“Scale”: The False Cognates

False cognates are pairs of words, from two different languages, where both words appear to be spelled and pronounced similarly, giving the impression they share the same meaning.  However, their meanings are not similar at all.  For example, as written elsewhere, in a case of linguistic convergent evolution, the English words “scale”, “scale”, and “scale” are all false cognates of each other. 

Example 1

“Scale” is a noun.  The plural noun is “scales”.  A “scale” refers to each of the small, thin horny or bony plates protecting the skin of fish and reptiles, typically overlapping one another.  It may also refer to a thick, dry flake of skin, or a rudimentary leaf, feather, or bract, or each of numerous microscopic structures covering the wings of butterflies and moths.  A “scale” may also be a flaky covering or deposit, a white deposit formed in a kettle, boiler, and so forth, by the evaporation of water containing lime.  It may also refer to a coating of oxide formed on heated metal. 

In such a case, “scale” can be a verb.  The 3^rd person present is “scales”; the past tense is “scaled”; the past participle is also “scaled”; and the gerund or present participle is “scaling”.  To “scale” is to remove scale or scales from something, or a surface. 

“Scale” originated from Middle English, a shortening of Old French “escale”, from the Germanic base of “scale”. 

Example 2

“Scale” is a noun.  The plural noun is “scales”; but if the noun is “pair of scales”, then the plural noun is “pairs of scales”.  A “scale” refers to an instrument for weighing, originally a simple balance, a pair of scales, but now usually a device with an electronic or other internal weighing mechanism. 

“Scale” originated from Middle English, in the sense of “drinking cup”, from Old Norse, “skál”, “bowl”, of Germanic origin, and related to Dutch, “schaal”; German, “Schale”; both meaning “bowl”. 

Example 3

“Scale” is a noun.  The plural noun is “scales”.  If, for example, the noun is “scale of notation”, then the plural noun is “scales of notation”.  A “scale” refers to a graduated range of values forming a standard system for measuring or grading something.  It may also refer to the full range of different levels of people or things, from lowest to highest, a series of marks at regular intervals in a line used in measuring something, a device having a series of marks at regular intervals for measuring, or a rule determining the distances between marks on a scale. 

A “scale” may also refer to the relative size or extent of something, or a ratio of size in a map, model, drawing, or plan.  In music, “scale” refers to an arrangement of the notes in any system of music in ascending or descending order of pitch, or the exercise of performing the notes of one or more scales as a form of practice by a singer or musician.  In mathematics, “scale” refers to a system of numerical notation in which the value of a digit depends upon its position in the number, successive positions representing successive powers of a fixed base.  In photography, “scale” refers to the range of exposures over which a photographic material will give an acceptable variation in density. 

In such a case, “scale” can be a verb.  The 3^rd person present is “scales”; the past tense is “scaled”; the past participle is also “scaled”; and the gerund or present participle is “scaling”.  To “scale” is to climb up or over something high and steep, and to represent in proportional dimensions; reduce or increase in size according to a common scale, such as of a quantity or property, variable according to a particular scale. 

“Scale” originated from late Middle English, from Latin “scala”, “ladder”; the verb via Old French, “escaler”, or medieval Latin, “scalare”, “climb”; from the base of Latin, “scandere”, “to climb”. 

English has three “scales”, from Old French, from Old German, and from Latin.  They are unrelated to each other, but came into modern English, sharing the same rules of grammar, giving us the same forms of the noun and verb.

The Difference between Being Correct & Sounding Correct

Any interaction is a negotiation, and any negotiation is about the power dynamics of interaction.  Being correct does not get you anywhere.  Sounding correct does.  Being correct and sounding correct guarantees success. Knowing when to merely sound correct, and when to be correct and sound correct, is what makes you influential.  It is not what you say, it is what they hear.  Do this well, and you can sell any person anything, and convince them it was their idea in the first place.

Economic Outlook for 2024

The following are some thoughts about the market outlook for the first quarter, 2024.  I am quietly optimistic that we are looking at the start of a long-term recovery after the challenges of the last few years.  At the very least, we have seen off the worst of the high inflationary environment brought about by the confluence of events, such as the logistics bottleneck at the supply side, the concerns about the war in Ukraine and the aftereffects of the pandemic. 

