Reducing carbon emissions is one of the most critical issues facing individuals and governments today. This is evident through a focus on ESG investing while governments create a cost through carbon credits to account for climate impact.

ESG stands for Environmental, Social and Governance. Within investing, it refers to investors considering these factors in companies they invest in.

Many ESG investors place significant focus on the environmental component and opt to get rid of environmental polluters from their portfolio.

Instead, they choose to invest in businesses working to cut dependence on fossil fuels.

In the meantime, governments limit carbon emissions of firms through carbon credits. But these credits can also be used as a source of revenue.

So, what are carbon credits and how do they become the new currency of ESG investing to meet environmental regulation?

This article will answer this question by explaining ESG investing and what role carbon credits have in this investment realm.

The Changing Environment of ESG Investing

It’s now widely recognized that non-financial factors can inform investors about business performance. And so, there’s growing interest in the significance of ESG topics in the investment world.

Also, businesses today are impacted by climate change, disrupting operations and supply chains. More notably, climate change also affects markets and demands.

As a result, markets are adapting to climate change and every business has to respond to it. Otherwise, it becomes both an operational and commercial risk.

So investors have a role to play in ensuring that companies manage climate risks responsibly.

This change is impacting investment strategy as investors shift from risk aware investments to opportunity aware investments.

More and more of them are looking to invest in sectors that benefit from climate change. And most notably, the majority of them show an interest in putting their money in sustainability-focused strategies.

The sustainability boom resulted in trillions of dollars through ESG funds.

Businesses can leverage this changing trend by showing a robust climate strategy through their ESG reports.

This change is quite new, but it becomes mainstream so quickly. This could be due to evidence that climate-aware investing strategies like ESG produce good results.

The evolution of ESG mirrors the change in how people perceive climate change, too.

In recent years, ESG policies moved from a simple principle of doing no harm to having a positive impact on the company’s bottom line.

Add to this the increasing need for transparent and robust ESG reporting. This is driven by regulation such as the case of the Green Deal as the EU’s reporting directive.

Firms that adhere to reporting requirements tend to gain good sustainability ratings. In turn, their investment results tend to be also higher than companies with weak reporting standards and poor ratings.

But policy aside, stakeholders are also putting greater pressure on companies to get more information on their ESG performance.

This further prompts firms to have more robust ESG strategies. They communicate these to their employees, investors, and customers.

Finally, securing sustainable funding is another key factor that drives companies to differentiate themselves via ESG investing.

Investors are now favoring ESG performance as a proxy for good management.

In fact, the big four firms – PwC, Deloitte, EY, and KPMG – hope that ESG is key to rebuilding consumer trust after many scandals and multi-million-dollar payouts.

Hence, companies that can demonstrate strength on ESG may secure better financial support and results.

And this changing landscape in ESG investing will increase as ESG becomes more integral to businesses. But what role do carbon credits have in the space of ESG investing?

What Do Carbon Credits Mean in ESG Investing

The Carbon Credit Standard

In the U.S., the coin of the realm is US dollars, in the EU, it’s euro. In the ESG world, it’s the carbon credit – a unit representing 1 tonne of CO2 removed/avoided.

A carbon credit is a permit that allows its owner to emit a certain amount of CO2 or other GHG. In the voluntary carbon markets, carbon credits are known as carbon offsets.

Carbon offsets occupy a relatively small space on the ESG realm. But as more countries and companies pledge to reach net zero, carbon credits are gaining more attention in ESG investing to hasten carbon reductions.

In fact, growing demand has fueled record-high prices in some markets.

But why should investors care? Because the carbon credit market is growing exponentially.

Carbon credits grew by a whopping 164% in 2021 with a notional value of $851 billion. And market projections are even more eye-popping.

Research firms forecast ranges that the market will grow as much as 30X more by 2030 and 100X more by 2050.

If these estimates are correct, the carbon credit market will be equal in size to the NASDAQ stock market by 2030.

According to the independent firm Katusa Research, the total carbon market (compliance and voluntary) could be as big as the oil market…

Source: Katusa Research

Entities have been relying on carbon credits to avoid or reduce their emissions.

Companies regulated under the “cap-and-trade” program (compliance carbon market) have no choice but to buy credits if they go beyond their emissions limit (cap).

For those who’re offsetting their emissions voluntarily, they can buy carbon credits from various projects. The most popular ones are nature-based projects like afforestation and tree-planting.

Markets and rules are beginning to blend

Carbon credits are still evolving as a distinct asset class. But carbon markets are starting to take better form as regulators and industry groups help codify rules around them.

In fact, various initiatives and regulations emerge to guide ESG investors in their investment decisions. The same goes for carbon standards and verification bodies.

They’re becoming more stringent to ensure the quality and integrity of the credits buyers and investors pick.

