Carbon offset markets: why are investors getting started?

Carbon offsets markets have heated up recently, and with recent news that private equity giant TPG is jumping in with both feet, investors may be wondering why the sudden interest…and what’s happening in the general trend.

So I sat down for a Q&A with my friend and former colleague Kendall Bedford. Kendall is an Impact Fellow at SustainVC and was previously a two-time summer associate with my firm, Spring Lane Capital. She has experience in the carbon offsets and environmental services markets and has recently completed a market mapping effort in the area of ​​carbon offsets in particular. We sat down and discussed what she found that might be of interest to investors interested in these markets.

So why did you decide to map carbon offsetting and related markets?

Because it’s a fascinating time in this market! After years of relative stability and general disinterest from the institutional investor community, in 2021 the demand for carbon commodities has exploded; retirement rates jumped 70% in the voluntary market alone and prices per tonne of CO2 equivalent jumped into double digits. Some say this is the result of the same rebound all markets experienced after returning to normal post-COVID. Others would suggest the chickens come home to roost for companies that have made unachievable climate pledges, and this must be their quick fix. Whatever the reason, carbon markets are booming and extremely exciting changes are happening in this space!

What makes investing in these markets controversial right now?

It is important to note that the carbon feedstock ecosystem is vast and often extremely complicated. Simply put, generating and selling offsets requires engaging with, at a minimum, a project developer, a third-party auditor, a carbon offset program/registry, and some sort of credit broker or buyer. Several start-ups are trying to reduce the administrative burden associated with participating in these programs, but in their system improvement goals, these organizations have come under scrutiny for creating more weaknesses in an already existing ecosystem. vulnerable.

That being said, unlike some, I wouldn’t rush to criticize the carbon products themselves. Instead, I’m particularly concerned with developers creating less legitimate or less secure projects to easily earn credits, when there are already several financially lucrative and impactful opportunities out there.

What areas do you find particularly interesting after mapping the market?

If you’ve been following the markets for a few months, you’d be hard pressed to miss the buzz surrounding biochar producers. Biochar is a charcoal-like substance created by the pyrolysis of waste and can be used as fertilizer, soil quality improvement, fuel, and several other applications. These projects are fascinating because not only are the developers selling an environmentally sustainable and financially lucrative product, but they are often eligible for an additional revenue stream through carbon offset credits. Carbon removal credits are issued and generated through processes similar to offsets, but instead of rewarding emission reductions, they are awarded for activities that sequester carbon. Although slightly newer than offsets, these biochar-generated carbon removal credits are now issued by better-known registries such as Verra, which recently created its first biochar protocol this summer. Moreover, the market for these products is increasing, which has motivated even more attractive prices; a notable example being Shopify and Carbofex’s long-term agreement this spring.

Any thoughts on the much-discussed carbon capture and storage projects?

If they’re not looking for shovel-ready projects today, investors might also do well when considering opportunities they can watch for the long term. IEA reports suggest that the global number of carbon capture, use and storage (CCUS) projects has already doubled between 2020 and 2021. This sector is particularly interesting because operators here have a wide range options, as CCUS projects can be applied to any solution that captures CO2 directly from industrial emissions or from the air. This market is particularly attractive because the technology can often be applied as an added benefit to a pre-existing or sustainable business model.

So beyond these emerging areas of interest, much of the current buzz in the offsets market is based on nature-based solutions, such as forestry and agricultural practices. Will it continue to dominate the market?

In an offsets context, nature-based solutions projects can be any type of carbon project associated with natural carbon removal solutions, and they generally fall into four broad categories: improved forest management , avoided land conversion, reforestation and blue carbon (ocean-related sequestration). ). As a former conservationist, I am extremely enthusiastic about these types of projects because they offer the opportunity to recreate or restore some previously degraded habitats. They usually have a powerful story attached to their creation and often their operations are made possible through the engagement and empowerment of the local community. Market demand for these carbon products is high, with prices above $12 per ton on average, which, while great for monetizing these projects, is bad for the “gold rush” mentality. from developers who hastily participate in the marketplace.

And so, recently, many of the most controversial offsets issued come from this segment due to the sometimes subjective methodologies and estimates that some developers use. This gold rush mindset leads to sometimes lowered standards, and it seems to hit nature-based solutions efforts particularly hard. The market will have to continue to demand high standards and rock-solid methodologies if it is to evolve. Some of this is happening now, but it will be important to see developers’ implementation and validation efforts continue to improve and remove the subjectivity of an offset’s value, for the market to truly grow. at the institutional level.

What do you wish more critics understood better about carbon offsets?

Putting aside John Oliver’s much-discussed and entertaining dismissal of their effectiveness, I truly believe that carbon products, including offsets, will be an important piece of the puzzle going forward. Some will say that ultimately we use them poorly and that long-term solutions will require a different set of tools. Regardless of belief, offsets have been around for over 20 years, and they’re certainly not going anywhere in the near future.

So instead of wishing they were gone, let’s use them for what they are and how they were intended, let’s try to support solutions that drive legitimate change, and make solid investments so we can implement more projects and create measurable change.