Here is a June article I posted a few months ago which may help a little:
Is Carbon The New Uranium?
4/04/2007 By: FN Arena
When Andrew Grant, managing director of CO2 Group (COZ), attended a global carbon conference nine years ago, he knew every face there. Back then the carbon trading market was estimated to be worth about $100 million globally.
When Grant attended the most recent conference in Copenhagen, there were 2000 attendees. Eighty per cent were bankers and financial traders. The global market is currently estimated to be worth $3.5 billion – and we're still only at the beginning. By far the largest carbon trading market is in Europe. The industry is now very mature. It boasts a lot of capital, a lot of service providers, and all the key names and brands that one would recognise are in there. Says Grant: "Europe is in the transaction phase", and by contrast, "Australia is still in the education phase". Australia is still stuck on short term politics.
It may come as a complete surprise to many, but the second largest (a long way second) carbon market in the world is in New South Wales. In fact, NSW initiated the world's first carbon trading scheme on January 1st, 2003, even ahead of Europe. The scheme introduced NSW Greenhouse Gas Abatement Certificates (NGAC). It may also come as a surprise that every householder in NSW is a participant in the carbon trading market.
That's right. Under the scheme, all NSW power generation facilities have legislated liabilities with respect to their carbon emissions. These liabilities are passed on to the consumer as part of the household power bill. Some industrial consumers of power have been able to avoid the additional surcharge by creating their own accredited carbon abatement schemes.
The targets set to create NGACs are currently comparatively soft – particularly by European standards. At present, NGACs trade at $15.30 per tonne of carbon dioxide equivalent.
Remember that price – for you will probably never see it again.
The carbon marketplace is growing dramatically and is expected to increase by 50% in 2007 alone. While Europe is considered a mature market today, it is still only a youngster. For starters, when the European Union initially set emissions targets on specific industries and created carbon trading, it deliberately omitted the two biggest carbon producers of all – building and transport – for the sheer economic and social adjustments that would precipitate. However, those industries will also be absorbed into the scheme eventually. Airlines, for example, are about to be included, and that will have a noticeable impact on airline tickets.
Australian state governments have already moved as well. NSW is not the only state with an existing carbon scheme of some sort – every state has one. The fact that they are all Labor governed is no doubt why, but again, that really isn't important, except for the fact that Labor, both state and federally, will force a rapid move to some sort of national trading scheme one way or the other.
And a national scheme is pretty much sitting on the table ready to go, thanks to agreement by all state premiers. A good deal of time and effort has already been spent. The premiers have given an ultimatum to the prime minister: introduce a national scheme by the end of May or we will introduce one for you. The prime minister has called together a taskforce to report on such a move. The report is due in May. Each member of the taskforce (other than government officials) represents one of Australia's largest carbon emitting companies. There are no environmentalists, alternative energy providers or independent climate scientists included. The Australian of the Year did not get a berth.
The United States is in a similar position. Australia is second only to the US in carbon emission per capita, but the US is far and away the world's largest total emitter (with China rapidly catching up). The US has not signed the Kyoto Protocol and has no immediate stated plans for a national carbon trading scheme.
Yet, like Australia, 29 US states have introduced carbon trading schemes of one sort or another, the most notable being in fuel-guzzling California. I'll be back.
With no viable national trading model yet existing in the US (already home to the Chicago Carbon Exchange) it is not hard to see just what upside exists in the carbon market. If the Democrats win government, they will immediately introduce a scheme, but the election is not till the end of next year. But again, the point is that private industry is already on the move.
US companies are quickly looking into ways to invest in or create carbon abatement projects. The same is true in Australia. As Andrew Grant puts it: twelve months ago no one cared; six months ago it was Oh My God; and now there is a scramble. There is no point in waiting around to see whether a national trading scheme will be introduced – it will. There is no point in waiting until it is introduced, for then it will be too late. When the European Union introduced its comprehensive legislation, the market capitalisation of European companies shifted by plus or minus 10% overnight, depending on which side of the carbon ledger they lay. The only way to avoid such movements in Australia is to pre-empt and act now.
Citigroup analysts, working on the basis of a $20/t cost of carbon, suggested some Australian companies could effectively have their market caps change by up to 45% if a scheme was introduced tomorrow (this assumes no government exemptions/extensions for major emitters, which are pretty much a given). (See "Costing Carbon Trading"; Sell&Buyology; 26/03/07).
