Published on June 2nd, 2020 |
by Tina Casey
June 2nd, 2020 by Tina Casey
The economic argument for keeping older coal power plants in operation seems clear enough: they’re already here. That’s it. That’s the case. If that seems like weak tea, it is. Coal is resting on a fragile veneer of bottom line respectability in the era of modern renewable energy technology, and a new report underscores how wind and solar could stomp all over existing coal power plants as the global economy shifts toward recovery from the COVID-19 crisis.
Renewable Energy & The Economic Case For Early Coal Retirement
The report comes under the self explanatory title, Renewable Power Generation Costs in 2019. Among the key findings is this nugget:
On average, new solar photovoltaic (PV) and onshore wind power cost less than keeping many existing coal plants in operation, and auction results show this trend accelerating – reinforcing the case to phase-out coal entirely.
“Next year, up to 1,200 gigawatts (GW) of existing coal capacity could cost more to operate than the cost of new utility-scale solar PV,” IRENA adds.
To emphasize: in many cases, utilities would save money over the long run by retiring coal power plants early in favor of renewable energy.
The Green Recovery, Great Depression Edition
That basic bottom line argument is already in force, as low cost natural gas has been the main force pushing coal power aside in the US since the shale boom erupted after the Bush administration.
The case for economic recovery based on renewable energy also has deep and game-changing roots in US energy history.
The proof is in the pudding. Here in the US it was renewable energy — in the form of hydropower dams — that helped the nation turn the economic corner during the Great Depression of the 1930s, a decade that spanned the construction of the Hoover, Bonneville, and Grand Coulee hydropower dams among many others, along with the birth of the Tennessee Valley Authority and the powerful rural electric cooperative network.
By the beginning of World War II, hundreds of hydropower dams were in action in the US, providing about 1/3 of the nation’s entire electricity output.
You might even say that renewable energy played a pivotal role in the victory of the anti-fascists over the fascists in World War II.
Just saying! Don’t just take our word for it. According to the US Bureau of Land Reclamation, US hydropower output soared during the war years. USBLR estimates that the hydropower dams under its purview increased their output by enough kilowatt hours to manufacture the equivalent of 69,000 airplanes, 5,000 ships, 5,000 tanks, 79,000 machine guns, 7 million aircraft bombs, and 31 million shells.
Of course, for COVID-19 recovery one might expect that low cost renewable energy would enable US factories to turn out more solar panels, wind turbines, electric vehicles, energy efficient appliances, and other clean tech products. One might.
The Green COVID-19 Recovery
The globe is peppered with existing coal power plants that could be targeted for replacement, with the end goal of stabilizing or even lowering electricity costs for ratepayers, which in turn would have a ripple effect on other economic activity.
That dynamic is especially clear here in the US, where wind and solar could economically replace 75% of the nation’s coal fleet as of last year, according to one analysis. The figure jumps to 85% by 2025, which is just around the corner.
As for natural gas, well, what about it? The renewables-over-gas trend is gathering force, partly due to support from leading electricity buyers like General Motors, among many other major US businesses that favor renewable energy over fossil fuels — and are pushing for a green recovery.
Then there’s the side benefits of renewable energy as demonstrated by the agrivoltaics field, which somehow seems to be crossing paths with the suddenly-hot regenerative agriculture field, which has been adopted by the US solar leader Silicon Ranch (partly owned by Shell, btw).
We haven’t even gotten to the US offshore wind industry yet so stay tuned for more on that.
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Environmental Commodities: What Are They & How Can You Trade Them?
The Essential Guide
Risk Warning: Your Capital is at Risk.
Environmental commodities are one of the newest categories of commodities traded on global markets.
In this guide, we provide an overview of what constitutes environmental commodities and why they’re becoming an increasingly important part of the global market.
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Read on to find out about why environmental commodities matter, how they’re regulated, managed, and where you can trade them with a regulated broker in Mexico.
What Are Environmental Commodities?
Environmental commodities are a class of commodities that take the form of non-tangible energy credits.
The value of these credits derives from the needs of market participants to produce and consume cleaner forms of energy.
The markets for these products formed as a result of government efforts to tackle greenhouse gas emissions (GHGs) and promote clean energy production and consumption.
Do Governments Support Environmental Commodities?
Many governments across the world have been placing restrictions on the rights of entities to produce GHGs.
Since many companies produce GHGs in the course of making their products, environmental commodities emerged as a way to buy and sell these rights.
In other words, if you place strict limits on individuals’ and institutions’ rights to pollute, then those rights become scarce and valuable.
Without any such limitations, the right to pollute would have no economic value since its “production” and “supply” would be theoretically unlimited.
Some governments have chosen to reward green energy producers by providing them certificates that serve as a type of subsidy. These certificates have economic value and are another form of environmental commodity.