J.P. Morgan’s Global Investment Strategy Group (GIS) believes the US economy could see a growth slowdown in the first half of 2024.  However, it will likely avoid a recession this year.  As it is, the expected recession of 2023 never materialised.  The higher bond yields and the reasonable stock valuations mean that forward-looking returns look more promising than they have been in more than a decade.  The lower likelihood of an economic downturn bodes well for your investment portfolio going into the new year.  As the market consolidates, we are going to see market growth in the 2^nd half of the year. I think it unlikely, because of the presidential cycle.  Politics is still the major driver of economic uncertainty in 2024.  This includes the US presidential election which could have unpredictable consequences for geopolitics, trade, and the wars in Ukraine and the Mideast. 

The reduced risk of a recession is just one element in a shifting financial landscape.  Emerging from the pandemic over the past few years, the markets experienced a historic increase in bond yields.  It is critical to recognise of the impact of higher interest rates.  There is a shrinking gap between job openings and unemployed workers in the US.  The cooldown in US wage growth to less than 5% from a peak over 7% suggest that the Federal Reserve is making progress in its fight to reduce inflation. 

It is estimated that the Federal Reserve could start cutting interest rates sometime in the second half of 2024.  If the rate cuts come in response to normalised inflation rather than a recession, the cutting cycle will likely be slower than during the early 2000s, Great Financial Crisis (GFC) and pandemic.  US inflation has fallen to between 3.5% and 4% on an annual basis, down from its highs of over 8% in the summer of 2022.  Inflation is expected to continue declining towards the Federal Reserves’ target, likely settling between 2% and 2.5%.  The normalised labour market, and lower impact of energy price swings on the overall price basket should help keep inflation in check. 

In March, the FDIC took over Silicon Valley Bank after it experienced a classic bank run.  Higher interest rates made its bond portfolio less valuable, threatening its balance sheet and spooking its customers.  Signature Bank and First Republic failed shortly thereafter.  Higher interest rates have been working their way through the economy, denting the balance sheets of bondholders, and raising the cost of borrowing.  This is also an indictment of the poor US regulatory framework, allowing banks to put so much of their reserves in long-term bonds, and not diversify.  This lack of liquidity caused the collapse more than the market conditions.  Corporate bankruptcies rose sharply in the US, in 2023, but are still well below the highs of the GFC.  Again, it was a liquidity issue. 

However, there are still several inflationary pressure points to consider.  Industrial policy and the transition to clean energy could support higher commodity prices.  We need to consider the impact of the carbon tax, which will drive prices of some sectors up.  GIS also predicts a challenging macro backdrop for equity markets in 2024, due to sluggish growth and stubborn inflation.  They estimate S&P 500 earnings growth of 2% to3%, and a price target of 4,200, with a downside bias.  GIS expects U. and global growth to slow by the end of 2024, since geopolitical risks remain high, and equity volatility is expected to generally trade higher in 2024 than in 2023.  Meanwhile, the US continues to command a quality premium over other markets, given its sector composition and cash-rich mega-capitalisation stocks. 

GIS foresees a bumpy start to the year is expected for Emerging Markets given high rates, geopolitical developments, and lasting US dollar strength considering the aforementioned geopolitical tensions. However, Emerging Markets should become more attractive through 2024 on Emerging Markets -Developed Market growth divergence, demand for diversification away from the US, and low investor positioning. 

BlackRock sees quality stocks in a strong relative position as the rate hikes end.  The greater market breadth is creating stock-picking opportunities.  BlackRock’s overall strategy is to retains focus on quality and lower-beta equities, because they sees attractive stock selection opportunities in 2024 amid a Federal Reserve pause and outlook for broadening market breadth. 

Goldman Sachs Research’s baseline assumption is that the US economy continues to expand at a modest pace and avoid a recession.  They project an earnings rise by 5%, and the valuation of the equity market equals 18x, close to the current P/E level.  They expect the Federal Reserve has finished its hiking cycle and Treasury yields have peaked.  They forecast most of these ownership categories will be net sellers of stocks in 2024. They expect positive returns to equities, but a 5% return risk-free in cash remains a competitive alternative. 

