Carbon Emission Reduction is next commodity!

We all know that “green” is the new “black” and social responsibility for climate change is becoming everyone’s duty. The reality is carbon emission reductions and other climate change agenda will be a result of the next financial revolution and windfall profits rather than a social duty to reducing our carbon footprint on the planet. It’s not a surprise big business and investors are flocking to this sector. According to Fortune magazine “Carbon Finance comes of age”

Last year traders bought and sold about $60 billion worth of emissions allowances, mostly in Europe and Japan, where governments regulate greenhouse gases. If, as expected, regulation comes to the U.S., this country’s carbon-trading market is expected to be worth $1 trillion annually by 2020. That’s why investment banks, utilities, industrials, and hedge funds – among them GE (GE, Fortune 500), Goldman Sachs (GS, Fortune 500), J.P. Morgan Chase (JPNV.L), and AES (AES) – are rushing into the business of carbon finance.

The new wave of carbon reduction is regulated by the Kyoto Protocol regulated by the United Nations under a program called Clean Development Mechanism or CDM. Thirty-six industrial countries (not including the U.S.) have agreed to reduction of greenhouse gas emissions over time. The key ingredient is that polluting nations do not have to reduce the pollution at the actual source but rather, in part, by financing “clean development” projects in other parts of the world.

Both Fortune Magazine and a recent radio piece on NPR explore interesting examples of how a Carbon Emission reduction CER functions as a commodity.

Take a Company X that gives off the harsh HFC23 gas, a product that is almost 12,000 times more potent than 1 ton of carbon dioxide (as far as global warming goes). Company X has a few choices:

1. Apply for credits under the CDM (which is a red tape nightmare) to obtain reduction money
2. Contact a company like EcoSecurities and have reduction method not only funded but a monthly income based on how many CERs are produced.

A great example of a successful CDM would beWorld Bank seals record CDM China deal from Carbonpositive.

Although the creation of a CER credit is interesting both the CDM and CERs are plagued byadditionality . This is when the reduction would have happened anyway, without the financial incentives offered through the CDM. Wikipedia states the following:

A crucial feature of an approved CDM carbon project is that it has established that the planned reductions would not occur without the additional incentive provided by emission reductions credits, a concept known as “additionality”.

CERs through the CDM can cost up to a couple hundred thousand dollars for compliance. Certianly not making the effort for everyone. The little guy can still fit into the equation with Verified Emission reductions (VERS).

From the EcoSecurities site VERS are the following:

In voluntary carbon markets, activities that reduce GHGs produce Verified Emission Reductions (VERs), that can be sold to companies or individuals wishing to voluntarily reduce their impact on the environment. Purchasing VERs can be an effective means of offsetting the part of a company’s carbon footprint where it is not in a position to reduce its emissions directly.

The existence of a voluntary market for emission reductions can support smaller-scale, sometimes village-level activities – which cannot withstand the costs of compliance with Kyoto (certifiers, validators, consultants etc.) but deliver real emission reductions and significant sustainable development benefits.

Examples of technologies that would produce VERS:

• Windpower
• Geothermal power
• Solar power
• Run-of-river hydroelectricity
• Biomass electricity generation
• Energy efficiency
• Animal and agricultural methane capture and utilization
• Landfill gas to energy
• Forestry

The reason is trend is so interesting is the wave of startups that will flourish from the value-chain of reducing carbon emissions. Startups will be at every stage of the game and revenue streams will go beyond just the gas reducing business model through subsidies, credits and a commodity exchange. We had the dot-com run, we had the real estate run and now we have the carbon reduction run. The best part is we are at the ground floor.