To add to the general hustle of NYC, not only did the UN start their general assembly season, blocking even more avenues with black SUVs and police brigades as usual, but also Climate Week NYC happened. It felt like summer camp of the climate space — with a familiar face from some area of climate or the world found at every corner of Manhattan.

While a week like this offers time to do serious business, meet clients and connect with the fam to discuss policy and technology, it’s also a good opportunity to reflect on takeaways as we move toward a new year in the carbon markets arena. Hence, please find my admittedly eclectic takeaways below.

• There is a lot of money, but nowhere to put it: It seems like every large institutional investor on Wall Street is looking at the carbon markets. Not as a pet project, but as a major investment opportunity. Most institutional investors, however, still don’t see anyone putting serious money (and by that I mean “Private Equity serious” money in the billions) into negative emissions. Large-cap players struggle to make their bets. And why wouldn’t they? Looking at how investment decisions are ideally taken in that order of magnitude, carbon currently fails all but one criterion — a potentially really large market. Return profiles, margin stability, demand drivers, technology resilience, etc. are either unknown or known to be extremely volatile. That makes it hard to deploy large capital. It’s one thing to fund a venture in carbon removal with a few (hundred) million dollars. It’s another to commit billions of pension money with long-term return expectations. Almost cynically, only the mining and oil and gas sectors consistently pop up as the most promising investment opportunities there. Mining companies because they are able to deliver scalable projects in remote locations and often own or lease large plots of land that can be used for afforestation or enhanced weathering projects. Oil and gas companies are of interest because they could, theoretically, refactor some technology to capture and storage (at site) from a multitude of processes.
• As a consequence, financial players are moving to the supply side . As one bank put it: “It’s hard to tell our investors we spend money on carbon removal; it’s much easier to tell them we make them money with carbon removal”. What seems like a basic truth also comes with a fundamental problem — climate action is pushed indefinitely downstream. Investors tell their banks, banks tell their clients, and their clients tell consumers to spend a bit more for climate neutrality. If everyone is trying to resell “credits as a service” to their customer, climate action will become incredibly fragmented. Ideally, large emitters also tackle sequestration because it is so much more efficient to work at the source. The lack of supply security also leads to the fact that the space is still early and…
• Really large-scale commitments to buying carbon removal are still scarce, despite everyone speaking of supply constraints. Imagine there were only ten companies buying oil in the world. What would the oil industry look like? Well, there are probably under 10 known significant purchase commitments to carbon removal. This is exactly what the carbon removal market looks like. It’s a lot of bets but little security. To scale and get the funds flowing in the right direction, clearer demand signals are direly needed (and CEEZER is here for it!). Many companies are unsure what technology or crediting scheme to invest in because policy and target methodologies are still evolving. While we still recommend adding removal into negative emissions portfolios early, many uncertainties remain. One CSO I spoke to put it as follows: “We want to do a lot, but anything that we touch can be void in six months because of one policy decision”. Policy development is notoriously slow and negotiating how the carbon markets can work globally is even slower. One great example of that is that…
• As it looks, Article 6 is going to be messy: As COP27 is approaching, the big question of how cooperation can work under the Paris Agreement is still a canvas of all sorts of speculation. The current interpretation of post-Glasgow Article 6 leaves every Party to decide which credit will require corresponding adjustments. This means that activities that currently run in the voluntary market suddenly require a corresponding adjustment of the host country to be fully valid. If this works on a country-by-country level, it’s going to be a huge challenge for buyers to dissect what credit works for what purpose. The reason why it affects the voluntary market is that when a country includes a certain sector activity (e.g., afforestation) into their nationally determined contribution (NDC), voluntary action in that sector can suddenly be part of the committed NDC path and therefore implicitly “part” of the compliance system. Hence, when selling a voluntary afforestation credit to another country, it will require adjusting its NDC for that credit. Now imagine how messy this can get when every country decides on their own…
• We are still very far away from a global CO2 price. When speaking with some embassies and UN delegates, the potential pooling options under the Paris Agreement will have a lot of influence on the market. Pooling is the idea of combining multiple national compliance markets into one pool (essentially like the EU compliance market already functions today). This can effectively lead to multiple compliance prices for CO2 and hence very different incentives to decarbonize across regions. Now, some systems allow the use of voluntary credits to fulfill at least a part of compliance requirements with or without the need to adjust for traded voluntary credits. This means that in an extensive compliance pool, the implicit comparison price per ton will be higher than in a cheaper compliance pool. It will be a huge challenge for buyers to assess if a credit can be validly traded to and from specific locations and whether it requires corresponding adjustments or not. Therefore, national, global, pooled, and a plurality of other ledgers will be necessary. This is why we should remind ourselves that…
• “The only ledger we should care about is the atmosphere”, as said by Alexia Kelly of Netflix (explicitly not speaking for Netflix by the way). I could not agree more. Many small players are trying to “solve” the measuring, reporting, and verification (MRV) problem by building their own standard and registry system. While that makes sense on a company level (and frankly for a cool equity story), it really doesn’t for the market. MRV only makes sense if it is comparable and standardized across many participants so that credits are comparable and conflicts of interest are kept at bay. Hence, companies should not care about the specific ledger or registry but about the verifiable climate impact (in terms of additional and permanent CO2 reduction) associated with every credit that is tradable. To do so, organizations need a clear tool to track their voluntary carbon impact across any ledger in a harmonized way. If this prompts everyone to scream “blockchain”, I want to say…
• Blockchain is still not solving the real problems. Everyone loves the idea of decentralized systems for climate action (and so do I!), but so far there is little real additional benefit from putting credits from a “centralized” chain (the registries) on a decentralized ledger. Double sales is not really the key problem in the verified market and double counting will not be solved by a different ledger but by clearer policy rules. In addition, MRV data is still too dispersed and variable by project type to be easily digestible when on the chain, and accountability is hardly constrained by a lack of public visibility (you can already see when every credit was retired). Moreover, the credit quality issue with some crypto projects remains. A purely neo-liberal “the price will solve it” mechanism, however, hardly seems to work if buyers cannot correlate price with quality and a virtually indefinite supply of low- to no-quality credits is in the market. If I had to make a bet, I’d say settlement and transaction security are where crypto can really make a difference. But transacting carbon credits securely is not enough anymore because…
• We all need to leave the carbon funnel. If anything, the world is waking up to the truth that carbon reductions alone will not solve the climate crisis. Climate change mitigation needs to be much more than verified, technical carbon emission avoidance and removal. Social equity and equality, biodiversity loss prevention, and other environmental externalities need to be tackled together to realize resilient and feasible change. If we want to make climate action stick, it needs to solve more problems than just atmospheric concentrations. With players like Klarna investing into broader portfolios, there are certainly first trailblazers on the way. Now we just need to make that scalable and measurable for everyone else.

With that in mind, let’s make it work. It’s time to get it done.

PS: Photo by Evan Brorby on Unsplash