Cap and Trade and the Russian Market

The other day we looked at railroads and their "green" impact. Today we look in another direction.

From the NY Times:

Dow Chemical & Gazprom recently signed a memorandum in which they agreed to look at opportunities where Dow technologies could be used to reduce carbon emissions, thus generating the emission credits. The companies agreed to look at opportunities worldwide.

Dow could then use some of the credits to offset its own industrial activities while Gazprom’s trading arm in Britain could market any excess.

In other words, by using Dow technologies (DOW), companies can generate carbon credits that they can then sell or use as currency to offset the purchase of the technology.

Additionally:

However, the true promise for this business is in carbon credits that come, like the gas, from Russia. Companies in Russia and elsewhere in Eastern Europe are among the world’s big producers of greenhouse gases. But they stand to benefit under the climate treaty by selling their rights to release carbon dioxide into the air, if they invest in greater efficiencies.

The statement said the companies would also explore projects in the small carbon market in the United States.

As a country, Russia possesses the credits in abundance under the Kyoto Protocol, which set a baseline in 1990 for emissions, before a sharp contraction in the Russian economy greatly reduced carbon emissions. Russia can transfer those benefits to its companies to sell.

In 2004, when Russia ratified the protocol, officials estimated Russian companies could earn $6 billion to $9 billion selling credits created from investments in emissions-reducing technologies.

Now, let's put aside that the largest polluters will benefit the most from the cap/trade program because of the 1990 baseline. Is it wrong? Yes. A joke? Yes. But, it is what it is and wishing it wasn't won't change anything.

Cap/Trade is shaping up to be a massive market. Personally, I'll avoid anything in Russia as their recent history of respecting property rights is poor, to say the least. However, if you have the stomach for it, the potential for nice profits is there as a large additional revenue stream will appear for those Russian companies. That being said, companies that have the technologies polluters (for lack of a better term) will want to generate the credits will be in high demand.

Why? Using a baseline of 1990 when Russian /Eastern Europe were coming out from a century of Communist rule means that even token upgrades ought to generate huge credits. In all reality, many operating facilities probably now already produce less than 1990 levels of pollutants so the impetus to "do something" to qualify for large numbers of credits will assuredly be there. That ensures demand for products.

It also means that the potential impact of cap/trade on some industrial companies may not be as great as originally thought as the products they produce may offset the emissions they produce. They may not realize the full potential profits from the sales of these products as credits may be used as currency, but the downside is reduced. Sadly, companies whose products do not lower emissions will pick up the tab for the rest.

A company like Dow looks to benefit as their products will be used by Gazprom and US energy companies to lower their emissions. The credits generated can be used by Dow to reduce their own emissions tab. Again, everything depends on base levels, requirements etc. but that is the basic theory. Other possible beneficiaries could be GE (GE) and BASF (BASFY.PK) (among others) who make emission control systems.

Again, until final legislation / treaties are signed and finalized, making investments here is guesswork. But, seeing that the market will be huge and knowing early entrants into markets tend to benefit the most, it is time to begin looking into possibilities.


Disclosure: Long DOW, GE

Comments

[Brad Smith:]

Todd, you have articulated a very keen observation about the investment value of carbon credits.

The scale of carbon credit creation, carbon trading and carbon mitigation metrics offers mega trend investment, economic development and business development opportunities.

You have keenly observed that the scale of carbon market space metrics offer compelling reasons to develop investment analysis expertise about global carbon mitigation mega trends.

Emission trading is already a global market > en.wikipedia.org/wiki/...

Developing carbon market investment expertise will enable investors to participate in a global channel of new investment opportunities.

US$600 Billion-Plus World Carbon Trade Market Projected By 2013 > www.treehugger.com/fil...

Some companies will pay a disproportionate percentage to purchase carbon credits in this emerging market space. Understanding why can help investors pick carbon market winners and losers.

“The Financial Times reported that the carbon market could "outstrip the conventional commodities markets" ~ estimates of more than $3 trillion by 2020 have been made by Point Carbon ~ Bart Chilton, commissioner of the Commodities Futures Trading Commission has estimated that “even with conservative assumptions, Carbon could be a $2 trillion futures market in relatively short order.” > www.triplepundit.com/p...

Whatever projected number one chooses to believe it a very large carbon market investment opportunity is being created. Researching carbon market trading now begins developing carbon market investment expertise that can be applies as more and more companies are required to address carbon footprint issues.

Cities that support aspirational goals to create low carbon footprint communities will discover that part of any action plan to achieve this goal includes purchasing carbon credits.

Under these assumptions estimates of potential carbon market metrics can be made for identified sub-markets and obviously no market will reach 100% of its potential estimate.

Examples of carbon credit sub-markets include:

Event Days at Convention Centers create a sub market that can be expressed as an annual gross value. Estimate $2,000 per day for each event to purchase a carbon credit, and the estimated aggregate value for Event Venues to purchase Carbon Credits may be more than $500,000,000 per year.

Homes create a sub market. Assume $370 per year carbon credit cost for a family of 4 and $200 per year for a 2 person household average = $285 x 100,000,000 homes and the estimated aggregate market value for homes to purchase carbon credits = $28,500,000,000 annually just for the United States.

24 million small-to-medium-size-b... (SMEs) in the United States. Assume $2,000 per year to purchase carbon offsets. (2,000 x 24,000,000 = $40,000,000,000 estimated aggregate market value for SMEs to purchase carbon offsets each year.

The $2-Trillion to $3-Trillion projected US carbon futures market value will ultimately generate substantial carbon trading numbers for the largest companies.

Obviously only small percentages of these estimated numbers will actually become carbon credit sub markets but the industry to create and trade these carbon credits will still be larger than many existing segments or categories.

The estimated numbers are offered to support your point that the carbon market space will be so large that investors should begin research and analysis to develop their carbon market investment expertise now so they can position themselves to benefit economically as global carbon credit trading markets take shape.

Thank you for making people aware of the emerging carbon credit trading opportunity and please keep sharing your keen observations about it.

Sincerely,
Brad Smith
SME Capital Markets
smecapitalmarkets.net

Jun 25 09:34 AM

[Ferdinand E...:]

Interesting, although some day I hope to write an article that proves beyond the shadow of a doubt that cap and trade is a scam. I plan to give one of my great lectures on it too, but not here in Sweden, because I have no desire to be hounded out of the country.

By the way, one of former President Putin's top advisors told him that cap and trade was about money, and not reducing pollution. Somebody seems to have gotten the message.

Jun 25 10:44 AM

[jerrydd:]

So we are going to pay Russia so our companies pollute more?
Cap and trade is a scam and those investing in it better beware as many got screwed in Europe with little benefit reducing pollution.

A straight carbon tax to the US gov rebated in payroll, income tax cuts, LiHeap is by far the way to go.

Jun 25 11:18 AM

[user396040:]

I have heard that the Russian natural gas pipeline system is leaky. Most regulatory regimes score methane(natural gas) as being 23 or 25 times as potent as carbon dioxide as a greenhouse gas. There may be an enormous opportunity for the Russian natural gas system to earn carbon offsets by reducing leakage from the pipelines.

Jun 25 05:37 PM

[crosseyed:]

buy Goldman GS they are already into the greatest scam in modern times.only a good old socialist with an abundance of empathy could desire such madness.The path to hell always has the best of intentions.

Jul 01 12:51 PM