Revenue created by the sale of carbon credits  

CO2 is the natural enemy of the Greens movement and the friend of the carbon sceptics. There is significant community and market consensus that the amount of CO2 created by Western societies needs to be reduced. Rather than putting attacks on carbon the markets are crying to create offsets but more importantly produce the total amount of carbon emitted.

None of us want to see a world where carbon offsets and carbon trading are simply for optics and there is no change in the practice of industry. It is clear that this is not the case and there is radical reform across all sectors in the developed world. Change of behaviour needs to be driven as a response to a change in cost.

The system we have today was first developed in United States as the amount of CO2 was rising and was resulting in acid rain. The national government introduced the concept of cap and trade, and this formed the basis of the first carbon credit markets. The key to this system was that the total number of permits available each year reduced and thus pushed up their prices. Today what we are seeing is a carbon offset projects need to be funded from the revenue created by the sale of carbon credits including the cost of involving brokers and market-makers.

Introduction

Carbon markets have emerged as a place to trade carbon credits and there are clearly two types of carbon credits; those created on a national level and those that an international level. Most developed countries have established national carbon credit markets which recognise the creation of units of carbon credit. Carbon units are sold on the supply and demand basis. There are now international markets such as that conducted by the Chicago Board of Trade and importantly the private markets which are run by traders, always seeking to make a profit.

The very essence of putting a price on carbon units is that supply and demand will work. What we have seen since COP 26 is a steady rise in the demand for and price rise of carbon credit units. Both internationally and in domestic markets we have seen concerns about the quality of the carbon credit units and volatility in price. Volatility in price should not be seen as the market is not working, rather like most trading markets it is working in a semi-strong form.

The picture now

What is important for the carbon markets is that they have developed a very high profile and companies are actively discussing their cost alternatives. In Australia we are reading of the cost of building carbon capture and storage (CCS) and that one of our national oil companies believes that he can store carbon units at USD $25 a tonne giving it a long-term, is financial advantage.

We are also seeing reporting standards which have been announced since COP 26 and the requirement to comply with these under International Accounting Standards. In the local Australian context, which is mirrored internationally, we are seeing corporate regulators, banks and insurers, consumer regulators and the Australian Stock Exchange, demanding declarations on scope 1, 2 and 3 emissions plus compliance with any stated or required carbon abatement schemes. In short, reporting entities are required to disclose what they’re doing about their position in the carbon market.

Joseph Stiglitz (Columbia) and Nicholas Stern (LSE) have said that the price of carbon units needs to be USD 50-100 per tonne to force organisations to change their behaviour so as to meet to 2030 targets.

EU Equalisation Regime

The great fear has been that organisations would choose to locate in countries with weak carbon abatement regimes and low prices of carbon. Almost single-handedly, the European Union has addressed this issue by imposing an import tariff equalisation cost where goods are produced and exported to the EU in regions which do not have the same effective cost of energy due to the payment for carbon credits. In short, they are imposing a special tariff to prevent offshore production having an advantage over local production.

At the same time banks, insurers and consumers are demanding that goods that are offered in the EU and financed by the EU are produced subject to the same carbon pollution ethic as the EU.

In few years prior to Covid 19 there was concern that a) China did not have the same value set as other nations and b) that it would allow pollution to continue to be transferred to China so that manufacturing would continue in that country. Over the last two years we have seen China has become particularly environmentally concerned and wanting only to receive best in class produces into their country where there is increasing community concern about the environment and health.

The international market for carbon credits is led by high-quality registries such as Gold Standard and Veera. These international organisations have established high quality standards and processes for achieving registration as projects which produce carbon credits they endorse and are subject to ongoing monitoring before they are issued with carbon credit certificates each year.

In the international market we are seeing projects emerging in many countries in Southeast Asia and Latin America as well as Africa particularly in environmentally sensitive areas near the equator. These projects of a powerful source of local good as carbon credits are only issued where there is an overall community benefit. Quality of internationally verified carbon credits follows strict protocols and rigorous auditing of the process. The acceptance and now requirement of large organisations such as the multinational oil companies, telecoms, banks, manufacturers will ensure that the integrity of the process continues. Such companies are paying for quality carbon credits and they are seeing them as an investment of the life of the project. As such many of these companies are actually investing in the projects which generate the carbon credits. This outcome is probably a very favourable product but incidental to the design of the carbon credits system.

Changing the way energy and products are produced

The world is seeing a steady increase in the cost of carbon credits. In turn, this steady increase in the cost of carbon credits is changing the way energy and products are produced coupled with community concern as to the source of what they are consuming and otherwise buying. There is a clear message also from the financial sector that they won’t fund or ensure products which do not meet the global expectations and do not comply with global reporting requirements.

Whilst there was once deep concern about carbon markets delivering community expectation reality is, we are seeing large organisations spending significant amounts of money to ensure that they buy quality carbon credit units so they cannot be exposed for having poor shams. Any behaviour which suggests that they were negligent or not even diligent in investigating the quality of the carbon credits that they purchased and markets as offsets will ensure that organisations will only fund and purchase carbon credits from projects which meet the highest standards.

See you next time!

By Paul Raftery

CEO, Projects RH, based in Sydney
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Source: Can carbon markets reduce carbon emissions? So far, progress has been slow  https://www.economist.com/films/2021/10/01/can-carbon-markets-reduce-carbon-emissions