New Carbon Markets Could Drive the Land Market

There has been a lot of speculation about the Biden administration’s focus on climate and how that will impact commercial real estate.

As Jake Fingert, general partner at Camber Creek and a former member of the National Economic Council during the Obama administration points out, much of the focus has been about reducing energy use in buildings. For example, there could be a strong push to move from heating oil to electric.

“I think that [climate] is going to be one area where there’s going to be a lot of energy and focus,” Fingert says.

But the real estate industry may not just see changes in existing buildings. Omar Eltorai, market analyst at Reonomy, thinks carbon markets will grow in the US, creating new potential sources of income for productive land, such as cropland and forest. Land plays a crucial role in capturing and storing carbon.

“I think carbon is really the big play there,” he says. “I see this playing out as being government-driven, whether at the state or the federal level.”

Eltorai can envision a scenario where the government or nonprofits are focused much more on conservation, and that can generate cash flows for lands. “But to be honest with you, I think the real story here is as much more on the carbon side,” he says.

Environmental, social, and governance goals are coming to the forefront for companies, whether its part of their investment criteria or part of their business practices,

“I think that environmental ethic is going to be the one that’s likely to be addressed,” Eltorai says. “It’s going to be one of the most dramatic new changes. And I think there is a real opportunity for new markets to form.

Eltorai thinks new markets will form to accommodate this environmental investment. They could be driven by companies buying carbon offsets trying to counterbalance emissions. Investment teams could also actively trade in the market.

Either way, Eltorai says credit carbon offsets and carbon sequestration has potential to change the economy. “I think there is still some technology there that needs to be further proven,” he says. “But I do think that carbon markets are the logical next step for linking the old-world economy we’ve been living in to this new economy that I would say the ESG advocates are pointing towards.”

Land could play a large role in this. Eltorai says a lot of that carbon market will be linked directly to how land is used. “I think the impact is greater demand for carbon credits,” he says. “

The carbon credits will essentially be linked to an activity on the land, whether it’s crop production and capturing carbon or something related to forest management. “There is a new market being formed and that market will be driven by the ‘big money,’” he says. “That big money could be driven by the regulators or it could be self-motivated. Some of the big asset managers have been making directional calls about what this new green economy will look like.”