About seven weeks after the launch of Climate Impact X (CIX), the Singapore-based global carbon exchange created by DBS, the Singapore Exchange, Standard Chartered and Temasek, a group of global banks has announced another global carbon exchange, in response to the increasing interest in carbon credits as a means of reducing greenhouse gas (GHG) emissions.
Project Carbon, the pilot carbon exchange jointly announced by Canada’s CIBC, Brazil’s Itaú Unibanco, National Australia Bank, and Scotland-based NatWest Group on July 6, is a digital platform designed to provide liquidity, price discovery and transparency for carbon credit projects. The pilot is built on a private Ethereum platform developed with blockchain-focused software engineering provider ConsenSys.
On June 16, China officially launched its national carbon emissions trading scheme, the largest carbon market in the world. The new trading scheme will initially cover more than 2,200 companies from China’s power sector, responsible for approximately 40% of the country’s carbon emissions, with more sectors expected to be added over time.
Both CIX and Project Carbon are voluntary and not expected to be operational until late 2021 at the earliest, but when they are, they will fast-track the use of carbon credits as a new alternative asset class.
The establishment of CIX and Project Carbon come at a time when global policymakers are moving to make carbon pricing go mainstream. The G20 finance ministers and central bank governors meeting in Venice on July 10, for example, issued a communique that officially recognizes, for the first time, carbon pricing as a tool for addressing climate change. Carbon pricing aims to reduce carbon emissions by using market mechanisms to pass on the cost of GHG to emitters.
Trading in carbon credits on the exchanges alone is expected to provide investment opportunities for asset owners and asset managers who are eager to tap new asset classes that can meet sustainability standards.
Asset managers are also expected to produce investment funds and other instruments from carbon credits when the market becomes big enough and liquid enough.
The establishment of CIX and Project Carbon is expected to increase interest and awareness among potential users, and hopefully fast-tracked their knowledge and use of this lucrative asset class.
Although carbon trading is still a complex process, purchasing high-quality carbon credits are an effective way of contributing to the transition to a low-carbon economy and reducing GHG for institutions, corporates and other entities.
A carbon credit, also known as carbon offset, is basically a certificate issued by a corporate or any entity representing one metric ton of carbon dioxide (CO2) equivalent that is either prevented from being emitted into the atmosphere (through emissions avoidance or reduction) or removed from the atmosphere as the result of a carbon-reduction project, according to a report by consultancy group McKinsey.
The carbon-reduction project can be in the form of a renewable energy project, such as a solar power plant, wind farm, or geothermal project. Other examples of carbon-reduction projects can involve reducing reliance on fossil fuels; natural climate solutions, such as reforestation, preventing deforestation or agroforestry; energy efficiency; and resource recovery, such as avoiding methane emissions from landfills or wastewater facilities.
The certificate or carbon credit is created when a carbon-reduction project (of the issuing entity) can demonstrate that it meets independent standards and criteria for carbon reduction.
“For a carbon-reduction project to generate carbon credits, it needs to demonstrate that the achieved emission reductions or CO2 removals are real, measurable, permanent, additional, independently verified, and unique,” the McKinsey report states.
The carbon credit can then be used to offset the issuing entity’s climate commitment. For example, if the corporate’s commitment is to reduce its carbon emission by one metric ton of CO2 per year, it would need to produce one carbon credit per year. If it can produce more than one carbon credit, it can trade the excess carbon credit in the carbon exchange and generate revenue from it.
“The impact of a carbon credit can only be claimed – that is, counted toward a climate commitment – once the credit has been retired (cancelled in a registry), after which it can no longer be sold," the McKinsey report notes. "A carbon credit is considered a voluntary carbon credit when it is bought and retired on a voluntary basis rather than as part of a process of compliance with legal obligations.”
Carbon credits have a multiplier effect because, as the report points out, the proceeds from the sale of voluntary carbon credits can be used for the development of other carbon-reduction projects.