America’s Growing Climate Solutions Act
This month in the United States, senators introduced a bipartisan bill that could lay the foundations for a new market-based, agricultural-driven carbon credit trading system. The proposed Growing Climate Solutions Act of 2020 directs the United States Department of Agriculture (USDA) to create a certification program so that farmers, ranchers and landowners who incorporate carbon dioxide-absorbing techniques into their agricultural practices can earn carbon credits which can then be sold to corporations looking to offset their own emissions.
To generate these credits, farmers can engage in activities that range from reforestation to sequestering carbon in soil to capturing methane from livestock. The carbon credit would be like any other commodity that the farmer nurtures and sells for a revenue stream, with the added bonus that this particular commodity would also deliver a win for the environment.
The bipartisan bill has a good chance of being passed. It also has the backing of environmental groups and of the agricultural industry, which welcomes the prospect of a new revenue stream to help counter years of declining crop prices, the US-China trade war, and a global pandemic.
The average price of carbon credits from other voluntary offset programs was $3/ton in 2018, according to Reuters. Growing demand for credits from corporations could push prices higher over the next couple of years, perhaps as early as 2021 when airlines will be required to purchase emissions reduction offsets to comply with the industry’s Carbon Offset Reduction Scheme for International Aviation (CORSIA).
In time, farmers may find it easier to generate future carbon credits due to improving protocols that help suck carbon out of the atmosphere and store it underground. Indigo AG, a Boston-based company, aims to remove 1 trillion tons of carbon dioxide from the atmosphere by getting farmers to modify their practices, and has been paying them $15 per ton of carbon. The company is not alone in thinking this is possible. Rodale Institute, a major agricultural think tank, also predicts that more than 100% of current annual global carbon emissions could be captured with a switch to widely available and inexpensive farming practices.
The European Union’s Green Deal
Over in Europe, which has the world’s most developed carbon trading scheme, carbon credit prices have roared back to pre-pandemic levels on bets that the EU’s ‘green recovery’ plan will lead to tighter supplies of carbon permits in the future. Billed as the world’s biggest “green” stimulus, the EU’s recovery plan aims to tackle the current economic slump, while fulfilling the Commission’s pledge to slash the bloc’s emissions from its current level of more 4 billion tons each year to “net zero” in 2050.
As details of the EU’s Green Deal emerged, traders began snapping up carbon credits, and in the process triggered a rebound in the price of permits from below €15/ton in March to about €25/ton today.
Carbon is also on the mind of Boris Johnson’s conservative government which just published details of its plans to implement a UK Emissions Trading System (“UK ETS”), starting in 2021 after the Brexit transition period has ended. This is meant to replace for Britain the European Union’s system for trading carbon emissions (“EU ETS”) which the UK has been a part of since 2005.
Regional Governments in China Pilot New Carbon Trading Systems
Meanwhile, China’s plan to build a nationwide carbon trading market robust enough to rival (and then eclipse) that of the EU is facing some delays in its rollout due to the coronavirus-led slowing of the Chinese economy. Interestingly, local governments have been picking up some of the slack.
Eight regional authorities, including Beijing and Guangdong, are currently piloting their own emissions trading systems. Since the building blocks for China’s nationwide scheme are already in place, it is highly likely that these pilots will simply be incorporated into the national program in the long run. The national system is expected to cover about a third of China’s national emissions, according to the International Carbon Action Partnership (Icap).
Bridging the Price Gap from $2/ton to $75/ton
About 50 countries have a carbon pricing scheme in some form. Still, the global average carbon price is only $2 per ton. That’s far below the $75 per ton that the International Monetary Fund says is needed by 2030 to limit global warming to 2°C or less — the level deemed safe by science.
While an average global price of $75/ton seems almost unattainable at the moment, that goal is not so farfetched in regional carbon markets like the EU where policy makers’ plans to foster a green recovery could further curb the number of available carbon allowances. At the same time, many large corporations have made commitments to reach net-zero carbon emissions. Their plans rely not only on reducing their own emissions but often offsetting them by buying credits from third parties.
As demand for carbon credits overtakes supply, prices will have to rise from current levels.
How to Invest
Investors can gain exposure to the carbon credits market via the iPath Series B Carbon ETN (GRN) which was launched nine months ago. GRN targets carbon credits from the EU Emission Trading Scheme and the Kyoto Protocol’s Clean Development Mechanism. The strategy gives investors exposure to the changes in prices of these contracts potentially allowing them to benefit from a reduction in supply of the credits.
Managing Director, Research
McAlinden Research Partners