The Dow Jones recently reported that New York Mellon (NYM) would be making an investment in a carbon offset project, further signaling the growing interest in and support for this new concept.
NYM’s investment in carbon trading is in line with the larger investment firm’s sustainability and climate change strategy. Since 2011, NYM has been a major sponsor of climate causes, including the American Climate Laboratory, the American Rivers Conservation Trust, and the Climate Change Awards. In addition, the firm has been investing in alternative forms of energy, such as solar power and energy storage systems.
The carbon offset project that NYM will be investing in is called the Clean Energy Project. It is a joint venture between American Electric Power and Statoil, a Norwegian company that is one of the world’s largest oil and gas companies. The project is based in Wyoming and uses carbon trading as a financial instrument to reduce carbon emissions. Carbon trading allows companies to purchase and dispose of carbon credits, or units of carbon emissions, from others.
Why Carbon Trading?
According to the U.S. Environmental Protection Agency, greenhouse gases, of which carbon is one, contribute to climate change. As the climate changes, so too does the demand for carbon offsets. Additionally, the agency states that its current methods of regulating carbon emissions don’t work, and new and innovative approaches are needed.
Carbon trading offers a viable alternative. Like with other financialized products like futures or options, investors stand a chance of profiting from climate change. As the climate crisis grows, so too will the demand for carbon trading. Investing in carbon trading provides a steady source of income and helps combat climate change simultaneously.
The Growing Popularity Of Carbon Trading
As interest in and understanding of climate change grows, so too does the demand for products that help reduce carbon emissions. Since the 2008 financial crisis, there has been a boom in the popularity of environmentally-friendly investment vehicles.
To date, the growth in investment in alternative investments such as impact real estate, body stock, and microlending has outpaced that of traditional investment vehicles. According to the Global Asset Management Association, alternative investment products managed over $16 trillion in assets as of 2018, with this figure expected to reach $27 trillion by next year.
Along with increased demand for carbon trading stems from the growing number of investors who see a parallel between climate change and financial instability. If tomorrow we learned that a third of the worlds’ known oil reserves had become non-renewable, the demand for oil would plummet, and with it, the demand for carbon offsets.
As interest in and demand for carbon trading grows, more and more companies will dive into the market, increasing access to investment opportunities and diversifying risk.
Why American Electric Power And Statoil?
In 2017, American Electric Power and Statoil formed a strategic partnership to develop America’s first carbon-free electric power plant. The project, called the Clean Energy Project, will use hydropower, solar power, and fuel cells to generate electricity. American Electric Power will own 67% of the partnership, and Statoil will hold the remaining 33%.
Although the initial public offering for the partnership has been postponed until 2021, the venture is already garnering significant interest from institutional and accredited investors. To date, the project has received interest from 12 pension funds, 27 university endowments, and 21 foundations.
How Does The Clean Energy Project Comply With The Kyoto Protocol?
The Kyoto Protocol was an international agreement, implemented in 2005, which limited the amount of carbon emissions that countries could emit. The protocol aimed to reduce carbon emissions to levels that existed prior to the industrial era. One of the main reasons why the protocol was adopted was to stop climate change.
To comply with the Kyoto Protocol, the Clean Energy Project must reduce the amount of carbon that the project emits (or offsets) relative to its annual carbon budget. To do this, the project will use several mechanisms, including purchasing carbon credits from companies and individuals that reduce their carbon emissions, investing in climate-friendly technologies, and donating to climate causes. In total, the project is expected to reduce its carbon emissions by 25% below the amount that it would emit if it were a conventional coal plant. When fully operational, the project will be capable of providing 630 MW of carbon-free electricity, more than enough to power 600,000 homes.
With regard to purchase of carbon credits, the Clean Energy Project will purchase carbon credits from Verified Carbon Reduction, a company that verifies that its customers have reduced their carbon footprint. Thus, providing investors with a credible guarantee that the carbon credit purchasable from the project will be invested in a climate-friendly manner.
In addition to purchasing carbon credits, the Clean Energy Project also intends to reduce its carbon footprint by investing in and utilizing carbon-negative technologies. In line with this, the project will install energy-efficient lighting, upgrade power plants to reduce energy consumption, and utilize solar panels.
Furthermore, the project will partner with nonprofit organizations that invest in and work for the preservation of nature. By donating to these types of organizations, the Clean Energy Project is able to claim a tax deduction in the US and reduce its taxable income. The resulting savings are then used to fund the project’s operations and expansion into the US, India, and Europe.
The Rising Popularity Of Carbon Trading
The popularity of carbon trading can be attributed to a number of factors. First, the price of carbon credits has plummeted, making it more affordable for companies. Second, due to its link to climate change, investing in and profiting from carbon trading is seen as a form of socially responsible investing. Third, the stock market has recognized the positive impact that climate change solutions can have on an investment’s value. Finally, the emergence of digital currency has made the purchase of carbon credits more accessible and convenient for consumers.