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Showing posts with label carbon. Show all posts
Showing posts with label carbon. Show all posts
Wednesday, September 09, 2015
Tuesday, March 17, 2015
The Haiku of Finance for 03/17/15
Carbon price regime
Plotting cost curve by country
Much like oil market
Plotting cost curve by country
Much like oil market
Seeking A Market Price For Carbon
Carbon dioxide emissions occur in the natural environment. Environmental scientists exploring the relationship between human-generated CO2 emissions and climate change advocate pricing these emissions. Economists now seek ways to endogenize the value of carbon emissions within financial models. Carbon pricing is a relevant topic for financial analysts if their models accurately encompass reality.
The Ceres Carbon Asset Risk Initiative looks sane at first glance. It does not write off all hydrocarbon reserves as stranded assets and allows room for energy companies to use their carbon reserves productively. The Global Investor Coalition on Climate Change gives the Ceres initiative credibility, although the language I read in some of the coalition's public materials takes a harsher tone than Ceres. Carbon Tracker Initiative takes the hardest line on stranded assets and I am not convinced their analysis will withstand long-term improvements in energy technology. More efficient internal combustion engines are one way to curtail emissions.
One widely known approach to estimating carbon costs is the social cost of carbon SCC. The flaw in using a comprehensive approach like SCC is its inability to account for whatever the IPCC's climate models cannot estimate. Approaching a financial estimate this way invites political meddling and artificial adjustments. Regulators need to set the bar somewhere, but allowing for too many variables sets the bar too high. An artificially high SCC risks exposure to Black Swan shocks from technology advances that will render it harmful to energy producers. Lawrence Berkeley Lab's early work on insurance risks from climate change is so intertwined with IPCC model assumptions that it shares the same drawbacks as SCC.
Analysts can find helpful ways out of carbon pricing problems. The CBO studied potential carbon taxes in May 2013 and balanced potentially high revenues with the regressive effects on low-income households and energy-intensive regions. The SCC's framework would be stronger if it used a Monte Carlo simulation of different discount rates. The World Bank noted in September 2014 that carbon pricing looks different in many parts of the world. Local costs for extraction and transport matter very much.
The financial sector should take the same approach to pricing carbon as it does to pricing oil. Investment banks track a global cost production curve for oil and gas fields. Tracking a cost production curve for major carbon emitting energy companies and nations is a logical next step. The IEA statistics on CO2 emissions are the first input for country-level analysis. Energy producing companies' annual financial statements contain annual production statistics. These are the starting points for a fuller understanding of the carbon cost curve. Simplifying the SCC and running it through a Monte Carlo simulation will give the carbon cost curve an elegance divorced from political agendas.
The Ceres Carbon Asset Risk Initiative looks sane at first glance. It does not write off all hydrocarbon reserves as stranded assets and allows room for energy companies to use their carbon reserves productively. The Global Investor Coalition on Climate Change gives the Ceres initiative credibility, although the language I read in some of the coalition's public materials takes a harsher tone than Ceres. Carbon Tracker Initiative takes the hardest line on stranded assets and I am not convinced their analysis will withstand long-term improvements in energy technology. More efficient internal combustion engines are one way to curtail emissions.
One widely known approach to estimating carbon costs is the social cost of carbon SCC. The flaw in using a comprehensive approach like SCC is its inability to account for whatever the IPCC's climate models cannot estimate. Approaching a financial estimate this way invites political meddling and artificial adjustments. Regulators need to set the bar somewhere, but allowing for too many variables sets the bar too high. An artificially high SCC risks exposure to Black Swan shocks from technology advances that will render it harmful to energy producers. Lawrence Berkeley Lab's early work on insurance risks from climate change is so intertwined with IPCC model assumptions that it shares the same drawbacks as SCC.
Analysts can find helpful ways out of carbon pricing problems. The CBO studied potential carbon taxes in May 2013 and balanced potentially high revenues with the regressive effects on low-income households and energy-intensive regions. The SCC's framework would be stronger if it used a Monte Carlo simulation of different discount rates. The World Bank noted in September 2014 that carbon pricing looks different in many parts of the world. Local costs for extraction and transport matter very much.
The financial sector should take the same approach to pricing carbon as it does to pricing oil. Investment banks track a global cost production curve for oil and gas fields. Tracking a cost production curve for major carbon emitting energy companies and nations is a logical next step. The IEA statistics on CO2 emissions are the first input for country-level analysis. Energy producing companies' annual financial statements contain annual production statistics. These are the starting points for a fuller understanding of the carbon cost curve. Simplifying the SCC and running it through a Monte Carlo simulation will give the carbon cost curve an elegance divorced from political agendas.
