Climate Change Investor Newsletter #6
July 2021
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What I’m Reading: What the Heck are Blue Carbon Offsets?
I went down quite a deep rabbit hole this month reading about carbon offsets generally, and “blue carbon” specifically.
According to NOAA: “Blue carbon is simply the term for carbon captured by the world’s ocean and coastal ecosystems …our oceans and coasts provide a natural way of reducing the impact of greenhouse gases on our atmosphere, through sequestration (or taking in) of this carbon.”
Plants absorb carbon into their root systems in the process of photosynthesis, emitting only oxygen as a byproduct. It turns out that sea plants — particularly kelps and mangrove swamps — are particularly efficient at this process, perhaps as much as 10 times more efficient than terrestrial tropical forests. Land-based forests also risk releasing carbon back into the atmosphere in forest fires, which is not a concern for kelp “forests.” Sequestration of carbon this way also has the salutary effect of reducing ocean acidification.
Carbon (offset) credits — which are on their way to becoming a mainstream traded commodity (although the United States has been slow to adopt them at a national level) — are produced via projects like reforestation or afforestation on land, making “carbon sinks.” That is, forests absorb atmospheric carbon.
Organizations which monitor and certify carbon credits, such as the Washington, D.C., based Verra, are increasingly looking at certifying blue carbon projects. The catch is that it’s hard to measure how much carbon is sequestered and how long it will remain there, which makes it difficult to assign a value to the credit. However, this problem has been cracked for forestation and other sequestration projects (including the above-the-water part of mangrove swamps), and several blue carbon pilot projects are already underway.
Unfortunately, these same ecosystems are under serious threat of loss through coastal development and shrimp farming, among other things. But that represents a business opportunity, too — once Verra and other credit-certifiers crack the code on how to calculate this, restoration of kelp “meadows” and mangrove swamps could be a source of valuable carbon credits.
What I’m Reading: Reducing Cow Burps with Seaweed (yes, really)
As part of my deep dive into blue carbon, I discovered to my surprise that there is a company which farms a particular variety of seaweed/algae that reduces methane emissions from cows.
Methane is dozens of times more damaging to the atmosphere than carbon dioxide, and cow burps (and to a lesser extent, farts flatulence) could be responsible for up to 14% of all greenhouse gas emissions annually, so it’s far from a laughing matter.
A company in Australia, Future Feed, holds a patent on a process using Asparagopsis taxiformis and Asaparagopsis armata to reduce methane production in the digestive tracts of ruminants. A very small amount (<1%) of dried seaweed is introduced into the cow’s regular diet, and it can reduce methane production by at least 65% and as much as 95%, according to university research from both the United States & Australia.
A few different companies are working on commercializing A. taxiformis and A. armata at scale. One is venture-backed Blue Ocean Barns, based in Hawaii, which has financial support from Starbucks, among others. Another Australian company growing it is Sea Forest, which is already in trials with farmers.
And in case you like a good steak from time to time and are wondering, studies so far say that feeding this type of seaweed to cattle doesn’t alter the taste of the meat.
What I’m Reading: Agrivoltaic Farming
I like to think that I’ve got a pretty good vocabulary, so when I was skimming over a solar power news site recently, the word ‘agrivoltaic’ stopped me in my tracks.
Agrivoltaics are solar farms that also grow plants. That led me to discover a government agency I’d also never heard of — the National Renewable Energy Laboratory, located in Golden, Colorado, with over 2,500 employees.
One of the projects NREL is overseeing is dual-use of land for both solar and agricultural functions, and according to SolarPowerWorldOnline, more than 30 projects across the United States are engaged in agrivoltaic research programs. Typically these projects tend to focus on one type of agricultural use, such as native vegetation, pollinator attractors, pasture grass for animal grazing, or horticulture.
One site, though (also in Colorado), encompasses all four types of agrivoltaic farming. “Jack’s Solar Garden” is reportedly the largest such site in the United States, and produces 1.2MW of solar power, enough to power at least 400 local homes.
The main challenges agrivoltaics face compared to ‘regular’ solar farms are that the panels need to be taller and at varying heights in order to enable sun to reach the plants, the need to avoid compacting the soil around them, and the addition of safety measures to protect civilians and animals that may be active around the panels.
