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Carbon Credit Winners

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Cryptocurrency gets all the airtime. Pundits argue over whether or not it counts as a “real” currency, while others wax eloquent on the potential uses of blockchain technology in daily life. Bitcoin rises, Bitcoin falls, and altcoins dominate the airwaves.

But lost in the crypto mania is the fact that cryptocurrencies might not even be the hottest emerging market today. That honor falls to something far less glamorous but more far-reaching.

The Law of Unintended Consequences

Carbon credits were hotly debated for years. They still are, but then something unexpected happened.

Governments went forward with a handful of headline programs. Sometimes these were national, like Canada’s, or international, like the EU’s. But for all the fervour over these initiatives, the market did something no one really expected.

It set up its own carbon trading schemes.

These private markets are growing rapidly, right alongside the regulatory programs. Combined, the twin carbon markets have created a new wave of carbon credit winners and losers. This week, we’ll look at the institutions making the most of both kinds of carbon markets.

California

California’s ETS began in 2012. In 2020, it collected $1.7 billion in revenue. That figure doesn’t include credits resold between companies; the actual amount of money changing hands was far higher.

California touts the program as an unmitigated win. $14 billion raised over the lifetime of the program, with billions of dollars reinvested in various climate initiatives. The state claims an overall 13% reduction in carbon emissions  during the lifetime of the program. The state’s economy grew overall during the same period. It’s tough to argue that the two are completely unrelated. Overall emissions reductions involved other factors as well, but the cap-and-trade program played a significant role.

So far, California is a clear carbon credit winner. The bottom-line cost of the program to the consumer is a different story, but the initial success of California’s cap-and-trade means that the program will be a model for other states.

Farmers (at least the big ones)

Trey Hill is a clear carbon credit winner.

To be more specific, Trey Hill made $150,000 for carbon sequestration in his 10,000 acre Maryland farm.

Now, not every farmer will be Trey Hill. He found himself at a lucky intersection. Hill uses old no-till farming methods like planting root crops and cover crops to naturally loosen and protect the soil. His experience led to his being approached by Nori, a Seattle-based startup selling carbon credits.

Nori sold credits for Hill’s carbon sequestration farming methods. In the end, Hill received $15 per tonne of carbon locked away in the ground due to his farming practices, and he came away with an extra $150,000.

Not every farmer will be Trey Hill, but his case is evidence that for innovative and unusual farmers, there will be ample opportunities in the voluntary carbon credit market.

Tesla

Carbon credits made Tesla profitable – not electric vehicles.

Shocking? Perhaps, but there’s no getting around the fact that Tesla walked away with a little over $1.6 billion in carbon credit revenue in 2020.

That’s a full six quarters of profitability, in large part due to ZEV credit.

That ZEV credit is arguably the capstone of California’s cap-and-trade program. Every car maker who sells vehicles in California needs to sell a certain number of Zero Emissions Vehicles; if they don’t sell enough, or if those sales are outweighed by internal combustion engine vehicles, then they need to purchase additional ZEV credits.

So if you’re Tesla, and you sold an estimated 60,000 vehicles in 2020, then you could be sitting on an accumulated pile of ZEV credits.

And by selling those credits, Tesla has powered its way to profitability.

As other car makers roll out their own EVs, Tesla’s margin for massive ZEV credit sales will diminish. But in the meantime, Tesla is a clear winner in California’s carbon credit market.

Voluntary credit markets

Nori and GoldStandard allow individuals to purchase carbon credits directly. Each offers a carbon footprint calculator – you can plug in your information and instantly see exactly how much carbon you need to purchase to offset your lifestyle.

Nori was behind the success of Trey HIll’s carbon credit sale, and they’re not alone. These third party carbon credit brokers open the door for individuals to get in on the action. The size of the carbon credit industry is only set to grow from here. Brokers like Nori are set for rapid growth.

There’s another kind of private credit broker as well. Companies like Verra facilitate investment in climate-friendly projects and sell carbon offsets in bulk to corporations and large-scale investors. These brokers also serve as gatekeepers, verifying the quality and effectiveness of the carbon credits they sell.

A quick glance at any of the projects in the offing through these brokers shows just how expansive the carbon credit market is:

  • Carbon sequestration through no-till farming in the USA
  • Wind power projects in India
  • Hydroelectric power in Honduras
  • PET recycling in Romania

That’s a global project list with implications for everything from green energy to agriculture.

And it makes the voluntary market itself the biggest winner of the carbon credit movement.

Next time we’ll look at some of the carbon credit losers, and see what lessons we can glean from their misfortune.