Category Archives: markets

Real, honest, true carbon offsets

Good news from the carbon-offset front: a serious attempt to set standards to distinguish real offsets from fly-by-night phoney ones is bearing fruit. The Voluntary Carbon Standard project has released its documentation (PDF) for how to prove you’ve got the real deal, based on the International Standards Organization’s nascent standard.

VCS isn’t the first to the market, but it’s aiming at a broad spectrum of potential offset-producers, including with a special category of oversight for so-called microprojects that would offset 5,000 tonnes or less of CO2 and equivalents per year. That’s a long way from giving you tradeable carbon credits for taking the bus instead of driving to work, but it’s big news if you’re anybody smaller than General Electric or Yahoo! or somebody, hoping to get into the offset business, and of course most of us are.

The main thing keeping offsets from being a legit way to make up for some of the evils we do is that they’re often unverifiable — God only knows what many self-described offset providers do with your money. Maybe nothing, or maybe they hire some shady characters overseas who’ll promise to plant trees that won’t last more than a season or two. Many are worthwhile, or at least are honest attempts to be, but that’s obviously not good enough if you’re a major corporation that wants to buy quite a lot of offsets that will stand up to serious scrutiny, or you’re an investor looking to front some money in exchange for offsets that you hope will be worth more later.

Goldman Sachs and Cantor Fitzgerald are in on this on this thing. The VCS project, like the Gold Standard, is a necessary step in making functioning markets in offsets that turn money into environmental improvements — and environmental improvements into money.

Ed Stelmach de Bolívar

The Globe and Mail‘s David Ebner has an occasionally wordy but comprehensive survey of Alberta’s oil patch, which is holding its breath waiting for an announcement from the provincial government on whether and how it’ll change the royalty scheme whereby oil and gas companies pay the government to exploit an officially public resource.

In a nutshell, this is how it works: Alberta’s oil and gas, like that of other Canadian provinces, are owned by the provincial government. Oil companies lease the rights to explore and exploit those resources, and pay the government a percentage on what they find, extract and sell. And Premier Ed Stelmach is to make up his mind by the end of the month on how much that percentage will increase.

Stelmach, responding to a sense among Albertans that they were being taken for a ride by low royalty rates set when the industry was practically dormant, asked a review panel to make a recommendation on new rates. Simplistically put, the panel recommended jacking up the royalties on mature projects from 20 per cent of profits to 33 per cent, on the grounds that, indeed, Albertans weren’t getting a “fair share” of the profits from their publicly owned natural resources.

Aaaiiiiiiieeee!, the oil industry responded, including in an instant-classic analyst’s note from Deutsche Bank comparing Alberta to Venezuela (PDF). Behind that overblown rhetoric from the kind of Wall Street analyst who gives Wall Street analysts their superior reputation for probity and manners, there’s a fair point: Alberta’s oil reserves are exceptionally expensive to extract. Many projects are borderline even with oil costing $80 a barrel, and if Alberta wants to increase its royalty rates, maybe riskier but higher-profit projects in places like Saudi Arabia and Angola make more corporate sense.

Partway into Ebner’s story is this reminder that for all the talk of the economic riches and environmental perils of the oil sands, work on “unconventional” reserves in Alberta is really just getting started:

The critical and most controversial issue – natural gas – has underpinned Alberta’s economic success and its overflowing treasury. The so-called Calgary oil patch is in fact a gas capital, with a shift only now beginning to swing to the oil sands. Canadian Natural Resources Ltd., the country’s second-largest producer, is the embodiment of this evolution, beginning life in the deep recession of the late 1980s as a scrappy gas producer and growing into a giant gas producer – and now making a big, long-term bet on the oil sands.

But the oil sands remains a tomorrow story, a key source of the province’s long-term revenues.

And the key to that key source of long-term revenue is just how much Alberta wants to extract from the oil companies. This is not a simple question, as Ebner explains.

