To meet net-zero objectives, companies across the globe are investing heavily in carbon offsets.
The carbon offset industry has boomed over the past year. In fact, the Voluntary Carbon Market (VCM) is now valued at over $1 billion. That’s up from just $300 million in 2018. And many experts believe it has the potential to reach $100 billion by 2030.
J.P. Morgan and Marc Benioff’s TIME Ventures seem to agree.
They took part in a Series-B led by Energize Ventures to support NCX – which raised $50 million.
What are carbon offsets, and why are they so popular?
Carbon offsets are tools that companies can use to “neutralize” their carbon emissions. This is done through various environmental projects.
NCX is a carbon marketplace that companies can use to find and purchase these carbon offsets.
First, NCX uses satellite images and machine-learning software to map forest areas. Once mapped, NCX serves as a go-between for companies and landowners to agree.
Suppose the landowners choose to refrain from cutting down their trees (for compensation). In that case, companies can claim those “offsets” against their own carbon emissions. It’s mutually beneficial – landowners are compensated, and companies can meet emissions goals.
So, if a landowner promises to keep trees intact, and a company pays them to do so, the company is doing something beneficial for the environment.
Note that many of these companies are working towards net-zero emissions. However, the technology to drastically reduce emissions or remove them altogether isn’t quite where it needs to be. So, offsets serve a purpose interim.
NCX then takes a percentage of the purchase price.
NCX was formerly known as SilviaTerra. It was founded in 2010 by two students who met studying forestry at Yale.
American International Group Inc. (NYSE: AIG) is stepping up with its own net-zero pledge.
AIG has committed to reaching Net Zero GHG (Greenhouse Gas) emissions across its underwriting and investments portfolios by 2050.
They’ve announced that they’re not investing directly into or providing insurance for the construction of any new coal-fired power plants, thermal coal mines, or oil sands projects.
They have also taken it a step further and announced they are phasing out investing and insuring companies that get over 30% of their revenue from these industries.
The New York-based insurer is also halting investing and insuring all new Arctic energy exploration activities.
AIG has also committed to having 100% renewable energy for its operations by 2030.
“The data about climate change is unambiguous and we believe that AIG can be a catalyst for positive change as it relates to sustainability advancements and renewable energy expansion.” AIG Chairman and CEO Peter Zaffino said in the statement.
Xpansiv is planning an IPO on the Australian Stock Exchange later this year. But right now they are in full M&A mode.
They are cashed up and have started making acquisitions in a massive roll-up play in the carbon markets.
Xpansiv’s trading platform currently hosts over 90% of all voluntary carbon credit transactions globally.
In 2021, Xpansiv recorded $305 million in revenue (~300% higher than the prior-year).
Over 120 million tonnes of carbon were traded on its CBL Exchange last year (a 4x increase over 2020.)
Their platform is used by the largest corporations such as Walmart, Tesla, Chevron, Shell, and Goldman Sachs.
The platform matches companies needing to buy credits (to fulfill their net-zero objectives) and speculators/investors with carbon credit providers.
They recently teased a potential vertical integration acquisition called the “Moonraker” project in their latest investor pitch deck. The transaction is expected to be worth over $100 million.
They also recently announced to acquire a leading provider of registry infrastructure for energy and environmental markets – APX Inc.
Xpansiv had two $100 million funding rounds in the past 2 years and also a $40 million pre-IPO deal.
They are expected to raise more than $500 million in the coming weeks – placing them at a ~$2 Billion market cap ahead of them being publicly traded.
As more and more companies make NetZero pledges, the amount of capital being deployed in the carbon sector is growing every quarter.
Xpansiv CEO, Joe Madden has stated that “it was clear that there were trillions of dollars in mismatch there, and somehow that would have to get reconciled. And markets were where it was going to get reconciled.”
The events unfolding in the Ukraine and sanctions on Russia have created sentiment across the board – even in the carbon sector.
Many are fearful of the potential economic fall-out of the Ukraine invasion and also a decline in overall industrial demand.
Typically, spiking gas and power prices would also increase the price of carbon.
