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Carbon Offsets and the Integrity Problem

Do the emerging carbon markets have an integrity problem?

Some certainly think so.

Some experts say as little as 5% of carbon offsets on the Voluntary Carbon Markets (VCM) actually measure up.

Most analysis is less dramatic, but there’s a perception that important weaknesses remain in the market.

One key problem aspect of the integrity problem is additionality. Simply put, offsets need to do something. Selling a carbon credit for something that already exists – say, a piece of prime forest – doesn’t provide a new offset; it just maintains the status quo.

If there is an integrity problem, how does the VCM address it? In the wake of COP 26, a few ideas have come to the fore.

1) Steer the market’s offset appetite in the right direction

Mark Carney, carbon maestro and former Bank of England governor, laid out a vision this week for offsets as the last rung of the net-zero ladder.

Decarbonize, come as to a net-zero carbon emissions policy as possible and then use offsets to finish cleaning up.

The risk right now, as he sees it, is that companies use offsets to avoid any uncomfortable decarbonization, thus reversing the process.

Despite that risk, players have the chance to direct the VCM strategically. Carney’s vision is one option – buying offsets after some of the hard work of decarbonization, or even alongside it. Other options would be to push the price of credits on the VCM higher, forcing entities to use offsets selectively.

2) Embrace the COP 26 framework – rough as it is

Fortunately, the COP 26 Article 6 agreement appears to have achieved at least one major goal; establishing a rough framework or standard for the VCM. Only time will tell, and a lot of the agreement is open to interpretation.

But if the Glasgow Agreement can become a standard – perhaps alongside third-party standards like Verra and the Gold Standard – then the VCM will receive a much-needed legitimacy boost.

Markets are accustomed to using multiple standards; the VCM could easily fit that mold, with offsets offered that conform to the Glasgow Agreement and third-party quality assurances. Broader implementation of those standards will also lead to higher offset prices.

3) Reward quality offsets

The simplest way to address the integrity issue is simply to reward high-quality credits. Easier said than done, but post-COP 26 has already seen an increase in grassroots-led efforts to produce carbon offsets of a high standard.

Those efforts range from Canadian energy producers funding local projects, to Scottish construction companies seeking employee input on carbon-reduction schemes. In the latter effort, the brainstorming campaign itself was a simple offset scheme, planting trees for every idea submitted.

Market solutions to market problems

As is often the case, the best solution to the integrity problem is simply to let markets develop naturally. The VCM is still young and underdeveloped, but the Glasgow Agreement may prove to be a stabilizing force.

Carbon prices would seem to agree – Australia notched another all-time high for carbon offset this week as global carbon prices continued to climb.

Despite any lingering problems, the outlook for carbon offsets is overwhelmingly positive. The VCM is projected to be worth 100 billion USD by the end of the decade. The price of carbon will need to climb well over $100 per tonne in order to help nations meet their Paris Agreement goals.

Futures prices for the EU ETS have already passed 70 euros per tonne (over $80 USD) and are creeping ever-closer to the $100 mark.

Key point – aside from structural agreements like Glasgow, the VCM is hitting these goals on its own. Markets solving their own problems: the VCM is front and center in demonstrating the power of market forces.

CRBN – iShares MSCI ACWI Low Carbon Target ETF

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Germany Speeds Up Green Economy

Germany’s new coalition has said they will stop burning coal for electricity by 2030 – 8 years earlier than planned.

Their goal is to offer more renewable energy sources and encourage their usage by placing additional taxes on the fossil fuel industry.

The new coalition plans on further developing climate legislation in 2022 and launching an immediate climate protection program. All sectors are planning to contribute: transport, construction, and housing, power generation, industry, and agriculture.

Outgoing Chancellor Angela Merkel wanted to reduce Germany’s dependence on the fossil fuel industry. However, her administration lacked the strategy necessary to get there.