It’s Stelmach’s job to try to set a royalty rate that maximizes the oilsands’ value to his taxpayers and voters. His trouble is that it’s an impossible task, requiring him not only to set one provincewide rate where rates for individual projects would be more appropriate, and to “balance,” somehow, the reasonable arguments made in Deutsche Bank’s note with a vague “feeling” among Stelmach’s voters that they’re being hard-done-by. Not only that, but we’re talking not only about maximizing the price the province gets from the oil, but maximizing the oil’s long-term value — which means factoring in the other economic activity the oilsands support.

The Star‘s David Olive points out that in the long term, the vastness of Alberta’s reserves likely matters more than the cost of extracting them:

Global oil firms are desperate for reserves, and Alberta’s oil sands represent more than 50 per cent of the world’s reserves available for non-state investment. Threats to move to other jurisdictions are almost laughable. Where will the producers go in search of a similarly giant reserve base that also boasts a politically stable regime – Russia, Kazakhstan, Iraq, Venezuela, Sudan?

In other words, whatever the royalty rate Alberta sets, there will eventually come a world oil price where digging all that oily muck is worth the effort. Indeed, the longer Alberta makes the oil companies wait, the more the oil will be worth. But all the jobs in pipefitting and trucking and fabrication and engineering are worth an awful lot, too, in 2007 prosperity that could set the stage for an oil-independent economy by, say, 2050.

You’d almost think that this problem of trying to maximize the oilsands long-term value would be one better set by, well, a market, rather than this system, reminiscent of the Klondike era, of staking claims and paying arbitrary percentages and having provincewide policy decisions made by one guy.

What’s a particular project worth to an oil company? Why not make them put their cards on the table and bid? Let the companies do all the exploring they like (and no leasing exclusive exploration rights that are little more than lottery tickets with multibillion-dollar payouts) but before they can put a steamshovel in the ground, they’d have to tell the government what they’re willing to pay for the oil they get out. A flat amount, a percentage, whatever the company thought would be fair. Let anyone else bid, too, and take the best, maybe with some automatic payout to the finder if that company doesn’t win the bidding.

Whatever form it took, it’d almost inevitably be superior than leaving Alberta’s whole economic future to one farmer from just northeast of Edmonton, no matter how clever a fellow Stelmach is.

Bush’s fifth stage of denial


It turns out the familiar list of arguments against doing anything about climate change …

  1. It’s not happening;
  2. It’s happening but it’s not our fault;
  3. It’s happening and it is our fault but there’s nothing we can do about it;
  4. It’s happening and it is our fault and there are things we can do about it but we shouldn’t;

Has a fifth entry:

  • It is happening and it is our fault and we can do something about it and we should do something about it, but not very much.

I’ve been generous to President George W. Bush on the climate file lately, noting how far he’d come in at least acknowledging that the world has a problem we should do something about, and recognizing the reality that any “solution” that doesn’t include India and China, among other nations exempted from significant action by the Kyoto Protocol, isn’t likely to do much other than shift more economic power to them while having negligible effect on greenhouse-gas emissions.

But I can’t read the president’s performance at the U.S.-called climate-change meeting this week as anything other than what the hard-core environmentalists say it was: a sophisticated effort to hijack climate-change talks in advance of the next round of post-Kyoto negotiations.

This excerpt from his speech on Friday is typical:

No one country has all the answers, including mine. The best way to tackle this problem is to think creatively and to learn from other’s experiences and to come together on a way to achieve the objectives we share. Together, our nations will pave the way for a new international approach on greenhouse gas emissions.

This new approach must involve all the world’s largest producers of greenhouse gas emissions, including developed and developing nations. We will set a long-term goal for reducing global greenhouse gas emissions. By setting this goal, we acknowledge there is a problem. And by setting this goal, we commit ourselves to doing something about it.

By next summer, we will convene a meeting of heads of state to finalize the goal and other elements of this approach, including a strong and transparent system for measuring our progress toward meeting the goal we set. This will require concerted effort by all our nations. Only by doing the necessary work this year will it be possible to reach a global consensus at the U.N. in 2009.

Each nation will design its own separate strategies for making progress toward achieving this long-term goal. These strategies will reflect each country’s different energy resources, different stages of development, and different economic needs.

