Demand for Carbon Credits Could Increase +15X by 2030 and 100X by 2050

Simon H
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Demand for Carbon Credits Could Increase +15X by 2030 and 100X by 2050

More and more firms are pledging to contribute to climate change mitigation by reducing their own greenhouse-gas emissions as much as possible. Many businesses, however, realize that they are unable to entirely eliminate or even reduce their emissions as quickly as they would want.

The job is more challenging for businesses striving for net-zero emissions, which means eliminating the same amount of greenhouse gas from the environment as they put into it. Many people will be forced to use carbon credits to offset emissions that they cannot reduce via other means.

The Taskforce on Scaling Voluntary Carbon Markets (TSVCM) of the Institute of International Finance (IIF) predicts that demand for carbon credits would increase by a factor of 15 or more by 2030, and by a factor of up to 100 by 2050.

By 2030, the carbon credit market may be worth more than $50 billion.

The market for freely obtained carbon credits (rather than for compliance purposes) is significant for a variety of reasons. Voluntary carbon credits redirect private financing to climate-action projects that would not be possible otherwise.

These activities might include biodiversity conservation, pollution avoidance, public-health improvements, and job development. Carbon credits also stimulate investment in the required innovation to bring the cost of new climate technologies down.

Furthermore, larger voluntary carbon markets would allow money to be mobilized to the Global South (Latin America, Asia, Africa, and Oceania) where the most cost-effective nature-based emissions-reduction efforts exist.

Given the anticipated demand for carbon credits from global attempts to reduce greenhouse-gas emissions, the world will require a large, transparent, verifiable, and environmentally sound voluntary carbon market.

However, the market today is fragmented and complex. Some credits were discovered to indicate emissions reductions that were, at best, questionable. Consumers are unsure if they are paying a fair price, and suppliers are unsure how to handle the risk of investing and working on carbon-reduction efforts without knowing how much consumers would eventually pay for carbon credits.

Using carbon credits to achieve climate change goals

The 2015 Paris Agreement, ratified by almost 200 countries, established a global aim of limiting average temperature rises to 2.0 degrees Celsius over preindustrial levels, ideally 1.5 degrees.

To reach the 1.5-degree target, global greenhouse-gas emissions must be reduced by half by 2030 and to zero by 2050.

More companies are embracing this movement: in less than a year, the number of organizations with net-zero pledges has more than quadrupled, from 500 in 2019 to over 1,000 in 2020.

To reach the global net-zero goal, companies must reduce their own emissions as much as feasible (while also measuring and reporting on their progress, to achieve the transparency and accountability that investors and other stakeholders increasingly want).

However, lowering emissions using today’s technology is too expensive for certain firms, even though the costs of those technologies may reduce over time. Furthermore, many causes of pollution cannot be eliminated at all businesses.

For example, large-scale cement production often necessitates a chemical process known as calcination, which accounts for a sizable percentage of the cement sector’s carbon emissions. Because of these restrictions, the emissions-reduction strategy for achieving a 1.5-degree target essentially requires “negative emissions,” which are achieved by removing greenhouse gases from the atmosphere.

The chart below shows what needs to be done going forward to meet that target.

reaching the 1.5 degree warming target co2 emissions chart

Purchasing carbon credits is one way for a company to deal with emissions that it cannot eliminate. Carbon credits are certificates that represent the quantity of greenhouse emissions kept out of or removed from the atmosphere.

While carbon credits have been around for a while, the voluntary carbon credit market has grown significantly in recent years. According to McKinsey, buyers will retire carbon credits totaling about 95 million tonnes of carbon-dioxide equivalent (MtCO2e) in 2020, more than double the quantity retired in 2017.

As attempts to decarbonize the global economy ratchet up, voluntary carbon credits may become increasingly popular.

Based on stated demand for carbon credits, demand projections and the volume of negative emissions required to meet the 1.5-degree warming goal, McKinsey estimates that annual global demand for carbon credits could reach 1.5 to 2.0 gigatonnes of carbon dioxide (GtCO2) by 2030 and 7 to 13 gigatonnes of carbon dioxide (GtCO2) by 2050.

The market size in 2030 might vary from $5 billion to $30 billion at the low end to more than $50 billion at the high end, depending on pricing assumptions and underlying variables.

global demand for voluntary carbon credits increase by factor of 15 by 2030 and factor of 100 by 2050

Despite the fact that demand for carbon credits has grown substantially, McKinsey predicts that demand in 2030 may be fulfilled by the potential annual supply of carbon credits: 8 to 12 GtCO2 per year.

These carbon credits would come from four sources: avoided nature loss (including deforestation); nature-based sequestration, such as reforestation; avoidance or reduction of landfill emissions, such as methane; and technology-based removal of CO2 from the atmosphere.

A variety of factors, however, may make mobilizing and bringing the entire potential supply to market challenging. The development of the project would have to be accelerated at an unprecedented rate.

The majority of the potential supply of avoided environmental degradation and natural-based sequestration is concentrated in a few countries. Many sorts of projects may fail to acquire finance due to the large lag times between the initial investment and the ultimate sale of credits.

When these restrictions are considered, the expected supply of carbon credits by 2030 decreases to 1 to 5 GtCO2 per year.

while there is an ample potential supply of carbon credits, several challenges could prevent this supply from reaching the market

These aren’t the only problems that carbon credit buyers and sellers confront. Due to variations in accounting and verification procedures, as well as co-benefits of credits (such as community economic development and biodiversity protection) that are rarely fully specified, high-quality carbon credits are scarce.

