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Carbon credits, burgeoning asset class on the road to net zero

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Following COP26, more and more companies are actively pledging to go carbon neutral by signing either the UN’s Climate Neutral Now pledge or the Net-Zero Carbon by 2040 pledge. These are promises made by a company to reduce or offset its carbon emissions and to report annually. And they’re some heavy hitters that have already signed up for this pledge.

38 of the world’s 150 largest tech companies will be carbon neutral by 2030, according to the International Telecommunication Union and the World Benchmarking Alliance. Google, for example, is the carbon neutral king and achieved carbon neutrality in 2007, Microsoft will launch a $1bn fund to ensure it’s carbon-neutral by 2030, while Amazon achieves this by 2040 and Apple has pledged to use 100 percent renewable power in its product and supply chain by 2030.

However, for many companies, reducing and eliminating a carbon footprint isn’t as straightforward. Unlike the tech giants, many businesses built on a fossil fuels-based energy framework will find it challenging to reach this goal. Therefore, it may be necessary to use carbon credits to offset emissions that cannot be removed.

  • Under the 2015 Paris Agreement, the global goal of limiting the rise in average temperatures to 1.5 degrees requires that global greenhouse-gas emissions are cut by 50 percent of current levels by 2030 and reduced to net zero by 2050. To achieve this, companies will need to reduce emissions as much as possible. But for some companies, this might not be possible due to the cost or technology at the time. And so, this means “negative emissions” are needed which is accomplished via sustainable projects which remove carbon from the atmosphere.

    According to McKinsey & Co, “Carbon credits are certificates representing quantities of greenhouse gases that have been kept out of the air or removed from it. While carbon credits have been in use for decades, the voluntary market for carbon credits has grown significantly in recent years.”

    Australian Carbon Credit Units (ACCUs) can be thought of as the same thing. Each ACCUs represents one tonne of carbon dioxide equivalent stored or avoided.
    They can be generated in two ways:

    • Sequestration – Converting carbon to biomass by vegetation in the soil.
    • Abatement – Curbing emissions to reduce carbon released into the atmosphere.

    ACCUs are a unit representing carbon reduction that The Clean Energy Regulator (CER) issues to registered projects as part of the Australian Government’s Emissions Reduction Fund (ERF). CER also administers the carbon markets for the Emissions Reduction Fund, which supplies Australian carbon credit units (ACCUs). Like stocks, once the project obtains them, they have a golden ticket to participating in a lucrative secondary market. It’s here that these carbon credits can be purchased to offset unavoidable carbon emissions.

    The Australian carbon credit market uses the trading system where a cap is set (total volume of credits available) and the market decides the price through supply and demand. The Clean Energy Regulator is developing an Australian Carbon Exchange which will operate in the same way as an online stock exchange. The trading of ACCUs became simpler, quicker, and helped support demand. It should be noted that carbon credits are a financial product regulated and issued by the Australian Government to project developers.

    Going one step further, will be the seismic shift to tokenize carbon credits onto a blockchain powered trading system. This provides a secure, trustworthy, efficient, and highly effective platform. Tokenisation is the process of converting an asset and rights into a digital representation via tokens. While tokenization is still in its infancy, it may play a critical role with carbon credits, in the not-too-distant future.




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