The Derivative - Emissions Trading and Carbon Allowance Futures with Michael Azlen

Episode Date: January 13, 2022

We're taking a trip across the pond to London in this episode and diving into the carbon markets and emissions trading with Michael Azlen, CEO and founder of Carbon Cap Fund and Management. Whether you care about making money off trending carbon emission prices, or saving the planet,  or both… Mike has become a leading voice for educating and explaining the role carbon emission credits and the emerging carbon futures markets play. In this episode, Mike breaks down the complex carbon concepts and answers some critical questions, like how do you trade carbon credits? What is an emissions trading system? Why is Europe the big player in this game? And he even gives us his hottest take in the market right now — we'll give you a slight hint, it involves climate change. Highlights from this week's episode include: The evolution of the U.S. and European Carbon Market Identifying and clarifying the difference between the voluntary carbon market and the compliance or regulated carbon markets (where Carbon Cap invests) How to think about a market that is structurally designed to increase in price Understanding how this market functions as a policy tool A closer look into Europe's carbon border adjustment mechanism And, how a hedge fund can make money and save the planet simultaneously —  you'll want to tune in for these details and more! Chapters 00:00-02:00 = Intro 02:01-12:38 = Wait? You can trade Emissions? What are Carbon Markets? 12:39-30:40 = Excess units vs Purchase units, Lowering Emissions, & Counter Party Risks 30:41-50:50 = Carbon Cap Mgmt and the Carbon Cap Fund 50:51-01:08:40 = Can we really Capture It? Climate Change, Natural Cycles & C02 levels 01:08:41-01:14:11 = Hottest Take More from this Episode: View World Carbon Fund - Generating Absolute Returns from Global Carbon Markets Visit Carbon Cap Management's website  Follow along with Michael Azlen on Twitter Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, or LinkedIn , and Facebook, and sign-up for our blog digest. And visit our sponsor, the CME Group at www.cmegroup.com to learn more about futures and options. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thank you. carbon contracts to execute, or corn or crude or cotton, and there's only a few hundred offered. You either spike prices higher and get a bad fill, or use advanced execution algorithms like they built at RCMX, which use anti-gaming logic and historical volume profiles to place trades more intelligently, based on what and when the market can handle. It's also just way cooler to buy with an algo called Prowler than buying with a limit order. Come on. To learn more, visit www.rcm-x.com. That's rcm-x.com. Okay, on to today's episode and the engaging Michael Aslan. Michael's been a lecturer at the London Business School for more than 15 years,

and you'll see why in a second here, with him able to break down these complex concepts rather simply for yours truly, like we're sitting there in a london classroom michael's the founder and ceo portfolio manager of the carbon cap fund and carbon cap management which did quite well last year past performance not necessarily indicative of future results but just how exactly do you trade carbon credits what is an emissions trading system why is europe the big player in this game we get into all that and more. Send it! Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative

investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Okay, we're here with Mike Aslan, founder and CEO of CarbonCab, joining us today from the UK. Welcome, Mike. Where are you at exactly? I'm in London in the United Kingdom. All right. Whereabouts in London? Proper? Yeah. In central London, there's a neighborhood called Dulwich, and that's where we are. It's a green spot in South London. And thank you very much for the invitation to come on the show today. I appreciate it. Thanks for joining us. I haven't been back to London since the pandemic, but hopefully we can get through this thing and come visit. Great. So we're here

to talk carbon markets and emissions trading. You've become one of the premier voices out there educating and explaining how all this works. So I'd like to start if you can, and just sort of start at the top and lay out the basics for what emissions trading is and what we're going to do here. Great. So I guess the first place to start is the big picture on climate change. And in 2018, after selling my previous company, I had a bit of a sabbatical. And one of the things I wanted to investigate was the science of climate change. I enrolled in a very high level program at the London School of Economics. And in that program, one of the things we studied was all of the different solutions that governments have tried to try and bend the curve of emissions downwards. And when you do look at that, almost nothing actually has worked to lower carbon emissions. But the one thing that has

had effectiveness has been when you put a price on emitting carbon dioxide. And really, the history of this goes back to the sulfur dioxide program in the United States. Under the Bush administration, they had a cap and trade program on sulfur dioxide. It was extremely successful, both at lowering the emissions dramatically, but secondly, it did it at extremely low cost in terms of the infrastructure and administration around that program. And that success really set the stage for the carbon market being launched in Europe in 2005. And the sulfur dioxide, we're talking like acid rain and that kind of stuff. That's correct. It was acid rain that they were trying to, um, to, you know, eliminate and the, the cap and trade program on sulfur dioxide emissions, it was applied across around 3,200

coal burning, uh, electric utility outposts across the United States. And, and it was really, really successful. And so I was going to ask this later, but we're touching on it now. So it feels like the US sort of fell off a bit after that and Europe took the baton. Why is that? Yeah, there are many, many reasons for that, Jeff. It's really unfortunate because a carbon market is really a market-based solution to address climate change. And of course, the U.S. really pioneered it. So it's a shame that there isn't a national carbon market.

But in the U.S., you probably know there is a very successful carbon market in the state of California. And on the east coast of the U.S., there are 11 states together that have formed the Reggie carbon market. That market's been expanding with New Jersey recently rejoining, Pennsylvania scheduled to join next month. So the markets are growing nicely. And that Reggie's the R-G-G-I that I read about? That's correct. Yeah. Much easier to pronounce Reggie. Thank you. So back up one step and what exactly is being traded? Who's doing the trading and like the polluters versus the non-polluters? How does that, how does all those machinations work?

Great. I mean, it might be helpful for me to share my screen. Is that without me helping? So the first thing is I wanted to identify and clarify the difference between the voluntary carbon market and the compliance or regulated carbon markets, which is where we invest. The voluntary market is for many people, it's the market they're most familiar with. That's where on a website, you can buy some carbon credits or carbon offsets. You might be able to click and offset emissions for a flight. And that voluntary market is, as they say, it's voluntary. So it's run as a for-profit activity by companies who pick a project. And the most common project is to plant trees. Trees grow and they suck in carbon dioxide and they emit oxygen, which is wonderful. And indeed,

our forests on the planet are carbon, massive carbon sink, as well as the ocean. So the voluntary carbon market is project related, but it's still really in its infancy. And it really needs additional sort of upgrades in terms of the quality of how those projects are monitored, verified, and reported in terms of what carbon is actually sequestered in those projects. You're saying someone in Saskatchewan or something is like, hey, pay me some money and I'll plant these trees. So it's for profit for them, right? The people purchasing voluntary, it's an expense. It's not a profit. Correct.

Yes. But the ecosystem behind it is a for profit activity. There's nothing wrong with that. But it does introduce that element of moral hazard. So, you know, I like there are five key characteristics about the voluntary market. And it's just where the market is today. The first thing is to say it's broadly unregulated. So that is just an issue to be aware of. The second is it's illiquid.

