Banking on Carbon – BMO Acquires Carbon Offset Developer Radicle Group

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Bank of Montreal, BMO, is buying carbon offset developer Radicle Group to meet the bank clients’ demand for advice on emissions reduction.

BMO’s acquisition reflects major banks’ growing interest to help clients measure carbon emissions. It will also allow the bank to help their clients manage a difficult transition toward net zero emissions.

The buyout is also a move by BMO to be at the forefront of developing products fit for climate transition such as carbon offsets.

Dan Goldman from BMO said that:

“Climate, energy transition and net-zero targets come up in almost every client conversation we have… It’s not topical, it’s front and centre in terms of thinking about how the world evolves… Helping our clients navigate what is clearly going to be an enormous part of their agenda going forward was paramount.”

BMO – Radicle Acquisition Deal

Buying Radicle supports BMO’s Climate Ambition to be its clients’ lead partner in the transition to a net zero world.

Founded in 2008, Radicle has built a reputation as a leading developer of carbon offsets. It’s also the leading adviser that helps organizations measure and reduce emissions.

The firm is one of Canada’s most advanced carbon offset developers that generates carbon credits that entities can buy and sell to offset their unavoidable emissions.

Radicle has 130 employees and over 4,000 clients including Imperial Oil, Meg Energy, TC Energy, Chevron, and ConocoPhillips.

Carbon offsets, despite criticisms as less effective, are Radicle’s key area of expertise. But they will not be BMO’s main focus. The bank will continue to develop and adapt new products with Radicle’s expertise.

Buying carbon offsets means paying for projects that provide positive impact to the environment. Common examples are protecting trees or capturing and storing carbon.

Radicle also helps entities measure their emissions so they can develop ways to reduce them and track their progress.

The Radicle team will work with various bankers to advise clients on several areas. These include investment and corporate banking, commercial lending, and wealth management.

BMO is aware that building the carbon offset expertise from scratch will take time. So, the bank set its eyes on Radicle which was exploring a sale.

The role of carbon offset markets

Canada’s major banks are criticized for their continued funding of the oil and gas industry. Yet, the banks defended by saying they plan to work with heavy emitters to reduce emissions.

BMO isn’t the only Canadian lender to tap the carbon market for emission offsets.

For instance, the Canadian Imperial Bank of Commerce joined 3 other banks last year to launch a pilot marketplace for trading voluntary carbon credits on a digital ledger.

It was called Project Carbon whose first trade occurred in September between the Nature Conservancy of Canada and NatWest.

Carbon markets have a vital role in fighting the effects of climate change and thus, enable a sustainable future. They’ve grown remarkably around the world as people and companies work to scale the technologies needed to reach net zero.

To achieve their own net zero pledges, banks also have to boost ways to measure and reduce emissions by the firms they finance. And BMO knows this well that’s why it struck the deal.

It also expects Radicle to speed up its emissions reduction efforts, scale its activities across BMO’s client network, and develop more sustainability services.

To date, Radicle helped its clients generate over C$100M in value and cut carbon emissions by 7 million tonnes.

BMO did not reveal the financial terms of its Radicle deal but expects it to close by the end of 2022.

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ZeroAvia Raises $30 Million Funding to Scale Hydrogen Aviation

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Hydrogen aviation startup ZeroAvia secured another US$30 million in funding from new investors, NEOM, AENU, and Barclays, to scale sustainable aviation.

IAG also added to its prior investment that bringing the capital increase of the Series B round to US$68 million.

By increasing its investment, IAG brings along with it its arsenal of European airlines. These include Aer Lingus, British Airways, and Iberia.

Other early investors are Amazon Climate Pledge Fund, AP Ventures, Breakthrough Energy Ventures, Horizons Ventures, Summa Equity and Shell Ventures.

ZeroAvia founder and CEO Val Miftakhov remarked about the investors:

Each of these star investors brings a unique perspective and strength to ZeroAvia’s wider team… Our new investors are each looking at our journey through a different lens, but all energized by our mission to enable zero-emission flight using hydrogen-electric engines. This is a great recognition of ZeroAvia’s leadership in the space, fueled by real, tangible achievements.

With three major airlines – United Airlines, Alaska Airlines, and IAG – as strategic investors, the new investment will advance ZeroAvia’s hydrogen-electric powertrain development program.

The aviation startup aims to power 200+ seat planes with hydrogen zero-emission engines by 2040, from 40-80 seats by 2026.

How safer is hydrogen than conventional jet fuels?

Airships use lighter-than-air gas like hydrogen to float and they’ve been around for ~150 years. But the 1937 Hindenburg accident almost killed the airship industry.

Today, they’re making a big comeback as the aviation industry, and the entire world, race toward net zero emissions.

Airplanes emit 900+ million tonnes of CO2 which accounts for 2% of the global CO2 emissions. The aviation sector is also the fastest growing source of GHG emissions.

In comparison, modern airships use only 10% of the emissions of jet planes though they’re not yet available on a commercial scale.

But ZeroAvia is working to make it possible via its hydrogen-electric, zero-emission aviation solution.

Compared to air, hydrogen is 14x lighter and it dissipates much faster, too. Plus, hydrogen is 2x to 3x less flammable than gasoline when in the air. That’s because it needs 18x more oxygen concentration to ignite than gasoline.

To top it all, hydrogen production, storage, transport, and use has been safe for over 50 years.

ZeroAvia’s Hydrogen-Electric Aviation Solution: HARE

Banking on the advantages of using hydrogen over liquid gas fuel, ZeroAvia takes its climate solution much further. That’s by using carbon neutral fuel cells.