All of which is fine and, as far as it goes, sensible policy. It makes no sense for the UN, or whoever, to dictate exactly what each country must do to cut its emissions. But then, the UN has never done so and likely never would — even under Kyoto, it’s always been up to individual countries to choose their own policies. The only requirement was that those policies get them to whatever emissions targets they signed up for.

But the Bush the administration opposes mandatory targets. Which means it opposes, in practice, any action at all.

I’m deeply sympathetic to the idea that each nation needs to find its own solutions, and to Bush’s stated position that “a variety of market mechanisms [can] create incentives for companies and consumers to invest in new low-emission energy sources.” Markets require scarcity to work, though — a scarcity of money and labour and resources are what drive companies and individuals to be more efficient, so as to maximize the resources they have access to.

In the case of averting the worst of climate change, what needs to be scarce is the right to emit. Somehow, that has to be limited, and that requires governments that treat emissions targets as if they’re “hard,” with punishments for not meeting them. Bush is arguing that no scarcity is necessary, and that market mechanisms will work anyway.

Won’t work. Can’t work. Waste of time.

Long-term hopes for long-term climate predictions

(Going to try something different with the pix and go a little more visuals-heavy. We’ll see how it goes.)


Credit: Flickr/rednuht

David Jeffrey at Oikos points to a MarketWatch story on the rise of futures markets in weather, and wonders whether this presages a market in climate-change predictions. MarketWatch:

For example, golf courses lose business on rainy days, while ski resorts see their bottom lines hit by unseasonably warm winters. The contracts are tailored to meet a business’s particular needs and based on temperature and precipitation levels, and they can range in duration from one day to six months.

One example would be a golf course purchasing a contract to be compensated based on the total number of rainy days over a given period. A golf club in Louisville, Ky., for instance, could buy a contract to be paid $2,000 every day it rains at least half an inch during the peak season.

Futures markets in weather were something Enron got into, shortly before the end, and that’s been used (in The Smartest Guys in the Room, for instance) as symbolic of how ridiculous the company got before it collapsed. Here’s how NPR mentions it:

Besides buying and selling gas and electricity futures, [Enron] created whole new markets for such oddball “commodities” as broadcast time for advertisers, weather futures, and Internet bandwidth.

Now, the idea doesn’t seem so silly, with so many businesses directly weather dependent. If you can find somebody to sign the other end of that golf-course contract, for instance, it’s probably a good idea to do it — you’ll shave off a little bit from the top of the maximum possible profit you might make in ideal weather conditions to drastically reduce the costs you’ll pay if things go horribly wrong and it rains cats and dogs.

The trick is finding either a speculator willing to make the bet, or someone who stands to make a lot of money if it rains like that and wants to hedge in the opposite direction. And indeed that seems to be the challenge for the post-Enron pioneers (think of Enron as the Donner Party) in this area. Says MarketWatch:

[T]he real challenge is not in designing and listing a contract but in creating opportunities to trade the products, he said, because it normally takes some time to develop an even, two-sided order flow.

“You have natural hedges looking to buy insurance against the risk, but (the demand) doesn’t correspond with speculators willing to take the other side of a trade,” Andersson said. “We listed our hurricane contracts knowing the big reinsurance companies wouldn’t be trading them on Day One.”

For the same reason, I’m doubtful that Jeffrey’s hope, that a direct market in climate-change futures, will ever come to fruition in anything other than toy-miniature form. We’re talking about an extremely long-term question, or set of questions (what will the temperature be in 2028? what will sea levels be at such-and-such a spot on the New Zealand coast in 2040?) that you’d almost certainly be better off anticipating the possibilities in the operations of your business rather than buying a futures contract to hedge against a particularly bad outcome.

Here’s a question: Are there any commonly traded futures contracts already out that extend that far into the future?

Anyway, none of this is to say that toy-miniature markets couldn’t work. They work pretty well for elections, even though the participants are generally playing because they’re political junkies, not because they’re trying to hedge against specific personal or business risks. But, pending Jeffrey’s further research, I’m not seeing it as an actual functioning part of the business world.