Thirdly, it's quite small in size. The total market last year was $300 million in carbon credits or offsets. Now, if you compare that to the regulated carbon market last year, that was 300 billion. So there's a 1000 times difference in size between these two carbon markets. The fourth point is it's very opaque on the pricing in the voluntary market. And the final point is that the supply of these credits and offsets is virtually unlimited. So they just bring more projects. Now, if we switch the lens over to the regulated carbon markets, and we apply those same five key points, first of all, they're run by government. So the markets are highly regulated.

Secondly, they're very liquid. So these markets are trading between $3 and $5 billion daily. There's exchange-listed futures, exchange-listed options. The size of the market I mentioned, $300 billion, so it's very big. It's very transparent. And the fifth and key point is the supply of carbon in these regulated markets is capped, and every year that supply is reduced. And so very important that the listeners understand that these are two very, very different carbon markets. And just real quick on that, and then I want to get to your little graphic. So you two, one of my favorite bands, UK group there for you. So they're doing their tour. They're saying we're

purchasing carbon credits. That's the voluntary, but you're saying who knows how much and if they're really doing that correctly and it's sort of very opaque. What would that cost them? Millions of dollars, hundreds of thousands of dollars? So the price of carbon credits and offsets in the voluntary market can range from as low as 25 cents per ton to as high as $600 per ton for a very high quality carbon project. And there's everything in between, but probably an average price today is $7 to $10 per ton for most projects. And I think the key thing for me is, when you understand, take a step back and say, you know, where are we on climate change? Currently, the you know, you look at the concentration of CO2 in the atmosphere at 415 parts per million, which has increased by 50%,

really, in the last 50 years of during the Industrial Revolution, we've warmed the planet already by about 1.1 degrees from pre-industrial times. Of course, the Paris Agreement has set an aspirational temperature threshold at 1.5 degrees or two. So globally, we're emitting now 40 billion tons a year, about 150 million tons every day. And that those emissions are impacting, continue to impact temperature. So at our current run rate, we have eight years of run rate emissions before we will breach the 1.5 threshold. And of course, when we as we raise the temperature, the planet itself begins to turn from a net sequestering of carbon to a net emitter of carbon. I won't go into that now,

but certainly that is why those 1.5 and 2 degree thresholds are very, very important indeed. So my issue on the voluntary market is if you burn coal, oil, or gas and you emit carbon dioxide, it's in the atmosphere for about 1 000 years so it has a very long half-life 1 000 about a 1 000 years so if you then plant a forest and the forest um sucks in uh carbon of course as long as the trees don't burn down or if the trees aren't blown down in a in a wind or indeed, if someone doesn't just come along 10 or 20 years later and cut them down, right. As long as that doesn't happen, those trees will sequester carbon, but eventually 80, 90 years, the trees will die. When they die,

they fall over, they decompose and the carbon is, is released. So let's say, you know, optimistically 150 year cycle with a forest or trees. So you emit carbon for a thousand years. You buy a tree based carbon offset and you claim net zero. Yeah, that's the issue. This is not net zero. And I think we really need to to to really think carefully about this and corporate claims of net zero and how they will achieve them are very, very important. I think this will come out more in the coming years.

Net 10%, net one-tenth, right? Yes, I would say. They should plant bristlecone pines. We used to belong to a golf course named bristlecone pines. Those live up to about a thousand years, I think. So back to the, your graphic here and who's, who's doing this and how it actually works versus the, uh, the excess units versus the need, those who need to purchase units. Yeah. So, um, when you, when you understand how this market functions as a policy tool, it's really fascinating. And I think it's an amazing policy tool to address climate change at scale, and it's market-based. So there's two ways to put price on carbon. You can put a carbon tax, which I don't like, or you could have a cap-and-trade system where we control the quantity of emissions and we let the market sort out the price. So here's how it works. So I'll use Europe as an example, but California and Reggie,

the carbon markets in the United States are exactly the same. It's a regulated system run by governments and it's mandatory inclusion. So any factory that emits more than 25,000 metric tons, so this is a big amount of emissions, any big emitter is included in the program by law. So it's mandatory. Once you're in the program, you are audited by the government every year, and you must give the government allowance permits that match your emissions. So if last year your factory emitted a million tons, that means by April of

this year, you must give the government 1 million certificates. How do you get them? Mainly the permits are sold at auctions. So in California, we have four big auctions every year. In Europe, we have an auction every single day. And each one of those permits that is sold allows you to emit one ton. Sorry, real quick. I think I read in some of your materials, one ton is about equivalent to driving a car from LA to New York. Yeah, I think that's probably quite a broad... Just to give someone a kind of visual or mental model of what these tons mean. Yeah. So that, that threshold of 25,000 tons, you can see that's quite a large amount for one installation or one factory to emit. I mean, that's per day or per year, per year, per year, per year. So that's where they,

they set the threshold. And so they're trying to capture the big emitters, which mainly are electric utilities, steel companies, cement companies, and chemical companies. These are the four big, big emitters. Now that total supply that the government sells every year is capped. And every year they lower that supply. The amount that they sell each year is lowered in Europe by about 2.2% in California by about 3.5%. So the way to visualize this, because it's hard for people to get this in their head, is that in year one of the program, we sell, let's say in California, 300 million certificates. At the end of the year, we audit those companies. And if their emissions are 300 million tons, the companies must give back to the

government those permits. Now they have complied. The government tears up the permits and destroys them. We then start year two of the program and the government then sells 270 million. And then the third year, 250, 240. So we bring the cap down, we're playing musical chairs, and we're pulling out a chair. So what we know with certainty, we know emissions are going down, because there's less permits, they have to go down. What we don't know is, out of all those 1000s of companies, which company indeed will choose to lower their emissions. And that's where the market, the invisible hand of the market, and the price signal answers that question. And that's where the market, the invisible hand of the market and the price signal answers that question. And that's how we get what we call least cost abatement. Because a carbon

market has two goals. The first goal is to cap emissions and lower them. But the second goal of a carbon market is to achieve that first goal at the lowest cost to our society. And that second objective is very, very important. And that's where liquidity and price discovery in a liquid carbon market play such an important role in achieving that second objective. And talk a bit about abatement. So we're talking about, hey, we know you have to keep making plastics and concrete and steel, but this is, we want to incent you to basically transition your equipment, transition your stuff to be less emitting. That's what we mean by abatement. And there's those that have already done that or are progressing and those that haven't. So explain that dynamic a little bit. Yeah. So probably the most famous environmental

economics graphic is this graphic here, which is the marginal Bateman cost curve. And this is a stylistic example of in any industrial economy, we've got the price of carbon dioxide per ton, the price per ton on the y-axis. And on the left axis, each box here represents a different industrial process. So making steel, making cement, making chemicals. Now, of course, some industrial processes, when the carbon price hits $10 a ton, the management team and the engineers in that business, they run their calculations. They say, hey, at $10 a ton, we can switch and make more money adopting this low carbon technology.

