Carbon offsets take flight on course to become trillion-dollar asset class

Carbon offsets have the potential to become the next trillion-dollar asset class, as they are one of the few financially viable methods available that encourage corporations to be held accountable for their pollution.

For that reason, global companies are increasingly invested in it, and that’s growing at a fast rate.

Global firms including Disney, Microsoft, Gucci, ExxonMobil and airlines such as Delta and easyJet, have all recently bought into carbon offsets spending millions to balance out their emissions.

Investment into carbon credit projects reached $36 billion between 2012 and 2022, with half of it occurring after 2020, a survey last year by climate research firm Trove found. There was a 160 per cent increase in carbon credit projects developed and registered with the five leading carbon registries in the post-Covid period between 2020-2023 as compared to the pre-pandemic period between 2012-2020, the survey said.

The voluntary carbon market – valued at $2 billion in 2022 – saw remarkable growth, doubling in size from the previous year, as reported by Washington-based non-profit Ecosystem Marketplace. Exponential growth is expected to follow, with the total value of carbon credits generated and sold estimated to reach about $1 trillion by 2037, according to a report by BloombergNEF.

The momentum is bolstered by those looking for impactful yet more realistic methods to curb their emissions during the early stages of their complete renewable transition. This includes initiatives such as the Glasgow Financial Alliance for Net Zero, a group of 450 financial institutions managing over $130 trillion in assets, all committed to achieving net-zero emissions by 2050.

Apple, Alphabet, Amazon, and Samsung and leading car makers such as Toyota, BMW, and Mercedes-Benz Group, have also declared net-zero targets with the aid of carbon offsets, according to the Net Zero Tracker.

Carbon offsets are a contested issue, with opponents arguing that they allow companies to continue emitting without making substantial changes to their business models.

Despite this perspective, about one-third of the world’s 2,000 largest publicly held companies are looking to the market.

Carbon currency rising

Carbon credits, also known as offsets, are permits that allow companies to emit a certain amount of carbon dioxide or other greenhouse gasses while paying a monetary price. The price of one tonne of carbon emissions can cost a company anywhere from a few cents to over $200 per credit depending on several factors including the genesis of the offsets, age, geographical location, and the good old market forces of supply and demand.

They are not a replacement for removing carbon but are rather considered a pragmatic option for companies to balance their output.

Businesses and people can purchase these credits to mitigate their emissions which pressures them to put a limit on their carbon emissions. That money is also invested in the development of carbon-negative technology including direct air capture, a method used to remove carbon dioxide directly from the atmosphere.

Carbon markets, where these offsets are traded, have become crucial tools for corporations to enable the early stages of renewable transition. This is evident by the projections for this type of market, which are collectively expected to reach $15 trillion by 2050, according to a Dubai Future Foundation report from May last year.

Carbon markets are “a pivotal tool in our decarbonisation journey”, Sheikha Shamma, president and chief executive of the UAE Independent Climate Change Accelerators (Uicca), said in September 2023.

The UAE Carbon Alliance, launched by Uicca in June, pledged to purchase $450 million in African carbon credits by 2030 from the Africa Carbon Markets Initiative that was launched at Egypt's Cop27 in 2022.

It's also being seen as a way to help African countries with their growing need for energy. The International Energy Agency said Africa will need to more than double its investment to over $240 billion by 2030 to meet the continent's fast-rising energy demand.

“Powering Africa” will be a key topic on the first day of the FII Institute's eighth annual meeting which begins in Riyadh on Monday, where Riham Elgizy, the chief executive of Voluntary Carbon Market, will speak on the panel.

A new commodity

The demand for carbon credits is rapidly growing driven by corporate sustainability commitments and stricter government regulations mandating emission reductions. Stringent targets and a limited supply of high-quality credits from projects that meet strict criteria, including additionality, permanence, accountability, and certification, ensuring reliable, lasting, and transformative environmental impact, will increase carbon's value in the coming years.

Once solely viewed as a harmful pollutant, carbon is now set to become an indispensable commodity in the fight against climate change. However, several challenges lie ahead.

Among them are de-globalisation, trade protectionism, and an increasingly fragmented world, which hinder the spirit of co-operation necessary for achieving common global goals. This is hindering low- and middle-income countries that need financial assistance to facilitate the energy transition and upgrade carbon-intensive legacy infrastructure, such as coal-fired power plants.

With such actions, it's evident that the functionalisation and commodification of carbon have set the wheels in motion towards global carbon neutrality. This process is set to evolve into a multi-trillion-dollar market.

Hand-in-hand

Ever-worsening climate change has left UN scientists stating that billions of tonnes of carbon must be removed from the atmosphere annually to have a fighting chance of reaching global climate targets. Investments from carbon markets and other traditional sources are crucial catalysts to this process.

Yet some bleak estimates suggest the damage has already been done. Carbon emissions already in the atmosphere will cost the global economy roughly $38 trillion, or one-fifth of global GDP, by 2050, according to the German government-backed Potsdam Institute for Climate Impact Research. This is regardless of future emission cuts.

But changing trends could alter the future, if done at the pace needed.

Adnoc, which is responsible for most of the UAE’s oil and gas production, has announced several sustainability targets as part of its 2030 strategy and upped its commitment to net-zero operation to 2045 from 2050.

The company aims to reduce greenhouse gas emissions by 25 per cent by the end of the decade and plans to limit its freshwater consumption ratio to below 0.5 per cent of total water use. It plans to invest $23 billion over the next five years in low-carbon solutions to develop systems that can capture four million tonnes of C02 per year and has set an annual carbon capture target of 10 million tonnes per year by 2030.

“Decarbonise the current energy system, while also investing in the new energy of tomorrow,” is how Musabbeh Al Kaabi, the executive director of low carbon solutions and international growth directorate at Adnoc and who is at the core of the strategy, described the transition method.

He highlighted Adnoc as one of the lowest carbon intensity producers globally at the Gastech conference in Houston in September.

“We produce our barrel at an equivalent of seven kilograms of CO2 per barrel. How did we do this? By embracing or connecting our operation, be it on the onshore or offshore, with the grid tapping into more sustainable sources of energy like nuclear and solar,” he said.

He also emphasised his confidence in the role of carbon removal technology to aid in the success of global decarbonisation.

“We are raising the ambition when it comes to carbon capture, and we strongly believe that carbon capture will be a big role in decarbonising the energy system of today,” he added.

Amro Zakaria is a global financial markets strategist and the founding partner of Kyoto Network and Madarik Ventures