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Understanding Carbon Credits and Carbon Offset market

Carbon Credits technically are regulatory allowances for emissions and can be bought and sold in a market.

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climate, Understanding Carbon Credits and Carbon Offset market

In 2018, the State of New York sued Exxon Mobil for falsely telling their investors it had properly evaluated the impact of future climate regulations on its business.

In 2019, a judge found that the “New York State Attorney General’s case failed to produce evidence that investors were misled.”

In America, the new Keystone XL pipeline from Canada to Nebraska has been delayed by environmental challenges, the Dakota Access Pipeline from North Dakota to Illinois also delayed, the Atlantic pipeline that would have taken gas to Virginia and North Carolina was cancelled after environmental challenges. The summary of this is simple – carbon emissions and fossil fuels are bad business.

READ: Is investing in commodities only for the brave?

The environment is now a major political and economic issue. Larry Fink, Cofounder of Blackrock which manages over $7trillion said in a letter to companies “climate change has become a defining factor in companies’ long-term prospects.” More significantly, BlackRock says it will “put sustainability at the center of her investment approach.”

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As the years go by, it will become increasingly difficult to raise international finance for NNPC, Dangote Refinery, or any emitter of carbon and methane including fertilizers, cow ranches, even NLNG.

READ: Dangote’s multi billion-dollar refinery is 75% complete, Otedola says

The business of fossil fuels is becoming expensive, but the world still needs fossil fuel, as planes must fly, factories must hum, so there has been a middle road.

The global aviation industry accounts for about 2% of global carbon emissions. Delta Airlines announced a goal to become the first carbon-neutral airline in the world.

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READ: Diageo to invest $219 million in renewable energy in Nigeria, six others

Delta Airlines emits about 37.7m metric tons of carbon dioxide, making it the second-highest airline CO2 emitter in the world. The airline intends to accomplish a carbon-neutral status in ten years starting March 2020 by mitigating all emissions. How? Delta is going to buy millions of dollars in carbon offsets, which allow companies to invest in environmental projects to counter the carbon it emits.

Welcome to the world of carbon credits. Carbon credits (CC) are easy to understand. A company like NNPC can buy carbon credits, allowing it to offset the amount of carbon it is emitting by openly flaring gas in the Niger Delta. In effect these are “licenses to pollute.

READ: If you have N1m today, how would you invest it?

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CC technically are regulatory allowances for emissions and can be bought and sold in a market. CC costs carbon – make it expensive, thus forcing innovation to reduce the cost of paying for carbon by expanding renewables. This is not new. Way back in 1997, the Kyoto Protocol created the Clean Development Mechanism to trade carbon. The EU does have its own EU Emissions Trading System, although it’s just 16% of world emissions, it works.

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Carbon as an asset class

The World Bank has recommended a price of $40 to $80 per ton for carbon to be traded. Krane Funds launched a new Carbon ETF to track the performance of the world’s three most liquid carbon credits, that ETF tracks the HIS Market Global Carbon Index which is the benchmark for the global price of carbon.

READ: Mike Adenuga: The journey from petty trade to Conoil and Glo

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According to the IHS Global Carbon Index, the global weighted price of carbon credits is $25.56. An investment made in 2018 when the index started would be up 132% – Not bad.

Consider BP, which emits 2m tons of carbon every year in Portugal. Now BP has decided to purchase carbon credits to offset all emissions associated with fuels it sells in Portugal. BP will essentially spend about 50m (Fifty million Euros) to meet that commitment.

READ: Dangote Industries targets $30 billion turnover by 2022 

When you link the statement of Black rock of “defining factor,” it simply points to carbon trading and that process becoming an important asset class to watch out for. Take Dangote Refinery, what is the carbon footprint of the refinery and its cement factories, at what year will it become necessary for Dangote to buy offset? Not too long off, I foresee.

READ: The odds against Bitcoin- Goldman Sachs

An investment in this alternative asset class will be to get into the carbon offset market and buy CC today to sell as CC prices rise. A good way to invest in this for example is buying an ETF like the KFA Global Carbon ETF (KRBN).

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Commodities

Gold’s appeal up thanks to a weaker U.S dollar

More COVID-19 relief programs pushed the yellow metal’s appeal up as an inflation hedge.

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Gold Up as U.S. hits Record Number of COVID-19 Cases, Gold stands firm above $1,800 over increasing virus fears and weaker dollar , Gold stands firm above $1,800 over increasing virus fears and weaker dollar, Gold prices surge higher, Traders focus on U.S. Federal Reserve

Gold was up at Wednesday’s trading session, thanks to a weaker dollar coupled with statements from Janet Yellen, the incoming Secretary for the U.S Treasury, calling for more COVID-19 relief programs; these helped to push the yellow metal’s appeal up as an inflation hedge.

What you should know: At press time, Gold futures were up 0.51% at $1,849.60/ounce.

  • The Secretary of the Treasury nominee made key statements during her Senate confirmation hearing held yesterday, where she discussed the economic gains of a large stimulus package that would far outweigh the risk of a higher debt burden.
  • The greenback dropped for the third consecutive trading session after Janet Yellen said in her hearing that tax cuts enacted in 2017 for large companies should be reversed.

READ: Six largest tech stocks by market value lose more than $1 trillion in 3 days

Stephen Innes, Chief Global Market Strategist at Axi, in a note to Nairametrics, spoke on the odds that the precious metal currently has amid a relatively strong greenback.

“Maximum stimulus overdrive, favorable to bullion turnaround in taper talk and slightly weaker dollar paint an encouraging backdrop for gold prices provided real rates oblige.

