Death By A Thousand Prices: The Ongoing Climate Policy Shift No One Is Talking About
Rob Day Nov. 23, 2020
“We need a price on carbon,” is a common rallying cry of the increasingly-lonely market-oriented climate activist.
While investors usually think about a “carbon tax” as the most commonly-described such policy, the most credible effort to establish a nationwide U.S. “price on carbon”, attempted over a decade ago, was an example instead of an emissions trading policy. Such policies would impose a cap on emissions for each relevant industry player, but also enable them to trade emissions allowances with each other, in a market structure. Since the bigger polluters would be purchasing extra emissions rights from someone else, these emissions trading policies also are a form of a “price on carbon”, just without fixed prices.
Okay, but why should investors care? After all, that “Cap & Trade” effort over a decade ago died in the Senate, and analysts point to little appetite in the next Congress for tackling similar carbon pricing legislation. Plus, many loud environmental advocates no longer push for a price on carbon, favoring instead other policies. So, both on the right and the left, people are saying a nationwide price on carbon isn’t going to happen soon. Why should investors pay attention to it, then?
Investors should care because quietly more and more of the North American economy is actually already under a variety of prices for carbon, with more on the way. Companies in the U.S. and Canada are increasingly operating within regional, state, local, and even self-imposed carbon pricing and trading schemes. These are already having an impact, and investors need to understand how this mixed bag of prices are affecting their companies and markets. At year-end 2019, there were 21 regional emissions trading systems in place around the globe, with another 24 under consideration (note: link opens pdf) — including in North America. The Regional Greenhouse Gas Initiative (RGGI) now covers most of the northeastern U.S. states, and since 2014 California and Quebec have collaborated on an emissions trading system since 2014.
While investors are often insulated from recognizing the prices of such high-level emissions trading systems (they get intertwined with other, mind-numbingly complex state regulations on key industries; and implied carbon prices have been low to date), a lot of the companies they invest into will be significantly affected as many of the regional systems in North America are tightening up starting as early as next year. And now all kinds of additional carbon prices are starting to be imposed as well.
At the local level, carbon policies by cities are on the rise. One recent example is New York City’s Local Law 97. This requires NYC’s 50,000 largest buildings to reduce their carbon emissions by 40% by 2030 (and 80% by 2050). If they don’t they will be penalized $268 per ton of CO2 equivalent, beginning as early as 2024. As soon as January 2021, a study is due that could enable emissions trading within this system — so a building able to reduce even more than required could sell that extra allowance to a building owner who couldn’t. Obviously the price they agree to wouldn’t be higher than the $268 per ton penalty, but that’s a pretty high cap on a de facto price on carbon. This could have a major impact on the NYC commercial real estate market, and other cities are watching with interest and might impose similar regulations.
Plus, hundreds of global companies are now including a hypothetical price on carbon in their internal planning and budgeting. This includes 25% of the Fortune Global 500. In some cases it’s a real price and not a hypothetical “shadow fee” — Microsoft MSFT -0.1%, for instance, charges $15/ton on all its internal businesses, with the proceeds going to pay for “sustainability improvements”.
From real estate, to technology, to transportation, to heavy industry, these various carbon prices are going to have a major impact on key markets.
The problem for companies and their investors is that this emerging set of carbon prices is scattered and inconsistent. Carbon is a global pollutant, not a local one. And yet the implied or explicit carbon prices of all of these formal and informal schemes is all over the place. RGGI’s most recent implied carbon price (note: pdf) was $5.65/ton. Corporate internal carbon prices range from $2/ton to $900/ton. The EU ETS is somewhere between $25-35/ton these days, and of course the NYC Local Law 97 implied price could go as high as $268/ton, as mentioned. All of this wild variation, while a recent study estimated that the true cost-per-ton of carbon emissions is $77 or higher. So we can expect that these carbon prices will go higher over time, not lower.
This makes things difficult for investors. Carbon pricing significantly impacts the economic value proposition for many existing and new lines of business. Carbon prices could determine winners from losers within both established and new industries. And yet, keeping up with all of the impacts of the increasingly complex set of carbon prices is nearly impossible already. And it’s getting worse.
So we can expect one or both of the following scenarios to happen:
- A cottage industry of consultants will likely arise over the next few years, providing expertise to institutional investors and Wall Street analysts, to inject specific carbon pricing impacts into their financial modeling and diligence activities. Those investors and analysts who don’t get access to this will be mispricing assets and thus will be at a disadvantage. This is the classic scenario where consultants can make a lot of money, and indeed many of the largest consulting firms are now establishing such expertise.
- Major corporations and investors, sick of the complexity (which itself becomes an additional de facto tax), will likely start demanding a more coherent carbon pricing policy. This probably won’t happen in 2021, but may happen sooner than you think.
For now, investors need to recognize that a price for carbon is already here. It’s just not evenly distributed.
This article appeared at Forbes]]>