The $30 million investment will go towards its 2-5MW hydrogen-electric powertrain development program for planes. These bigger planes will use liquid hydrogen fuel as opposed to gaseous for smaller planes.

ZeroAvia’s hydrogen-electric powertrains offer a long range, higher energy density, lower fuel and maintenance costs. It’s the first practical hydrogen-electric, zero-emission aviation solution to replace traditional engines on existing fixed wing aircraft.

Here’s why ZeroAvia’s hydrogen-electric is a great option for long-term transition to clean aviation:

This latest funding will also help ZeroAvia deploy building infrastructure at airport sites. It will support live demonstrations of its Hydrogen Airport Refueling Ecosystem (HARE). And that’s in preparation for routes carrying passengers and cargo in the next years.

A rendering of a potential (HARE) refueling process for hydrogen-electric planes.

The startup is ground testing its ZA600 powertrain at its R&D facility at Cotswold Airport in the UK. The testing is part of “Project HyFlyer II,” the name of its program to demonstrate hydrogen-electric flight in a Dornier 228 plane.

The firm also recently welcomed a second test bed to its US facility at Hollister, CA.

This is how ZeroAvia’s hydrogen-electric powertrain tech works:

Zero-emission aviation starts with green hydrogen. Green hydrogen is produced through electrolysis and stored at or near airports. This will reduce transportation costs that drive up the price of hydrogen before. Locally available renewable energy then powers the electrolyzers.

Green hydrogen powers electric propulsion via the fuel cells. Renewable hydrogen stored in tanks converts to electricity in flight using a fuel cell, which then powers the electric motors.

Both the old and new investors are betting on ZeroAvia’s novel hydrogen fuel cell aviation solution to help bring the sector to net zero emissions.

Here’s a quick overview of each of the new investors.

IAG: International Airlines Group is one of the world’s largest airline groups with major airlines in Spain, the UK, and Ireland. They include Aer Lingus, British Airways, Iberia, Vueling and LEVEL. It’s the first airline group to commit to achieving net zero emissions by 2050 and began partnering with ZeroAvia in 2020.

Barclays Sustainable Impact Capital. Barclays will invest £175m of its own capital in fast-growing, innovative, environmentally-focused companies like ZeroAvia. Its investments target the goals and timelines of the Paris Agreement.

NEOM. It’s a region in northwest Saudi Arabia on the Red Sea being built from the ground up as a living laboratory. It’s leveraging green hydrogen as a key power source in delivering the world’s first zero-carbon city. It can produce green hydrogen for power at scale.

AENU. This is an evergreen impact fund that invests multi-stage in climate-tech and social impact companies in Europe & US. AENU drives systemic transformation in venture capital towards impact, accessibility, and stakeholder-alignment.

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Are Clean Energy Tax Credits the Solution for Electricity?

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The benefits of clean energy tax credits outweigh the efficiency gains of carbon pricing according to a study of popular climate policies.

Many believe that putting a price on carbon is the most efficient way to cut emissions from the electricity generation or power sector. Pricing carbon emissions with a tax or with a cap-and-trade program is often considered the “first best policy”.

Lawmakers have to consider a couple of factors when deciding which climate policy approach to choose. But policymakers in the U.S. have started to focus on clean energy tax credits.

Policy Options for Decarbonizing the Power Sector

1. Carbon pricing

This approach involves two options: carbon tax and cap-and-trade.

A carbon tax, also known as GHG emissions tax, mandates power sector emitters to pay for their emissions with a certain amount.

Under a cap-and-trade system, firms trade permits to stay within a set carbon budget. There’s a set limit on carbon emissions they are allowed over a long period of time.

For every tonne of carbon emitted, the entity must get a permit or allowance to cover it. These permits are then traded, often as carbon credits, either in government auctions or in private carbon markets.

A popular example of a cap-and-trade is the European Union Emissions Trading Scheme, there are numerous other programs in different jurisdictions.

2. Subsidizing clean energy (Clean energy tax credits)

Under this approach are also two options for subsidy. One is the Zero-emission Energy Subsidies (ZES) which pay producers a fixed amount for a unit of electricity generated from clean or zero-emissions sources.

An example of this is the production tax credit for wind power which is different from solar power generation. But both subsidies are often done via tax credits.

The second option is Zero-emission Capital Subsidies (ZCS). ZCS subsidizes the creation of capacity and not the production of electricity from clean sources. A perfect example is investment tax credits for solar power generation.

Why are clean energy tax credits more effective?

Ryan Kellogg and co-author Severin Borenstein examined how those policies can lead to various GHG emissions.

They pointed out that pricing carbon penalizes fossil fuels like coal that is the dirtiest source. They then consider the impact of policies on electricity prices and government revenue.

Carbon pricing results in the highest electricity prices for consumers and generates government revenue. On the other hand, prices are lower under clean electricity tax credits but it calls for government spending.

In general, the high prices under carbon pricing seem to be efficient as they give consumers incentives to conserve power. While low prices under clean energy tax can result in over-consumption.

But, the authors claimed that this point of view is unlikely to hold in bringing the power sector to zero emissions.

That’s because utilities mark up the retail price of electricity above the wholesale price. This is to cover the fixed costs associated with electricity distribution and utility programs like subsidies for solar and energy efficiency.

In the US, those markups can be 2x more than the cost of producing electricity itself. In a sense, if the power or electricity generation sector decarbonizes via a carbon price, it leaves the consumers to pay much higher prices.

