Welcome back. I had a terrific evening yesterday at a London production of Kyoto, a new play that brings to life the first decade of international climate negotiations — and the oil industry machinations that sought to undermine them. It’s a fast-paced, innovative staging that conveys the raw intensity of climate diplomacy, and the tremendously high stakes involved. Don’t take my word for it: here’s the lowdown from the FT’s theatre critic.
One of the key flashpoints in the play is the intense argument at the 1997 Kyoto summit over carbon offset trading. Almost three decades on, the controversy around carbon markets has only grown. But as we highlight in today’s newsletter, some investors are still seeing opportunities in the troubled sector.
CARBON CREDITS
Singapore pushes to become ‘the hub’ of carbon markets
Reports of the death of the voluntary carbon market may yet prove exaggerated. The $32mn funding round announced yesterday by London-based carbon credit rating agency BeZero Carbon would be seen as small beer in some industries. But for the carbon credit sector, battered over the past two years by a reputational crisis and a fundraising drought, it looks like a noteworthy shot in the arm.
BeZero’s fundraising provides fresh evidence of the outsized role that Singapore has taken in the carbon credit market. The lead investor is GenZero, launched in 2022 with $3.6bn of committed capital from Temasek, Singapore’s $288bn sovereign wealth fund.
From the start, GenZero has had a mandate to invest in promoting carbon market development as one of its three core focus areas — alongside the related field of nature-based projects, and broader climate technology. “We think the journey towards net zero will be impossible without effective carbon markets,” chief executive Frederick Teo told me.
Teo said the investment in BeZero reflected the need for transparent and reliable data that would allow buyers to identify high-quality credits and regain confidence in the market. Transaction value in the voluntary carbon market fell from $2.1bn in 2021 to $723mn in 2023, according to Ecosystem Marketplace. Separate data from MSCI shows that volumes and prices remained depressed last year. Corporate buyers have taken fright at media and academic allegations that many projects have hugely exaggerated their carbon benefits.
Tommy Ricketts, BeZero’s chief executive, said the company had about 150 clients for its credit ratings and broader market data, assembled by a full-time employee base that included 77 scientists. Ricketts added that, given BeZero’s leading role in ratings and the industry’s growing emphasis on transparency, an investment in BeZero amounted to “a leveraged play” on the future growth of the carbon market.
“It’s just about waiting for that inflection, that catalyst, whatever it may be,” Ricketts said.
Will that wait pay off? If this market does return to growth, Singapore will deserve a share of the credit. Singaporean companies can now use carbon credits to offset up to 5 per cent of their liabilities under its national carbon tax regime. That tax currently stands at about S$25 ($18.30) a tonne — a quarter of the price under the EU’s emissions trading scheme — but is set to rise significantly in the next few years.
This means that, unlike most other governments, Singapore has given its companies a real economic incentive to invest in carbon credits. It’s taken a fairly careful approach on which sorts of credits can be used, setting out minimum standards and forming agreements with individual countries on the use of projects in their jurisdictions.
All this, Ricketts argued, was part of a push by Singapore to become “the hub of carbon” — a bet that, despite its current travails, the carbon credit market could become one of real economic significance, and that this entrepreneurial city-state could become its global centre of gravity.
If that is indeed the strategy, GenZero appears to be its financial spearhead. The fund has made a series of investments in carbon credit companies — notably in Climate Impact X, a Singapore-based carbon marketplace. Other investments have included South Pole, one of the largest carbon credit consultancies, and Perennial, which uses machine learning and remote sensing to assess the carbon impact of soil projects.
All these companies have been affected by the headwinds assailing the sector — notably South Pole, which has been embroiled in some of the more high-profile controversies over project quality.
But Teo — along with GenZero’s financial backer, the Singaporean government — is betting that a turnaround in the market will come in due course. The integration of carbon credits in mandatory carbon pricing schemes, as pioneered by Singapore, is one potential driver of demand. Another is a major change in the international rules for airlines: from 2027, nearly all of them will be required to buy carbon credits unless they achieve big emission reductions.
Then there is the long-awaited international carbon trading mechanism that was promised in the text of the 2015 Paris Agreement. At November’s COP29 in Baku, a basic agreement on what credits could be used in this mechanism was hailed by some as a breakthrough, though there remains a huge amount of work to do before that system will be up and running.
All this may sound far too optimistic to the many who see the voluntary carbon market as a busted flush. And unless the market can address the serious concerns that have been raised around quality and integrity , it is highly questionable whether its growth will be beneficial to the global struggle against climate change.
But Singapore clearly thinks this sector is worth a punt, albeit a fairly modest one by the standards of the huge sums deployed by its sovereign investment funds. It’s also an opportunity to strengthen its ties with developing nations around the world, which are home to the bulk of carbon credit projects.
With the clear mandate and stable funding that he’s been given by the government, Teo is able to be far more patient than most investors in this space. “We’re taking a constructive view of carbon markets for the long term,” he told me. “It would be naive to imagine things will be hunky-dory in 2025 or 2026.”
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