Friday, March 13, 2015
Stranded Assets Of The Carbon Bubble
I attended a Climate One talk at the Commonwealth Club this week about how an alleged carbon bubble in the valuation of oil and gas companies will eventually lead to stranded assets remaining unextracted. I am no stranger to this subject since I blogged about another Commonwealth Club session on natural resources in June 2014. It's a complicated argument with more than one side.
The Carbon Tracker Initiative's Carbon Bubble report is one renowned reference for the pro-bubble case. Here's the theory in a nutshell. The argument contends that burning hydrocarbons raises the earth's carbon budget beyond a threshold that human civilization can tolerate. Avoiding this threshold and the climate catastrophe it will cause requires sequestering discovered hydrocarbon energy reserves in the ground forever. These reserves thus become stranded assets that cannot contribute economic value to an energy company's balance sheet. The financial markets' expectation that these unavailable assets will still become available implies that energy companies' stocks trade at an unsustainable "carbon bubble" valuation.
A contrary analysis in the Wall Street Journal from January 2015 argues that the world economy will still need significant hydrocarbon energy for the foreseeable future. I have enough financial expertise to see wisdom in realistically calculating economically recoverable energy reserves. Energy and mining companies are always engaged in a complex pursuit of exploration, discovery, and write-down of reserves that has more to do with local geography and logistics than with global carbon regulation. Carbon bubble proponents should remember that when they estimate large amounts of uneconomical reserves. They should also remember than even the IPCC caveats its climate warnings with probabilities, not certainties.
Some of the carbon bubble logic falls apart in the face of project economics. If energy company executives are truly incentivized to replace depleted reserves as the driver of share price, and if difficult projects are indeed only profitable at higher energy prices, then it follows that stringent carbon controls that drive up oil prices will revive those abandoned projects that have unfavorable break-even points.
Carbon bubble proponents and critics need to revisit the US DOE EIA's Annual Energy Outlook. Consider that population growth, energy use per capita, and energy use per dollar of GDP are all very relevant in forecasting the amount of reserves the energy sector must discover and develop. Tighter carbon rules will make less energy available in the short term before any dramatic supply increase from renewables comes on line to save us.
The financial sector has begun pricing securities that make lower contributions to the world's carbon budget. Fossil Free Indexes has made a stab at finding benchmarks for portfolio managers. Clean Energy Victory Bonds are a proposed category of US Treasury Bonds that individual investors could buy. The victory bonds' emphasis on funding widely available technology distinguishes them from the Clean Renewable Energy Bonds (CREBs) that public utilities have issued to develop specific commercial-scale projects.
The movement encouraging divestiture from energy companies should not concern long-term value investors. It is music to the ears of bargain hunters who seek undervalued securities with reduced demand. Thank institutional investors for making energy stocks cheaper. We can also thank the water-energy-food security nexus for making those three inputs more expensive, and thus more profitable for natural resource companies developing new projects.
The World Bank's World Development Report (WDR) from 2010 is a good reference for analysts pursuing insights into how the energy sector will change, with or without carbon bubbles. Analysts must also compare the competing market valuations of the sectors for oil/gas, coal, nuclear, and renewables both inside and outside the US. The ongoing WDR series reveals opportunities for direct investment and portfolio rebalancing. The energy sector's component valuations will reveal opportunities for arbitrage. Count on Alfidi Capital for continuing insights into companies that deliver ROI, with or without carbon limitations.
The Carbon Tracker Initiative's Carbon Bubble report is one renowned reference for the pro-bubble case. Here's the theory in a nutshell. The argument contends that burning hydrocarbons raises the earth's carbon budget beyond a threshold that human civilization can tolerate. Avoiding this threshold and the climate catastrophe it will cause requires sequestering discovered hydrocarbon energy reserves in the ground forever. These reserves thus become stranded assets that cannot contribute economic value to an energy company's balance sheet. The financial markets' expectation that these unavailable assets will still become available implies that energy companies' stocks trade at an unsustainable "carbon bubble" valuation.
