Carbon Risk Managment

I recently wrote an article for Utilipoint on “Carbon Risk Management” software applications on an enterprise level. Little did I realize how much activity was out there. I have been inundated with requests to see those applications. Tomorrow, I am visiting Ron Dembo who founded Algorthymics and now the He called me to tell that he has that enterprise level carbon application, and I will see for myself tomorrow. The point is that carbon world is full of data sets. These data must be aggregated, scrubbed and verified if if it going to fully accepted on the enterprise level. That means data for reducing a company’s carbon footprint but also for trading.

The emergence of global carbon markets will not only uncover value and liabilities for corporations, but will also require active carbon asset management on an enterprise level. Ron Dembo, founder of Algorithmics, has recently raised this issue, and he is correct that the time to think of carbon on an enterprise level is now. This is particularly true when you consider the cross commodity dimension of carbon with not only energy assets, but also with both agricultural and metals exposures. These are all volatile markets. We expect the same volatility in carbon trading and finance.

To broaden this issue further, one can start looking at the basic business exposures of carbon globally. There are going to be price inefficiencies—even within one multinational company falling under multiple carbon regimes in different regulatory jurisdictions. I have been asked many times if there will be one price for carbon and the answer is: absolutely not. In effect, there are going to be regional and international differences, even within multinational companies. The prices on the futures screens are for standardized contract which may capture 20 to 25 percent of the carbon market. But, much more trading will be bilateral and over-the-counter (OTC).

The first step in carbon asset management is measuring the carbon exposure. This is business unit by business unit analysis, and is affected by fuel mix, mobile vs. stationery sources, cross commodity exposures, weather exposure and basic global economic forces, to name a few of the risk exposures. The bottom line is that the decarbonization of the global economy, which is really the goal of all greenhouse gas legislation, is to create protocols that are ubiquitous and will be implemented to change business behavior. The process is only beginning. The actuality is that the global carbon footprint continues to increase each year primarily from the burning of fossil fuels (It has been up 3.1 percent per year globally since 2000 due to increased global usage of fossil fuels).

Regarding trading, we now have 2 viable carbon exchanges in the US. The well known Chicago Climate Exchange and the new comer, the Green Exchange. Check out the Green Exchange is supported by environmental brokers such as Evolution Markets, TFS Energy and ICAP, the New York and European investment banks, hedge funds, and energy companies that will provide liquidity on the trading platform. The true value of an Internet-based exchange today is not only daily trading in futures contracts but more importantly the ability to clear bilateral contracts where most carbon trading occurs. With all the ruckus in DC on energy trading, it is important that trades post on exchanges. Watch the Green Exchange. It only launched on March 17th and is starting to gain traction. This will be the subject of a longer post.

Peter Fusaro, Chairman, Global Change Associates

2 replies
  1. FeButterfly
    FeButterfly says:

    Very informative post. I wonder how many companies are really thinking ahead on this issue. I am also curious as to how individuals can participate or will individuals be subject to various carbon taxes while trading becomes available for business?

  2. Peter Fusaro
    Peter Fusaro says:

    Not as many as we need. Basically, mostly energy companies know their carbon footprint since they have been required by law since 1995 to comply with emissions laws. That needs to be broadened. Today, individual can buy credits on carbon reduction projects, but more fundamentally, can make their homes more energy efficient through changes in lighting, heating and cooling systems, appliances, and insulation. Consumers can purchase more energy efficient cars and should queue up for plug and play hybrids. That will cost money. The dirty little secret of all this is that there is no free lunch but doesn't it make sense to pay for a cleaner environment.Peter Fusaro

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