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A Message from Co-Presidents Angela Schwarz and Randy Lack Regarding the Rise Fund Transaction

Angela Schwarz

Randy Lack

We are pleased to announce that The Rise Fund, a global impact investing fund managed by alternative asset firm TPG, has acquired a majority stake in Element Markets. This acquisition will provide Element Markets with the scale and resources to grow and expand into new markets while enabling us to continue delivering best-in-class solutions to our valued clients. We are committed to continue building Element Markets and the management and staff of Element Markets will all remain in place as we will continue as a standalone business powered by The Rise Fund.

The Rise Fund is the world’s largest global impact platform committed to achieving measurable, positive social and environmental outcomes alongside competitive financial returns. With more than $5 billion in assets under management across its platform, The Rise Fund works with growth-stage, high potential, mission-driven companies that have the power to change the world. Headquartered in San Francisco, The Rise Fund was founded in 2016 by TPG in partnership with Bono and Jeff Skoll and offers deep expertise in business solutions to help achieve the United Nations’ Sustainable Development Goals. As part of TPG, The Rise Fund offers investment resources, business-building skills, rigorous measurement, and a global network to help portfolio companies accelerate growth and impact. Thanks to clients like you, Element has experienced explosive growth over the past five years and with The Rise Fund supporting us we could not be more excited about our future in renewable natural gas, carbon, emissions, low carbon fuels marketplace.

The day-to-day operations will continue without interruption and you will continue interacting with your key contacts just as you always have. In fact, by having access to The Rise Fund’s network of resources and experience partnering with mission-driven companies like ours, Element Markets will be able to further strengthen the already best-in-class solutions we offer our clients and partners as we grow.

Element Markets welcomes Mike Stone (CIO of TPG Rise) and Marc Mezvinsky (Business Unit Partner within TPG) to the Board of Directors. We would also like to thank and celebrate our departing board members Mark Lerdal, Stephen Schaefer, Paul Argyropoulos, and Keith Little for their service on our board and the leadership they provided to the company.

Most of all we would like to express our deepest debt of gratitude to all of our clients and partners for your trust and support in Element Markets, and we look forward to continuing our dedication as a service provider and to expand our role in the fight against climate change. Our commitment to you is that we are only getting started and we will maintain the same quality of partnership and focus that you have received to date. If you have any questions, please do not hesitate to reach out.

Sincerely,

Angela Schwarz and Randy Lack

Partner News

Hank Paulson to Lead TPG Rise Climate Fund

TPG and The Rise Fund continue to make investment a potent tool in fighting climate change with Henry Paulson, the former U.S. Treasury secretary, joining TPG as the executive chairman of a new global fund, TPG Rise Climate. Mr. Paulson will use his expertise to work with companies and governments worldwide to find scalable investment opportunities focused solely on combating climate change. Mr. Paulson sees this as an opportunity to leverage finance as a mechanism to rapidly address climate change while building on The Rise Fund’s success in providing returns that match traditional investing approaches.

RNG Updates

Renewable Natural Gas (RNG) continues to be an important and growing part of the low carbon energy economy. Its broad application of uses has helped RNG become a smart alternative for everything from transportation to Scope 2 emissions. Here is what we are watching in this new year.

Renewable Fuel Standard

The Renewable Fuel Standard (RFS), which is administered by the Environmental Protection Agency (EPA) has several important upcoming milestones. The Renewable Volume Obligation (RVO), which tells transportation fuel makers how much alternative fuels they are required to blend, was not released by the EPA on the November 30th deadline, and it is unlikely that any numbers will be released prior to the new administration coming into office. The delay is not only significant for compliance in the upcoming year, but will also impact the timing of the EPA’s efforts to address the broader set and reset of the RFS program that takes place in 2022.

Facing this reset, a coalition of biofuels group is asking President-elect Biden to consider implementing a national low-carbon fuel program. The coalition is hoping a new course will set a durable price signal for clean fuel deployment and stabilize demand beyond 2022.

