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 Carbon Trading  Strategies

Prepared by NetZero LLC. White Paper Series August August 2023

Climate Change is Real

Climate change and the ensuing global warming are two of the most defining and pressing problems of this century. More greenhouse gases have been released into the atmosphere in the last 30 years than in the entire history of our planet, causing average temperatures to rise by about one degree Celsius.

Most practitioners and academic experts agree that carbon pricing is the most important economic tool in the fight against climate change. Carbon pricing can be defined as assigning a market value to the GHG released into the atmosphere. Ever since 2005, compliance carbon credit markets (such as the European Union Emissions Trading System – EU ETS) are organized by professional Financial Market Infrastructure providers, while markets for voluntary Environmental Credits have been emerging and now outnumber the Compliance Markets.

  • Develop
    Developers with Projects that produce Environmental Credits choose a methodology and Exchange to register the Credits.

  • Register
    The chosen Exchange will verify the Project Submissions, and if the Project qualifies, will issue the Environmental Credits.

  • Trade
    Once the Environmental Credits are registered, they are available for trade as either physical credits or through futures contracts.

Current State of Emissions Trading

Voluntary Carbon Markets
In areas outside of Compliance Markets, several Voluntary Carbon Markets have emerged. The leading voluntary Carbon Markets are Gold Standard, Verra, and CBL.

Environmental Credit Types
The Voluntary Carbon Markets focus on several Environmental Credit categories including clean energy, agriculture, afforestation, land uses, and low-carbon industrial process.

Compliance Markets
The largest Compliance Market, providing 87% of global volume currently worth approximately $850 Billion,is the EU ETS. Australia and California have Compliance Markets as well but are small in overall volume.

Each Compliance Market has its own Methodologies that set forth the criteria to register and secure environmental Credits for trading.

Leading Global Trading Platform
Blackstone invested over $400M into Xpansiv to become the global Exchange to trade and settle Environmental Credits. Today, through its' CBL Exchange, it pulls from all the large Voluntary CarbonMarkets allowing most trades on a single platform.

How to Maximize Financial Return

Voluntary Carbon Markets
A Project Developer needs to analyze the matrix of possibilities when applying for Environmental Credits. The location of the Project is the primary driver because it forces the Project into either a Compliance Marketor Voluntary Carbon Market.

Pricing in the Compliance Markets is relatively stable but Voluntary Carbon Market pricing fluctuates depending on the Methodology andProject.

Which Exchange and What Credits
Each Voluntary Carbon Market has its' own Methodologies depending on the Project Type. The Project type and Methodology influence the pricing for Environmental Credits in each Market.

Primary reasons to fully analyze the strategy before determining the Market and Methodology:

  • Location: Understanding which type of Market the Project will be located in Compliance or Voluntary.

  • Classification: What type of Environmental Credits are available to the Project location?

  • Methodology: What Methodologies are available to determine the lifecycle assessment of the Project and ultimately the number of Environmental Credits awarded.

  • Restrictions: Are the Environmental Credits mutually exclusive and what type of restrictions are in place?

  • Pricing: Which Exchange provides the most advantageous pricing?

  • Volume: Does one Market or Methodology provide a greater return to the Project?

  • Compounding: Can multiple Methodologies be combined or used in parallel?

Trading Partner Involvement

You Shouldn't Do This Alone
Even though the Markets, Exchanges, and Environmental Credits process seems like it is simple, many aspects of the process are intertwined and complex.

Understanding these complexities maintains accounts on the various Exchanges and will work with you to analyze the best outcome for your Project.

After the Environmental Credits have been registered with the chosen Exchange, a trading strategy needs tobe implemented so the pricing arbitrage between the Exchanges where the Environmental Credits trade is maximized. The trading strategy will address whether to keep a simple physical trading scheme or toimplement a more aggressive scheme that plays on the pricing differences across multiple Exchanges.Lastly, the trading strategy should consider the use of any futures contracts or options contracts available forthe physical credits.

The Process

Undertaking an all-encompassing process taking into consideration all aspects of the Project, available Exchanges, and Methodologies.

This includes:

  • Discussing the expected financial results of the Project,

  • Crafting a Strategy to meet or exceed the agreed results,

  • Selecting the optimal Exchange to list the Environmental Credits,

  • Selection of the optimal Methodology on the Exchange to achieve the agreed results.

  • Drafting the Project Description using the selected Methodology,

  • Retaining a Verifying Body to Validate the Project Description,

  • Registering the Project Description with the Exchange,

  • Understanding any implied restrictions on the Environmental Credits,

  • Developing the corresponding Monitor Report Verify processes,

  • List the Environmental Credits on the Exchange,

  • Implementing the most effective Trading strategy for Environmental Credits, and

  • Determining whether to hedge future Environmental Credits allocations with the use of either futures contracts or call options.

2023 is Expected to $1.7B – $2.0B for Voluntary Markets

Global Market: 2030 - 2050

  • Shell/BCG: 10-40 B

  • Bloomberg: 10-50 B

  • Morgan Stanley: 100-250 B

  • McKinsey: 50 B

Pricing Per Unit: 2030 - 2050
12/1/2023 pricing is $0.75

Bloomberg:  

  • 2030: $13-$20

  • 2050: $50-$270