Climate Solutions Group

Optimistic Outlook for Environmental Markets in 2018

OPTIMISM FOR ENVIRONMENTAL MARKETS

22

Jan 2018

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Could 2018 be the year that carbon markets take off? More investors are betting on it. The prices for carbon credits increased by about 20% in North America over 2017[1]. Other compliance-based environmental markets seem to be delivering positive results as well. Investors are taking notice.

Bullish Outlook for Carbon

In response to the rising price of carbon credits, investors, consultancies, and analysts are turning bullish on the 2018 carbon market. The price increases for carbon credits are based on provincial and state-backed trading programs in Canada and the US. Carbon markets are expected to not only grow but become more robust as regulatory reforms continue across the North America and elsewhere. Currently, the total global value of implemented carbon pricing initiatives is $52.21B.

The California cap-and-trade system (Western Climate Initiative), the Regional Greenhouse Gas Initiative (RGGI) and the EU Emissions Trading Scheme (EU ETS) are currently settling on reforms to correct imbalances between the supply and demand of carbon credits. This is a very positive initiative that will create more regulatory certainty for long term investment planning.

Improvements to these compliance-based programs could set the stage for carbon market expansion into unregulated regions. For example, Oregon could join the Western Climate Initiative, and talks are underway for Virginia and New Jersey to join RGGI as well. Furthermore, the development of blockchain applications is expected to further increase the transparency of carbon offsets and carbon credits for use in compliance based programs[2].

Beyond Carbon to Other Environmental Markets

Outlooks are also optimistic for Renewable Energy Certificates (RECs) as well as Renewable Identification Numbers (RINs), which are used for the existing Renewable Portfolio Standards (RPS) and Renewable Fuel Standards (RFS) respectively. These two programs have created markets that are valued around $21.1B USD.

Concerns that Trump will loosen rules for the RFS program have faded which have contributed to the rebounding price of RINs[3].

On the renewable energy side, developers may face financing issues in the short term as the Trump Administration has imposed tariffs on imported solar panels and components. Despite these changes, the US electric sector is expected to continue its transition to cleaner energy sources as wind and solar prices continue to drop[4].

Overall, the markets for RINs and RECs is looking healthy for 2018.

Economic Performance and Environmental Markets

Concerns about the potential impact of environmental markets on economic growth have been a barrier for market growth but current data shows that these concerns may be less valid that initially thought. The implication may be that more jurisdictions will introduce legislation that creates linked environmental markets, thereby creating more investment opportunity.

Canada is an interesting case study that demonstrates how carbon markets may not be a significant impediment to economic growth. Ontario and Quebec have a linked cap and trade program, British Columbia has a carbon tax, and Alberta has a hybrid carbon levy system. The economies in these four provinces actually outperformed the provinces without carbon pricing.

carbon pricing in Canadian provincesThe graph above shows the Real GDP growth of each province[5]. The year-over-year growth doesn’t necessarily suggest that carbon pricing causes economic growth. However, the figures do suggest that carbon pricing does not necessarily harm economic performance or competitiveness.

As more leaders realize that environmental markets and healthy economic growth are not mutually exclusive, markets will continue to expand into jurisdictions that are currently unregulated. The bullish outlook for carbon credits and broader environmental markets may prove to be accurate for the 2018 year.

References

[1] Bloomberg (2018) Millennials are Snubbing Diamonds. Retrieved from: https://www.bloomberg.com/news/articles/2018-01-18/millennials-snubbing-diamonds-has-hedge-fund-seeing-slump-deepen

[2] Tapscott (2018) Ten cryptocurrency predictions for 2018 from the co-founder of the Blockchain Research Institute. The Financial. Retrieved from: http://www.finchannel.com/business/70898-ten-cryptocurrency-predictions-for-2018-from-the-co-founder-of-the-blockchain-research-institute

[3] Environmental Finance (2018) Reforms boost outlook for carbon and renewables markets. Retrieved from: https://www.environmental-finance.com/content/analysis/reforms-boost-outlook-for-carbon-and-renewables-markets.html

[4] Bloomberg (2018) Trump’s Tariffs on Solar Market Biggest Blow to Renewables Yet. Retrieved from: https://www.bloomberg.com/news/articles/2018-01-22/trump-taxes-solar-imports-in-biggest-blow-to-clean-energy-yet  

[5] RBC Economics (2017) Key Provincial Comparisons. http://www.rbc.com/economics/economic-reports/pdf/provincial-forecasts/provtbl.pdf

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