219 to 212: The US Carbon Commodities Market Gets Underway
Line BreakAuthor: Eli Magid (11 Articles)
Eli is a financial markets entrepreneur and co-founder of a green start-up which utilizes carbon finance to prevent rainforest destruction in developing countries. Previously, Eli worked for Morgan Stanley facilitating M&A, equity offerings and private placements among a variety of industries. Eli began his career at Credit Suisse, structuring and executing over $15 billion of debt securitizations across a diverse credit and product spectrum. Eli has a BSc in Applied Economics & Management from Cornell University.
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On June 26, after much political maneuvering and horse trading, the US House of Representatives voted on the American Clean Energy and Security Act (ACESA). Passed by a very narrow margin, 219 to 212, the 1,200 page bill was the product of the Obama administration’s strong push for a law to be on the books before the U.N.’s December climate change conference in Copenhagen. The essence of the bill involves cutting carbon dioxide emissions from 2005 levels by 17% by 2020 and 83% by 2050 and was the first time either house of Congress had approved a bill meant to curb the heat-trapping gases scientists have linked to climate change. In September the bill moves to the Senate, where political wrangling driven by ideological and regional differences will further alter the bill before President Obama touches his pen to it, signing it into US law.
At first, I thought about dedicating this blogpost to the eco-warrior environmentalist who believes its about damn time to herald in that Green Revolution which will prevent the earth from getting so Hot, Flat, and Crowded. But then I said to myself, maybe I should dedicate this victory to the economist who is seeing his theories of putting a price tag on an economic externality like pollution finally vindicated.
Despite having lofty intentions, at the end of the day this post is dedicated to people like myself: the savvy and self-interested rugged opportunist. You’re the trailblazer who jumps from bubble to bubble, the surfer who rides successive economic waves. You were on Wall Street in the mid-90s, in internet by the late-90s, and when the ‘00s came along you were already in the emerging markets, then real estate, then commodities. You’re in hibernation now because of the recession which is totally cool, because you’re stalking the markets, scoping out what will be hot when things take off again. I see a lot of myself in you, and because I admire your guts and tolerance for risk, I’m sharing my thoughts on this piece of legislation and the new markets it will help create (full disclosure: this author works for an Israeli start-up involved in carbon development and trading).
Handouts for “Green”
The bill sets out to bolster “green” the same way TARP shored up the financial system. By 2025, the bill would direct an estimated total of $190 billion to energy technologies and efficiency measures:
• $90 billion to energy-efficiency and renewable-energy technologies
• $60 billion to carbon-capture-and-sequestration technology
• $20 billion to electric vehicles and other advanced automotive technologies
• $20 billion for more basic scientific research and development
The bill also creates a Clean Energy Deployment Administration within the federal government that would provide loans and loan guarantees to spur private investment in energy technology.
Mandated Renewable Energy
The legislation sets a national standard of 20% for the production of renewable electricity by 2020 (renewable energy currently generates 10% of US Energy), although a third of that could be met with efficiency measures rather than renewable energy sources like solar, wind and geothermal power.
Efficient Cars and Really Smart Grids
The bill includes a “cash-for-clunkers” program that would provide roughly 1 million vouchers, ranging from $3,500 to $4,500 in value, to consumers who trade in older, less-fuel efficient vehicles for new vehicles that get better gas mileage. There are also a number of provisions that support electric vehicles and plug-in hybrids.
Another focus of the bill is the development of “smart grid” technologies. Standard electricity grids broadcast power from a few central power generators to a large number of users. Smart grids are overlayed with digital technology and are therefore capable of routing power in more optimal ways to respond to a very wide range of conditions. Much like computers and routers manage the flow of bits on the Internet, smart-grid technologies will use information to optimize the flow of electricity.
Carbon Cap and Trade: A $2 Trillion Market
This is really the essence of the bill and the bulk of the 1,200 pages. Although I touched a bit upon cap and trade in one my earlier posts, in light of the bill’s passage its worth examining in a bit more detail.
In the future cap and trade system which will go into effect in 2012, companies must meet certain pollution reduction targets. Companies are financially rewarded for reducing their pollution below a target level through selling the surplus pollution allowances that they are now too “green” to utilize. Companies polluting above their target levels are penalized for being “dirty”; they must either buy these allowances or purchase credits derived from projects which reduce pollution in the developing world. The goal is to reduce allowances every number of years to achieve a reduction of greenhouse gases in the United States to 17% below 2005 levels by 2020, and 83% by 2050.
The system is based on a similar plan successfully used in the US back in the 1980s to reduce the amount of sulfur dioxide, the main cause of acid rain, in the air. There’s currently a small amount of carbon and other emissions trading in the United States, mostly due to regional regulations or voluntary initiatives, but this market is set to explode once federal emissions regulation comes into play. In the EU, which has had a cap and trade program in place for a few years, carbon trading already totals $120 billion and has doubled each year from 2005-2008.
If predictions by the US Commodities Futures Trading Commission global are correct (and they’ll be the ones regulating this new market), the global carbon market including the value of its derivatives will top $2 Trillion by 2020 making it the largest commodities market on earth.
This colossal market will require an army of players and service providers including:
• Consultants and developers to design and implement pollution reducing projects
• Accountants (or the equivalent) to verify that carbon reductions and offsets are real
• Lawyers to close deal docs and make sure activities comply with regulation
• Brokers and traders to trade the products, derivatives and create hedging strategies
• Financial service data providers to provide product and market information
• IT infrastructure and software for registries, exchanges and portfolio management
Carbon could very well could be the next big thing, and its effects on the financial service industry will be felt far and wide. Calling all of you opportunistic surfers still out there – are you ready to catch the wave?
Line BreakAuthor: Eli Magid (11 Articles)
Eli is a financial markets entrepreneur and co-founder of a green start-up which utilizes carbon finance to prevent rainforest destruction in developing countries. Previously, Eli worked for Morgan Stanley facilitating M&A, equity offerings and private placements among a variety of industries. Eli began his career at Credit Suisse, structuring and executing over $15 billion of debt securitizations across a diverse credit and product spectrum. Eli has a BSc in Applied Economics & Management from Cornell University.