A contrary analysis in the Wall Street Journal from January 2015 argues that the world economy will still need significant hydrocarbon energy for the foreseeable future. I have enough financial expertise to see wisdom in realistically calculating economically recoverable energy reserves. Energy and mining companies are always engaged in a complex pursuit of exploration, discovery, and write-down of reserves that has more to do with local geography and logistics than with global carbon regulation. Carbon bubble proponents should remember that when they estimate large amounts of uneconomical reserves. They should also remember than even the IPCC caveats its climate warnings with probabilities, not certainties.
Some of the carbon bubble logic falls apart in the face of project economics. If energy company executives are truly incentivized to replace depleted reserves as the driver of share price, and if difficult projects are indeed only profitable at higher energy prices, then it follows that stringent carbon controls that drive up oil prices will revive those abandoned projects that have unfavorable break-even points.
Carbon bubble proponents and critics need to revisit the US DOE EIA's Annual Energy Outlook. Consider that population growth, energy use per capita, and energy use per dollar of GDP are all very relevant in forecasting the amount of reserves the energy sector must discover and develop. Tighter carbon rules will make less energy available in the short term before any dramatic supply increase from renewables comes on line to save us.
The financial sector has begun pricing securities that make lower contributions to the world's carbon budget. Fossil Free Indexes has made a stab at finding benchmarks for portfolio managers. Clean Energy Victory Bonds are a proposed category of US Treasury Bonds that individual investors could buy. The victory bonds' emphasis on funding widely available technology distinguishes them from the Clean Renewable Energy Bonds (CREBs) that public utilities have issued to develop specific commercial-scale projects.
The movement encouraging divestiture from energy companies should not concern long-term value investors. It is music to the ears of bargain hunters who seek undervalued securities with reduced demand. Thank institutional investors for making energy stocks cheaper. We can also thank the water-energy-food security nexus for making those three inputs more expensive, and thus more profitable for natural resource companies developing new projects.
The World Bank's World Development Report (WDR) from 2010 is a good reference for analysts pursuing insights into how the energy sector will change, with or without carbon bubbles. Analysts must also compare the competing market valuations of the sectors for oil/gas, coal, nuclear, and renewables both inside and outside the US. The ongoing WDR series reveals opportunities for direct investment and portfolio rebalancing. The energy sector's component valuations will reveal opportunities for arbitrage. Count on Alfidi Capital for continuing insights into companies that deliver ROI, with or without carbon limitations.
Monday, July 07, 2014
Monday, June 09, 2014
Revolutionary Resources Must Cover Costs And Carbon
The Commonwealth Club addressed natural resource shortages and mitigation strategies today. I have yet to read Resource Revolution so I'll withhold judgment on the author's arguments. I keep hearing about resource constraints in the context of these billions of middle class consumers the developing world is supposedly creating. I don't think they're coming, but the developed world has plenty of room to grow.
US energy use has tracked population growth and GDP growth fairly closely for much of this nation's history. The EIA's Annual Energy Outlook has all the details. The post-WWII explosion in US GDP had a lot to do with rising domestic oil production. Petroleum has the highest energy content of any energy source you can name. The current US fracking boom and the widespread adoption of efficient technologies has prolonged the US's ability to generate high GDP growth. Transitioning to a post-hydrocarbon energy future makes maximum possible use of this window of opportunity
More analysts need to consider the impact of the sharing economy on resource use. Millennials using ZipCar and Airbnb won't generate demand for the steel and wood used in new cars and hotels. Analysts should also consider whether the developing world's aspiring middle classes will bump right up against the food-water-energy security nexus limits on population size and composition for a given watershed.
There is plenty of analytical controversy over why oil prices remain high despite declining driving in the US and cheap alternatives like natural gas (at least in North America). I'm pretty sure it's because the production cost curve for oil is rising around the world and cheap oil is getting harder to produce. Keeping those costs manageable may require energy companies to adopt sustainable ESG criteria that will keep them in the hunt for investment dollars worldwide.
Resource sector analysts have discovered the "carbon bubble," a new methodology for valuing investments in hydrocarbon production. Claiming that hydrocarbon investments are "stranded assets" because their eventual carbon emissions will negate any economic value they produce is IMHO a baloney calculation. Physical plant has a natural depreciation schedule and expected salvage value. The carbon itself now has economic value because it is a useful input into other green processes. Here's my ultimate carbon capture cycle . . . coal production to energy plant to CO2 emission capture. The fly ash from coal burning makes concrete. The captured CO2 is a feedstock for algae production, which processes into biofuel. See folks? There are no stranded assets anywhere in that carbon chain.
