Sinking Capital into Carbon Sinks

Life on earth is based on carbon.  Carbon atoms form four bonds with other atoms, making possible numerous possibilities for complex molecules that make up plants and animals.  The more carbon the better, right!  So, why is there such a fuss about carbon in the environment? 

Carbon moves freely through our environment in a sophisticated cycle.  Twin carbon atoms or carbon dioxide cycle from land to the atmosphere to the ocean and back again as animals respire, plants grow and organic matter ultimately decomposes.  The cycle has created carbon sinks or reservoirs:  soil and fresh water on land, the atmosphere, marine biota in oceans, and fossil fuels in sediments.

Humans have disrupted the cycle by unleashing unprecedented amounts of carbon dioxide through the combustion of oil and gas from the sediment reservoir and releasing it into the atmospheric reservoir.  The normal processes of photosynthesis, respiration and decomposition have not kept up.  To make matters worse, deforestation has reduced the number of plants that take in carbon dioxide and produce oxygen as they grow.  In 2017, according to the National Oceanic and Atmospheric Administration atmospheric carbon dioxide was 409 million parts per million  -  higher than at any point in the past 800,000 years.

For perspective investors can take a look at the level of atmospheric CO2 in the year they were born and then calculate the percentage increase to the last full-year measure in 2017.   (There has been a 7% increase just since this weblog was started and the author is facing a whopping 90% lifetime increase.) 

ATMOSPHERIC CARBON DIOXIDE IN YEAR YOU WERE BORN
Year	CO2		Year	CO2		Year	CO2
1958	317.45		1978	337.69		1998	368.66
1959	217.72		1979	338.96		1999	370.99
1960	319.02		1980	340.93		2000	371.81
1961	319.48		1981	342.54		2001	373.37
1962	320.63		1982	343.97		2002	375.02
1963	321.39		1983	345.25		2003	377.73
1964	na		1984	na		2004	380.35
1965	322.13		1985	348.33		2005	382.29
1966	324.42		1986	349.77		2006	384.61
1967	325.02		1987	351.31		2007	386.50
1968	328.13		1988	353.69		2008	387.21
1969	327.78		1989	355.64		2009	389.55
1970	329.72		1990	356.32		2010	392.46
1971	331.50		1991	358.66		2011	393.25
1972	332.65		1992	359.09		2012	396.18
1973	333.17		1993	359.57		2013	398.41
1974	334.64		1994	361.23		2014	401.38
1975	333.17		1995	363.30		2015	403.28
1976	334.64		1996	364.57		2016	407.42
1977	336.13		1997	366.35		2017	409.01
Source:  National Oceanic and Atmospheric Administration

For those with a lot more candles on their birthday cake or those with long term perspective, the NOAA provides data all the way back to the mid-1800s.  In 1850, atmospheric carbon was 30% less than today.  CO2 levels were rising even then but at a fairly languid pace about 2% to 3% every twenty-five years.  Perhaps this was as a consequence of a building population, deforestation and the advent of steam power.   In the 1950s the pace of growth in atmospheric CO2 increased, which is most often linked to the proliferation of fossil fuel combustion in transport and industrial engines. 

ATMOSPHERIC CARBON DIOXIDE
Year	CO2		Year	CO2		Year	CO2
1850	285.2		1925	302.3	+6.9 in 25 yrs	2000	369.6	+37.7 in 25 yrs
1875	288.6	+3.4 in 25 yrs	1950	311.3	+9.0 in 25 yrs	2005	379.5	+9.9 in 5 yrs
1900	295.7	+7.1 in 25 yrs	1975	331.9	+20.9 in 25 yrs	2010	389.2	+9.7 in 5 yrs
Source:  National Oceanic and Atmospheric Administration

This stroll through CO2 levels is not just for giggles.  Since carbon dioxide is the most important gas in the atmosphere for controlling temperature, rising CO2 level means rising Earth temperatures.  The consequences are severe:  extended deserts, rising sea levels from melting polar caps, volatile and unpredictable weather patterns.  For Earth’s creatures it means loss of habitat, disrupted reproductive cycles and shifting competition for food. 

Humans are not going to come out of this unscathed.  Crop yields could be at risk, water supplies depleted, infrastructure threatened, and vast region rendered uninhabitable.

Humans could use a good carbon sink and it is not too late to ‘sink capital’ into a project or two.  Manmade carbon sinks or reservoirs are not unheard of.  Carbon sinks can be created in underground formations by sequestering carbon emissions from power plants for industrial facilities and channeling it into the formation.  This is something like accelerating the collection of CO2 in the sediment reservoir. 

In early 2018, the U.S. Congress expanded eligibility for a tax credit called 45Q for fossil fuel producers that capture or reuse CO2 releases.  Now owners of the sequestration equipment can share in the tax credit.  The change is likely to encourage industrial equipment suppliers to jump on the sequestration wagon.  NRG Energy (NRG:  NYSE) is a likely beneficiary with its commercial scale post-combustion equipment.  NRG has already teamed up with JX Nippon Oil & Gas Exploration with a proof of concept project in at NRG’s power plant near Houston, Texas.  The plan is to capture CO2 from flue gas at the plant.

Someone even floated the idea of ‘artificial trees’ with chemically treated leaves to soak up CO2 at a faster pace than regular leaves.   As goofy as the idea might seem, it might be worth exploration.  About half of all CO2 is taken up from the atmosphere by photosynthesis in plants.  That is why deforestation leads to a dramatic increase in atmospheric CO2 levels. Researchers at Columbia University’s Earth Institute have designed an artificial tree that could collect as much as one tone of carbon from the air each day for roughly the cost of a car.  

Even if artificial trees are deemed impractical, reforestation efforts and the preservation of grown trees is likely to have a significant impact on CO2.  The Eden Reforestation Projects promote reforestation of forest systems by hiring local workers to plant and tend trees.  Eden has projects in Nepal, Madagascar and Haiti.  In the U.S., the Nature Conservancy promotes the Plant a Billion Trees project.  It is a worthwhile effort given that about 50% of the U.S. water supply is filtered by forests.  This is not news.  With the Organic Administration Act of 1897 the U.S. Congress provided for the establishment of national forests to secure water flows and prevent erosion.

Photosynthesis is at work in the oceans as well as on land.  Microscopic aquatic organisms call phytoplankton near the ocean surface pull CO2 from the atmosphere.  Since they are the bottom of the ocean food chain, phytoplankton is soon consumed by fish that move the CO2 down into the ocean depths.  If the next fish is not eaten it dies and sinks with its CO2 cache to the ocean floor.  

This is called the ocean’s biological pump.  Scientists have experimented with iron on the ocean’s surface to stimulate the growth of phytoplankton. In 2017, Oceaneos Environmental Solutions of Vancouver has sought permits from the Chilean government to release up to ten metric tons of iron particles off the coast of Chile.  The permits have not been granted out of concern Oceanos is trying to boost fishing rather than restore the ocean pump.

Carbon capture and sequestration is the most mature of the carbon sink technologies.  Otherwise investment opportunities are mostly confined to research and development projects.  Given the dire consequences of excess atmospheric CO2, it seems like investors need to think of these early stage investments as an insurance premium against catastrophic loss.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.