Carbon Trading Outlook: Insights from Lawson Steele

[00:00:00]RAOUL PAL: When change comes, opportunity  abounds. We're about to enter a period of   the fastest pace of technological change in  all human history, something we refer to as   The Exponential Age. And Real Vision is going  to be your guide to this incredible future.  Lawson, good to see you, my friend.  LAWSON STEELE: Hi, how are you doing?  RAOUL PAL: Yeah, good. Listen, I want to catch  up with you. You had an unbelievably good call   last year. I think carbon was one of the  best performing commodities in the world.  LAWSON STEELE: It was. Yeah. RAOUL PAL: Yeah. And I spoke   to you on Real Vision, Pierre Andurand on Real  Vision and a few others about this a while ago,   and we've gone a long way, come into a new year,  so I just thought it'd be a great opportunity   to get your thoughts. Where we are now, what  lies ahead, and a bunch of other questions   I've got. But first, actually before last, and  just give people who didn't see the first one,   a bit of your background, so they know why I'm  talking to you, what you do, that kind of stuff.  LAWSON STEELE: Yeah, sure. Well, I've covered the  European carbon markets since before it started.   It started in 2005. I began to look at it in 2004.  I had a claim to fame, I guess, back in 2006 in   January, I claimed by forecasting the prices fall  to zero. It was trading at 13 at the time, and   11 months later, it literally went to zero. I've  never had a better call in my life. Then I got--  RAOUL PAL: Sorry to interrupt. Have you seen the  film about this, about the French carbon traders?  LAWSON STEELE: Yeah, I did. Yeah. It's  outrageous. I had to stop watching it because   the main character really annoyed me. It was just  like incessant talking. I've had enough of him.   Anyone particularly blessed  with intelligence, so anyway.  Then for many years after, I got really, really  dull. And then November 17, I twigged that   the EU have finally come up with a new mechanism  by which they're going to tighten the market   and realize that it was absolutely huge.  Then in January 2018, I published when   it's at eight, it's not 80, just  above, it's been a 10 bagger.  But the big question for me is whether,  just for the fact that it's a 10 bagger,   is that the end of it? And I think the answer is  no. It's got much more to come. That's my carbon   bid and I've been a utilities analyst, would you  believe, for 35 years, because somebody has to be.  RAOUL PAL: This is perfect for you, because  this is where carbon meets utilities. And it's   exactly your sweet spot. Talk to us  about what drove last year a little bit,   just so people can get in the  frame of what's going on here.  LAWSON STEELE: There's always  a lot of noise flying around.   Ultimately, for me, it's simple. Supply is too low  versus demand. And that creates the shortage. And   we are now in a multiyear, actually a decade of  deficits. And that's what really, really matters.   Then you got all sorts of noise around that about,  oh, the gas price has gone up and therefore, the   carbon abatement prices. Coal is so much higher,  so therefore, carbon needs to be higher, but   I think that's just a mirage. And really, there's no   sensible connection now with the gas price,  and actually, if it were, carbon would be   350 euros or something at the moment,  given where gas and coal prices   are. There's endless political noise emanating  from Poland and Czech and Greece, and so on,   saying, oh, the carbon price is  too high. I literally had a fight   as it turned out with the Greek Prime Minister. And now I'm having with the Polish Prime Minister,   because they both said energy prices are way too  high, which is true, and it's because of carbon,   which is absolute rubbish. And it's because  speculators received more rubbish. I did   do some calculations yesterday and I worked  out that if you look at German power prices,   which are up fourfold last year, from 50 to 200  euros per megawatt hour, 12% of that, just 12% is due to carbon, 80% is due to gas, and then   there's the remaining 8% which  is probably due to wider margins.  So bottom line is that it's all down to gas.  Carbon has done diddly squat really, 12% is   no great shape. Particularly when you then take  it on to the final consumer level, which means   it's much more diluted, maybe a 2%, 3% impact.  There are a lot of moving parts, a lot of noise.   Of course, you have a 55 package with the  EU saying we want to tighten our 2030 goals   by having a 55% reduction in emissions  from 1990 levels, versus 40% target before.  Interestingly, they put most of the brunt or  bigger part of the brunt on the EU ETS system,   so the EU ETS system, the carbon system has  the requirement to tighten its [?] by 61%,   not the 55 that EU wants. The 55 as an  average and therefore obviously for the   non-industries which are outside the EU ETS  scheme, which essentially are agriculture,   transport and buildings, they don't have to  reduce their emissions as much as the EU ETS.  That's already interesting. But ultimately,  that is an event which really comes in from   2024 onwards, in my numbers anyway. But it  doesn't change the fact of the next three years,   four years, we have a cumulative  100% shortfall in supply.  RAOUL PAL: Talk people through a little bit  about what the EU ETS system is quickly just so   they're on the same page, and why  there's a supply/demand issue,   a structural massive supply and demand issue. LAWSON STEELE: Yeah. Basically, what it is,   if you think of a bucket, you've got a bucket  of permits of allowances, and each allowance   allows you to pollute it. You can emit one  tonne of carbon dioxide. The entities which   are underneath this umbrella of the EU ETS, the  EU emission trading scheme, have to comply. And   therefore, they need to deliver the same number  of allowances as they have emitted on the 30th   of April each year. That is their Groundhog  Day where everything has to be reconciled.

