Carbon Winners and Losers

Happy Hump Day!

Today, we’ll look at the carbon credit winners and losers.  I like this space because it’s still under the radar, unlike our friends in the crypto world.

This may be your big chance to get out in front.

So, let’s continue our education and information gathering in the carbon credit space.

Crypto, Crypto, Everywhere…

Cryptocurrency gets all the airtime. Pundits argue over whether it counts as a “real” currency, while others wax eloquent on the potential uses of blockchain technology in daily life. Bitcoin rises, Bitcoin falls, and altcoins dominate the airwaves.

But lost in the crypto mania is that cryptocurrencies might not even be the hottest emerging market today. That honor falls to something far less glamorous but more far-reaching.

The Winners

Carbon credits have been hotly debated for years. They still are, but then something unexpected happened.

Governments went forward with a handful of headline programs. Sometimes these were national, like Canada’s, or international, like the EU’s. But for all the enthusiasm over these initiatives, the market did something no one expected.

It set up its own carbon trading schemes.

These private markets are growing rapidly, right alongside the regulatory programs. Combined, the twin carbon markets have created a new wave of carbon credit winners and losers. Today, we’ll look at the institutions making the most of both kinds of carbon markets.

California

California’s ETS began in 2012. In 2020, it collected $1.7 billion in revenue. That figure doesn’t include credits resold between companies; the actual amount of money changing hands was far higher.

California touts the program as an unmitigated win. $14 billion was raised over the program’s lifetime, with billions of dollars reinvested in various climate initiatives. The state claims an overall 13% reduction in carbon emissions during the lifetime of the program. The state’s economy grew overall during the same period. It’s tough to argue that the two are entirely unrelated. Overall emissions reductions involved other factors as well, but the cap-and-trade program played a significant role.

So far, California is a clear carbon credit winner. The bottom-line cost of the program to the consumer is a different story, but the initial success of California’s cap-and-trade means that the program will be a model for other states.

Farmers (at least the big ones)

Trey Hill is a clear carbon credit winner.

To be more specific, Trey Hill made $150,000 for carbon sequestration in his 10,000-acre Maryland farm.

Now, not every farmer will be Trey Hill. He found himself at a lucky intersection. Hill uses old no-till farming methods like planting root and cover crops to naturally loosen and protect the soil. His experience led to his being approached by Nori, a Seattle-based startup selling carbon credits.

Nori sold credits for Hill’s carbon sequestration farming methods. In the end, Hill received $15 per ton of carbon locked away in the ground due to his farming practices, and he came away with an extra $150,000.

Not every farmer will be Trey Hill, but his case is evidence that there will be many opportunities in the voluntary carbon credit market for innovative and unusual farmers.

Tesla

Carbon credits made Tesla profitable – not electric vehicles.

Shocking?  Maybe.  But there’s no getting around the fact that Tesla walked away with a little over $1.6 billion in carbon credit revenue in 2020.

That’s a full six quarters of profitability, in large part due to ZEV credit.

That ZEV credit is the capstone of California’s cap-and-trade program. Every car maker who sells vehicles in California needs to sell a certain number of Zero Emissions Vehicles; if they don’t sell enough, or if those sales are outweighed by internal combustion engine vehicles, they need to purchase additional ZEV credits.

So, if you’re Tesla, and you sold an estimated 60,000 vehicles in 2020, then you could be sitting on an accumulated pile of ZEV credits.

And by selling those credits, Tesla has powered its way to profitability.

As other carmakers roll out their own EVs, Tesla’s massive ZEV credit sales margin will diminish. But in the meantime, Tesla is a clear winner in California’s carbon credit market.

Voluntary credit markets

Nori and GoldStandard allow individuals to purchase carbon credits directly. Each offers a carbon footprint calculator – you can instantly plug in your information and see precisely how much carbon you need to purchase to offset your lifestyle.

Nori was behind the success of Trey Hill’s carbon credit sale, and they’re not alone. These third-party carbon credit brokers open the door for individuals to get in on the action. The size of the carbon credit industry is only set to grow from here, and brokers like Nori are set for rapid growth.

There’s another private credit broker as well. Companies like Verra facilitate investment in climate-friendly projects and sell carbon offsets in bulk to corporations and large-scale investors. These brokers also serve as gatekeepers, verifying the quality and effectiveness of the carbon credits they sell.

A glance at any of the projects in the offing through these brokers shows just how broad the carbon credit market is:

    • Carbon sequestration through no-till farming in the USA
    • Wind power projects in India
    • Hydroelectric power in Honduras
    • PET recycling in Romania

That’s a global project list with implications for everything from green energy to agriculture.

