Green Building Stocks
Green Building, Meet the Carbon Market
Carbon dioxide (CO2) has become all but the hottest buzzword of the first decade of this new century. It is the main culprit for the advance of climate change, and is talked about every day in news headlines, editorials and blogs.
But among all the various sources of CO2 emissions, the worst offender is rarely talked about. In fact, I'd venture to guess that many Green Chip readers would be hard-pressed to name it, what with all the discussion of transportation and industrial emissions.
Although those two sources are serious perpetrators worthy of attention—at about 27% and 25%, respectively—the biggest source of US carbon emissions is buildings, at 48%. In addition to nearly half the nation's emissions, buildings are also responsible for 65% of electricity consumption, 30% of raw materials use, and 30% of our waste output.
Many efforts are underway to curb CO2 emissions from the building sector, with green buildings leading the way.
Green Buildings and Carbon
Carbon was one of the main themes at this year's Green Build conference in Chicago, which attracted over 20,000 attendees and more than 850 vendors.
As you may or may not know, I've been touting the various ways to profit from mandatory and voluntary reductions in CO2 for quite some time. And, sure enough, the first session I attended at the conference was entitled, "Carbon is the New Gold."
One of the speakers at that session was Michael Walsh, Executive Vice President of the Chicago Climate Exchange (CCX), host of the nation's voluntary CO2 reduction scheme. Under the first phase of the CCX, member corporations volunteered to reduce their emissions 4% by 2006 from a baseline of their average emissions from 1998 to 2001. In the second phase, an additional 6% reduction is to be made by 2010.
Once a corporation volunteers, the contract is legally binding. And if a target is missed, the violator must purchase Carbon Financial Instruments (CFI), which are essentially carbon credits generated either by offset projects or companies that come in below target.
Although there is money to be made in the CCX by generating and selling CFIs, there is little opportunity for the individual investor to profit. But there is another point, highlighted by Michael Walsh, to be made here: The CCX is just the preseason of the carbon market.
You see, carbon trading and offset projects are still in their infancy. According to Walsh, "We're still learning the players and making the rules."
With a 500% increase in the price of carbon since the Kyoto Protocol went into force in 2005, this is one hell of a preseason. And I can't wait to play when it counts.
Future of the Carbon Market
If the initial success of the three primary markets—the CDM, the EU ETS, and the CCX—is any indication of the future profit potential of trading and reducing carbon, there is going to be some serious money made.
Already, the carbon market is worth $32 billion in its infancy. And, according to a report by research firm Celent, it's scheduled to grow to over $58 billion by 2012. That's an 81% growth in market size in just four years.
With that kind of growth, financial institutions the world over are looking for a way to get in.
"The opportunity is that it's a new product area that's not traded very heavily on exchanges right now," says Niamh Alexander, an analyst at Keefe, Bruyette & Woods. "Lots of exchanges are likely to come up with different structured products to participate in that market."
Even the New York Stock Exchange (NYSE) is entering the game. They've partnered with French bank Caisse des Depots to launch a market for carbon trading by early 2008. That system will allow the sale and purchase of carbon allowances and credits just like any other commodity.
Other institutions like the New York Mercantile Exchange (NYMEX) and the CME Group are also looking at offering ways to trade carbon contracts. The time frame, however, is still unknown.
According to the author of the Celent report, Axel Pierron, things in the carbon market would happen more quickly if there were less uncertainty surrounding regulation. Because for all of the various mechanisms—voluntary or mandated—for reducing and offsetting carbon emissions, there are as many sets of rules and regulations.
Clarity After Kyoto
Of course, we get the basics. Under Kyoto, participating countries are to reduce their emissions 5.2% below a 1990 baseline by 2012, with targets along the way. In order to meet targets, countries hand down emission allowances to individual companies.
If a company is going to miss its target, it has to buy carbon credits from one of a variety of sellers, including companies with excess allowances, brokers, CDM developers, or an approved exchange. Simple, right?
Not quite. Some countries elected not to hand down allowances to companies, instead opting to handle emission reductions on their own. Some governments, like the Dutch, have created entire programs to handle this. Others go to the newly established World Bank Prototype Carbon Fund (PCF), which represents six governments and 17 utilities, for the purchase of carbon credits. And there's more.
Some countries, like those in Europe, are allowed to bundle their allowances and divvy them up however they want. So, for example, one country in the EU may have significantly different targets than its neighbors. And not only are these countries allowed to band together, but they also have their own carbon market called the EU Emissions Trading Scheme (EU ETS).
Plus, there are also multiple ways to generate credits. The Clean Development Mechanism (CDM) allows industrialized countries to invest in emission-reduction projects in the developing world, while Joint Implementation (JI) allows developed nations to invest in projects in other developed countries.
And all those projects have to be evaluated in a lengthy United Nations certification process.
You can see how all this adds up to complications and makes the red tape even stickier. And carbon traders have become so concerned at the lack of transparency and the uncertainty of post-Kyoto markets that they're threatening to withdraw billions of investment dollars unless a successor to Kyoto is announced in the near future.
Those dollars, according to one analyst, could be shifted to voluntary markets in the future, as such schemes are not affected by an expiring treaty. Especially if the slow UN processes continue to affect carbon industry juggernauts like EcoSecurities Group PLC (LON: ECO), which just took a 46% hit in its share price after it failed to meet earnings expectations because of what it called bureaucratic delays, they might be tempted to turn to the voluntary markets.
Back to Green Buildings
Although I've substantially digressed from my original thesis, here's what I was trying to get at.
Buildings are a substantial source of global and domestic CO2 emissions. And as the number of green buildings increases, so to do the opportunities for carbon credits, offsets and profits.
Although they're not in the carbon game yet, Liberty Property Trust (NYSE: LRY) is already profiting from green building. They already have a host of green buildings in their portfolio, including the $500 million Comcast Center in Philadelphia. Sandy Wiggins, a director of the US Green Building Council, has even gone so far as to call the company a "poster child for commercial green development."
Liberty is profiting from the increased rents associated with green buildings and their tenants are benefiting from lower operating costs thanks to increased energy and water efficiency and greater productivity from their employees. It's a win-win.
And if Liberty can begin to harvest and sell carbon credits, that's when the profits will really start pouring in. Right now, though, the benefits of energy efficiency and the associated reductions in carbon are being passed along to the utilities—a problem for which Liberty is working hard to find a solution.
I'll leave you with a few quotes I jotted down at the GreenBuild 2007 conference from John Gattuso, Senior VP of National and Urban Development for Liberty, regarding green building . . .
"It's an absolutely compelling economic case."
"Any rational developer would pursue green buildings."
"This is the way to make more money."
That's what we're all about.
Until next time,