GIS believes the Federal Reserve’s dovish pivot has tipped the odds away from recession and toward a soft landing.  The sub trend growth is now the base case probability at 60%, and they have dropped the likelihood of Recession to 25%.  They favour the higher yielding credit sectors of the bond market: corporate bonds and securitised bonds, including agency pass-throughs, non-agency commercial mortgage-backed securities and short-duration securitised credit. 

Morgan Stanley contends investors need to pay close attention to monetary policy if they want to avoid a variety of potential pitfalls and find opportunities in a cooling but still-too-high inflation and slowing global growth.  2024 should be a good year for income investing, with Morgan Stanley Research strategists calling bright spots in high-quality fixed income and government bonds in developed markets, among other areas. 

Following interest rate hikes by central banks, global inflation has moderated from a peak of close to 10% in mid-2022 to a current pace of less than 5%.  While geopolitics and energy prices pose a risk, we see more gravity weighing down inflation than buoyancy pushing it up.  Higher yields have also been a headwind to the broad global economy.  As such, global multi-asset portfolios have not gained much ground since November 2020, and investment-grade debt has posted negative total returns for three years in a row.  High rates may be beneficial in some ways, but there has been relatively underwhelming returns in global portfolios as a result. 

Other themes for 2024 include a potential boost in productivity from artificial intelligence (AI) and governments incentivising politically important industries.  The US is amidst a presidential primary.  It is in the interest of the incumbent administration of President Joseph Robinette Biden Jr., to roll out initiatives to grow the economy.  The Bipartisan Infrastructure Bill, CHIPS Act and Inflation Reduction Act have contributed to an unprecedented surge in manufacturing construction over the past two years.  We will be better placed to assess how successful they have been this year.  Artificial intelligence (AI) may see a potential boost in productivity, with governments incentivising certain industries like financials, airlines and healthcare.  Governments around the globe are also incentivising investments in important areas like national security, the energy transition, semiconductors, infrastructure, supply chains, and anything exposed to climate change. 

The higher interest rates mean bonds are now as competitive with stocks as they have been since before the GFC.  US aggregate bonds should deliver 5%-plus returns over the next 10-15 years with just a quarter of the volatility of large-capitalisation stocks.  Because of the added volatility, US large-capitalisation stocks should reward investors with returns of 7% over the same time frame.  For conservative investors, in order to lower downside risk, and limit the range of potential outcomes, I suggest a shift towards more bond exposure.  However, for those aiming to maximise upside potential, they should keep their portfolio tilted toward equity. 

In a higher-yield environment, some of you might be considering cash and money market, while waiting for better opportunities later.  However, cash is expected to underperform most asset classes in 2024.  We must consider currency and interest rate exposure for global portfolios. 

Looking at China, while many expected a surge in consumer spending and a big spike in oil prices, once China eased travel restrictions, this did not happen.  For one, there is the trade conflict with the US.  The Chinese government is also adjusting the economy by balancing GDP away from the real estate sector, which once stood at almost 30% of GDP, and by curbing other industries  such as tuition.  These are wise measures for long-term growth, but the result is short-term pain.  Otherwise, Chinese growth would not be sustainable. 

China is pivoting to investing in levels of manufacturing capacity to seize a long-term strategic advantage.  This includes electric cars, batteries, solar panels, renewable energy developments, high-end manufacturing, precision engineering, and metallurgy.  China is no longer the factory of the world for mass-produced goods only.  We should expect disruption in the short-term, but substantial long-term growth. 

Asia is expected to account for 60% of global GDP growth in 2024.  Despite the higher risk attached to geopolitics and China’s economy, it remains the main region for growth opportunities.  Bangladesh, and ASEAN are likely to see accelerated growth in the medium term.  The anticipated robust growth and a relatively promising outlook in Asia could present attractive potential for discerning investors in 2024.  A significant theme is the potential for disruptive technological innovation, providing investors with rewarding and untapped opportunities in companies well positioned to benefit from ongoing transformations.  Asia’s continued strong growth momentum and relatively promising outlook should provide attractive potential for selective equity investors in 2024. 