[00:06:40]What it means is that if you take a permit or an  allowance out of that bucket, you're reducing the   size of the bucket for those entities, which is  going to force them to reduce their emissions.   This bucket shrinks every year anyway, because  that's what the EU is trying to do. They're   trying to go from here down to the 55% reduction,  or in the case of the EU ETS scheme, 61% by 2030.  That bucket shrink, shrink, shrinks, which puts  pressure on these companies to essentially reduce   their emissions, because otherwise they're  going to have to pay a huge penalty price.   And this is the thing is that on the 30th  of April, when you go to your government and   cap in hand, and you report your emissions, you  either have to deliver the same amount of permits   or allowances, so if you produced 10 million  tons of carbon, you got to deliver 10 million   carbon permits or allowances. If you're short, if you've only got six,   because that's all you manage to buy, then on the  other four, you will have to pay a penalty price   and a penalty price this year is now 111 euros per  permit. Okay. And it's actually worse than that,   because-- maybe I'll just show this chart. What this is telling you is that for 2021, you are   24% short. That's a squeeze in the system and  therefore, that means that when you go to the   30th of April, you find that you're 24% short of  what you need, or the permits you need to deliver   to your government. And consequently, you have  two issues. First of all, you say, well hang on,   I'm going to have to pay a penalty price now of  111 euros per allowance that I don't deliver.  Now on top of that, the first thing you do  is to try and buy the permits, the permits   go up because there isn't enough supply, and it  goes up to 111. When it gets to this 111 point,   then you have a dawning realization that not only  are you having to buy the permit for delivery as   off site, not only are you having  to pay a penalty price, but also,   you are now having to buy those allowances  because you've got to deliver them next year.  You have two options. You can either deliver the  allowances you need this year, or you can deliver   them next year with a penalty price of 111 on  top. That means that now you realize this. On   the 30th of April, you don't have enough permits,  you've got to pay that penalty price of 11. On top   of that, you got to buy the permits for delivery  the following year. You're never ever forgiven.  Consequently, given that those permits are  now trading at 111, your penalty price or   your opportunity cost is 222. Therefore, knowing  that in advance, you try and buy the permits.   There weren't enough to go around. There was  24% squeeze, of course, you drive up to 222.   And when it gets to 222, you think, oh, bloody  hell, still haven't bought the bloody things.  I've got a penalty price of 111. They're trading  at 222, so actually, the opportunity cost is   not as I first thought, 111, it's not 222, it's  actually 333. And that just goes on to infinity.   Now, you say, well, actually, if you had a surplus  the following year, that wouldn't be a problem.   Because you say, well, I'll sort that out by  the next year, I'll be fine. But the problem   is that next year is even worse. Next year, you  have a 35% shortage, i.e., this year, in 2022.   And on top of that, you're trying to buy the 24%,  which you didn't deliver last year, so actually,   your cumulative deficit is 59% this year, and it  gets worse and worse and worse and worse. Breaking   through 100% shortfall cumulative in 2024. And that's before the Green Deal kicks in.   The Green Deal really, as I put down here, kicks  in from 2024. Sop really, it really has little   impact, if anything at all, on the next three,  four years. And what may happen is that actually,   the Green Deal may kick in in 2023, not  2024 as I've assumed, in which case,   this 26% in 2023 might be more like  35% deficit, so it could get worse.  RAOUL PAL: And currently, the  EU have not actually reduced   carbon as much as they need to. Is that right? LAWSON STEELE: No, absolutely not. Yeah, sure.   What you've had really in the first instance,  we've had the switch from coal to gas powered   electricity. Coal produces twice as much carbon as  gas. We've had that. And that's about as much as   utilities can do today. Power, which is half of  the emissions of the EU, this willingness scheme,   has done what it can do so far with annual  reductions in emissions due to renewables coming   onstream and that sort of thing. That that will  happen over time, but it'll be slowing gradually.  