Carbon emissions: the new gold-egg laying goose

Last month, JP Morgan acquired a company called Campbell Global. In separate news, asset managers with combined AUM of over $6 trillion called for a global price on carbon emissions. Meanwhile, the FT wrote that about half of the world’s asset managers have now made net-zero commitments. Finally, this month China launched its own carbon-trading market.

This is only a snapshot of recent news reports and analyses. The list could be much longer but the message won’t change. Carbon emissions are officially turning into a massive global business.

That company that JP Morgan bought, Campbell Global, has $5.3 billion in assets under management. It also has some 1.7 million acres in forests under management—forests that can be used for carbon sequestration. And since banks are not known for their altruistic motives, one might reasonably assume investments in carbon sinks would be returned in one form or another. At the very minimum, it gives JP Morgan better green credentials, which have become increasingly important among investors and big clients.

But there could be a lot more to carbon sinks. In Australia, for example, farmers can earn carbon credits for a variety of carbon sequestration projects, among them planting trees for carbon sinks. Carbon credits can then be traded, just like stocks.

Now, look at the call for a global prices on carbon emissions. The firms behind it make the sound argument that emitters need to be more strongly motivated to invest in more environmentally friendly practices. The motivation they propose: paying through the nose for the carbon they emit.

Financial penalty is indeed a strong motivator for behavioural change: fines work best for illegal parking, for instance, or for feeding the animals at the zoo. But you can’t trade fines, for the most part. Carbon emissions, on the other hand, you can trade. And those who get in on this game earlier, stand to make the most money.

Earlier this year, the price for carbon emissions in the EU hit an all-time high of 50 euro per tonne. According to one ICIS analyst, however, it could reach 90 euro in ten years. But even this won’t be enough for the world to achieve net zero by 2050, according to OECD, which has forecast that carbon emissions need to cost $147 per tonne for net zero to happen.

"Non-regressive and revenue-neutral carbon-pricing instruments – harmonised across borders – will not only unleash massive investment in renewable power systems globally, but boost sectors from construction to transport, which are in urgent need of transition," said the chair of the Net-Zero Owner Alliance, the group of asset managers calling for a global carbon price, Allianz board member Günther Thallinger.

The massive investment in renewable power would be one lucrative business opportunity for those well positioned to take it, such as, well, asset managers and other institutional investors including pension funds and insurance majors. But carbon trading itself also has a major profit potential if prices continue on the upward curve. This, since it depends on politicians, is the most likely scenario, meaning higher prices are all but guaranteed.

The fact that firms managing some $43 trillion in assets have committed to net zero emissions will certainly help. The Net Zero Asset Managers initiative launched last December. To date, it has more than 130 signatories and has pledged to, among other, more general things, to “Work in partnership with asset owner clients on decarbonisation goals, consistent with an ambition to reach net zero emissions by 2050 or sooner across all assets under management (‘AUM’)” In other words, the world’s largest asset managers will be helping their clients reduce their carbon footprint.

Now imagine a scenario ten years from now. The net-zero party is in full swing, companies are facing ever-greater penalties for carbon emissions, so they are investing in renewable power, carbon capture and whatever else brings their emissions down. The global supply of carbon is, as a result, declining. Consequently, the price of carbon shoots up higher and because the carbon-trading market is now global and quite mature, talk begins about a carbon shortage. Prices fly higher, prompting a selloff by large traders, which mitigates the rally and buying begins again.

The latter part of this scenario is what we regularly see on oil markets today. The same is true of other commodity markets. Indeed, carbon, for all its bad rap, is quickly turning into just that, another commodity, only in the form of the more palatable “carbon credits”. Effectively, however, it’s carbon emissions that are currently being bought and sold in the EU, and, from very recently, China. It seems safe to assume that the lower emissions go, the fewer credits there would be to go around and the higher prices will climb.

Now, this could make for a fascinating, though completely hypothetical, development, where demand for carbon emissions begins to rise. Of course, this is unlikely to prompt utilities to switch from solar to coal but it may prompt an expansion of the carbon market to other chemical compounds. After all, if carbon emissions could become an asset to trade, anything can. Water is one good candidate, with some analysts predicting severe shortages within our lifetimes.