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“Gold has been facing headwinds from a strong US dollar and higher real rates so far this year. The market is trying to hold the yellow metal above crucial support levels, which is encouraging,” Innes stated.

READ: Investors worry over future of Crypto under a Joe Biden Presidency

What to expect: However so far, gold has struggled to recover convincingly past the $1850 psychological level, and the 50dma around $1960 remains the ultimate target Q1 for gold bulls.

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Commodities

Oil prices rally high on incoming COVID-19 relief program

Brent oil futures gained 0.68% to trade at $56.28 a barrel adding to yesterday’s 2.1% gain.

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global oil market, Bonny Light and Brent crude oil, Arthur Eze, Nigeria cuts crude oil production to 1.77mbpd, Nigeria wants international oil companies to pay up now , OPEC+ deal gets a boost as Russia and Saudi Arabia consider further output cut, 4 key reasons why Brent crude might slip back to $35 per barrel, How substantial is compliance for the Oil market?

Oil prices were all fired up at mid-week trading session in London.

Holding on to their previous gains on reports that the incoming Joe Biden administration will offer more quantitative easing programs, boosted hopes for energy demand

What you should know: At press time, Brent oil futures gained 0.68% to trade at $56.28 a barrel adding to yesterday’s 2.1% gain. West Texas Intermediate futures rallied by 0.79% to trade at $53.40 a barrel, building on a 1.2% rise seen at the last trading session.

READ: First cargo of Nigeria’s newest crude grade, Ayala, to arrive Europe

  • Both major oil benchmarks stayed above the $50 mark.
  • The Treasury Secretary nominee, Janet Yellen advised the U.S lawmakers in acting fast on COVID-19 support packages during her Senate confirmation hearing held yesterday.

Stephen Innes, Chief Global Market Strategist at Axi in a note to Nairametrics gave valuable insights on the mindset of energy traders in regards to Saudi’s recent cut and massive stimulus package on its way to financial markets stating;

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“The energy markets are racing higher out of the gates in Asia aided by a lower dollar and hopes of a sizeable economic stimulus package from the Biden administration.

READ: Covid-19: Nigerian government explains how it will fund proposed N2.3 trillion stimulus

“Energy traders are packing in a chunky stimulus-response that might matter to investors from both a commodity and currency perspective where the US dollar could weaken to oil prices benefit since crude is priced in US dollars.

“The most favorable elixir of US stimulus and the imminent Saudi production cut bolstering efforts of OPEC+ to keep supply well below demand this year continue to help price action.”

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READ: Non-oil sector is critical to Nigeria’s economic recovery in 2021 – Cordros Capital

What to expect: Ahead of presidential inauguration day, Oil traders offer up a Biden policy seal of approval on the agenda’s sequencing with vaccinations plus stimulus now and taxes later, to drive risk through the first half of 2021.

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Commodities

Oil traders weigh if COVID-19 support programs will buoy economic growth

Brent oil crude futures gained 0.40% to trade at $54.95 while WTI futures were dropped 0.23% to trade at $52.30 a barrel.

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FG battles 6 oil firms for failure to remit N20 trillion , ExxonMobil, Shell, Chevron delay $58.4 billion oil and gas investment in Nigeria, Crude Oil: Nigeria’s oil production slips for the third consecutive month , Tax reform, policy uncertainty to cause oil drop as foreign firms look outside Nigeria, Nigeria plans to support oil price with lower production cost per barrel, Oil price slumps further to $30 pb, as Nigeria grapples with high production cost, Reduction in PMS: A nod to the deregulation of the downstream sector?

Oil prices were mixed at the second trading session of the week. Oil traders are cautiously optimistic that further COVID-19 stimulus programs will buoy economic growth against the increasing COVID-19-induced lockdowns sighted in key international markets.

What you should know

At press time, Brent oil crude futures gained 0.40% to trade at $54.95, while West Texas Intermediate futures dropped by 0.23% to trade at $52.30 a barrel. There was no oil settlement transaction on Monday at the world’s largest economy, due to public holiday.

READ: Nigeria’s GDP growth to rebound between 1.7% and 2.0% in 2021 – United Capital report

  • Both global oil benchmarks remained above the $50 mark.
  • In addition, oil traders are treading cautiously on reports that the third-largest crude oil importer, India, recorded poor fuel sales in 2020, as well as rising numbers of COVID-19 cases in Japan and China.

What they are saying

Stephen Innes, Chief Global Market Strategist at Axi, in a note to Nairametrics, dropped valuable points as regards macros weighing the black liquid hydrocarbon, taking to account the U.S dollar recorded losses at Tuesday trading session, thereby arbitrarily supporting crude oil prices.

  • “Many COVID-19 jitters out here, but oil prices continue to hold and looks to nudge higher eyeing support from the weaker US dollar as oil sensitive currencies are showing the way. The US data has been less encouraging lately. However, yesterday’s Q4 China GDP data provided a festive reminder that China’s economy continues to fire on all cylinders and brought with it dip-buying support.
  • “Overall, the policy mixes between OPEC+ current supply discipline coalescing with the Biden’s administration’s overarching focus on public health and economic responses to the COVID-19 pandemic, suggest oil prices can go much higher.”

READ: Non-oil sector is critical to Nigeria’s economic recovery in 2021 – Cordros Capital

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What to expect

Oil traders anticipate that oil prices will stabilize near the current level, as progress is made on the COVID-19 vaccine roll-out. As the black liquid hydrocarbon moves closer on the path to a typical demand environment, oil prices will then soar.

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