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Next time an over-reaching vegan with ten kids tells you off for picking up a hamburger, stating it is “bad for the environment,” show them this chart.
I don’t mean to bash large families or those with plant-based inclinations but this is the reality of the world we live in.
With expanding populations, we need to find much more viable solutions to climate change, which even the conspiracy theorists are now having trouble denying.
The elimination of coal generation is more impactful than doubling the pace of renewable capacity growth though both are needed to achieve Biden's goal of 100% clean power by 2035.
However, humans by nature are self-serving and the purpose of the corporation, an entity upon itself, is to maximize profits.
So in order to have a positive climate impact, we need to tilt the unit economics in order to align incentives in the system.
Now entering the ring, in the blue COOOORNERRR… carbon credits!
Carbon credit prices are hitting all-time highs in Europe, up 135% over the last 12 months and now considered a very HOT commodity.
The Wall Street Journal even ran a big piece on it a couple weeks ago…
Now that I think about it, carbon credits have some properties of NFTs: tradable, unique, identifiable, economic value, etc…
But who is the boss of these? Does the Fed hand these out like they’re printing money right now?
This week, in <5 minutes, we’ll cover carbon credits:
The problem of greenhouse gases (GHGs) 👉 Carbon dioxide production
Carbon Credits 👉 Tradable certificates (tokens), cap-and-trade programs
Assigning responsibility 👉 Interesting ideas to track carbon on a micro level
Examples in the market today 👉 Corporations driving change
How GRIT’s Playing it 👉 New private deals on deck
Let’s get started!
1. The problem of greenhouse gases (GHGs) 👉 Carbon dioxide production
Carbon dioxide being released into the atmosphere is the primary cause of global warming. This is done in two ways: natural and human.
Carbon dioxide is added to the atmosphere naturally when organisms respire or decompose (decay), carbonate rocks are weathered, forest fires occur, and volcanoes erupt.
Atmospheric carbon dioxide is created by human activities when hydrocarbon fuels (wood, coal, natural gas, gasoline, and oil) are burned.
Carbon dioxide is a greenhouse gas (GHG): a gas that absorbs and radiates heat.
Unlike oxygen or nitrogen (which make up most of our atmosphere), greenhouse gases absorb that heat and release it gradually over time, like bricks in a fireplace after the fire goes out.
Without this natural greenhouse effect, Earth’s average annual temperature would be below freezing instead of close to 60°F.
But increases in greenhouse gases have tipped the Earth's energy budget out of balance, trapping additional heat and raising Earth's average temperature.
Carbon dioxide concentrations are rising mostly because of the fossil fuels that people are burning for energy.
This is a very important problem because global warming stresses ecosystems through temperature rises, water shortages, increased fire threats, drought, weed and pest invasions, intense storm damage and salt invasion, just to name a few.
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2. Carbon Credits 👉 Tradable certificates, cap-and-trade programs
The ultimate goal of carbon credits are to reduce the emission of GHGs into the atmosphere.
A carbon credit is a generic term for any tradable certificate or permit representing the right to emit one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas
Carbon Credits were introduced to re-align incentives.
To give an idea of what it represents, one credit permits the emission of a mass equal to one tonne of carbon dioxide which is the equivalent of a 2,400-mile drive in terms of carbon dioxide emissions.
A somewhat controversial idea came about to facilitate carbon credits: cap-and-trade.
Cap: set upper limits on GHG emissions, which will gradually lower over time. Trade:a market created for companies to buy and sell allowances that let them emit only a certain amount, while supply and demand set the price.
California’s cap-and-trade program launched in 2013 and is linked with the Canadian province of Quebec’s cap-and-trade system through the western climate initiative.
It is the fourth largest in the world, following the cap-and-trade programs of China, the EU, and the Republic of Korea.
Essentially what this does is put a hard cap on pollution-producing businesses like electric power plants, large industrial plants, and fuel distributors. In total, about 450 businesses that are responsible for around 85% of California’s total greenhouse gas emissions must comply BY LAW.
Once a cap is set, the government sells “allowances” to exceed these limits, essentially taxing pollution. These credits are then resold on an open market just like any futures exchange product.
By creating a free market that is tradable and transferable, investors and speculators are welcomed into the market on top of actual companies that need to purchase these in order to be compliant.
When you have more actors in a market, this creates a more liquid market, therefore making price discovery more effective!
There are also valid risks when it comes to this. The first is a concern:
Well shit… if I buy these credits as an investor, aren’t I betting against climate change?
It is quite the opposite. By increasing the demand for these credits, you are pushing the price up, therefore theoretically increasing the tax on corporations that are required to buy these credits.
The other, more valid risk is that superior carbon capture technology comes out that will eliminate the need for cap and trade programs altogether.
Although this technology does not exist in this capacity yet - the acceleration of carbon capture could essentially wipe out the need for this market.
The reason this program is somewhat controversial is the negative impacts of this tax on the economy. Businesses would compensate for higher production costs and diminished markets by slashing jobs. Consumers would have to pay more for energy and energy intensive goods.