We have had a setback with that power, because of  course, Europe has run out of gas. With literally   gas prices have gone through the roof,  hence the 80% I was talking about earlier,   they've gone through the roof, because  we had a prolonged outage or winter,   I should say last year, so storage levels were  not replenished as much as it should have been.  The way the gas market works in the summer, at  least in Europe, you push gas into the storage   levels underground, and then utilize that in  the winter. The problem is that that reserve   wasn't injected high enough because it started  late. And then on top of that, you've had   problems with delivery of gas from Russia, and  you've had LNG problems with Asia sucking up LNG   prepared to pay more than Europe and so on,  so you've ended up with a bit of a mess.  The consequence of that is that there actually has  been a physical shortage of gas. And therefore,   what was a coal to gas electricity switch  over the last two years, which is exactly   what I forecast back in 2018, has actually  retrenched a bit. But that to me is a temporary   issue. But the point is that power have done as  much as they can if you normalize that issue,   so now it's down to industry. And industry have done diddly squat   since 2005. Why? Because they've been getting  90% free allowances ever since this thing   started. Yes, they've tightened up a little  bit this year, and they've reduced that to 85%.   But the carbon price was low in the  past. They only had to buy 10% of what   they needed. Now they need to buy 15, so  it's more that the carbon price is higher,   but it's still not anywhere near high enough where  it needs to be to get industry to do something.  And the industry is not going to do anything  until that carbon price is at that level,   and they see it to stay at that level. And then  they'll think, okay, now we'll do something. But   it's going to take them three, four years  to reinvent the engineering processes and   cut their carbon emissions by 30%,  40%, 50%, whatever they need to do,  RAOUL PAL: What are the industries  we're talking about here   who are the big polluters and need to change? LAWSON STEELE: Well, you've got power talking   about it. You've got chemicals, oil and gas,  you've got metals and mining. You've got ceramics,   you've got pulp and paper.  And there's 41 other [?] which   is you want. RAOUL PAL: Those guys have been observing   the market not really concerned about it, but  they're going to have to become players. At what   price do you think they will start getting forced  in where the 15% is actually meaningful to them?  LAWSON STEELE: I'll just rephrase I think  something you said, or I don't think most   of them are actually watching it because it's  just been way below the CFO's parapet. It's just   nonexistent. And it's only now the price is going  up and that they're having to buy 15 instead of 10   that it may, in some cases, raise its nose above  the parapet, but probably still not enough. But   that's, yeah, in some companies, it is and  others, it's not there yet. It is improving.  The way I think about this is, if we  think about the price of carbon itself,   there are three ways to think about it. This  is the forecast. As I said, back in January   2018, it was eight euros, that's when I turned  a buyer. It hit my 65 target of Q3 last year,   two days before it hit 66, something  like that. And then it corrected,   and then we're now roughly  around 88 or 86 at the moment.   I need to move on one quarter here, but anyway. For me, what happens is, first of all,   because you don't have any liquidity in the  market, because it's all tied up and hedging,   because you have this multiyear deficit, which  means that demand or supply just simply do not   intersect, then unchecked, as we discussed, at  111, 222, 333 and so on, it will go to infinity,   when stocks are going to infinity is that  at some point, we'll have demand elasticity.  If it's costing us 10,000 euros just to have  this connection, let alone the hardware,   then we probably wouldn't have it, or we probably  would actually, call it 20. But then before that,   you're probably going to get a political  reaction. The question really is to understand   what price is politically acceptable,  what price is required by corporates   to actually change their behavior.  Now, when I look at the corporates,   the first thing I have is, I've got BASF, who  said that they won't do anything below 140.  In other words, the carbon price has to  be at or above, more to the point, 114   to get them to trigger or think about  triggering changing their carbon emissions.   And it needs to be there obviously for a sustained  level. You got Heidelberg Cement talking about   120. And you got BP involved, about 100, you got  Swiss Reed Insurance Company talking about 200.   And you're going to have these new  shipping coming into the scheme in 2024.  But they're already thinking about what to  do. And they are talking about 100 up to 150.   Wherever you're looking at in that suggested  price, they need to be north of where we are.   