When it comes to evaluating the quality of new credits, suppliers have considerable lead times, which is a critical step in maintaining the market’s integrity. When it comes to selling such credits, suppliers face unpredictable demand and rarely receive competitive price.

Overall, the market is marked by a lack of liquidity, inadequate financing, poor risk-management services, and limited data availability.

These challenges are significant, but they are not insurmountable. Verification techniques may be improved, and verification procedures can be made simpler.

Clearer demand signals would instill greater confidence in suppliers’ project plans and encourage investors and lenders to provide funds. All of these requirements can be met if a large-scale voluntary carbon market is carefully developed.

A fresh action plan is required to scale up voluntary carbon markets and a multi-pronged strategy would be required to establish a viable voluntary carbon market.

In its analysis, the TSVCM identified six areas along the carbon-credit value chain where action may help the voluntary carbon market scale up.

1. Creating standardized criteria for finding and verifying carbon credits

Because carbon credits are so varied, the voluntary carbon market presently lacks the liquidity needed for effective exchange. Each credit is related to the underlying project in some way, such as the type of project or the area in which it was completed.

Because buyers assess additional features differently, these variables influence the credit’s cost. Overall, credit irregularity indicates that linking a single buyer with a corresponding provider is a time-consuming, inefficient over-the-counter procedure.

If all credits could be established using identical qualities, buyer-supplier matching would be more efficient. The first set of qualities is concerned with quality. The quality criteria specified in the “core carbon principles” would serve as the framework for assessing whether carbon credits represent genuine emissions reductions.

The second set of attributes would cover the additional properties of the carbon credit. Standardizing such characteristics in a unified taxonomy will aid suppliers in marketing credits and consumers in identifying credits that meet their needs.

2. Getting contract with Standardized terms

Because of the diversity of carbon credits available in the voluntary carbon market, particular types of credits are exchanged in quantities too small to provide meaningful daily price signals. Making carbon credits more consistent would concentrate trade activity on a few types of credits while also boosting market liquidity.

Following the establishment of the aforementioned fundamental carbon principles and standard features, exchanges may create “reference contracts” for carbon trading. A core contract based on fundamental carbon ideas would be included, with further features specified and paid individually according to a standard taxonomy. Core contracts would make it easier for corporations to purchase large quantities of carbon credits at once: they could bid on credits that met certain criteria, and the market would aggregate smaller quantities of credits to meet their bids.

Another advantage of reference contracts is the ability to maintain a constant daily market price. Even if reference contracts are developed, many parties will continue to deal over the counter (OTC). Prices for credits traded via reference contracts might serve as a starting point for OTC trade talks, with other characteristics priced separately.

3. Setting up trading and post-trade infrastructure

A strong, adaptable infrastructure would enable the voluntary carbon market to function smoothly, allowing for high-volume listing and trading of reference contracts as well as contracts with a limited, regularly stated set of additional characteristics. As a consequence, project developers would benefit from the creation of structured finance solutions.

It is also necessary to have post-trade infrastructure such as clearinghouses and meta-registries. Clearinghouses would aid in the development of a futures market while also protecting against counterparty default. Meta-registries would provide buyers and suppliers with custodial services and enable the creation of consistent issue numbers for specific projects (similar to the International Securities Identification Number, or ISIN, in capital markets).

A robust data infrastructure would also increase the transparency of reference and market data. All environmental and financial markets need sophisticated and up-to-date information. Due to restricted data availability and the difficulties of following the OTC market, transparent reference and market statistics are currently unavailable. Buyers and suppliers would benefit from new reporting and analytics services that combine freely accessible reference data from multiple registries via APIs.

4. Getting a common consensus on Carbon Credits

Credits are viewed with skepticism in the context of decarbonization. Some experts are skeptical that businesses will reduce their own emissions much if they had the option of offsetting emissions instead. As part of a wider effort to attain net-zero emissions, businesses would benefit from clear guidance on what constitutes an environmentally efficient offsetting plan. Carbon credit principles would help to ensure that carbon offsetting does not preclude other efforts to decrease emissions and resulting in greater carbon reductions than would otherwise occur.

In accordance with such rules, a company would first calculate its need for carbon credits by disclosing its overall greenhouse-gas emissions, as well as its goals and methods for reducing emissions over time. To compensate for emissions from sources that it can eventually eliminate, the company may purchase and “retire” carbon credits (claiming the reductions as their own and withdrawing the credits from the market, so that another organization cannot claim the same reductions). It may also use carbon credits to offset “remaining emissions” that it will be unable to eliminate in the future.

5. Ensuring Market Integrity

Concerns regarding the integrity of the voluntary carbon market stymie its spread in a number of ways. For starters, the varied nature of credit increases the likelihood of errors and fraud. Money laundering is also a possibility due to the market’s lack of pricing transparency.

One corrective measure would be to implement a computerized system for project registration, credit verification, and issue. Verification organizations should be able to track a project’s impact on a regular basis, not only at the end. A digital approach may minimize issuance costs, shorten payment times, accelerate credit issuance and cash flow for project developers, allow credits to be traced, and boost the credibility of corporate offset claims.

Other upgrades would include the implementation of anti-money-laundering and know-your-customer regulations to prevent fraud, as well as the formation of a regulatory body to check market participants’ eligibility, regulate their behavior, and oversee the market’s operation.

