The world is at a pivotal point in the fight against climate change, which is now an integral part of news cycles. For millions of years, the global “carbon cycle” has been in balance with nature, where plants absorb CO2 and animals release it. However, over the past 150 years, with industrialization and population growth, there has been a rapid increase in emissions of CO2 and other greenhouse gases (GHGs), which has upset this balance and raised global average temperatures to levels not seen for millennia. CO2 accounts for 76% of global greenhouse gas emissionsThis warming is leading to more frequent extreme weather events. Solving this global problem, where emissions know no borders, requires extensive action. It is expected that 2 billion more people will be added by 2050, which will likely increase global CO2 emissions.

In response to this situation, there is massive global and corporate pressure to switch to “greener” models. In 2015, it signed 195 countries Paris Agreement, a legally binding framework aimed at combating climate change, covering 97% of global emissions. The aim is to keep global warming below 1.5 degrees Celsius. In addition, 44 nations, including the European Union, have committed to achieving “Net Zero”, which means reducing emissions by the same amount as they produce. The motivation is not only to save the planet, but also the economy, as inaction could lead to a decline in global GDP of 13%.

It's not just governments; corporations are also being pushed towards green models. Investors and consumers are increasingly looking for environmentally responsible companies. This trend is leading to significant changes in the cost of capital for businessesCompanies with a strong focus on environmental, social and corporate governance (ESG) are gaining better terms for debt and equity financing. Bonds with a higher ESG rating have a lower coupon on average, which means lower interest payments. The ESG bond market has grown massively, by more than 2600% between 2013-2020, and is expected to grow significantly further.

A key catalyst for this shift is new regulatory requirements for transparent reporting of greenhouse gas emissions. Many financial experts believe that emissions will eventually become a line item on financial statements. Companies are starting to disclose their carbon footprints, although currently less than 50% companies with a market capitalization of over $1 billionThere are three types of emissions that companies need to be familiar with:

• Scope 1 emissions: Direct emissions from the company's own operations.
• Scope 2 emissions: Indirect emissions from purchased energy.
• Scope 3 emissions: Other indirect emissions in the value chain (including suppliers and customers). These are the most underestimated. It is highly likely that most companies will be forced to report their Scope 1 emissions within 5-10 years, with Scope 2 and 3 likely to follow soon.

There are two main approaches to solving the emissions problem: removing emissions from the atmosphere (natural or technological methods) and adjusting current emission levels through government incentives (subsidies, taxes). An important tool in this process is carbon creditswhich give the holder the right to negate 1 metric ton of CO2 equivalent emissionsThese credits can be sold, traded or used to offset your own emissions. They are a key incentive for the private sector.

Carbon credits are created through government programs (often under “Cap-and-Trade” systems, where there is a limit on emissions and companies can trade allowances) or by physically removing carbon from the atmosphere, known as “carbon offsets.” Offsets come from projects such as reforestation or renewable energy. Once verified, companies can use or sell the credits.

There are two main markets for carbon credits:

1. Compliance markets: Government-regulated and controlled, where credits can usually only be used within that jurisdiction.
2. Voluntary Markets (VCM): Especially for private companies that want to go beyond regulations. These markets are international, allowing credits created in one country to be used anywhere in the world. An example is offsets from reforestation projects in the Congo that can be used by companies in Europe or North America.

The carbon credit market is still in its infancy, which creates opportunities. Today, the global compliance market is worth more than $900 billion. The global voluntary market was worth around $2.5 billion in 2023, with with projections of 100-250 billion USD by 2030, suggesting huge growth potential. Just to meet the net zero commitments of the approximately 800 largest companies would require 11.5 billion tonnes of carbon credits on the voluntary market. The current generation of VCM credits falls far short of this requirement. The voluntary market must grow by at least 1500% only to cover existing corporate liabilities. Corporate demand in the voluntary market has the potential to grow by 700% (low estimate) to 3800% (high estimate) in the coming decades.

The main catalysts for market growth are: the continued increase in corporate commitments to carbon neutrality/net zero, government initiatives (e.g. setting a global carbon floor price, enforcing national commitments), and the development of market platforms and transparent emissions reporting. Rising costs for large polluters (e.g. in transport, energy, steel) are forcing them to either invest billions in emission reductions or purchase offsets, which is increasing demand for VCM.

In conclusion, the carbon credit market represents a huge opportunity with growth potential that is currently unmatched by other markets. We are still only at the beginning of this “carbon credit revolution”. Spring

Strategy from CarbonCredits.com entitled "The carbon credit revolution“

Glossary of key terms

• Carbon credit: A permit that gives the holder the right to negate 1 metric ton of CO2 equivalent of greenhouse gases. They can be traded or used to offset their own emissions.
• Net Zero: Reaching a state where greenhouse gas emissions are reduced by the same amount as are released into the atmosphere.
• ESG (Environmental, Social, and Corporate Governance): A set of standards for a company's operations that socially responsible investors use to screen potential investments.
• Greenhouse Gases (GHGs): Gases in the Earth's atmosphere that trap heat and contribute to the greenhouse effect, e.g. carbon dioxide (CO2), methane, nitrous oxide.
• Carbon Cycle: A natural process in which carbon circulates between the atmosphere, oceans, soil, plants, and animals.
• Carbon Sink / Carbon Wanderer: Any natural or artificial reservoir that accumulates and stores carbon from the atmosphere (e.g. forests, oceans).
• Paris Agreement: A 2015 international treaty that deals with climate change and aims to keep global warming below 1.5 degrees Celsius.
• Cap-and-Trade: An emissions control system where governments set a maximum allowable limit on total emissions (cap) and then issue permits that companies can buy and sell (trade) with each other.
• Carbon Offset: A credit that represents a reduction in greenhouse gas emissions of one metric ton of CO2e created by a project that removes or reduces emissions independently of regulatory programs.
• Compliance Markets: Carbon credit markets, which are regulated and controlled by governments and are part of regulatory frameworks.
• Voluntary Carbon Markets (VCM): Markets where individuals, companies or organizations purchase carbon offsets voluntarily to offset their emissions beyond regulatory requirements.
• Scope 1 Emissions / Emissions Scope 1: Direct greenhouse gas emissions that come from the company's own resources or are controlled by the company.
• Scope 2 Emissions / Emissions Scope 2: Indirect greenhouse gas emissions from the production of purchased energy consumed by the company (e.g. electricity, heat, steam).
• Scope 3 Emissions / Emissions Scope 3: All other indirect greenhouse gas emissions that occur in the company's value chain, including upstream and downstream activities.
• Carbon Cost of Capital: The impact of a company's carbon emissions on the cost of raising funds, with companies with a better environmental profile potentially receiving more favorable terms.
• Decarbonization / Decarbonization: The process of reducing or eliminating carbon dioxide emissions.
• Reforestation: Restoration of a forest that was previously logged or destroyed.