Meet Louis Redshaw, MD, Redshaw Advisors

Louis-Redshaw

Q1: Describe your career to date in bullets. What does Redshaw Advisors do?

  • 1995-6: MSc in Environmental Technology and Energy Policy from Imperial College
  • 1996-2003: Electricity and renewable energy analyst / trader / marketer for London Electricity / Enron / EDF
  • 2004: Managing Director and founder of Barclays Capital’s emissions trading business, the world’s largest by volume
  • 2014: founded Redshaw Advisors

Redshaw Advisors was set up to help companies to be successful in the increasingly diverse and complex global carbon markets, whatever their exposure (or desired exposure) is caused by. We are a group of emissions trading experts and we assist companies understand their direct and indirect carbon risk exposure and help them hedge it. We also assist companies and supra-nationals in elements of carbon market design and we support financial institutions in their efforts to invest in carbon markets.

Q2: What are the main carbon-related uncertainties facing European companies up to 2020 and beyond?

The uncertainties depend on what kind of company you are and therefore what kind of exposure you have.

  • Companies captured by the EU Emissions Trading Scheme (EU ETS) have a compliance requirement and usually need to buy at least once per year. (This is a minimum – although we advise that they do it a little more often than that).
  • Companies with indirect exposure, and that’s almost everyone else, need to find a way to hedge that exposure.

What both sets of companies have in common is uncertainty in relation to price development.

There are a lot of moving parts to the EU ETS. What is more, politicians and the European Commission (EC) keep moving the goal posts. That all said, there is sufficient certainty coming from Brussels to cause all the major analysts (and we work with the best, Energy Aspects) to predict that EU carbon prices are likely to be triple the current price by 2020.

Beyond 2020, the carbon price uncertainty is compounded by free allocation uncertainty. Companies that are accustomed to receiving free carbon permits to cover 100% of their requirements are in for a big change. The EU ETS review recently published by the EC confirms that no-one will receive 100% in the future.  Indeed, the majority will only receive allocations covering 30% of their expected emissions.

Q3: Should institutional investors be considering direct carbon as an asset class?  What could it add to their current strategies?

Investing in carbon markets, either as a hedge for other investments or as an asset class in its own right should be a no-brainer.  After-all carbon emissions must and will fall due to the dawning realisation that climate change is real, man-made and only manageable by reducing carbon emissions.

Historically, carbon markets have been volatile and unwelcoming places for institutional investors. For example, the emerging Chinese carbon markets continue to suffer from teething troubles related to over-allocation. However carbon markets such as the EU’s and California’s are maturing fast and are putting such issues behind them. As a consequence we are finding that investors are waking up to the fact that carbon markets can be used to hedge exposure to fossil fuel investments at a time when there is increasing pressure to divest these assets, either due to forecast underperformance or for ethical reasons.

The European carbon markets are of particular interest at the moment because they are set to outperform all other commodity markets by tripling in price over the next 5 years as a consequence of major legislative changes. These changes, backed by politicians across Europe, have been specifically designed to increase prices. Clean-tech equity investments are a crowded trade so carbon, in which investor interest is currently low, can add outright value, diversification and a hedge to most portfolios.

Q4: Could we ever see a single global carbon market? By when? What barriers would need to come down? What catalysts do you see?

Carbon is ubiquitous and completely standardised (one ton of CO2 is one ton of CO2 wherever it is reduced). It is also relatively easy to measure. So, a single carbon price is theoretically straightforward. However, even in other global commodities markets – such as oil – we don’t have a single global price, instead we have two major benchmark prices relative to which a multitude of other products trade.

The UNFCCC meeting in Paris in December 2015 will bring together a patchwork of national emissions reduction commitments, a large number of which will incorporate some form of emissions trading scheme.  A single carbon market is made very difficult by:

  • economies being at different stages of de-carbonisation
    • (For example it would cost more to reduce a tonne of CO2 in Europe than in the U.S. or China)
  • Also, countries have different levels of ambition to ‘do their bit’ to save the world from climate change
    • (again it is easy to contrast Europe and the U.S.)

The key to a single carbon market is to transform this patchwork of ETSs into a single scheme by gradually, presumably over many years, drawing together the different schemes ambition levels and abilities to reduce carbon.

For emissions reductions to take place as efficiently as possible and to remove the free-rider effect of emissions pricing in some regions and not in others, the world will have to have a global carbon price. Both of these factors, that prevent us reducing carbon at the lowest possible cost, will become more apparent as each independent carbon market develops and the calls for a unified market will intensify.

Redshaw Advisors has been working with one supranational to simplify the idea it has had for a global, networked carbon market.  Rather than waiting many years for the markets to converge they can be linked now if a carbon exchange rate can be set that reflects the difference of ambition and ability of each ETS.

This would move us one stage further on and transform the barriers to a global carbon market from being fundamental ones to being technical ones, such as:

  • setting the exchange rate and
  • getting the different economies to agree to accept each others carbon for compliance.

This should be a  much simpler approach.  Once these obstacles are overcome, and it could be within the next few years, the parallel with oil (i.e. a global benchmark price with other related products being priced relative to it) can be a reality for carbon sooner rather than later.

Q5: If you could travel back in time for a day, when and where would you go to?

I would travel back to 1990 and attend the Rio Earth Summit.  I would tell them that I know that when it comes to combatting climate change, by and large, the next 25 years will be wasted.  I would encourage them to get real, legally binding commitments from countries at that summit.

Source: Sri Connect Logo

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