State-Level Credit Programs for Transportation Fuels

The success of California’s Low Carbon Fuel Standard (LCFS) has paved the way for similar programs across North America. These fuel programs are designed to decrease the amount of greenhouse gases (ghgs) created during the fuel’s lifecycle, including the production, processing, transportation, and consumption. RNG, especially from agricultural projects, has very low carbon intensity (CI) scores, making it valuable in these types of programs. The Oregon Clean Fuels Program (OCP) creates direct incentives for the production and use of low and negative-carbon fuels. Colorado and New York are working towards implementing programs, while Washington State has put their rule-making on hold until there is clarification around a recent Washington State Supreme Court ruling regarding the Department of Ecology’s Clean Air Rule. In addition to the initiatives within the U.S., implementation of the Canadian Clean Fuel Standard continues with draft regulations published in December 2020, with late 2021 as a target date for final rules.

RNG In Thermal Applications

RNG is increasingly being used in place of fossil fuel based natural gas for Scope 2 emissions in buildings. RNG is one of the only ways building owners can directly address emissions from burning of natural gas in their building operations. This increased interest and usage is driving a flurry of new activity to support adoption. In the latest beta version, 4.1, of the U.S. Green Building Council (USGBC) LEED (Leadership in Energy and Environmental Design) rating system, U.S.-based captured biomethane is a newly listed strategy for renewable energy procurement for buildings, allowing building owners to accrue up to a total of 5 points towards their LEED score. Natural gas utilities across the country are starting to purchase RNG on behalf of their customers, and Oregon recently joined Vermont, Maine, and Michigan in providing RNG to homeowners. In December of 2020 California joined these other states with the CA PUC voting to allow residents to upgrade their natural gas service to RNG.

Carbon News

U.S. Compliance Carbon Markets Strengthen Moving into 2021

The two main compliance carbon markets in the U.S., AB 32 in California and Regional Greenhouse Gas Initiative (RGGI) in the Northeast, saw price increases for carbon allowances in the final two months of 2020 and early 2021. Both markets faced COVID-related impacts in the spring resulting in price dips, but the remainder of 2020 and the beginning of 2021 have been colored by strong recovery across the board.

The California Cap-and-Trade program was subject to high volatility in March around the onset of COVID lockdowns as speculators pulled their positions from the market. However, the program saw consistent recovery through the remainder of 2020. Joint Auction 25 held on November 17 was the first auction to fully sell out since pre-COVID times, clearing at $16.93/MT. Around the time of the auction, the California Air Resources Board announced the 2021 floor price at $17.71/MT. Since the auction was conducted, California Carbon Allowances (CCA) prices tracked upward toward the new floor price moving into the new year and have continued to rise in response to the Georgia election, trading at $17.76/MT in the second week of January.

In the Northeast, carbon allowances absorbed COVID impacts on a smaller scale than California but saw a similar trend of price recovery. For RGGI, market strength seen in Q4 was attributed to Virginia’s linkage to the program in Q1 of 2021 and Pennsylvania’s potential linkage in 2022. RGGI held its final quarterly auction of 2020 on December 2, which sold out and cleared at $7.41 per ton. The beginning of 2021 has resulted in a price spike as Democrats gained control of the Senate, with allowances trading at $8.90 per ton on January 11.

Massachusetts Cap-and-Trade Auctions Shift from Annual to Quarterly

The Massachusetts cap-and-trade program created under the MA Global Warming Market Solutions Act (GWMSA) has been conducting annual allowance auctions since its inception in 2018. At the end of 2020, the structure of the program’s auctions shifted to a quarterly format with the first quarterly auction taking place on December 16, 2020, which cleared at $7.25/MT. The MA cap-and-trade program has been colored by thin trade throughout its lifetime. COVID impacts led to decreased emissions mid-2020 that have steadily recovered through Q3, but market oversupply has remained, and EM holds a conservative view of the market moving forward.