Guidelines and growing investor awareness are helping carbon credits gain traction.

In the US, proposed SEC disclosure rules around climate change impacts mandates carbon credits accounting and reporting. This is a big step to promote transparency in the space.

Investors more aware of credits role in ESG

As the emphasis on corporate climate pledges grows, investors’ interest in carbon credits also intensifies.

Activism around ESG will grow even more in the next few years as the world fights global warming.

In the “E” factor, more investors are now becoming aware of how carbon credits can directly impact a company’s cash flow, reputation, and other standing.

So, when reports showed that 100 global companies are accountable for 71% of total emissions, ESG investors have greater reason to push for carbon reduction measures.

As such, we can expect that trading carbon offsets to rise even more.

Here are the reasons why carbon credits matter a lot in ESG investing.

Evaluating carbon credits: Some key factors to consider

Projects that produce carbon credits vary. So, ESG investors have to assess them well to know which ones to choose.

Local stakeholders will more likely favor carbon reduction projects with local co-benefits like job creation and biodiversity. However, these credits tend to cost more but they carry less risk and may offer more permanence.

There are certain metrics to consider to select quality offsets. These include additionality, permanence, measurability, and scalability.

It may take some time before carbon credits to become key asset allocation options for the average investor. But more transparency, better pricing, and market standards gave the offsets some spotlight they deserve.

When implemented correctly, offsets play an important supporting role in the fight against global warming. This is especially true when reducing carbon emissions is a battle of increments, not an overnight fix.

We believe they’re worth actively exploring within a broader ESG-investing context. Their global abundance can especially encourage flows of capital to stakeholders in developing countries and help facilitate broader attainment of SDGs.

How Companies Can Benefit from ESG Investing with Carbon Credits?

The strong emphasis on the “E” factor in ESG investing has never been greater. The world has been experiencing extreme weather conditions such as floods, drought, and heat waves.

Climate change has also been impacting every sector of the economy. Every business has to bear the environmental impacts associated with their operations.

So to limit the speed of global warming, companies are pledging to cut down their carbon emissions. More firms commit to reaching net zero emissions by 2050 or earlier.

This is where leveraging carbon credits as the currency of ESG investing puts a company at an advantaged position.

By investing in projects that reduce GHG emissions or avoiding reliance on fossil fuels, carbon credits are created. Firms with excess credits can sell them to other companies that fail to meet their carbon reduction targets.

This will bring in more measurable incentive for companies to make contributions in fighting climate change.

And more remarkably, ESG investors prefer to place their money on greener business models.

Carbon credits represent a certain amount of GHG emissions reduced or avoided.

That means where carbon credits are linked to, investors are also more likely to follow with their money. Popular examples include using renewables, adopting cleaner technologies, and energy-efficient investments.

Carbon credits are now commonly traded and they’re not only by businesses. Some investors are trading carbon credits in a similar way to physical commodities.

But ESG investors need to ensure that carbon credits are indeed reducing emissions as they claim to be. Once this is verified, companies will realize that ESG investing with carbon credits is all worth it.

The post ESG Investing with Carbon Credits – What Investors Need To Know appeared first on Carbon Credits.

Ethereum won the spotlight with the Merge, which cut the crypto’s energy use and carbon footprint more than expected by 99.99%.

The second-largest cryptocurrency – Ethereum – recently eliminated its energy consumption overnight by shifting to a new “proof of stake” blockchain system called the Merge.

Designed to drastically cut down the network’s overall energy use, the upgrade has indeed done just that.

Initial estimates of energy consumption reduction is about 99.95%. But the Merge was able to go beyond that with 99.99% less energy use than estimated.

The software upgrade also cut Ether’s carbon footprint by the same figure.

Ethereum Energy Use Before Merge

The so-called “Merge” was executed as the energy intensity of cryptocurrency protocols such as Bitcoin and Ethereum is a hot issue in the U.S.

In fact, the White House published a report detailing the energy impacts of crypto mining operations.

Crypto miners, including Bitcoin and Ethereum, use an energy-intensive consensus mechanism called “proof of work” (PoW).

Proof of Work is estimated to account for about 0.9% to 1.7% of all U.S. electricity use in 2021.

Earlier, the PoW mechanism required miners to work with high-powered computers to solve complex puzzles to earn tokens or Ether.

Ethereum used to run on the same unsustainable PoW mechanism as Bitcoin. This consensus system is so inefficient as shown below.

Ethereum Footprint Before Merge

Prior to the Merge, a single Ethereum transaction consumed about 264 kWh of energy according to Digiconomist data.

That’s equal to the consumption of an average U.S. household over 9 days.

What’s worse is its carbon footprint; the same single Ethereum transaction emits 125 kgCO2.