Goldman Sachs Research predicts a resurgence in the Japanese equity market in 2024, driven by robust global economic growth and reforms in the stock market.  The TOPIX, a gauge of Japanese stocks, is expected to climb by about 13%, reaching 2650 by the conclusion of 2024. 

In summary, after considering the various factors, and reading the extent economic reports, I personally recommend a slight overweigh on US equity and bond in the near-term, before reviewing at the start of the 3^rd Quarter.  Areas of growth include healthcare, and technology.  East Asia and Southeast Asia remain important growth regions, and still look good for long-term investment.

The Challenge of Making Carbon Credits Fungible

Fungibility refers to the property of a good or asset where individual units are interchangeable and indistinguishable.  In other words, each unit of a fungible asset is considered identical and can be exchanged or replaced with another unit of the same asset without any loss of value or change in quality.  Examples of fungible assets include money, commodities, and certain financial instruments.  In the case of money, a specific unit of currency, such as a dollar bill or a digital currency unit, is fungible because any unit of the same denomination is equal in value and can be used interchangeably.  Similarly, commodities like gold or oil are often considered fungible because each unit of the same type and grade is interchangeable with any other unit of the same type and grade. 

Fungibility is a key concept in economics and finance, as it simplifies transactions and facilitates the liquidity and trade of assets in markets.  Non-fungible assets, on the other hand, are unique and not interchangeable with other units.  Real estate, collectibles, and certain types of intellectual property are examples of non-fungible assets.  Fungibility is lacking in the carbon markets, even across compliance exchanges.  For the carbon market to move to next level, and be a distinct commodity to be traded and consumed, this is a necessity.  Just like in the commodities market, for it to function, the market must have confidence that all producers are working within the same regulatory framework, to the same standard, such that the market can reliably value all carbon credits of the same category to the same value, regardless of geographic origin.  There must also be enough of the market for there to be liquidity. 

The basis of the market is a carbon offset credit, or simply a carbon credit.  A carbon offset credit is a tradable certificate representing the reduction, the removal, or the avoidance of production, of one metric ton of carbon dioxide (CO₂) or its equivalent in other greenhouse gas emissions.  It is called CO₂e.  The intent is to mitigate climate change by incentivising and by financing projects that reduce or offset greenhouse gas emissions.  There are, broadly, two kinds of markets: the voluntary and the compliance.  Voluntary carbon credits do not meet the verification and validation requirements to be considered a financial instrument.  The key to the commodification of carbon credits is found in the compliance market. 

While I may refer to carbon credits as a commodity and a financial instrument, a financial instrument and a commodity are distinct concepts, but there can be overlap in certain situations.  A financial instrument is a broad term that refers to various contracts or assets whose value is derived from an underlying asset, index, rate, or instrument.  It represents a tradable asset that has monetary value.  Examples of financial instruments include stocks, bonds, derivatives such as options and futures contracts, currencies, and various investment funds. 

A commodity, on the other hand, is a raw material or primary agricultural product that is traded on an exchange.  Commodities are typically standardised and interchangeable with other goods of the same type.  Examples of commodities include gold, silver, oil, natural gas, agricultural products, and base metals. 

Financial instruments can be linked to commodities in certain cases. For instance, financial instruments like futures and options contracts can be based on the value of commodities.  Traders and investors use these derivatives to speculate on or hedge against price movements in commodities.  Some financial instruments are specifically designed to track the performance of a commodity or a basket of commodities.  Exchange-traded funds (ETFs) and commodity-linked notes are examples of such instruments. 

A financial instrument is a broader category that encompasses various tradable assets, while a commodity specifically refers to raw materials or primary agricultural products.  However, financial instruments can be created based on the value of commodities, allowing investors to gain exposure to commodity price movements or manage related risks.  In the case of carbon credits, it can become a commodity, and because of the nature of the contracts, and the possible derivatives, it can become a financial instrument. 

At the moment, however, there are key differences between the commodities markets and the carbon markets.  For example, commodities have defined rules on standards and regulations that must be adhered to.  The carbon markets lack that.  The standards are evolving, and there are different levels of credibility in the different markets.  This explains why the EU ETS alone takes up more than 90% of all the compliance carbon markets, despite there being around 30 such markets. 

