Since the onset of the industrial revolution our economic system has ushered in an era of unprecedented human abundance. One of the most significant has been our ability to harness fossil fuels for the purpose of energy. Our homes, skyscrapers, computers, almost everything in our lives are made possible by cheap energy afforded by large-scale fossil fuel extraction.
Fossil fuels are just one sector of the capitalistic system, built around the old concept of supply and demand that brings products to market based on two factors; cost of production and perceived value. A product will never be sold for less than it costs to produce, and as high as the market is willing to pay.
In short, this works.
However, many argue that the cost function of this equation is flawed, and as climate change threatens to disrupt economies the world recognizes we need to be taking steps to mitigate and protect our planet. Reducing fossil fuels and greenhouse gasses are top of the agenda, but the market won’t take note until carbon reduction is viewed as a strategic management decision-making and financial opportunity.
Introducing, Carbon Financing.
Carbon Dioxide – A by-product of any human based activity that involves, at any point in its life cycle, the use of energy derived from fossil fuels. While the cost to cut down a tree can be quantified, the value that tree brings in the form of CO2 sequestration is valuable today in the carbon market place.
Trees, through the process of photosynthesis, take CO2 from the atmosphere and convert it into energy and biomass and as a result, as trees grow they sequester more and more CO2. Scientists have long since been able to calculate the amount of CO2 a tree takes out of the atmosphere based on its species and other factors, for which are beyond the scope of this discussion!
Carbon finance takes that quantified volume of CO2, usually measured in metric tonnes, and monetizes what has essentially become an intangible commodity. Through awareness of Carbon Dioxide and other greenhouse gas’ contribution to climate change, corporations, governments and individuals are demonstrating a demand to purchase these quantified and verified carbon emission reductions. This demand signal has created a voluntary carbon market where buyers of Carbon Dioxide purchase Verified Emission Reductions (VERs verified by one of a handful of accredited third party certifying bodies). In this way, they can offset their own Carbon Footprint while we work on transitioning our global energy production to renewables.
Just like other products and services, the price of VERs, more commonly known as Carbon Credits or Carbon Offsets, is dictated by their cost of production and their perceived value. Buyers are able to purchase meaningful amounts of carbon credits and the price remains high enough to make it attractive for suppliers to invest in carbon projects with the promise of earning carbon finance.
Currently, in the first quarter of 2018, the average price for 1 ton of CO2 purchased in the Voluntary market was $3.20 USD.
The emergence of carbon finance is also referred to as valuing natural capital. Paying mother nature for the services she provides and as a result, bringing the costs of these services into or economic system.
For centuries we’ve been enjoying these services free of cost, finally we understand their value.
Written by Michael Malara