Decoding the Path to Net Zero with Carbon Credits

Managing carbon footprints has become a key component of global efforts to reduce carbon emissions and mitigate climatic effects. Thanks to carbon credits, companies have a financial incentive to cut their carbon emissions. Those who find it difficult to reduce emissions can still operate, albeit at a higher cost. In such cases, understanding the basics of carbon credits and how they have evolved over the years becomes vital. To find out more, GLG’s Anupama Sughosh recently hosted a webcast with Lars Kroijer, Founder of AlliedOffsets, to delve into the carbon credit markets and explore why firms should consider investing in them.

What are carbon credits, and how are they represented?

There are very natural ways of absorbing carbon, for example, by buying a carbon project to plant trees that is the size of a football pitch to capture carbon. We can take this project to a registry and suggest using it for credits and get a report done based on the available evidence from the pitch project. Let’s say 1,000 tons of carbon credit can be generated over the next few years. In principle, the project is good to go to sell the 1,000 tons of carbon credits.

For instance, these 1,000 tons of carbon credits may be in demand by a company similar to Starbucks, which may require carbon credits for 500 tons of carbon. The other 500 tons can then help them achieve net neutrality. Intermediaries like brokers and traders will mediate and negotiate a fair price for it. Starbucks then purchases 500 credits and retires these credits. Indirectly, Starbucks has contributed to reducing emissions in the world. This is how the market works and how carbon credit projects function.

How do carbon credits get priced?

The determination of carbon credits is not yet fully established. Corporations are allowed to buy these credits to offset their emissions and try to reduce their environmental impact. This mechanism emerged approximately 10 years ago.

For certain types of credit, we need to consider the type of project, the registry, and the forestry development board. Ensuring the credibility of the credits is crucial. The demand for credits largely depends on the buyers. Large companies, such as American Airlines and Delta Air Lines, are among the biggest buyers. They are stringent about the projects they invest in to avoid being accused of excessive emissions.

Certain news channels recently exposed that some larger carbon projects didn’t deliver on their promises. Some of these projects were given more credibility than they deserved, raising doubts about the credibility of the credits and the registries. As a result, some corporates claimed to be reducing their carbon footprint based on questionable credits acquired at lower rates, seeking benefits from the situation.

Technologies like carbon dioxide removal (CDR) provide a tech solution for capturing and storing carbon dioxide for several years. The science behind creating a ton of carbon captures is verified. However, being a nascent market, the price of CDR is higher compared with the traditional markets, and there are supply-demand issues and project-related considerations.

Rating agencies evaluate various aspects of carbon credit projects to verify their legitimacy.

Will markets like India launch a social stock exchange for carbon credits?

The country is well-positioned not just to be a source for the carbon credits projects but across sectors. The country has a vibrant base of engineers, and if India builds new technology for carbon credits projects, it could be powered by the PE/VC community. On the demand side, India is a strong candidate to address issues related to climate change, as the country might be directly impacted by it.

No country can claim to be completely green. Green hubs operate online, and the exchange trades commodities at a standard level. Each credit and project can be traded differently, and they may be illiquid.

Various technologies can be used to determine carbon credits and the markets. It largely depends on the type of project, ranging from the growth, density, and height of trees assessed through LiDAR (a Light Detection and Ranging technology that has several applications within the context of Voluntary Carbon Markets) to drones used to measure the amount of carbon captured.

The carbon credit space is still evolving, and so are the regulations. With the current newfound awareness of the scope of carbon credits across the various sectors, there will be more collaborations to foster the reduction of carbon emissions.

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About Lars Kroijer

Lars Kroijer is the Founder and Managing Director of AlliedOffsets, which works on a database of carbon offset projects around the world. He has authored the books Money Mavericks: Confessions of a Hedge Fund Manager (Financial Times Press — 2010 and 2012 — second edition) and Investing Demystified: How to Invest without Speculation and Sleepless Nights (Financial Times Press — 2013). He has knowledge of various stakeholders in the voluntary carbon markets and views on metrics used to evaluate and benchmark the various carbon ratings agencies. He also has expert knowledge about different market players, carbon credit pricing, and the market size for carbon rating agencies and drivers of adoption and growth.

This carbon credits article is adapted from the GLG Webcast “Carbon Credits — Are Offsets the Way Forward?” If you would like to access similar transcripts or speak to industry experts like Lars Kroijer or any of our approximately 1 million industry experts, please contact us.