Incoming Chancellor, Olaf Scholz, is hoping to change that. He has negotiated the terms of these changes for two months. So far, discussions have been well received. They include:

  • Allocating 2% of land throughout Germany to renewable farms, such as wind and solar.
  • Keeping carbon emission permit prices above 60 euros (or $67).
  • Eliminating a surcharge used to support clean power growth beginning in January 2023.

Germany’s economy is the largest in Europe and the 4th largest in the world. Their commitment to renewable energy can build on what was discussed at COP26 earlier this month, where world leaders promised to:

  • Help developing countries finance green initiatives.
  • Reduce overall emissions.
  • Create a global standard for the carbon marketplace.

Simply put, carbon credits are a way to offset carbon emissions. For every carbon credit purchased, one metric ton of carbon is offset from the atmosphere through an environmental project, like reforestation.

The carbon credit industry has boomed over the past year. It is expected to be valued at $100 billion by 2030 – up from just $300 million in 2018. Many expect this new global standard to cause it to grow even more.

To fight climate change, there needs to be a mix of technological innovation, government regulation, and carbon offsets. Each has an important role to play. With temperatures continuing to increase, nations must think big. Germany has shown us this and is leading the way.

Coal currently supplies nearly a quarter of Germany’s population with electricity.

Farms – The Focus of New Carbon Projects

Demand for carbon credits has increased exponentially over the past year, as companies face pressure to show their commitment to fighting climate change.

In 2016, less than $200 million was invested in carbon projects. Now, carbon offset projects are valued at $1 billion.

Reforestation and methane capture has always been at the top of the environmental project list; however, new projects targeted to farmers could help remove over 570 million metric tons of carbon from the atmosphere.

For example, Indigo is currently paying farmers to reduce their use of carbon-intensive fertilizer. Famers are planting cover crops to draw carbon into the soil and then not tilling the land.

Indigo then measures the amount of carbon sequestered, generating carbon credits. These carbon credits are then sold to companies looking to offset their carbon emissions. Believe it or not, companies are flocking to purchase offsets generated by farms.

Chris Harbourt, the Global Head of Carbon for Indigo, told the New York Times, “It tells a great story if you can tell Americans buying a product that their dollars are going to an American program that benefits farmers.”

Though offsets through farmland seem promising, some critics are concerned. They feel that since these farmland projects are not long-term but annual, farmers could choose to give up on the program, negating any progress. They are also worried about the rigor of soil sampling and verification methods.

Indigo says they have ways to fight against this – and believe that the carbon credit industry will only improve.

When combined with innovative technology, and increased regulation, the carbon offset industry can help combat global warming while sparking economic growth. This is why leaders at COP26 were so focused on setting an international standard – they see the value carbon offsets can provide.

In the case of farmland – Indigo couldn’t be more right. Offsets will not only help in the fight against global warming but support local farmers as well.

Offsets continue to show that they are a win for the environment and the economy alike.

EU Carbon Price Hits All-Time High with Germany Considering a Floor Price

European carbon price hit a record high today after Germany announced it may set a floor price of 60 Euros/tonne for emitters over the next few years.

The EU’s Emissions Trading System (ETS) went as high as 73.18 Euros (~$82 USD) per metric ton.

EU Carbon Price Germany

The EU’s ETS forces power companies, manufacturers, and airlines to pay for each tonne of carbon dioxide they emit.

The European Union made the carbon market a central part of its ‘Fit for 55’ package to accelerate pollution cuts this decade. The EU’s goal is to cut net CO2 emissions by 55% from 1990 levels by 2030.

Similar to the UK’s carbon price mechanism, the German decision on carbon prices would create an additional domestic levy. This added charge for emitters in Germany is on top of the price paid in the EU emissions trading system.

Germany is Europe’s largest economy and manufacturing accounts for 23% of Germany’s GDP compared to 11% of the UK’s GDP.

Manufacturing is a high-emitting industry and this significantly makes burning coal less attractive there faster than other EU members.