But politically, what I think happens is  the price goes up to a level, which we'll   call 110 at the moment, which is sufficient to  trigger the intensity of the political debate,   which is a debate we've had ever  since 2005 when the scheme started in   Kyoto back in 1997, when it was discussed. We get to that intensity of that debate,   the intensity of debate then that triggers  the political process, which was very slow   is going to be the European Commission  recognizes that they need to do something,   and then we'll come up with a proposal which in  the case of the Green Deal, took nine months.   The proposal then gets put in front of the  European Council, they need 70% of their   members to agree, then Parliament, it goes over  to Parliament, they need 50% of their members.  They want to pretend to do some work,  so they'll change it a little bit and   bat it back and forth maximum three times.  And then it needs to be agreed between   Council Parliament and Commission, the trilogue  and when the trilogue agrees, then they will try   and find a plenary session to put it in front of  which of course is already a bag full of chocolate   blocks id you recall it, and then it needs to  be enacted, rolled out, this is a long period.  That's not me barking, it's the dog. When  we think about what that price could be,   we've had the fact that France Timmermans,  who's head of the EU Climate MEP number two,   right hand man to Ursula von der Leyen, he has  publicly stated that the carbon price needs to   be way north of 50. And I'm pretty sure, given the  murmurings I've been hearing from MEPs beforehand,   that that means two to three  times higher than 50, so 100, 150.  You've got Germany, which is the  industrial heartland of Europe,   who is now putting in a carbon floor of 60 euros.  They will effectively go in and buy allowances   as and when the carbon price gets to that level,  should it and this is the one country which   in theory, stands most to lose given that  this is the industrial heartland. You got   the European greens talking about 150. You got  the Bank of England talking about around 150.   You got Norway talking about 200. But all these numbers are interesting, because   he had when I started talking about this back in  January 2018, they thought I was barking math when   I was talking about 65 euros, and I got massive  pushback, people saying, no way. When do you get   50? Well, here we are. And it's like carbon  gets to the new level and you take your time,   and you reset a bit of panic and everything  else and then resets and everyone says, okay,   this is okay. And then, all right, yeah, fine.  Okay, now we can think about the next level.  I think it goes up in something like ladder  rungs if you like. That's where we are.   And by the way, just to add one last thing,  which is a split down here, I did a cross   sector piece back in March last year. And what  we did was to ask the 150 analysts that cover   nine other companies that [?] saying, what happens  to your earnings per share if carbon goes to 110?  And what was astonishing was that of the  900 companies, less than 3%, 26 of them   had a significant impact on carbon in 110. And  even more so, if you then set a limit to-- sorry,   just one last thing, if we then said, okay, we'll  unleash the beast, what happens if you pass on   that cost to consumers? What price increase do you  need? The biggest increase was airlines who just   needed eight, chemicals needed to five and cement  needed two. So clearly, 110 is not going to do it.  RAOUL PAL: That's why I'm just looking at  this and listening to you. I'm just thinking   that 110 number looks ridiculously low. I can't  see a world where the industry itself is not   buying this, and it doesn't really matter to them.  The EU needs that to change. It has to change.   It feels like the market is short  the upside, and the more it goes up,   they have to cover their positions because  they're just waiting until it hits a level.  It feels like you're going to have to go and  flush all that out at some point. That's the   market dynamics generally of a restricted  supply, increasing demand, because the   demand increases, the market goes up, right? LAWSON STEELE: Yeah, it does. And it's what I   said back in Jan 18. Amazing things seem  to have panned out. But I think there is   more hoarding of permits, what I  expected, because as the price goes up,   you begin to do your homework. Well, first of  all, you just panicked a little bit and think,   why is it going up, why is it going up?  Well, I'm not selling, I'm not selling.   And then you do your homework and realize  actually, you should be hanging on and buying as   many as possible as a corporate, or anyone else  for that matter, but certainly as a corporate.   Actually, yeah, the supply is tightening.  There's tightening, because the MSR mechanism   and the liquidity is tightening,  because we're realizing actually,   I need to hang on to this stuff. And that's,  everything I've shown you is pre-snowball,   what I call the pre-snowball effect. The snowball effect is that   everybody will be buying more permits. It'll  be utility will be buying more permits because   you will have customers asking for longer-dated  contracts, four years instead of two you say.   Which means that they will then say yes, of  course, here, they're not going to immediately   hedge their carbon position like buying more of  it plus the gas. You're going to have industrials   waking up or spending their coffee and realizing  what they should be doing is exactly this.  