Director and CIO of cKers Finance, and co-founder of global sustainability advisory firm cKinetics.
Carbon markets today are estimated to be worth over $100 billion and are expected to grow in the coming years. This potential spike in value could lead to a great opportunity for both the environment and investors. Has a new gold rush started? Let's take a closer look.
Carbon Is A Way To Put Value On A Scarce Resource: Air
Imagine that our Earth was the size of an apple. Our atmosphere would be similar to the skin of the apple. That is how small our atmosphere is. The atmosphere stretches a mere 6.2 miles after which it rapidly loses its air density. So far, we have deemed air to be an endless resource, but that is clearly not the case.
Carbon markets are a way to put a price on the real estate that exists above our heads.
Combatting Climate Change By Bringing Carbon Markets To The Forefront
As a species, our activities emit about 42 gigatonnes of carbon dioxide every year. If you weigh every human being on the planet, our collective weight would be approximately 0.3 billion tons . If you add up all the oil we consume in a year, that would be about 4 billion tons .
Now imagine, these 42 gigatonnes of carbon dioxide getting added to the thin layer of the atmosphere (remember the thin skin of an apple). This is creating an imbalance that is causing climate change. Scientists, who have been researching this topic for decades, tell us that in order to limit our planet's temperature warming to 2 degrees, we can emit no more than 1,150 gigatonnes . At our present pace of emissions, we would blow through that in approximately 25 years.
However, this is where several countries have set goals that aim for steep emission reductions by the mid-century. The policies aim to stretch this "carbon budget" and hence carbon prices become important.
Growth Of Carbon Markets
A carbon market comes into existence when a policy gets enacted to regulate carbon emissions through a market mechanism. A decade ago, there were 21 market mechanisms across the globe that put a price on about 5% of the globe's emissions. Today , there are 68 mechanisms covering about a quarter of the emissions. The larger ones among these by value are the EU Emission Trading Scheme (EU ETS), the Western Climate Initiative (WCI), Regional Greenhouse Gas Initiative (RGGI) and the U.K. Emission Trading Scheme (U.K. ETS).
At the climate change conference in Glasgow in 2021, countries across the globe came closer to agreeing on a framework connecting market mechanisms with each country's goals. Once formalized, this will provide a boost to carbon offsets and potentially allow for them to be used across jurisdictions.
Over the coming years and decades, we will likely see more rules and regulations to govern our atmosphere. Many of the regulations are likely to be market driven.
The Worth Of These Carbon Markets
If we just take the EU ETS, WCI, RGGI and U.K. ETS, they represent about 5% of the global emissions and are valued today at about $110 billion as per our companies' estimates (we take today's average carbon prices in these markets alone). These are older markets that have been around for over 10 years (keeping aside the U.K. ETS, which got carved out of the EU ETS, post-Brexit). Many of the other markets are new, being less than five years old. We could see them grow quickly in value.
Legitimacy Of Comparing Oil And Gas
Oil and gas markets generate value by releasing energy (and carbon), whereas carbon markets generate value by capturing carbon. Hence, it is controversial to compare carbon markets with oil, but doing so builds a greater appreciation for our atmosphere as a resource (just as oil is a valuable resource).
There are several similarities, the key being:
• Both are highly regulated.
• Both are finite commodities.
• Both draw interest from policymakers. Oil and gas form the underpinning of our current economies and many jobs are intrinsically tied to them. Carbon markets form a basis to move toward energy independence and many (future) green jobs can be enabled through them.
There are also a couple of key differences:
• Oil and gas can easily be traded across geographies, whereas carbon markets (as of now) are not fungible across geographies.
• Oil and gas are a part of our daily lives as consumers, whereas carbon markets are just beginning to seep into our consciousness.
Valuing Our Air
Let's fast forward 30 years. Placing value on our atmosphere would mean we are using it more judiciously. Just as there is an industry that thrives today to take carbon out of the ground, there could be another industry thriving that may be putting carbon under the ground. Around these may be many secondary industries around financing, solutions, research and the like.
A big change is also expected for biodiversity. Natural and working lands as well as oceans are the most effective way to capture carbon . Having a price on carbon is likely to mean a fillip to work that recharges our natural ecosystem. Till we have a means of putting a price on preserving our environment, carbon prices will likely play an indirect role.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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