A Sound Investment: The Economics of Carbon Credits

Introduction - As the world grapples with the intensifying effects of climate change, the concept of carbon credits has emerged as a pivotal tool in the global effort to reduce greenhouse gas emissions. Carbon credits offer a market-based mechanism to incentivise reductions in carbon emissions, driving both environmental and economic benefits. This article will delve into the intricacies of carbon credits, explore the economics behind them, and highlight their potential in shaping a sustainable future.

Understanding Carbon Credits – The 2015 Paris Agreement was an international agreement aiming to limit global temperature rise to 1.5°C. Achieving this goal will require greenhouse gas emissions to be cut in half by 2030, and reach Net Zero emissions by 2050 i.e. any emissions are balanced by removals meaning there is no overall increase in carbon in the atmosphere. Since the agreement was signed, many governments, private companies, and other organisations have set Net Zero targets. These targets focus on avoiding and reducing emissions, with carbon credits being used to compensate for any emissions that can’t be eliminated.

Carbon credits are certificates representing the reduction of one metric tonne of carbon dioxide or its equivalent in other greenhouse gases. They allow organisations to pay to remove emissions from the atmosphere through tree planting and other activities, thereby compensating or offsetting for any emissions they cannot avoid. They also put a price on carbon and provide a financial incentive to reduce emissions in order to avoid the need for purchasing offsets.

There are two main types of carbon credits: voluntary carbon credits and compliance carbon credits. Voluntary carbon credits are bought by companies or individuals looking to offset their emissions voluntarily, while compliance carbon credits are used by companies to comply with legal regulations in cap-and-trade systems such as the UK Emissions Trading Scheme. In these systems, Governments set a cap on the amount of carbon that can be emitted within a sector, and companies within that sector are required to purchase carbon credits if they cannot meet the cap through emissions reductions.

The UK Government announced in May 2024 that it was beginning a consultation to explore how voluntary carbon credits could be integrated into the UK Emissions Trading Scheme which is projected to lead to a significant growth in the demand for credits created in the UK.

Nature-based Solutions (NbS) – Our work is exclusively focused on the development of nature based solutions. Nature-based solutions have emerged as a cornerstone in the realm of carbon credits, leveraging the inherent ability of natural ecosystems to absorb and store carbon dioxide. These solutions encompass a variety of conservation and restoration activities, such as reforestation, afforestation, peatland restoration, and regenerative agricultural practices. By investing in nature-based projects, we harness the power of nature to mitigate climate change, enhance biodiversity, and support local communities.

The Economics Behind Carbon Credits - The supply of carbon credits is determined by the availability of projects that reduce emissions, while demand is driven by companies and governments seeking to offset their emissions. Pricing mechanisms are influenced by factors such as regulatory frameworks, market demand, the cost of implementing carbon reduction projects, and the quality of the underlying project (much like any asset).

The absence of a price on carbon is one of the principle causes of climate change. By creating a financial value for carbon reductions, carbon credits encourage investments nature restoration and environmental improvement. The very best nature-based carbon credits offer a multitude of additional benefits. These credits ensure substantial carbon storage by leveraging natural processes such as reforestation, afforestation, and peatland restoration, which not only absorb and store carbon dioxide but also enhance biodiversity and ecosystem resilience. They provide significant co-benefits including improved water quality, soil health, and wildlife habitats, while also fostering social and economic advantages for local communities through job creation and sustainable development. With rigorous verification and transparency standards, these premium credits mitigate the risk of greenwashing, ensuring that investments lead to real, measurable, and lasting environmental impacts.

The Future of Carbon Credits - Looking ahead, the future of carbon credits as an investable asset class is incredibly promising. Innovations and technological advancements are set to enhance the market. Blockchain technology, for instance, can improve transparency and traceability in the carbon credit market. Advances in measuring and verifying emissions reductions will also provide more accurate assessments of carbon reductions.

Expanding the scope and scale of carbon credit markets can increase the availability of carbon credits and drive further emission reductions. Broadening the range of eligible projects and integrating new sectors into the market will create more opportunities for carbon credits to play a significant role in addressing climate change. Major global brands are already leading the charge in this arena.

For example, Microsoft has committed to becoming carbon negative by 2030. The company plans to purchase high-quality carbon credits from projects like reforestation and soil carbon sequestration. These credits help offset their emissions while they invest in sustainability initiatives to enhance their brand reputation and meet their ambitious ESG targets.

Apple has set a goal for its entire supply chain and product lifecycle to be carbon neutral by 2030. The tech giant purchases carbon credits from renewable energy projects, forest management, and wetland restoration efforts. These credits help Apple compensate for emissions, bolstering its position as a sustainability leader in the industry.

