The Paris Agreement in 2015 expressed a preference for the use of markets in the fight against climate change
Well functioning markets allow emissions to be reduced at the lowest cost and are more efficient, and more welcomed by business, than taxation or direct regulation. The implementation of effective carbon markets is therefore a key component of the global effort to reduce GHG emissions. The correct design is key to the successful inflow of new capital into a new carbon market. Without consideration of where liquidity – the lifeblood of markets – will come from and how it can be maximised, the market risks being economically inefficient and can fail to send a reliable carbon price signal.
The correct design is key to the successful inflow of new capital into a new carbon market. Without consideration of where liquidity – the lifeblood of markets – will come from and how it can be maximised, the market risks being economically inefficient and can fail to send a reliable carbon price signal.
Liquidity is a function of:
- Price transparency (good liquidity means that market participants can readily obtain market price information),
- Market depth (good liquidity means that abundant volume is available on the bid and offer),
- Bid / offer spreads (good liquidity requires offers to buy and sell to be priced close together),
- Transaction costs (good liquidity means there is a low cost of market access relative to the market price) and,
- Barriers to market entry (good liquidity occurs when the market is easily accessed and regulatory hurdles are not prohibitive),
- Market Maker.
Because carbon markets are being implemented – i.e. they are not arising spontaneously due to natural supply and demand – there is usually one vital ingredient missing from the best intentioned Emissions Trading Schemes: experience of directly participating in them. Our experience ranges from standardisation of EUA trading contracts in 2004 to kick-starting the secondary CER markets in 2006. Our founder Louis Redshaw trail blazed the trading of both instruments after identifying the specific impediments to liquidity. While at Barclays the team were founder liquidity providers in the California cap and trade system and in RGGI. Since 2004, the team now at Redshaw Advisors, has been responsible for the trading of more than 8 billion tonnes of carbon in every ETS in the world.
The Redshaw Advisors team are able to provide advice on the design and implementation of successful carbon markets to Governments, supra-nationals, exchanges, trade associations and companies alike.