Other carbon prices are also reaching new highs. The Race to Netzero is on.

Boston Divests from Fossil Fuels

With unanimous approval, newly sworn-in Boston Mayor, Michelle Wu, signed an ordinance to divest the city from fossil fuels. Under the ordinance, public funds cannot be invested in any company that receives more than 15% of its revenue from fossil fuels, tobacco products, or private prison industries.

The ordinance is expected to reduce investments within the fossil fuel industry by $65 million. As of Monday, Boston officials did not say whether current assets would be impacted.

During the signing ceremony, Wu stated, “This is deeply personal for many of us and urgent. My older son Blaise was born in the first year that I served in this building, and the first year that we started to hear it was the hottest year ever on record. Since then, his six years alive on this planet have each been our hottest on record.

Wu went on to say, “We’re moving quickly to make sure that Boston will set the tone for what is possible for that brightest greenest future for all of our kids.”

According to Wu, the goal is to distance Boston from fossil fuels that are a driving force behind climate change. Since Boston is a coastal city, climate change, if not addressed, is a direct threat.

Boston joins a growing number of cities and organizations that are looking to keep their investments green:

• The Ontario Teacher’s Pension Plan recently said that they are focusing on green investments.
• Harvard University President Lawrence Bacow announced they will move away from fossil fuel investments.
• New York City officials announced that their two city work pensions funds will pull fossil fuel investments to focus on clean energy – which is about $4 billion worth of funds.
• Canadian Pension Plan Investment Board and Conservation International have partnered to invest in high-quality carbon offset projects.

As cities begin to look for ways to be a part of the climate change solution – net-zero goals seem more within reach. Per Senator Edward Markey, “What Boston represents here today is the future.”

Billions May Pour into Carbon Markets

Though nations have been hoping for a global standard for the carbon markets for quite some time, one was finally implemented at COP26 in Glasgow this month.

This new standard will now govern how countries trade credits across the globe, easing the critic’s concerns by creating structure and transparency.

The carbon marketplace is a platform where countries, companies, and individuals can purchase carbon credits.

One carbon credit is equivalent to one metric ton of carbon. That ton of carbon is then “offset” through an environmental project, such as reforestation. Experts believe the global carbon market will reach $100 billion by 2030 – up from $300 million in 2018.

Two recent studies show some primary areas to focus on in the fight against climate change: conserving and growing forests, mangrove stands, and peatlands. They also include maps of high-carbon regions that could serve as a resource.

So, as multilateral corporations and carbon markets look to support biodiversity through offset projects, they can focus on these three areas (and others) with the promise of a global standard.

One potential project includes the African Great Green Wall: a 5,000-mile band through the Sahel to restore 247 million acres.

It is only about 4% complete (and costs about $3 billion a year). Currently, funding to restore this land has not come from carbon trading but rather through national budgets and international donors.

Alisher Mirzabaev, lead author and senior researcher at the University of Bonn’s Center of Development Research, said, “This paper, we hope, will be helpful in terms of targeting where to channel those investments. We would like to guide those investments to the most efficient use.”

Carbon Markets and COP 26: The Revenge of Supply and Demand

Two weeks of COP 26, plus an extra day of last-minute negotiations. And even then, all the agreements signed at COP 26 were riddled with complicated language and potential loopholes.

But stare a bit closer at everything, and some patterns start to emerge. First and foremost? In a world where there’s a limited amount of room for atmospheric carbon, emissions are becoming a precious commodity in their own right.

Put another way, the law of supply and demand is back – and better than ever.

The supply is the amount of room left for CO2e in the atmosphere, particularly if the goal is to keep global warming under 1.5C.

The demand is the number of industries that are still rapidly emitting vast quantities of CO2e into the atmosphere.

When demand is orders of magnitude greater than supply, what happens?

Yep – prices go up.

The Return of Article 6

Let’s back up a bit. COP 26 ended with a series of agreements, most of them promises for further action. Crucially, among those agreements was a new framework for Article 6, the international carbon market.

