http://environmentalresearchweb.org/cws/article/news/68675
May 4, 2017 Trading long-term carbon dioxide removal futures would be 'reckless' Right now the technologies available for removing carbon dioxide, such as direct air capture or afforestation schemes, are expensive and often not fully proven. But over time some of these technologies are likely to become significantly cheaper. So there is potential to create a "futures" market for carbon dioxide removal, allowing investors to sell carbon dioxide removal credits to polluting companies today, based on the assumption that the investors will be able to deliver the technology at a lower price in the future. In most instances, however, trading long-term carbon dioxide removal futures would be a reckless manoeuvre <http://iopscience.iop.org/article/10.1088/1748-9326/aa54e8>, according to an investigation of whether this is a realistic way to organize risk transfer for this particular market. "Futures" are a form of financial instrument that fix a price now for performance in future. Additionally, they can provide a vehicle for borrowing and lending within commodities markets. In conventional commodities markets, sellers of a commodity use futures to transfer risk: reducing their financing costs and increasing their ability to guarantee performance against business obligations such as leases. Meanwhile, the buyers of a commodity can, for example, use futures to hedge against short-term fluctuations in prices of raw materials. So a farmer can use futures to control the risk of lower grain prices in the future, and a baker can buy futures to control the risks associated with rising prices. Previously it has been suggested that credits, based on carbon dioxide removal, could be traded on a futures market – thus allowing polluting companies to benefit from the improvements in carbon dioxide removal technology that are likely to occur over the coming decades. In order to assess the potential of a carbon dioxide removal futures market, D'Maris Coffman <https://www.ucl.ac.uk/bartlett/construction/dr-dmaris-coffman> and Andrew Lockley <https://www.ucl.ac.uk/bartlett/construction/people/honorary-and-visiting-academics>, both at University College London, UK, looked at the ways in which an ideal transaction might play out. The researchers considered the case of a buyer, most likely a polluting company, who seeks removal of one tonne of carbon dioxide. The firm purchases a future commitment, probably from an operator of a carbon dioxide removal technology, to remove this amount of carbon dioxide from the atmosphere in 30 years’ time. Superficially, carbon dioxide removal futures are appealing but, as Coffman and Lockley point out, the roles of buyer and seller are reversed in terms of risk. "This risk is greatly exacerbated by the long timescales involved, and the inherent technological risk involved in developing and delivering technologies at a fixed price, decades hence," said Lockley, whose findings are published in Environmental Research Letters (ERL) <http://iopscience.iop.org/article/10.1088/1748-9326/aa54e8>. For a classic farming example, the assets exist (save for insurable crop failure) and the farmer would find it very difficult to renege on the contract. The carbon dioxide removal equivalent, on the other hand, has significant technology risk, with sellers potentially selling technology that may never come to fruition, or be far more expensive than anticipated. "For example, the inexpensive strategy of ocean iron fertilization is controversial and may be prohibited," said Lockley. Regulated markets could help to ensure that contracts are more reliable, and that moral hazard is minimized. However, Lockley and Coffman believe that regulation wouldn't be enough to control for the inherent risks associated with such an uncertain futures market. They conclude that the only realistic form of carbon dioxide removal futures might be "government backed", to support state obligations made under climate change treaties. "In practical terms, this would closely approximate to a carbon tax, with the state agreeing to fund matched carbon dioxide removal services at a future date," said Lockley and Coffman. "A poorly-regulated carbon dioxide removal futures market has the potential to destabilize both the global climate system, and the global economy." Related links - Carbon dioxide removal and the futures market D'Maris Coffman and Andrew Lockley 2017 Environ. Res. Lett. 12 015003 <http://iopscience.iop.org/article/10.1088/1748-9326/aa54e8> - ERL <http://erl.iop.org/> - Andrew Lockley <https://www.ucl.ac.uk/bartlett/construction/people/honorary-and-visiting-academics> - D’Maris Coffman <https://www.ucl.ac.uk/bartlett/construction/dr-dmaris-coffman> Related stories - Carbon scrubbing: in it for the long haul? <http://environmentalresearchweb.org/cws/article/news/43107> - How much carbon would adding olivine to the oceans remove? <http://environmentalresearchweb.org/cws/article/news/64739> - Mopping up carbon <http://environmentalresearchweb.org/cws/article/opinion/53809> -- You received this message because you are subscribed to the Google Groups "geoengineering" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. To post to this group, send email to [email protected]. Visit this group at https://groups.google.com/group/geoengineering. 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