Voluntary Carbon Markets: A Primer

  1. Mandatory (compliance) markets have been “created” by Governments, which basically forced a punitive market on polluting industries like energy, steel and cement via cap-and-trade schemes. The largest one is the EU Emissions Trading Scheme (EU ETS) and is a $300bn market. The tradable asset is called a carbon allowance. A polluter which purchases these credits (one costs ca. $60), buys the right to pollute, they don’t actually save CO2 with the purchase. It’s a penalty. The mandatory markets can easily get to $1 trillion in size.
  1. Voluntary markets are based on the goodwill of people and companies. If you buy 1 carbon credit (=1 tn CO2e) for $10, you are supporting a project, which has already saved this 1 ton CO2. If you retire (destroy) carbon credits equal to your carbon footprint, you become carbon neutral. As an investment, voluntary carbon credits are practically non-existent, but my thesis is that they will become an asset class and could go from a $500m market to >$50bn by 2030, likely with the help of crypto. A 100x opportunity and it is very early.
  • The first type is, it’s a brand new market, but it’s growing really fast and it kind of comes out of nowhere and surprises people. And honestly, that’s actually the rarest market. And that would be things like cryptocurrencies. It just kind of came out of nowhere in terms of hitting the scale that it did so rapidly….”
  • “I think the second type of market that are non-obvious are, every once in a while, you have a market that looks extremely crowded. And so you think there’s tons of activity and it’s game over, but in reality, it’s still the really early days either because the product isn’t quite there yet, or the infrastructure isn’t quite there yet…”
  • “The third type of non-obvious market is one where there is an opening from a sales or distribution or channel perspective…”
  • Market structure
  • Demand
  • Supply
  • Price structure
  • Intrinsic and relative value
  • Liquidity
  • Infrastructure
  • Tokenization
  1. Market history and structure
  • 35% of buyers bought for resale, most others buy for CSR/PR retirement.
  • Project price dispersion similar to today — between $0.5-$50 with large scale renewable energy dominant and offering the lowest prices.
  • An old school value chain: project developer — wholesaler — broker — retailer, increasing prices by up to 75%. Still often the case today.
  • Average prices are down 40% driven by a growing carbon credit inventory due to excess issuance vs retirement.
  • Market players in 2008 expected to trade 476mn tons volume by 2020, but the market traded 141mn tn last year vs 131mn in 2008.
  • There used to be more than 25 standards/registries vs 5–6 today, most have gone out of business.
  • Governments: every major economy has a Green Deal and doesn’t shy to print trillions for the transition to the new industrial age. Wasn’t the case 5 years ago.
  • Consumers: everyone wants environmentally friendly products and climate cautious workplaces (driven by Millenials / GenZ). Wasn’t the case 5 years ago.
  • Corporates all want to go carbon neutral. Wasn’t the case 5 years ago.
  1. Demand
  1. Supply

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Boris

Boris

Climate, crypto, macro and tech M&A