So indeed, they switch. By selling their certificates. Yeah. So either they don't have to buy the certificates in the auction anymore, so they have that savings. Or if they're in a position where they're receiving an allocation from the government and some vulnerable businesses do get a free allocation, which falls every year, they would be able to sell those permits to fund that low carbon technology. But the key point here, Jeff, is that we climb this marginal abatement cost curve. So once we unlock the lowest hanging fruit, this industry abates, we then move to the next

hanging fruit and the next and the next. And this is crucial because we're lowering our emissions in California, but we have the confidence that we're doing it at the lowest cost. Every time it comes down, it's the low cost guy who abates. Now you can only make that claim of least cost abatement if you have two things, liquidity and price discovery in that carbon market itself. And that's why that ecosystem of having all these traders trading carbon, just indeed like in wheat or in corn or in oil, we want to have a liquid market for this price discovery. I just wanted to mention two other advantages of a carbon market. Obviously, capping and lowering emissions and ensuring

lease cost abatement is one. But the other really interesting ones are the fact that a liquid carbon market provides companies the ability to hedge. A carbon permit does not expire. So you can buy today and use it in three or four years to meet your obligation with the government for your emissions four years from now. So you can use these permits to hedge your forward carbon obligation. It also provides an ability for a piece of low carbon intellectual property. And someone invents a better scrubber to scrub out CO2. When they bring it to a venture capitalist, the VC will back that technology because they know there's a pathway to monetization. There's a pathway to... A tax doesn't do that,

but a liquid carbon market provides it. That's very interesting. And I think the final point is these auction revenues. So in California, this is raising billions for the California Treasury. In most carbon markets, the revenues from selling the permits are segregated and they're used to invest in energy efficiency and low carbon initiatives. So it really is kind of a virtuous program to address climate change. And I guess the proof is in the pudding. You can see the numbers here. So by no means does a carbon market restrict GDP growth in any way. It's a market-based mechanism. So it really utilizes the power of the market, allocating those resources to both give you GDP growth and lowering emissions. And certainly in Europe, which is the longest running market,

emissions are down 1 billion metric tons per year since the program was started in 2005. So we're in a world of 40 billion tons. 1 billion is moving the needle. Yeah. And help me understand if I'm, so if I'm a big polluter, why don't I just, okay, I've got to pay this cost. It gets more expensive every year because the supply, I just pass on those prices, right? Concrete becomes more expensive. Steel becomes more expensive. I pass those on to my customers. Who cares?

What's the answer to that? So there's a couple of different answers to that. The first is obviously we live in a global competitive marketplace. So one of the things that now Europe is bringing in is a carbon border adjustment mechanism. So, for instance, the Ukraine exports from the Ukraine a lot of steel and cement into Europe. But in the Ukraine, you don't have to pay a carbon tax. So one of the things that the companies scream about in Europe, they say, hey, we're paying this carbon price, but they don't. So what they're bringing in now in Europe, and the US is talking about the same

thing, is basically a border tariff. If you're trying to export from your country with no carbon price into Europe, you will get hit with a carbon tax at the border to export, to import your goods. And what was really interesting when Europe announced this within a few weeks, the Ukraine announced they're going to launch their own carbon market because they want access, unhindered access to the European market. And what we're seeing is an explosion of countries now launching carbon markets off the success in Europe. So today we're invested in five carbon markets. Europe, of course, the UK has its own carbon market because of Brexit. There's two carbon markets in the US, as you know, California, which is linked with Quebec and Canada. I'm a

Canadian. Oregon and Washington State are both moving legislation through to join the California market. So that's interesting. So is New Mexico is making some rumblings. On the East Coast, of course, you have the regional greenhouse gas carbon market. That's 11 US states. New Jersey joined last year. Virginia joined this year and Pennsylvania is scheduled to join next year. And North Carolina is now making some noises about joining. So really interesting to see these markets growing. And why has it become such a, diving off topic a little bit, it seems like it's become like a red versus blue thing in the U.S., right?

Those are mainly all blue states. Like, would you ever get Texas on board? Would you ever. Right. So it seems like a free market solution that Republicans would kind of like. And indeed, the history is that it was kind of. It was Republican completely. Yeah.

Yeah. What's that look like politically? Yeah. There's there's such a big divide that I think that the chances of, you know, not the chances, I think the timing on a national carbon market in the United States is probably still some time off. I mean, if you look at the makeup of the Senate in particular, you know, it's going to be very difficult, isn't it? So, but it's nice to see the individual states that are, you know, taking this, but I take your

point. It's difficult to predict, Jeff, what will happen, you know, on the red versus the blue states, but they are growing. When you get concrete moved from Pennsylvania to Ohio, and then just ship it across the border from Ohio. So you don't have, you have like that similar Ukraine dynamic inside the U S with each state. You may, you may start to see that. All of the research so far on that, what you just described is called carbon leakage, where the actual emissions move to a different jurisdiction. So far, that's been almost unheard of because to move a big factory, obviously, it's hugely expensive. So there would have to be a major, major price difference to make that, you know, economically viable. But you're quite right. Just globally, just to touch on what's happening, though, is the amazing development of carbon market. China has

launched their carbon market in the summer covering 5 billion tons of emissions. So that is really big news for climate change. Korea has been running their carbon market since 2015. We're invested in the New Zealand market. We really like the New Zealand market. Mexico has a big carbon market. They're in their pilot phase. Brazil, even with Bolsonaro in Brazil, they are now moving legislation through both houses in Brazil to launch a national carbon market. And five weeks ago, Malaysia, the country of Malaysia, announced they're launching a national carbon market. There's another dozen countries that are looking at this. So we're probably in the first or second inning on carbon.

When I began to look at it three years ago, we were trading about half a billion per day. Now we're trading three or four billion per day. And I think very soon we'll be trading in excess of 10 billion per day. And many are saying we will overtake crude oil in the next 10 or 20 years. Really? Wow. And so this kind of neuters the argument of like, hey, it's not worth it trying to reduce our carbon emissions because China is just going to pollute and do whatever they want, right? What are your thoughts on that? The more global it becomes, the less valid that argument becomes. Yeah, I mean, what we all hope for is we hope that we have eventually these markets linked. So Switzerland had its own separate

carbon market, but then last year it linked with the European carbon market. And what we'd like to see is we want one global carbon price where all the markets eventually link. Because again, it comes back to the efficiency of least cost abatement. It's probably cheaper to abate emissions in Africa or in some Asian countries than it is in highly developed Western economies. So linking these markets makes sense. But obviously, there's a lot of political issues. So I think we're probably a decade away from linking all the carbon markets. But you're right. I mean, if China lowers their emissions on their carbon market by 2% per year, that's 100 million tons per year, which is that's the

entire emissions of the united kingdom being taken out every year so this is one of the few policies that has the ability to move the needle for the paris agreement i believe and so you're you're talking about this the trading and the increase in the trading talk to me a second about who are the like how does it clear is there counterparty risk like that seems a big deal to me if i'm buying this certificate from someone else and they can't pay me. So, so yeah, so carbon, most of the carbon trading that is done today is done through exchange listed futures and options. So on the Intercontinental Exchange, which owns the New York Stock Exchange, of course, they have listed futures and options. If you buy the futures contract and hold it to expiry, you get delivered the physical permits, just like if you hold oil or you hold wheat. Our listeners know it as ICE.

