is that we recorded this conversation with Gordon on Friday afternoon. But as those of you following COP26 news know, the negotiations dragged on into Saturday. So if some of Gordon's comments around topics like Article Six and carbon trading sound like they were made while the outcome of COP26 was still uncertain, that's because they were.
So before we get things going with Gordon, here's a quick message from the exclusive sponsor today's episode, ICE.
Environmental, social and governance issues are in the spotlight. Investors need the markets, data and indices to understand how their decisions impact the planet, people and their portfolios. ICE provides data, markets and analytics to help you measure performance, manage risk, and connect to opportunity. For more information, visit ice.com/ConnectToESG. Or click on the link in the show notes.
Sean McMahon 01:51
Hello, everyone. And thank you for joining us for today's episode of The Modern Money Smart pod. Our guest today is Gordon Bennett, the Managing Director of Utility Markets for ICE. Gordon, how're you doing today?
Gordon Bennett 02:03
I'm great. Thank you,
Colin Hogan 02:04
Gordon, it's great to have you with us. We know you are on the ground at Glasgow and we would really love to hear what the key takeaways from this year's conference are from your perspective.
Gordon Bennett 02:15
Sure, thank you. So I've not been to a COP before. So it's a little bit difficult for me to benchmark it against anything. So I'm not really sure what my expectation was going. But I was struck by the the sheer scale of the event, you know, you have the blue zone, which is the official zone. And then you have the green zone where the public can go to but but I was I was pleasantly surprised by all of the events outside of of those zones, there was a lot going on. You know, I was only there for the first week it was it was hectic, there was a lot of good energy, lots of planned meetings, but also some great unplanned one. So you know, I love to being there. It's great to be back in Scotland, because I'm from Scotland, I spent the first 22 years of my life there. I'm not from Glasgow. But this was actually written in an article, I think, from David Callaway from the US and he he sort of told the story that Glasgow had a sort of great sense of humility about it. So there's there's no airs and graces in Glasgow, everyone's treated the same. And I sort of heard this in a few panels that were happening outside of the official Blue Zone, where, you know, humility was used on more than one occasion. I think that's a, it's an important point to make, because the sheer complexity of the subject matter. You know, there are no experts, you need humility to be able to say, I don't know the answer. And if I can elaborate a little on this, I see. Net Zero in in two strands. One is energy transition, and the other is the creation of a new asset class for for natural capital. And so if I take the first one, energy, transition energy, value chains are complex. If you haven't read Vaclav Smil, then then I think it's worth worthwhile, very worthwhile read. He has a book called energy and civilization history. And it's a great way to sort of truly understand both the importance of of energy but also its complexity. Importantly, energy has been in transitioning since the dawn of civilization. So we've done it, but perhaps not the scale and the speed required and so you know, that really hit home in terms of what's required and how fast we need to do it. I think there was a comment around we need the scale of the Industrial Revolution in the speed of sort of the technology revolution. So that's, that's pretty daunting. And also if you think that energy transition is really physics, chemistry, engineering, geopolitics, behavior, economics, or perhaps better carbonomics, there's a lot of things in there that you need to understand. So no one can know it all. I'm a big fan of Adam Grant and his latest book think, again, he has he has this great picture in titled what I know. I don't know if you guys have seen it or read it. But they're these circles. And the smallest circle is things I know, I know. And then the next circle is things I know, the next circle is things I think I know. And the largest circle is the things I don't know. So there are no experts in in energy, energy transition. So that that's that's the real challenge. Getting to the answer is complex, and it needs it needs collaboration. And so that's why I think financial markets are important, because it's, it's about different groups of people figuring out the answer in the most effective means possible. So we're talking about the allocation of capital and the management of risk, you need access to risk management tools, because no one can seem to see the future, regardless of whether you're an expert or not. No one can see the future. So smoothing our earnings profiles is critical to having access to capital and, and cheaper forms of capital. So that's the energy transition component. And then going back to natural capital, creating anything that's new is is really hard. And so creating a new asset classes is going to be difficult. I do have some good news, though. If you want me to elaborate further.
Sean McMahon 06:50
Yeah, let's hear, we might hear some good news. It seems like all the news out of Glasgow has been a little rough.