As higher natural gas price encourages some power generators to switch to cheaper and dirtier coal. Coal emits upwards of double the emissions of natural gas, so this should increase the demand for carbon permits – in theory.
Some are speculating that some participants are offloading their EUA positions to cover losses elsewhere.
Before Russia’s invasion of Ukraine, the EU carbon price was near an all-time high of close to 100 Euros, this followed a record 2021.
Analysts at Engie EnergyScan noted that the “fundamentals of the market, i.e., its increasing tightness, are not changed by the crisis and the current prices could be considered as attractive”
Some speculators may be in a holding pattern in regards to entering the market again and are likely waiting for a resolution to the conflict. But the overall macro view of the carbon sector still remains strong.
Germany has placed a hold on the Nordstream 2 underground natural gas pipeline, which runs between Germany and Russia. The channel is almost complete and operable.
This move by Germany will not impact the immediate supply of natural gas. However, it could affect Europe’s already strained natural gas resources – and impact carbon markets.
Natural gas and oil prices have increased.
Fears that Russia will withhold future natural gas have driven prices up to $90 per megawatt-hour. That’s an increase of 10%.
The price of oil – also a Russian export to Europe – rose 1.5% ($99.50 per barrel). This is the highest level Europe has seen since 2014.
U.S. natural gas prices also increased, though less than in Europe.
Luke Oliver, Managing Director and Head of Strategy at KraneShares, told ETF trends, “Halting certification of the Nordstream2 gas pipeline will put increasing pressure on natural gas prices, which in turn make fuel switching from coal to gas more expensive and increases demand for carbon allowances.”
Simply put, if the price of switching from coal to gas is higher, the demand on carbon markets may increase even more.
Oliver went on to say, “This puts pressure on the entire energy complex. This is no doubt positive for a carbon price, albeit sadly not necessarily positive for emission reductions.”
Per Oliver, “2022 has been an interesting year already for carbon markets. With new proposals around upper price band triggers, we’ve seen some volatility; however, our modeling would suggest that even IF the proposal was adopted, it wouldn’t meaningfully limit upside potential.”
Only time will tell how this will impact the energy sector and carbon markets.
Regardless of what will be, one thing is for sure: we all hope for peace in the region.
According to various outlets, Chevron Corp. (NYSE: CVX) is closing in on buying Renewable Energy Group (NASDAQ: REGI) Inc. for ~ $3 Billion.
Chevron is looking at paying $61.50 per share for Renewable Energy according to the sources close to the deal.
Renewable Energy stock climbed over 36% in after-market trading on the pending news.
The official announcement could be made as early as next week, but the terms and talks could still fall through.
This would be a major push for Chevron’s energy transition into renewable fuels. Renewable energy demand is expected to grow in the coming years as organizations and governments follow through on their decarbonization pledges.
The meteoric rise in ESG related debt is creating some accounting problems. Advocates are now urging for more regulations and rules with the increasing demand for ESG bonds.
Environmental, Social, and Governance (ESG) bonds are debt instrument that has socially-responsible and environmentally-friendly criteria (such as low carbon emissions).
This affects the borrowing rate, the higher the ESG criteria the lower the interest rate.
According to Moody’s, the ESG bond market is poised to hit $1.4 trillion in 2022.
But the accounting rules for determining liabilities and assets are not keeping pace with the booming market.
The ESMA (European Securities and Markets Authority) found that many firms are applying different valuation models to their assets and liability.
This has the potential to “negatively affect the decision-making of financial market participants and thus the efficient functioning of capital markets” ESMA told Bloomberg.
ESMA expressed concerns that existing plans by the International Accounting Standards Board (IASB) to oversee the market are not moving fast enough.
Many are asking for specific guidelines for valuing financial instruments whose interest rates change based on environmental, and social targets.
Most banks want IASB to adopt a standard that’s based on valuing an asset at a so-called “amortized cost”.
They say that using the “fair value” model can put risks making profit and loss statements more volatile.
Bloomberg found that back in September 2021, more than 25% contained no penalty for missing their ESG goals, and only a marginal discount if targets are met.