Carbon credit markets will make the price of carbon even more transparent as different parts of the energy supply chain bid on it. It's a legitimate resource and it needs a global price, just like oil. All it takes is enough demand and some adaptive accounting rules to make it official. That's the real resource revolution I'd like to see.
US energy use has tracked population growth and GDP growth fairly closely for much of this nation's history. The EIA's Annual Energy Outlook has all the details. The post-WWII explosion in US GDP had a lot to do with rising domestic oil production. Petroleum has the highest energy content of any energy source you can name. The current US fracking boom and the widespread adoption of efficient technologies has prolonged the US's ability to generate high GDP growth. Transitioning to a post-hydrocarbon energy future makes maximum possible use of this window of opportunity
More analysts need to consider the impact of the sharing economy on resource use. Millennials using ZipCar and Airbnb won't generate demand for the steel and wood used in new cars and hotels. Analysts should also consider whether the developing world's aspiring middle classes will bump right up against the food-water-energy security nexus limits on population size and composition for a given watershed.
There is plenty of analytical controversy over why oil prices remain high despite declining driving in the US and cheap alternatives like natural gas (at least in North America). I'm pretty sure it's because the production cost curve for oil is rising around the world and cheap oil is getting harder to produce. Keeping those costs manageable may require energy companies to adopt sustainable ESG criteria that will keep them in the hunt for investment dollars worldwide.
Resource sector analysts have discovered the "carbon bubble," a new methodology for valuing investments in hydrocarbon production. Claiming that hydrocarbon investments are "stranded assets" because their eventual carbon emissions will negate any economic value they produce is IMHO a baloney calculation. Physical plant has a natural depreciation schedule and expected salvage value. The carbon itself now has economic value because it is a useful input into other green processes. Here's my ultimate carbon capture cycle . . . coal production to energy plant to CO2 emission capture. The fly ash from coal burning makes concrete. The captured CO2 is a feedstock for algae production, which processes into biofuel. See folks? There are no stranded assets anywhere in that carbon chain.
Carbon credit markets will make the price of carbon even more transparent as different parts of the energy supply chain bid on it. It's a legitimate resource and it needs a global price, just like oil. All it takes is enough demand and some adaptive accounting rules to make it official. That's the real resource revolution I'd like to see.
Wednesday, July 10, 2013
Pricing Carbon Costs Into Retail Products
Some of my recent research is leading me into unexplored territory. I blogged about how businesses can learn about Sustainable ROI and I've been hunting for data that will make such a calculation viable. Calculating returns means adjusting gross revenues and eventually earnings for the true price of things like carbon use. Energy producers can use carbon credits to price their emissions but pricing consumer goods is probably more difficult. The EPA even has a Social Cost of Carbon (SCC) that finance professionals can use as a discount rate for carbon's contribution to a project's NPV. That covers the whole enterprise. The individual retail product is another matter.
The UK's Carbon Trust has confirmed through research that consumer demand exists for low-carbon products. On the other hand, the Economist notes that pricing retail products for carbon is difficult. I believe Big Data can close the gap between an unmet consumer demand and the inability of business to quantify that demand.
The Consumer Goods Forum members have the ability to identify the input cost of every factor in the consumer goods value chain through its Sustainability Pillar. The National Retail Federation is the Big Data aggregator for finished goods sales and demand trends. Put the two together and I bet something magical will happen. More specifically, the carbon price of finished retail goods will be within reach of marketers who can mine retail data through several lenses. The final touch will be an app shoppers can download while they browse store aisles that will help them search for goods with low carbon prices.
Come on, retailers. This golden opportunity awaits the first consumer products maker that can dig into its supply chain and leverage the data mining of the two organizations I mentioned above.
The UK's Carbon Trust has confirmed through research that consumer demand exists for low-carbon products. On the other hand, the Economist notes that pricing retail products for carbon is difficult. I believe Big Data can close the gap between an unmet consumer demand and the inability of business to quantify that demand.
The Consumer Goods Forum members have the ability to identify the input cost of every factor in the consumer goods value chain through its Sustainability Pillar. The National Retail Federation is the Big Data aggregator for finished goods sales and demand trends. Put the two together and I bet something magical will happen. More specifically, the carbon price of finished retail goods will be within reach of marketers who can mine retail data through several lenses. The final touch will be an app shoppers can download while they browse store aisles that will help them search for goods with low carbon prices.
Come on, retailers. This golden opportunity awaits the first consumer products maker that can dig into its supply chain and leverage the data mining of the two organizations I mentioned above.
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