December 18, 2023 | Volume 1, Issue 2 | The BlackSummit Team

Welcome to the second issue of our new monthly newsletter, Carbon Market News Roundup, the goal of which is to introduce our audience to a new asset class market in the making: the carbon market. Our first issue can be read here.

In order to meet their net-zero emissions pledges, global firms must turn to carbon credits to offset emissions they cannot avoid by other means. Carbon credits represent CO₂ that has been reduced, avoided, or removed from the atmosphere. Projects that reduce, avoid, or remove carbon from the atmosphere can generate credits and sell them to polluting companies, who then ‘retire’ the credits to offset their emissions. Already, the carbon market is worth over $900 billion and is expected to reach $2.68 trillion by 2028.

Last issue, we explored the difference between the compliance and voluntary carbon trading markets as well as the different types of carbon credits. This week, we will expand our focus to the importance of decarbonization and how the carbon market can assist that goal. We will also examine the opportunities that institutional investors see in the market as a new asset class, and we will finish with promising developments from the latest UN climate summit, COP28.

The Importance of Decarbonization and How Carbon Markets Help

Earth on verge of five catastrophic climate tipping points, scientists warn

Ajit Niranjan, The Guardian

Carbon Markets 2.0

GenZero



Global emissions have grown from 25 billion tons in 2000 to nearly 40 billion in 2022, as seen below in the graphic from Visual Capitalist.

According to the United Nations, the current rate of emissions, in addition to insufficient climate policies, will cause the Earth to heat up 3°C warmer than pre-industrial temperatures, far above the goals of 1.5-2°C agreed to in the 2015 Paris Agreement. This has potentially catastrophic consequences.

A number of vital natural thresholds for the Earth’s climate are now highly likely to occur, as the Earth has already reached 1.2°C above pre-industrial levels. These tipping points include the collapse of big ice sheets in Greenland and the West Antarctic, widespread permafrost thawing, the death of coral reefs in warm waters, and the collapse of an oceanic current in the North Atlantic. These events can trigger disastrous cascading effects such as the loss of entire ecosystems and the inability to grow staple crops. Such collapses would most likely be irreversible.

How can the carbon market help in the face of this potential disaster? By providing an economic incentive to reduce emissions. To motivate decarbonization, greenhouse gas emissions must be regulated, priced, or both. Carbon pricing is an economic signal that allows emitters to pursue reductions.



Carbon markets are an effective way to implement such pricing, enabling: (1) cost-effectiveness, where supply, demand, and price result in the efficient allocation of resources; (2) flexibility, which expands decarbonization options beyond the firm- or country-level; (3) scalability, resulting from rules and regulations in the market that can be tightened or loosened as necessary; and (4) innovation, in which potential new streams of revenue and cost savings from emissions reduction funnels money into new technologies.

Wall Street Gets Ready to Cash In on $1 Trillion Climate Market

Alastair Marsh, Bloomberg

Large institutional investors have begun ramping up their interest and activity in the burgeoning new market. Banks like Goldman Sachs, Citigroup, JPMorgan Chase, and Barclays have been building carbon trading and financing desks, looking to jump into the development of new carbon sequestration projects, to trade carbon credits, and to advise corporate clients who wish to purchase the credits.

Analysts believe that there will soon be a sharp increase in demand for credits, a demand which cannot be matched by the current levels of supply. As stated in this issue’s introduction, many companies will not be able to meet their net-zero goals without the use of offsets. As such, these large institutions are trying to establish the foundations to benefit from the incoming sudden increase in demand.

COP28 Produces Deal to Transition Away from Fossil Fuels

COP28: Historic agreement in Dubai calls for ‘transitioning away from fossil fuels’

Mattieu Goar, Le Monde

In a first, COP28 targets the root cause of climate change

The Economist



Four Takeaways From the COP28 Climate Summit

Somini Sengupta, The New York Times

The 28^th Conference of the Parties on Climate Change (COP28) saw meaningful progress for the fight against climate change from the 198 participant countries that attended. Not only was a fund established to distribute money to the countries hit hardest by climate change’s effects, but a historic deal regarding fossil fuels reached consensus in the last hours of the conference. The text of this deal states that countries would work towards transitioning away from fossil fuels “in a just, orderly, and equitable manner.” While the landmark agreement has been lauded by governments around the world, at one point during COP28 it looked like it would fall apart. The president of the conference, Sultan al-Jaber, head of Abu Dhabi National Oil Company, spent all Tuesday night – the last official day of the conference – consulting with the US, the EU, and other countries to set up an agreement for Wednesday’s meetings.

The tension between countries that wanted to phase out fossil fuels (the EU, small island nations, and some Latin American countries) and petrostates made it difficult to find consensus. The first draft of the agreement, published Monday, was weak and seemed to be tailored to the concerns of petrostates, which displeased countries wishing for much stronger language. The next iteration included a ‘phasing-out’ of fossil fuels, which disturbed the Gulf exporting countries. The winning compromise was to soften the language, cutting the term “phase-out” of fossil fuels and replacing it with a “transition” away from fossil fuels. While the deal does not set a date for the green transition, it is the first time that all fossil fuels have been mentioned in a COP agreement, and it has been hailed as a victory for multilateralism and climate diplomacy. The next steps are actual implementations of the deal at the national level of the countries, which will be closely watched – especially due to the failure to enforce the phasing out of coal as agreed upon 8 years ago in the 2015 Paris Climate Agreement.