The Carbon Credit Market Blows Up

The Carbon Credit Market Blows Up

September 17 2021

At the 2017 Oscar Awards, Leonardo DiCaprio used his Best Actor acceptance speech to urge the audience to stop procrastinating on climate change. The activist is also known for his jet-setting lifestyle, including famously renting a 482-ft super yacht to watch the 2014 World Cup in Brazil. To reconcile his climate activism with his profligate lifestyle, DiCaprio purchases “carbon credits” to offset his carbon emissions.

Corporate emitters are also buying carbon credits as part of their plan to halve their emissions by the early 2030s. They cannot reduce their emissions fast enough, so they are buying carbon credits for the balance. Delta Airlines has no way to stop burning jet fuel, so plans to offset its emissions with forestry credits.

Today, carbon credits are being supplied to the market by paying landowners to plant or not cut down trees, or by having farmers use more sustainable growing techniques. The world’s largest industrial plant just started running in Iceland to pull CO2 directly out of the air and turn it into stone. They say it is economically viable if it can sell the carbon credits at $300 a ton. Forestry credits trade for around $10 a ton.

The EU has lit the fuse on carbon credits with its carbon cap and trade system. The emissions of most EU companies are capped at current levels, and they get a steadily lower number of “carbon credits” each year as the cap is reduced. Companies that cannot cut their emissions fast enough have to buy credits in the market. California has a similar cap and trade system.

The demand for credits is exploding as multinational corporations look to meet the net-zero demands of over 600 institutional investors who own the bulk of their voting shares. These shareholders are insisting that companies aggressively begin to either cut or offset their emissions. The 2021 replacement of five members of Exxon’s Board was a shot across the bow.

While the total amount of transactions in credits today is less than $500 million, capturing 5 billion tons of CO2 at $200 a ton results in a $1 trillion market – or over 1% of global GDP. We expect, in the very near term, the introduction of an international electronic carbon exchange that allows consumers and companies to buy and sell credits from all sorts of different issuers, much like we trade shares of Apple on NASDAQ or cryptocurrencies on Coinbase. Market-based trading systems are powerful and effective devices to bring about dramatic change – in contrast with pure government regulation.

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