This over-pricing of electricity is problematic if decarbonizing other sectors like transportation and building calls for electrification.

The chart above shows that the ZES policy leads to electricity prices that are lower than a carbon tax. The same holds true in the case of the clean energy standard. That’s because the ZES enables zero-emission sources to rival fossil units.

Also, ZES wholesale prices are below the social marginal cost of producing electricity each year. It also includes the final year when emissions are eliminated so that private and social marginal costs are identical. This is better at aligning retail power prices with social costs.

The Climate Benefits of Clean Energy Tax Credits

A similar study on a specific example of clean energy tax, the “Build Back Better”, found that its benefits are about 3x-4x greater than its costs. The graph below illustrates the cost and benefits of this climate policy. SCC means social cost of carbon.

Across a wide range of assumptions, the authors find that the projected benefits of the tax credits go above the costs. Plus, on a cost/tonne of CO2 basis, they tend to deliver greater emission reductions than other climate policies in place.

As per Borenstein,

“We found that the standard economic logic of carbon pricing doesn’t fit the electricity sector very well, due to the other pricing distortions in the industry… Carbon pricing is still a powerful tool, but this shows it is important to think through the full context in which we are doing GHG regulation.”

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Tesla’s Carbon Credit Sales Down 49% in Q2

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Tesla recorded $344 million in regulatory credits for Q2 2022, down 49% from Q1 which was $679 million.

The credits account for 1.7% of the overall gross margin for the quarter, down from 2.9% last quarter.

The public has been anticipating how much the EV carmaker will earn from its carbon credits this second quarter, and year-over-year it was down 3%.

Since 2017, Tesla has made ~$5.1 billion from the sale of regulatory carbon credits as shown above. The credits sold help other automakers meet their emissions regulations and bypass billions in fines.

Alongside the carmaker’s carbon credit sales is the company’s commitment to further reduce its carbon footprint as revealed in its 2021 Impact Report. This report seems to be the answer to the public’s long wait for Tesla’s decarbonization strategies. 

Currently, the carmaker is providing energy generation and storage products using its patented solar energy system. They significantly contribute to Tesla’s regulatory carbon credit generation.

Most importantly, they also represent Tesla’s massive efforts in cutting down its carbon footprint.

Tesla’s GHG Emissions

In 2021, Tesla began measuring its Scope 1 and Scope 2 GHG emissions considering the principles and guidance of the GHG Protocol.

The carmaker used the operational control approach method or accounting for GHG emissions from operations under its control. The table below shows Tesla’s emissions for all three scopes.

For its Scope 3 emissions, Tesla measures two largest categories: use of product and supply chain.

Use of product emissions:
Tesla has access to primary data from its ~2 million vehicles on the road and fleet of solar and storage products. So it can calculate emissions from use of products each year with accuracy, not just estimates.

Supply chain emissions:
The company had identified which materials and processes in the supply chain are key emitters. It means the firm can prioritize its engagement and projects to tackle those emissions.

100% Renewable Supercharger network

Tesla’s global Supercharger network was 100% renewable in 2021. Thanks to a combination of its onsite resources and annual renewable matching.

Plus, all home charging in California was 100% renewable through annual renewable matching. 

As such, the only emissions from the use of Tesla vehicles were from home charging outside of California. It can also be from use of third-party charging networks.

Tesla’s Emissions Reduction Strategies

Decarbonizing the Manufacture and Use of EVs

1. Building new, better designed and more efficient factories. Building components need less movement, use fewer robots, and consume lower energy.

2. Covering roof space with solar panels. All new Tesla factories are designed to be covered with solar panels. As of the end of 2021, the carmaker installed solar panels with a capacity of 21,405 kW on the roofs of Gigafactory Nevada, Gigafactory New York, and manufacturing facilities in California.

3. Leveraging AI to make factories more efficient. Tesla is leveraging 6 years of sensor data to train an AI program to safely control 195 interconnected HVAC units. In its first full year of operation, there’s significant load reductions compared to baseline use.

Increasing Vehicle Utilization

Tesla batteries are designed to outlast the vehicle. A vehicle gets scrapped after about 200,000 miles of use in the U.S. and 150,000 miles in Europe.

By creating a battery that can last for 1,000,000 miles (4,000 charging cycles), Tesla helps reduce emissions per mile driven for high-mileage vehicles like trucks, taxis, or delivery vans.

Reducing Fleetwide Emissions

Tesla Semi offers an opportunity to have a great impact on GHG emissions from transport. Combination trucks, which are mostly semi trucks, in the U.S. account for just 1.1% of the total fleet of vehicles on the road.

But they have high fuel consumption because of their weight and heavy use. In fact, they account for about 18% of all U.S. vehicle emissions.

This is why Tesla’s plan to also electrify the heavy-duty truck segment is vital in transitioning the world to sustainable energy.

Right now, cell availability is the limiting factor for full production. A Tesla Semi needs more cells than a passenger vehicle.

Accelerating Deployment of New Factories via Emissions Credits

Emissions credits or carbon credits revenue is used for Tesla’s EV capacity expansion, which in turn displaces ICEs.

In 2021, the EV manufacturer generated almost $1.5 billion in revenue selling emissions credits to other OEMs. The proceeds go to building new factories to make more EVs.

Tesla delivered almost 1 million EVs globally last year. In comparison with other carmakers, Tesla outperformed all others as shown in the chart.

