What’s happening in the world of carbon?
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October 12, 2021

What’s happening in the world of carbon?

If you’ve followed the news in the past few months you probably can’t help but feel a little bit desperate. Record temperatures in Canada and the arctic, massive droughts in Madagascar and the US west coast, landslides in Japan, fires in Greece and once-a-century floods in Germany. These glimpses into what a future beyond 1.5°C warming may look like can be depressing and awaken a sense of urgency for ramping up climate change action.

In a previous post we talked about the growing frequency and severity of extreme weather conditions resulting from climate change, the importance of reaching net zero CO2 emissions by 2050 and how carbon removal can play a role in reaching this goal. But the question remains: How are these efforts being financed, is there a market for carbon removal and how will it develop? At this point it makes sense to take a closer look at what is happening in the global carbon market.

Over the last years since the Paris Agreement there has been a steadily increasing willingness to invest in climate solutions. France has pledged 30% of its climate funding by 2030 and the UK has committed at least £3 billion over the next five years toward natural climate solutions (NCS). Furthermore, the UK has introduced the Sustainable Farming Incentive pilot programme which will reward farmers for managing their land in an environmentally sustainable way, which includes payments of up to £70 per hectare for improved grassland soils (which, as we learned before, are very good at storing carbon). Similarly, the EU passed a reform of the Common Agricultural Policy (CAP) that designates 30% of direct farmer payments for environmental practice and has set a target to make 20% of the EU budget spending climate-related. 

On the other hand, there have also been greater efforts on internalizing externalities by putting a price on carbon, be it through a carbon tax or cap-and-trade markets. These mandatory schemes are mainly focused on industrial firms and energy production, but are now increasingly including the transport sector as well, incentivizing actors in these sectors to either reduce emissions or to buy carbon offsets from other actors that do. However, in most regions carbon removals are not counted as offsets and, hence, do not play a role in these schemes. This has changed with CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation), a new offsetting scheme for the aviation sector in the member states of the International Civil Aviation Organization (ICAO), which pilots this year. Here, the aviation industry is incentivized to offset any emissions exceeding the baseline emissions from 2019 and 2020. Under this scheme, also carbon credits from Verified Carbon Standard (VCS) projects are eligible for purchase, including credits from NCS such as tidal wetlands restoration and sustainable grassland management. 

Simultaneously, there has been an increasing interest in voluntary carbon markets as part of a Environmental and Social Governance (ESG) movement related to climate commitments, thanks – in part – to rising popular demand for business accountability, transparency and sustainability. As part of its climate pledge, Microsoft has committed to reaching negative emissions by 2030 and has since purchased up to 1.3 million metric tons worth of carbon removal, most of which are natural climate solutions. Similarly, Amazon has pledged $100 million for natural climate solutions, Apple has pledged $200 million and Shopify has pledged $5 million annually for carbon removal within their respective climate funds. 

While these pledges have been voluntary, the public calls for environmental accountability and transparency remain a significant driving force in the growth of ESG principles in the business world. And as environmental financial disclosures and ESG-related risk analysis become mandatory – as we now see in the EU with the Non-financial Reporting Directive (NFRD) and the Sustainable Finance Disclosure Regulation (SFDR) –  we may expect rising investments in voluntary carbon markets driven by consumer pressure and the competition for environmental benchmarks. This comes at a time when biodiversity loss and climate change – acting as so-called threat multipliers – have topped the charts in risk for the global economy for the last few years, according to the World Economic Forum (WEF). 

Additionally, carbon credits have gained popularity on smaller levels for offsetting individual carbon footprints, where companies such as myclimate, atmosfair and MoorFutures offer a range of projects that offset or remove carbon for the compensation of carbon emissions for individuals and companies alike. 

This virtually exploding interest in the carbon market shows that it isn’t a purely environmentalist demand any longer, but is evolving into a very lucrative business model. Putting the risks that this situation holds aside it also bears the question: Are there enough carbon credits to go around and can project development keep up the pace with this rapidly expanding market?

This is a difficult question to answer since markets are not always predictable and market disruptions (both positive or negative) are always a possibility, but according to the Boston Consulting Group (BCG), at the current rate the net supply of credits annually coming onto the market will fall short of supply by 300 million metric tons of carbon dioxide equivalent (MtCO2e) in 2030. Be that as it may, the fact that project monitoring, reporting and verification (MRV) is still a tedious task for project developers represents a major obstacle for efforts to counteract this trend. Consequently, to keep up with the growing demand in the coming years, finding market disruptors to speed up this process is key. Seqana offers fast, robust and affordable solutions based on satellite imagery that can help project development thrive and satisfy this growing demand of carbon credits by accelerating MRV in NCS projects.

jakoblevin
Posts made: 12

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