In early December, water futures became a tradable commodity on Wall Street. Investors now can bet on the availability of water in California, one of the most important agricultural markets in the world.
The emergence of this futures market is a signal of real scarcity for one of the planet’s most precious natural resources. Yet there is a silver lining.
Like the futures markets for gold and oil, if water becomes even scarcer, its price goes up. This creates a quantifiable tool for the cost understanding of water scarcity, which encourages conservation and investment in water-saving technology.
Now, imagine if a market mechanism were extended to other pressing challenges like carbon emissions that cause climate change.
Well, it’s already happening. However, there are several key differences: Water is getting scarcer; carbon emissions are increasing. And for carbon emissions, there are at least two steps necessary.
For the first part, look at the global payment-processing company Stripe. In 2019, it committed to spend US$1 million to buy credit from a number of companies for future carbon removal from the atmosphere and sequestration of this in long-term storage. In October this year, the company invited businesses that use its software to support carbon removal directly by committing a portion of their revenue to the project (it launches for US businesses first).
Why is this important? The Paris Agreement on climate change has set a goal to limit global warming to below 2 degrees Celsius over pre-industrial levels. To reach that target, the international community needs double-digit decarbonization. That’s a big ask. Heavy investment is needed to enable this.
But how? Consider how Stripe’s actions could trigger reductions in the price of carbon-capture. By paying carbon-removal companies now for future carbon sequestration, it is investing in these companies and their technology. And then by asking its customers to join it, Stripe is creating a demand-side market for the technology.
Wright’s Law, used for forecasting prices, says that increasing volumes lead to learning effects and rapidly decreasing prices. Stripe is triggering this effect by being a buyer of first resort. Its actions will push carbon-capture prices to decline.
This concept is visible in the rise of electric vehicles and the cost of the batteries that power them. In little over a decade, the cost of lithium-ion batteries has dropped nearly 85%. Electric vehicles now have become cheap enough to compete with traditional fossil-fuel cars, and the cost keeps going down as the market opens up.
This is partially due to innovative efforts by companies like Tesla that got into the market early. Apple’s recent announcement that it will design and sell an electric car in 2024 will expand the market even further and drive costs lower.
Of course, Stripe won’t make money out of its carbon purchase. If anything, it is paying a higher price now for what should be cheaper in the future. Still, anti-climate-change advocates like Stripe should be rewarded for their moral risk-taking. Particularly if we want them to help make anti-climate-change technology viable.
So here’s the next part. What if financial markets were to create a trading instrument that is inverse to the mechanism of the California water (or gold or oil) futures? In essence, this would be a derivative instrument based on the future spot price of carbon removal.
Carbon credits bought up to a certain date could be priced according to the inverse of spot prices – like bond prices go up when interest rates go down. And like bonds, there could be a series of future tranches of carbon bought at specific, set dates so the market is sustainable. The details can be left to Wall Street, but the possibility certainly is there to reward those who take a position now on our future good.
It is morally wrong for the developed world to tell developing economies that they must reduce their greenhouse emissions now after the West has done more than its fair share of polluting the Earth in the past. Carbon sequestration can remove the excess greenhouse gases, if we invest in the technology.
Yet the leading economies of the world have, for various reasons, refused to embrace the principle of Wright’s Law for meaningful climate impact. The private sector has picked up the slack though, as is clear with the stunning rise in the electric-vehicle sector.
While Stripe might be a small company, its approach is one that smaller, more nimble countries could easily adapt. Tech-focused countries such as Estonia and Singapore, for example.
In addition, major hydrocarbon-producing countries such as those in the Persian Gulf region might see the logic of investing in carbon removal as the opposite complement to their fossil-fuel industry, profiting eventually through the financial markets.
The markets might yet help save us from the devastating effect on the climate of too much carbon dioxide.
This article was provided by Syndication Bureau, which holds copyright.
Joseph Dana, based between South Africa and the Middle East, is editor-in-chief of emerge85, a lab that explores change in emerging markets and its global impact.