Gordon Bennett 06:55
Yeah, there's lots of challenges there. But the good news is, we have the tools today to do it. So you know, the tools to do it is pricing externalities. That's, that's, that's for me that the key to delivering net zero, so pricing, both positive and negative externalities. And as we've been pricing externalities for for over a decade, and I mean, no, it works. We've, we, we've seen it in action. I think above all else, the key takeaway for me is that we need a better narrative in terms of the rule of financial markets. And I think today, we have a fantastic opportunity to tell the story of financial markets through a sustainable lens that hopefully make it more appealing to a wider stakeholder community. You know, when I, I co chair the sustainable finance, working group, ice, and this has been going for about two years now. And when I was sort of doing my homework to think about, you know, what, what, what's the purpose of, of what is sustainable finance? I actually, you know, I was doing better reading and doing a bit of internet searching. And I actually find myself going back to the question is the question of rather than what is sustainable finance? Do I really understand what is finance? And despite being in the industry for nearly 30 years, I didn't I find myself not having a really good answer for that. And eventually, after, you know, some some weeks of homework and thinking about it, I sort of I sort of landed on that the purpose of financial markets is to allocate capital and to manage risk, and at the core of that is, is valuation. And I am a chartered accountant by training, and there's something called the fair value hierarchy. And quoted uncoated markets sit at the top and clearly ace have operate quoted markets, both New York Stock Exchange and and our derivative exchanges. And we sit at the top of the fair value hierarchy because those whose prices on our exchange are transparent, and they're executable. So corporates are able to use our markets to hedge their risk and smoothed their earnings. And why is that important? Because it allows them to access large more forms of capital and cheaper forms of capital, which allows them to grow, you know, allows them to spend more than their earnings that gives them leverage and effectively funds the the growth of the real economy. And it wasn't until I started thinking about what sustainable finance was that I really had this epiphany in terms of this is what financial markets are for, and this is the role that that we are playing in it. It really gives me more of a sense of purpose in my day to day job when when I started thinking About what financial markets do for the real economy.
Sean McMahon 10:04
Just real quick, um, you know, we got a lot of listeners who might not be familiar with that term carbonomics. So, you want to take a second just kind of walk them through what the basics of what that means.
Gordon Bennett 10:12
So carbonomics for me is about it's about pricing externalities. And so the best example of this in practice would be electricity generation sector. In the UK. If you were to apply a purely economic model, the gross profit margin of electricity generation in burning coal is called the Dark spread. And burning natural gas is called the spark spread. Applying that economic model, coal is cheaper to burn the natural gas, so you're burning the more carbon intensive fuel. carbonomics is a applying the cost of an externality and in this instance, cap and trade, plying the cost of pollution, that those gross margins are now called the clean doc spread, and the clean spark spread. And if you because call is more carbon intensive, you flip the metal orders. So it's now more profitable to burn natural gas, which is the entire intent of the policy, you end up abating emissions because natural gas is is less carbon intensive than coal. No. coal to natural gas switching is kind of like the the easier in this sort of abatement merit order, that's the sort of the easy yards, we still got a lot more but that principle of buying that cost pollution gives you the right answer, we just need to apply that across more sectors, sectors of the economy.
Sean McMahon 11:51
And so one of the takeaways that seems to have come from Glasgow and COP26, is that there just seems to be a whole swath of people who just cringe when they hear the word carbon and economics kind of merged together. So what kind of reaction did you get from folks in Glasgow when when that topic was on the table?
Gordon Bennett 12:09
Yeah, that this was one of the in the first in the first day even was one of the positive surprises for me, I was at various events throughout the day, on day one. And there was a wide group of people talking about pricing, carbon and pricing externalities, from ex vice presidents to you know, Prince Charles, we read in the press in the FT the next day, but Prince Charles and Angela Merkel were in favor of putting a price on carbon. And there were several journalists, I was at one event where there was, you know, a hot debate about the rule of some hydrocarbon companies, you know, the big energy companies that have that have a lot of hydrocarbon in their mix today. And, you know, that affect the greening companies that they're, they're part of the solution, but there are a few hand grenades being thrown in in terms of their role. But the same person who was throwing in the hand grenades was also saying, you know, carbon pricing is really part of the solution, and we need it. So I was pleasantly surprised by this of the diversity of the groups of people coming out in favor of, of pricing externalities, because I am, in my view, and clearly working for a network of exchanges and clearinghouses and data services, where we're clearly pro market. But the thing about pricing externalities is that, you know, going back to my point, the good news as we know how to do it, it works. You know, we've got some great examples of carbonomics working in practice. So if you can put the price on a negative externality of pollution, you can change the outcome. You can abate your emissions.
