August 2022 – @MarianaVargas – Ten years ago a petroleum engineering student was doing his thesis on extra-heavy crude oil, today he is working on renewables, hydrogen, carbon capture. As the world changes, we are molding ourselves to it, creating new normalities and it seems that the energy business is no exception to the rule. Europe has managed to take advantage of carbon credits, turning our environmental problem into a business opportunity and the doors are just opening to a financial world where Latin America will play a fundamental role.
In 1995, the Kyoto Protocol discussed the possibility of monetizing pollution, that is, paying countries or companies to stop polluting in large quantities. By the 1990s the world had already decided to act and add global pollution to the international agenda, thus Carbon Credits and Carbon Offsets were born. Each one is equivalent to one ton of CO2 and the price of each credit or offset is set by the market, quoted on the stock exchange.
Their difference is mainly based on the fact that they are traded in different markets. Carbon credits are traded in the regulated market, which is implemented at a national or regional level, through “cap and trade”. The “Cap” is a carbon dioxide emission limit that the State imposes on companies after having studied their size, productivity and activity. The trade consists of the fact that if the company does not exceed the CO2 emission limit imposed by the State, it has the right to sell these credits to other companies that had a negative surplus.
The voluntary market involves everyone who wants to enter and is 100% optional, nothing is imposed. Between the two markets, this is the smaller one, for now. Let’s say a company, any company, emits 20 tons of carbon dioxide per year and wants to be environmentally conscious and join the Carbon Offsets market. This company has several ways to create these offsets and market them, compensating for the 20 tons of CO2 it emits.
It can invest in renewable energy projects, it can plant hectares of trees (creating forests) that function as CO2 capturers, invest and innovate in its energy sources and processing, channeling them more towards an ecofriendly process. These projects will count how much CO2 is being removed from the atmosphere and their final sum will be the Carbon offsets that the company can trade at its convenience.
The purpose of this market is to reduce pollution levels globally and create a market that encourages these pro-environmental measures.
As we can see, the voluntary market will grow more in the medium term than the regulated one, since the optional is a feature that captivates many companies; Shell in 2021 mentioned that it plans to reduce 120 million tons of CO2 from the environment by 2030. A study showed that in 2022 this market is $400 million, it is expected to grow to $20-25 billion by 2030.
The only drawback that many are seeing in this new world is the lack of regulation of the voluntary market. As we mentioned before, if a company invests in a renewable energy project and in one year it captures 10 tons of CO2 and this company sells these credits, the buyer will want to verify that the renewable energy project really exists or that it captures 10 tons of CO2, what if it produces less?
Currently, there is no international organization in charge of regulating or verifying these transactions; however, the market needs will be satisfied by the market. There are currently companies that are emerging as project inspectors that seek to streamline the carbon credit market.
The fifth industrial revolution brought with it problems, one of the most criticized has been the loss of privacy with technology, however, telephones have not ceased to be produced. Every investment has a level of risk.
This market presents itself as a very interesting opportunity for developing countries, it is the perfect opportunity to convert infertile land into solar panel fields, high altitude mountains into wind turbine farms and to take advantage of the mighty rivers to develop the hydroelectric industry.
By obtaining income for helping the environment and at the same time developing very profitable projects, some African and Latin American countries are undoubtedly beginning to emerge as great candidates to participate in this market.
27 years after it was created, this market is beginning to take center stage and the timing is perfect. Many companies such as BP, Total Energies and Apple have invested in reducing their CO2 emissions as a pro-environmentalist policy and corporate social responsibility. Monetizing these decisions translates into large revenues. By the first quarter of 2021 Tesla was able to sell its carbon credits to a manufacturing company for $518 million, giving it significant revenue.
It seems that the risk that this market offers is worth taking, its track record of use has given it strength and reliability. The lack of regulation seems to be a medium-term problem, as it has held back this large market for 27 years, but now that the world has experienced the volatility of the crypto market, it seems that the experience has increased the risk tolerance of many players in the financial markets. Today, investing heavily in renewable energy or alternative markets is no longer a crazy move but an excellent opportunity. Because of this, it seems to be only a matter of time, before an international entity appears as an inspector and verifies the roots that sustain this futuristic market.