There’s confusion, however, among Tesla’s customers about the company’s claim that its cars produce zero carbon emissions. This led to German Consumer Consumer Association (VZBV) suing Tesla recently.

VZBV claims that consumers were misled into thinking that buying from Tesla will cut the entire emissions from all cars.

The emissions that Telsa reduced by producing EV’s are bundled up and then sold as regulatory credits (carbon credits).

These carbon credits allow other car manufacturers to exceed the emissions limits applicable to their vehicle fleets. T

elsa’s potential consumers are only notified about the emissions rights on page 75 of its Environmental Impact report, which could be downloaded from the website.

Though it’s common practice for other automakers to buy carbon credits from Tesla to offset their emissions, it’s not a sustainable strategy. To meet stricter regulatory mandates worldwide, an industry-wide shift to EVs is crucial.

Tesla’s “Solar + Storage” Products and Supply Chain

Commercial customers: Megapack and renewables (solar)

Pairing energy storage with renewables enables cost-effective decarbonization of the grid. A single Megapack has an average 3,000 kWh worth of battery storage capacity.

In 2021, Tesla started building a new production facility that can produce 40,000,000 kWh of energy storage a year. This helps households rely less on the grid and avoid blackouts.

Tesla sold 4 GWh worth of energy storage products, more than 15% of the 25 GWh global market in 2021. This includes projects in California and Australia.

Add to this Tesla’s Powerwall solar technology for residential customers. Installing solar panels on roofs can help reduce carbon emissions while allowing customers to save on energy costs.

Supply chain: battery recycling

“What happens to Tesla battery packs once they reach the end of their life?”

Before decommissioning and recycling a consumer battery pack, Tesla does everything it can to extend the useful life of each pack. For instance, they send out over-the-air software updates to Tesla vehicles to improve battery efficiency.

Moreover, while Tesla works with third-party recyclers, the firm also recycles in-house. On-site recycling allows for raw material transfer straight to the company’s nickel and cobalt suppliers.

The firm’s cell recycling facility unlocks the cycle of innovation for battery recycling at scale. This enables Tesla to improve current designs via operational learnings and to perform process testing of its products.

By the end of 2021, Tesla’s recycling facility achieved a production rate of over 50 tons of recycled material per week.

Outlook for battery supply chain responsible sourcing:

In 2022, Tesla plans to continue building on its battery responsible sourcing program and improve on the data points. More importantly on the development of supply chain GHG emissions reduction plans and future investments.

All these emissions reductions initiatives allow Tesla to earn massive carbon credits revenue. As the automaker continues to electrify the industry, it can expect more sales from regulatory credits.

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DeepMarkit Facilitates People Going Carbon Neutral Via MintCarbon.io

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DeepMarkit announced that its MintCarbon.io platform can help individuals and families offset their annual carbon footprints to become carbon neutral. This innovative solution is critical in Canada’s commitment to reduce its carbon emissions by 30% by 2030.

Canadians emit about 14.2 tonnes of carbon per person per year. If the average cost of $15/tonne of carbon is applied, an average Canadian can offset their annual carbon footprint for $213.

Using the same cost, an average family size of 2.9 people emitting ~30 tonnes/year can become carbon neutral for a reasonable cost.

Via MintCarbon.io, DeepMarkit helps fight carbon emissions by making it easier for people and businesses that want to drive net zero to buy and retire NFT-based carbon credits on the platform.

MintCarbon.io is a web-based ecosystem that facilitates the minting of carbon credits into NFTs, among other features. The NFT minting process for carbon credits is done by confirming and authenticating them on a carbon project registry.

Once the credits’ authenticity is verified, they can then be minted into carbon credit NFT via MintCarbon.io. Once minted, the user can hold, sell or retire their NFTs on a third-party platform.

Read full news release HERE.

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Canada Explores Options to Cap Oil and Gas Emissions

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The Canadian government proposed two options to set emissions cap in the oil and gas sector to achieve Prime Minister Justin Trudeau’s goal of reducing it by 40% by 2030.

The two emissions reduction options are in a discussion paper published by Environment Minister Steven Guilbeault.

The federal government aims to cut emissions across all sectors by 40% – 45% below 2005 levels by 2030. It also plans to hit net zero emissions by 2050.

The oil and gas industry accounts for over 1/4 of Canada’s total emissions (27%) or 179 million tonnes in 2020. The emissions cap in this sector was first promised during the last year’s election. But clear details about the plan are not available so far.

Sources say that the cap for the end of this decade will be close to the nation’s Emissions Reduction Plan announced last March. If so, it means it will be about 110 million tonnes, which is a 32% reduction over 2005 levels and 46% from 2019.

In the past 30 years, emissions from the sector increased by 83% as gas, oil, and oilsands production also rose.

Proposed Options for Oil and Gas Sector Emissions Cap

1. Cap-and-trade: sets regulated limits on emissions from the sector

The first option is imposing a new regulated, cap-and-trade system for the entire oil and gas sector. As such, there will be certain allowances (carbon credits) given to specific firms via an auction.

Lower-emitting companies can trade credits with higher-emitting ones. Those that don’t buy enough credits to cover their emissions need to buy them from other firms that have more credits than their cap.

The money from the auction would be for funding programs that aid the sector to cut emissions. The total allowances will decline over time in line with the emissions cap for the oil and gas sector.

2. Modifying the carbon pricing requirements

The second option is to alter or impose a steeper carbon price on the sector to cut down emissions. This will demand provincial governments to have their own carbon pricing systems to put in place the changes.

