A Brief History of Carbon Markets and Their Exciting Future

Source: National Atmospheric Deposition Program,  2010 Annual Summary

Signed into law by President George H.W. Bush, the 1990 Clean Air Act Amendment was a dramatic change from previous environmental regulations, as it used market-based regulation to combat acid rain in the United States.  Previously, the cost of pollution was borne by the decreased health of the general public and the environment and was only discouraged by inflexible regulatory oversight.  However, after the law came into being, the costs were partially transferred to those power plants that created the majority of the pollution and the price of compliance had the elasticity needed for businesses to adapt.  A wild success, the amended law has brought major reductions in emissions and acid rain, increased power generation, and $50 billion in improved health outcomes at a total cost 15-90% less than alternatives.

The United Nations Framework Convention on Climate Change (adopted in 1992) and the Kyoto Protocol (adopted in 1997) gave many nations around the world the incentive to reduce the carbon-based emissions that are causing global climate change.  Seeing the market-based success of the Clean Air Act Amendments, most governments chose to employ a similar “cap-and-trade” regulatory model to achieve their carbon reduction goals.  This was the origin of the various carbon markets.  However, in order to make the transition as painless as possible, many of the earliest markets were created with a gross oversupply, which kept the price very low.  Much of the optimism associated with the new markets met with this political reality and the additional burden of the 2008 economic collapse, causing prices to crash and driving many suppliers from the market.  The perception that carbon markets do not work stems from this initial period of lost dreams.

Source: World Bank Group, 2015 State and Trends of Carbon Pricing

However, something new is afoot.  Those early markets have increased demand and reduced supply at the same time that new markets have come into existence.  As it currently stands, there now exist carbon markets in places as diverse as Europe and New Zealand, provinces of China and prefectures of Japan, California, Quebec, and Kazakhstan.  The demand for carbon offsets has grown significantly as a result, and the market has reason for even greater optimism as new, even larger markets emerge.  China, the world’s largest polluter and second largest economy, is bringing a national market online by 2020.  The United States, the world’s second largest polluter and largest economy, has strongly incentivized mass-based trading in the EPA’s Clean Power Plan, creating a national framework for state markets by 2022. 

Source: World Bank Group, 2014 State and Trends of Carbon Pricing

All of this combines to provide, for the first time, the price stability and upward trends that the market has craved.  Prices for carbon have shown calm and steady improvement over the last two years, with conservative estimates predicting a growth of carbon credits from present values around $13 / metric tonne to $65 / metric tonne in 2040 in inflation adjusted dollars.  Even Exxon-Mobil – the world’s largest publicly traded oil company – has placed the predicted value of carbon at $80 / metric tonne in 2040.  Less conservative estimates see even greater gains.

The history of carbon markets is somewhat checkered, but we are on the verge of significant and investable improvement.  It is an exciting time to be involved. 

I believe in the future, and to be a good investor, you have to believe in the future.
— Sam Altman


Climate Change and Forests

This weekend marks the halfway point for the 190 countries that have gathered in Paris for a large conference on climate change called COP 21.  An abbreviation for Conference of the Parties, it is the 21st meeting of the countries that signed the United Nations Framework on Climate Change.  There is a lot of optimism about the conference, but it won’t quite be the fix that we really need.  If you’re curious about why, here are a couple of articles from Vox and The Guardian explaining what is happening in Paris and why it is falling a little short.  Though we’re not yet done with 2015, it is going to shatter the record for warmest year ever recorded. Work will still remain to be done. 

Climate change is important to the health of American forests for many reasons.  Natural ecosystems evolve to fill a specific climate niche.  When that changes, nature must change as well.  However, if the pace of change is rapid (as it is with anthropogenic climate change), natural adaptation is dramatic at best.  For example, Alaskan forests are expected to warm 8°F by 2080, bringing the average annual temperature from below freezing to above.  This will have major effects on the forest and its underlying permafrost, increasing the likelihood of fire significantly, and “strongly suggests that boreal forest vegetation will shift from spruce-dominated forest, prevalent across the landscape during the last century, to deciduous dominated forest.”  We’re losing the forests in Alaska as we know them.