This emission is the same as watching YouTube for 20,900 hours! That’s equal to over 2 years of watching.

At the same time, the total annual Ethereum footprint is almost 54 Mt CO2. That’s equal to the emissions of the entire country of Singapore.

In fact, if Bitcoin and Ethereum were one country, estimates put their combined power use at 12th in the world with over 300 TWh per year.

These footprints were slashed after Ethereum shifted to the “Proof of Stake”(PoS) crypto model of mining.

Ethereum Footprint After the Merge

PoS doesn’t need computers and offers a greener, more energy-efficient way for crypto users to deposit their Ether. They call this process “staking”.

With PoS after the merge, there’s no longer a network of energy-intensive mining devices that compete with each other to make the next block for the underlying blockchain. Rather, wealth plays a major role in the block creation process with PoS.

Instead of using expensive GPUs and high specs, users need only a basic laptop and a stable internet connection.

The result is a massive reduction in power use by Ethereum.

To compare Ethereum’s PoS with PoW and Bitcoin’s power use, here’s a good illustration from the crypto firm itself.

Source: Ethereum blog

When it comes to emissions, the crypto’s footprint for a single transaction also dropped to only 0.01 kg CO2. That corresponds to only 2 hours of watching YouTube.

For its annual total carbon footprint, it went down from 54 Mt CO2 to only 0.01 Mt CO2.

Ethereum Footprint After Merge

For some industry experts like the ConsenSys, it remarked that the Ethereum’s Merge is the “biggest decarbonization in the history of tech”.

If the company seeks to get carbon credits from such a massive reduction in its emissions, that would be a huge amount. One carbon credit is equal to one ton of carbon avoided from getting emitted.

Also, carbon-backed crypto tokens have been gaining more traction recently.

And though other blockchain networks like Bitcoin, Ravencoin, and Ergo have seen growing hash rates after the Merge, their massive energy use is not tied to Ethereum anymore.

As such, Ethereum manages to shed the environmental issues that continue to shake the world of cryptocurrency.

One board member of the Enterprise Ethereum Alliance said about the new PoS mechanism:

“This upgrade is very significant and I believe it will allow enterprises to consider public Ethereum blockchain approaches where they did not prior.”

Looking ahead, many predicted a continued push to green crypto mining operations in the U.S. as the world races to net zero emissions.

The post Ethereum’s Stealth Move to Wipe Out Its Carbon Footprint appeared first on Carbon Credits.

Bringing the iron and steel industry to net zero by 2050 requires $1.4 trillion of investment, $250 billion of which is for carbon credits, according to Wood Mackenzie.

Currently, iron and steel production together release a total of 3.4 billion tonnes of carbon each year. This represents 7% of total global emissions.

To meet the global demand for steel by 2050, the industry must produce 2.2 billion tonnes of steel.

The industry emits a lot of carbon and is one of the most difficult one to decarbonize.

Wood Mackenzie analyzed in its latest report, “Pedal to the Metal: Iron and steel’s $1.4 trillion shot at decarbonisation”, the what, when, and how of reaching net zero pathway.

Remarking on the report, lead author Malan Wu said that:

“Decarbonising the steel industry is a big task. To meet Wood Mackenzie’s 1.5°C accelerated energy transition scenario by 2050, steel emissions must reduce by 90% from current levels. There is an urgent need to act now to decarbonise the iron and steel sectors. Business as usual is no longer sustainable.”

Footing the Bill to Reach Net Zero

The 1.5°C pathway requires 2050 steel emissions to decline by over 90% from current levels. But the analysis assumes only a 33% decline in steel emissions from current levels.

The report shows the urgency to act now to bring the industry to net zero emissions. It also presents an investment opportunity for the operators as the sector decarbonizes.

The largest factor for the industry to be successful in its climate goal is to switch to Electric Arc Furnaces (EAFs).

But that’s only one part of the $1.4 trillion investment opportunity for industry players.

Other measures needed include:

Exploring new high-grade iron ore mines
Greening current steelmaking routes,
Adopting new technologies (EAF, DRI, etc.)
Developing a hydrogen ecosystem for steel, and
Buying carbon credits

Mining companies will have to cut their operational emissions and invest in new green steel technologies. These include high-grade mines and DR pellet capacities.

Decarbonizing the industry also calls for shifting to clean energy use. This is equal to about 2,000 GW of renewable energy generation capacity (that’s ⅔ of current global capacity).

Now add developing the hydrogen technology to this…

The net zero goal needs about 50 million tonnes of green hydrogen per year.

Here’s the breakdown of the trillion investment.

Carbon Credits (Offsets) are a Must for Iron and Steel

As upgrades and green technologies are still not enough, the iron and steel industry needs to buy up to $250 billion in carbon offsets, also called carbon credits. They’re necessary to tackle emissions that can’t yet be reduced.

