Investing in global carbon markets

Todd Warren

Tribeca Investment Partners

In this third and final instalment of Tribeca’s carbon credit video series, I outline the mechanics of voluntary carbon credits - particularly certified nature-based credits and why Tribeca is excited about the long-term return potential for this nascent asset class. I also discuss the various structural challenges investors have in accessing certified voluntary carbon markets and how Tribeca has forged the necessary market access and counterparty relationships to fully exploit the opportunity.


What is a voluntary carbon credit?

A voluntary carbon credit is a voluntary action essentially to reduce a carbon footprint. Think of it as an optional reduction in your carbon footprint and it typically takes the form of an offset. So you buy a carbon credit to offset against your carbon footprint. A few important points to note about this; you can't utilise a voluntary carbon credit unless you retire it. By retiring it, it means it can't be resold or used again by somebody else. To give you some idea of the numbers and why we're so excited about the voluntary carbon opportunity, of the total supply of voluntary carbon credits in any given year, there's around 80% of those bought by corporations and retired. 

So it's like buying shares in a company that buys back 80% of its paper every year. 

You're automatically going to crimp the supply of those credits and with demand only heading in one direction, it's clearly going to create a tremendous investment opportunity in the voluntary carbon market.

What’s an example of a voluntary carbon credit project?

One of the key types of projects that we are investing in are nature based voluntary carbon credit projects. They are projects that look to utilise nature to store carbon. Photosynthesis is the most effective process of storing carbon. Go back to your school science lessons: trees, plants, soil, sequester carbon and emit oxygen. Think of it this way - the world's jungles and forests are the world's lungs. 

The projects we're investing in are projects that avoid the destruction or the deforestation of the world's jungles.

These are nature-based carbon credit projects. Deforestation and forest degradation is responsible for 15% of the world's carbon emissions every year. That gives you an idea as to why the protection of these forests is crucial to a reduced carbon future. These projects are recognised by the UN and they're called REDDs - carbon credits created through the Reduction in Emissions from Deforestation and forest Degradation. These projects are largely in equatorial jungle areas in developing countries. As a result, we think these projects are fascinating from the carbon perspective and the protection of these jungles, but what is also very interesting and creates a new level of demand for these types of projects, we think, is the social side. When these REDD’s are certified by the various certifying parties around the world, they're assessed against the United Nations Sustainable Development Goals, the UNSDGs. There are 17 of them, and when the projects are certified for their carbon sequestration potential, you speak with the local communities in which these projects exist, and essentially place a price on carbon that incentivises the local communities to, in essence, farm carbon and prevent them from clear felling equatorial jungle for the purposes of other farming ambitions - palm oil, sugar, etc. Through putting the price on carbon, you shift the behaviours and encourage them to protect the jungles. Now what comes with that? I talked about the UNSDGs, and through the project development itself there are more employment opportunities for the local communities; there are better education opportunities through schools being constructed, more teachers being employed; there's water sanitation projects; there's all sorts of education around the treatment of women in society.

When you invest in these projects, you can also determine how many of the UNSDGs the project ticks. 

When you buy a credit in those projects, you know exactly which of the UNSDGs each project also qualifies for. More UNSDGs creates more demand and a higher quality of carbon credit. In our view, you're not just buying a great investment opportunity because it's an acceleration of this whole carbon theme, you're also buying something that accelerates the social aspect - the significant co-benefits that come with these carbon credits. In essence, with these voluntary carbon credits, you can come to the conclusion that they are higher quality, and therefore should be in higher demand than many of the compliance or regulated credits as well

Can you name a specific voluntary carbon project that you have invested in?

One great example of an REDD carbon credit is the Rimba Raya Biodiversity Project, which is a project on the southern coast of Indonesian Borneo. Through the protection of this particular swathe of equatorial jungle, it also happens to protect the largest natural habitat for Orang-utans. That's a huge broader environmental benefit outside of the carbon aspect. This project specifically ticks every one of the 17 UN-SDGs. So you've got an amazing project that will be around for many years to come, protecting a massive swathe of equatorial jungle, and protecting biodiversity. The biodiversity angle is something that's not often talked about and, of course, creating massive new opportunities for the local community in that part of southern Borneo.

How do investors access voluntary carbon credits?

Not easily. Some of the challenges of buying voluntary carbon credits, setting aside the opportunity, are:

  • there are no significant custody arrangements. All the big banks would love to take your money, except that they won't custody these assets for you, so you face a risk from a counterparty perspective on that front.
  • Securing supply is very challenging. These carbon credits are largely traded over the counter. They're OTC markets, so the buy-sell spread is wide and pricing transparency, frankly, is poor. You need to be very experienced, understand where these credits are trading, who’s trading them, who are the right brokers and indeed what’s the right price. As a result of that, it's very difficult. If you want to buy a certified Rimba Raya credit, for example, that’s been certified by an outfit called Verra in the US, (an NGO based out of Washington, who is also the registry for that credit) you've got to have an account with Verra. Now Verra doesn't open up an account for just anybody. You have to spend a lot of time and go through a lot of hoops to have an account with Verra. We have that account established with Verra.

For part one and two of our carbon credit series, please click here.

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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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