United States Sees Carbon Legislation Possibility with New Administration and Flipped Senate

The Democratic presidential victory in November opened up the opportunity for climate action on a federal level as Biden has included several energy and climate-related goals in his “Build Back Better” plan and is currently in the process of selecting his energy and environment team as Inauguration Day draws near. One notable appointee is Michael Regan, North Carolina’s top environmental regulator, as nominee to head the Environmental Protection Agency (EPA). Regan worked in the EPA’s air quality program under Bill Clinton and George W. Bush, followed by eight years at the Environmental Defense Fund, and most recently leading the North Carolina Department of Environmental Quality. Other picks for Biden’s climate team include Gina McCarthy, a former EPA administrator as senior advisor on climate change, and Jennifer Granholm, a former governor of Michigan to lead the Department of Energy. These decisions have signaled Biden’s intention to undo four years of environmental deregulation enacted by the Trump Administration and include climate change as a major factor in the United States’ economic policies.

One of Biden’s proposed actions is the implementation of a federal carbon pricing mechanism that would pave the way to a U.S.-wide compliance market. The ability of a Biden administration to pass this legislation heavily depended on the Senate runoff in Georgia. With newly gained Democratic control of the Senate, federal carbon pricing legislation will likely face fewer barriers and potentially lead to a federal carbon market within Biden’s first term. These recent developments will likely lead to stronger action toward Biden’s goal of carbon neutrality for the country by 2050.

Verra Explores New Unit to Boost Upfront Finance for Carbon Offset Projects

The voluntary carbon offset registry, Verra, is currently in a public consultation period for a proposed mechanism labeled “Early Finance Carbon Units” (EFCUs). The purpose of EFCUs is to create an incentive for the financing of carbon offset projects upfront through an instrument that can be traded among project investors or translated into Verified Carbon Units (VCUs) to be retired. Ideally, the creation of EFCUs would provide additional funding at the onset of new projects to scale up activity throughout their lifetime, ultimately leading to more reductions associated with the project activity. Verra is accepting public comments on the potential concept and use of EFCUs until January 30th and anticipates the next steps to be taken in the spring of 2021.

Emissions News

EPA Proposed Revisions to CSAPR Create New Seasonal NOx Allowance Trading Group

On October 15, 2020, the EPA proposed the Revised Cross-State Air Pollution Rule (CSAPR) with the goal of reducing summertime NOx emissions from power plants in 12 states, creating a third seasonal NOx trading program. The proposed revision to CSAPR would split the program’s primary ozone seasonal NOx program into two separate allowance markets: CSAPR NOx Ozone Season Group 2 and Group 3, with the primary differences between the groups being geography and budget stringency. States included in Group 3 are IL, IN, KY, LA, MD, MI, NJ, NY, OH, PA, VA, and WV. The introduction of the new allowance program would help downwind states meet federal air quality standards. Each state will be subject to an emissions cap that will be adjusted between 2021 and 2024, with a final cap set indefinitely in 2024. The cap for Group 3 will be set at 106,300 short tons in 2021 and decrease to 93,100 short tons in 2024. Regarding allowances, the EPA proposed an authorization of a one-time conversion of allowances banked between 2017 and 2020 under CSAPR NOx Ozone Season Group 2 into allowances that may be used in the Group 3 program. Under anticipation of this new program, the Seasonal NOx market has responded with prices increasing tenfold in the first two weeks of January 2021.

The revised CSAPR rule underwent a period of public comment which ended on December 14, 2020. Element Markets continues to monitor the development of the finalized EPA revisions to CSAPR. If approved, facilities located in the states subject to the Group 3 Trading Program must participate beginning in the 2021 ozone season. All facilities in Group 1 and Group 2 will not undergo any regulatory changes at this time.

Explainer Series

Carbon 101 – Understanding Voluntary Carbon Offsets

As the global economy is becoming proactive in curbing climate change, several decarbonization strategies have gained popularity in corporate social responsibility (CSR) and sustainability goal-setting language. One phrase you will likely come across is the use of “carbon offsets.” Element Market’s Carbon Desk is well-versed in the carbon offset space and will be breaking down the meaning and use of carbon offsets. Today we will talk more about the basics of carbon offsets being used for voluntary purposes.

