Environmental and climate-change developments are emerging as structural factors in influencing global commodity markets. Extreme weather, natural disasters, biodiversity loss, climate-action failure and human-made environmental disasters are increasingly concerning governments, business and public awareness.

For commodity producers, these issues are critical. Fossil-fuel energy use accounts for two-thirds of global emissions – 36 gigatonnes of CO2 a year. All other sources of carbon emissions – including industry, agriculture, transport, land-use change and forestry – emit only 21 gigatonnes.

Carbon emissions from energy production have risen by 41 per cent since 2000. Coal still accounts for 44 per cent of the total and oil another 35 per cent. The fall in coal emissions has been largely offset by increases from oil and natural gas but several oil producers have announced plans to cut the carbon intensity of their energy supply mix or even to become net CO2 neutral over coming decades.

Coal-fired electricity generation accounts for around 25 per cent of all global carbon emissions but many major banks and investors are saying they will divest from companies with a large exposure to coal. That could limit investment capital raised by the sector.

There are nevertheless 2,425 coal-fired power stations globally: 48 per cent are in China, 13 per cent the US and 11 per cent in India. Another 385 plants, mainly in China, are under construction. Demand for thermal coal is thus expected to remain broadly steady. Falling coal consumption in the OECD economies, led by Europe, will be largely offset by higher consumption in India.

With no viable alternative to the extensive use of coking coal in steel production, these carbon emissions remain a challenge. Steel demand seems set to keep increasing: while China’s growth will be less construction-oriented, other emerging economies, including India and Indonesia, will fill the gap.

Steel producers, can nevertheless mitigate carbon emissions – around 8 per cent of the global total – through recycling, reducing stocks, and better energy efficiency.

Prices of battery-related commodities such as lithium and cobalt have been depressed by increased supply and the recent impact on sales of electric vehicles caused by coronavirus and global trade tensions. However, the environmental agenda should support future demand.

A comprehensive carbon pricing mechanism can help reduce emissions while balancing growth objectives. Carbon pricing has been a key part of the UN Framework Convention on Climate Change since its inception in 1992 but only 20 per cent of global greenhouse-gas emissions are currently covered by carbon pricing – and less than 5 per cent are priced at a level consistent with achieving the temperature goals of the Paris Agreement.

The International Energy Agency has set out scenarios suggesting measures that could lower carbon emissions from energy-generation from around 35 gigatonnes today to 10 by 2050.

But in the absence of a comprehensive carbon price, alternatives are being sought – including consideration by the European Union of a carbon border tax to level the playing field between countries with strong mitigation schemes and those without.

First published 5 March 2020.

Would you like to find out more? Click here to read the full report (you must be a subscriber to HSBC Global Research).

Disclosure and disclaimer

More, collapsed
Will Europe’s green trillion boost growth?
The EU’s plan is ambitious – but involves very little new money
Join the conversation?

Join our Linkedin group to get an unparalleled view of macro and microeconomic events and trends from a bank that is a leader in both developed and emerging markets.