The current carbon price in Canada is at $50/tonne and is set to go up to $170/tonne by 2030.

Right now, oil and gas producers can avoid paying a bigger carbon price by buying carbon credits from other sectors. But with the new emissions cap, they can buy credits only from companies within the sector, not outside of it.

The government noted in a background document to the published paper:

“Both options could include some time-limited flexibilities to reflect the timelines of major emission reduction projects.”

While the sector’s emissions intensity (oil sands emissions per barrel of oil) declined by 30% since 1990, it remains higher than its global rivals.

And though most of Canada’s oil and gas companies are already reducing emissions through various means, the sector has a lot to do.

The Oil Sands Pathway Alliance

The Pathway Alliance is the country’s biggest oil sands producers group working together to tackle climate change. It has six member companies, including Suncor, the largest oil sands producer. Together, their operations account for 95% of Canada’s total oil sands production.

The collaboration seeks to bring the sector’s emissions to net zero by 2050. This includes cutting 22 million tonnes of carbon from 2019 levels by 2030. And one major part of their emission reduction strategies is the carbon capture and storage (CCS) projects.

The Alliance’s leading oil and gas producers are not against the emissions cap but said it must be feasible and realistic.

It’s important to note that the new cap-and-trade system must settle key issues involved to prevent confusion. And this must include agreeing on the current emission levels to serve as the baseline for reductions.

The Alliance says it’s only about 68 million tonnes in 2019 but the government reports it to be around 83 million tonnes.

The difference is significant and it can impact what reduction measures the sector has to pursue.

The oil and gas sector and its stakeholders can comment on the emissions cap proposals until September 21. The government will reveal the final design early next year.

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Agriculture Program GIves $16 Million for Living Labs

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A new Canadian agriculture program committed $16 million to “living labs” that can allow producers to get agricultural carbon credits.

The Canadian government will fund 9 new living labs across the country. Two of them are in Alberta while one is in Northern Alberta and British Columbia.

Living labs are a concept used in the context of open innovation and collaborative networks to address societal needs. They are designed to include users (producers) in the early stage of the innovation process.

In the case of the agricultural sector, living labs are a… “novel way to speed up the development of sustainable agricultural practices and technologies.”

The Living Laboratories Initiative in Alberta

Agriculture and Agri-Food Minister Marie-Claude Bibeau announced the funding program for Living Laboratories. Bibeau said that the living labs will help the country to reduce emissions. Plus, they’ll be beneficial for a collaboration between various stakeholders.

She added that:

“By working together, they [living labs] are creating innovative research-based solutions that can be applied to real-world challenges on the farm.”

The Living Laboratories Initiative brings together farmers, scientists, and other groups to develop and test innovative practices and technologies to tackle agri-environmental issues.

The federal government has begun a network of living labs between 2019 and 2021. They’re found in PEI, Manitoba, Quebec and Ontario.

In Alberta, the federal government partners with the Alberta Beef Producers and the Food and Water Wellness Foundation. Both organizations seek to improve the beef, forage and cropping sectors.

The $16 million is a second installment for living labs announced last year. It’s part of the $185 million funding support from the Agriculture Climate Solutions. It’s a 10-year program for developing and implementing better environmental practices.

In particular, the program supports efforts for carbon sequestration and reducing carbon emissions.

The announcement is also a part of Canada’s emissions reductions plan launched in March this year. The Canadian government pledged ~$1 billion to help the agricultural sector cut emissions.

With the funding, the living labs can directly work with farmers, researchers, and other interested groups to develop best agricultural practices that boost soil carbon capture. As such, Alberta producers and growers can also earn more agricultural carbon credits.

As Bibeau further noted:

“Here in Alberta, and across Canada, our farmers are adopting approaches and technologies such as precision agriculture, zero tillage, efficient grazing, environmental farm plans… and our cattle producers are playing a vital role in preserving our grasslands. They are storing carbon…and so are on the frontline of climate change”

Alberta Agricultural Carbon Credits System

Alberta was the first to enact a carbon trading system in North America in 2007. Regulated emitters (emitting ~100,000 tonnes of carbon) buy carbon offsets from agricultural producers who take part in approved protocols.

Alberta is one of the three Prairie provinces in which most of Canada’s crop farming happens. Though Alberta’s carbon credit system covers many sectors, most credits are from projects in the agricultural sector.

Agriculture is part of the voluntary, non-regulated sectors of Alberta’s economy. The voluntary reduction of emissions must meet the standards of an Alberta-approved offset protocol.

The province has 19 offset protocols, of which 4 are agriculture specific with 3 active today. Other protocols offer other industries the opportunity to create carbon offset credits.

Agricultural Protocols for Generating Carbon Credits

Each of the protocols have detailed guidelines for crop and beef producers to follow to claim offset credits accordingly.

But emission reductions associated with improved agricultural practices (reduced nitrogen use or cattle days on feed) must be clear. Once verified, the reductions are given corresponding carbon offsets. They’re then tracked via the Alberta Emissions Offset Registry.

Producers can sell those offsets as carbon credits to regulated emitters or in the voluntary carbon market.

But carbon offset credits are available mostly for crop growers not beef producers in Alberta. This is where the current agricultural program supporting living labs can help.

As the director of the Food and Water Wellness Foundation said:

“One issue the project intends to address is the lack of proper models to calculate how much carbon is being captured by pasture land and ranching operations… This is a very important project for that reason, to help build out the data to actually make good carbon credit offsets a viable approach.”