Colin Hogan 14:13
We know there are some negotiations going on over a tax on carbon markets. Do you have any sense of where those are headed?
Gordon Bennett 14:24
I do not, but I do. What I think about attacks is that so on the one hand, I'm happy that people are talking about pricing carbon. On the other hand, don't think that tax is the best way to go about it. A market based mechanism, like a cap and trade is the most effective way and for two, two reasons to good reasons. Cap and Trade is the only way to actually limit The emissions. So it puts a cap on the quantity attacks doesn't do that. And this is the beauty of carbon cap and trade programs, it puts an actual cap on the emissions now you get a price out of the end of it and as a market base price, but more importantly, it's about controlling the quantity. Tax doesn't do that. The other thing you can do with the tax is really hedge it effectively. And this is the the purpose of financial markets by having a market bake based mechanism like a cap and trade putting a price on carbon. So you know the price of carbon today but you can also access a financial market allows you to hedge your exposure to carbon pricing into the future. So you can hedge your exposure to carbon prices. In the same way that you can hedge your exposure to electricity, natural gas, oil, you name it, and attacks you can do that. We'll be right
back. environmental, social and governance issues are in the spotlight. issues like climate change, diversity and data privacy have growing influence across the investment cycle. From assessing exposure to allocating capital and achieving sustainability goals. Investors need markets data and indices to help them understand how their decisions impact the planet people and their portfolios. Ice provides quality data analytics and markets to help you measure performance, manage risk and connect opportunity. For more information, visit ise.com/connect to ESG. Or click on the link in the show notes.
Sean McMahon 16:37
And now back to our conversation with Gordon Bennett, managing director for utility markets at ISE. Alright, now just stepping back a second in terms of you know, taking a look at the whole map around the world obviously, is is active in a lot of markets. But some of those markets are more ready and better prepared to shift their sources of energy. So how is that conversation playing out both, you know, within ice and how you're structuring your products, but also know and Glasgow, like, there's G 20 versus, you know, the developing nations so, so what is that conversation sounding like these days?
Gordon Bennett 17:09
Yeah, that's a great question. I think there's there's two, there's really two questions in there. One is about sort of shifting. How you shift sort of primary energy sources. I do think there's a close correlation between sort of countries preparedness to their natural resource availabilities. If you're lucky enough to be in a country with such a high density of renewable resources, it's easier for you to transition. And in fact, you might have even transitioned already, you know, particularly with respect to electricity generation, you know, if you've got an access of abundant geothermal or hydro, that can manage that intermittency, from other renewable sources, like wind and solar, then it's easier to be closer to net zero or even gross zero. He talks about sort of g7 G 20, split versus sort of the the rest of the world or developing global size, you know, there's, you've got to weigh up, it's not as simple as going, you know, cutting carbon, it's not as simple as climate risk that there's sort of energy poverty, right. There's nearly a billion people in, in the global side that don't actually have access to electricity. So that's a difficult question. To answer. So, clearly, the developed world world needs to do more. But we also need to solve for for energy poverty, which is difficult. And then the other aspect, I suppose is with respect to who's in support of market based mechanism, and and who aren't, I think that any country that supports market forces really has to be a proponent of of carbon cap and trade. You know, Europe and the UK have proven that cap and trade works. Their emissions have been abated, particularly in the electricity generation sector. Even in the US, although there's not a federal program, there are cap and trade programs in in California, and also in Reggie, which is a cooperative of states and the Northeast, the Atlantic seaboard. But there are some other countries in the g7 20 that effectively do support market based mechanisms but haven't really adopted cap and trade and that's a that's a bit of a, a big mess for me.
Colin Hogan 19:55
Are there other mechanisms that that companies are using right now to come? To get to where they need to be on the energy transition outside of carbon credits and carbon pricing, what are some other tools available to them?