6. Building Demand

Finding an effective way for carbon credit buyers to express their future needs will help incentivize project developers to increase carbon credit supply. Long-term demand signals might include promises to reduce greenhouse gas emissions or upfront agreements with project developers to acquire carbon credits from future developments. To measure medium-term demand, a registry of commitments to purchase carbon credits may be utilized.

Consistent, widely accepted guidelines for companies on acceptable uses of carbon credits to offset emissions; increased industry-wide collaboration, in which consortiums of companies align their emissions-reduction goals or establish shared goals; and improved standards and infrastructure for the development and sale of consumer-oriented carbon credits are all possible ways to promote demand signals.

To keep global warming to 1.5 degrees Celsius, net greenhouse-gas emissions must be reduced quickly and significantly. While companies and other organizations may achieve the majority of the needed reductions by implementing new technologies, energy sources, and operating techniques, many will need to supplement their own abatement efforts with carbon credits in order to achieve net-zero emissions. A strong, well-functioning voluntary carbon credit market would make it easier for companies to locate reputable carbon credit suppliers and execute transactions on their behalf.

Furthermore, such a market would be capable of communicating signs of buyer interest, motivating suppliers to increase credit supply. A voluntary carbon market would speed up the transition to a low-carbon future by allowing for more carbon offsetting.

Adapted from https://www.mckinsey.com/business-functions/sustainability/our-insights/a-blueprint-for-scaling-voluntary-carbon-markets-to-meet-the-climate-challenge

How Shipping will be Affected by the EU’s New Carbon Deal?

Tony S
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How Shipping will be Affected by the EU’s New Carbon Deal?

The EU is proposing a new carbon pricing plan that will impact the price of carbon emissions, specifically in the transport sector.

Legislation in the EU is being drafted to accomplish the goal of being carbon neutral by 2050. To accomplish this goal, the EU is seeking a 90% reduction in transport emissions by 2050.

Solutions for Shipping

Alternative methods of transport and fuels will be provided to member states to reduce emissions. The EU mentions multimodal transport as a solution. This results in multiple transport avenues such as railways or waterborne transport for goods to move within the union.

As a result, these trade routes can be simplified and optimized in a way that keeps pollution to a minimum.

There is staunch opposition from shipping companies, as green alternatives to current fuels such as renewable hydrogen or ammonia are not incentivized in the deal. Rather, the EU is incentivizing using natural gas as a fuel source, which can be considered toxic if fuel spills are to occur.

Inland Waterways – the Future?

According to the EU, inland waterways account for 17% of the emissions that road transport uses and 50% of the emissions railways use. Inland Waterways would decrease carbon pollution, while also decongesting many high traffic land routes.

Noise pollution is also a factor that would decrease with increased shipping through inland waterways.

 

Federal Government Rejects Saskatchewan’s Carbon Pricing Plan

Tony S
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Federal Government Rejects Saskatchewan’s Carbon Pricing Plan

The federal government has rejected a request from Saskatchewan to use a provincial carbon pricing plan.

Saskatchewan premier Scott Moe has opposed the federal carbon price, feeling it puts a strain on an uncompetitive economy in Saskatchewan. In a statement released by the premier, Moe states “The rejection of Saskatchewan’s submission can only be viewed as an arbitrary and political decision from the federal government.”

Moe also indicated that the federal government will not accept any further submissions of a carbon pricing plan until 2023.

The Saskatchewan rejection contrasts with the carbon pricing plan approved in New Brunswick, which provides reduced fuel prices in exchange for a carbon tax.

The move shows the Canadian governments commitment to uniting carbon taxes across the whole country, rather than letting provinces decide how they should implement carbon measures. The federal government mentioned a benchmark carbon price is in the works and could be implemented as early as January 2023.

Minister of Environment and Climate Change Jonathan Wilkinson did mention previously that the new benchmark would eliminate any rebates or cuts offsetting the carbon tax.

Canada aims to be carbon neutral by 2050, they have also been tasked by the UN to reduce emissions from 40-45% by 2030. A change in carbon pricing methods could eliminate any discrepancies and help Canada reach their Net-Zero goals.

 

 

What is a Carbon Offset? A Carbon Primer

Carbon Publisher
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What is a Carbon Offset? A Carbon Primer

Carbon Offset Primer

So what is a Carbon Offset and why do entities buy them?

In recent years, global climate change has driven interest in carbon offsetting as a way to reduce greenhouse gas emissions.

A carbon offset is a way to balance out the carbon emissions you produce by investing in projects that reduce emissions elsewhere.

But what exactly is a carbon offset, and how does it work? In this article, we’ll explore the basics of carbon offsets, how they are created, the types of projects they support, and how investors can get involved.

Buying a carbon offset or credit is the right thing to do for the planet. Offsets do not simply kick the global warming can down the road: They create a way to buy their way into the problem, not out of it.

Offsets can trade in the compliance markets (like those from the Clean Development Mechanism or Joint Implementation projects). However, the majority are traded in the voluntary markets.

Carbon offsets can also have co-benefits such as job creation, water conservation, flood prevention and preservation of biodiversity.

Below is a chart which shows the annual credit generation from carbon offset projects in the voluntary carbon market. In 2021, annual credit production in the voluntary carbon market hit a record at over 400 million MtCO2.

voluntary carbon credit retired and issued 2023

How Offsets are Created

Carbon offsets are created through the development of projects that reduce greenhouse gas emissions or remove carbon from the atmosphere.

