The Era of Climate Brinkmanship is Ending as Carbon-Free Cashflow Rises (2)

— The climate transition is set to be better managed
— Climate activist Greta Thunberg will be pleased

By Mathew Carr

OPINION, Feb. 9-13, 2021 — LONDON: Not before time, the right things are becoming desirable in the previously cut-throat world of financial markets.

The push-pull for climate-friendly products has become so strong, pension funds are starting to ignore profits made from burning coal, crude oil or even natural gas.

Instead of black gold, examples of emissions-cutting market innovation are gushing thick and fast.

Green is the new black in the commodity world.

A few days ago research and rating provider S&P Global joined dairy group Danone to become one of the first companies to introduce a carbon-adjusted-earnings-per-share metric into its financial reporting.

The metric – based on a theoretical cost per share of the company’s emitted carbon dioxide subtracted from regular earnings per share – provides transparency into how far down the climate transition curve a company is.

The world’s biggest investor Blackrock, belatedly on board with the climate transition itself, said a couple of weeks ago that the global coronavirus pandemic “presented such an existential crisis – such a stark reminder of our fragility – that it has driven us to confront the global threat of climate change more forcefully and to consider how, like the pandemic, it will alter our lives.”

Carbon-adjusted EPS is another way of progressing toward net-zero targets, favored by more than 2,000 businesses, cities, states, universities and investors around the world, according to UN data. ESG standards and climate disclosure is increasingly becoming mandatory rather than optional.

So, a compelling stage has been set, because these measures imply demand for carbon allowances and renewable-energy credits will rise, as corporates and governments seek to hit targets in 2025, 2030, 2035, 2040, 2045 and 2050.

Photo by Zukiman Mohamad on

Stockmarket darling Tesla made $1.6 billion from selling regulatory carbon credits it received last year, far outweighing its net income of $721 million — meaning it would have otherwise posted a net loss, according to CNN.

A carbon credit boom isn’t quite set in stone. Remember, they were going to be huge 10 years ago, but politics got in the way and demand never showed up.

Now though, things seem different.

Occidental Petroleum’s sale of a shipment of carbon-neutral crude was another recent surprise. The shipment from the Permian to India was apparently made carbon neutral via green emission-reduction projects in both India and Thailand. I’m seeking confirmation and more information.

Trading in the voluntary carbon market could merge with compliance buying and selling under the Paris climate deal, according to some enthusiasts. That climate deal is meant to be biting from this year, but the pandemic has also slowed the number of possible negotiation meetings.

Further, not all emerging nations are on board with a surging voluntary carbon market. They prefer a UN system. Rich countries and companies say the failure of politicians to set carbon trading rules is a key reason why the climate crisis is now so acute.

Giving the market a bigger size won’t necessarily be easy, the Taskforce on Scaling Voluntary Carbon Markets concluded on Jan. 27. It needs to be turning over about $100 billion a year instead of $320 million, it said. See this:

If demand does show up this time, it could stir prices a lot. EU carbon allowances have more than doubled since the start of the pandemic to about 38 euros a ton. Voluntary carbon allowances are mostly more like 6 euros.

Perhaps soon, commodity indexes such as Bloomberg’s BCOM will include EU allowances or voluntary emission credits for the first time. At the moment, the energy element of the index is made up largely of fossil fuels, even though carbon has reached about half the cost of Europe’s wholesale electricity price. And electricity is where it’s at.

The past few years has seen a lot of climate brinkmanship. Mr Donald Trump expanded oil and natural gas, China and India are planning coal-power expansion, Brazil’s Amazon is burning at a rapid pace.

So the shift to greener markets is sorely needed.

Carbon credits could for instance reward striking Indian farmers should they agree to pivot toward more climate-friendly agriculture. They could make the Amazon worth more alive than dead.

See this:

To be sure, the pandemic has placed the global airline industry in severe doldrums, drying up a key area of previously expected offset demand.

Demand Recovers Scenario

Assuming demand does recover, one useful thing that’s happened over the past five years is testing of a cool mechanism for efficiently buying and selling emission credits.

The Pilot Auction Facility for Methane and Climate Change Mitigation handled by the World Bank employs auctions to maximize the use of public resources. Private corporations could use the same system.

Emissions-project investors bid for tradable put options that give the right to sell emission reduction credits, in this case to the World-Bank overseen fund. The projects willing to sell for the lowest price, win the options.

That injects price tension into the mix, reducing the chance of overblown profits for sellers and helping buying companies push up their adjusted carbon earnings per share.

A fund buying like this for corporates would lower the cost of meeting their net-zero targets. All this assumes emission-credit markets are well managed and not oversupplied. It’s going to be tough to make that happen in the next few weeks or months.

The World-Bank-overseen facility was created five years ago to keep projects running because carbon-credit prices plunged amid the flagging demand I mentioned earlier. Rich countries put in the cash.

The first sales result back in 2015 showed the program was “extremely efficient and scalable,” providing sorely needed finance to projects and making capturing methane worth the cost, the bank said at the time. Methane is a potent greenhouse gas with a global-warming potential 25 times that of carbon dioxide.

I wrote this in 2015:


The facility hosted three successful auctions between 2015 and 2017, allocating nearly $54 million in climate finance, with the potential to abate about 21 million metric tons of CO2 equivalent, according to its website. The Pilot Auction Facility also addressed nitrous oxide through 2020. The volume is about a day and one half of U.S. energy emissions. It’s a start, at least.

Such structures should prevent profiteering in the next batch of carbon markets, something the first batch was criticised for.

They could also boost transparency and increase the incentive to install strict oversight of the green projects, including in countries with a history of corruption. Auction rules can insist on high standards and stipulate which projects can buy the put options.

That means countries would want to make sure their projects are attractive and so they would make sure they are managed properly. Projects looking to sell into the fund (buy the put options) would also need to make sure they meet standards, or they won’t be able to use this as a revenue-generating route.

No one wants to be seen buying bad credits, whether they’re bad because of their environmental credibility, bad because of the behavior of the people running the project, or bad because of the national oversight.

See this:

Tate Britain: Kumari Singh Burman’s ice cream van — Diwali inspired art

(Corrects to capitalize Indian, adds link, adds S&P Link, adds details Saturday)


  1. […] See also some of the key trends for corporates seeking to burnish their green credentials, including another cool way of ensuring a buyer might check fair value using price tension provided by auctions of put options:… […]

Leave a Reply