Now, framework might be a strong word, here. COP 26 didn’t establish any sort of regulatory body, and it didn’t solve all the long-running issues that had plagued previous Article 6 discussions.

But it did underline the role of private carbon markets – the voluntary carbon market, or VCM – in driving carbon prices higher.

More broadly, COP 26 acknowledged that the VCM is, at this point, one of the primary tools governments and organizations can use to influence carbon prices.

And despite some watering-down of the Article 6 rules (hello, zombie Kyoto Protocol credits!), the market responded almost instantly.

Within 48 hours of the close of COP 26, EU ETS credits reached a price of 67.65 euros a tonne – a record high.

Carbon Offset Price

Article 6 Framework

What are the takeaways from the new Article 6 framework?

  • Public/private carbon market for offsets
  • Bilateral credit trading framework between nations
  • 5% of credit price from every project deposited into a fund for developing countries to fight climate change
  • 2% burn rate – out of each project, 2% of the credits issued need to be over and above what is required to offset the emissions.

Beyond that, the framework finally clarified what, exactly, a carbon credit or offset is. To meet the definition of an Article 6 “activity”, a credit needs to demonstrate:

  • A baseline CO2e reductions calculation
  • Additionality for each project
  • Accurate monitoring
  • Clear emissions reduction calculations

These are already the VCM’s best practices – clarify a baseline for the definition of an offset, demonstrate additionality, monitor and verify the performance of the project, and demonstrate that a tonne of carbon emissions was actually removed by the project for every credit sold.

What did COP 26 do?

It reiterated that global warming makes carbon a precious commodity.

It clarified what a carbon credit is.

It highlighted the intense market forces that will drive carbon prices higher.

Finally, it underscored the colossal growth of the booming carbon market. Trading in carbon credits had exceeded $700 million by September, putting it on track to pass the $1 billion mark in 2021. And that was before COP 26 and the surge in carbon prices.

Supply and demand is back. Demand for carbon emissions remains high. Demand for entities to reduce those emissions also remains high.

Offsets and credits themselves are still in short supply.

Do the math.

Carbon Offset Subscription Service – Ecologi, Continues to Grow

In 2019, UK start-up Ecologi had an idea: With subscription services all the rage, why not allow environmentally conscious consumers to subscribe to offset carbon emissions by funding environmental projects?

Let’s just say the idea took off.

Ecologi completed a seed investment round of $5.75 million (£4.05 million) in April. Their pre-money valuation was £16.5 million from lead investor General Catalyst, along with Entrée Capital. Now, Ecologi’s pre-money valuation is at £75 million. They also exceeded a £2 million crowdfunding target on Crowdcube.

Ecologi plans to use the money to expand in the US and EU. They also plan to use the funds towards product development.

Carbon offsets have grown in popularity over the past year as nations and businesses across the globe look for ways to reduce their carbon emissions. This is done by purchasing carbon credits. Each individual carbon credit is equivalent to one ton of carbon being removed from the atmosphere.

Though some have raised concerns over the role of carbon offsets in the fight against climate change, world leaders have voiced their support. Carbon offsets were a central discussion point during COP26, as nations agreed to standardize the offset process.

Some experts even believe the industry could reach $22 trillion by 2050.

According to Elliot Coad, Ecologi CEO and Co-founder, “Community ownership is at the heart of what we do and has been the driving force behind our growth over the last two years, so we felt it was only fitting that we offered our loyal subscribers the chance to own a stake in Ecologi. Since GC’s investment in April this year, we have spent the last three months turning down VC money in favour of a community-based crowdfund.”

Ecologi’s B-Corp certification is in process. Their ultimate goal is to plant one million trees every 10 days, reaching 1.7 billion trees by 2030.

As of now, subscribers through Ecologi have supported planting 26 million trees, offsetting 943,120 tons of carbon.