Gordon Bennett 20:10
Yet, so I'll use Bill Gates here. He has a great book, How to avoid a climate disaster. And he he, he does a great job of sort of putting into laypersons terms, what we, what we use energy for, you know, he talks about how we stay warm and stay cool, how we plug in, how we, how we make stuff, how we get around and, and how we grow stuff. So that that's really the the energy complex. But the other thing that he does is he talks about this thing called the Green premium, which is effectively saying that greener technologies are newer, and so they tend to be more expensive in the beginning. So it requires more investment. And he effectively says, in order to incentivize more investment in greener technology, we need to read the green premium. And so there's two ways to read the green premium. You either make the dirtier fuel more expensive by pricing, the the negative extra externality, and that's what we've talked about a lot. So far on the call, you know, the cost of pollution, cap, and trade is about negative externalities. But you can also make the greener technology more valuable by putting a value on the positive externality. So ice operates renewable energy certificate markets, these are all in the US, which surprises many people that sort of the best, the most liquid, renewable energy certificate markets are actually sitting in the US. And again, like the cap and trade programs, they're state by state. So regardless of whether the federal government can can put into place, good market based mechanism, states are stepping up. And so that renewable energy certificate puts a value on the positive externality of, of green electricity. So you're increasing that value of the of the greener technology and, and you're eroding the green premium that way. And when you talk a little bit about carbon credits and particular nature based, you know, we talked about creating an asset class for for natural capital, that, for me, is about pricing, another positive externality, and it's about pricing the positive externality of capturing and storing carbon. So I think it's better people, people are more sort of up to date with pricing, the negative, perhaps I'm not so aware of some of the tools to to price positive externalities to erode that green premium.
Sean McMahon 23:12
Alright, and I know you explained kind of the renewable energy credits and but also on the nature base side of things, I know that ice just launches first nature based solutions, carbon credit futures contract. So talk to me a little bit about a kind of how you, you know, formulated that but be also what, what the reaction has been so far from market participants.
Gordon Bennett 23:30
So we're gonna we're gonna launch that next year. And importantly, the announcement had two parts to it. It was the launch of the futures contract. But it was also the intention to launch our our carbon oversight committee. And this is important because we think that natural capital today and and also the carbon credit space, often referred to as the voluntary carbon market, probably needs this extra layer of governance to make it more of an investable asset class. You know, there are that's not to say there aren't standards today there are. But it's a little bit ironic, in that there are so many standards that actually it lacks a form of standardization. So it's a little bit of the same scenario that we have in the world of disclosing, you know, climate related risk. There's there's lots of different standards out there, which which leads to a lack of standardization. And there seems to be on the disclosure side, a move towards a common standard. You know, we've seen some important announcements from the chancellor last week about UK companies having to disclose Those climate related risk from from 2022. So I think there's something similar happening at an SEC level. So hopefully, we're going to see some sort of government mandate to, to bring a standardization to the disclosure side of climate risk. And our role with the carbon oversight committee is to try and bring, try and bring financial market rigor, regulatory, regulatory rigor, and governance to to make natural capital, an asset class and make it more of an investable asset class, and really put a value on the positive externality of carbon capture and storage.
Sean McMahon 25:52
Are there any other products out there that you think either, you know, the market loves them already, or you think and a ton of time in the future? There might be, you know, space for more creative contracts?
Gordon Bennett 26:05
Well, I think they're, I think people need data. You know, it's people are, companies are all signing up to their commitments, I'm not sure if they've figured out exactly how they're going to meet those commitments. But you know, as we touched on at the very beginning, that this is a huge area of complexity. So delivering data in an effective manner will will become important. And the data side of the of the ice organizations doing a whole host of work in terms of ESG reference data, whether that be in the equity space, or more recently, we made an announcement this week that we're also doing the ESG reference data in the in the, in the corporate bond space. So there is a insatiable demand for data. And we're building lots of tools that allows companies to basically digest and interpret the data, we've got quite a cool tool. That is, you know, a lot of the things that we've talked about on the market side of the business is sort of looking at climate risk from a transition risk perspective and, and pricing the transition risk, but we have some great tools in terms of more around the physical risk, and particularly in the municipal bond space. Whereas we have this tool called risk with it with a que, and it looks at municipal bonds. And if you look at the, the the coupon and the other attributes of the bond, without looking at fiscal climate risk, they they have a very similar value. But if you if you overlay things like flood risk, fire risk, and so forth, they actually have very different values. And that's just another application of carbonomics for me, whereby you're looking at different attributes, that you weren't looking at the past to value an instrument. So we've got a whole host of products and services across exchanges and data services that allows people to sort of move to a sustainable finance model, adopt carbonomics and in practice,
Colin Hogan 28:35
so bringing things back to Cup 26. And are there any developments that that you are seeing or hearing that, that maybe aren't making the headlines?
