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The race to limit global warming by reducing emissions of greenhouse gases has created new dynamics in markets. Commodity markets may be among the most profoundly affected, but they also have a crucial role to play in the transition to a lower-carbon economy.
It is time for commodity traders to help make that happen — using market forces, risk management skills and our unique insight and expertise in managing global commodity supply chains — to reduce carbon emissions.
This may seem a surprising statement from the head of one of the world’s leading oil and metals trading firms. But we recognise that the energy transition is already having a far-reaching impact on our business and that we have an important part to play.
Companies of all sizes and in all sectors now report emissions and set targets for cutting them — not just the so-called Scope 1 and 2 emissions for which they are directly responsible in their operations, and from the use of the products they make — but also those generated in their upstream supply chain, from the manufacture, processing and transportation of inputs, or Scope 3 emissions. Trafigura is no exception: we have set targets for reducing our direct emissions and we are working to quantify and reduce those from our supply chain.
Tackling upstream emissions is difficult due to fragmented supply chains and the data needed to manage emissions outside an organisation’s control. From our daily interactions with customers, it is clear that accurate, reliable information about the carbon footprint of products and services has itself now become a vital but scarce commodity.
Fortunately, the market can bring a solution to this conundrum, by enabling greater emissions transparency as part of the trading process.
The key is to consider carbon as another specification for commodities — just as today, we deliver commodities to meet customer specifications of quality and grade. By providing a carbon value for the commodities we supply, producers, traders, financiers and customers can identify opportunities to reduce carbon in global supply chains.
Carbon markets — whether compliance or voluntary — can help to channel investment from emitters into the technologies and projects needed to do this. Trading carbon is an opportunity for our industry to participate in high-growth markets, extend the services we offer to customers and benefit from finding and removing inefficiencies in new markets. It is also an opportunity to help establish benchmark pricing, increase liquidity and drive transparency. In voluntary carbon markets, greater regulation, established standards and verification of projects’ claims will be prerequisites to achieving these aims.
Opportunities range from incentivising lower-carbon production, to choosing lower-carbon transportation, to offsetting residual emissions with credits generated from projects that remove or sustainably reduce carbon in the atmosphere.
At Trafigura we saw how this can work when we established a low-carbon aluminium trading desk two years ago and a financing facility to support it with two of our banking partners. The facility enabled us to access financing at a preferential interest rate and, in turn, to pay a premium to low-carbon aluminium producers.
And through establishing a carbon trading desk, and a power and renewables division, we are leveraging our skills in managing risks, providing financing and liquidity and connecting producers and buyers in rapidly growing markets that will help the transition to a net zero world.
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Unless supply chain emissions can be quantified to a far greater degree of accuracy with a transparent and standardised approach, it simply will not be possible to reduce emissions at source.
Even so, if it is widely accepted that removing — as well as reducing — carbon emissions from the atmosphere will be required to achieve net zero.
Providing transparency and greater accuracy of supply chain emissions across each stage of complex value chains on a global scale is a task that no company can hope to achieve alone. It will require co-operation between producers, logistics providers, traders and customers across multiple industries on an unprecedented scale.
Trafigura is committed to playing its full part, and believes that transparent emissions specifications paired with a liquid carbon market could offer one of the more effective ways of driving the climate transition.
The author is executive chair and chief executive officer of Trafigura
The Commodities Note is an online commentary on the industry from the Financial Times
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