Carbon credits for dummies
Can you really make money from cleaning up the earth, I hear you ask?
There is a new resource in town – well, carbon has been around for ~50,000 years - but carbon credits are pricking the ears of even the most lethargic financier. A carbon credit is an environmental vendible that obtains its value from a tonne of CO2 or greenhouse gas that is reduced, removed or captured before entering the air. In layman’s terms - it’s putting a price on polluting the atmosphere (and it’s high-time if we want to address our warming world).
There are two sectors to this market: compliance and voluntary.
Compliance is the mandatory trade of carbon credits as a result of needing to comply with government set regulations. An example of this is where a government sets a limit on the of tonnes of CO2 per year on a company, if the company goes over that limit, they must cough up for credits to offset this. The other market is voluntary, meaning just that; individuals or companies can voluntarily offset their emissions. Large companies, HNW individuals and big funds are all starting to commit to this for a number of reasons, but most commonly as a result of investor pressure.
How are these coveted carbon credits created? Again, two ways; sequestration and carbon reduction.
For sequestration, planting trees for example then produces - cue buzzword - ‘sequester’ carbon in the soil through natural photosynthesis. The second activity is carbon reduction, which is when voluntary action is undertaken to prevent carbon production before it enters the atmosphere, which is achievable by using renewable energy instead of fossil fuels. Aussie entrepreneur Sophia Hamblin Wang’s winning COP26 best business pitch is an example of this process, which involved taking carbon emissions from industrial processes and converting them into materials for construction.
Crediting carbon is not the most straightforward process - it requires a science-based rubric to ensure regulation and governing bodies to certify and evaluate a project on their quality, along with consistent evaluations carried out over the life-span of the project. The project type, geography and size come into play, but a universally agreed rule is that carbon credits cannot be granted if it was already going to happen anyway i.e. national parks, wildlife reserves etc.
Can you really make money from cleaning up the earth, I hear you ask?
Absolutely. The value of the industry is nothing to be snuffed at. There is a LOT of money flowing in from capital markets, and there is undoubtedly going to be billion-dollar companies grown from this space, simply capitalising on the fact that they have the ‘first-mover advantage’. At an absolute minimum, 10 billion tonnes of greenhouse gases need to be removed from the atmosphere annually to reach net zero by 2050. Here’s a little breakdown: if there are 10 billion tonnes of greenhouse gases that need to be offset every year (that’s in a good year - there are billions more than 10, but for the sake of time we’ll stick to 10), and 1 credit costs US$40 (they will cost more than that as companies scramble for credits, but again, for the sake of our time and now your patience we’ll stick to US$40), that’s a US$400 billion industry per year. Gold, in comparison is approximately a $150 billion industry, lithium set to grow to $129 billion.
Watch out oil and gas.. carbon credits are coming for your market share: Annual global market share of a range of commodities
Whilst some may believe capitalists are trying to fill their pockets on the back of the planets’ demise, we have to remember that there is a worldwide shift occurring. Wealthy, powerful corporates, capital investors and funds are shifting focus, and eye-wateringly large amounts of money are being pulled out of oil and gas. Infact, so much of it is being redirected into net zero trade and portfolios are dropping lazy net-zero committers directly.
The next breed of unicorns will be green thoroughbreds and as an investor, why would you just stand by and not take advantage of the possibility of simultaneously helping your bank balances and the planet? It’s a clean focused frenzy out there and the only plausible way to reach decarbonisation is by way of free market entrepreneurship, which is providing solutions with the right incentives in place: carbon credits.