You're going to have financial investors obviously  playing that and then you're going to have the   net zero elements which is that both  industrials and financials for that matter   will be setting the net zero targets. It's not had  50 meetings on where corporates are over the last   three months or so, and I actually thought  stupid saying exactly the same thing, but   I can sum it up. Actually, I was speaking  to somebody just now and I've got next   week after next when I come back from skiing, I've  got the executive committee of a huge company.  I've never seen such a turnout of top management  who want to go through this. But they're all   saying the same thing. Yeah, we're thinking about  net zero targets. We haven't set them yet. We're   trying to measure our scope one, scope two, scope  three, but we haven't quite measured that yet. And   we know that we can offset the residual balance  once you produce your emissions as much as you can   to that level, or you can't reduce them anymore. That residual balance, we know we can   use voluntary carbon offsets. Would you know  that you can use emission trading scheme like   EU ETS? Oh, no, I didn't. I'm going to think  through this. I think, oh, this is such a better   vehicle than voluntary carbon offsets. Voluntary  is people making a lot of money at the moment,   because of the huge opaqueness of that market,  but it's fundamentally flawed in my view,   because let's say you're going to-- I'm going  off on a tangent here, but I'm getting excited.  RAOUL PAL: Now, this is important, because a  lot of people, you and I see it on Twitter,   everyone's like, well, what about all of these new  crypto tokens or different offsets? And I'm like,   why would you do that when we've got  the perfect system here? But carry on,   explain the difference on why it sounds so good. LAWSON STEELE: I'll say one thing. Let's first   of all distinguish the two, the EU ETS scheme  doesn't give [?] about voluntary carbon offsets.   Okay, they both have the word carbon, but it's got  nothing to do with EU ETS scheme, which is what   we've been talking about and are talking about.  Don't confuse the two, which many people do.   The voluntary carbon market is like, for example,  the most obvious is we're going to grow a forest,   which is going to be great because it's  going to take carbon out of the atmosphere.  And that's about your carbon market offset. People  think is great, because I can invest in that as a   corporate, and then say, hey, look, we're doing  this. We can offset that against what we emit,   and therefore we're green. That's not  true. If you think about planting a tree,   if it's anything like my garden, you plant it,  and a squirrel comes along and nibbles the bark,   or the dog's going to do  something against it, whatever.  The chance of that tree looking beautiful  when it grows up to maturity are low.   But anyway, let's assume that it survives  pests and survives fire, it survives hurricane,   so you get a full maturity of the tree, which  by the way, will take 15 years to mature. But   let's assume that happens and that the forest  or the other trees go together, and they have   this forest which is out in the prospectus and  that delivers that. So then, okay, good so far.  Eventually, these trees will die, fall over and  decompose. Clearly, you have to have a replanting   shadow to maintain the forest size, which is what  happens, it's what the prospectus generally say.   What they don't say is that actually, what you  need to do is not just replace the tree which   has fallen over but also capture the carbon which  had been released into the atmosphere. Really,   your forest needs to grow infinitesimally. That's a crap system, it's not ESG compliance,   it falls down on all sorts of metrics. It's  not regulated, right. Whereas the carbon permit   market, the EU ETS is fully regulated, fully  compliant. Look, here's just one thing, which   is worth talking about. You got the IGCC, which  is a terrible acronym, you'd have thought 250   pension funds could have come up with something  better. But anyway, the IGCC is 250 pension funds   worldwide all linked under the same banner, and  they got assets under management of $33 trillion.  And these guys have said, we will  not accept a voluntary carbon market   permit as a way to achieve our net zero  targets. But we will accept a regulated   carbon permit market. In other words,  the EU ETS is accepted by 250 pension   funds with $33 trillion under management,  and the voluntary carbon market is not.   Anyway, going back to what I was saying in  terms of net zero, you've got pension funds,   you've got companies and as they begin to  set their net zero targets, will realize that   what they can do is to invest in EU ETS market  which is much better, recognized by investors   than the unregulated voluntary carbon market. RAOUL PAL: And again, I'm listening to you. Now,   you've brought another source of demand into the  equation and I'm just looking at that 110 number   and think that looks ridiculous now. What is the  number in your head that actually reaches, because   I can tell, this bullish story continues to  pick up the next few years. And it doesn't stop.  