The Evolving Carbon Markets

We want to describe how we understand the evolution of carbon markets.

Governments and industry will not act seriously on climate until compelled to do so. As an example, few governments are banning fossil fuel exploration and project development, even though we know that burning all the fossil fuels in production and reserves will bring us to 3.5°C warming. In fact, there's an exploration spree at the moment.

Voluntary emission reductions have not been effective in decreasing atmospheric carbon (CO2 + CH4). Human suffering has not made a compelling argument: the moral argument has led to symbolic, but ineffective action. For instance, Hurricane Dorian destroyed a significant portion of the Bahamas, but no one noticed or cared. This begs the question: what would be a compelling reason to take climate change seriously?

We argue that serious impairment of international trade due to climate events is the only issue that will compel governments to act decisively. International trade is the only common interest that will bring adversaries - China, USA, India and others - to the table. These adversaries, who seek economic dominance, will not willingly reduce their emissions if it means curtailing their economic activity.

Just look at the graphic below showing the deep interconnection of fertilizer suppliers and users. Disrupt one significant part of it, possibly due to climate, and the whole is disrupted.

What climate event would be so severe as to impair international trade? We can only speculate. However, such an event was briefly experienced by one of us. In November 2021,?an atmospheric river dumped so much water over Vancouver that it flooded extensive parts of the region. For two weeks, this cut off movement of goods from the Port of Vancouver, which represents 20% of all the goods entering Canada. Extend this for a couple more weeks and the impact on the national economy - and possibly beyond, such as from delayed grain shipments - will be severe.

We know that impactful climate events are increasingly frequent and potent. Hurricane Katrina was massive, but Dorian was worse. Floods are greater, heat waves are hotter and last longer. Thailand is presently going through a heat wave, which is causing power outages and impacting the economy.

It is not far-fetched to imagine that a moment will come - a perfect storm - when 2-3 extreme events occur coincidentally and severely impair international trade. The probability increases as the frequency and intensity of extreme climate events increases. We predict that it will happen before 2030, but are open to persuasion.

One thing we can confidently predict is that the world will be caught by surprise when it happens and this will make for panicked decisions. It will be understood that failure to act means that the next time will be even worse. However, when the world agrees to act decisively, the spigots of money will be wide open, akin to what happened during the 2008-2009 banking meltdown. We expect this will include government support for CDR, among other measures.

If valid, there are a few consequences falling out from this argument.

1. A mechanism like Article 6 from the Paris Agreement will be enacted, but with binding emission limits. While some will argue for market mechanisms and other means to control carbon emissions, we believe that their regulation will be required, comparable to the regulatory limits on contaminant discharges. The Montreal Protocol that implemented a ban on CFCs may provide a model.
2. The constant delay in decisive action means that industry will be behind in it mitigation of carbon emissions. They won't be able to meet strict emission limits and will require carbon offsets during this transition. We expect that this will last 15 years or so. That's Blue Skies Minerals' first market.
3. The existing American voluntary market is a prelude to a global compliance carbon market. Eventually, every independent market will be rolled into this global carbon market.
4. Offsets will need to be verifiable and equivalent internationally. A ton of carbon removed in Stockholm must be demonstrably equal to a ton of carbon removed in Nairobi, Guangdong, Lima or Austin Texas. This will put an onus on universally agreeable Measurement, Reporting, and Verification (MRV) of Carbon Credits. There's no other way this can work.
5. There's a requirement for policing, and an agreement will include severe punishment for cheaters because the consequences of non-compliance are too dire for the global economy. Everyone will be watching (and monitoring) everyone else, especially adversaries. For them, MRV takes on a national and economic significance.
6. We will overshoot. This means that we will need to draw down atmospheric carbon long after we enter the period of low fossil fuels demand. That's Blue Skies Minerals' second market. It'll be operated by governments, essentially following a model of sewage treatment.

We have between now and then to get our solutions ready.