Daniels Trading is nonpartisan and does not endorse political candidates. The purpose of this blog post is to provide objective, unbiased information on what we believe could happen in the markets. The content is not intended to convey a preference or state a position in support of any candidate, and the sentiments expressed do not necessarily reflect the viewpoints of our team members.
Any CME contracts considered to be Green Energy are likely exotics (e.g., low volumes, limited public interest). However, we can start with European-style carbon futures and work backward.
The 2020 election of Democratic candidate Joe Biden to the U.S. presidency marked the dawn of a new era in American energy. Gone were the deregulation, growth-oriented policies of the Trump administration; in their place was an economic template rooted in sustainability and the development of environmentally friendly energy reserves.
When Joe Biden was sworn in as president in January 2021, many participants in the global derivatives markets had already begun pricing in a mass exodus from fossil fuels. Given Biden’s stated goal of a “net-zero” U.S. carbon economy by 2050, the market’s focus shifted immediately to greenhouse gas emissions, technology, and environmental protections.
As a result, derivatives such as carbon offsets and other green energy futures gained importance. Let’s take a look at a few of these products and at how the Biden environmental plan may impact the markets.
ICE Environmental Markets
For decades, the Intercontinental Exchange (ICE) has been the tip of the green energy futures spear. As the global movement for climate stewardship gained steam, ICE became a prominent player in the provision of environmental derivative products. ICE’s offerings are classified as carbon emissions or green attributes.
ICE’s carbon markets are based on the concept of cap and trade. According to ICE, a cap and trade program is “a market-based mechanism that governments or regulatory bodies use to reduce carbon dioxide and other greenhouse gases from entering the atmosphere.”
Under cap and trade, limits (caps) are set on the amount of carbon dioxide that may be emitted according to geography and industrial sector. If entities cannot adhere to these limits, they must acquire (trade) additional allowances. The largest cap and trade system in the world is the European Union Emissions Trading System (EU ETS), which accounts for 45 percent of EU greenhouse emissions.
ICE’s carbon markets are broken into two divisions: allowances and offsets. A carbon allowance, or carbon credit, is a government-issued permit that allows an entity to emit a certain amount of carbon dioxide into the atmosphere. They may be traded between entities and are among the most well-known of all green energy futures. A carbon offset is a certificate awarded for adopted initiatives that reduce emissions. Offsets are used by regulated entities to meet cap guidelines.
ICE defines a green attribute as “the cumulative environmental benefits of a specific commodity.” Accordingly, ICE lists green attribute contracts as either renewable fuels or renewable electricity. Renewable fuels are the most diverse asset class, featuring biodiesel and ethanol contracts. ICE’s renewable electricity listings are based on energy credits and certificates for certain states (e.g., Connecticut, Maryland, and New Jersey).
In his first 100 days, Biden signed a series of executive orders that reinforced the environmental promises from 2020’s campaign trail. Permits for the Keystone XL pipeline were withdrawn, and the issuance of new oil and gas leases on federal lands was halted. Both items contributed to angst in the energy markets and Q1 2021 rallies in WTI crude oil, Henry Hub natural gas, and refined fuels.
As it pertains to green energy futures, the pro-environmental policies of the Biden administration are likely to do two things: expand listings and boost valuations. On the expansion front, the Chicago Mercantile Exchange (CME) launched the CBL Global Emissions Offset futures contract (GEO) on March 1, 2021. The offering is designed to provide physical delivery of regulated carbon offset credits to interested parties. Although the trade of carbon emission and green attribute contracts is largely limited to industrial and institutional participants, the CME’s launch of the GEO may be the first step toward the sector going mainstream.
On the valuation front, increased carbon emission regulation is arguably a catalyst for bullish green energy futures performance. If stringent standards come to pass and cap and trade programs expanded, the pricing of ICE carbon allowances and offsets will likely move much higher, but the future of cap and trade in the United States remains unclear.
Want to Learn More About Green Energy Futures?
Carbon allowances? Green attributes? Cap and trade? The green energy revolution has a lingo all its own. To learn more about the opportunities of trading green energy futures, contact the market pros at Daniels Trading. With more than two decades in the market, the Daniels Trading team has the experience and expertise to navigate the rapidly changing energy dynamic.