Bibeau said she is working with Environment and Climate Change Minister Steven Guilbault on developing a carbon offset credit system for beef producers.

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What Drives the Growth of The Carbon Offset Market? (3 Key Factors)

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The demand for quality carbon offsets is at an all-time high due to the strong eagerness of businesses to act on climate change.

This leads to the fast and high growth of the carbon offset market. For only a period of 2 years (2019 to 2021), it grew by 3x and reached $1 billion market value.

In fact, the Paris Agreement set up a fund of $100 billion to help finance projects that remove or reduce carbon footprint.

But apart from the demand alone, what could be the other reasons that drive such immense market growth?

If you’re asking the same question yourself, this article will give you the most comprehensive answer. It will identify the key drivers that promote the growth of the voluntary carbon offset market.

It will also discuss the other important factors that help grow the market and will continue to shape its development.

What are Carbon Offsets?

Carbon offsets are assets used to compensate for an entity’s carbon emissions. The offsets are from activities or projects that suck in carbon from the air. They’re also from initiatives that reduce future emissions.

As such, the credits produced by the projects represent the amount of carbon offsets that they deliver. They allow individuals, firms, and countries to offset their emissions.

One carbon offset represents one carbon credit. And in turn, one credit equals one ton of carbon removed or prevented from entering the atmosphere.

When can you use carbon offset credits?

Carbon offset credits are best to use when emissions reduction solutions are not enough. In other words, they’re perfect for a “last case scenario”.

Emitters can also use them as a short term measure ahead of bigger emissions reduction plans. High emitting sectors can use them to address their hard-to-abate emissions.

Large firms that are required by the government to account for and reduce their carbon footprint often use carbon credits as offsets. This refers to the compliance market where firms must meet the limit to their footprint.

But many big companies are also willing to invest their funds in projects that create carbon offset. They do this in the voluntary carbon market (VCM) often via carbon trading houses or exchanges.

Broadly speaking, the compliance carbon market and the VCM are two separate carbon markets. Yet, there are instances where they overlap that the image below shows.

Source: ICAP, Morgan Stanley Research

For example, the China Emissions Trading System (ETS) allows emitters to use carbon offset credits (CCER) to meet up to 5% of allowances or credits they need to account for in their report.

On the other hand, the EU ETS and the UK ETS don’t allow such use of carbon offsets.

Though the carbon offsets market is still in its infancy, its future holds a lot of promise for growth.

The increase in its market size from $306mn in 2020 to $1b in 2021 is solid proof of its rapid growth.

In fact, analysts expect that the voluntary carbon offset market can reach a value of ~$35bn by 2030.

That’s under the net zero scenario where ~1Gt of carbon emissions must be offset by the end of the decade. The three key participants in the market are:

corporations or business companies,
institutional investors, and
governments.

Here are the major factors that are responsible for promoting such growth in the carbon offset market.

3 Key Factors Driving Carbon Offset Market Growth

We’re highlighting the three key drivers of the offset market, followed by other minor factors.

#1. Rising Climate Targets

As mentioned earlier, there are three market players – corporate firms, governments, and institutional investors. Each of them contributes to the growing climate ambitions.

Corporate net zero pledges:

The whole world is seeing a rapid increase in offsetting demand from businesses. This is mainly because of the growing pressure on their responsibility to commit to their climate goals.

In fact, the net zero pledges from corporations continue to further rise. The graph below illustrates a specific case of the growth in carbon offsets by MSCI World. Its purchases rose in line with the rising number of net zero commitments.

The recent report on corporate net zero pledges for 2022 by Net Zero Tracker revealed that 702 companies on the Forbes Global 2000 have net zero targets. The number was up from 417 in 2020.

Carbon offsetting or buying carbon credits for emissions was found dominant among corporate net zero strategies. Yet, the net zero targets remain to be unacceptably low if the planet has to reach net zero emissions by 2050 according to the analysts.

Some firms will buy carbon offsets today to offset their current emissions. While others may do so to hold and retire them against future emissions to reach future targets.

Either way, we can expect that as companies near their key climate goal dates (as early as 2030), there’ll be more demand for carbon offsets.

Governments:

Same with corporate climate pledges, governments and nations were also eager to decarbonize. Countries that joined the Paris Agreement have set and submitted their plans for cutting their carbon footprint. They reflect these in their net zero goals via Nationally Determined Contributions or NDCs.

In fact, 18 out of 20 top emitters have declared their carbon neutrality or net zero pledges. There’s also a big increase in the number of national policies governing net zero targets. It went up from only 10% of national carbon emissions in 2020 to 65% in June 2022.

Plus, the count of large cities with a climate goal doubled, from 115 in 2020 to 235 this year. The chart below shows the current status of governmental net zero targets per level.

Though many are already in the law, most of them are also in policy documents waiting for approval.

To achieve their climate goals, countries use different means to cut their emissions. The common ones include carbon pricing mechanisms such as the ETS and carbon taxes. The most recent system introduced in the CBAM – carbon border adjustment mechanism.

For most of their unavoidable emissions, governments are turning to carbon offsets to address them. The Article 6 of the Paris accord allows nations to sell or buy carbon credits to count toward their NDCs.

But only one of the two participating countries can account for the emission reductions in its NDC. That’s to avoid the risk of double counting the offsets.

Institutional Investors:

Carbon emissions linked to the operations of the asset management industry are small. Yet, there’s a growing focus on how asset managers or institutional investors contribute to climate change. That’s through the allocation of capital to carbon intensive issuers.