One of the most common ways to create carbon offsets is to support renewable energy projects such as wind or solar power.

When you invest in these projects, you are helping to reduce the amount of greenhouse gases released into the atmosphere, which in turn can help to mitigate climate change.

Other carbon offset projects might include reforestation efforts, methane capture from landfills, or energy efficiency improvements.

A portion of offset spending also goes toward investing in futuristic technology for carbon sequestration and emissions mitigation. Many methods of carbon offset creation, like direct air capture, are in the very incipient stages of development. Increasing demand for those novel offset types enables large-scale deployment, rapidly making them more economical.

Eventually, new technologies will reach a tipping point. For example, Prometheus’s forges are expected to remove 11 GT of CO2 from the air each year by 2050.

  • That’s the equivalent of 20% of current emissions, all from a single company.

And it’s only possible with heavy, ongoing investment in carbon credits and offsets—even “risky” ones.

Types of Carbon Offset Projects

Carbon offset projects are grouped into 2 categories:

  1. Avoidance/Reduction projects like renewable energy (wind, solar) and methane capture
  2. Removal/Sequestration Projects like reforestation and direct carbon capture

Carbon offset categories

The physical cost of offsetting incentivizes the companies to identify operational “leaks”—areas where emissions can be reduced or eliminated—then begins to force the company to eliminate emissions throughout their entire value chain.

Companies that use offsets at least in part to manage their emissions implement emissions reductions at a higher rate, spend almost five times as much on reductions, and mitigate or eliminate a greater proportion of their emissions as those that do not use offsets.

Investing in offsets also helps the earth through the offsets themselves. Reforestation increases biodiversity, and the installation of solar panels and wind turbines pulls energy demand away from coal and fossil fuel supplies.

A carbon offset can be resold multiple times but once retired, it can no longer be resold. To ensure there is no double-sale, a carbon offset must be kept on a registry. This registry keeps track of the issuance and retirement of offsets.

Carbon Offsets Investing 

Investing in carbon offsets can be a way to both reduce your carbon footprint and support sustainable development around the world.

When you invest in a carbon offset project, you are essentially purchasing a credit that represents the amount of greenhouse gas emissions that have been reduced or removed.

These credits can then be sold or traded on carbon markets, or used to offset the emissions of a particular activity (like air travel or shipping). The price of carbon offsets can vary depending on the type of project and the structure of the market, but in general, they are a cost-effective way to support climate action.

Investing in carbon offsets—whether for better financing terms or to help prevent further climate change—encourages competitors in the marketplace to do the same.

Etsy, the online market for handcrafted goods, purchased high-quality carbon offsets for all of its competitors for a single day, and committed to offsetting its own carbon footprint in the future. It calculated the total cost of doing so at just a penny per package, proving that it’s an expense every other retailer can afford to bear.

  • Demonstrating the economic feasibility of emissions mitigation encourages other companies to do it, even if it’s for a reason other than saving the planet.

In fact, it may be a combination of all of these reasons and more: creating a more resilient supply chain, improving supplier relationships, and increasing employee retention are all co-benefits of purchasing carbon credits and carbon offsets, ensuring your company can thrive forever.

The Importance of Blue Carbon Credits

Simon H
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The Importance of Blue Carbon Credits

What is Blue Carbon?

Blue carbon credits are created by the growth and conservation of carbon-absorbing plants, such as mangrove forests and their associated marine habitat.

Blue Carbon refers to the carbon stored in coastal ecosystems like mangroves, seagrasses, and salt marshes.

These ecosystems cover just 1% of the ocean floor but can store up to 10 times more carbon per unit area than terrestrial forests.

Blue Carbon is so-called because it is stored in marine or coastal living organisms and the sediments beneath them.

Blue Carbon ecosystems are vital for the health of our planet. They not only store carbon but also provide essential services such as water purification, coastal protection, and habitat for marine life.

Over the past decade scientists have discovered that seagrass meadows, tidal marshes and mangrove forests are among the most intensive carbon sinks in the world. This means blue carbon offsets can remove enormous amounts of greenhouse gases.

A blue carbon offset project should have its carbon credits trade at a premium.

This is because of the large positive second-order effects such as the positive effects on corals, algae, and marine biodiversity (e.g. sharks, whales, sea turtles) that have been so negatively impacted by activities such as over-fishing and farming.

  • Mangroves Store 10x more carbon than terrestrial forests (Source: Kauffman et al, 2018)

Yes, forests can grow in the ocean. Examples include the mangrove forests in sea bays, such as Magdalena Bay in Baja California Sur, Mexico.

Blue Carbon Marvivo Bay Mexico
Image: MarVivo Magdalena Bay Project

Mangroves are trees (about 70 percent underwater, 30 percent above water) that have evolved to be able to survive in flooded coastal environments where sea water meets fresh water and the resulting lack of oxygen makes life impossible for other plants.

  • Mangroves cover just 0.1% of earth’s surface (Source: FAO, 2003)

Mangrove trees create shelter and food for numerous species such as sharks, whales, and sea turtles. Mangrove forests are a valuable marine ecosytem.

Second Order Effects of Blue Carbon Credits

Other positive second-order effects of mangrove forests include their importance as a pollution filter, reducing coastal wave energy and reducing the impacts from coastal storms and extreme events. Blue carbon systems trap sediment which support root systems for plants. This accumulation of sediment over time can enable coastal habitats to keep pace with rising sea levels.

