We have 12 years left to fix our global economy and contain global warming. Or at least that’s the conclusion the Guardian comes to about the latest IPCC report. If that is the case I can confidently say that we are all screwed – we better work out a way to deal with temperature increases of 2 degrees or more. I don’t say this with any great pleasure but there’s simply no way we can get a complex range of independent actors – nation states – to agree to make the changes that are needed. But this cynicism shouldn’t hide a more positive story – big changes are coming, it’s just that they may come too late.

If I had a crystal ball with any predictive accuracy I’d suggest that there are four givens we’re all going to have to deal with. The first is that although we will succeed in cutting carbon emissions by mid-century very substantially it won’t be enough. We’ll have to factor in mitigation effects.

The next certainty is that renewable energy production will carry on accelerating. If we have a Corbyn government, we’ll get to 50% plus levels quickly. If we have anyone else it might take a decade longer but the destination isn’t any different. Renewables will rule.

Which will I confidently predict produce some major problems not least from the electrification of transport? Next week I’ll examine the whole issue of energy storage in much more detail, but for me the bottom line is ominous – we’ll face an exponential increase in electricity demand, massively increased renewables supply and a precipitous decline (in relative terms) in base power loads. Intermittency will be a mega problem and we’ll see the growing prevalence of negative power pricing as grids struggle with oodles of green power at the wrong time of the day. Day in, day out. This suggests my next certainty. Battery and storage technologies are the next big thing.

My last conclusion is that the price of carbon has to increase. We simply have no other choice in a global market economy. This is one of those sordid facts that state-controlled centralisation can only mask and push into other areas. Until we place a proper price on carbon emissions, we won’t be able to change behaviours. Governments can ordain all sorts of nonsense, but economic actors will simply choose to ignore those directives. The only long-term solution is to price carbon appropriately. As sure as night follows day, at some point in the next few decades, carbon prices will vastly increase. The only challenge is to reduce the inefficiencies surrounding the nascent markets in emissions and carbon. At some stage, these markets will find a sensible price.

A note from Berenberg in mid-August suggests that this moment of revelation might be closer than we think. According to analysts Lawson Steele, Andrew Fisher and Oliver Brown, the 2018 carbon market already looks to be in deficit, putting upward pressure on the carbon price, power prices and generation earnings. Here’s the detailed note with accompanying chart.

“22mt less supply of permits this year: This puts the market into deficit for 2018 as we had forecast a 19mt surplus (which in any case we think has been snapped up by financial players).
What’s going on? Three countries, Germany, the UK and Netherlands, carry out their own auctions; the rest are done by the EU on behalf of individual countries.  German auctions will pause from 9 November to a yet-to-be-specified date in Q119. Announced on the EU website yesterday, but only filtering through now, all this is down to the EC not being able to finalise an amendment to the auctioning regulation in time for the EEX (the auction platform used by Germany) to seamlessly continue auctions (EEX was awarded a 3-year contract in March 2018).

Supply/auctions of 22mt shift from 2018 to 2019: This means that about 22mt will no longer be auctioned in 2018 and will pass through to 2019. But 2019 is already in serious deficit due to the MSR kicking in, so 22mt additional supply in that year will make no difference to the deficit. Whereas this year, 2018, now passes into deficit. Coupled with auctions in the last two weeks that have been 5x oversubscribed, this suggests that the deficit is beginning to bite. In turn, that could lead to an earlier, and perhaps sharper, carbon rally than we expected – we forecast €15/t for 2018, €25/t for 2019 and €30/t for 2020.”

My question? Is it time to go long carbon prices and buy into a carbon fund or ETF???