Carbon Credits
Many people have heard of “carbon credits,” but most have no idea what they really are. Very few have any idea how to obtain and sell them. All of our clients are surprised to hear that the revenue streams created by carbon credits can eclipse the revenue streams they earn in their core business in very short order.
According to the World Bank, the carbon credit industry grew from an $11 billion market in 2005 to a $65 billion market in 2007. Although statistics are not yet available, economists believe the industry more than doubled again in 2008.
The New York Times has estimated that within a decade the carbon credit industry will be a trillion dollar worldwide industry—making it the world’s largest commodity industry. It is not an overstatement to predict, as many leading economists have, that the carbon credit market will eventually become the world’s largest market of any kind.
The carbon credit industry in the United States is in its infancy. Carbon Trader formed to explore opportunities for obtaining and monetizing those credits in the various domestic voluntary and over-the-counter markets. Carbon Trader is also placing itself strategically in new industries with carbon credit potential and monitoring, and in some cases influencing, public statutory developments at the federal, state and regional levels.
Cap & Trade
The market in the United States is loosely based on the “cap and trade” system first implemented in the late 1980’s for acid rain reduction and imported into the carbon emission reduction platform via the Kyoto Protocol. The Kyoto Protocol establishes minimum standards for the certification of credits that member countries must meet or exceed.
What all Kyoto-based systems have in common are the fundamental cap and trade elements. Cap and trade is a method of imposing an artificial marketplace on a given environment impacting behavior. The idea is to assign a value to each ‘unit’ of carbon emission. Once that is done, basic economics dictates that a ‘market’ will form and, if done right, emitters will be incented to change behavior and capture profits resulting from those changes.
The numbers are complex, but the analysis is relatively straight-forward. Each jurisdiction (usually country by country) assesses its baseline (Year 1) carbon emissions nationwide and assigns a number of units to that baseline. In a round numbers example, country X might determine it has 50,000 units of carbon emissions in Year 1. It then doles out those 50,000 units (as 50,000 carbon credits) throughout its private economy to large emitters, based on Year 1 emissions levels of each of business.
Each business can only emit as many units as credits it has; unless, of course, that business buys more credits on the open market. If a company emits less than their unit levels would allow, they can sell the corresponding amount of credits to other emitters.
If country X reduces the number of credits it issues in Year two to 40,000, then each actor must either take steps to reduce its emissions or purchase credits from another actor who has reduced its emissions further. In the process, the price of credits (and, therefore, the price of emitting) has gone up, and those that reduce their own emissions and have resulting credits for sale can make a tidy profit for their greening efforts.
Economists developed the concept of carbon ‘offsets’ to incentivize non or small emitters to get in the game and further drive down emissions. Actors outside the cap and trade system who do not have carbon credits to trade, can nevertheless be awarded credits for changing their business to reduce carbon emissions.
The Current U.S. Market
The current United States market is missing the central element of Kyoto and related protocols. The United States market is purely voluntary and does not involve cap and trade at all. Credits for carbon offsetting or reduction activities are awarded by the private voluntary markets in the United States, the biggest of those markets being the Chicago Climate Exchange. Credits can be either traded on the issuing exchange or sold in private placements—direct B to B sales—at a mutually agreed upon price.
Information about where the market is heading is scattered and closely guarded by those who have it. Everyone agrees that the voluntary market in the United States will be involuntary sooner than later. Many states and regional cooperatives are implementing mandatory systems as we speak.
While nobody knows the exact path the carbon credits market will travel, everyone agrees it is headed in only one direction. Carbon credits on the Kyoto-related exchange have been trading at numbers in excess of $30 U.S. for the last few years. Carbon credits have traded in the voluntary U.S. markets for between $1 and $7 per credit. Somewhere between, or even in excess of those two numbers, there is vast profit potential for first mover leaders in world’s fastest growing commodity market.