Some CDR Co-Benefits are like Financial Derivatives
Financial derivatives are derived from underlying assets, like stocks and bonds. For example, an “index fund” is derived from the combination of a set of underlying stocks. You can’t buy a security called the Dow Jones Industrial Average, but you can buy a derivative contract that amalgamates the performance and exposures of the DJIA.
Investors often refer to the diversification and risk reduction benefits of buying derivatives. One can combine securities that are expected to move in different directions under certain market conditions (like supermarkets vs. restaurants, or companies with foreign vs. domestic operations).
Similarly, the companies themselves that underlie a security can attempt to diversify into a “conglomerate,” entering sometimes unrelated businesses to create internal diversification (Check out the US company GE, or Alec Baldwin’s famous line from 30 Rock, “I am now the Senior Vice President of television and microwave programming”). Though conglomerates have sometimes worked, companies almost always retreat from conglomeration, with mixed success.
In Carbon Dioxide Removal (CDR), producers today are encouraged to become “conglomerates” by CDR investors and by CDR buyers. As far as I can tell, the primary reason for this encouragement is that diversification might allow the producer to survive long enough until buyers and investors eventually get around to actually buying and investing in CDR. In biochar, for example, if the market isn’t ready to buy or invest in carbon credits, you may at least be able to sell the biochar material, or generate and sell electricity, or produce monetizable industrial heat, or earn a fee for getting rid of forest residue.
To make this state of affairs more palatable to our virtuous selves, we call these side hustles “co-benefits” to the primary mission, CDR. But when you look at the ultimate disposition of carbon, it’s clear the majority is being emitted for the sake of delivering the co-benefits. Calling these enterprises “CDR-based” is at best misleading. There are significant carbon and financial costs to delivering them.
Back to financial derivatives. The purpose of a derivative is to maximize the benefits of combined assets, and minimize the penalties. Question: In a conglomerated operation like Bio Energy with Carbon Capture and Storage (BECCS), is a BECCS plant the best way to a) spend the capital required to build the plant, b) reduce the need to drill for fossil fuel, c) immediately maximize the amount of carbon durably removed from the air, d) deliver inexpensive electricity to users, e) use the electrons that enable the CCS portion of the conglomerate, or f) encourage wise land use? Taken individually, the answer is obviously no–BECCS is not the best solution for any of these things individually. But the more relevant question is, taken collectively, is BECCS the best solution to accomplish all of these things together? My answer is maybe, maybe not.
CDR portfolio managers may already think deeply about this question, but perhaps the rest of us should be doing the same. What financial or corporate derivative could be assembled to deliver all of the benefits, and as few of the enabling costs as possible, to maximize financial or social or environmental value? My guess is that it is not a conglomerated corporate mechanism. At least not with today’s available structures. We instead ought to be thinking about what combination of assets satisfy these combined ESG values the best.
And, is it fair to contextualize methodologies in the CDR framework when the majority of carbon is emitted while chasing co-benefits? I would argue the answer is no. If you emit more carbon in the production process than you store, go to market some other way. CDR is actually a co-benefit to another primary business.