Similar effects are expected across the American Mountain West.  An ecological region known as the western or North American cordillera, the likelihood of fire also increases substantially with a warming climate. In this area, it is expected that the likelihood of very large fires (those exceeding roughly 12,000 acres) will increase about 400% in the later part of this century.  Focusing solely upon climatic suitability of native trees and if climate change continues unabated, we are looking at 50-90% loss of suitable climates for our western forests.  Ask anyone who is involved in wildfires, meteorology, or water or forest management, and they’ll tell you that it is already upon us.  For example:

The situation seems pretty dire, but the tools to fix this are already at hand.  The environmental adage to “Think globally, act locally” is true now more than ever.  Individuals, companies, and governments are getting increasingly involved in how they interact with the world by changing what they do. There is still a chance that we can avoid the most severe outcomes.  Are you interested in what you can do?  Try the following:

1.)  Learn about what is driving climate change.  If you don't know where to begin, consider looking around the website Skeptical Science.  It has numerous explanations about the science surrounding climate change, especially for those that doubt the effect that we're having upon our climate.  It includes links to all of the reference material as well as various levels of technical detail, depending on the background of the reader.

2.) Evaluate your own carbon footprint.  There are a lot of ways to improve your carbon footprint.  Since many of the things you can do are free and others that cost a little but ultimately save you money, why wouldn't you give it a try?  Our carbon footprint calculator is here:

3.) Support individuals and organizations that support our climate, including those that participate in carbon markets.  If you’re interested in learning more about carbon markets, give our Carbon Market FAQs a look.  Also, please think about trying to offset your own footprint – it helps in many ways and it feels good, too. 

4.) Plant a tree.  Seriously.  Growing plants are the best natural way to remove carbon from our atmosphere and trees are the world's largest and longest living plants.

I’m a realist about what is happening at COP 21, but it still gives me hope.  For decades we have ignored the problem and, more frustratingly have even denied that it exists.  If this is the time that the international community gets serious about fixing this problem, maybe you could too?  Food for thought.

A spark neglected makes a mighty fire.
— Robert Herrick

Optimism and Trees

The best time to plant a tree was 20 years ago.
The second best time is now.
— Chinese Proverb

The above proverb is a metaphor for many things in our lives.  It is about taking the long-view and starting a task where the incremental change is imperceptible, but the accumulated achievement can be monumental.  A child on her first day of school cannot appreciate that in 20 years, she might be a doctor.  The proverb also speaks to the idea of having vision – of seeing what might be where currently nothing exists.  Lastly, the proverb speaks to optimism.  The future, in this light, is a time and a place to look forward to.  It is a statement that one will enjoy the fruits of his labor or that generations to come will and are worth the investment. 

Planting trees is inherently an exercise in optimism.  The timescales at which trees grow and mature is hard to internalize within the human experience.  The oldest tree in the world first emerged from a seed over five millennia ago – before even the formation of the first human civilizations.  In a world where communication is globally instantaneous and business outlooks are quarterly, this can be a hard thing to truly comprehend.  All of recorded history has been exceeded by the lifespan of one tree, living quietly its life on a mountain in California.

In the realty market, a premium is paid for property with mature trees, because even fast-growing trees in hospitable areas take decades to mature.  We value things as they are and not as they might be.  On a logical basis, we understand that someone must have planted a tree for us to enjoy its shade today, but it is hard to find the urgency to plant a tree when the return on investment is so distant.

While the proverb applies literally in this case, its broader meaning is the more important.  Are you an optimist?  Is the future worth the investment?

The Year in Fire

The first real snow of the season arrived the other night, which gave me a chance to work my new snow shovel and do some thinking.  My thoughts turned to the wildfire season that occurred this year, and I thought I might share them with you. 


