ESG Insights: Solutions for creating and marketing low carbon commodities

In this article, we discuss the emerging low carbon market, focussing on the market risks, and the four key elements necessary for honest market success.

The global push to reduce carbon emissions calls for creative solutions; one of which is the emerging market for low carbon commodities. Low carbon commodities are those offering a lower carbon footprint per unit than the “business-as-usual” form of the commodity.

While low carbon commodities are marketed under many different names, the term “low carbon” will be used for purposes of this article.

The three low carbon commodities emerging on the market now are:

1) low carbon natural gas (as gas, compressed natural gas (CNG) or liquefied natural gas (LNG)),

2) low carbon hydrogen, and

3) low carbon ammonia.

Similarity to Renewable Energy Market

“Green” electricity generated by renewable resources such as solar, wind, and geothermal is nothing new, having been available for 20 years or more in some markets. Green electricity typically has a simple definition: it is generated using only renewable resources with no carbon emissions.[1]

The low carbon commodity markets emerging now are more complex and require more effort to police. These emerging commodities cannot be produced with zero carbon emissions, but they can be produced with significantly lower carbon emissions by going beyond “business as usual” materials and processes.

An Emerging Market: Low Carbon

Different levels of low carbon and “business-as-usual” commodities exist on a continuum of how much carbon is released from the production of each unit. Low carbon commodities may be produced using renewable energy, using low carbon feedstock, aggressive methane leak reduction practices, or a combination of all the above. This means there may be multiple verified metrics for the commodity to qualify as low carbon.

Low Carbon Market Risks

The big questions for low carbon commodities are: how do you guarantee to the buyer that the commodity is truly low carbon and therefore worth the premium price? And, how do you get your low carbon product to your buyer without expending more carbon to ship it a long distance?

The answer to both questions is to recycle, with enhancements, the programs that support the existing renewable energy market. These existing programs:

• Design and police an exacting qualification protocol to ensure carbon reductions are made during production; and
• Establish a robust banking and trading system for a severable low carbon credit to substitute for shipping product long distances.

Developing qualification protocols for processes as complex and varied as carbon capture and sequestration and methane leak detection across multiple supply chains is complex. The protocols will require the application of four key elements: measurement, independent validation, transparency, and consistency. The same elements are key to a successful credit banking and trading system as well.

Measurement

Quality data is the basis of any good system, and of course, an elegant protocol cannot make up for estimated or infrequently monitored data. The metrics selected to demonstrate low carbon status must be measurable, and should be measured with sufficient frequency to provide confidence that quality does not vary significantly between measurements. Application of automatic data collection and recording systems provides greater confidence than manual data management.

Independent Verification

Quality data only has value if it is reviewed and confirmed by a reputable source who does not have “skin in the game”. In the absence of the rules and regulations, and subsequent governmental enforcement that supports the veracity of other types of emissions data, verification of low carbon commodity data by an informed and independent third party can provide the same degree of confidence in veracity. Regarding the data collection processes themselves, verification by recognised, independent, experts in the field will provide confidence in their appropriateness for purpose.

Transparency

Innovative processes inherently involve trade secrets. If everything about a low carbon commodity is published publicly, others will be able to replicate the process without the investment made in research and development made by the originator. Nevertheless, transparency is still key in an extra-regulatory qualification protocol to establish confidence in its effectiveness and veracity. While the details of the processes and measurement methods may not be published, the certification of them by third party verifiers and the process by which verification was conducted can be published.

Consistency

It should go without saying that a protocol for producing a certified low carbon product must be consistent in both its application of technology, and in the level of review applied to each grade of product produced. However, consistency becomes harder to track with increasing complexity and granularity. Overall, the protocol must ensure the actual carbon reduction accomplished in each product is in line with the value assigned the “low carbon” designation. This aspect becomes particularly important when there are multiple protocols being executed by multiple participators in the market.

As of now, low carbon commodities are still in development - on the market, but in modest amounts. However, this is the stage when the best approaches are identified and become dominant, and when the market players determine how much they are willing to pay for a low carbon benefit. Now is also the stage in which severable low carbon attributes (that can be banked and traded in their own right) will start to be developed.

Keep an eye out for the next in this series, where we will continue to discuss low carbon as an important attribute of commodity marketing.

[1] Some programs acknowledge biomass as renewable, but others do not, because it is a renewable resource, but not zero carbon. Also, solar, wind and geothermal energy are not zero carbon throughout their extended life cycles, but only in terms of the act of generating power.