And it makes the voluntary market itself the biggest winner of the carbon credit movement.

Next, we’ll look at some carbon credit losers and see what lessons we can glean from their misfortune.

The Losers

Combine regulatory carbon credits and voluntary carbon offsets, and you’ve got a brand-new market with explosive potential. But not everyone can, or will, profit from the new markets.

The irony is that many carbon credit losers are entities that should seem like a perfect fit for any planet-friendly initiative. Instead, these obvious carbon winners are losers. Let’s look at the list.

Farmers (small ones)

Earlier, I told you about a farmer who won big due to carbon credits – $150,000 big. But that farmer had a secret ingredient that most American farmers simply don’t have.

His farm was a 10,000-acre farm.

The trick is that carbon credits aren’t that expensive right now on the voluntary market. His credits sold for a little over $15 a ton, and he sequestered about 8,000 tons of carbon.

The math simply doesn’t work for smaller farms. That means that one prime candidate for the carbon credit movement will likely get bypassed entirely – organic farms.

That’s right. Organic, carbon-conscious farms that go out of their way to be planet-friendly will likely miss out on carbon credits . . . which are designed to reward carbon-conscious companies that are planet-friendly.

Most organic farms simply aren’t big enough to compete for carbon credits at scale. They don’t have enough acreage to hold much interest for the third-party exchanges that coordinate carbon sales. The average size of an organic farm in the US is 285 acres. That’s even less than the average size of a regular farm, at 444 acres.

And it’s less than 0.03% of that 10,000-acre farm that won big. Apply the same percentages to the original $115,000 amount, and your average organic farm in the USA would be eligible to receive roughly $3500 in carbon credits for projects that are often multi-year undertakings.

Those small farms stand to gain pennies if anything, while larger corporate farms gobble up the credits. That makes small, organic, low-carbon-emissions farms into carbon credit losers.

Nuclear power plants

Nuclear is the obvious answer to so many emissions problems. Need something that will efficiently replace all your natural gas and coal power plants? Go nuclear. Want to provide lots of both blue-collar and white-collar jobs? Go nuclear.

And yeah, want an energy source that is nearly greenhouse gas-free? Go nuclear.

But nuclear power suffers from heavy regulations and an incredibly lengthy construction time – from 7-8 years to well over a decade, depending on the country and size of the plant.

And with all the emphasis on cutting emissions NOW, nuclear plants will lose out.

Who will buy nuclear carbon credits when they can buy credits from a wind farm or a water reclamation project? Especially when those projects can be ready in a matter of months or a couple of years.

Large nuclear energy plants are a carbon credit loser.

Oil and natural gas companies

Media tends to focus on the continuing massive demand for oil and then panic that the global economy will never wean itself off fossil fuels.

The fact is, oil and natural gas are already suffering a slow death by a thousand cuts, and carbon credits are one of them.

On the voluntary market, carbon credits are a way for consumers to reward renewable energy companies directly. Think of them as a free-market subsidy, providing an extra income stream for green energy producers. Fossil fuel companies will have to compete with increasingly profitable green energy companies and can scale up quickly.

And it isn’t just the carbon credit issue. Under both market and government pressure, automobile companies are building more electric vehicles and fewer internal combustion engines. Governments like the EU and the UK are taking steps to ban the sale of new internal combustion engine cars as early as 2030, forcing companies to shift to electric.

Electric cars are just the beginning. Electric cars paved the way for the same technology to be used in boats. As that technology scales up, the demand for fossil fuels will slowly but steadily decrease.

And all along the way, carbon credits will go to green energy initiatives and emissions-reducing projects. Fossil fuel companies will largely lose out on the carbon credit bonanza.

Transparency (at first)

Carbon credits are a new frontier for investors and startups alike. The voluntary carbon offset market is especially wide-open. Right now, nearly any earth-friendly project can start to look like a legitimate offset.

But not all carbon offsets are created equal. Without an external regulator to weigh the impact of one project against another, entities purchasing carbon offsets rely on the trustworthiness of the third-party vendor.

In these early days of the carbon offset markets, there’s less transparency and less chance to determine good projects from bad ones accurately.

As entities develop better metrics to track the effectiveness of carbon offsets, transparency will improve. But for the short term, until the markets adjust, transparency is a carbon credit loser.

Every emerging market opens new vistas to investors.

Find the peaks.

Avoid the valleys – don’t be a carbon credit loser.

Until tomorrow.

All the best,

Sean

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