Carbon offsets, which are independently-verified GHG reductions that are registered by a third-party non-profit registry, provide a necessary and proven mitigation measure for companies aiming to reduce emissions and/or achieve sustainability goals. We are frequently asked about the steps to initiating a voluntary offset purchase, and what factors come into play when selecting carbon offset projects and ensuring that the associated GHG reductions meet broadly accepted, verifiable requirements. Here’s a quick primer.

The three-step process for voluntary carbon offset buyers is as follows:

Quantify: GHG emissions fall within three categories, defined as Scope 1, 2 and 3. Scope 1 emissions are those directly associated with an entity’s operations (think: facility emissions, flares, gas boilers, etc.). Scope 2 emissions are indirect emissions from owned or controlled sources (think: purchased electricity, heating, and cooling). Finally, scope 3 emissions are indirect emissions from sources that an entity does not own (think: business travel and employee commutes, emissions from third-party manufacturing, etc.). Following the quantification of Scope 1, 2, and 3 emissions, sustainability goals are identified, and specific emission reduction targets are set.
Reduce: Once emissions have been calculated, the next step is for a company to identify emission reductions they can make through measures such as building efficiency retrofitting, switching to suppliers with lower emissions associated, etc. We refer to these initial reductions as “low hanging fruit” measures to initially reduce emissions.
Offset: Once all “low hanging fruit” emission reduction methods have been implemented, the remainder of emissions that cannot otherwise be reduced can be addressed through the purchase of carbon offsets. Through the purchase of carbon offsets, the customer acquires the right to make claims of the carbon reductions associated with the project activity.

So, what kinds of projects qualify for carbon offsets? Common project types include landfill gas capture, industrial processes, renewable energy projects such as wind and solar, agricultural projects, and reforestation/avoided deforestation. To qualify for registration as a project generating carbon offsets, projects are first validated and verified through third-party non-profit registries that ensure the offsets created by the project activity meet the following criteria:

Permanent: Reductions associated with project activity will not be reversed.
Additional: Project activity is not required by regulation and only occurs due to carbon offsets.
Verifiable: Reductions associated with project activity are independently verified by a third-party.
Enforceable: Undisputed ownership of offsets, reassuring there is no double-counting associated with project activity.
Real: Reductions associated with project activity can be accurately measured in accordance with scientifically based protocols.

The main registries where carbon offsets transact on the voluntary carbon market are Climate Action Reserve (CAR), American Carbon Registry (ACR), Verra, and Gold Standard. Carbon offsets are verified, issued, housed, and transacted on the registries to ensure a streamlined flow of offset generation and retirement. Entities can offset their emissions on a 1:1 MT CO2 emission to MT CO2 offset basis. When a company has offset an equal volume to its unavoidable emissions, zeroing out their emissions, it has achieved carbon neutrality. Element Markets works with many companies across different sectors to reach their sustainability goals, using carbon offsets as one of the main environmental commodities to achieve decarbonization.

In the next Carbon 101 feature, we will break down the use of carbon offsets for compliance purposes.

Element Updates

TPG’s The Rise Fund Acquires a Majority Stake in Element Markets

While Angela and Randy’s message above covers The Rise Fund transaction, the full press release is available here for those interested. Angela also spoke with David French at Reuters about the deal.

Element Markets Continues Record of Success with Six Top Rankings in Environmental Finance Annual Survey

We were proud to learn that for the ninth year running, we received top rankings from the Environmental Finance Annual Market Survey, this year earning six “best” designations and four “runner-up” titles. Full details can be found in the press release on our website. Our results over the past few years have shown remarkable consistency, with repeat top rankings across several categories including Best Trading Company: RGGI, Best Trading Company: Options and Spot & Futures (California), and Best Broker and Best Advisory for Renewable Identification Numbers. This year, we added a new distinction as the Best Advisory/Consultancy for all North America. We are grateful for our continued, trusted relationships with our clients, as this achievement is only possible due to each of you taking the time to nominate us.

Element Markets Shares Insights with Environmental Finance Magazine:

Leading through volatility

In this interview, Randy Lack discusses how Element Markets navigated the disruption carbon and renewable fuels markets experienced in 2020 and what we could expect in 2021.