Commodities are abundant enough that while changes in supply and demand will influence price, there is still liquidity in the market.  That is not the reality with carbon credits.  In fact, as we push towards a more stringent compliance regime, to pave the way for rated carbon credits, we will face an initial shortage oof such carbon credits because there are not enough compliance credits to meet the expected exponential rise in demand due to the implementation of the carbon tax globally. 

While we may refer to carbon credits a commodity, commodities are generally raw materials that may be consumed to produce finished products.  The commodity itself is a physical product.  That product may be tested, assessed, and validated, which creates confidence in its fungibility.  Carbon credits are smart contracts, sometimes on a blockchain.  They are intangible products based on a physical asset, the carbon sink.  It is because of this intangibility that the market confidence for carbon credits can only be based on the stringent compliance standards and regulatory framework.  It is this point that precludes voluntary credits from being considered either a viable commodity or a financial instrument. 

The intangibility of carbon credits is what feeds the inherent uncertainty of the product.  This is what needs to be addressed.  Analysts, experts, and market observers have advanced the idea that carbon credits are like bonds.  This is a conceptual comparison, an analogy used to highlight certain financial characteristics that carbon credits and bonds may share, such as tradability, market value, and the potential for generating returns. 

Like bonds, carbon credits can be bought and sold in markets, and their value can be influenced by supply and demand dynamics.  Both financial instruments have the potential to provide financial benefits, although the mechanisms through which they do so differ.  This leads to the debate whether carbon credits should be treated more like bonds.  This implies that market underpinnings such as ratings, compliance standards, regulatory audits, and insurance drive pricing and risk scoring.  They differ in significant areas.  Bonds represent debt issued by governments, municipalities, or corporations.  When an investor buys a bond, they are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity. 

Investors in bonds receive periodic interest payments as income, and they are typically repaid the principal amount at maturity.  Carbon credits do not generate periodic income.  Their value is associated with their ability to offset or reduce greenhouse gas emissions.  Bonds are issued by governments, municipalities, or corporations to raise capital.  The issuer has an obligation to repay the principal amount and make interest payments according to the bond’s terms.  Carbon credits are generated by projects that reduce or offset emissions.  The entities undertaking these projects may sell the credits to generate revenue, but there is not a direct obligation to repay a principal amount as with bonds. 

In any case, whether we consider carbon credits a commodity or financial instrument or both, a key contention is the lack of trust in the quality of the carbon credits, and the associated reputational risk for buyers and investors.  Buyers and investors are forced to conduct extensive amounts of due diligence prior to executing any carbon credit transaction, which adds to cost.  Because of this variance in due diligence in the absence o framework, there is no fungibility.  There is also the challenge for buyers to align their due diligence requirements to wider message on net zero strategies, and Sustainable Development Goals (SDGs).  In the course of this, there is a lack of understanding, in many quarters, on the differences between reduction carbon credits, avoidance carbon credits and removal carbon credits. 

There are specific areas that need to be addressed, as we work towards fungibility in the carbon market.  We cannot achieve fungibility for all compliance carbon offset credits, but we can have fungibility within classes.  That means we have to class them according to type of project.  These include cookstove offsets, renewables, afforestation, reforestation, biochar, peatland, direct air capture, and green and blue sequestration, among others.  Some of these types are not suitable for the compliance market.  For example, cookstove offset projects are responsible for millions of junk credits. 

As part of the verification and validation process, we need to consider location, because that has a direct correlation to credibility.  From location, we can consider political risk, regulatory risk, local community engagement, benefit-sharing, relevance to buyer’s business; geological risk such as natural disaster, corruption, and even project viability.  This is especially important when we see this in light of the SSGs. 

In summary, we need to identify the types of carbon credits for the compliance market before we create a regulatory framework that encompasses the points of contention to be addressed.  We need to identify, qualify and quantify the risks.  We need a wide variety of strategic partners from regulators to central banks to project owners to buyers before traction can be achieved.  From this, we need to work towards a rating system for carbon credits, so that they can be rated, and eventually made investment-grade.  When we have that, we can apply for carbon credits to be recognised as financial instruments by elect central banks, and made fungible.