How Are Energy Producers Reacting To Regulations?
Compliance programs in some regions may require electricity producers, for example, to purchase these certificates to meet minimum requirements for green energy production.
The significance of environmental commodities is likely to increase as the world grapples with a growing population and the effects of fossil fuel consumption on the environment.
Types Of Environmental Commodities
Most environmental commodities evolved as a result of government environmental policy. Government actions as they pertain to the environment usually do one of two things:
- Penalize polluters.
- Reward clean energy production.
What Is Cap and Trade?
In cap and trade, governments place a cap on GHGs. This is usually an annual cap and may apply to the whole economy or to specific sectors of the economy such as refineries or power plants.
Often, the annual cap declines each year since the goal is to reduce emissions over time. The government then divides the total cap allowance into smaller cap credits.
The trade part of cap and trade is what enables the marketplace to determine the price of these cap credits.
Companies can buy and sell these credits, each of which permits them to emit a certain amount of GHGs (create pollution).
Since the credits cost money, companies have an incentive to cut emissions.
How Does Cap And Trade Work?
As an example of how cap and trade works, let’s assume the government instituted a total cap of 10,000 tons of carbon annually, and ten pollution-creating factories were responsible for all of the GHG.
The government could then create 10,000 one-ton carbon credits and either allocate them (give a certain quantity for free to each factory) or auction them (have each factory bid for the amount it needs).
Each factory would be required to hold the number of allowances equal to its level of GHG emissions.
If a factory needed more than the amount it received through allocation or auction, it would have to purchase additional credits in the marketplace. If a factory produced fewer GHGs than the amount it received, it could sell the excess credits in the marketplace.
This type of program penalizes companies that produce excess pollution by making their actions more costly.
What Are Carbon Offsets?
Carbon offsets are projects that generate carbon credits for companies, but they do so outside the bounds of a company’s normal operations.
For example, building a wind farm, installing solar panels, planting trees or forest preservation are all carbon offset projects.
The difference between cap and trade and carbon offsets is that the latter occurs outside of the government-mandated caps and are a way to reward clean energy production.
However, carbon offsets are credits all the same and can be bought and sold in the marketplace.
Renewable Energy Certificates (RECs)
These credits are known as green tags, renewable energy credits, or tradable renewable certificates.
They are tradable energy certificates in the United States that represent proof that 1 megawatt-hour (MWh) of electricity was generated from an eligible renewable energy resource.
See this guide on Energy Commodity Trading to learn about other energy markets for traders.
The certificate serves a purpose to prove that the generation of energy contributed to the shared system of power lines that transport energy.
Solar Renewable Energy Certificates (SRECs)
These are RECs that are specifically generated by solar energy.
What Are White Certificates?
These trade-able certificates are also known as energy savings certificates or energy efficiency credits. They work in a similar manner to renewable energy certificates.
However, white certificates are awarded for gains in energy efficiency rather than the production of renewable energy.
History Of Environmental Commodities
A global market for environmental commodities wouldn’t have developed without the Kyoto Protocol.
This diplomatic document, which was adopted on December 11, 1997, is an international agreement linked to the United Nations Framework Convention on Climate Change (UNFCC).
It formally committed the signatories to internationally binding emission reduction targets.
Implementation of the Kyoto Protocol commenced on February 16, 2005. The detailed rules for the implementation of the Protocol, known as the Marrakesh Accords, were adopted in 2001.
The first commitment period started in 2008 and ended in 2012. An amendment to the Protocol in 2012 added a second commitment period (2013 to 2020), revised the list of GHGs, and made additional revisions.
How Did The Kyoto Protocol Impact Developing Countries?
The Kyoto Protocol, however, was controversial in that it placed a greater burden on developed nations for reducing GHG emissions.
The justification was that these nations had contributed to GHG emissions for a longer time than the developing world and, therefore, were more responsible for reducing them.
More than 100 nations, including China and India, were exempt from compliance under the treaty.
How Were Developed Countries Impacted?
The United States, which emits 35% of the world’s GHGs according to the Kyoto Protocol, saw this as unfair and refused to ratify the treaty.
In December 2011, Canada renounced the treaty and thereafter formally withdrew. The Canadian government noted that since China and the United States never agreed to the treaty, the Kyoto Protocol was unworkable.
In 2015, all nations agreed to sign the Paris Agreement, which effectively replaced the Kyoto Protocol. In this new agreement, the signatories agreed to limit warming “well below 2 degrees” above pre-industrial levels and below 1.5 degrees if feasible.
Voluntary & Mandatory Credits
Carbon markets exist both under compliance schemes and as voluntary programs. Each of these schemes has produced its own carbon credit markets.
Compliance schemes operate under mandatory national, regional or international carbon-reducing programs.