"Think globally, act locally" – that was the catch-cry of environmentalists back in the nineties, who were then still being dismissed as hippies and tree-huggers. On Saturday night last in Sydney an estimated half of the city's population turned off its lights for one hour, resulting in a 10% reduction in power usage. While largely symbolic, the extent of participation surprised the power companies.
As is usually the case with any cause, the climate change battle has been taken up by movie stars and rock musicians – particularly those who live in big houses and own their own planes. While some are using solar powered amplifiers on their recordings, others are simply looking at ways to invest in carbon abatement to thus offset their personal carbon footprints.
This is exactly what the organisers of Australia's biggest annual nationwide rock festival – the Big Day Out – have done as well. In order to put on what are carbon neutral shows, the organisers have elected to invest in carbon sequestration, in the form of trees. To do so the organisers approached the CO2 Group.
CO2 Group was a little surprised when the BDO came knocking on its door. In fact the last six months have brought more surprises for the Group, as the BDO has not been the only organisation suddenly looking to offset its carbon emissions ahead of any ratified government scheme. But then when CO2 listed three and a half years ago, this is exactly what its business model was set up to achieve.
CO2 Group is the only company listed on the Australian Stock Exchange whose sole purpose is the creation of carbon credits. A renewable energy company can create carbon credits, but only in the process of producing energy. A forestry company can create carbon credits, but only until it cuts down its trees for use in building. CO2 Group simply plants tees and then leaves them alone. It is purely a carbon credit generator.
As it is accredited under the NSW carbon trading scheme, CO2 is in fact the only company in the world accredited to create carbon credits from planting trees.
The immediate assumption one might make is that CO2 might well be a pioneer, but pretty soon everyone will rush to plant trees and carbon credits will be generated willy-nilly. Nothing could be further from the truth.
The process by which CO2 has achieved its NSW accreditation has been long and arduous. Andrew Grant related that this is most third party-audited business he has ever been involved with. A carbon credit is a very specific instrument that must satisfy very exacting standards. Without such standards, businesses would be able to lay claim to carbon credits left right and centre that would be spurious at best.
Carbon sequestration is the process whereby carbon dioxide is removed from the atmosphere ("sequester" means "absorb"). One form of sequestration, oft talked about in the media of late, is geosequestration – the process of pumping carbon dioxide underground and leaving it there for future generations to potentially deal with, much in the same vein as some nuclear waste schemes. Other processes include the capturing of carbon dioxide for use elsewhere rather than atmospheric release. This can occur, for example, during underground coal gasification.
Longevity is the most important factor in the acquisition of accreditation for a sequestration project. Government regulators must be convinced that carbon removed from the atmosphere will stay removed for a very long time. There cannot be a risk of sudden release due to some risk event (eg an earthquake releases geosequestered carbon dioxide, a forest fire takes out a timber plantation).
CO2 Group is in the business of "building", operating and managing carbon sinks. While management is prepared to own the land on which trees are planted, it would rather not. Nor does it actually need to "own" the trees. What it does own is the capacity to generate the carbon credits, providing customers such as the Big Day Out with its carbon offset.
Nor is it any tree that is planted. CO2 has spent a great deal of time in identifying its particular Mallee eucalypt as an ideal carbon sink, and perfecting its use. The specific genetics and growth program process are commercial in confidence. This is CO2's "eleven herbs and spices". Not just any old tree can be planted with gay abandon in order to gain accreditation as a carbon sink.
The trees are not planted as forests, but typically along strips amongst cereal crops. As owners of the land the farmers are paid upfront for strips representing typically 10% of acreage. The eucalypts are not bothered by water shortage, and require no irrigation or fertiliser. The strips will then act as windbreaks, reduce soil erosion, address soil salinity, provide shade for livestock, and not be at much risk from bushfires given they are not concentrated in forests. Whereas many carbon schemes are met with hostility from local landowners (think noisy, bird-slicing windmills), CO2's scheme is met with open arms. It is win-win all round.
Mallee eucalypts can live for five hundred years. Typically the carbon carrying capacity is reached in 40-50 years. From seed to mature tree, the eucalypt absorbs carbon dioxide, keeps the carbon (which is the wood) and spits out oxygen. The growth period from 7-15 years is when they are most sequester-efficient. CO2's trees are protected, and cannot be cut down.