Gordon Bennett 28:45
Well, I was at dinner. And one of the things that we're talking about is that, you know, the Paris Agreement was really about keeping temperatures well below two degrees, and preferably limiting to one and a half degrees. But now it's all about one and a half degrees. So it's not about well below two anymore. There's this focus in that that has got to be one and a half degrees, I think that's quite a big shift, and perhaps doesn't get the recognition that it deserves. I think the role of the private sector and how corporates are adapting or getting ready to adapt is really important. And we're going to need lots more of public private partnerships. But I'm told that in previous cops, there was less of a private sector cohort. Now some people might think not as a negative, but I think it's really important. The private and public sector need to work together to hit to hit net zero. So I think there's this real it's a recognition that this is real. You know, Paris provides At the framework, I feel that we're now in so planning and execution mode. And that that's quite a, that's quite a big, big move for me.
Sean McMahon 30:13
Now I want to, I want to ask you a couple questions about, you know, what you see as the successes or the failures of COP. So just just to let our listeners know, we're recording this on, you know, Friday, November 12, right around lunchtime. So the conference hasn't wrapped up yet. And it might even stretch into the weekend. But you know, when you look at what you thought about, you know, two weeks ago, before things started, what would you chalk up as the biggest successes? And then where did COP26? Perhaps, miss?
Gordon Bennett 30:38
Great, great question. And as we touched on in the beginning, that the complexity is really astounding. And actually, the complexity to keep on top of what's being announced at COP26 Is, is pretty difficult to have to say. So it's a it's a hard question. But what what I, there's few things that stood out for me, there's lots of lots of important announcements. But if I renamed to name some thing, the me thing player pledge is important. You know, me things not really been talked about before, not not everyone signed up to it. But there's a good group of countries that have signed up to the methane pledge. Pledge. Pardon me. There's the US China collaboration that was announced this week, I think that's fairly groundbreaking. And clearly the US and China have big carbon footprints. So I'm hoping that's a real positive for our, our path to net zero. We had the deforestation announcement to end deforestation by 2030. And so that ties really nicely to building this asset class for for natural capital. So I think that's a real positive. And then we had the the GE fans, the global financial alliance for Net Zero effectually, committing something like $130 trillion to deploy to the transition. So you know, it's an important point to make. It's a, it's a big reallocation of capital. And so we seem to have a commitment that, that the dollars are there, which, which are really important. And we touched on it earlier, but I do think they the UK is the Chancellor's announcement on the disclosure point of things from being able to sort of transparence transparently disclose in company accounts, how companies are going to manage their climate risk, I think that's a huge, it's very difficult to manage your risk if you're not able to sort of to measure it. So I think that's a really important announcement as well. And then finally, we really touched upon it before. But regardless of the individual enhancement, I think it really feels it's a general recognition. This is happening, whether it's countries, companies and individuals, and there's a recognition that we need to adapt. And we are adapting, and we're firmly in the planning and execution phase.
