$19 Trillion Captured Carbon Market – How Will We Reward Carbon’s Hunters and Gatherers?

June 30, 2021 |

The IPCC forecast seen below tells the tale of how the next 50 years will play out in climate action. There’s going to be a demand to remove 50 gigatons of carbon emissions through abatement (wind, solar, renewable fuels, energy efficiency, and so forth), and 20 gigatons per year through direct CO2 and methane removal. Assumes of course that when the Arctic melts that we won’t have a catastrophic release of methane — a topic for another time.

First of all, let’s do a value exercise. Adding up the carbon price in California these days, you get to $275 per ton, more or less. California has a market-based approach, demand and supply keep the exact number jiggling around a bit, but that’s where it is, ballpark, these days. That’s mostly for transport because most of the actual emission-reducing legislation has been aimed at transport for reasons of energy security as well as emissions.

With electric power the actual price support is harder to calculate. But consider the $981 price on carbon for electric vehicles — based on common-sense math which you can follow here. Point is, transforming electric stuff ain’t cheap, either. 

What’s the carbon-reduction economy worth? 70 gigatons per year – that’s 70 billion tons, is worth 19.25 trillion per year — that’s 93 percent of the size of the entire US economy last year. 

Time will tell how supply and demand will work out, so let’s be circumspect. Yet, we can say for sure that carbon removal is going to be big business. So, you might do well by doing good. 

But how?

Usually, we invest in technology, technology, technology… and then some more technology. Yet, manufacturing represents just 11 percent of our economy, and even if you subtract slices of the economy relating to government, education, health care, entertainment, food service and services unrelated to manufacturing, the pie still looks like this:

Finance, insurance, real estate 30
Professional services 17
Manufacturing 15
Wholesale trade 8
Retail trade 8
Information 8
Construction 6
Transport & warehousing 4
Utilities 2
Mining 1
Agriculture 1

From this, you might form a theory that a new sector of finance, insurance, real estate, services and trade might emerge in the remainder of this century worth $12 trillion per year in today’s dollars. Without personally making or inventing a single thing, excepting the birth of the value-adding engine of services, finance and trade of the goods and services of the future. As I said, it’s interesting, and speculative but not far-fetched. 

I suspect we are conditioned to believe that technologists will rule the future and all power will transfer to them. I would only point out that Steve Jobs was not a technologist, and neither is Tim Cook for that matter. Neither is Warren Buffett nor Jaime Dimon, and I’m not too sure that Jeff Bezos is at the end of the day a technologist, per se. Bezos did not invent secure internet purchasing or machine learning but understood the consequences these innovations would have for the old bricks-and-mortar businesses of retail and delivery.

What is holding back climate action right now? It is not so much the technology.  An acquaintance of mine who at the time headed up Wells Fargo’s climate investing told me that the single biggest barrier to solving climate was the shortage of due diligence experts to evaluate the projects and the deal flow.

With respect to the value of finance, trading and logistics, consider a humble box of Corn Flakes. I just enquired at Amazon.com to discover the price, and it’s running at 51 cents an ounce my friend, and there’s about 0.7 cents an ounce in the corn, even though corn prices are sky-high at the moment.

So, where’s the cost? 

Manufacturing, yes. But also, in finance, insurance, trade and services. Sure, we see an awful lot of stories about tech billionaires and there seem to be a large number of them, but how many of them are actual inventors and how many of them are really financiers, traders or merchants, disguised as technologists through the branding, styling and communication that pertains to what we call “technology companies”? 

You might well state that the value of Apple plays back to fundamental innovation, but another might state that most of its value is derived from packaging, integration, brand, and the network effects that flow from control of technology platforms. 

Finance, trading, insurance, services. We’re busy building technology and wondering why much of it is taking so long to become profitable, or useful, or transformative. We never think that technology will invent itself, but we seem to believe that financial, risk, trading and service firms and platforms will appear like the blinding light that appeared to Apostle Paul on the Road to Damascus.

Will that be so? A student of Floridian insurance markets might be skeptical. Today, 548,716 Florida buildings obtain property insurance through Citizens Property Insurance Corporation.

The total insured value of the buildings covered is $148 billion, and the reason that Citizens exists is that traditional insurers, faced with the massive opportunities that climate change represents in the economy, exited the market, more or less.

Citizens is a creation of the Florida state legislature dating to 2002, has roughly $6 billion in cash to cover losses and there’s another $10.6 billion in the Florida Hurricane Catastrophe Fund. Which is to say, Florida’s fine until it’s not, more or less the state is self-insuring.

Real estate is doing pretty well down here, and mortgages are flowing, too. Climate change has not brought about a transformation of the insurance or mortgage industry, yet. 

Transformation of our financial systems is needed in order to assess risk, spread it, and to help create speedier rates of returns for investors that will justify the technology, policy, currency, market and adoption risks they are running. Altruism only takes society so far and though it is unpalatable to say “greed is good,” it may be fair to say that “greed can lead to good”. Certainly, it is the case that small investors find it hard to run large and long risks, and will not be able to fully participate in a technology-driven shift of it takes too long or leads to losses that cannot be borne.

We need:

1. Straightforward, system-wide carbon targets that tie back to societal goals.

2. A market system within those targets. Those who miss their goals buy credits from those who over-innovated.

3. A single standard by which we count carbon.

4. A book and claim system by which we report progress.

5. An audit system to vet those claims and root out the liars.

6. Carbon trading platforms which are as easy as trading stocks or currency, so that traders can participate and create liquidity in carbon trading.

70 gigatons. 50 to reduce, 20 to recapture. There’s a lot of friction in the system and if we try to go fast the way we are structured, something will catch fire and burn. If we get focused on finance, that’s one way of ensuring that what doesn’t get burned is us. 

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