Compliance markets are government regulated. The largest carbon compliance markets are in the European Union, China, Australia, and Canada.
With the compliance carbon market, the government tells various industries how much carbon they can emit. It’s then up to a company within that industry to stay under their allotted carbon amount.
The problem is, for some companies, staying within their permitted carbon threshold is simply not possible.
This doesn’t mean that they’re not committed to reducing their carbon emissions.
It just means that they can’t. Perhaps the tech to reduce or eliminate emissions isn’t available yet, or the tech to reduce or eliminate emissions isn’t accessible (it is too expensive to utilize, at least for now). It could be as simple as the electricity in their country being largely provided by fossil fuels.
That’s where carbon credits come in.
For example, Company A emits 150 metric tons of carbon into the atmosphere, but its government only allows it to emit 50. So, company A must do something to neutralize those extra emissions. It purchases 100 carbon credits (1 carbon credit = 1 metric ton of carbon) to offset that carbon.
Companies can purchase two different types of carbon credits on the compliance carbon market:
Permits to pollute; or
Project-based reduction credits.
A permit to pollute essentially says, “Hey, we went over our emissions, so we’re paying a fee for every metric ton of carbon above what we were allowed.”
It’s important to note that the fees can be pretty excessive, so this isn’t necessarily a get-out-of-jail-free card. The price for permits increases annually, and the permitted amount also shrinks each year to push industries to go green. The government aims to reduce carbon emissions – not for companies to continue emitting them. So, when companies must purchase permits to pollute, it isn’t exactly favorable for them to do so.
Project-based reduction credits work differently.
With a project-based carbon credit, a company offsets its carbon emissions by investing in environmental projects such as forestry and conservation, improved agriculture practices, and renewable energy. Take a look at the table listed below from Offsetsguide.org to get an idea of how carbon offset projects work:
One metric ton of carbon is offset from the atmosphere through environmental projects for every project-based carbon credit purchased. Therefore, these types of carbon credits are also known as carbon offsets.
This allows companies to do more than just buy permits to pollute. It enables them to do something positive to negate the extra emissions into the atmosphere. In other words, they’re becoming “carbon neutral.”
The good news is that project-based reduction credits aren’t just available on the compliance carbon market. Carbon offsets are the sole credit offered on the voluntary carbon market.
Voluntary Carbon Market (VCM)
What’s great is that when it comes to VCM, it isn’t just limited to companies in regulated areas.
Individuals and NGOs across the globe can purchase offsets too. That means that offsets are available to everyday consumers.
The VCM works differently because it is entirely voluntary. So, no government regulation or government mandate causes companies (or individuals) to purchase credits on the VCM. They’re simply doing so because they want to. They see the value carbon credits and offsets can bring to their organization and lives by making them carbon neutral.
Here is a chart from Climate Care that maps out the different carbon credits and market types.
(Climate Care is based in Oxford and Nairobi. They finance, develop, and manage carbon reduction projects globally.)
How are carbon credits and offsets verified?
While carbon credits for the compliance market are government regulated, carbon offsets for the VCM are not. That doesn’t mean that they’re not vetted – simply that they’re just verified by third parties.
Critics felt this process wasn’t stringent enough in the past, but verification methods have changed. It has become far more accurate due to new regulations agreed upon at COP26, standardized across the globe.
Third-party entities are non-profit organizations that ensure that customers receive what they are paying for. They measure the amount of carbon offset through an environmental project and interpret the data, giving any offset project with their seal a green light for approval.
Third-party verifications include the Verified Carbon Standard (managed by Verra), the Gold Standard, the American Carbon Registry (managed by Winrock), and Climate Action Reserve.
They’re committed to ensuring that offset projects are high-quality, so that those purchasing offsets aren’t throwing their money into something that isn’t real. Below are some of their standards.
Let’s look at Verra for a moment since many consider them to be the premier standard.