Yes, exactly. Savvy guys, ICE, but go ahead. Yeah. Okay. Yeah. So, yeah, for people that are savvy, yeah, it's ICE Futures Europe and ICE Futures in the US. So that's where the contracts trade, as well as the options market. One interesting thing is that a carbon permit in California, you can't bring it to Europe

and give it to the regulator in France to meet. So there's no cross-fungibility or direct arbitrage capability. So the markets are priced quite differently in terms of the price per ton, even though it's the same one ton of CO2, same commodity, but it means there's also very low cross correlation. And in fact, that's one of the things we leverage on in our global carbon fund by diversifying across multiple carbon markets with low correlation, we achieve a lower risk profile. And so what's the volume and the liquidity on the ICE contracts look like? Do you have an equivalent to, you mentioned crude oil before, is it a tenth of crude oil? Do you know those numbers up there?

Yeah, I don't know. I don't have the numbers relative to crude. That's a very good question. But I can tell you that most of the liquidity in the futures is in the European market. It's probably trading about half of that $4 billion daily traded value. About probably 50% to 60% of that is the European market, with the rest of the futures value traded being split between the UK market, which is also becoming more and more liquid, the California market and the Reggie market, all three have listed futures on ice. Real quick back to that. So if I'm, but the actual factories are buying certificates, right? Not just futures they're buying from the government. So

that's that kind of counterparty risk there. It doesn't totally matter. Yeah. So, so, you know, certainly in our fund, we hold daily liquidity futures and options. We'd also hold the physical carbon certificates. They do trade on a daily basis, to be able to participate in those auctions. It's really designed for big emitters like electric utilities and whatnot. But you can do it. And we find it's useful for an arbitrage. Obviously, you want to be able to arbitrage the cash against the futures market. So, yeah. I think, yeah, you'd have to be an ECP, right?

Eligible contract participant. I think it, yeah, I think, yeah, you'd have to be a ECP, right? Eligible contract. I think it's 10 million minimum. You've mentioned the fund a couple of times. Let's switch gears a little bit. Where did the idea come from? Start a hedge fund trading this stuff? So, so yeah. Were you coming at it more from a like, I want to make a lot of money or I want to save the planet? A little bit of both? Yeah. So what happened was when I learned about these markets, my first thought was once I understood, it took me about a couple of weeks to really understand the mechanism. I had no idea it was trading. These markets even existed trading half a billion a day at the time.

I thought maybe I should own some of this in my personal portfolio. I like the fact that you have a commodity with lowering supply every year and kind of demand is correlated to economic growth with higher prices. But I wanted to get the stats. I have been teaching on the graduate degree program at LBS for 18 years. One of the things I teach is long run asset class returns over a hundred years, 17 countries, equities, bonds, real estate, etc. So my first question on carbon was, what does the return, what are the statistical properties of carbon? And I could not find the data. So I hired a PhD student from the LSE Grantham Research Institute on climate change. And we have written a full academic paper on carbon as an emerging asset class. That paper will be published this summer, but the CFA Institute has already published

a case study with the core conclusions of that. And broadly speaking, there were three noteworthy things. One, carbon has been going up at about 20% annualized rate of return for the last eight years. Volatility is between 15 and 20. So it can be quite volatile, even as a portfolio. And thirdly, very low correlation. That point I mentioned about lack of fungibility between the permits means you have effectively zero correlation between carbon markets, but carbon itself has effectively zero correlation between carbon markets, but carbon itself has effectively zero correlation to equities, bonds, real estate, and commodities. And this was the really important

thing for me in my analysis, being an investment professional. And I presented this research, Jeff, at a conference, and I was approached by the CEO of a Swiss private bank. He said, I want to back you, Mike, to launch this fund. He took a stake in the GP, a minority stake. And so that I formed an environmental asset management business, our current company, CarbonCap. And we have these dual goals. So you're quite right. First goal is we want to generate 13 to 15% annualized return with 13 to 15 vol low correlation monthly liquidity. So that's pretty standard. But the second objective is we want to have a direct impact on climate change, both through softer things like my teaching, my speaking at conferences and educating people about climate

change and carbon, but we commit 20% hard of the performance fees are used to purchase carbon and permanently cancel those permits. And that is a direct impact on climate change. So to put some numbers on that, if you invest $5 million in the fund, if we generate a 10% return, then that will cancel about 500 tons of carbon, which is approximately the carbon footprint for 50 people in Europe, or it would take out the footprint for a family office. Right. And, but that ties back to that voluntary. That's the, uh, No, when we cancel carbon, we buy compliance, highest quality carbon and cancel it. It costs us a lot more money to do that.

But I think the price tells you a lot about the quality. I like it. Put your, I lot more money to do that. But I think the price tells you a lot about the quality. I like it. But I was going to catch you there. Like, hey, you were saying that voluntary stuff's a little shady, but you got it. And then so is it holding? I think I read something. It's holding most of there's a portion that's just long this stuff, right? So I wouldn't say just long. So let me, let me take you through very quickly the investment strategy. So the first thing is because carbon emissions mainly come from electric utilities,

a lot of the electric utilities are the biggest emitters of carbon dioxide. So they have quite sophisticated hedging programs. Many utilities sell their electricity three years forward. They then buy the coal, the gas and the carbon in the forward market. So they buy the inputs, sell the outputs and they lock in their forward margin. Quite interesting. And electricity, which cannot be stored, electricity volatility, which is very high, knocks on to their hedging programs in coal, gas, carbon. So this makes carbon sometimes very volatile because electricity, of course, cannot be stored industrially yet. So I'll give you some numbers. I mean, European carbon has 50% annual standard deviation, three and a half times the volatility of the

stock market. It's very volatile. So the first thing that we decided, I've got a lot of my personal money in the fund, is we wanted to have a hard risk cap. And this is hard. We must be under it. And we've set that at 15% vol. So stock market volatility, 1.5. That translates to 2.2% daily value at risk at a 97.5 confidence interval. So we calculate this risk number on our portfolio every day, and we must be below it. We report this to a third party independent compliance, regulated compliance entity. So that's the first thing about what we're doing is we're trying to do this in a risk controlled manner. You're quite right. We then have two strategies in the fund. The first strategy is long bias. We call it core long plus hedges. So this is where we use physical carbon, futures, and options to

build a portfolio across these five markets to capture that long run bull market. But we tactically underweight and overweight the markets based on deep fundamental research to say, hopefully we can add some alpha versus a simple buy and hold approach. The second strategy we call alpha, and this is mainly intraday, but idiosyncratic trades around the fact that most carbon trading is done by the end users. So I'm not trading against Goldman Sachs. I'm trading against a steel company or a cement company. And there are some very interesting strategies that we have developed.