For instance, the Net Zero Asset Managers (NZAM) Initiative now has 273 signatories that represent ~$60 trillion in assets under management (AUM). All participating firms commit to support investing aligned with net zero emissions by 2050 or sooner.

Signatories to the group agree to deliver some major commitments including:

Setting interim targets for 2030 for the proportion of AUM in line with achieving net zero emissions
Reviewing goals every 5 years to ensure that AUM covered by net zero commitment grows up to 100%
Working in partnership with asset owner clients on their decarbonization goals

Across all key net zero strategies that investors can make, it’s not likely that they’ll see zero emissions across all portfolios. This means carbon offsets can also play an important role in executing their strategies.

But that’s best done if the offsets are for long-term carbon removal or would be the last resort only. There are no other viable options to consider to reduce emissions.

#2. Growing regulatory (compliance) and industry association requirements

If all participants in the compliance markets identified earlier were to use all their regulatory emission allowances with carbon offsets, it would total to 275 Mt CO2e. This is almost equal to the same size of the entire VCM today, which is 298 Mt CO2e.

When it comes to the growth of the carbon offset market due to the compliance market, there are 2 major things involved.

Rising number of markets permitting the partial use of carbon offsets
Increasing number of sectors joining the carbon markets

Though carbon offset credits used to be common in the VCM, we’re now seeing a rising trend of their inclusion in the compliance markets.

The China ETS is one example given earlier. Other examples are the case with Singapore and California.

The former expressed intention to include high quality carbon offset credits in its market mechanism. In the same way, California’s compliance market also plans to change carbon offsets from 4% this year to 6% in 2026.

Notably, the EU ETS remains strong in its stance to ban the use of carbon offsets and credits in its low carbon transition this decade.

Moreover, forecasts show that many compliance markets will cover new sectors in the long run to reach net zero emissions. In effect, the emissions covered will also grow and so is the need for carbon offsets.

As the image below suggests, many compliance carbon markets still have a long way to go for growth when it comes to adding new sectors.

Take for instance the case of China ETS. It only includes the power sector in its regulatory emissions requirements. It’s the same for the Regional Greenhouse Gas Initiative (RRGI).

While for both the UK and EU ETS, they cover only 3 sectors right now out of the 7 major ones. These include the power, industry, and aviation sectors.

Also, many of those market mechanisms included the sectors that are easiest to decarbonize. So as new sectors that have less readily available decarbonization means will join the race to net zero, we can expect to see a higher reliance on carbon offsets.

#3. Increasing participation in the speculation market

Lastly, more and more buyers of carbon offset credits are using them to get exposure to the market. They’re buying the offsets to retire them in exchange for environmental impact later on.

This is where the carbon offset futures come in. For the direct exposure to the VCM, buying the futures can be a viable option as a retail investor. Market participants with this purpose continue to grow as forecasts see the carbon offsets price to rise over time.

As a result, they want more exposure and new investors keep on adding with the goal of selling the futures at a higher price later. Though the market is not yet liquid, estimates for carbon offsets demand are very promising.

For instance, the Taskforce for Scaling Voluntary Carbon Markets (TSVCM) survey suggested that market size in 2030 can be between $5 billion and $30 billion. It can even grow into ~$50 billion at the high end of projection.

That means something between 20x and 200x growth for the carbon offset market within a decade. The chart below plots this high growth.

Other Drivers of VCM Growth

CORSIA:

CORSIA is a market-based mechanism developed by the International Civil Aviation Organization or ICAO. It stands for Carbon Offsetting and Reduction Scheme for International Aviation.

It will drive further growth of the carbon offset demand as ICAO aims to bring the global aviation industry into carbon neutral level from 2020. This industry accounts for about 2% of global emissions but traffic is growing so fast.

Airlines can offset their emissions that go beyond the 2020 levels by buying CORSIA eligible offsets. CORSIA is one of the market-based measures that ICAO is using to achieve its climate goals. These measures take the largest contribution in reducing the aviation carbon emissions.

ICAO projects that, between 2021 and 2035, the CORSIA system will offset ~165MT of CO2e/year. This figure represents ~1.8x the size of the voluntary offset market in 2021.

With that said, major American airlines are already in the market buying carbon credits to offset their CO2 footprint.

The Carbon Crypto Movement:

Another recent driver of the VCM growth is the carbon crypto movement. Crypto currencies have been getting much media attention and investor interest. But as the crypto industry matures, developers started to apply blockchain to one of the other hot markets: carbon offset credits.

However, it’s also common knowledge that crypto mining uses very high energy. In fact, Bitcoin’s energy consumption equals the total electricity generated by the Netherlands. As such, many crypto mining companies committed to either preferring renewable sources or buying carbon offsets.

Plus, tokenization of carbon offsets is taking the market by storm by showing potential in resolving issues like verification and transparency.

Non-fungible tokens (NFTs) allow crypto carbon projects to issue NFTs for certain projects or particular pieces of offset projects. Though most of these carbon crypto initiatives are in their early stages, their ability to link carbon offsets to a blockchain avoids the issue of double-counting of carbon credits.

These unique features of the carbon crypto will drive NFT carbon offsets to grow even more. In effect, they will also bring more growth to the entire carbon offset market.

Top technologies improving the quality of the offset market

As more money pumped in the VCM continues to increase, the market is facing more criticism over time. For example, carbon leakage and permanence of the credits receives more scrutiny.

Luckily, recent advances in technological solutions emerge to help address those problems and improve the quality of the offsets. Here are the top 3 technologies that provide market solutions.

