Disclosure: The following represents my opinions only. I am long AAV.TO and WCP.TO (Image credit to veeterzy on Unsplash)
Lately there’s been a lot of talk around our (virtual) office about energy markets, energy policy, the electrification theme, and carbon. When I say we discuss carbon, I’m not talking about debating the drivers of climate change, but rather carbon’s role as a new “commodity” coming to a market near you. Personally, my thinking on carbon is partly based on what we just witnessed/are witnessing with respect to the creation of the marijuana market. Before legislation officially brought weed into the capital markets, marijuana was “external” to the formal economy. The market existed, but there was no money to be made in it without breaking the law. Once the laws changed, *poof*, a new market appeared; a market that made a lot of early investors a lot of money. Now, with a growing chorus, shifting global government policies (and “net zero” commitments with respect to fighting climate change) mean that carbon dioxide, which until relatively recently had no value associated with it, now does have a value. This is no “niche market”. The size of the global carbon market is expected to meet or exceed that of the largest commodity market in the world today; the oil market. This is a seismic market event in progress.
As they say, “one man’s trash is another man’s treasure”; and carbon is no exception. Emitted for centuries by human industrial and agricultural activities without any apparent cost or consequence, carbon dioxide is clear, colourless, odourless, and, until relatively recently, largely worthless. Today, as more countries and companies around the world set “Net Zero” emissions targets in the hopes of trying to limit humanity’s impact on the Earth’s climate, “carbon” (carbon dioxide) is being priced in a variety of markets, at levels largely set by governments. Ultimately, the “cost” of carbon will be paid by the consumers of goods and energy (which should come as no surprise) and I can’t see how the inclusion of that cost won’t be broadly inflationary, but that’s beside the point. The point is that these policy changes are more or less baked in the cake now, so I’m just going to roll with them, which means that I want to think of how I can play this from a market perspective. There are two ways to reduce carbon dioxide in the atmosphere… you can try to pull it out of the atmosphere (“sinks”), or you can stop it from going into the atmosphere in the first place (“sources”). These are not mutually exclusive options, but for this note I’m only going to focus on the “source” side of the equation. If you’re running a gas-fired power plant today, or burning gas in an industrial process, your “trash” is CO2, and now, like it or not, you’re going have to deal with it. That’s a lot of trash looking for a home.