Carbon credits represent certain amounts of carbon reduced or removed from the air, either through nature or technology.

In the case of iron and steel, CCUS (Carbon Capture, Use, and Storage) is a technological option to curb emissions.

The present supply of CCUS is limited and is in its nascent stage. The current global CCUS pipeline is 14x the amount currently being captured of 63 million tonnes per year (Mtpa).

But emission reduction efforts from other industries are also calling for this measure.

The industry must capture and store 470 Mt of carbon to reach its emission target in 2050. And that calls for a $200 – $250 billion investment in CCUS.

Forged Blueprint: What Miners and Steelmakers Can Do

SO, what should iron ore miners and steelmakers do to solve the industry’s net zero equation?

The following images provide some clarity…

Achieving net zero will entail a revolutionary transformation of iron and steel, and its value chain. But a collaboration among key industry players will help drive green action.

The post Iron and Steel Industry Will Buy $250B Carbon Credits for Net Zero appeared first on Carbon Credits.

Converting ammonia into hydrogen is an emission-free fuel to help decarbonize the heavy-duty and shipping transportation industry.

The transportation industry is the biggest polluter in the U.S. In 2020, it accounted for the largest share at 27% of all the country’s GHG emissions according to the US Environmental Protection Agency.

Due to the significant amount of transportation emissions, actions are taken to reduce the sector’s pollution. This includes the notoriously dirty shipping industry.

The recently introduced Clean Shipping Act of 2022 aims to rid of emissions in ports in 2030 as the soonest. The law also restricts anchoring of ships in U.S. ports that don’t follow the zero emissions guidelines.

Ammonia Is Key to Hydrogen Rollout

As per the International Maritime Organization (IMO), ships with 5,000 gross tonnage and above are responsible for 85% of net GHG emissions from the shipping industry.

The industry currently emits about 1 billion tons of carbon annually. But with increased regulation, carbon offsets, and innovative technology, carbon emissions can be reduced.

IMO’s goal is to decrease that by 50% by 2050, and will implement a long-term strategy by 2023.

Given the size and weight of those ships, battery technology is not possible to use in them. Thus, hydrogen has become the leading alternative technology to power the massive vessels.

And to support the rollout of hydrogen, ammonia is a critical element.

Ammonia naturally doesn’t contain any carbon molecules. So it has a great potential to be a zero emission fuel. Plus, it can carry hydrogen effectively to a fuel cell.

Hydrogen, in itself, has some challenges when it comes to storage and transportation. This is where ammonia becomes helpful in aiding the deployment of hydrogen.

Why ammonia?

There’s already existing infrastructure for ammonia as it has been used in agriculture for long years as input. There’s a pipeline for ammonia production and storage, making it a potential renewable fuel.
Also, ammonia is a liquid which makes it easy to store. This reduces the cost and space requirements for its storage in comparison with hydrogen and LNG.
Lastly, ammonia even has a high volumetric energy density. It means the storage vessels can be light, fast, and travel long distances.

With all these qualities of ammonia, it’s suitable for decarbonizing the shipping industry. After all, there has been an agreement that the sector has to shift to new fuels and propulsion technologies to reach global emission goals. And ammonia is one option for that.

Based on the infographic below, zero carbon fuels will hit a 5% fuel mix by 2030. That means the industry has about 8 years remaining to achieve 60GW of electrolyzers to produce about 30 million tons of ammonia.

Meanwhile, it’s the size and operational profile of a ship that determines the applicability of carbon-free technologies.

For instance, the most vital performance metric for huge sea vessels like cargo ships is often the energy density requirements for fuels and motor systems. But for small and medium-sized ships like ferries, such factors are less strict.

Ammonia & Hydrogen for Clean Shipping

The clean hydrogen community expects that government financing programs will promote the technology and infrastructure in the U.S.

There are some major initiatives in place to advance the policy environment and drive the ambitious hydrogen agenda.

Take for example the case of putting up regional “Hydrogen Hubs”. These efforts make it easier for advancing clean hydrogen technology. These hubs can positively impact the country’s climate policy environment.

More collaboration, funding, and technology demonstrations can help push this fuel alternative for a clean shipping industry.

Ammonia is currently gaining traction as a solution for carrying hydrogen and decarbonizing shipping. In this case, it makes sense to include ammonia technology solutions in those efforts.

Ultimately, there must be a full transition away from fossil fuels to tackle global warming. And the shipping sector must do its part to cut down its emissions.

Clean hydrogen technology alongside ammonia may offer a suitable solution.

The post Ammonia: Carbon-Free Fuel for the Shipping Industry appeared first on Carbon Credits.