Verra has a network of auditors on hand to follow up on all Verra-approved offset programs. They oversee all operational aspects, aligning them with stringent standards as set by Verra. More importantly, these auditors are assigned to projects that align with their area of expertise. Because of this process, to date, more than 1,775 certified VCS projects have collectively reduced or removed more than 865 million tons of emissions from the atmosphere.
Where can you purchase carbon offsets?
As an individual, it’s unlikely that you’ll be able to purchase carbon credits directly from the source (ex: a farmer). However, you can buy credits through a third party (through the VCM), so you have a few options.
You can choose to offset carbon when you make a purchase.
Many companies allow consumers to add “offsets” to their purchases to offset their emissions. For example, numerous commercial airlines are doing this so that their customers can fly in a green way.
Look at American Airlines, for example. Their non-profit, Cool Effect, allows customers to purchase offsets to reduce the impact of their flight. This is done during the checkout process, making it quite simple for any customer to use.
Other airlines, such as Delta, United, and British Airways, are doing the same.
You can buy carbon offsets individually, picking and choosing on websites such as Nori, Gold Standard, and South Pole.
Nori.
Nori works with individuals, companies, and NGOs, making purchasing offsets simple. For example, on Nori’s website, once you select “remove carbon” on the Nori homepage, you can enter the number of credits you would like to buy. Currently, they cost $15 each, with an additional 15% fee for processing.
If you’re a business owner, you can even use various tools that Nori has available to calculate your carbon emissions and purchase a subscription of offsets each month.
To date, 75,553 metric tons of carbon have been offset through Nori.
Gold Standard.
Gold standard is one of the oldest marketplaces, developed over a decade ago. They have created 2,300 projects in over 98 countries and have reduced 191 million tons of carbon.
What customers love about Gold Standard is the ability to narrow down projects based on what aligns with your own values. This makes the process of purchasing offsets very personalized.
South Pole.
South Pole has developed over 700 climate action projects worldwide. They have carbon calculators for individuals (and organizations) to calculate their carbon footprint that also help find projects that align with their needs.
If you’re a farmer or own land, you can produce carbon credits yourself to sell.
Anyone who owns or operates land can produce and sell carbon offsets to increase their profits while helping the environment. This is especially true of farmers and ranchers. This can be done by:
Conservation tillage or no-tillage practices,
Nutrient management and precision farming,
Returning biomass to the soil as mulch after harvest,
Planting cover crops off-season, as well as rotating crops,
Promoting forest regrowth and converting acreage into grasslands or woodlands,
Using flood irrigation systems instead of surface irrigation systems,
Alternating manure management and feeding schedules; and
Switching to alternate, renewable fuels that are low carbon.
A third-party expert from one of the verification sites listed above can then verify data from your property and conduct a site visit to see how many offsets your project is eligible to receive. Since the VCM is expected to expand rapidly over the next ten years (and through 2050), these projects have excellent earnings potential.
The price of carbon offsets is increasing.
With most of the world focused on hitting net-zero by 2050, carbon offsets are at an all-time high.
The reason why is that net-zero and neutrality goals can only be achieved with the help of massive carbon offset purchases. Demand is up, and supply is low. As such, the prices continue to increase. In fact, the current E.U. price for carbon offsets is at more than €80/ton.
Here’s the average price for various types of projects that generate carbon credits:
California is the only state in the U.S. with a rigid carbon market – which is where most offsets are sourced. But other states are starting to take the lead.
So, the income potential is seemingly endless for farmers throughout Europe and the U.S. – where the carbon offset industry is growing.
What about green investments?
Investing in carbon credits, carbon ETFs, and carbon stocks is an excellent way to diversify your investment portfolio and also do something to help the environment.
The Fossil Free Fund is a great tool that you can use to help you identify mutual funds and ETFs that are environmentally conscious.
In addition to finding top-rated, green funds, you can search for funds that you currently have within your 401K, retirement plan, or personal portfolio to see if they are invested in the fossil fuel industry. This way, you can make changes if need be.
Another way you can start to make your investment portfolio greener is by searching for funds through companies committed to green initiatives – such as Tesla (TSLA) and Brookfield Renewable Partners (BEP).
