If society is undervaluing the *cost* of carbon emissions, then isn't it going *long* rather than short?
That is, if the economy in general currently prices carbon emission at zero and expects that price to remain flat in the long term, but a tax on emissions will cause carbon emissions to have a negative value, then the value will go down contrary to expectations, which makes it a long position.
I understand that shorting carbon emissions (expecting the cost to go up, meaning the value goes down) would look like dumping unexploited fossil fuel assets, investing in green energy, and the like. Or maybe I'm confused and got it exactly backwards, that definitely happens sometimes.
Thanks Erik. If the price of emissions is currently zero, and your company emits 1m tons of carbon every year, and the price goes up to $50/ton, you lose $50m. That means you are short the price of carbon emissions. If you were, on the other hand, sequestering 1m tons of carbon today via direct air capture (likely out of the goodness of your heart, since you wouldn’t be getting paid that much for it on voluntary markets), and the price went up to $50/ton, you’d be long the price of carbon - you’d make $50m / year in that situation. This stuff is non-intuitive, and it’s also a case of terminology. I’m trying to adopt what I think finance will do, but it could be equally the opposite terminology and it’ll just be a matter of convention - just find and replace in this article, and the title will sound less catchy :)
John, you mention in note 11 that you're happy to share examples. I have some that come to mind - what are yours?
If society is undervaluing the *cost* of carbon emissions, then isn't it going *long* rather than short?
That is, if the economy in general currently prices carbon emission at zero and expects that price to remain flat in the long term, but a tax on emissions will cause carbon emissions to have a negative value, then the value will go down contrary to expectations, which makes it a long position.
I understand that shorting carbon emissions (expecting the cost to go up, meaning the value goes down) would look like dumping unexploited fossil fuel assets, investing in green energy, and the like. Or maybe I'm confused and got it exactly backwards, that definitely happens sometimes.
Btw I found my way here via https://www.newyorker.com/news/annals-of-a-warming-planet/everyone-wants-to-sell-the-last-barrel-of-oil
Thanks Erik. If the price of emissions is currently zero, and your company emits 1m tons of carbon every year, and the price goes up to $50/ton, you lose $50m. That means you are short the price of carbon emissions. If you were, on the other hand, sequestering 1m tons of carbon today via direct air capture (likely out of the goodness of your heart, since you wouldn’t be getting paid that much for it on voluntary markets), and the price went up to $50/ton, you’d be long the price of carbon - you’d make $50m / year in that situation. This stuff is non-intuitive, and it’s also a case of terminology. I’m trying to adopt what I think finance will do, but it could be equally the opposite terminology and it’ll just be a matter of convention - just find and replace in this article, and the title will sound less catchy :)
That New Yorker article is great. Thanks!