The Next Step for Carbon Credits

The following is the original draft of the article written for the Business Times, by Ng Kin Foong, Chief Executive Officer of Red Sycamore and I.  The article was polished by Gwen Wanda Ling Poon Wah, Communications Director of ADK Connect Singapore Pte. Ltd.  She was invaluable in getting the article to print. 

Twenty-six years after the Kyoto Protocol, efforts to end global climate change have been slow, because it is expensive, and politically unpopular.  Bloomberg’s green-energy research team estimated, in July 2023, that the cost of achieving a net-zero world would cost US$196 trillion in investments by 2050.  Governments have prioritised immediate concerns such as rising food costs and combating inflation over combating the climate crisis and meeting net zero targets.  As a result, climate commitments have not been kept, and we are experiencing the tragedy of the commons while facing an existential crisis. 

How then should the world move towards halting the climate crisis?  Enter carbon credits.  The clean development mechanism framework designed carbon credits to incentivise developing nations to protect the environment while pursuing economic growth.  The intent is to create a win-win model for saving the environment without short changing developing countries.  The premise of carbon credits is conceptually sound, but many feel that the implementation of carbon credits has been beset with problems. 

In recent months, the media has been awash with bad news on voluntary carbon credits, with hundreds of millions of dollars’ worth of credits generated from environmental projects being invalidated.  Detractors say that projects set up for creating carbon credits are often based on vague predictions, can cause community conflicts, and do not create additional climate benefits.  Yet, this does not recognise the reversed Greenhouse Gas (GHG) effect of such projects on the climate and its benefits.  The world still needs carbon credits, and proponents of carbon credits are still pushing for it.  After all, carbon credits are a vital part of the strategy to mitigate the growth in GHG that comes from economic development, incentivising businesses to adopt environmentally sustainable practices that save the environment.  Governments implement a carbon tax for companies that are heavy polluters, forcing them either to purchase carbon credits, reduce their GHG emissions, or pay hefty fines.  This compels companies to reduce their carbon footprint and helps those with greener processes become more competitive. 

Then why are governments not implementing carbon credit systems globally?  According to the National Climate Change Secretariat Singapore, only 47 countries have national jurisdictions with carbon pricing, or compliance markets. Countries are reluctant to implement carbon taxes amidst the current global economic climate of inflation, as the cost of business passes on to consumers.  As the world grapples with the more urgent concerns of keeping food affordable and keeping inflation manageable, implementing a carbon regime has taken a back foot, slowing down the investments in carbon initiatives and delaying legislation. 

To make things more complicated, countries worldwide do not have a unified carbon system.  This creates uncertainty, especially amongst companies which operate across national jurisdictions.  How can they partake in the carbon credit system if they do not have clarity?  To illustrate this point, shipping companies prefer to buy blue carbon credits locally as their business impacts the ocean where they sail.  Yet, if they sail between Europe and Singapore, where should their blue credits come from?  The lack of good projects with strict regulatory oversight across the jurisdictions where these companies operate definitely hinders the development of the private market for carbon credits. 

If governments are moving slowly, why does the private sector not step up?  With the lack of information, consensus, and clarity of the international community on the processes that create carbon credits, voluntary market development has been hampered by bad quality credits, poor regulatory oversight, and a lack of credit fungibility across jurisdictions.  For example, Verra, the world’s largest carbon credit certification company certifying 75% of all carbon offset credits in the market, was forced to invalidate billions of dollars’ worth of credits after an investigation by the Guardian and other agencies in January earlier this year.  Until these challenges are addressed, investment will not pour into carbon projects from the private sector. 

Yet, this does not mean carbon credits do not work.  These challenges faced by the carbon credits market are neither new nor unforeseen.  New financial mechanisms are often introduced voluntarily to gauge market reaction and its effects before legislation comes in to protect investors.  These legislated products then become the new standard from which the market develops.  Likewise, the development of the carbon framework is currently underway, and is far more important than many realise.  If we do not implement the carbon regimes properly, the entire carbon credit system will be discredited before it even has a chance to mature. 

