AFR busines summit 2024: Orderly transition requires at are deep, liquid, trusted financial markets
Already a subscriber?With 25 years of runway to 2050, there’s little time left to develop and scale the financial markets and instruments required to achieve net-zero emissions.is about huge systemic change.
The world needs to shift how it powers homes and cars, the types of machinery in factories and farms, and what is used to construct property and infrastructure. Those changes require investment in a wide range of metals and materials, including battery metals and rare earth minerals. In parallel, scaling the supply of carbon credits is critical to offset emissions that cannot be reduced or abated, and to provide incentives to decarbonise. CBA’s head of institutional banking, Andrew Hinchliff, says a carbon price is crucial to achieving net zero by 2050.In an uncertain world, these technological shifts create financial risks. Today, we lack readily available, liquid and transparent hedging tools to manage those risks – which makes progress towards net zero that much harder. Take electric vehicles for example. Battery technology is now economically efficient and proven to the point that it can help to significantly reduce transport emissions. For EV manufacturers, the obstacle to scaling output may not be the technology but access to reliable, consistent raw materials that go into the EV and the ability to manage the price risk of these commodities.Commodities are known for their volatility. It’s challenging to get supply and demand balanced on a global scale, which can lead to wild price swings in the market. But for manufacturers who buy steel to make car panels or nickel for batteries, that volatility can make entire product lines uneconomic. We know that commodity producers want price certainty to ensure sustained investment. Meanwhile, consumers – such as manufacturers – similarly seek some certainty around access to supply and, most importantly, cost base.Historically, industry turned to financial markets to hedge such risks – helping propagate trade in everything from milk to inflation futures around the world. But history also shows that creating a new market is incredibly challenging. In the 1970s, as the world grappled with currency risk in a post-Bretton-Woods reality, the US experienced an era of financial innovation and Chicago quickly emerged as the hub of futures trading. Yet, 64 per cent of the financial futures contracts launched between 1975 and 1982 failed. Consider that the world’s first lithium futures contract – a metal ubiquitous in our phones, EVs and utility-scale batteries – started trading on the CME Group Inc’s derivatives marketplace only in 2021.To support an orderly transition, we need financial markets that are deep, liquid, trusted and ready to provide the risk management required by the consumers as well as producers of these commodities. With 25 years to go, the urgency has never been greater.We need to tackle the challenges head-on to mobilise all parts of the carbon ecosystem. Australia has some of the world’s best land and coastal resources to sequester carbon and generate carbon credits, backed by human capital that is innovative and entrepreneurial. We benefit from jurisdictional stability and a respected, government-regulated carbon market scheme. The opportunity for our country is meaningful. The Carbon Market Institute estimates that 7 per cent of global demand for carbon offsets can be generated in Australia. With demand for carbon offsets forecast to grow 20x by 2030, the success of this market could be a significant economic opportunity. At the same time, a reliable carbon price provides a crucial economic signal that can help accelerate the technological and industrial change required for the energy transition. Markets play a critical role in scaling down the cost curve for emerging climate technologies, bringing these to market earlier and allowing them to be used in direct decarbonisation efforts.What is required is additional financial market infrastructure to promote liquidity and transparency, as well as significant scaling of high-integrity supply and clear signals of demand. Already, many organisations are working to stitch together pieces of this puzzle, from market infrastructure to project development to risk management tools. But we recognise that to succeed, we need a coalition of market participants that can lend momentum to the growth and development of a market that delivers the “net” in net zero.Our investment in Nindethana, Australia’s largest native seeds merchant, aims to unlock the supply of native seeds that can support biodiverse land restoration and reforestation projects. We’re also working with farmers and innovators to pilot carbon measurement solutions, and new sequestration methodologies and technologies that can help spur supply. To support project developers, we have offered Australian Carbon Credit Unit pre-pays that provide capital upfront to facilitate investment in supply.Developing and scaling these markets at pace is critical as 2050 draws closer. We are confident Australia is up to the challenge, and CBA is here to play our part alongside others to help scale carbon and other markets that will underpin the climate transition.is the group executive of institutional banking and markets at CBA, which is a sponsor of The Australian Financial Review Business Summit.
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