Our goal is 4% to 6% a year on this piece. So if we can add an additional 4% to 50 basis points a month through these alpha strategies, so you have these two strategies that operate under this risk limit. And so on the core long plus the hedges, what are the two questions? One, based on the supply getting taken away, this must be a very steep contango. So how do you buy and hold that in the futures? Do you pay a big roll cost? And then two, what are those hedges look like? Yeah. So I think probably a better name for core instead of core long plus hedges is probably core long plus convexity. So because we have that hard cap on our risk exposure, if we have a high conviction view that a carbon market

is going higher, we can't load up on the market because we would breach our VAR risk limit. So the only way to make that bet is to purchase typically out of the money call options. And that gives us that upside convexity. So we've done that quite successfully. On the downside, we can hedge using puts if we think there's a policy event or a macro event that might affect that. And the way we allocate between the two strategies is using a weekly investment committee meeting where we score the markets. Before I go into that, though, I want to answer your question. Carbon markets are not in excessive contango currently. And really, if you look at the history, they never have been.

They typically trade at a small amount of a contango that is in excess of short-term interest rates in that particular market. The one exception to this is California. The California market is trading at about a 3% contango. So it's not extreme, but in California, if you're a buy and hold investor like us, you would like to hold the physical carbon rather than buying the futures and rolling. Right. So that's where the contango sits. In the other markets, there's very little contango. It doesn't make sense to me, right?

If you know the supply is coming down every year by, you know, edict, so to speak, by the governments, it would seem it'd be, you know, like the mother of all contango markets. I guess there's the risk of policy change and whatnot. So the interesting bit is that supply and demand analysis. And just to put a very broad brush on that, the supply of carbon, everyone knows because the government discloses. We know in Europe, 1.6 billion permits is going to be sold. So we know the supply. So we spend all our time, Jeff, trying to work out the demand for carbon. And in the case of electricity generation, of course, you're quite right. If the economy grows, we need more electricity.

And you might think, OK, we've got to turn on more coal and gas and more carbon. But of course, what's happening at the same time is renewable power, solar, wind, hydro, and other forms are coming on the grid, and those are pushing thermal generation off the grid, which means less emissions. And that's a big picture way of saying there's a lot of complexity when you drill into trying to identify where is that supply and demand, is a carbon market tight or is a carbon market loose? And I think we've built some very, very interesting tools there. And then on the alpha strategies that Rodrigo Gordillo at Resolve Asset Management, he likes to talk about the different economic incentives, right? So a pension that has to come in and buy at quarter end to meet their obligations, right? At basically at any price.

So is that kind of a similar structure there? You know the players, you know some of the things they have to do. They're not as concerned about intraday price probably. And you can kind of harvest some of that. So there's a whole ecosystem of participants from short-term speculators to the longer-term buy and hold investors. And indeed, but still, it's dominated by the hedgers, the companies that have to buy a certain amount of carbon over the year. They might give their trader a VWAP target. If the trader can beat the VWAP over the course of the year, the trader gets a bonus, this kind of structuring

for the big emitters. So they can be quite sophisticated in how they trade their carbon hedges. I'll just take you through maybe one or two of our alpha strategies. So again, in total, we're trying to trade these idiosyncratic strategies to generate 4% to 6% per year, in addition to what we're making in the core. So the core we hope is going to generate 4% to 6% per year in addition to what we're making in the core. So the core, we hope, is going to generate more like 10% to 12%. The first strategy is the auction. So this is quite unique to carbon. So every day in Europe, between 2 and 6 million tons of carbon is sold at a daily auction

at 10 o'clock in the morning. And we have done a lot of quantitative work around the auction. We participate in the auction every day on either a long or a short basis. We're typically in and out within 30 minutes. So we participate in the auction long or short, and then we exit in the secondary market

and we extract a small amount of alpha almost every day from that process. And we're providing liquidity into the whole auction window as well. So that's a very unique alpha strategy, I would say, that's unique to carbon. I heard your Canadian roots there. Yeah. Ed Bratton, our head carbon trader, has been trading carbon in Europe for 15 years. So he knows the brokers very well.

So most of trading in the future is screen-based, of course. But there's also for big blocks of carbon. If you're trying to move a block, that's voice brokered. And so we'll see a lot of those flows. And we will facilitate blocks of carbon in the market. Typically, we hold for only a few minutes, if you understand the facilitation trade, we buy it a couple cents under the market. As soon as we buy it, we blow it out in the market and we take a one or two cents. But the real value there is seeing those flows of carbon. That's what was back to back as we call it in the grain

cash markets. So you're not buying it unless you know you can sell it over here. Yeah. I mean, we're buying a block of futures and then we immediately are on screen selling out those futures in a few minutes later. So we have a number of facilitation trades. We do a lot of analytics in the carbon options market. We've developed some really nice tools in the options market. We like looking at skew. We like looking at the level of implied volatility in different parts of the curve. We think that that's also provides some alpha opportunities. And I was going to ask you about that when you said you're getting some of that convexity with the call options. What does the skew look like in that market? It seems like

most everyone would be on the call set. Yeah, it's interesting. Like most markets, you do have that option smile. So you've got, you know, the out of the monies are at a higher implied and it does still tilt to the put. So the put out of the money, deep out of the money puts. Yeah. Even though you have this upward bias to the markets, it's like that. We really like to look at that skew and how that skew changes as a short-term technical signal for our more shorter-term trading strategies. And then, and I think we covered it. I'll just ask. So your mandate's absolute returns. It could be, but you also have that core. So there couldn't be a case where it's carbon's up 200% and you guys are flat or down or something like that. So it's, there couldn't be a case where it's carbons up 200% and you guys

are flat or down or something like there could be, but you hope, sure. Hope not. Yeah. Hopefully never. So I'll give you a good example. So the first thing is you're quite right. We are absolute return targeted. So we have this absolute return objective over a rolling 12 month window. So we can have a down month or a down quarter, but we're hoping over 12 months to be positive. And therefore, in the core, while we think it's kind of probably long bias for the foreseeable future because there's an upward trend in carbon prices,

however, I can say we did our first big short position in carbon in September. So really interesting scenario happened in September. You probably have seen in Europe, we had this huge gas spike in gas prices. Gas prices went up more than 100% in September in Europe. And as I was saying, if you're an electric utility, you can burn either coal or gas. Coal, for the same amount of electricity production production coal emits twice the carbon dioxide so when the carbon price went up burning coal was uneconomic you'd lose money if you made if you

burn coal so they shut the coal off but when the gas price went up a hundred percent burning coal became profitable again right so coal was in the money as we say yeah from the point of view of the the profitability of coal. So they turned on the coal generation. Of course, that emits more carbon and the carbon price really had a big pop in the UK. We were long UK carbon. The price went up significantly. And then a second factor happened in the UK. We have lots of wind generation on the grid in the UK, much higher than other European countries. And we had this weird 10-day period where it was becalmed. There was no wind.