I’m sure we’ll be hearing the word ‘agrivoltaic’ more often in years to come.
Chart of the Month
What I’m Reading: Phytoplankton & Carbon Removal
I have always been impressed by the entrepreneurial spirit of participants in startup incubators like YCombinator, but I wasn’t aware until recently that YCombinator was now also sponsoring “X-Prize” type challenges to entrepreneurs to come up with solutions to climate change.
One such project revolves around challenging entrepreneurs to engineer phytoplankton that can be deployed at scale. Phytoplankton “eat” carbon dioxide (that is, they take it out of the atmosphere in photosynthesis) and could precipitate (excrete) a bioplastic substance that can be used as a carbon sequestration medium and sunk to the bottom of the ocean, “locking” the carbon on the sea floor. It’s an idea that was originally floated (pun regrettably intended) in the 1980s but it has gained interest in recent years.
Of course, the reason why this is a YCombinator challenge is that it would require genetically engineering the phytoplankton to adopt certain behaviors that would sequester carbon on a vast scale. And the phytoplankton require nutrients in the sea that would need to be put there with large bioreactors towed behind (probably) thousands of boats. It’s not quite a moon shot, but it would still require genetic modification that hasn’t been developed for a project with ambitions this expansive.
Even if it can be engineered, it’s far from a sure fix for climate change. One study suggested that the plankton may be smaller (and less effective at sequestration) than previously believed. Additionally, scientists will need to consider potential unintended consequences of deliberately engineering a huge oceanic phytoplankton bloom.
Still, it’s a tantalizing thought.
What I’m Thinking About: Direct Air Capture of CO2
A lot of climate change remediation efforts focus on reducing or eliminating emissions, e.g. using electricity instead of fossil fuels, but an increasing number of solutions are centered on removing carbon dioxide from the atmosphere.
Carbon is captured either through pumping air through a chemical solution or by passing it through a heated “sorbent” filter (i.e. a filter which captures molecules, I had to look at that one up).
Some approaches to DAC involve pumping the carbon-infused liquid into geologic formations (e.g. retired/empty oil/gas wells) where the carbon can bind with rock and remain locked underground, while others result in the creation of low-carbon-intensity synthetic fuels.
One company taking both approaches, Carbon Engineering, acknowledges that the synthetic fuel would by definition return some carbon to the atmosphere, but argues that since its DAC facilities (currently in pilot status in British Columbia) take CO2 back in, it results in a net-zero carbon release cycle. The synthetic fuel process avoids using fossil fuels entirely.
The International Energy Agency estimates there are about 15 DAC plants worldwide, most of which are still small scale. But Carbon Engineering has an agreement with Occidental Petroleum to build a large-scale plant in the near future. E-commerce giant Shopify* (SHOP) has agreed to use Carbon Engineering for its carbon offset credits, making it the largest public company to do so.
There is even a company, Co2Rail, working on carbon capture trains.
*N.B. Shopify’s carbon removal plan is worth a read (PDF)
What I’m Reading: Making “Green Steel”
Steel, a vital part of our everyday lives, is also a leading cause of greenhouse gases. In fact, iron & steel manufacturing happens to be the second-most-polluting industry after energy, accounting for more GHG emissions than India, up to 9% of all fossil fuel emissions worldwide.
As with energy, the steel industry anticipates that it will soon come under governmental pressures to reduce its carbon footprint. Steel and iron are currently produced using blast furnaces powered by pulverized coal injection, but steel can also be produced using electric arc furnaces, a technology that dates from the 19th century. A steel plant using renewably produced electricity for its arc furnace(s) would theoretically be carbon neutral.
Several large steelmakers have already announced plans to reduce or eliminate their carbon footprints. Arcelor Mittal (MT), one of the biggest, announced plans in March to produce “green steel” which would come with certificates attesting to its carbon neutrality.
And Germany’s largest steel producer, Thyssenkrup (TKA.DE), announced plans last year to produce “carbon neutral” steel by 2025 using hydrogen as a fuel source. It cautioned, however, that its ability to use this process depended on significant developments in the hydrogen supply infrastructure.