Funds with carbon credit futures are another option. However, it is the riskiest because it is the least diverse.If you need more information, we have a stock watchlist that you can use. Stocks include:
According to experts surveyed by the Taskforce for Scaling Voluntary Carbon Markets (TSVCM):
“Based on stated demand for carbon credits, demand projections from experts… and the volume of negative emissions needed to reduce emissions in line with the 1.5-degree warming goal… the market size [for carbon offsets] in 2030 could be between $5 billion and $30 billion at the low end and more than $50 billion at the high end.”
Some experts even believe the VCM could reach $100 billion by 2030 – up from just $300 million in 2018.
Carbon credits help companies and individuals meet emissions goals. They can also help everyday farmers and landowners worldwide earn extra income. So, carbon credits serve both to spark economic development globally as well as a method of fighting climate change.
Renewable energy’s goal has always been decarbonization. But, with renewable energy projects central to the carbon credit industry, the focus has changed.
In the past, companies used renewable energy projects to create carbon credits. These projects differed from their usual operations. Profits made were then put right back into those projects to keep them running.
But now, credits are worth so much more. The voluntary carbon market has reached $1 billion. This is up from just $300 million in 2018. Some experts think it could reach $100 billion.
As such, energy companies consider carbon credits a financial tool. So, they are no longer getting carbon credits for “extra” projects. Instead, companies are obtaining credits for projects that are a part of their original operating plan.
Gold Standard said, “any national or a regional grid-connected Renewable Energy project located in an Upper Middle- and High-Income Country (as classified by the World Bank) shall be deemed ineligible for the issuance of GS-VERs or GS-CERs.”
Certified Carbon Standard agreed.
“Where certain project types have moved beyond their need to be supported by carbon financing, it is not appropriate for Verra to continue supporting such project types.”
Because of this shift, many project owners want other options. And the Renewable Energy Certificates market seems to be a good choice.
Renewables are the sole focus of RECs.
The Importance of renewables.
Research has shown that fossil fuels have caused the Earth’s temperature to increase .3 and 1 degree Celcius. In 2018, 89% of carbon emissions were from the fossil fuel industry. In 2019, GHG emissions were at 36.7 metric tons.
Since renewable energy is needed to fight climate change, incentives to switch to and produce renewables are essential.
Gold Standard and Verra have both said that their regulations on renewable energy credits do not apply to REC market certification.
The Ninepoint Carbon Credit ETF (CBON) came in hot on the heels of the Horizon ETF (CARB), with the former launching on the NEO exchange just a week after the latter.
Similar to CARB, CBON’s holdings are comprised entirely of carbon allowance futures. Where they differ, however, is that CBON provides exposure to a mix of the three leading carbon emissions trading schemes:
The European EUAs,
The Californian CCAs, and
The RGGIs of the northeastern U.S. states.
This makes CBON more similar to the previously mentioned top U.S. carbon credit ETF KRBN, which also holds a mix of futures for all three types of carbon allowances.
Ninepoint is a leading alternative investment manager focused on the clean energy economy. With this Fund, investors can access the global emissions market, which is expected to grow significantly over the next couple of decades.
An orderly energy transition supports Canada’s long-term energy leadership and is supported by various incentives. The investment community is also contributing to the success of this transition.
For Canadian investors looking for something with more balanced exposure to the compliance carbon markets instead of just the E.U.’s Emissions Trading System like KRBN, CBON is a good choice.
In addition, CBON has a second, U.S. Dollar-denominated listing – CBON.U. This is the exact same product as CBON, just trading under U.S. Dollars instead of Canadian Dollars.
For those carbon conscious Canadian investors who already have investments or savings held in USD, choosing CBON.U instead can help eliminate the currency risk associated with making an investment in CBON.
To provide the best experiences, we use technologies like cookies to store and/or access device information. Consenting to these technologies will allow us to process data such as browsing behavior or unique IDs on this site. Not consenting or withdrawing consent, may adversely affect certain features and functions.
Functional
Always active
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
Preferences
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
Statistics
The technical storage or access that is used exclusively for statistical purposes.The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
Marketing
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.
