Carbon credits are one of the key outcomes of the COP26 climate summit in 2021 that were green-lighted by the approval of Article 6 – the Paris Agreement’s wording governing carbon markets.
Article 6 of the Paris Agreement permits countries to cooperate to achieve emission reduction targets. Under Article 6, countries can transfer carbon credits earned from the reduction of GHG emissions to enable each other to meet climate targets.
Carbon credit trading is pretty brisk in 2022, while many are still trying to assess future growth. In fact, the size of the voluntary carbon offsets market is projected to grow from US$ 305.8 million in 2020 to US$ 700.5 million by 2027, according to Market Reports World – despite forecasts of slowdowns in global growth and a possible recession.
Boom to Bust?
But carbon credits have seen a pre-recession boom once before. In 2008-09, the global financial crisis led to a squeeze on credit and financial markets, resulting in a global economic recession. Prior to the 2008 recession, the global carbon market had risen rapidly to approximately $118 billion by 2008, an 84 percent increase from 2007 due to higher trading volumes and prices, according to research group New Carbon Finance- as reported by Reuters. However, carbon credit prices then fell later in 2008.
“The price of carbon permits called European allowances (EUAs) fell to around 15 euros ($20.46) a tonne in late 2008, halving a two-year high hit that summer. Lower industrial output, a flood of emissions permits to the market, strong selling to generate cash in the financial crisis and falling oil prices all contributed to carbon’s decline,” as reported by Reuters.
The bright side of the global recession was that global greenhouse gas emissions declined but that decline also cratered the voluntary carbon markets. Reportedly, the value of credits traded on voluntary markets fell 47 percent in 2009 to $387.4 million as companies cut back on offsetting emissions as they reduced spending on corporate social responsibility initiatives.
Is it different this time?
One person who believes the current surge in the carbon offsets market will fare a bit better in 2022 than it did in 2008 is Lionel Kambeitz, Chairman and Director of Delta CleanTech (Delta). “I believe carbon trading is a little more permanent, this time around,” says Kambeitz. “We traded about $30 million in 2007-2008 and we aggregated and traded a lot of carbon credits in that period of time. But it’s been a long time since the last wave, this one looks a little bit better. This wave is less reliant on government and more reliant on industry. I don’t think we have to worry as much about changing political winds or geopolitical events that are going to stop it the way it was stopped in 2008. The 2008 global financial crisis just stopped it in its tracks.”
Kambeitz says it was as if somebody turned the lights off and many thought the market would come back sooner. He thinks the return of carbon markets is due to the actions of capital markets that are leading a renewed interest in voluntary carbon credits.
Kambeitz has a long career in carbon capture and managing carbon credits. Along with Jeff Allison, he founded the predecessor of Delta CleanTech, which became a global leader in CO2 capture, decarbonization of energy, solvent & glycol reclamation, blue hydrogen production, and carbon credit aggregation and management. In the first 10 years of existence, the company participated in more than 50% of the design of all the carbon capture plants in the world. In February this year, Natural Resources Canada (“NRCan”) contracted Delta to assist NRCan with establishing a CO2 costing and performance database “to contribute to the increase of knowledge in applying CCUS technologies to different facets of facilities in Canada”.
Finding the right validation
Delta has been a very significant trader in carbon credits, including agricultural credits, since 2007 & 2008 and is now focused on validation and tokenization of carbon credits using blockchain technology.
“The concept is to employ proprietary technologies for the mitigation or the reduction and sequestration of CO2 to be able to produce carbon credits and then move it through the value chain, certified, validated, making sure the fidelity is correct. We put it on a digital ledger, and then tokenize it and move it to the market. So we’re an originator – originating the carbon credits with our licensed technologies, all the way up to tokenization of the carbon credits.”
Using blockchain to tokenize the credits is particularly useful when dealing with some of the California Compliance Allowance products like CCO8s and CCO3 Carbon Offsets. CCO8s are carbon credits with an eight-year invalidation period.
The CCO8 buyer accepts the risk of project or credit invalidation until eight years after the initial California Air Resources Board issuance. CCO3s are CCO8s where a second verification is conducted that reduces the invalidation period to three years, but the buyer still assumes the risk of invalidation. Buying carbon credits that are validated, certified, and tokenized using blockchain much is less risky.
The longest word in the dictionary
“The word blockchain seems like one of the longest words in the dictionary,” Kambeitz says. “It’s a fairly simple process. We’re using complex algorithms. We employ an auditing process that ensures the security, the non- counterfeit-ability of these tokens. So really, it’s a very fundamental digital ledger, one that uses almost no power. It’s a misconception about blockchain that it uses a lot of power like bitcoin. There’s quite a difference in the energy consumed because we’re not mining a bitcoin. We’re dealing with an audit process.”
As agricultural, methane, CCS & CCUS projects and carbon credit generating projects multiply in number and size, there are a lot of emerging opportunities for creating carbon credits. More commitments are being made by CEOs that their companies are going to be net zero by 2030 or 2050. Many E&P & midstream companies that are purchasing voluntary carbon credits view those credits as assets that will appreciate.
The new boom?
Kambeitz predicts that disclosures are going to have to be made about carbon and carbon liability, as they start taking up more and more pages of the annual reports and the financial statements. He thinks having carbon credits on financial statements (or at least recognizing them) is going to be required.
“It’s creating the new carbon economy boom- the voluntary carbon economy, “ Kambeitz says.
“The voluntary carbon economy is creating an incentive. It’s creating a carrot instead of just a stick and I think you need both to solve this problem. We need the stick of government- punitive taxation and associated compliance, compliance credits. But I think we certainly need the carrot, which creates new technologies, innovation, investment and risk-taking in carbon mitigation.”
Maureen McCall is an energy professional who writes on issues affecting the energy industry.