It is important to understand where both sides are coming from.
3. Assigning Responsibility 👉 Interesting ideas to track carbon on a micro level
Mr. Friedland is a billionaire mining legend and the podcast host accurately describes him as “the Indiana Jones of mining with a healthy dose of MacGyver-style technology awareness”
It covers a lot of ground, but a particular section I found interesting was when Mr. Friedland went into the concept of granular assignment of a carbon footprint through blockchain-like technology that could foster electronic markets where there are 30 grades of copper, nickel, and lithium from individual mines.
“They'll be blockchained and graded and audited annually so that an automaker in Europe that wants to have the greenest car, they'll just say, okay, this is made with, this grade of copper, this grade of nickel, this grade of cobalt, this much energy went into making the car, the mines have been audited to split roughly half the take with their local communities over the mine life. So the whole definition of sustainability will be revolutionized.”
To me, this sounds like an epic technological undertaking that could surpass the efficacy of a carbon credit cap-and-trade incentive network.
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4. Examples in the market today 👉 Corporations driving change
There are always a bunch of splash PR headlines that hit the tape to convey that a company is at least thinking about the climate problem.
It has become an absolute minimum to bring up ESG now, which is great to see.
While Carbon credits attempt to shift incentives, root-cause initiatives on a company level are also extremely important.
Acer (NASDAQ:ACER) - Acer declared its mission to help tackle environmental challenges with its Earthion platform that unites employees and supply chain partners and expands its sustainability efforts.
General Motors (NSYE:GM) - Their commitment to renewable energy use began more than two decades ago and is expected to culminate by 2035 when they plan to source 100% renewable energy to meet GM’s global electricity needs.
Starbucks (NYSE:SBUX) - Source 100% renewable energy for its more than 9,000 US, Canada, and EMEA company-operated stores since 2015.
Cisco Systems (NASDAQ:CSCO) - in the last five years, Cisco has implemented over 440 energy efficiency projects that reduce costs and emissions.
Intel Corp (NASDAQ:INTC) - Over the last five years, Intel’s renewable energy supply and renewable energy attribute purchases have totaled more than 26B kWh of green power.
Microsoft (NASDAQ:MSFT) - Signed a power purchase agreement (PPA) to cover 100% of Microsoft’s energy consumption in Sweden
Apple (NASDAQ:AAPL) - The company recently shared details about its $4.7B spend in green bonds to support environmental projects around the world. While running on 100% renewable energy for nearly 3 years.
And the list goes on…
Now, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel and see what he thinks about carbon becoming the new oil?
5. How GRIT’s playing it 👉 New Deals
I mentioned Abaxx briefly in last week’s newsletter but wanted to expand on it more. I happen to be an early investor in this company and so is Robert Friedland - so I’m in good company.
Abaxx is developing the technological infrastructure and applications for the ESG economy. They are using things like deep learning, natural language processing, smart contracts, and distributed ledger and decentralized datastore technology.
All this powers their global commodity market’s exchange that focuses on the goal of improved price discovery and increased transparency.
Six months ago, through my proprietary deal flow connections, I was able to get in on a hot new carbon deal. I invested on two private rounds at $0.25/share and $0.75/share BOTH had full warrants. The rumour is they are now going public at $1/share, raising +$100MM and looking to list on NASDAQ! With that size raise I can only assume there are MASSIVE institutional investors. Their mission is to build the “carbon royalty” equivalent of Franco Nevada (FNV-T) one of the most successful mining royalty companies of all time. If they achieve even a quarter of what FNV has I will be a VERY happy camper ; )
Next Deal? I will be putting money into another carbon credit deal very soon. It is backed by some heavy hitters I have made money with before. This deal hasn’t happened yet but if you subscribe to my paid newsletter I will let you know the name of the company and contact information so you can learn all about it for yourself directly from them!
When it comes to climate change I believe the world naturally needs to care more and more about attribution. Attribution drives the forensic breakdown for seeking responsibility for actors in a system.
When functioning members of society choose to live in that entity, they have to follow not only etiquette but the rules of law so that chaos does not ensue.
Although the world seems to be in a state of chaos, I believe human ingenuity will prevail, as long as we get the right systems in place.
Our survival depends on it.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
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What else we Grittin’ On?
Goldman (Diamond) Hands. Goldman Sachs is taking their retail research a step further by keeping tabs on diamond hands (retail trading data). Clearly they want in on the meme action. You think it’s a joke. They think it’s bigger bonuses ; )
Re-Open America. Retail sales fell 1.3% in May. People are spending less on houseplants and TikTok slippers to experiencing the joy of dining out on patios. This will help ease some of the supply chain bottlenecks and help +85% of the U.S economy which is service-based.
Yield Control! The FED’s balance sheet just expanded by its largest weekly amount since March. They now own 30% of all Treasury notes & bonds. Have we moved from ‘tapering’ to ‘yield curve control’?
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