The environmental and clean energy commodity markets (SO2, NOx, CO2, RECs, RINs, etc) are constantly in transition. For those who make a career out of these markets, we need to be prepared for changes in the market at any time. These changes are born from regulatory development, financial market fluctuations, new technology developments and many other areas.
Back when we graduated from university (soon after they stopped writing with chisels and stones), the idea of a career that blended business and protecting the environment did not exist. You either did one or the other. That began to change with the implementation of the Clean Air Act and the Clean Water Act in the 1970s. Environmental consulting companies began to emerge to help companies comply with the new regulations. The environmental market transitioned from being one of just policy development to an industry that someone could make a career out of. This industry was still populated mostly by engineers, government agencies and NGOs - but it was real and it was growing. And better yet, the environment was benefitting from it.
Soon after, thanks to the efforts of the government, the Clean Air Act created the New Source Review Offset Program, for regulating new source construction in areas of poor air quality, and the SO2 Emissions Trading Program, for reducing acid rain. The implementation of these programs transitioned environmental protection into an industry that grabbed the interest of Wall Street and financial traders. Enron was one of the first energy trading companies to trade SO2 emission credits and build a business around it. Soon after, other energy companies and banks joined in and the SO2 program became actively traded in the financial markets and transitioned into a financial product traded on exchanges. The NOx Allowance market followed shortly after and soon a whole new industry was born. Environmental protection was no longer the pastime of governments, NGOs and engineers.
With US-based emission trading markets actively managing the emissions from the energy sector, the next step was logically going to be the global CO2 markets. The Kyoto Protocol had been discussing such a global market since 1995 and it was increasingly becoming a reality. Could the idea of protecting the environment evolve from a passion of those truly interested in improving environmental quality into a global market that involved banks, energy companies, hedge funds, trading houses and others? The answer was a resounding “yes”. Not only did the global carbon market develop, according to the World Bank, in 2011 the notionally traded value of the market reached a record high of $176 Billion.
For anybody involved with the environmental commodity markets from 1997 (when the Kyoto Protocol was ratified) to 2010, it felt like there was no stopping it. Projects were built using carbon offsets and renewable energy credits as revenue streams and an entire industry was born to fund the construction of projects across the globe. A new era of environmental protection, business and financial markets was born and was taking off. However, the recession in 2008 slowed down this growth significantly, as it did many other markets. Protecting the environment can essentially be seen the actions of a prosperous civilization - after providing for shelter, food, clothing and other basic needs, the environment tends to come last. Now that the economy had dramatically slowed down in a recession, the environmental markets became less of a priority.
The next transition for the environmental commodity markets was now that of massive contraction. Funds dried up for projects, the Kyoto Protocol was not re-ratified, the price of carbon credits dropped significantly and projects could no longer rely on environmental commodities as a strong revenue stream for construction and operation. The number of people making careers in the environmental and commodity space had increased significantly up through 2010. Now it was quickly diminishing as the market could not accommodate such numbers.
It was at the Conference of the Parties (COP) in Copenhagen in 2010 when we saw the last big attendance at a COP and when the market seemed to fall apart from lack of industry and government support. For those of us who had been in the environmental markets for over 20 years, it felt like our industry was transitioning back to the days of environmental consulting and only the engineers, government agencies and NGOs would be left. I personally chose to take this time to step away from the market and wait and see.
I am happy to report that over the past year I have seen another transition in the markets developing. This time the transition is back to regrowth. I was fortunate enough to attend COP in Lima, Peru this past December. There was a sense of momentum in the air in Peru and a feeling that the recession was truly easing and that the world could again focus on protecting the environment. There is also a significant push to develop the roadmap to the Paris COP in December 2015 and to actually implement some policies that will help to grow the markets both globally and domestically. It feels like we are again in transition in these markets but this time, it is back on the upswing.