Carbon trading is part of the energy industry now. In a previous post, we introduced you to the concepts of carbon credits and cap-and-trade programs. The notion was conceived and birthed by the United Nations (UN) through a Kyoto Protocol treaty in 2005. The document recognizes that it’s impossible to exist in a modern world that doesn’t create pollution and sets forth a market-based mechanism called “Cap and Trade” to manage global emissions.
(Politically speaking, it’s a great plan, except for one significant flaw. The UN classified China and India as “developing/non-industrialized” nations. Even though they are the first and third most responsible for global emissions, they got unlimited credits and no caps.)
In More Recent News
At the 2021 Climate Summit, President Biden pledged to cut greenhouse gas (GHG) emissions by at least 50% in nine years. It’s a lofty goal — to say the least — meaning cap-and-trade programs will probably play a key role in the energy and transportation industries’ future profitability. It also means investors and organizations can take advantage of carbon credits by purchasing them immediately because their value will balloon soon.
And since our appetite for energy and goods isn’t falling, we don’t expect manufacturing or energy suppliers to slow their production any time soon.
So, today we dive deeper into carbon trading. We’ll explore how organizations and individuals can profit by trading carbon credits in the US and around the globe. Then we’ll take a high-level glance at carbon trading in other nations.
Before we get deep into these waters, let’s have a light review of greenhouse gases/emissions. Any American fifth-grader can tell you that GHGs are bad for the planet and every living thing on it.
But let’s define which greenhouse gases are we’re talking about (and have a little side rant about global warming). Then, we’ll talk about President Biden’s executive order in January 2021 and its effect on the potential value of carbon credits. Lastly, we’ll explore the nuts and bolts of carbon trading and share some insights from the experts.
Greenhouse Gases, Carbon Dioxide, and Pollution
Greenhouse gas (GHG) is any gas that absorbs infrared radiation (often in the form of heat) from the Earth’s surface and traps it. Think of it like a greenhouse used to keep plants thriving in the winter or like a car interior that becomes blistering hot in the summer — on a global scale.
In the US, the leading producers of GHGs are transportation and energy production. Manufacturing, agriculture, and food production play a much smaller role in our naughty gas output. China and India are known for high levels of emissions thanks to more manufacturing in those nations.
One Side Rant: Is the Earth Actually Warming? If So, Are We Solving the Problem with Carbon Credits?
Yes, the Earth is clearly experiencing a warming trend, which it seems to do like clockwork every few hundred million years. Still, today’s world is an icebox compared to its early years at 3600° F. It is considerably cooler than the most recent temperature spike when the planet averaged 85° during the mildly toasty Paleocene-Eocene Thermal Maximum (PETM) 56 million years ago.
- While giant ferns and dinosaurs aren’t considered polluters, the pitch among climate change proponents is that varying concentrations of GHGs may have driven some climate changes in pre-history.
- Some scientists hypothesize that a great “methane burp” was triggered by a volcano, which caused GHG levels to escalate immediately.
- But regardless of the cause, it appears that GHG levels have always been exceptionally high during warm periods and lower during cold periods.
Those warmer periods are times of life and abundance on our planet. When the Earth is warm and balmy, flora and fauna grow large and reproduce rapidly. When the Earth is cooler, everything is smaller, as well as slower to grow and multiply. Suppose one studies NASA’s temperature maps over the past decades. In that case, it’s clear that balmy jungles — our precious rainforests — are busy getting busy and generating all kinds of heat and gases, not just battling carbon monoxide with oxygen as your children’s schoolbooks suggest.
So ultimately, whether the Biden Administration addresses a cause of climate change or a symptom remains to be seen. Now, let’s get dive deep into carbon credit trading.
How Carbon Credit Trading Works
Carbon Trading Begins with “Generators” (Known Polluters)
In a past article, we discussed carbon credit generation. One carbon credit is equal to one ton of carbon dioxide. That’s about the same emissions as a 2,400-mile cross-country drive in a standard automobile.