So they had to turn more coal on. And the UK carbon price went up to over 100 US dollars a ton equivalent. When it hit that 100, I sold our long UK carbon and we went short UK carbon. Looking at the fundamental supply and demand modeling, it just did not justify such an increase. It went up, I think, over 42% or 43% UK carbon prices. We shorted it. The next month, wind, of course, it started to be windy again. And that pushed the coal off the grid. Emissions came down and the UK carbon price fell 26% the next month. And we did extremely well. So that's a good example of how being long, short, or flat, we can participate or not in the markets. And then if you make a bunch of money being short carbon,

you're sort of pro-emissions, but then you have that where you can put it back through your incentives by those credits. So I like that. I had a meteorologist on here about a year ago, Jim, I'm forgetting his name right now. But I was asking him like all these wind turbines, like, isn't it taking wind out of the global equation, right? If you're turning it into power and the turbines are capturing them and they're all, and he kind of said, yes. So it could be like the more wind turbines you buy, the less global wind there could be, which seemed like an interesting. Wow. I've never heard that before. And I need to, I need to think about that. I mean, because I mean, it's interesting, isn't it? Yeah. Like it can't, you can't destruct power, right? Like you can't, if you're getting it, pulling something out of the system,

pulling this energy out of the system, where does that come from? Right. Yeah, no, it's really, it's really interesting. I think, I think my, my quick thought on that would be and i don't know what the numbers are but i i would think of of all the wind energy that's generated on the planet the amount that we're pulling out through wind turbines is probably something like i don't know one one thousandth of one percent or something so perhaps it's insignificant but it is growing rapidly i was dr Dr. Jeff Masters. That's who it was. So we'll put that in the show notes. Okay, that name rings a bell.

Yeah, he founded Weather Underground and flew Hurricane Hunters. Great guy. When you're talking to investors, when people are investing in this space, how do they view it as an asset class? Is it just a do-good investment? It helps with their ESG scores? Or is it actually diversifying? And how do you view that? Yeah. So I can tell you my experience with investors. So we launched the fund with 10 million, it's grown to 80 million now. So we're still very small. Most investors are focused on absolute return, monthly liquidity, low correlation and risk management. Kind of classic. I'd say about 10% of the investors really like the climate impact side of what we're doing, but I expect that 10%

will grow over time as more people are focused on it. But that's kind of the mix between environmental impact versus traditional kind of hedge fund investing. Got it. But you view it as a classic diversify, right? Like it's not going to necessarily track inflation or do well when the economy grows, all that. It's just a classic absolute return diversify. The two interesting areas is because carbon costs can be passed through to consumers,

as the carbon price rises, it could be a natural inflation hedge. In fact, the California carbon market has a floor and ceiling in the market where they take away supply or release carbon supply. And those floors and ceilings go up every year at 5% plus inflation. So there's, again, a natural inflation link to carbon. And we've done quite a bit of work for one big institutional client looking at carbon as an inflation hedge. And it turns out, if you look at rolling 36-month correlations against the CPI, the U.S. Consumer Price Index, as an inflation measure, carbon is actually a better inflation hedge than traditionally something like equities. So that's one aspect of carbon. The other one is the hedging capability. So now it's becoming much more recognized that if you own a diversified portfolio or an ETF, you have climate risk of some type embedded in there. And therefore,

owning some carbon could be a natural hedge against that climate change risk. And that's in infrastructure, private equity, fixed income. It's really in every asset class. So some of our investors see owning our fund as a way of hedging against that. So I wanted to also ask, we've kind of covered this, but who's selling? It seems like it's just a natural buyer's market. You just said you're selling, so mainly speculators? No. Yeah, you have obviously when a company that is receiving a free allocation,

so most of the industrial emitters will get a free allocation of carbon, but it goes down every year. So they are getting these permits allocated to them, very similar to what their emissions are. But if they then cut their emissions, they will have excess permits that they can sell back into the market to monetize. So if they, let's say, do a debt issuance, they raise $300 million of debt to put new low-carbon technology in the factory, and then they cut their emissions by 50%, then they'll have these permits they can sell in the carbon market and recover some of that investment they've made in low carbon technology. And these certificates sit on the balance sheet, like their assets, just like anything else, and they could re-hypothecate them and borrow against them

and all sorts of stuff? Yes, they can. That's another advantage. They are an asset. Obviously, they're a bit of an esoteric asset. So I don't know what banks lend against them or I'm not involved in the repo market. I do know are your thoughts on that sort of, it seems like the far limits of deregulation and free markets to me, right. Of like, I can't remember what Texas went up to $43,000 per kilowatt or something, you know, and then right back down to $4. But like, what are your generally your thoughts on that? Is that beneficial to the ecosystem? Is that dangerous to it? Well, I think that, you know that generally volatility is never a good thing. Policymakers, they would love to see carbon just slowly going up and up and up in a slow

way, but that's not how markets work, especially commodity markets where you get squeezes, where entities have to buy whatever the commodity is to deliver on their underlying promises. And so you do get these dislocations in commodity markets. And that's why risk management, I think, is so, so important. But in terms of the development of this, I think that that carbon price signal is the single most important factor in helping transition to a low carbon technology. Because when you look at that price per ton, it has so many impacts throughout the supply chain, throughout the development of low carbon technology. It's just, in my view, it's just the most important signal if we are going to get to decarbonization. Yeah. My worry is you get the evil specular. Back in 07, everyone had like a little long commodity index in their portfolio.

Prices were huge. Oil's at $140 a barrel. And you started to get this, hey, the evil speculators are driving up commodity prices. You could kind of get the same pushback of the evil emissions traders are driving up carbon prices, which is causing your electricity to be higher. And we need to come in and do something about it. Yeah. Well, in California, they have a holding limit of 11 million tons of carbon. So about $300 million is the max position that one entity can hold. In Europe, we don't have that yet. I mean, the market's much bigger and much more liquid in Europe, but perhaps they will bring in these types of regulations. And of course, we don't have that yet. I mean, the market's much bigger and much more liquid in Europe, but perhaps they will bring in these types of regulations.