All this can be calculated into insurance premiums, and lower-cost premiums are good for business and residents. These are all free second-order effects. To put it in perspective, natural disasters and extreme weather events created over $270 billion worth of economic losses in 2020. It is absolutely in the best interest of citizens and insurance companies to mitigate the effects of climate change.

Coastal wetlands and mangrove forests will become an ever-increasing sector for carbon credit generation. That is because mangrove forests and coastal wetlands sequester carbon at a rate that is up to ten times greater than mature tropical forests.

Because the carbon is sequestered and stored below water in aquatic forests and wetlands, it is stored for more than ten times longer than in tropical forests.

  • The significant positive second-order effects attributed to each blue carbon credit are why many investors believe it will trade at a premium to other carbon credits.

Blue Carbon and the Food Footprint

There is a land-use carbon footprint of 1440 kg CO2e for every kilogram of beef and 1603 kg CO2e for every kilogram of shrimp produced on lands formerly occupied by mangroves. A typical steak and shrimp cocktail dinner would burden the atmosphere with 816 kg CO2e.

It is estimated that over 1 billion tons of carbon dioxide is released annually from degraded coast ecosystems.

There are around fourteen million hectares of mangrove aquaforests on earth today and they’re under attack by the deforestation practices caused by intense shrimp farming

Are the shrimp you eat part of the problem? Soon, these shrimp will be labeled, and consumers will know and be required to cover the offset costs for the environmental damage.

To put things into perspective, 14 million acres of wetlands will absorb as much carbon out of the atmosphere as if all of California and New York State were covered in Tropical Rainforest.

Think of Blue Carbon as the “high grade” gold mine at the surface.

With the economic value of Blue Carbon credits and the technology that will enable Carbon Rangers to preserve forests and wildlife, expect entrepreneurs to expand the Carbon Ranger program to mangrove forests across the globe. This will be a step forward and a small part of solving the climate emergency.

These are just a few of the examples of how carbon credits will be created to enhance stakeholder capitalism.

The percentage of blue carbon credits trading in the Voluntary Carbon Market (VCM) is still uncertain, but current trends suggest they are set to grow and establish themselves. Investing in blue carbon credits can be more challenging compared to other types of credits, primarily due to the market’s nascent and evolving nature.

However, this also presents an opportunity to support and shape the development of this emerging market. Investing in blue carbon credits not only contributes to environmental goals but also helps accelerate the establishment of a new and impactful sector.

Oceanic Blue Carbon

In addition to coastal blue carbon mentioned above, Oceanic blue carbon is stored deep in the ocean within phytoplankton and other open ocean biota.

The infographic below shows the typical blue carbon ecosystem

Blue Carbon Infographic
Source: Natural Carbon Sinks: Blue Carbon ecosystems in climate change mitigation, 2021

There are many factors that influence carbon capture by blue carbon ecosystems. These include:

  • Location
  • Depth of water
  • Plant species
  • Supply of nutrients

Improving blue carbon ecosystems can significantly improve the livelihoods and cultural practices of local and traditional communities. In addition, restoring blue carbon regions provides enormous biodiversity benefits to both marine and terrestrial species.

– CarbonCredits Editor

 

Carbon Credit Winners

Simon H
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Carbon Credit Winners

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 $1.79 billion in carbon credit revenue in 2023.

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 2023, 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.

 

Carbon Credit Losers

Simon H
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Carbon Credit Losers

Combine regulatory carbon credits and voluntary carbon offsets, and you’ve got a brand-new market with explosive potential. But not everyone can, or will, profit from the new markets.

The irony is that many of the carbon credit losers are entities that should seem like a perfect fit for any planet-friendly initiative. Instead, these seemingly-obvious carbon winners are actually losers. Let’s look at the list.

Farmers (small ones)

In the last article, I told you about a farmer who won big due to carbon credits – $150,000 big. But that farmer had a secret ingredient that the vast majority of American farmers simply don’t have.

His farm was a 10,000 acre farm.

The trick is that carbon credits aren’t actually that expensive right now on the voluntary market. His credits sold for a little over $15 a ton, and he sequestered about 8,000 tons of carbon.

The math simply doesn’t work for smaller farms. That means that one prime candidate for the carbon credit movement will likely get bypassed entirely – organic farms.

That’s right. Organic, carbon-conscious farms that go out of their way to be planet-friendly will likely miss out on carbon credits . . . which are designed to reward carbon-conscious companies that are planet-friendly.

Most organic farms simply aren’t big enough to compete for carbon credits at scale. They don’t have enough acreage to hold much interest for the third-party exchanges who coordinate carbon sales. The average size of an organic farm in the US is 285 acres. That’s even less than the average size of a regular farm, at 444 acres.

And it’s less than 0.03% of that 10,000-acre farm that won big. Apply the same percentages to the original $115,000 amount, and your average organic farm in the USA would be eligible to receive roughly $3,500 in carbon credits for projects that are often multi-year undertakings.

Those small farms stand to gain pennies, if anything, while larger corporate farms gobble up the credits. That makes small, organic, low-carbon-emissions farms into carbon credit losers.

Nuclear Power Plants

Nuclear is the obvious answer to so many emissions problems. Need something that will efficiently replace all your natural gas and coal power plants? Go nuclear. Want to provide lots of both blue-collar and white-collar jobs? Go nuclear.

