Potential size of the greenhouse gas markets

[Note: The abbreviation "GHG" represents "Greenhouse Gas".]

     A couple of months ago, I went to a speech on environmental law. One of the speakers commented half-jokingly that just a few years ago environmental lawyers had pretty low popularity ratings. The presence of environmental lawyers in a transaction normally was considered a sign that troubles were brewing ahead. No more, the speaker said with a grin. These days, environmental lawyers are like rock stars, attracting admiring attentions.

     Because of the rising public awareness of the risks associated with the alarming trends in global climate changes, investments in the GHG markets have surged recently, in tandem with the rising popularity of environmental lawyers. It was not too long ago, however, when "green investment" (which includes "GHG investment") was often met with skeptical eyes. The markets then were simply too small and the returns too low. Of course, concerns over global warming and the market-based framework set forth under Kyoto Treaty have changed the calculus. But the question remains whether this segment of the green markets can grow large enough to sustain sufficiently high returns. Other related questions also linger around for investors: Is this market already too crowded? Is it too late to enter? How long can investments continue to generate sufficient returns?

     Answers to these questions likely depend on two key factors: The amount of GHG emissions we will have to (or want to, or be able to) reduce, and the market price of GHG. For example, if we manage to cut 100 billion tons of GHG emissions within the next 50 years, and if the price of a ton of GHG is worth $1 throughout the period (an arbitrary assumption), then we have a potential demand of $100 billion. Our economy would have to invest that much capital within the period to invent new technologies, systems, or policies, or to implement existing technologies, systems, or policies.

     To get a more realistic estimate of the necessary amount of GHG emission cuts, I turned to the report published by the Intergovernmental Panel on Climate Change (IPCC). Recently, the panel published its "Climate Change 2007" final report. The report included estimates of the amount of GHG emissions that we would need to cut within the next century in order to stabilize the amount of atmospheric GHG at a sufficiently low level. According to the report, we need to cut in the order of ~100 billion tons of GHG between 2000 and 2030, and over 2 trillion tons of GHG between 2000 and 2100. (See table below.) Moreover, the panel estimated that the price of GHG could fall within the range of $5-$80 per ton. (Currently, carbon prices in Europe is ~$32. See here.) So, these numbers project the size of the GHG market in the order of ~$500 billion to ~ $8 trillion by 2030, and to grow 10- to 20-fold by the end of the century.

     To put these numbers in perspective, the IPCC report also estimated that energy infrastructure investments could total over $20 trillion by 2030. That means, the GHG market can account for ~3%-40% of total energy infrastructure investments before 2030, and the percentage will likely increase many fold by 2100.

     $500 billion to $8 trillion of demand during the next 30 years is sizable. And the demands will likely surge rapidly before the end of the century, if we manage to pull our acts together and the computer models are correct. These numbers actually already need to be increased today, because the IPCC projections assumed that the growth rate of GHG emission would begin to abate beginning year 2000. Numbers in the IPCC report, however, also indicated that between 2000 and 2004, the annual GHG emission growth rate did not decline at all. The growth rate actually nearly doubled that in the previous decade. As a result, the GHG emission reductions will have to accelerate relative to the IPCC projections in order to reach stabilization as scheduled. That will increase the size of the GHG market.

     Of course, these estimated ranges of GHG market size depend on the accuracy of the extremely complicated computer models. They also assumed that we human beings could achieve the scale of GHG emission reductions projected by these models. At this point, however, the observed climate changes seem to have outpaced most previous computer models. Whether or not we human beings can manage to achieve the projected GHG emission reduction goals, on the other hand, is a big question mark.

     Human efforts or hypes alone will not be enough to achieve the GHG emission reduction goals. We will need to figure out ways to effectively reduce the net GHG emissions, counting emissions through every node along the chain of interactions. That's a monstrously difficult undertaking. We have made significant efforts since Kyoto. For example, last year alone we saw member nations of the Kyoto Treaty reached an agreement to begin negotiating a new protocol to succeed Kyoto; Australia ratified the Kyoto Treaty; and, even US managed to enact a new energy bill. Despite these efforts, global GHG emissions have continued to accelerate in recent years. Whether we human beings can manage to stabilize climate changes remains the greatest uncertainty in estimating the potential size of the GHG markets.

     On a final note, investment funds controlled by governments have grown rapidly in size recently. It has been projected that these funds (called "sovereign wealth funds") can exceed $10 trillion by 2015. (See here.) That's more than the money needed to reach the GHG emission reduction target for year 2030 set by IPCC. Hopefully, managers of these sovereign wealth funds will increase their investments in this sector. That will be a win-win situation for the Earth and humanity!

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