And the more well-known it gets, and the more  you go around speaking to all of these companies,   telling the utilities they need to hoard stuff,  and it starts going through the levels that   forces the big polluting industries in, that  all feels like that two- or three-year process.   So, if you're wrong, you're probably wrong  to the upside, right? I know you've got a   gray area with an arrow suggesting that it's  something different. What is that gray area   and the arrow? What's in your head here? LAWSON STEELE: The first thing is that   I'm not just speaking to utilities. Okay,  I've been speaking to all sorts of including   coke manufacturers and game companies and to a  plethora of companies I've talked to, which is   really interesting, because utilities, I know them  backwards, and they know me and everything else.   One of the Executive Committee I was talking  about is actually a utility, the week after next.  But it's funny, you can tell I've had this before.  I'm digressing. But I've spoken to some investors   where I've gone in, I've talked carbon back in  2018. Went back in 2019. Yeah, good idea. Talk   me through that again. I'm going to talk through  it again, after about the fourth meeting, says,   oh, yeah, that's interesting, isn't it? What's the  price? Whoa, it's going up 70%, 80% now. As you   know, we've gone up five, six times by then. Oh, well, that's just, the price is too-- I'm   too late. Alright, so some people will never  ever invest it and people will look at this   now and say, it's a 10 bagger from 2018,  do I really want to invest in these levels?   Forget the history. It's where it's going. Where  are we going to? First of all, why have I got 110?   I got 110 because I'm an analyst, and I got  to sit in front of a fidelity of capital or   whatever and I got to justify the price I'm doing. And if I say, well, it's just my gut feeling,   I'll be shown the door. But if I say it's  110 or 100 which is the penalty price,   then that pulls water. But no, this goes north.  The question is a combination of speed and  quantum. If this goes to 110 tomorrow  morning, the EU will have to react.   Well, at least if it goes to 110 and stays  there, shall we say, that puts more pressure.  But if it's going to 150 over the next six months  or eight months, then that's more acceptable.   How high could it go? I think it goes way to  triple figures. Is it 200? Is it 170? Is it   300? I really don't know. I know fundamentally,  it goes way up there, but then it's difficult   to gauge that political response at what  level does it come in and what does it do?  RAOUL PAL: Why would pension funds, why  would BlackRock not say with that group of   pension funds that we're going to buy these  credits because it will force ESG changes   amongst the industry? Are they going  to have a fight with the EU over this?   Because they're highly motivated by this, right? LAWSON STEELE: Yeah. I can think of all sorts of   different angles you will have depending on  the person that whatever investment fund,   whether it was BlackRock or another, some will  say, well, it's not in my mandate. I'm not   allowed to buy anything, buy equities. I can't  buy commodities, gas, coal, let alone carbon.   Mandates will have to change and  that's generally a slow process.   But to me, it's blindingly obvious.  But it's down to what you're   restricted to do and how big you [?] are. RAOUL PAL: Yeah. It's just because I look at   the BASF. And if they're like, well, that's the  biggest chemical company in Europe, if they're   like, not interested, call me up when it gets to  140 or 150. Well, that tells me that the price is   not high enough. If the EU really wants change,  they have to go well through everybody's targets   because what you're basically saying is, Lawson,  give me a call when it gets to 140. But don't   bother me before then. That's saying that there  was no pain at 140 either. It's like, well,   I'm interested. It tells you that it has to go to  200 plus for the EU to get their emissions goals.  LAWSON STEELE: There isn't pain. There  isn't pain today. We can come back to   Poland and discuss that if you like. RAOUL PAL: If there's no pain now,   it's just basically another system  for governments to get better revenue.  LAWSON STEELE: Yeah, well, the revenues  are huge. Today's price, you're getting   50 billion euros per annum compared to the  UK Brexit, which is 40 billion for one-off.   And yeah, it's going to go up. And ironically for  Poland, it's making a lot of noises. They are the   biggest beneficiary. They're getting 9 billion  euros per annum from the scheme. It's crazy.  But yeah, the price is not high enough in absolute  terms, and it's not high enough because they can   pass it on. And what should happen is that  they should reduce these free allowances.   They're reducing the bid this year 5%, that's  nothing. These things need to come down.  RAOUL PAL: What's stopping them doing that? What's  stopping them saying we're going to make a 40%   reduction in free allowances, stop piggybacking? LAWSON STEELE: Because they cannot do anything   fast. Okay. You have this legislation called  legitimate expectation. And if you are   relying on some legislation in order to make  decisions, then you cannot change that legislation   quickly because you can sue them under the  legitimate expectations law. A, they know that.   