Sean McMahon 33:06
Any major disappointment? Yes. So
Gordon Bennett 33:08
from a disappointment point of view, I think, cap and trade was conspicuous by its absence. There was one announcement that I picked up on, I don't think it made the mainstream press but there was an announcement between New Zealand and the Western Climate Initiative, which is California and Quebec, colloquially known as the California cap and trade program. So there was a, there was an announcement around New Zealand collaboration where there's this intention to collaborate and an ideally link cap and trade programs. And I think that's really important. If we want to get to a global carbon price. We need more countries. First of all, adopting carbon cap and trade, we need those to be covering more sectors of the economy. So California is the standout here about 80% of the economy is covered on the California cap and trade whereas in the UK, in Europe, it's more like 40%. However, fit for 55 in the EU will mean that the EU cap and trade program will will look more like California, but we definitely need more linking. If we link then the prices that might be an arbitrage it in the beginning, but we'll see the the carbon pricing coming together. So linking is really important in terms of creating a global cap and cap and trade price. And regardless of the size of New Zealand versus California and also versus the EU, any form of linking I think is positive and other countries need to sort of join, join that initiative. Particularly the EU in the UK, very similar cap and trade programs, they should really be linking. So I was disappointed that cap and trade really played a bit of a backseat. There was lots of discussion about the voluntary carbon markets, which is good, because they're an important part of the solution. But cap and trade. The key the key difference between cap and trade and voluntary carbon markets is again the point around cap and trade control the actual quantity of emissions so I am disappointment disappointed that cap and trade wasn't talked about more and more countries weren't stepping up in terms of, you know, signing up to or giving their, you know, positive signs about adopting cap and trade programs. So I listened to a couple of your earlier podcasts on on kop 26. And there was a reference to the G 20. Pittsburgh meeting in 2009, which was all about the post 2008 financial crisis. And the agreement was that we needed reform in OTC derivative markets. And that meant, you know, we needed to move to clear markets. And then we spent a lot of time since 2009 really implementing those those in practice. However, I find it frustrating that there was little to no recognition that the energy markets had its 2008 crisis in 2001 with Enron. So Enron went bankrupt, and the the energy market largely self regulated and, and move to a clear and cleared environment. So the the G 20, sort of derivative OTC derivatives to clearing was sort of implemented in a way that it was brand new, and there was nothing to lean on in terms of the pathway. So we could have had a far more effective implementation of a move to clearing with a look into what the energy market did in its response to, to the Enron bankruptcy. And so the sort of links into some of my points around the tools exists today, we just need to utilize more of them in in more places, so carbon cap and trade in particular, pricing, negative externalities exists, energy markets, energy companies, particularly electricity generation companies in in Europe have been living with carbon price risk for 1015 years. So they are pricing the negative externality of pollution into their business models today. And, and it we need to sort of learn from those organizations and those countries that have put in place mechanisms that price, negative externalities, and positive externalities and try and get those to grow in, in other areas of the economy and in other countries. So there's, there's clear examples of this working in practice that we can point to, that can help us get to eventually enable the energy transition carbon markets are not new. They may be new to quite a large stakeholder base, but they're not new. And they work.
Sean McMahon 38:29
So capita trade is what you see is the kind of pre existing tool, you know, that can be applied to the energy transition and the climate crisis, just like the energy market that we're all following Enron was whether people knew it or not, was what was falling in Pittsburgh, is that we try to say,
Gordon Bennett 38:46
Yeah, that's what I'm trying to say. I'm saying there were there, there was a part of the economy had already adopted to financial shock. And it was it was the bankruptcy of Enron, and basically, the energy market effectively self regulated and say, we can't have all of this OTC by bilateral credit exposure, we need a central clearing model and the energy market largely self regulated. And with Pittsburgh, Ge 20, the implementation of that was done on the basis that this was a brand new thing, when when actually there were there were lessons to be learned from that would have meant that we would have had enough more effective implementation by not forgetting about history. And this is the important point about the narrative. We've got to tell a really good narrative, we've got to be able to, if you've got a solution, you've got to be able to tell the story of that solution to get a wider stakeholder base to support your solution. And so it might be you know, carbon pricing, carbon cap and trade. There's quite a small All stakeholder based have really been subjected to carbon pricing risk. And it's really the electricity generation sector in Europe have had to live with carbon price risk for for well over a decade because they don't get any free allocation of allowances for every tonne. They admit, they have to pay for it. So it's it's a real financial risk to them. And what I've found over the last one and a half, two years is that I was surprised in the beginning, when I was talking to corporates and financial institutions, and being asked to talk to them about carbon markets and environmental markets, I was sort of thinking, you know, am I, at what level? Do I pitch this? Am I going to pitch this too low, because they, they know about these markets, they're, you know, they've been, they've been in operation for over a decade. And so I don't want to be teaching to suck eggs for one of a better phrase. But what I found is actually that, that most people weren't really aware of the existence of these markets, and certainly weren't aware of how they worked. And and then when I stood back and thought about that, it actually made sense, because as I said, it's only a small constituency base that really had to live with carbon price risk. And so there's a whole sectors of the economy that haven't really had to live with it. So it makes sense that organization's perhaps don't know about all the tools are out there. So it's important that we get the narrative right to be able to sell to a wider stakeholder holder community that the the tools exist today, we just need to make better use of them and more use of them.
