Carbon credits: the emerging asset class with big upside

Todd Warren

Tribeca Investment Partners

There is immense and growing investor interest in carbon credit investment as the global economy strides forward towards meeting aggressive decarbonisation targets.

We recognise there is a largely unmet demand for sustainable natural resources investment opportunities. In October 2021, Tribeca Investment Partners launched a unique investment vehicle - 2050 Strategy – which looks to profit from the asymmetric returns anticipated from the multi-year drive towards meeting net-zero targets.

As part of this 2050 Strategy, which focuses on nascent sectors with significant tailwinds such as Green Chemicals, Green Finance, Green Food and Industrial Innovation, Tribeca invests in a diversified portfolio of Voluntary Carbon Credits via the VT Carbon joint venture we established with Viridios Capital.

In response to increased investor appetite for information on this growth sector, Tribeca has produced a three-part educational video series detailing the global carbon credit market.

In the first of this series, I summarise the differences between the regulated and voluntary carbon markets and outline the investment opportunity voluntary carbon credits offer investors.

Stay tuned for videos two and three to be released in the coming weeks. For more information on Tribeca Investment Partners, please visit our website.

Transcript

What is a carbon credit?

This is a common question we're hearing more and more of, certainly as we hear the term “carbon credit” bandied around at the workplace, on the news, and in the school playground. Importantly, it comes back to the first or original climate conversation that was had at the UN Climate Conference in Kyoto in 1997, and the United Nations Intergovernmental Panel on Climate Change was formulated with an intention of creating a marketplace for carbon, ultimately putting a price on carbon. And therefore obviously enabling us to, with an increasing price, incentivise a shift in behaviours by governments, by corporations, or indeed by individuals to ultimately reduce our carbon footprint.

That was further elaborated on at the Paris Climate Conference, when the Paris Agreement was put in place in 2015. That was essentially the most major step we've seen forward, and that was around what you would've heard about the temperature controls that we need to put in place to limit, obviously, global warming with the intention of initially reducing the climate temperature increases to two degrees, but ideally 1. 5 degrees.

Now around that, there was essentially a need to create a market for carbon, to put a price on carbon to incentivise a change in behaviours. So the carbon credits were created in essence to allow governments, corporations, or indeed, perhaps individuals to reduce their carbon emissions. Now a carbon credit, regardless of what type of carbon credit it relates to, or indeed where it's traded, relates to one tonne of carbon. So they're all equivalent to one tonne of carbon. And so regardless of what price you might see or which market might trading in, they're all one tonne of carbon. And so it might be an offset that relates to your ability to reduce your emissions by a tonne of carbon. In other words, it's like a permission slip, for want of a better description. So if you're a corporation with a certain level of emissions, you can buy a carbon credit that reduces your emissions by, in each case, a tonne of carbon.

Can you explain the difference between regulated and voluntary carbon markets?

There are different marketplaces for carbon. The two primary markets are the regulated or compliance market, and the second type of market is the voluntary market. The compliance market or regulated market is, for want of a better description, a mandated market, a mandated type of carbon credit. In other words, if you are a corporation or an emitter captured by certain governmental regulations, you may have compliance requirements or regulations that require you to reduce your carbon footprint over a period of time. If you do reduce your carbon footprint faster than regulations require, you'll have a carbon credit that's tradable under a compliance market. The alternative market is the voluntary market. And by definition, or by its name, you'll know that it is a marketplace that is for want of a better description, optional. 

So it's a market where carbon credits are tradable for those entities who want to reduce their carbon footprint faster than the regulations or the compliance market would require them to do so.

Now there's a whole other question in ‘Why would they do that?’ And in very simple terms, it's because consumers or indeed capital markets are requiring companies to reduce their carbon footprint faster than any of the net zero ambitions that countries have made. Obviously, we've got a situation now where the lion’s share, or the significant majority of both developed and developing countries have made some ambitious statements around net zero, though some may argue they're not ambitious enough. The point being that those frameworks that governments are placing upon the economies to reduce carbon provide a certain level of compliance or regulatory requirement. 

The voluntary market is for those people or corporations who want to accelerate that reduction in carbon emissions. Indeed that's where we think you'll see the biggest opportunity from an investment perspective is in the voluntary market.

How do the UN Sustainable Developments Goals (UNSDG) effect carbon markets?

I touched on the fact that we think there's a fantastic opportunity in the voluntary carbon market, and that's of course framed from the perspective of a desire to accelerate the reduction in carbon emissions. In the voluntary carbon market, the key certifiers of these voluntary credits also assess them against the United Nations' Sustainable Development Goals, of which there are 17, and they relate to better employment opportunities, they relate to better environmental outcomes of course, they relate to water sanitation, better rights for women, et cetera, et cetera. Now the voluntary carbon credits , where we particularly see the opportunity, are primarily in developing countries. So when these certifiers assess these credits for qualification, certifying whether there is actually a credit being created, they also assess them against the United Nations' Sustainable Development Goals, the UNSDG’s.

Why is that important? Well, if you are a corporate looking to buy a carbon credit to reduce your carbon footprint, what you get with these voluntary credits that have been assessed against the UNSDG’s is not just the environmental benefit, clearly, but also a social benefit. And it's these co-benefits that come alongside the environmental benefits of the voluntary carbon credits, these primarily nature-based credits that we're investing in, that we think will add a whole new level of benefit for the world, but also a greater level of demand for these types of credits as corporates look to obviously tick an environmental box, make some environmental positive steps, but also address some social imbalance. And that creates a greater price, ultimately, as more and more corporates demand this type of credit, and therefore creates a very interesting investment opportunity.

What is the market size of the voluntary market?

The voluntary market today is about $1 billion, but bearing in mind a mere 18 months or so ago it was about $300 million. 

 So it's dramatically increased in size in a very short period of time. Going forward, and coming back to the point about corporates wanting, or needing, or being forced to reduce their carbon footprint faster than any government requirements, we think they will be entering more and more so into the voluntary market. And as a result, we'll see an even greater increase in the size of that market.

How much growth are you expecting in the voluntary carbon market?

We think from a billion dollars today, it's likely to be $15-$20 billion by the year 2030, with McKinsey predicting demand to grow potentially a hundred times larger by the year 2050. The point being that in order to achieve those Paris Goals, we need to incentivise a massive amount more in terms of new projects that sequester or store or avoid carbon emissions. The only way you can do that is if the price goes up and more and more participants are in that place, and that creates the massive investment opportunity we see.

Learn more

For information on Tribeca Investment Partners please find information here


Todd Warren
Portfolio Manager
Tribeca Investment Partners

Todd is the Portfolio Manager for the Tribeca 2050 Strategy which is focused on decarbonisation beneficiaries such as carbon credits, green chemicals, green metals, green food and industrial innovation. As a senior member of the Tribeca Global...

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