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.
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.”
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.
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.
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.”
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.
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.
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.
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.
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).