By any measurement, 2015 was a rough year.  According to the National Interagency Fire Center, over 55,000 wildfires burned about 9.8 million acres of wildland this year, taking the lives of 13 firefighters in the process, God rest their souls.  Focusing on the forest impacts alone, this was within 1% of the worst year ever.  In the modern era, the eight worst fire years have all occurred in the last 15.  Of the four different years where losses exceeded 9 million acres, they have all occurred in the last nine years.  As a trend, the problem is getting larger. 

Additionally, there is much evidence that the fires are getting more severe.  Not only are we having larger, more frequent fires, but they’re also burning with greater intensity.  While high severity fires used to be relatively rare, they now have become very frequent.  This changes how the forest responds in significant ways.  In lower severity fires, much of the undergrowth and smaller trees would burn away, leaving areas for natural tree planting and reducing the competition for resources to the larger, surviving trees.  Often, this permitted the forest to mature a stage in their development and almost always led to increased ecological and biodiversity.  However, high severity fire (also sometimes known as crown fires) leads to total forest stand replacement.   Over the large areas we now see as commonplace, this is leading to many environmental problems, including:

1.) Soil degradation, including death of soil microbes and loss of basic nutrients

2.) Increased erosion, which worsens flooding tendencies, fills streams with sediment, reduces fish habitat, and makes regrowth more difficult

3.) Loss of habitat, increasing the stress many species experience from large firescapes.

4.) Loss of snowpack, as burned areas melt sooner, further exacerbating western droughts.

Though 2015 was a bad year for wildfire, it also likely to be the new normal.   Bigger, more intense fires means our forests have some real challenges ahead of them.

An optimist stays up until midnight to see the new year in. A pessimist stays up to make sure the old year leaves.
— Bill Vaughn

Begin at the Beginning

Having never blogged before, I'll start by asking for the patience of my audience as I explore this new medium.  

In 1989, the Lowman fire burned in Idaho.  Named after the town of Lowman, it's about 70 miles north of Boise, where I grew up.  1989 was a hot, dry year where storms would roll through Idaho every day with lots of energy but no rain.  As a result, the state was struck by  dry lightning with alarming frequency.   In one eight day period, 335 wildfires were ignited in the Lowman area, eventually burning over 46,000 acres of land.  As wildfires go anymore, this isn't a small fire, but it isn't a big one, either.  To put this into context for those who might not think in terms of acres, it was larger than the city of St Louis.

Anyways, as a kid, this was oddly both awe inspiring and nondescript.  I remember seeing the billowing, mushroom cloud of smoke rising over the mountains that frame the north side of Boise and thinking it amazing.  Simultaneously, I remember not being worried or upset, but digesting it as just another piece of the world in which I lived.  I always assumed that it would grow back or, if it wouldn't, that someone would replant it.  I mean, that's our forest, right?

Well, in 2011, I took my wife to see where I grew up.  Wanting to show off the beauty of the West, I took her through several scenic small towns in Idaho which mainly consist of a dozen families, a diner, and amazing scenery.  On our travels, we drove from Stanley to Lowman.  Along the way, we were confronted with the scar of the Lowman fire - 22 years later.  It's not really growing back.  Sure, there are areas where nature has made a resurgence, but in much of, there is only grass and some brush.  That's it.  

The Lowman fire shocked me out of my childhood understanding of the world that someone would take care of it.  Amongst other things, it motivated me to leave the service and start RenewWest.  It is the reason you're reading this blog.

The thing about the Lowman fire is this - you can see a lot of it from the paved highway that traverses it.  Every year millions of acres burn in the western United States and Alaska.  Except for the few people who might live in the area, these areas are literally out of sight and out of mind.  We're in the process of losing massive tracts of forested land every year and nearly nobody knows.  Many locations won't see forest replacement for 300-500 years.  In some locations, they're gone forever with a changing climate.

We've got to fix this.  I'm going to try.  Are you interested in helping?


Definiteness of purpose is the starting point of all achievement.
— W. Clement Stone