Carbon Market Seen Getting Scale Like Mortgages and Airlines Did (1)

By Mathew Carr

Sept. 23, 2021– (LONDON) The voluntary carbon market, which probably needs to scale to $100 billion a year within a decade from $1 billion, can learn a thing or two from mortgages and airlines.

Voluntary carbon is an inefficient, small cottage industry, every project is different, and stuff is bought as a story,” said Nick Gogerty, author and managing director of Carbon Finance Labs, which provides clean solutions.  “There’s a crude quantification of a ton…but that is it.  It’s one of the many reasons that the voluntary carbon market is tiny.”

The market allows emitters to purchase emission credits from forest projects and other programs from Africa to Asia that may also help alleviate poverty, improve education for girls or improve water quality. These are the climate-saving stories which resonate with individuals and companies, motivating them to buy. The problem is the market is so small it’s really not making a dent in the massive problem.

Gogerty argues all that storytelling is holding the market back. Carbon credits, and the projects supporting them, need to be bundled together and risk-assessed, freeing investors of financial pain if that new forest happens to burn down, for instance. Yes some projects will collapse, which becomes simply a feature of every large portfolio of credits.

Carbon Finance Labs is a unit of Occidental, the oil company.

US home loan surge — opportunities with caution

Gogerty said at the North America Climate Summit that voluntary carbon can, and should be, on the same trajectory that U.S. mortgages have been in the past century, for instance. Or the airline industry in the past 40 years.

As Investopedia tells us, collateralization of assets gives lenders a sufficient level of reassurance against default risk. It also helps some borrowers obtain loans if they have poor credit histories. Collateralized loans generally have a substantially lower interest rate than unsecured loans. In carbon, this will help finance forest-growing, methane capture at rubbish tips and even some niche renewable energy (where such projects truly still need carbon finance to get off the ground and stay there).

“In 1920’s America, the ‘average’ home loan was 5-10 years in duration and was created & owned by a local bank. That local bank held the risk based on ‘Mr Jones,’ who held an account,” Gogerty explains to me after the summit. “Mr. Jones is a known hard worker and swell guy, so we lend him $5,000 at 8% and hold onto his loan with 30% down.  Note (mortgages really were 5-10 year terms back then– 30 year-loans didn’t exist.)  “Loans were a cottage industry, small fragmented and wildly inefficient.” 

Then came pooling mortgages and collateralized mortgage obligations (CMO), where the next-generation Mr Jones would be assessed on “normalized” risk factors such as loan to value, % of the downpayment.

Mr Jones’ personal story died and he “became a ‘loan file’ record,” Gogerty said. But he gets cheaper finance.

Mr. Jones’ loan could be aggregated with thousands of others, Gogerty said.  The efficiency of aggregation of risk factors v. stories allowed for cheaper money for the second Mr. Jones — maybe 6% per year and risks are distributed and diluted into the pool. “Billions of dollars opened up for new projects.”

But didn’t CMO help cause the global financial crisis earlier this century, I hear you ask? Yes, so regulators are racing to quickly get a better handle on risks, since the climate crisis has become so acute. With good management, regulators will better reduce the risks that the value of carbon projects will plunge — and they’ll need to ensure rewards are spread across society. It’s no sure thing.

Skepticism is high. See this from Climate Home website

The industry-led Taskforce on Scaling Voluntary Carbon Markets —a regulator being set up — is pitching carbon offsets as a win for the Global South. This is greenwashing at its most patronising: Climate Home said. See note.

The credit revolution also happened in aircraft leasing (securitization), where a bunch of “airline stories” got normalized as risk/performance factors and can be purchased as a portfolio with massive efficiencies, reductions in the capital cost of aircraft, which unleashed aviation revolutions in the 1980s and beyond. (See note one.)

“So in carbon we need to get away from the story of carbon and move to factors of performance risk and co-factors, social etc.  to create bigger portfolios. The truth is voluntary carbon as a $1billion market functions fine for its own sake. It just doesn’t do much for the planet. If the world is going to push $100 billion into voluntary or hybrid/compliance markets, risk factors and frameworks are the only way it happens,” Gogerty said.

Carbon rating agencies

This scale isn’t just nice to have but a necessity if the world is going to get the required money into emission-reduction projects, said Evan Ard, a managing director at broker Evolution Markets.

There’s a new breed of business offering ratings services to lay out the risks — but the going’s tough because it’s hard to compare the various stories with each other.

U.K. rater BeZero uses a massive database and analysis to offer “premium carbon removal baskets,” allowing individuals and businesses to achieve net zero today.

Every AAA+ BeZero rated basket blends one direct air capture removal unit with an “optimised portfolio of the highest quality removal offsets from the world’s three major carbon sinks – trees, oceans and soil,” it says.

Its ratings system is illustrated here:

BeZero Hero:

There’s a lot more work to do, said Tommy Ricketts, CEO and cofounder at BeZero, speaking at the summit. “At the moment there’s not even apples-to-apples data. And that’s a very big problem.”

Gogerty’s Future (5-15 years) — It may involve the following roles/goals, even if they do seem a bit weird today:

  1. Corporates, companies or regulators asking for a minimum portfolio weighting average of assets. Example: 100 million tons/carbon rated A or better
  2. Synthetic portfolios of credits like CMO. A carbon portfolio constructed to have an A rating means corporates have less work to “pick and choose” between the stories told by brokers.  They merely buy exposures to meet obligations. The Chief Financial Officer drives the purchase more than a compliance or sustainability team
  3. Risk management products. Carbon-default protection for portfolios
  4. Rise of independent Ratings Firms that are “recognized” by regulatory entities like the Nationally Recognized Statistical Rating Organization structure in the U.S.  And / or type tier 1/capital allocation models
  5. Regulated insurance industries. Getting the risk review and management out of the issuer’s hands.
  6. Complimentary factor models to disaggregate innovation, SDGs etc. associated with a credit to assess net contribution to a portfolio

    (More to come)



2. Summit link for recordings…

12:45pm-1:45pm – Side Event hosted by Carbon Finance Lab: C-Capsule – Envisioning a Compliance Gateway for Highly Effective & Durable Voluntary Instruments 

Recording available HERE

3. Climate Home:–t3xeVelrnzddE

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