Good morning.

The real work to avoid a US deficit starts today and will give us a sense of how the stage of the drama will unfold. A terrible attack in Pakistan left 100 dead and ratches up tension.

Meanwhile, reports of inaccuracies in one of the world’s largest greenhouse gas crediting programs are a good reminder to take care and conduct your due diligence. Otherwise, you might find you’re making misleading statements to regulators and shareholders which (checks notes) is bad.

The US Deficit Fight: Round 1

The real work to avoid a default, or even the perception that there might be a default, starts today when President Biden meets Speaker McCarthy. The President has until Monday (February 6th) to propose a budget which should be finalized by March 9th. What is said, unsaid, and hinted at over the next few weeks will give us a sense of how likely it is that some kind of agreement can be reached. 

Although I titled this ‘Round 1’, the number of rounds and the timeline overall are unclear. As a reminder, there’s no exact date when the US will fully run out of cash. ‘Technical measures’ are already in place, but there’s no way to calculate an exact date when the US will technically default. Moreover, there doesn’t need to be an actual default for damage to be caused, as we saw in the last big debt fight in 2011. Then, just the increased concern that default might occur led to the rating agencies downgrading US bonds. There’s real concern that the experience of 2011 has been forgotten by many, and is being downplayed by others.

“I think that the possibility of miscalculation runs higher today than it did in 2011,”

Neil Bradley, a former top Cantor aide, via Reuters

Here’s a deeper dive into sovereign debt in general, and the repercussions of a debt-ceiling showdown in the US.

Security in Pakistan After Mosque Attack

The death toll in Monday’s suicide bombing at a police barracks in Peshawar, Pakistan, is now reported to be 100, with another 170 wounded. The attack was terrible in itself, but the fact that the attack could get deep into the heart of a well-fortified area means that many areas previously considered secure may now be under greater threat. Several armed groups oppose Pakistan’s government but the main armed opposition, the Tehreek-e-Taliban Pakistan (TTP) has denied carrying out the attack. However, there are reports that Islamic State – Khorasan Province (ISK / ISKP), an offshoot of the TTP, has admitted responsibility. 

People and rescue workers gather to look for survivors under a collapsed roof, after a suicide blast in a mosque in Peshawar, Pakistan January 30, 2023. REUTERS/Fayaz Aziz

Pakistan is already under significant financial pressure, still suffering from the damage and losses caused by flooding in 2022 and preparing for what will likely be contentious elections this year. Attacks in previously secure areas make things more tense and could also bring about a destabilizing event, such as the death of a senior government or opposition figure. See Reuters for more.

How Accurate Are Carbon Offsets?

I stumbled across a Guardian investigation into inaccurate, or at least embellished, carbon credit certification by Verra “The world’s leading greenhouse gas [GHG] crediting program.” The Guardian headline gets straight to the point, “more than 90% of rainforest carbon offsets by biggest certifier are worthless, analysis shows”, and the article cites several researchers who assess that Verra’s estimation of the number of trees saved were significantly inflated.

You can read the Guardian article here and Verra’s rebuttal here.

I don’t think there’s a simple answer as to who’s right and wrong in this case: as they say, ‘it’s complicated’. However, two things did stand out that I think are worth keeping in mind.

Seems like a good time for a relaxing image of some trees. Image DaYsO on Unsplash

Offsets Might not Match Credits

First,  although Verra countered that the studies were flawed and inconsistent, their response didn’t deny that there may be some discrepancy between the amount of deforestation credited, and the actual amount of forest saved. This could be between 10-25% so potentially a significant difference between the amount of carbon offset reported and the actual amount offset may be different. Thorough due diligence should spot something like this and be able to account for that in reporting but, if due diligence isn’t carried out, there’s a distinct possibility that the amounts of carbon or other GHG reported as offset are incorrect.

Verra stresses that its REDD program is voluntary but might be used to meet mandatory requirements.

“The voluntary carbon market is distinct from compliance markets, which are largely driven by government policies or legally binding agreements. In some compliance markets, entities can purchase and use carbon credits generated by carbon projects to comply with the respective regulations or requirements.”

Verra

So anyone relying on a carbon-trading system, even one as well-established as the REDD program seems to be, would be well-advised to confirm the accuracy of the trades they are making to avoid falling foul of regulators. Remember, someone has to sign and certify that your regulatory reports and statements to shareholders are accurate: best be sure that you’ve checked to make sure that’s the case.

Deforestation ≠ Reforestation

Second, part of this market is presenting deforestation, not reforestation. So instead of planting a tree, you’re paying to stop a tree from being cut down. This feels like double accounting: after all, that tree is already hard at work sequestering someone else’s carbon. Keeping it alive doesn’t help mitigate the additional carbon you’re emitting so it doesn’t seem a one-for-one trade.

I’ve no doubt that this is explained in the REDD program’s detailed paperwork somewhere but at first glance, that wasn’t apparent to me and may not be apparent to others who are participating in these programs.

Again, you may need to be sure that what you’re reporting to shareholders and regulators is accurate, and blaming the exchange may not be enough to get away with wildly inaccurate statements. Do your third-party due diligence.

Whatever Verra is doing seems to be net-positive and we desperately need an effective market for GHG trading and sequestration. However, this seems like a good reminder that there may be discrepancies in the ‘exchange rates’ and effectiveness of these programs and, particularly if these are part of a regulatory filing, you should check your homework.

On to the numbers

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Relative Values (90-Days)

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Trends (21-days)

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Commentary and Evaluation

Brent Crude

Potentially impacting: Fuel prices | Gound shipping costs. | Plastic prices | Changes to fuel subsidies (potentially leading to unrest) | Cost of living (especially transport and heating) | Changes to traffic volume/transportation choices | Demand for automotive products | Theft and smuggling.

Brent Crude is low for this 90-day interval. Prices increased moderately over the last 21 days after moderate fluctuation.

Iron and Steel

Potentially impacting: Cost of construction projects | Construction project timelines | Cost/availability of raw materials | Infrastructure project timelines/costs | Cost and availability of finished metal goods | Value of scrap | Value of 2nd hand equipment/vehicles.

Iron and Steel remains very high for this 90-day interval. Prices increased moderately over the last 21 days after slight fluctuation.

Market Volatility (VIX-US)

Potentially impacting: Availability of capital for investment | Interest rates| Share prices | Consumer confidence | House prices/rent | Financial certainty/uncertainty | Financial models | Stock-based compensation values.

Market Volatility (VIX) is low for this 90-day interval. The index decreased moderately over the last 21 days after significant fluctuation.

Wheat

Potentially impacting: Bread, pasta, couscous & noodle prices | Changes to food subsidies (potentially leading to unrest) | Cost of living | Movement from low-income to food insecure to undernourished | Increased theft or graft in loosely governed areas | Demand on charities.

Wheat remains very high for this 90-day interval. Prices increased moderately over the last 21 days after moderate fluctuation.

Ocean Freight (FBX)

Potentially impacting: Supply chain costs (direct and indirect) | Supply chain delays | Port capacity/throughput speed | Customs clearance | Availability of goods and materials | Consumer demand/hoarding.

Shipping (FBX) remains very low for this 90-day interval. Prices decreased moderately over the last 21 days after some fluctuation.

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