[Climate Coin Investment] #1 : THE REAL VALUE OF CARBON CREDIT
Disclaimer : This is not financial advice for any investment.
TL;DR
- You may not have noticed but the world is already at war with carbon emissions in the process of transitioning to net zero.
- In line with the Paris Agreement of COP26, 64% of countries around the world have already declared net zero, and the issue of carbon reduction has become pivotal for companies so far to the extent that it determines the fate of their survival. Furthermore, the day when individual based carbon emission levels will be set and managed, is closer than ever.
- Following active discussions on carbon credit worldwide the carbon credit market has had unprecedented growth since 2017. Alongside the implementation of net zero, carbon emission regulations will inevitably become stricter and hence the carbon credit market is expected to grow even more.
Hello! Ben here from Nonce Classic. Nonce Classic has recently confirmed the tremendous growth potential of the carbon credit market in the midst of a major trend towards the global goal of net zero (carbon emissions caused by humans — carbon reduction by humans = 0 ). Moreover, we too believed that the questions and issues the carbon credit market suffered from the last 30–40yrs could be perfectly answered through crypto technology and that is why we have added a carbon credit crypto project to the Nonce Classic portfolio. There have been many teams out there that have tried to solve environmental problems through crypto but very few that have measurable experience working in the carbon credit scene. Thus we have put in our efforts to find projects that are not crypto projects created for the sake of issuing tokens but projects that pragmatically use crypto technology to combat climate change by solving problems of the current carbon credit market. In that process, we came to hear of Climate Coin, a veritable carbon credit crypto project, and us Nonce Classic as an accelerator, have begun contributing to its growth and invested in its tokens. Starting with this article, we plan to publish a series of articles explaining why the carbon credit market is bullish, why we invested in Climate Coin, and what kind of project Climate Coin is specifically. In this first article let us understand the carbon credit market and look into its growth potential! Let’s begin :)
The Unavoidable Arrival of the Era of Net Zero
What does net zero mean? It is a state of equilibrium where the amount of carbon emitted by human activity is negated by carbon reduction initiatives. From the perspective of the average Joe who is not particularly concerned with environmental issues, it can be hard to believe that net zero is realistically possible by 2050. But global discussion and cooperation to save the planet are happening much faster than we think.
In the Paris Agreement of COP26, held in Glasgow, UK on Oct. 31st 2021, nations throughout the world agreed to an obligatory global framework to “reduce more than 50% of global annual greenhouse gas emissions by 2030 and reach net zero by 2050”. In line with this, governments around the world have begun to pledge net zero at the national level and are keeping each other accountable by submitting Nationally Determined Contributions (NDC), which are national carbon reduction plans, every five years to check that implementation has been active. So far, a whopping 127 of 198 countries worldwide have declared net zero.
The reduction plans of each government for the 1.5 degree pathway have naturally led to carbon reduction obligations for companies in each country. In places where environmental regulations are currently the most stringent, such as countries in the European Union, it is not uncommon to see companies that face bankruptcy due to the cost of purchasing carbon credits — to meet their allocated carbon allowances — exceeding their operating profits. In this day and age that we are living in and will need to live in, the considerations of how a company can minimize carbon emissions in its operation and how one can secure carbon credits will become crucial.
The recent actions of the US Securities and Exchange Commission (SEC) on climate change are likely to intensify the concerns of companies around the world on reducing their emissions. On March 21st, 2022, U.S. local time, the SEC unveiled a regulation that required all companies listed on the U.S. stock market to disclose their annual greenhouse gas emissions and their impact on climate change. The proposed regulation was prepared by the SEC through in-depth analysis and input from stakeholders since last year, and is expected to pass without major changes as 3 out of 4 SEC members agreed. If the regulation is passed, it is expected to affect not only US companies, but also countless companies around the world, directly or indirectly, making a tremendous impact worldwide.
Foreign companies listed on the U.S. stock market will naturally become subject to mandatory disclosure, and even companies that are not listed on the U.S. stock market will be directly or indirectly affected and in more cases than not, obligated to disclose emissions. This is because companies listed on the U.S. stock market that have significant greenhouse gas emissions or set specific targets for greenhouse gas emissions are subject to stricter emission standards (Scope 3) and obligations to disclosure which will magnify investigation into all related companies. There are three methods for calculating greenhouse gas emissions. Scope 1 is limited to measuring the amount of carbon emitted directly from facilities and transportation that a company owns or has control over. Scope 2 measures carbon emissions associated with the purchase of the company’s source of energy. Scope 3, the most stringent standard, covers all indirect emissions from all value chains of a company.