And yeah, want an energy source that is nearly greenhouse gas free? Go nuclear.

But nuclear power suffers from heavy regulations and an incredibly lengthy construction time – from 7-8 years to well over a decade, depending on the country and size of plant.

And with all the emphasis on cutting emissions NOW, nuclear plants will lose out.

Who will buy nuclear carbon credits when they can buy credits from a wind farm or a water reclamation project? Especially when those projects can be ready in a matter of months or a couple of years.

Large nuclear energy plants are a carbon credit loser.

Oil And Natural Gas Companies

Media tends to focus on the continuing massive demand for oil, and then panic that the global economy will never wean itself off fossil fuels.

The fact is, oil and natural gas is already suffering a slow death by a thousand cuts, and carbon credits are one of them.

On the voluntary market, carbon credits are a way for consumers to directly reward renewable energy companies. Think of them as a free-market subsidy, providing an extra income stream for green energy producers. Fossil fuel companies will have to compete with green energy companies that are increasingly profitable and can scale up quickly.

And it isn’t just the carbon credit issue. Automobile companies, under both market and government pressure, are building more electric vehicles and fewer internal combustion engines. Governments like the EU and the UK are taking steps to ban the sale of new internal combustion engine cars as early as 2030, forcing companies to make the shift to electric.

Electric cars are just the tip of the iceberg. Electric cars paved the way for the same technology to be used in boats. As that technology scales up, the demand for fossil fuels will slowly but steadily decrease.

And all along the way, carbon credits will go to green energy initiatives and emissions-reducing projects. Fossil fuel companies will largely lose out on the carbon credit bonanza.

Transparency (at first)

Carbon credits are a new frontier for investors and startups alike. The voluntary carbon offset market is especially wide-open. Right now, nearly any earth-friendly project can start to look like a legitimate offset.

But not all carbon offsets are created equal. Without an external regulator to weigh the impact of one project against another, entities purchasing carbon offsets rely on the trustworthiness of the third-party vendor.

In these early days of the carbon offset markets, there’s less transparency, and less of a chance to accurately determine good projects from bad ones.

As entities develop better metrics to track the effectiveness of carbon offsets, transparency will improve. But for the short term, until the markets adjust, transparency is a carbon credit loser.

Every emerging market opens new vistas to investors.

Find the peaks.

Avoid the valleys – don’t be a carbon credit loser.

 

When to Purchase Carbon Offsets

Simon H
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When to Purchase Carbon Offsets

Carbon credit buyers and investors do not need to know all of the intricacies of how offset methodologies work and how projects are developed. But to buy carbon credits, they should understand the offset lifecycle: how offsets are created and eventually retired.

That will help them determine the type, price, and risk of investment options available to them—and whether or not a purchase will help them meet their organization’s emissions reduction goals.

Each new carbon offset has five major points in its lifecycle:

  • Development of a new offset type
  • Selection of an offset methodology
  • Planning of an individual project using that methodology
  • Implementation and verification of the project, registration with a carbon authority, and the beginning of offset issuance
  • Transfer to the purchaser and retirement of the offsets

carbon credit lifecycle

Each phase represents an opportunity for substantial investment: in new offset technologies, in offset project ideation and development, and in offsets themselves.

Both price and risk begin extremely high, as there is no guarantee emissions will be removed. As the project enters the planning phase, the price falls and terms improve in order to attract investment.

Prices rise again as validation, verification, and registration take place—this means the risk of delivery has decreased and high-quality offsets are more likely. Then prices level off or rise slightly as the risk of double-counting or leakage rises and brokers and retailers take their cut.

Offset purchasers should become familiar with each point on this curve. It will help them determine how to maximize the ROI and other benefits their organization receives in return for offset purchases.

Offset Type Development

Dozens of offset types, such as methane capture from landfills and large hydro projects, have been established over the past thirty years. The two most popular types are currently wind and reforestation.

The problem is that while many types of carbon offsets have proven effective at removing CO2 emissions from the atmosphere, those currently in existence are only stop-gap measures.

For example, to erase the emissions from aviation, the entire United States would need to be planted with trees. That’s why investment in new types of offsets is so vital: the technology that will arrest global warming has likely not been invented yet.

Fortunately, new technologies and methods of removing CO2 emissions from the atmosphere are constantly moving along the timeline above. Experimental types of offsets currently in the funding and research phase include:

  • Accelerating mineral weathering in rocks using electrochemical forces.
  • Genetically engineering phytoplankton to capture CO2 in the ocean.
  • Flooding deserts create manmade oases that phytoplankton can inhabit.
  • Developing enzymes that capture carbon.

The holy grail of offset development borders on alchemy: turning atmospheric CO2 into a usable product. For example, Coca-Cola has already signed a deal with a company that uses direct air capture of CO2 to make its soft drinks bubbly.

Purchasing carbon credits at this stage is risky:

During type development, there is no guarantee that carbon offsets will be able to be produced from the eventuating invention.

It’s also expensive. Experimental methods of removing carbon from the atmosphere can cost hundreds of dollars per ton during development.

For example, Climeworks—which captures CO2 and sends it to a local greenhouse (the irony!)—says it currently costs about $600 to remove a ton of CO2 using their methods. (Their cost per tonne is expected to drop below $100 within the decade.)