Satellite Data/Imagery

Satellite monitoring provides critical environmental data from space. The major satellite remote sensing technologies offer plenty of environmental applications that can help farmers improve yields and reduce fertilizer use.

They are also useful in monitoring and verifying carbon offsets. They do this by providing insights into the use of land areas creating carbon credits.

For instance, satellite images can confirm the existence of a forest and track illegal deforestation activities. This can help tackle the permanence concerns with the forestry offsets by providing proof.

The image below shows an example of satellite monitoring of deforestation of the Amazon forest.

Drones

Drones are unmanned aerial vehicles that can support data gathering activities. They also work alongside onboard sensors and global positioning systems (GPS).

Drones are very useful for many environmental purposes like reforestation and seeding projects. They can help speed up the process of surveying land areas, gathering topography information, and more. These are important for measuring carbon performance of a project.

Plus, drones can also be used to track deforestation but this can be quite costly right now.

Machine Learning/AI

AI can help analyze data from satellites and sensors to boost transparency in using carbon offsets. It’s useful in analyzing a large amount of data that satellite imagery and sensors provide.

Machine learning can help in measuring carbon sequestered in trees, crops, and soil. This enhances the quality of carbon data for offset projects while also improving their verification.

The case of Pachama is a perfect example for the valuable use of this technology. The firm’s AI gives high assurance to buyers of carbon credits to reach their net zero goals.

With all these drivers combined, one can see why the carbon offset market is set to grow exponentially.

If by chance you’re in the market looking for the best offset programs to consider, read our top guide here. Or in case you want to know about the governance of this market, we also got you covered in this comprehensive article.

 

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Microsoft Signs 10-year Carbon Removal Deal with Climeworks

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Microsoft signed a 10-year carbon removal deal with Climeworks to suck in 10,000 tons of CO2 from the air using direct air capture.

The deal is the most significant long-term agreement Microsoft has made with a carbon dioxide removal (CDR) supplier. It’s also one of the biggest direct air capture (DAC) deals to date via Climeworks’ DAC plant in Iceland.

Climeworks calls its DAC plant Orca. It has the capacity to remove 4,000 Mt of CO2/year. It sucks in CO2 from the air and turns it into stone underground.

Fans draw huge amounts of air into the DAC system. Chemicals react with the CO2 which leaves nitrogen, oxygen, and other gases to return back to the atmosphere.

The chemical filters are then heated using renewable energy to release the CO2. This is then dissolved in water, and injected into basaltic rock 1,000m underground. Over 2 years, the dissolved CO2 crystallizes into a mineral holding it for good.

The DAC system can also upcycle the captured CO2 into new materials like low carbon fuels or chemicals.

Microsoft – Climeworks Carbon Removal Agreement

The DAC deal is part of Microsoft’s climate goal to be carbon negative by 2030 and reach net zero emissions by 2050. The tech giant revealed these targets in 2020. One year later, Climeworks’ carbon removal was the only DAC solution chosen by Microsoft for its first CDR portfolio.

To date, Microsoft has a total of 21 carbon removal projects around the world. It has another 106 proposed projects in the pipeline.

The tech giant said that it pledged to remove 2.5 million Mt of carbon from the beginning of 2021 through the contract. But the financial details of its CDR purchase agreement with Climeworks weren’t revealed.

Last March, Microsoft announced that it had allocated $471 million toward its $1 billion Climate Innovation Fund. The fund is for ramping up the development of carbon reduction and removal technologies. It has bought 1,400 Mt of CO2 removal from Climeworks last January 2021.

As for the DAC pioneer, Climeworks noted that the investment from Microsoft will help scale up its carbon removal technology. The firm’s co-CEO and co-founder said that:

“Long-term commitments like this multi-year agreement are crucial for scaling the DAC industry because the guaranteed demand catalyzes financing of our infrastructure… and consequently accelerates the development of the required ecosystem for scaling DAC.”

The DAC company has set the ambitious goal of multi-megaton carbon removal capacity by 2030 and gigaton by 2050. It’s building a much bigger plant called Mammoth that will be done by 2024. It can remove 36,000 Mt of CO2/year, which is 9x more than Orca can.

The company has set the ambitious goal of multi-megaton capacity by 2030, and gigaton capacity by 2050.

The Critical Need for Carbon Removal

Tech companies have been investing in CDR projects that drives growth in the industry. The Microsoft – Climeworks carbon removal agreement comes only a few months after the tech firm joined Alphabet and Salesforce in a similar deal. The three giant firms committed $500 million to scaling CDR by 2030.

In August 2021, Climeworks and Swiss Re also inked a 10-year carbon removal agreement worth $10 million.

Earlier this year, Alphabet also joined McKinsey, Meta, Shopify, and Stripe in investing $925 million to carbon removal initiatives. This commitment called Frontier will advance CDR technologies to help fight climate crisis.

The Intergovernmental Panel on Climate Change estimates an average of 6 billion tons of CO2 needs to be removed each year to achieve climate goals by 2050.

Meanwhile, the International Energy Agency says there are 19 DAC plants operating worldwide right now.

CDR technologies have been criticized as a distraction from emissions reduction efforts and are too small to push the needle. Yet, efforts to reduce emissions are happening too slow according to analysts.

And so the UN’s climate panel believes that removing CO2 is now critical, along with drastic reduction efforts.

Ultimately, the world has to remove billions of tons of carbon each year to bring global warming to safe levels. How many billions will depend on how and where individuals and firms invest their money.

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