And of course, we have the CFTC has its own position limits for hedgers and speculators in the carbon markets. Yeah. Yeah. And at the end of the day, it might be a good thing even, right? If the prices get shut up, it's better for the plant. Absolutely. And what's the end game look like for all this? I have this idea in my head that it eventually feeds on itself, right? If it gets super successful,

carbon's up here, all the carbon goes away, this particular game is over, right? Yeah. So it's really interesting when you take a step back and you think about the development of the markets. The first thing to say is we're probably in the first or second inning today, looking at 10 or 20 years as more companies roll out and as we slowly decarbonize. So there's a long time to go, but quite interesting to think about, you're quite right. What we want is we want this market to disappear when we want, when carbon emissions hit net zero. Of course, everyone's talking net zero, net zero, net zero. Now, one of the interesting things here is to look at the concentration of carbon in the atmosphere.

Most scientists and pundits now say at some point we are going to have to remove CO2 from the atmosphere because, you know, today we're emitting another 150 million tons and that concentration is just going to keep going up and up and up. So at some point in the future, maybe 10 or 15 years from now, we're going to emit to representing a carbon market, represent one ton that has been removed from the atmosphere. Now, the cost of removing carbon from the atmosphere today, called direct air capture, is about $600 a ton. But that will come down with technology, just like solar and wind came down. The emissions are like $75 a ton? Which are?

What's the emissions price? Yeah, about, let's say in US dollars, about in Europe, we're at 75. California is $30. Reggie is only $13. So different markets have- Is infinitely more than those, yeah. Yeah, it's much more. So I think as these prices go up

in terms of emitting carbon, they could introduce the ability for, if you can prove you have sequestered and pulled a ton out, you will get issued a permit. So then offsetters like all these corporates that are currently using the voluntary market, which I've already said, there's a lack in my view, a lack of veracity there and certainty about what's being emitted. But they could buy in this much more regulated market, and then truly make a net zero claim. And I think it's quite likely that these markets will morph into carbon removal permits. So that probably extends the life of the carbon markets of the

asset class by another 20 or 30 years. I had this in my notes. I didn't know if we're going to get it, but we had another guy, Michael Cow on the pod who was not on our pod, but in some of his tweets is saying the infrastructure needed to actually capture all that carbon is insane. Like three times per his stats, the amount of pipeline that we currently have in the U.S. that took a hundred plus years to build. Yeah. What are your thoughts there? That it's doable. That's a pipe dream. I think I think it is doable with the right incentives and at the right amount of time. I think that's why when I say, you know, another 20, 30 years, this is the timescale. And when, again, when you step back and say, well, where are we, you know, we only have eight years of run rate emissions now before we

hit 1.5 degrees. So, you know, we really do need to, we need much higher carbon prices. We need a lot more decarbonization quickly across the globe. And then eventually we need to pull it out at huge scale. We really do. So it's all going to happen, but I think, I think he is right. This is probably a 50, 75 year, you know, massive undertaking. And what, how does that work? Do you know how that works? So there's tons of pipeline and you just run this dirty air through there and it captures it. So, so there's, there's several companies that have direct air capture technology. It's based on an amine chemical that reacts with the CO2. So you blow air at high speed over this surface.

It captures the CO2, but CO2 is very dilute in the atmosphere. So it takes energy. So you're consuming energy. What's the source of that fan? If you're burning coal to generate that electricity, you can imagine, right? So you want to power these things with renewable energy, solar and wind. So there's no carbon footprint. You capture the CO2. You then need to typically heat up that membrane to release the CO2. So again, there's more energy usage. And then once you've captured it, you liquefy the CO2, you pipe it and you inject it deep underground where it will be, can be permanently stored. So that whole process, you know,

Turned into oil, gasoline and 7 projects that are underway all around the world. There's a magazine called Carbon Capture and Storage, which, you know, talks about all these developments in this technology. And those costs will come down from $600 a ton to $500, $400, $300 eventually over time. And that's what we need. Yeah. It's like, I think of ethanol, right? And all the, it like takes more energy to make ethanol than it saves.

So there seems like a bit of that to it of like, if we're just using this carbon power to scrub it, it's not worthwhile. And just popped in my head, I don't know, we're getting into physics here, but all these, what'd you say? 150 million tons a day? That's current emissions on the planet yeah about

40 gigatons uh per year so where does that go like we're supposed to be weighing us down right it's like in the atmosphere there's extra weight on all the atmosphere year after year yeah it's it's um the the book i would really recommend i've now read 33 books on on climate change and as i said over 200 academic papers, but there's a recent book that I think is excellent. It's called Breaking Boundaries. And this book Breaking Boundaries by it's by a Swedish scientist, Johan Rockström. And it's a really excellent book, because not only does it talk about climate change, but more broadly about how we as a species are interacting with the planet.

And when there was only a billion people in the world, nature was basically endless. So we would take from nature, ingest that into the economy, and then emit the waste, and it didn't affect anything. Now we're 7.8 billion. So the amount we're sucking in is huge, and the amount of waste, and that's accumulating, and now it's beginning to really impact.

And one of those waste products, of course, is CO2, but by no means is it the only waste product. So that, that book is, I think it's really frames it nicely. And the other thing I really like about it, it's all based on, you know, very firm science, but it talks about these these sleeping giants And these are the carbon feedback mechanisms. Coming back to your point, Jeff, where does the carbon go? Today, most of the carbon we emit is absorbed by the oceans. Then it's absorbed by our forests.

And the remaining that is not absorbed ends up in the atmosphere. And of course, that's where the problem is. It ends up in the atmosphere. We know what carbon dioxide does. It traps heat. So we're wrapping the world in this duvet and it's just heating up and heating up and that's causing, you know, drought, weather changes, storms, all kinds of nasties. So, but, but those two sinks, the carbon sinks, the forests and the ocean, the ocean, the carbonic acid buildup from absorbing all that CO2 is increasing the acidity and the future absorption rate of the ocean is now quite diminished. So that

sink is going away. The forest, I don't have to tell you what's happening there. We've devastated the forest. So the ability for forest to uptake is also hugely diminished. So more of what we emit ends up there that exacerbates temperature and all the negative, uh, negative impacts of climate change. So, um, that's, that's sort of what's happening. Um, and what, you know, on the, on the science side. Yeah. And what would you say? I'm sure anyone who is a climate denier has tuned us out long ago on this one,

but if there's any listening or if I'm out at a party and talking to someone who's like, ah, that's all hogwash, right? Like, do you have any, a quick, a quick way to change their mind? I'm very evidence-based and very scientific. And I like, that's why I like reading peer reviewed academic research because the whole process you, you put out something and a whole bunch of really smart people read it. And if you're full of crap, they're going to call you out on it, right? So and then this is the process of how we advance

our society. But but very, very quickly, there's one, I think key, there's two key questions on climate change for deniers. The key first question is, the planet has always changed in temperature, if you look back at the record temperature and co2 has always moved up and down and actually we understand why that has happened and this is prior to our species being on the planet so we've only been around these last 250 000 years prior to that you get these changes what caused them we we understand that pretty well now something called milankovitch cycles which is changes and perturbations in the Earth's orbit, change the amount of solar radiation and that massively changed the temperature

and CO2 on the planet. And quite interestingly, when the CO2 levels changed up and down, that had nothing to do with us. That was all generated from the planet itself. If you then look at what's happened. How are the temp and CO2 tied? So I understand that orbit wobbles and we get higher temps, but how does that cause more CO2? Yeah, let me just show you the, if we look back at the cycle. So we have only been around as a species around 300,000 years here.

