Emissions house of the year: Element Markets

Energy Risk Awards 2020: US environmental markets trader and asset manager thrives on complexity, and sees opportunities for clients in battered green markets

Randy Lack: “Environmental commodities are on the bottom rung, in terms of attention, for a lot of companies right now”

One day, perhaps, a single price on carbon will bring together and simplify the myriad environmental markets and pricing mechanisms that exist across the US and other jurisdictions. Until that time, emitting companies and traders in US emissions markets have to understand, execute and comply with a jumble of federal and state-level compliance regimes – covering nitrogen oxides (NOx), volatile organic compounds, sulphur dioxide and carbon, among others.

That complexity creates opportunity for companies such as Element Markets, winner of Emissions house of the year. The Houston-based firm is one of the largest specialist environmental markets groups in the US, and is active across the whole suite of traded markets.

“We embrace the most difficult, nascent, illiquid markets, because that’s where a company like ours really provides substantial value for our clients,” says Randy Lack, co-founder and co-president.

“What I tell my staff is, the more difficult [the trade] is, the longer it takes, the better for us, because that means we’re doing something that somebody else can’t.”

The company claims to participate in around two-thirds of the regional emissions transactions in the US, including 75% of all emissions-reduction credit transactions in the northeast, and almost half of brokered transactions in the Houston-Galveston-Brazoria NOx market. Last year, it completed a giant $150 million emissions trade to enable the expansion of a major US petrochemicals firm in the Gulf of Mexico, which took over two years to complete (see last year’s Environmental products house of the year award).

A particular significant deal for Element Markets was its appointment as the exclusive renewable natural gas (RNG) marketing partner for Monarch Bioenergy, a joint partnership between Smithfield Foods, the largest pork producer in the world, and Roeslein Alternative Energy. The two companies have established a joint venture to invest in capturing methane emissions from the former’s pig farms, which will be transformed into zero-carbon biomethane.

“The biogas from Smithfield sites is projected to produce over $1 billion in RNG at new sites across Virginia, North Carolina, Utah, Arizona and California,” says Lack.

Element Markets will take delivery of the RNG at the pipeline and market it to the transportation fuel markets under both the federal Renewable Fuel Standard and the California Low Carbon Fuel Standard (LCFS) programmes, he says.

It’s a complex process, and involves negotiating with the California Air Resources Board (ARB) to determine the degree of carbon reductions that can be claimed from the project. Element Markets needed to set out how the gas was captured and delivered into California and agree with the ARB a carbon-intensity score against which credits can be claimed. The firm was able to argue for the lowest carbon-intensity score agreed in the LCFS market. “It comes down to tens of thousands of dollars a day of value for our clients,” says Lack.

We embrace the most difficult, nascent, illiquid markets, because that’s where a company like ours really provides substantial value for our clients

Randy Lack, Element Markets

The company is also identifying opportunities in the voluntary carbon market, where corporations are getting into the climate policy vacuum left at the federal level.

“Last year was our largest volume ever in greenhouse gas trading,” says Lack. “Specifically, we were very successful in the voluntary market: we delivered over 3.5 million tonnes [of carbon dioxide credits] to sustainable buyers last year.” Currently, the company has access to carbon offsets from a portfolio of 40 projects, generating offsets equivalent to around 6 million tonnes of carbon dioxide each year.

There are synergies between its RNG and carbon offset businesses. Last year, the company worked with a major cosmetic manufacturer that entered into a long-term, 15-year RNG purchase commitment, which helped a landfill gas project to be constructed near its largest US manufacturing site. Ultimately, the RNG will allow the company to achieve carbon neutrality for all 21 of its manufacturing and distribution facilities, across 12 states.

Will such voluntary environmental commitments slip down the agenda in the economic downturn that is almost certain to follow the Covid-19 pandemic?

Lack is clear-eyed as to what the economic disruption will mean for voluntary carbon markets: “Environmental commodities are on the bottom rung, in terms of attention, for a lot of companies right now. The first thing you have to worry about is keeping your businesses running … I think we’re going to see a lot of volatility in the environmental commodity markets this year [in terms of voluntary demand].”

However, he notes that companies will continue to face obligations under compliance markets in the US.

“Compliance requirements are unchanged for all environmental products,” he says, observing that recent falls in prices in response to the pandemic present a buying opportunity.

“I think it will take four to six months to return to normal, because it’s going to take that amount of time for companies to wake up and decide it makes sense to spend money now mitigating exposure over the next five or 10 years at current values.”