Investing in carbon offsets at this point does not net an organization any real offsets. Rather, it involves investing directly in companies that are working on breakthrough technology for the capture of CO2.

Thus, it should be undertaken by companies that can make use of the possible co-benefits of the eventual offsets (think of Coca-Cola’s uses for the carbon), companies that do not need the offsets for compliance, and companies that want a reputational bump from supporting the development of new technology.

Offset Methodology Selection

Once a carbon offset technology is ready for a new project to be built around it, it requires the creation or selection of an offset methodology, which is a complex set of rules around the creation of that offset.

The methodology provides guardrails for a project developer, outlining what they must do to establish a baseline for the project, determine additionality, calculate project emissions reductions, and monitor external parameters to calculate absolute emission reductions.

Entire libraries of approved methodologies already exist that cover the most developed project types. It is up to project developers, though, if they want to create a brand new methodology to get the program approved and moving forward.

That adds a resource-intensive, risky layer to the project, but it can be necessary for offset developers who want to attempt novel project activities.

Investing at this point is an ultra-high-risk, high-reward proposition. If the buyer is heavily involved in the selection or creation of the methodology, it can yield assurances as to the quality of the resulting carbon offsets and their relevance to the buyer’s operations.

That is paired, however, with a long lead time before offset delivery (likely a few years) and a high measure of risk if the methodology is not approved.

This option is for companies that have a lot of time before they need offsets, and have the time to invest in researching new offset projects and building relationships with project developers.

Offset Project Inception: Project Planning, Validation, and Registration

Once a methodology has been chosen, the project developers generate a project plan that assesses the feasibility of the project, its environmental impacts, and possible risks to development.

The plan is solidified into a project design document, which outlines the anticipated reduction in emissions from the project, plans for quantifying and monitoring those benefits on an ongoing basis, and proof of additionality for the project.

Independent third-party verifiers examine and approve the project design, ensuring that emissions reductions will take place. Then—and only then—can the carbon offset program be registered. This official registration sets the program up to begin issuing carbon offsets.

There are two general options for investment at this stage, both of which involve investing in the project directly:

  • Investing for the right to a specific percentage of the offsets created by the project.
  • Investing for the right to a specific number of offsets created by the project.

The former requires (and enables) much deeper engagement and a broader understanding of the mechanisms of carbon offsets than do later stages.

Investors must be able to evaluate the strengths and weaknesses of specific projects alongside third-party verifiers to decide whether the project is likely to deliver on its plans.

The latter generally looks like an Emission Reduction Purchase Agreement (ERPA). ERPAs take risks away from project developers by letting them pre-sell a specific volume of offsets. In exchange for taking on the delivery risk, buyers or investors get to lock in below-market offset prices.

Both options have a lower cost than later in the development process, and buyers may be able to invest in at-cost offsets. As always, that comes with a price: the offsets will be delivered over time, not all at once, and this type of investment generally requires a long-term agreement (as with an ERPA).

Offset Project Implementation: Verification and Issuance

Projects that have become operational must be monitored over a period of time based on the original methodology and plan. Then, another verification audit process assesses the realness and quality of the claimed reduction in CO2 emissions; these verifications typically occur a year apart.

Once verification has been passed, the project developer can issue carbon offsets equal to the number of tons of CO2 that were verified to have been captured or reduced.

Those verified offsets are deposited into the project developer’s offset “bank account.” This is where the transition from “project readiness” to “pay for performance” takes place. In other words, those offsets are no longer just theoretical; they are continually being created, and the developer can begin delivering on long-term contracts.

Offset Sale and Transfer

Any offsets that have not been pre-sold become available for direct, one-off purchases from consumers and corporations. While purchasing directly from a project developer can help avoid transaction costs, it is not without its risks—especially in terms of the quality of the offsets.

Since there is no centralized marketplace for the voluntary carbon market, finding buyers remains challenging for project developers, and identifying quality offsets is difficult for all but the most knowledgeable buyers.

Thus, three new entities have been created to facilitate the easy purchase of offsets: brokers, exchanges, and retailers.

Brokers have purchased credits from the project developer or exchange and can transfer them to clients or retire them on their behalf. Brokers can be used to create a diverse basket of offset credits from different projects, different methodologies, and different project types.

Beware that some brokers sell offsets from projects they have directly invested in; while that may reduce fees, it might also make the broker biased toward selling their offsets, regardless of quality.

Exchanges are places for developers to sell directly to buyers (and for traders to invest in carbon offsets). North America and Europe host a few environmental commodity exchanges that list carbon offsets and facilitate transfers.

While purchasing offsets in an exchange can be as easy as using Robinhood, it can be difficult to ascertain the exact quality of the offsets.

Retailers sell off-the-shelf carbon credits (just like the old boxes of Microsoft Windows CDs), then retire them on behalf of the buyer. Retailers have physical ownership of the offset, while brokers and exchanges do not.

Purchasing carbon credits from a retailer offers the same benefits as buying from Best Buy: unlike Amazon, their employees can help companies understand the process of offsetting and what types of offsets are most likely to help meet their goals.

Offset Retirement

Offsets can be sold and resold. With each new transaction, they are transferred into a different account in the offset program’s registry. Those new buyers can hold them, transfer them to another account through a sale, or retire them.

Offsets are retired by “using” them by claiming their verified CO2 reductions against an emissions reduction target. Each carbon offset registry has a retirement process that prevents the offset from being transferred or used again—think of it like a dollar bill being removed from circulation.

