GHGs and environmental assets in CTRM systems.
Globally, 77% of all Green House Gas (GHG) emissions are in the form of Carbon Dioxide (CO2). However, there are two other significant GHGs; Methane (CH4) (15%) and Nitrous Oxide (N2O) (7%). The remaining 1% is made up of fluorinated gases, so called ‘F Gases’, which are Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs) and Sulfur Hexaflouride (SF6).
Methane accounts for 15% of GHG emissions:
- It is 25 times more potent at trapping heat compared to CO2
- It is 80 times more potent in the short term (20 years)
Nitrous Oxide accounts for 7% of GHG emissions:
o It is 300 times more potent at trapping heat compared to CO2
Fluorinated gases are regulated as controlled substances under the Montreal Protocol and are even more powerful GHGs than the others, having a global warming effect up to 23,000 times greater than CO2. HFCs are impactful, but short lived. PFCs and SF6 can remain in the atmosphere for thousands of years. The European Commission has set a target of a 50% reduction if F-gases by 2030.
Methane as the next target for legislative and social impact
The major sources of Methane release are agreed as being oil and gas exploration and agriculture, with waste (garbage/trash) coming in at third place. While the levels of release are contested, the following by the Environmental Defense Fund (EDF) are often cited:
- 41% – Agriculture
- 35% – Fossil fuel Production and Distribution
- 16% – Waste
Once significant progress is made on CO2 and policy tests move the Overton Window to bring about a shift in public and corporate acceptance of extending the scope of environmental policy around GHG emissions, (as has been done for CO2), Methane reduction will be targeted and likely approached in the same way as CO2, giving us a model to plan business change pathways.
The issue with Methane is nothing new, this GHG has been on the climate change radar since 2016. However, CO2 has had the limelight – now that’s changing.
Including Methane into the scope of environmental policy may not be that difficult. For example, in the US there are roughly 3 million abandoned wells of which 2 million are ‘uncapped’ and leaking Methane. Since I first drafted this article, Biden won the US election and capping wells has become part of a sweeping jobs and environment plan. Agriculture, mainly focused on meat production was touched on but appears to have got significant pushback.
The International Energy Agency estimates that worldwide the oil and gas industry can achieve a 75% reduction using technologies available today — two-thirds of it at no net cost. – EDF
Analysis also needs to be done around possible disruptions and market traumas in the Emissions Trading System (ETS) that may occur, some scenarios I derived from further research include:
- Methane Credits / Emissions Allowances added to the UK and EU trading system
- A Combined Emissions Credit system established once the complexities of a unified ETS are fully established (International EU ETS credits end after 2020)
- The US establishes an ETS system which joins with the EU and UK systems and this becomes global, with China and India joining at a later date
- Gold Standard / Verra type organisations are formed (or they expand scope) to certify Methane or Combined emissions offset activities in the Voluntary sector (an uncontested multi-million dollar market, I’ll discuss in a later article)
- A new taxonomy of combined emissions classes and credit system is developed and approved by organisations in the various countries
- Supply chain emissions are factored in to move from Net Zero to Absolute Zero
Expanding Commodity / Energy Trading and Resource Management Systems
Developers of Commodity / Energy Trading and Resource Management (CTRM / ETRM) software systems have an incredible opportunity, and ESG responsibility, to enable and support the development of a market for emerging asset classes that help achieve radical decarbonisation in the aggressive timescales being set.
By integration of a full set of GHGs (CO2, CH4, N20), renewable power sources from any form of generation (wind, solar, geothermal, biomass, etc.), stored power (e.g. battery arrays) and of course Hydrogen, however derived -it will be possible to overlay all of these assets with the needed risk management, pricing, purchasing and payments, contract and workflow processes, analytical insights, compliance and reporting and more that we’d expect in a CTRM / ETRM.
Climate goals are a good thing, along with policy that enforces their achievement -but beyond tax derived government subsidies- it’s markets in environmental asset classes that generate cash flows which can be utilised to achieve environmental goals, provide funding to those in need of capital to engage in decarbonisation activities and provide an incentive to reduce emissions across all sectors. This will help assure we stay within the 2-degree scenario in the timescales we need the change to happen.
That’s the significance of getting this integration achieved and expanding trading in more than just traditional energy and commodities or CO2.
Mark