And B, actually, every single meeting I've  had since 2000 for the EU, they've said,   we want the market to set the price. And if they change the goalposts quickly,   they'd kill the market. They'd  kill the market and they get sued.   And industry will be in absolute uproar.  For example, talking about implementing   this carbon border adjustment mechanism,  CBAM for short. CBAM is basically saying,   if you want to come and compete in Europe,  you're welcome to under the usual restrictions,   but you also must be on the same carbon footing as  the European companies are, the domestic players.  And therefore, we are going to charge you a  national carbon permit based on your outputs   and your carbon intensity, and so on, so on.  That levels the playing field. That's fine and   very sensible. And it's potentially coming in  in 2024. But then you can't say we've leveled   the playing field, but we're still giving  our lot free allowances, because that's just   protectionism. That's not a level playing field. Therefore, they are reducing or proposing to   reduce the free allowances from 2026 by 10%  per annum, which is bullshit, because it means   not until 2030, 2040, 2045 will  you have zero free allowances.   If your sole goal, and it's not your sole goal,  but if it is your sole goal to save the planet   by 2030 in terms of emission reductions, then you  should eliminate free allowances and let carbon   go to the moon. What started doing all that is  politics and at least a bit more softly. And yeah,   sure. We got jobs to protect and look after people  and everything else, but that's the difficulty.  RAOUL PAL: Why do you have the drop off in price  back down to 65? Because it doesn't feel like   anything actually changes for a while. LAWSON STEELE:   No, and I got-- coming back down 75 in 2023. But  again, still with the gray shaded area above it.   I think that whole curve is going to be higher. RAOUL PAL: Yeah, that's what's in my head,   it's like, the curve is higher and it's  probably longer. LAWSON STEELE: Well,   I've done it to 2030. And yes, the scheme of-- RAOUL PAL: Because you've got the drop off   afterwards, so it feels like there's an elevated  plateau, probably, whether it's 110 or--  LAWSON STEELE: The plateau could be longer.  It's difficult, isn't it? Because I think the   actual political process will be longer,  but then the market will anticipate that.   What exactly happens to the price on the back  of that and want to start discounting it.  RAOUL PAL: Now, getting bit into the  market dynamics bit nearer term now.   April is the date that everyone needs to  prove their carbon. How much do you think   has been done? Is it done? Is the trade done for the time being so we can consolidate,   you've said it should go a stair step level?  Or is it still quite a bit of panic buying   that needs to be done? What's your sense in this? LAWSON STEELE: I think we're in the final furlong   for this year, which takes us through to April  30th. 7th of January, today. That means that   most companies, if not all, have not yet had  those audited results for 31st of December 2021.   And therefore, do not know precisely  what their emission levels are,   because those are also audited. Once they have that in their hands,   if they haven't done much, and a lot of them  happened, they will realize what they need to buy   and go out and buy it. There is a squeeze going  into April the 30th. What companies ought to do   is a steady buying throughout the year. RAOUL PAL: Yeah, but   they still aren't used to this really, I guess. LAWSON STEELE: No. Most companies don't do that   anyway. And even some utilities are not allowed to hedge, Polish utilities aren't allowed to hedge   legally, and therefore they buy as they pollute. RAOUL PAL: And I'm looking at the   price action the last couple of  years, we tend to peak in June,   then sideways consolidate for a lot. And then  towards the end of the year, we start getting   this need to buy more. Does that feel like  it's the same pattern probably repeats itself?   So we squeeze April, whether it goes  on a bit further or not, who knows?  LAWSON STEELE: Yes and no. RAOUL PAL: And again, we're not trading this for   short term price gains. I'm just talking about [?] structure.  LAWSON STEELE: Sure, I'm a  long-term thinker anyway,   although I've become bit more short-term  of late. I think that's right,   except that these step change in the  auction level triggered by the MSR happens   in September. Alright, so you've got really-- RAOUL PAL: Talk me through what you mean by that.  LAWSON STEELE: April 30th, you got the compliance,  the MSR is the market stability reserve.   And that's the mechanism by which, under certain  circumstances which are in place at the moment, it   triggers a reduction in the pre-[?] auction level,  which was set back in 2008, all the way to 2013.  RAOUL PAL: I.e., it will increase  supply a little bit. LAWSON STEELE: No,   it reduces supply. RAOUL PAL: Reduces the supply. LAWSON STEELE: Dramatically. The whole market,   the demand/supply imbalance, it's not a  story about demand, okay. Demand is moving   plus or minus a little bit, but nothing  too exciting. It's supply. When you got   demand of around 800 million, 900 million or so,  you're getting supply reductions of 300 million to   350 million per annum for the next four years.  