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Carbon Credits as an Asset Class

Carbon is an essential element for all life forms on Earth. But anthropogenic carbon emissions are unquestionably causing the enhanced greenhouse effect, threatening the most intricate systems of life on the planet via climate change.

But many will see a financial opportunity amongst the carnage. The global shift towards ‘net zero’ will most certainly create one of the largest combined efforts between people, institutions, and governments that anyone has ever seen, as everyone rushes to comply with international law and personal commitments, similar to the boom in ESG investing. This is where a new type of commodity comes in—Carbon Credits. Biden’s climate bill will see the US becoming closer to reaching international climate targets and prompt an increase in carbon negative and sustainable projects receiving tax breaks—which in turn will spur the carbon credit market’s trading volume as these projects look to offload their carbon credits.

But what are carbon credits?

Carbon credits are a type of tradeable permit that allows a company or country to emit a set amount of carbon dioxide or other greenhouse gases into the atmosphere. There are growing regulations and multiple non-government organisations that exist to ensure these schemes are verifiable and legitimate. Carbon Credits can be bought and sold in order to help companies or countries meet their emissions targets, and there are two types of carbon credits: voluntary (VCC) and mandatory (MCC), with the former being the most accessible to retail investors as a tradable asset, with more exchanges emerging, as currently the entire sector primarily operates B2B with relatively high fees and barriers-to-entry. The voluntary market typically follows the mandatory market, and at times, is explicitly allowed to be accepted into mandatory compliance schemes, further boosting their value and utility.

Analysis suggests

McKinsey analysts suggest that the voluntary market for carbon credits will reach $50 billion in 2030 from a current trading volume of about $2 billion for all carbon credits, a staggering potential increase of 2400%. This is because, in order to achieve net zero, the global economy will need a growing supply of credits, at upwards of 7–13 gigatons per year, according to the Taskforce on Scaling Voluntary Carbon Markets. Bloomberg predicts that this currently unfilled demand could potentially cause an increase in the price of VCCs from the single digits to as high as US$120 per tonne by 2050—and institutions are listening. Netflix bought 1.5 million carbon credits in 2021, proving the existence of institutional demand from both an offsetting and an investment standpoint.

To summarise, this trailblazing, ever evolving, and relatively new commodity should definitely be something that new investors should keep on their radars. As institutions and governments rush to further regulate and invest in carbon credits, and as retail investors gain increasing access to carbon financial instruments, the price will almost definitely increase in the long term.

Analyst: Oliver Bonallack

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