Trading carbon credits on futures exchanges in the US, London, and Paris was once regarded as the most effective strategy for industries and agriculture to cut back on their GHG (greenhouse gas emissions). In 2010, ICE (Intercontinental Exchange, Inc.) bought CCX (the Chicago Climate Exchange). By November of the same year, CCX closed its doors and the price of CO2 plummeted to as low as 5-10cents per carbon ton. The EU (European Union), the global leader in carbon auctioning, had to retrench in an effort to sop up its oversupply of carbon credits (allowances); China’s CER’s (certified emission reduction certificates), tied to EU credits, took a nosedive, and Japan withdrew from the only international carbon reduction agreement, bearing the name “Kyoto Protocol.” In the political arena, Donald Trump categorically rejected the validity of climate change on the campaign trail.
The future for carbon futures looked and remains grim. Carbon credit futures prices still haven’t recovered and the prospects for a single or even any number of trading systems for carbon credits are possibly more illusory than ever.
For climate change fighters, there is some good news. This Fall has seen a renewed global focus on climate change concerns. China and the US, the world’s two largest GHG emitters, simultaneously signed The Paris Agreement on Climate Change, now ratified by a global majority. California, the world’s sixth largest economy, has a carbon auction system that actually works and is expanding in cooperative agreements with Quebec and RGGI (Regional Greenhouse Gas Initiative) on the east coast of the US; and private sector “climate change” initiatives abound. Nonetheless, defining national strategies and harmonizing the trading systems will be a protracted exercise as temperature levels continue to climb, especially with US leadership now in question as a result of President-elect Trump’s lack of enthusiasm for the Paris Agreement.
It’s small wonder that politicians aren’t inclined to find a ‘quick fix.” However, if any carbon reduction strategy has a life in the Trump administration, it may rest on a carbon tax which has had bipartisan support. However, the first attempt to introduce the tax bombed when Washington state voters turned down Initiative 732 on November 8. It would have introduced a carbon tax starting at $25 per ton in 2018.
Nonetheless, proponents continue to claim the tax would encourage businesses to conserve energy or switch to clean energy and also allow for tax cuts in other areas, namely a 1% reduction in the sales tax. The World Bank and International Monetary Fund have endorsed the carbon tax as the panacea to meaningful carbon reductions. The IMF maintains that post-tax energy subsidies, defined to include both energy production and consumption, are at the astronomical level of 1.9 trillion USD or 2.8% of global GDP. Advanced economies, according to the IMF, account for 40% of the tab. All we have to do is introduce the carbon tax and the IMF model gifts us with a forecasted 13% decline in CO2 emissions. The World Bank treads more lightly but nonetheless, its findings also favor a carbon tax as the preferred route to utopia.
But carbon taxes would do more harm than good. If the prospect of meaningful tax reform in the US is any metric, we should give pause before embracing a global carbon tax. Good intentions notwithstanding, the tax approach is inequitable, inefficient, and ineffective. Another tax or even a substitute tax will ensure greater regulation but not guarantee the kind of structural reform needed to tackle carbon emissions impacts. It represents further distancing from market-sensitive risk mitigation strategies that, if well designed, offer greater potential for reaching emission reduction targets set out in the Paris Agreement.
What better place to start than with agriculture since our sources of food will surely be the most impacted by climate change. Instead of trading carbon credit futures, which have had a sketchy track record, let agriculture lead the way with a new climate risk hedge. Commodity futures have stood the test of time as a hedge against climate variability. Consider the proposal to write new futures contracts for commodities that measure carbon reductions in crops and in food, feed and biofuel products. The reductions, written into each futures contract, would be certified and traded at a higher value than the standard futures contract. If the premium price holds, and there is reason to think that it would, then the new CPC (commodity plus carbon) futures contracts will create revenues along the agricultural value chain more targeted than a carbon tax.
Instead of putting faith in a carbon credit that the market appears to register as lacking in intrinsic value, a CPC contract that measures and values carbon reduction values on farm or at the end-product level translates potentially into premium prices in the value chain. The new futures contract requires a tight certification and verification system with acceptance by the market of the benefit of any such new “green futures” contracts for commodities. CPC rewards good agricultural practices through the use of new technologies and strategies that result in measurable and lasting carbon reductions. And we already know from focus groups that traders and merchandisers see the growth potential for such products and are prepared to commit to trading this type of futures contract.
While production agriculture in certain crops and under prudent practices sequesters a level of emissions, it still accounts for 11-15 percent of annual GHG emissions in the US and 1/5 of total emissions worldwide according to FAO (UN Food and Agriculture Organization). When scaled through the food and feed supply chain, the estimated consolidated annual emission level can reach as high as 50 percent of the national total. GAP (good agricultural practices) standards result in a lower carbon footprint and serve to mitigate climate change risks. CPC contracts for crops are the change agent from waste and environmental abuse to an agriculture system that rewards premium quality product and satisfies 21st century consumer demand. In a survey conducted by the Carbon Disclosure Project in 2014, 39% of participating companies realized monetary savings from their own emissions reduction activities, and 34.5% benefited from new revenue streams or financial savings as a result of their suppliers’ carbon reduction activities.
The market is ready and can accommodate these new futures contracts that offer an effective and equitable route to achievable carbon reduction. CPC can be replicated for other industry sectors, but starting with agriculture which is a main source of carbon emissions, enhances the sector’s contribution as a steward of the earth, and returns the focus for a clean environment to the most tested risk mitigation instrument in economic history—the futures contract.
President/ CEO, GIC Group
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