Also, realize that carbon credits are based on “ex-post” accounting. Put another way, they are performance-based but in arrears. A new carbon credit isn’t issued until after emissions are reduced and approved auditors verify that reduction under internationally agreed standards.
In a nutshell:
- Companies known to pollute receive [X] number of carbon credits. A government or organization allots those credits.
- In the beginning, the company will operate as usual — and pollute as usual — but no more.
- If they exceed their expected emissions, they face an expensive fine.
- Periodically their credit allowance goes down, so they receive fewer credits.
- To operate using fewer credits or to generate more, a business may need to adjust their business model, find carbon-neutral options within their operations, or shut down for a time.
- Meanwhile, one organization can sell its unused credits to another company that exceeds its credit allotment.
The goal is to encourage polluters to work together to lower industrial emissions. California and a group of ten Eastern states are all eager to take part.
Now, some call carbon credits carbon offset certificates or simply certificates. And it’s important to know they do expire.
Carbon Offset Certificates Are Short-Term Investments
Depending on the issuing organization or government, carbon offset certificates will expire within two to three years, or five years at the maximum. So carbon credits aren’t meant to be bought and held. They are designed to be bought and sold within a few years, and their value is currently self-capping.
You Can Trade Carbon Credits, But Their Value Will Never Exceed the Cost of a Penalty
However, the Biden Administration has made clear their intentions to increase penalties for polluters, particularly in the oil and energy industries in the US.
Per Biden’s Executive Order on Protecting Public Health and Environment and Restoring Science to Tackle the Climate Crisis, by September 2021, we will have new regulations, performance standards, and emissions guidelines for “methane and volatile organic compound emissions from existing operations in the oil and gas sector[s].” This includes oil exploration, extraction and production, transportation, processing, and storage.
Clearly, fines and penalties will be skyrocketing soon. The cost of fuel will quickly become frightening for the average American consumer. Also, the value of carbon credits will balloon as well.
Carbon Trading: It Costs Megabucks to Play
Unlike introductory investment opportunities provided by the likes of Robinhood.com, carbon credit trading is an expensive market that might be difficult for individual investors to join. At CTX Global — the world’s first global exchange for voluntary carbon credits — you’ll spend $995 to join the game and $495 annually after that (plus another $80 in sales tax if you’re located in the UK). That’s before any commissions or trade expenses, or even the cost of a single certificate.
So you’re in it for a grand and haven’t even bought a certificate yet! But speaking of certificates, how much does one cost? Here’s a fun experiment. Try to find out what it costs to purchase carbon credits without paying to join CTX or some other marketplace.
One could say this game is far too expensive and challenging for the average consumer, like one who hopes to build a retirement fund or supplement their kids’ educations. It feels like this is a market where only the whales are welcome to swim. And the rich will get much richer after September 2021.
What Financial Experts Say About Carbon Credit Trading
Come Biden’s 2030 deadline for reduced emissions, experts say this market could be worth $100 billion.
Per Jess Shankleman and Akshat Rathi of Bloomberg.com, “global warming is the world’s biggest market failure.” On one side, industry is clogging the atmosphere with GHGs. Meanwhile, countless projects battle the issue by planting trees and developing technology to capture carbon dioxide. Carbon credits turn previously removed or reduced carbon into a commodity like corn.
That’s the newest theory offered by Mark Carney, the former governor of the Bank of England, and Bill Winters, the chief executive of Standard Chartered Plc. These financial masters set up a rule-making task force made up of bankers, sustainability experts, airline execs, commodities traders, and scientists.
According to Carney, the market for carbon offsets could be worth $100 billion by 2030. That’s up from about $300 million in 2018. He and Winters plan to use the findings of their Taskforce on Scaling Voluntary Carbon Markets to launch a pilot program by fall 2021 when the next round of global climate talks occur.
Meanwhile, stay tuned for the third piece in this series. We’ll discuss nature-based solutions that could help offset carbon emissions.