The GEO Carbon Offset Contract: A Giant Leap For Mankind

Former Bank of England Governor, Mark Carney, announced the launch of a taskforce to figure out how to jumpstart voluntary carbon offset markets.

(To understand what I mean by “Voluntary” markets and see the differences between voluntary and “Compliance” markets, please see my article entitled “Want To Understand Carbon Credits? Read This”.)

Carney points out that, right now, the voluntary carbon offset markets are too small, having a total capitalization of only around $300 million. To put that number into context, if the voluntary carbon offset markets were a single stock, it would be a microcap.

If our civilization is to make it into the next century, these markets should be worth tens of billions of dollars today (and rapidly growing), not hundreds of millions.

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Carney, a Harvard-trained economist, understands what a powerful force well-run financial markets can be in changing the world. Markets, at their heart, are phenomenally efficient mechanisms for connecting investor capital to good ideas. Investors supporting the best ideas win the most money, so the speed at which new ideas can be funded, tested, and proliferated is truly amazing.

If you have any doubt about this contention, consider the supercomputer you keep in your pocket and check an average of 96 times a day.

To efficiently connect capital to good ideas, markets must clear a few hurdles:

  • Assets traded on the market must be well-understood by all participants
  • Market prices of assets need to be transparent (i.e., you know at what price other participants are willing to transact)
  • Transaction costs must be low
  • Traders should not have to worry about the other side filching on a transaction (i.e., “counterparty risk” must be eliminated)
  • The process of “settling” the transaction (i.e., making a legal exchange of the asset for money) must be as quick and as automatic as possible
  • Buyers and sellers must be able to remain anonymous

When I first started learning about the voluntary carbon credit markets, I understood why their market capitalization was so low: nearly every project is “bespoke” – specifically tailored to a unique situation – and are usually missing many or all of the characteristics listed above.

Specifically, bespoke contracts means that it takes a lot of time, energy, and expense to understand what each asset is and how one differs from another. Customization adds complexity, and complexity is the bane of financial markets.

The taskforce Carney announced last week is designed to figure out how to standardize and systematize the voluntary carbon offset markets so they can become more transparent, efficient, and sensible. The only way these markets will help civilization is if they are heavily used, so he knows he must figure out how to make it easy for that to happen.

Mark, if you’re reading this, call me.

I can solve your problem today – without your having to worry about the logistics of pulling together a taskforce in this Age of COVID – simply by introducing you to the San Francisco start-up, Xpansiv CBL Holding Group (XCHG), which I featured in a recent article.

XCHG’s CEO, Joe Madden, is ahead of the curve. He and his colleagues announced the launch of a new benchmark carbon offset product at the end of August, and trading in the product — called the Global Emissions Offset or GEO — began this month.

When I spoke with John Melby, XCHG’s President and COO, this week, he told me that the voluntary market is seeing a wave of major commitments from corporates, industrials, and energy companies alike. The GEO is gaining broad adoption as a vehicle to help accelerate the growth of these important markets.

The market on which the GEO trades – CBL Markets – is designed to meet all the conditions of a well-run market listed above.

The GEO aggregates credits from different standards related to the CORSIA program (an international program for offsetting air travel related carbon emissions). CORSIA is well-understood and the credits that can be used to satisfy CORSIA requirements are well-defined.

Just because the credits satisfy CORSIA requirements does not, however, mean that they can only be used as part of that program. Any company participating in a voluntary carbon offset program (e.g., Microsoft MSFT , Apple AAPL , Amazon AMZN ) can transact in and retire GEO credits, knowing that because of the CORSIA standards, the offsets are bona fide and well vetted.

In effect, the GEO makes what has been a bespoke market into a scalable, standardized market based on assets with which participants are already comfortable and knowledgeable.

Not only is the GEO a well-understood asset, it also transacts on an open, electronic trading platform that enables buyers and sellers to understand up front the pricing environment in which they are transacting. This is the dictionary definition of a fair, transparent market.

Melby says a wide range of institutions – airlines, banks, corporates, and carbon credit developers – have been drawn to the GEO and that the “depth” of the market is increasing daily.

CBL Markets serves as the central counterparty to each trade, meaning that participants need not worry about counterparty risk. Also, settlement of the contracts occurs the same day as the trade was made (“T+0”), which means that there is less settlement risk than even the US equity markets, which settle on a T+3 schedule.

Transaction costs are low, just a few cents per contract, and trading is being facilitated by financial services firms, including Australia’s Macquarie and AitherCO2 — experts in the business of transacting commodity contracts on behalf of customers.

It may not be fashionable to say these days, but as Gordon Gecko once opined, “Greed is good” when it comes to sustainability. Greed prompts smart, aggressive people to dream big and take risks by investing their time and energy into moonshot projects.

Dreaming big and taking risks on moonshots is the best chance we have as a civilization to continue to survive and thrive into the 21st century. Intelligent investors take note.

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