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Should Carbon be the New Gold?

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Should Carbon be the New Gold?

Voluntary carbon credits are a type of Voluntary Carbon Unit (VCUs) and represent the prevention or removal of 1 tonne of CO2e from the atmosphere. By purchasing and retiring (deleting from existence so no one can offset with that same carbon credit) these credits you can offset your carbon footprint. A simple example: If you were to emit 100 tonnes of CO2e you could purchase and retire 100 VCUs to result in a net zero carbon footprint, making you carbon neutral.

By definition, VCUs are also voluntary. This means that they do not exist on the compliance carbon credit markets because they are produced and retired voluntarily by people and organizations that have not been forced to do so by law in their operational jurisdiction.

The current rate of change in the voluntary carbon credit market is rapid and difficult to follow. It is very difficult to predict what will happen over the next few years, let alone over the next decade. The blog will review three interacting themes that will impact the carbon pricing market over the short and long term.

  • The current lack of supply vs demand (The carbon credit crunch)
  • The role of institutional investors in the carbon market
  • The role of innovative carbon capture technologies

Supply vs Demand

First of all, let’s look at the supply vs consumption of VCUs. Over the past few weeks MyCarbon has been digesting some data from www.slyvera.io, a leading provider of data for land based carbon offsets. In June they released their voluntary carbon credit market report titled “The Carbon Credit Crunch” and some of the insight they provide highlights the extent to which demand is outstripping supply in the VCU market.

Figure 1 [1] – Annual change in available VCU inventory: www.sylvera.io

Figure 1 highlights how VCU supply has outstripped global demand by up to 50,000,000 tonnes per annum from 2011 to 2018, allowing global inventory of available carbon credits to gradually increase. This provides organizations and individuals with a fantastic range of carbon credit projects to choose from making it easy and relatively low cost for them to offset their emissions. Since 2018 this trend has reversed as demand for carbon credits has outstripped the supply with a net reduction in available inventory of more than 50,000,000 tonnes per year in 2020 with that trend set to increase into 2021.

In any other market this would come as a shock and would get people worried. Normal market dynamics dictate that as demand outstrips supply, prices will increase and that is bad for the average consumer. Before we get too worried we need to remember what the purpose of the carbon market is. That purpose is to provide a potential fix to the climate crisis by incentivizing the market to develop carbon credits and reduce emissions. The market is designed to allow the flow of capital from carbon emitters to carbon reducers and removers in the most efficient way possible. 

This is why demand outstripping supply for carbon credits is fantastic news. This is why the increase of prices for carbon credits is fantastic news. For the planet to reach net zero as quickly as possible we need the price of these credits to increase and increase as quickly as possible. As the price of these credits increase, the incentive for businesses/people to reduce their own carbon emissions vs buying carbon credits to offset their emissions increases. It also incentives the production or more carbon credit due to greater return on investment, therefore reducing / removing more emissions.

In 2020 the average price for a VCU was $3-5/tCO2e. This is projected to rise to between $20-$50/tCO2e by 2030 driven by skyrocketing demand [2]. If the average price for a forestry based VCU increases 3-5x, how many more forestry projects will be produced due to the greater investment incentive. If renewable based VCUs increase in price 5-10x, how many more solar and wind farms will be developed. Our bet is that these projects will become one of the largest producers of wealth for the next 30 years.  This is why carbon offsetting needs to be taken seriously as the primary fight against climate change. It has the potential to turn carbon into gold.

Carbon Credits – Money Making Scheme or Climate Saviour?

The primary demand for VCUs has traditionally come from corporations who retire them to reduce net emissions. This demand has grown consistently since the birth of the carbon market, driving the incentive for reduced or removed emissions. Recently the dynamic has started to change as demand for carbon credits has increased disproportionally to the number of carbon credits retired.

Figure 2 [1] – Retired Vs Issued Carbon credits: www.sylvera.io

Figure 2 highlights how the number of VCUs issued has begun to skyrocket whilst the number of retired VCUs has climbed consistently. There is one key driver for this shift and that is the entry of investors looking to purchase and hold carbon credits to sell later at a higher price, this seems like an obvious investment decision based on the previously discussed pricing trends.

The first impression from this shift in dynamic feels uneasy. It feels like the climate crisis is being turned into some money making scheme and wealthy investors are taking advantage. We regularly discuss this theme with some of the projects we purchase carbon credits from and they have some slight hesitancy in providing carbon credits to large investors because of this feeling of unease.

We need to quickly remember what purpose the carbon market has in fixing the climate crisis. We want demand for VCUs to increase. We want prices of VCUs to increase. We want the flow of capital from emitters to removers and reducers to increase. Large investors have the ability to make this happen even quicker by driving demand and prices even higher. That uneasy feeling we get from accepting that carbon credits are now a highly valued investment asset needs to disappear because the quicker we accept this the quicker we will see more solar farms, more wind farms and more reforestation projects. Corporations will have to start reducing their emissions as the price of offsetting emissions becomes less financially viable. The only people that don’t win in this equation are those who cause too much damage to the planet through CO2 emissions.

Can We Send the Price of Carbon Credits to the Moon?

What price could bitcoin reach? What price could TESLA stock reach? These questions are highly speculative but technically there isn’t a limit as long as economic growth continues. There is perhaps a limit to the price of a carbon credit.  

At MyCarbon we believe that one of the most valuable forms of carbon credit from an environmental perspective are those driving innovative technologies such as Direct Air Capture. These technologies involve the setup of a factory that either mechanically or chemically, directly pulls CO2 out of our atmosphere. The reason these technologies are so valuable is that they are currently in their infancy, they likely highly scalable and they are one of the only solutions for permanent removal of CO2 from the atmosphere which will be required if we want to hit the Paris Climate Agreement targets.

Direct Air capture technologies are currently very expensive (approx. £200 to £1000/tCO2e) due to their low stage maturity. As the technology develops the expectation is that these prices will decrease as they are made more efficient and increase in scale. This could perhaps put a cap on the price of carbon credits. Hypothetically if this technology reached £50/tCO2e within the next few decades it would have a huge impact on the market. Obviously supply and demand will shape pricing but the scalable nature of these technologies means that supply should be able to meet demand in the long term. Why purchase a forestry carbon credit when you could guarantee 1 tonne of CO2 removal through direct air capture technology for the same price? There are other benefits associated with certain forestry projects as categorized by the UN’s sustainable development goals but the value they add is limited in the context of climate change.

So our prediction is no, the price of carbon credits will not go to the moon. But there is the potential to increase pricing 10-20x by 2050 if we are realistic about hitting net zero.

References:

[1] – www.sylvera.io

[2] - Future Demand, Supply and Prices for Voluntary Carbon Credits – Keeping the Balance; Trove Research.


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