The SEC’s proposed carbon emission disclosure mandate and regulations are just one example of how policies related to carbon credits can be applied across all borders and affect all related parties. As such incidents will continue to occur throughout the implementation of net zero, even companies that are not immediately obligated to disclose their carbon emissions now must be thoroughly prepared in advance so that they can appropriately respond to changes in carbon emission laws and policies impending.
Moreover, in the near future, carbon reduction obligations will become relevant on an individual level. Contrary to the efforts made so far at the national and corporate level to reduce carbon emissions, individual consumption has increased dramatically with the improving level of individual quality of life and convenience. Since consumption is directly related to carbon emissions in every way, an increase in consumption inevitably leads to an increase in individual carbon emissions. In this regard, countries around the world have agreed that in order to realistically achieve the goal of net zero, carbon emissions must be reduced on an individual level, and thus solutions to individual carbon reduction are being actively discussed and studied under the term Personal Carbon Trading (PCT).
PCT refers to a system in which carbon emission quotas are imposed on individuals within the national carbon budget with quotas being tradable between individuals in the form of carbon credits. To maintain a high standard of living, individuals who emit more than their allotted carbon emissions can purchase carbon credits from individuals who emit less than their allotted carbon emissions. European cities with well-established carbon credit markets are rigorously preparing for the era of net zero by conducting prototype projects for individual carbon reduction early on. The era of having to check the carbon footprint on product labels while shopping, choosing a means of transport with less carbon emissions, and worrying about the level of carbon emissions from taking a hot shower is a reality that is much closer than we imagine.
The Fearsome Growth of the Carbon Credit Market
The carbon credit market is divided into the compliance market and the voluntary carbon market.
A Compliance Market is where carbon emission allowances are enforced by law to which actors must comply. Companies in industries that traditionally emitted a lot of carbon are immediately included in the mandatory (compliance) carbon market, and each year, each government receives a carbon emission allowance in the form of carbon credits. If a company’s emissions are less than the allocated cap, and there are carbon credits left over, it can be sold to other companies that have more carbon emissions than the allocated cap and thus need carbon credits (Cap and Trade). The annual amount of emission permits that are allocated free of charge to companies are designed to decrease every year, in other words, companies’ demands for carbon credits are structured to inevitably increase every year. The value of the compliance market in terms of its annual trading volume has grown like never before since 2017, reaching $261B in 2020, five times its volume in 2017.
The Voluntary Market is where carbon reduction is not compulsory by law, and carbon credits are traded for personal reasons or to form an eco-friendly reputation for market participants. Although voluntary, it is quite common to see a company being forced to offset the carbon it emits by purchasing voluntary carbon credits under direct or indirect external pressure, even if it is not included in the compliance market. For example, when a company seeks to receive an investment from the government or another company, it may be rejected from the investment because it is not a net-zero company. If an individual or a company that is a major shareholder of a company declares to go in the direction of net zero, the companies below it have no choice but to implement net zero according to the decision of the major shareholder. Moreover, as the world’s trend is moving toward ESG management, becoming an eco-friendly company is no longer a strategic choice to have the upper hand in competition, but an essential measure to not fall behind in the competition. Thanks to this eco-friendly trend, the annual trading volume of voluntary emission credits increased roughly 7 times in value from 2017 to November 2021, exceeding $1B. The overall voluntary credit market continues to grow strongly and is expected to be valued between $5B and $50B by 2030. (TSCVM Final Report 2021)
In Closing…
Through this article we explored how net zero, a goal jointly promised by countries throughout the world to counteract climate change, has brought significant changes at an international, corporate and individual level. We delved into the details of how these changes will become increasingly prominent as we near the target year of net zero, and thus how the carbon credit market will grow exponentially in proportion to these changes. In the next article let’s discuss the obstacles hindering the growth of the carbon credit market, how the project we have invested in seeks to solve these issues and ultimately why we made the decision to invest in Climate Coin. Stay tuned!
Then till we meet again…let me leave you with a quote from the Co-Chair of the IPCC working group, Jim Skea,
“It’s now or never, if we want to limit global warming to 1.5°C” — Jim Skea
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Translated by Esther Kim
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