Sean McMahon 41:51
And now one of the hot topics at COP26 has been Article Six. So what's your take on that?
Gordon Bennett 41:58
Yes, I think this is one of the key parts that we could really do with getting a positive result out of because Article Six is really being kicked out in the CANS been kicked down the road, since since cop 21. And an Article Six is really going to provide the guardrails for, for creating an international carbon credit market. So you know, if there's one thing I wished for, to be able to get a result out of COP26, it would be sort of dotting the I's and crossing the t's on Article Six. Because we did have an international sort of carbon credit unit before, and it was under the Clean Development Mechanism. And the unit for trading was certified emission reduction car. And actually, we had approximately 8 billion of those treated our ice over a period of six or seven years. And importantly, it was allowed to be used for compliance purposes in the EU ETS. And so it created this demand pool for international units. And it also traded against the most liquid carbon contract in the world, which was, which was an EUA. So Article Six is really the tool to provide a pathway for an international carbon credit. So it really is, it really would be quite game changing. If if we could get a result for for Article Six. Again, even if we don't know, I think that the private sector can help solve for it. So when we talk about the voluntary carbon market, we can make that market better and we can use that market as a as a tool to create this international carbon credit unit. But it's a government a un type agreement would be a far better guardrail to help to help create this international carbon unit. So I'm, I'm very hopeful that they come up with with a lay agreement in on Friday, or maybe over the weekend that can really transform sort of international carbon credit trading.
Colin Hogan 44:16
So Gordon, where do you think this conversation will be a year from now? Do you have any predictions you could make for cop 27?
Gordon Bennett 44:28
Well, there i Oh, my default answer for forecasts is is also there's always some a gentleman called John Kenneth Galbraith, he was talking about economic forecasters, but I've I've used it for all sorts of forecasting, which is, there are two types of forecasters. Those who don't know and those who don't know, they don't know. And I don't know the future, but I'm positive that we're going in the right direction. And I think that we'll get Get More evidence of implementation of of netzero plans will get better documentation of what people are committing to. And I think that stakeholders are going to make corporates live up to those commitments, you know, we refer to voluntary carbon markets. They're not really, I don't think they are voluntary. I talked to a friend about this a year and a half ago. And I asked him the question, is a voluntary carbon market a bit of an oxymoron? Because if the price gets too high, do you stop buying them because you don't need to? And he said, Well, Gordon are not voluntary, because you as an organization are going to make a commitment. And your shareholders and other stakeholders are going to hold you accountable. So you're complying with your commitments as opposed to complying with the mandate. So I think we're where we're going to head down the right track that the big, unforeseen is we're talking about 30 year plans, right. 2050 is a long time away. And so that makes it even more difficult in terms of a forecast. And so if you miss your forecast, and in the first year, you do have time to make up. So I think we're going on the right tracks.
Sean McMahon 46:30
All right. Well, hey, Gordon. Colin and I want to thank you very much for joining us for the Modern Money SmartPod.
Gordon Bennett 46:35
It's my pleasure. Thank you very much, guys.
Sean McMahon 46:38
One important footnote to our conversation with Gordon - as we noted at the top of the show, we talked him on Friday, but the negotiations at COP26 went into overtime, and didn't conclude until Saturday, Gordon made some comments about global carbon trading markets, and the importance of dotting the I's and crossing the t's on Article Six.
Well, it turns out a final text was indeed agreed upon in Glasgow. We are putting a link with more details in the show notes. And I might cheekily suggest that perhaps the negotiators in Glasgow heard what Gordon had to say, and decided to go ahead and take care of business.
That's our show for today. I just want to say one final thank you to the exclusive sponsor today's episode, ICE.
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