It is huge. That's just the automatic trigger.  And that's what this market is about. And that  step change happens in September, and it looks   back like a two-year average, give or take,  and adjusts accordingly. So really, you've got   the 30th of April compliance, and you've  got September, which is your adjustment.   But underneath all of that, you've  just got this massive imbalance   and the price going up, which is forcing people  to wake up and understand what's going on. Now,   that just increases and makes people  behave logically by buying more permits.  RAOUL PAL: The ways people play this,  and we talked about this before,   and I've been on Twitter talking about it because  everybody always asks. There's the EU ETS futures   that trade on ICE, very straightforward if  you're able to do that. Then there's the KRBN   that's in the US. That's not a perfect tool.  Do you want to explain just why it's different?  LAWSON STEELE: The KRBN is an  exchange traded future. Essentially,   it buys carbon permits around the world. If you  think about what that means, today, you've got   carbon schemes, you've got EU ETS, you've  got UK, you've got Switzerland, you've got   New Zealand, and you've got California,  and RGGI on the East Coast, so select six,   and China but China is virtually  zero in terms of volume.  You've got six different places to invest. What  KRBN does is it's a global carbon portfolio.   In actual terms, that means it's about--  depending on what it is on the day or week,   whatever, it's about 60% to 70% exposed to  the EU ETS scheme and has exposure to others,   so it's not a pure play on the EU ETS but it does  have exposure to other ones that you won't know.  RAOUL PAL: And are those, without spending all  the time going through all the global ones,   are they generally similar schemes  with similar limited supply dynamics?   Is there a global squeeze going on? LAWSON STEELE: The prices have gone up,   but California is interesting because  it says we'll start off at this level,   the level was quite low, and we will  increase the price by 6% per annum,   so quite active. Imagine a nice  yielding bond or whatever. But   the price has gone up beyond that, discounting an  awful lot of that. And it's discounted that maybe   one day, it'll become much more real about it. Because the price now is about where it was,   $30, something like that. It's clearly  not delivering what the EU ETS is at $80.   And of course, as we know, $80 is way too low. But  I'm not getting the sense that those markets are   going to explode the way that EU ETS scheme as of  then, because they haven't had the history of--   why are we here today in 2022 with EU ETS  scheme here because from 2005 platform,   brief part and the end of 2005, from there to  2018, 2019, the carbon price did diddly squat.  And therefore, the EU basically spent years  trying to come up with the right formula to   get this thing going up. And they've finally done  that. These other countries or schemes or whatever   haven't had that yet. RAOUL PAL: Yeah, to me,   it all clicks with me immediately. When I  first heard the story, and then looks- -  LAWSON STEELE: [?] cost,  aren't you? I know you are.  RAOUL PAL: It's a deflationary cryptocurrency  going on demand. It's pretty bloody obvious to me   how this works. And I saw that and  it's like, okay, well, we know how this   works out. And it's deflationary. We're  seeing even in cryptocurrency world where   Ethereum is this deflationary asset  where you're buying back or removing   supply. I'm like, it's the same as this carbon  market. The other instrument is GRN, is it?  LAWSON STEELE: Yeah, GRN is one that's quite  illiquid. Then you got IG index, if you want   to spread betting, if you're not in the US, you  can do that in the UK and so on, or the Europe,   whatever. It's pretty limited at the moment.  Yeah, at some point, it is difficult for   traditional retail investors, what you call the  man on the street to invest in carbon today.   ETF is like what? But at some point, a product  will come out which allows retail to get involved.  RAOUL PAL: KRBN is not the worst. You look at  it and go, well, there's a bunch of cash just   because they invest in futures contract just so  everybody's aware. They don't need to put the   cash in. But it's not a bad product. LAWSON STEELE: No, it's good.   It's just delivered price performance. RAOUL PAL: Fascinating. Lawson, listen, thank you,   my friend. That's just a good update to know where we are, what we got to see. Sounds like the year   ahead is going to be another  interesting year, right?  LAWSON STEELE: Yeah, super exciting. Yeah.  Sorry I'm going to put up with such bad weather,   but yeah. RAOUL PAL:   Brilliant, perfect. Okay. I'm sure we'll catch  up with you again halfway through the year to   figure out where we are then. LAWSON STEELE: All right, cool.   Good to see you. Okay. RAOUL PAL: Take care. LAWSON STEELE: Bye.  RAOUL PAL: When change comes, opportunity  abounds. We're about to enter a period of   the fastest pace of technological change in  all human history, something we refer to as   The Exponential Age. And Real Vision is going  to be your guide to this incredible future.