Making Your Offset Investment Decision

The opportunities to purchase throughout the carbon credit lifecycle look like this:

Where you choose to invest in the carbon offset lifecycle depends on myriad factors, including:

  • The business goals and expected advantages behind your purchase.
  • How quickly do you anticipate needing the offsets to be delivered?
  • The guaranteed quantity of offsets you will need.
  • The price level that can be afforded or that makes the most financial sense.
  • The amount of time and effort available to apply to the offset acquisition.

Answers to each of these questions will guide you toward options that differ in their timing, volume, and price, and your ability to evaluate (or influence) their quality.

China to Make Disclosure of Carbon Emissions

Simon H
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China to Make Disclosure of Carbon Emissions

China intends to make climate and carbon emission information disclosure mandatory in the future. According to central bank Governor, Yi Gang, they have completed some trials with select commercial banks and publicly traded enterprises,

“Our goal is to make a uniformed disclosure standard, and in the future, we will go in the direction of mandatory disclosure of climate-related information,” Yi said during a panel discussion at the Bank for International Settlements’ Green Swan conference.

President Xi Jinping’s vow to make China carbon neutral by 2060 implies that the world’s most polluting country will need to undertake a dramatic transition away from fossil fuels and toward sustainable energy.

The People’s Bank of China (PBOC) is attempting to contribute to this transformation by creating green financing and tackling related financial concerns. According to Yi, the PBOC has undertaken stress tests to analyze climate risks and has offered policy incentives for banks to issue loans for green projects

It is also examining the impact of the economy’s shift to renewable energy on inflation projections, he added.

To reduce emissions, the government is going to require an estimated $343 Billion in annual investment by 2030, rising to over $600 Billion trillion yuan for the three decades running up to 2060.

Adapted from: https://www.bnnbloomberg.ca/china-to-make-climate-information-disclosure-mandatory-yi-says-1.1612748

Highlights of China’s New National Carbon Market

Simon H
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Highlights of China’s New National Carbon Market

On July 16th, the world’s largest producer of greenhouse gas pollution – China, launched a nationwide carbon emissions trading market.

This was a long-awaited move toward combating climate change, and the market aligns the ability to pollute into an allowance that can be purchased and sold. It is one of several measures implemented by the Chinese government in an effort to demonstrate its commitment to drastically decreasing carbon dioxide emissions in the future decades.

Xi Jinping, China’s leader, has vowed to combat climate change and aims to portray his country as an ecologically responsible world power.

Mr. Xi made two landmark climate promises last year.

  1. He promised that China’s carbon dioxide emissions will peak before 2030.
  2. China will attain carbon neutrality before 2060.

He added, implying that the quantity of carbon dioxide gas produced into the environment by China would be offset by techniques such as forest planting.

Mr. Xi’s commitments, if fulfilled, have the potential to make a substantial influence in the world’s efforts to combat climate change.

The Paris Agreement, a worldwide agreement aimed at limiting global warming to less than 1.5 degrees Celsius, would not be achievable unless China and the other major countries move quickly to reduce greenhouse gas emissions.

China’s greenhouse gas output accounted for 27% of global emissions in 2019. That’s more than the combined amount of the next three largest polluters — the United States, the European Union, and India.

Since passing the United States as the leading polluter in 2006, China has faced strong domestic and international pressure to decrease emissions and do more to combat global warming.

China’s new carbon emissions market functions by restricting the amount of carbon dioxide that businesses may emit. The aim is to generate competition to push them to become more energy efficient and to embrace clean technologies.

Companies that reduce their carbon footprint can sell unused pollution allowances; those that exceed their emissions allowance may be required to purchase additional permits or pay fines.

Governments can force firms to adopt carbon-cutting technology by auctioning permits and gradually reducing the amount of pollution that they are permitted to emit.

Emissions trading, rather than top-down administrative measures, can be a more effective and flexible instrument for reducing emissions.

China’s carbon market has been in the works for some years.

Over a decade ago, the Chinese government began local experiments of carbon trading and in 2015 planned on developing a national trading scheme. However, the Chinese government has failed to get the conditions perfect for a nationwide launch.

To guarantee that the market works, authorities must correctly measure emissions from industries and plants and then verify that polluters do not cheat by concealing or altering emissions data.

However, with China’s huge industrial base and relatively lax regulation, this has proven to be difficult.

Earlier this month, a company from Inner Mongolia, a province of northern China, that is participating in the new market, was penalized for faking carbon emissions statistics.

The Chinese government first said that the market might include steel production, cement production, and other sectors, as well as power plants.

However, it limited the scope to only coal and gas facilities that provide power and heat – a sector with fewer competitors and therefore simpler to oversee.

China’s coal and gas power sectors covers almost a tenth of total world CO2 emissions.

Other industries may enter the market in the coming years.

The Shanghai Environment and Energy Exchange chose 2,225 power plant operators, many of which are subsidiaries of China’s state-owned power conglomerates, to trade on its platform.

China’s carbon emissions market now dwarfs, Europe’s and California.

These and other carbon trading program may eventually join forces, becoming a possible worldwide market.

For the time being, however, overseas investors and financial firms will be barred from entering China’s carbon market.

However, most experts believe it would take years for China’s program to grow into an effective instrument for reducing emissions.

Adapted from: https://www.nytimes.com/2021/07/16/business/energy-environment/china-carbon-market.html

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