Investing opportunities in the carbon credit market

WHAT does venture capital have to do with saving the environment? A lot, it seems. At COP27 this month, we have seen many calls to action from governments, with some from companies and financial institutions on the sidelines of the event. In the past few weeks, we have seen the launch of the African Carbon Markets Initiative, and the US announcing a voluntary carbon market scheme to boost investment in developing nations. On the flip side, regulators are planning to heighten their scrutiny of voluntary carbon markets to prevent greenwashing. But, to begin with, what are carbon markets?

In the race towards net zero, one area of immense interest for venture capitalists (VCs) like us is the carbon market and the solutions enabling carbon trading. Carbon markets are simply trading systems in which carbon credits are sold and bought. There are various types of carbon markets. The compliance carbon markets (CCMs) are created and regulated by national, regional, or international carbon reduction regimes, while voluntary carbon markets (VCMs) function outside of compliance markets and refer to the issuance, buying and selling of carbon credits by businesses and individuals on a voluntary basis. Today, CCMs are the more mature and larger of the two markets, with an annual trading turnover of more than US$261 billion .

VCMs have experienced strong momentum in recent times and, many companies – even in hard-to-abate industries like oil and aviation – have started or been relying on them to offset their carbon footprint. Carbon offset projects reduce greenhouse gas (GHG) emissions, resulting in the creation of carbon credits. Examples of such projects include forestry, conservation/ restoration, renewable energy, community projects, and waste-to-energy amongst others. In the voluntary market, any corporate or individual can then buy these tradable credits to offset the carbon emissions from their operations and consumption.