Voluntary carbon credits, on the other hand, allow businesses, governments, individuals, and others to purchase carbon offsets that were either created by compliance schemes or in the voluntary market.
The latter is called Voluntary Emission Reductions (VERs). VERs can’t be used as carbon credits in the compliance market and therefore have smaller demand and less liquid trading markets.
What Drives Environmental Commodity Prices?
Several long-term trends could create investment opportunities in environmental commodities over the next two decades:
- Climate Change
- Population Growth
- Environmental Regulations
Climate Change On Environmental Commodities
There is ample evidence that climate is changing, and there is a growing consensus that human activity is contributing to these changes.
According to the US National Aeronautics and Space Administration (NASA), carbon dioxide levels in the air are at their highest in 650,000 years, and average global temperatures are 1.8 degrees Fahrenheit higher than they were in 1880.
Seventeen of the 18 warmest years on record have occurred since 2001.
All of these facts are contributing to a growing global consensus that GHG emissions must be controlled and regulated, which bodes well for the environmental commodities markets.
How Will Population Growth Affect Prices?
Increases in the world population and demographic shifts could fuel demand for environmental commodities.
Two hundred years ago, less than one billion humans inhabited the earth. Today, the United Nations estimates that there are almost 8 billion people on the planet.
Today’s population size is roughly equivalent to 6.5% of the total number of people ever born!
Are Populations Increasing In Cities Or Suburbs?
Populations are increasingly moving out of rural areas and into urban centers.
The World Economic Forum estimates that the number of people living in cities could reach 6.4 billion by 2050.
The urbanization of the world will very likely lead to even higher GHG emissions.
These trends could exacerbate an environmental crisis and lead to a call for more market-oriented solutions. The global environmental commodities markets could benefit from these trends.
There is growing evidence that countries across the world are taking GHGs more seriously and instituting regulations to curb them.
In the Paris agreement, China pledged to cut its carbon emissions by 60 to 65% by 2030, compared to its 2005 level.
The country has also set a goal to raise its share of energy generated from solar, wind, nuclear, and non-fossil fuels to 20% by 2030. China also intends to target 2030 as the year it reaches its peak carbon dioxide emissions.
How Are China And The US Contributing To Environmental Regulations?
China has is also beginning to take a tougher stance on pollution-causing industries such as mining. Crackdowns on environmental pollution have caused the shutdowns of more than half of the lead and zinc mines in parts of the country.
However, there is still important resistance to mandates on emissions reductions.
The US withdrawal from the Paris Agreement may be an impediment to environmental commodity trading in the world’s largest economy.
Environmental Commodity Exchanges
Environmental commodities have faced a difficult time gaining a foothold in trading markets.
The Chicago Climate Exchange (CCE), founded in 2003, was North America’s only voluntary and legally binding GHG reduction and trading exchange.
However, inactivity in trading led to its closure in 2010. The lack of a formal agreement by the United States to reduce GHGs led to its demise.
Exchanges with environmental commodity products include the following:
- Carbon Trade Exchange (CTX): This is the world’s first and largest electronic exchange for trading voluntary carbon offsets.
- CBL Markets (CBL): This electronic exchange connects buyers and sellers of voluntary and compliance GHG emission products in both the North American and Australian markets.
- CLIMEX: This exchange is a market leader in green certificates and emission rights through its auction platform and through direct trading between parties.
- CME Group: In March 2017, the CME launched California Carbon Allowance (CCA) futures contracts in partnership with CBL. The CME also offers other global emissions contracts.
- European Climate Exchange (ECX): This exchange, which was formerly a subsidiary of CCE, manages the product development and marketing for ECX Carbon Financial Instruments (ECX CFIs). These products are listed and admitted for trading on the Intercontinental Exchange (ICE) Futures Europe electronic trading platform.
- European Energy Exchange (EEX): This is the leading energy exchange in central Europe. The EEX offers markets on emissions auctions and emissions secondary markets.
Environmental Commodity Brokers
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Environmental Commodity Trading Resources
Investors can find additional information on investing in environmental commodities from the following sources:
- Environmental Protection Agency (EPA): This US government agency website has good information on RECs and how they work.
- European Commission (EC): This legislative institution in the EU has detailed explanations of the cap and trade scheme in Europe and the dates for the implementation of different components of it.
- United Nations Framework Convention on Climate Change (UNFCC): The website for the UN agency responsible for the Paris Climate Accord has a comprehensive implementation timeline for the Accord and a plethora of reports on climate change, GHG data, and other environmental topics. UNFCC also has PDFs detailing each country’s strategies to meet its obligations under the Accord.
To learn more about commodities, see:
- How corn is farmed and what drives its price
- All about feeder cattle as commodities
- Crude oil production and the countries with the biggest reserves
- How copper is mined and produced
Start Trading Corn at Plus500.
72.00% of retail CFD accounts lose money.