Stocks I’m Looking at:
Carbon Streaming Corp. (MXVDF)
Precious metals streaming is one alternative approach to investing in mining companies. The “streamer” buys the metal up front in exchange for an agreed price and provides financing to the miner. Carbon Streaming Corporation is a startup in Canada trying to do the same thing for the voluntary and compliance carbon markets. It’s got a management team that is experienced in the metal streaming space and I’m going to keep my eye on the company, but decided to hold off buying shares for now because it has literally no track record (it has only been operating since March).
AmmPower (AMMPF)
Another very small, early-stage company, AmmPower has business lines in the production of “green ammonia” and mining of lithium. As I discussed in the June newsletter, ammonia can be broken down (or “cracked”) into hydrogen for use in fuel cells, but ammonia has the advantage of being more energy-dense and easier to handle & transport than hydrogen. The management team just brought on the former CTO of Ford as a senior advisor, and they completed a stock-only deal to buy a hydrogen producer. Since the stock has come off its mid-June highs I’m considering a small position.
Decarbonisation Plus Acquisition Corp. II (DCRN)
Another SPAC, DCRN, has agreed to a business combination with Tritium, an Australian maker of fast charging stations. Their customers include Chargepoint, the #1 vendor in the space, which is testament to their product. The stock price in late June was below the SPAC offering price around $10, offering a form of insurance. The deal hasn’t officially been completed, however, and I need to do more research into the charging space. Plus, we already own another promising SPAC in the charging space, TPGY.
Solaris Resources (SLSSF)
Readers of this newsletter know how long-term bullish I am on copper, but so far I have stuck with the industry leader, Freeport MacMoRan (FCX). In late June, however, I came across Solaris Resources, which has a number of compelling stories in its favor. First off, its biggest mine is in southeastern Ecuador — it’s at low altitude, near a water source, and the copper is relatively close to the surface (many copper mines are in high-altitude locations far from water sources). Additionally, Ecuador recently elected a right-leaning government that will be friendly to the extractive industries (in contrast to, say, Peru, another major copper producer, which has gone the other direction). The copper ore at the Ecuador mine is also high quality. I need to do a bit more research before I pull the trigger on this stock, but it’s tempting.
What I Bought in June
Rio Tinto (RIO)
Rio Tinto is the second-largest mining company in the world, and has shifted its operations in the direction of renewable energy-focused resources, including copper, aluminum, nickel, lithium, and cobalt, all of which are must-haves to produce electric vehicles, windmills, solar panels, and batteries. They have also pledged recently to reduce emissions in aluminum production. The stock pays a 5.46% dividend yield, and trades at a respectable 14 trailing P/E ratio. Analyst consensus price target is >$100 (it currently trades at around $85) and it generated nearly 38% TTM operating margin.
I am Long…
CWEN, SEDG, TELL, MP, TPGY, TTCF, ABXXF, SLV, GLD, BEP, FCX, AEM, ESM, CCJ, DNN, ENPH, RUN, VWDRY, RIO.
Conclusion
What do mangrove swamps, algae, agrivoltaic farms, carbon-capturing trains, and arc furnaces have in common? They are all potential (or currently operating) businesses that could help remediate climate change, and most if not all will be in increasing demand in the very near future. To the extent that governments and businesses are going to attach greater urgency to climate-friendly technologies and industrial techniques in years to come, these are all areas that will create value and reward investors. Some will become public companies, others will stay private, some will undoubtedly fail, but the point is that barring some tectonic political shift, the winds are at this trend’s back.
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About
The Climate Change Investor is published by Marc C. Johnson, an investor with over 25 years of experience investing in public and private markets. An avid consumer of financial research and new technologies, he believes that remediating climate change is both a moral imperative and an incredible business opportunity.
Disclaimer
Marc Johnson and the Climate Change Investor Newsletter are not registered investment, legal, or tax advisors, nor are they broker/dealers. No content contained herein should be considered financial advice. All opinions are based on research by the publisher of the newsletter and are intended as educational and entertainment material only. Although best efforts are made to ensure the information is accurate and current, occasional unintended errors and/or misprints may occur. Conflicts may be hidden or obscured. Neither Marc Johnson nor the Climate Change Investor Newsletter have received outside compensation for mentions of any stock, company, or project herein unless otherwise noted. Do your own research. Consult a financial professional on all investment decisions. © 2021 Marc Johnson