The role of carbon credits in achieving global climate goals cannot be overstated. They are essential for meeting international climate targets and supporting sustainable development. By continuing to innovate and expand the carbon credit market, we can make significant strides toward a sustainable future.

Elevating Carbon Credits: The Oxygen Conservation Premium Carbon Credits

In 2024, Oxygen Conservation is set to revolutionise the carbon credit market by launching the world’s first premium carbon credits. This initiative aims to elevate the investment quality of carbon credits, ensuring that they not only contribute to emission reductions but also deliver substantial environmental and social benefits.

Oxygen Conservation’s premium carbon credits will be generated from projects verified under the UK Woodland Carbon Code and the UK Peatland Code, ensuring high-quality standards endorsed by the UK Government. These projects, managed on land owned by Oxygen Conservation, will focus on new woodland creation and peatland restoration, providing significant carbon storage while enhancing biodiversity, improving water quality, and supporting local communities.

The premium pricing reflects the high standards and significant impacts of these credits, encouraging buyers to prioritise emission reductions as part of a comprehensive climate strategy. Our intention is to elevate the carbon credit market, making carbon a more attractive and secure investment. By emphasising quality, transparency, and significant environmental and social impacts, these premium carbon credits will set a new standard in the market, driving further investments in regenerative projects and contributing to achieving the United Nations Sustainable Development Goals (UN SDGs).

The Hedge Against Humanity's Failures - Carbon credits have emerged not only as a market mechanism for reducing emissions but also as a crucial hedge against humanity's collective failures in addressing climate change effectively. In a scenario where we fail to achieve significant progress towards Net Zero, the value of carbon credits is poised to rise dramatically. As climate impacts intensify, the urgency to mitigate greenhouse gas emissions will become even more pronounced. Governments worldwide will likely impose stricter regulations and higher penalties on carbon emissions, driving up demand for carbon credits as companies scramble to comply with increasingly severe environmental policies.

In a worsening world, corporations will face mounting pressure from consumers, investors, and regulatory bodies to demonstrate genuine commitment to sustainability. The need to offset their emissions will become more critical, making high-quality carbon credits, particularly those from nature-based solutions, an essential component of corporate strategies. As these credits become scarcer and more valuable, their prices will soar, reflecting the heightened demand and the premium placed on verified, impactful offsets.

Moreover, the failure to make progress towards Net Zero will likely lead to more frequent and severe climate-related events, further underscoring the need for effective carbon mitigation strategies. As natural disasters and environmental degradation escalate, the market will increasingly recognise the intrinsic value of carbon credits as vital tools for resilience and adaptation. This escalating demand, coupled with a constrained supply, will drive the value of carbon credits to unprecedented levels, making them a crucial hedge against the escalating costs and risks of a deteriorating climate.

The Future of Carbon Credit Value - The future value of carbon credits is set to rise exponentially, particularly those generated from nature-based solutions. As governments worldwide expand carbon pricing mechanisms and cap-and-trade systems to include more sectors, there is a growing recognition of the importance of natural solutions such as reforestation, afforestation, and peatland restoration. These projects not only store significant amounts of carbon but also provide additional environmental benefits, making them highly attractive in the carbon market.

Nature-based solutions are increasingly being integrated into corporate sustainability strategies. Companies are investing in projects that offer multiple ecosystem services, such as biodiversity conservation and water quality improvement, which add a premium to their carbon credits. This integration ensures that the price of carbon credits reflects their broader environmental and social benefits, driving up their value. As corporations aim to meet ambitious sustainability goals, the competition for high-quality nature-based carbon credits will intensify, further boosting their market value.

Additionally, the harmonisation of different emissions trading schemes into a more integrated global market will provide greater liquidity and stability, making nature-based carbon credits more attractive to investors. As the demand for these high-quality offsets continues to outpace supply, their value is poised for substantial growth, making them a sound financial investment and a crucial component of global climate action.

Closing the Carbon Loop - Carbon credits are a powerful tool in the fight against climate change, offering economic incentives for reducing greenhouse gas emissions. The potential benefits for the environment, economy, and society are immense. As we continue to innovate and push the boundaries of premium carbon credits, the future of carbon as an investable asset class looks incredibly bright. By embracing this market, we can drive significant environmental, social, and economic benefits, ultimately offering a regenerative future for all. The introduction of premium carbon credits by Oxygen Conservation is a significant step forward, promising to elevate the quality and impact of carbon credits and inspiring confidence in the world’s most important alternative asset class!