There has been a lot of press over the last couple of months around carbon offsets – not least because of Mark Carney’s efforts to legitimize the idea. Mr. Carney’s focus is to create a robust trading platform for the buying and selling of legitimate offsets so that a carbon market can operate efficiently. He believes that without accurate and realistic carbon values, and the ability to buy and sell them, the capital markets around emission reduction will be inefficient and that less money will be attracted into the area. On this, he is probably correct, but in our view, the carbon offset markets have a long way to go.
If the value of offsets rises, because demand is also rising, companies will look for offset opportunities that cost the least. To begin with, these are likely to be incremental – some low-hanging planting opportunities (note that there are plenty of less expensive places than the US to plant trees), methane emission avoidance (very good because of the multiplier effect on carbon offsets), some capture and sequestration opportunities. The direct air capture projects discussed in the linked article are not at the low end of the abatement cost curve, and they may be the highest cost. Last week we talked about the possible cost curve for CCS and noted that a few unfortunate locations may have extremely high costs of CCS and limited other local alternates – these companies could afford to pay for a DAC offset – and we repeat the chart from last weeks report below. However, they would be better off looking for other, more concentrated sources of CO2 to capture. The companies pursuing DAC are clearly banking on a couple of things – improvements in costs and rising credit values. We would argue that there are much lower cost “low-hanging-fruit” options that should be pursued first.
Source: Multiple Studies, Client Conversations, and C-MACC Estimates
Our CCS cluster focus last week and the discussion on offsets above should demonstrate that C-MACC is well-positioned to conduct the Carbon Abatement Study – linked here. Our partnership with the Power Research Group, as well as our understanding of other carbon use technologies gives us the ability to provide insight on the topic generally and drill down to specific company opportunities and risks. We are in active discussions with potential participants/clients for the study and are happy to take further questions.