To date CO2 has planted five million trees over 2,500 hectares, which equates to 1.2 million tonnes of carbon dioxide offset. Under the business model, the Group enters into contracts with its customers to plant trees on their behalf. The contracts are long term and work on a carbon off-take supply agreement, similar to a long term power off-take agreement. It is not just the music industry that has been interested.
CO2 has signed a thirty-year contract with the NSW government-owned Eraring power station, the fifth largest in the country and amongst the top ten greenhouse gas emitters in the country. The deal includes options to create a sink of up to 15,000 hectares within three years. The Victorian State Government has signed a deal to offset its vehicle fleet. EDS Technology has signed a deal not only to offset its business, but also the personal carbon footprint of all of its salaried employees. There are two more deals with AAA-rated Australian companies in the pipeline. This is just the beginning. CO2 has entered into an agreement with Macquarie bank (who else?) to market its product.
CO2 Group, as noted earlier, is surprised just how quickly corporate Australia is suddenly moving on carbon offsets ahead of a ratified national system. As well as NSW accreditation, CO2 has just attained accreditation under the existing federal government "greenhouse gas friendly" scheme, which is merely a de facto at this stage but means CO2 is already a step along in a national process. The greatest benefit CO2 has at its disposal is scalability – Australia has one of the world's largest areas of previously cleared land, suitable for the planting of CO2's trees. The Group is also years ahead of its sequestration competition in terms of product development and accreditation.
And then there is the price.
The extraordinary jump in the price of uranium over the last two years has been the result of a sudden significant surge in demand meeting a supply side that is not only lacking the extent of recent investment and development to cope with it, but that takes a good deal of time to respond. The carbon market – in the form of carbon credit generation – has effectively only just begun. But suddenly the demand has surged. Demand has only just begun as well. While technology has the capacity to react quickly to commercial need, most carbon sequestration concepts are still largely on the drawing board.
Getting a handle on where the price of an internationally recognised carbon credit may go is not easy. It is not as simple as a pound of uranium oxide is a pound of uranium oxide. Given the somewhat esoteric nature of a "credit", it is no surprise that stringent accreditation processes will prevail, making it unlikely that carbon credit availability can be rushed on to the international market.
Yet as climate change becomes more ominous each day, and corporations suddenly realise the potential extent of capital losses under a carbon reduction scheme, the race is on. The corporate market will outrun the regulatory bodies.
The NSW government forecasts the demand/supply curve for NGACs will look like this (chart may not show on some third party re-distribution channels):
Andrew Grant suggests this curve could readily be applied to any market in the world – Australia nationally, the US, even Europe. CO2 has listed on the Chicago Carbon Exchange (the first Australian company to do so – not AGL, as was widely reported in the media). The CCE will likely be a precursor to international carbon trading.
Accepted wisdom has carbon credits priced at US$30-40/t by 2020. The Australian Bureau of Agriculture and Resource Economics has modelled carbon up to A$600/t by 2030. This figure is not realistic – whole economies would have shut down long before this price was ever reached – it is simply a modelled outcome. European units are forecast to reach A$27/t by 2012. Citigroup recently used A$20/t to model the market capitalisation impact on Australian companies, but suggested this was probably conservative. Australian National Renewable Energy Certificates are forecast to reach A$35/t by 2011. The International Energy Agency suggests the cost of carbon storage and capture could by as much as US$55/t.
The only pattern here is that there is no pattern. Carbon credits are still a concept in development, albeit much work has already been done and accreditation has been established in a piecemeal fashion across the globe. Demand/supply curves suggest the price of carbon should follow a price curve similar to that of uranium, but it's not that simple. While governments will no doubt ease in carbon reduction targets, and provide adaptation concessions, there remains a simple matter of major industries becoming commercially unviable if the cost of carbon were to reach too high. The world cannot just shut down.
Technology is currently being fast-tracked across all areas of green-friendliness – sequestration, renewables, "clean coal", hybrid cars, and so forth – and although the price of achieving carbon reduction will start high, it must fall as developmental milestones are achieved.
The price of carbon cannot go off the radar, but it certainly will not fall from here. In the case of a company such as CO2 Group, it is not so much the forecast price of carbon that drives upside, but the capacity to grow in scale. Carbon will eventually find a price level that satisfies the elements of government regulation, scientific modelling, and corporate adjustment. But those companies who have achieved first-mover advantage in the market stand to benefit greatly from the market growing substantially in breadth, internationally. Tree-planting is one of the cheaper means of creating a carbon credit. Just how cheap, CO2 isn't saying.