And you can see clearly the historical cycle of CO2 and temperature on the planet. So this is normally initiated by one of the three changes in the orbit or the tilt of the axis of the planet. That normally triggers an increase in solar radiation once that temperature goes up then the natural biosphere starts to emit co2 how does that happen the biosphere like permafrost an organic matter that is locked up in that permafrost as that melts it begins to emit methane methane has 28 times the potency of CO2 as a warming gas, and you get these cycles. Now, these cycles, historically, you can see here, are on the order of about 100,000 years. So once the carbon hits a peak, you get natural carbon capture by the planet, begins to capture

it when it hits a high concentration, and the equilibrium comes back into line. What happened, though, as human beings in the last 10,000 years, we had the Holocene period, very stable temperature. And only that stable temperature allowed us to develop society, agrarian society, and eventually the Industrial Revolution. And really, it's the last hundred years where this CO2 has spiked. So the question, there's two questions for climate deniers. The first is, is this CO2 spike because of us human beings, or is it just another one like this one back here? How do we know? And the answer to that is the following. If you sample the CO2 that is in our atmosphere today, what you find when you carbon date that CO2 is it is millions of years old. And the only way it could have gotten into

the atmosphere in the last hundred years is if we dug it up in coal, oil, and gas, we burned it and we emitted it. It's a lock argument. There is, there's no, to me, this is judge, jury, and executioner on our human beings, the cause, because you can't argue with that, that particular piece of science. What could be released like the permafrost argument, right? But not in that scale. But, but the permafrost, that's the whole point point the organic matter of permafrost is not old oh okay that's that's stuff that died in the last hundred thousand years that is that is decomposing this is millions of year old carbon that has been underground in oil deposits from millions of years ago that's the that's where fossil fuels emanate from. So that really locks down the argument of

the carbon that's in the atmosphere. Where did it come from? Came from us digging the stuff up and burning it and emitting it. The second part, I think, from a climate change point of view is, you know, is this likely to cause a real big problem? And, you know, I think when I look at this graph and you see when you have more CO2, it traps heat. So you get an increase in temperature, right? It makes, that makes perfect sense. And when you look at where it is now, and in such a short period of time, you know, this took this, these typically take like 50, 80,000 years. we have done this in 200 years um and you think about the implications for our children it's it's not a it's not a it's not a pleasant thought and in that book which is based firmly on the science it um he really explains the additional sleeping giants like

the arctic sea ice that sea ice is white. It reflects light. Now it's melted. That light hits the ocean or the ground. It generates heat. And we get this feedback mechanism where it just gets hotter and hotter and hotter. And I say tipping point. I like, uh, I don't know if you've ever seen Arnold Schwarzenegger's video. I don't remember if it was when he was governor after, and he's like, Hey, if you don't believe this, go turn on your car, sit in your garage and breathe in that. Right. He's like, that's a bigger scale, but like, what, what are you talking about? You wouldn't do that, but you're like, no, this stuff isn't, isn't hurting us. So we'll wrap up here. New this season.

We're asking our guests to share their hottest take. So what's your hottest take right now? Either something nobody else in your space agrees with or nobody sees coming? Yeah, I would say I'm hopeful about the progress we're making on climate change. We're really far behind on it, on the topic. But as I look at that global map and I see the number of countries that are embracing putting a price on emissions, it makes me think we have a chance of addressing it. And again, addressing it in a market-based way, which has got to be the most effective way. So I would leave the audience with a message of hope. I think the 1.5 degree aspirational threshold,

we've already warmed the planet by between 1.1 and 1.2. We aren't going to make it. We're not going to stay under that temperature. And that's, I feel very sad in saying that, but I think that's, that's the honest truth. And therefore, you know, once we go back beyond 1.5, we're triggering more of those feedbacks and, ands and that increases the urgency. Game over or what's your thoughts on that? Like we'll just find new technologies, new ways to deal with it? Yeah, I don't think it'll ever be game over because we're very ingenious as a species of finding ways out of things. But the problem is going to be the cost of dealing with what's coming down the pipe. The cost is going to be huge, both in economic cost to our society, but also in moral and ethical cost,

because the central band of the planet is now warming so fast that water scarcity, crop depletion, those people that live in that band around the center of the planet, they're going to migrate. And the UN estimates we could have a billion migrants, climate change refugees in the next 20 years. Where are these people going to go? I mean, that could cause wars, conflicts. So there's a huge cost to not dealing with the problem my uh my son is uh 12 seventh grade he does debate contests and their topic this year is uh water infrastructure and fracking but to win the debate usually their last thing is like and then that would cause war and everyone on the planet dies right like make an argument make your argument in the end is but but these are like real things

right these people need somewhere to go. Where are you going to put them? Yeah. Well, and we're going, we're going to 10 billion. We're at 7.8 billion, but we're going to be peaking at 10 billion by 2050. And, you know, when you think every person has some kind of carbon footprint, you know, it, it, it becomes an equation that we're trying to solve and we really need to get moving on it. What, what if we just killed all the cows instead? We had a meat guy on here, like as GDP, as everyone's meat consumption, cow consumption goes up huge as they get more wealthy.

Right. That would kill all the methane or reduce that methane. But all the meat on the table, right? I mean, it's a multifaceted approach, but, but, you meat on the table right i mean um it's a multi-faceted approach but but you know the amount of sort of um the the reduction in meat consumption in the western world of course is is quite dramatic been quite dramatic in the last couple of years but at the same time the developing world india and china and other countries they want to eat more meat as they go up they get a higher gdp per. So it's about an educational job. It's really, it's the whole thing is a very difficult issue to solve. Yeah. That global GDP to meat consumption curve is almost exactly spot on. It's crazy. Yeah. Excellent. Well, I really enjoyed it.

As I mentioned, you know, obviously if people are interested, we have a lot of educational materials on climate change, on carbon pricing, on carbon markets and how they work. There are short videos. There's a webinar. There is a lot of research materials on our website in our research library, www.carbon-cap.com. And I'd encourage people to go to the website. The CFA case study on carbon as an asset class is also available. Thanks so much, Mike. It's been fun. Thank you very much. You've been listening to The Derivative. Links from this episode will be in the episode

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