New Carbon Exchange Mechanism Needed

What can we expect moving forward?  With more illuminating information gleaned from scientific research and best practices in ESG projects, regulations are expected to tighten while carbon credits evolve into financial instruments.  Carbon credits generated from such projects will be rated based on the project’s impact on both the planet and the people within the communities residing near the project, and those with the highest ratings will command the highest prices.  When we have investment-grade carbon credits, we will see the development of a secondary market to trade those carbon credits.  That means we will have investment-grade credits on a blockchain, futures, options, even ETFs.  A carbon credit, as an asset class, will generate the sort of revenue to fund the actions to fight climate change.  They will be the new standard, as voluntary credits become niche. 

For this to work, we need to see a new carbon exchange mechanism.  Currently, carbon credits are not fungible across the different jurisdictions due to a lack of consensus within the international community on the regulatory framework.  This discussion requires partners from the private sector, and private funders.  What we need right now is a deeper discussion on this, and a framework in place to move towards these investment-grade carbon credits.  Fortunately, finance is one of the themes that will be discussed at COP28 in Dubai in December.  We will expect to see a tightening of regulatory requirements, a single or unified verification and validation authority, and one unified international standard to lay the groundwork for this mechanism.  Moving in this direction also addresses accusations of greenwashing that plague many voluntary carbon projects, as the tighter regulations prevent a false declaration of value for each project.  At any rate, the certainty that investment-grade credits provide will incentivise the creation of good offset projects that benefit the environment, which is better than not having any offset projects at all. This will also create certainty for investors and catalyse the private sector to finance good projects, moving us closer to reaching our net-zero targets. 

As the market matures, the other argument that abatement is better than offsets will be resolved as different asset classes are created for different types of credits, with the pricing mechanism determining the value of different types of credits generated.  Credits are currently priced based on reliability, impact and cost, which can be made fungible across carbon credit classes.  To curb speculation, governments can give tax rebates to smaller firms in key affected industries, and regulate access to the market, slowing down price inflation caused by carbon taxation and protecting smaller firms. 

The inflationary impact of carbon taxes on the economy is inevitable, but this pales when compared to the cost of climate change.  According to Deloitte, inaction on climate change will cost the world US$178 trillion by 2070.  This must have spurred the European Union to launch the pilot phase of the Carbon Border Adjustment Mechanism, a scheme that will tax carbon-intensive goods imported from outside the bloc, on from 01^st October 2023. 

Implementing carbon taxes and the carbon credit system acts as an insurance policy for the future, because not having it costs way more.  The world is already losing arable land for food production from the USA to Australia, biodiversity in oceans and forests, and natural disasters are becoming more severe from Libya to Canada.  If we do not go green, the world will burn.  The only way we can stop this climate crisis is to have conversations, collaboration, and commitment to international climate goals. 

If handled properly, carbon credits might just be the catalyst for the 5^th industrial revolution: the carbon credit revolution.  

This article is contributed by Terence Nunis, Chief Executive Officer of Equinox GEMTZ, a strategic consultancy, and Kin Ng, Chief Executive Officer of Red Sycamore, which establishes carbon sinks for the creation of investment-grade blue carbon credits.  Both Terence Nunis and Kin Ng will be speaking at the upcoming COP28 in Dubai. 

Note: Essentially, carbon credits are certificates allowing the holder to emit a certain amount of carbon dioxide or other greenhouse gases.  One credit permits the emission of a mass equal to one ton of carbon dioxide.  With the market mechanisms on carbon credits agreed through the Marrakesh Accords, the goal was to limit the increase of carbon dioxide emission by incentivising companies and nations to curb their emissions.  Total annual emissions are capped, and the market allocates a monetary value to any shortfall through trading via an exchange, or through private placement or auctions. 

The original article may be found here: https://www.businesstimes.com.sg/opinion-features/next-step-carbon-credits.

COP28 Warm Up Event: “Taking Sustainability to the Next Level”

On Tuesday, 31^st October 2023, Red Sycamore, in collaboration with Think & Grow held an exclusive panel discussion at the Mandala Club.  The panel title was “Taking Sustainability to the Next Level”. 

The carbon market is evolving rapidly.  There are contentions on the direction the market should take, in accordance to the UN Framework Convention for Climate Change, and the various protocols and treaties.  The regulatory framework is playing catch up to the realities on the ground.  All this constitutes a massive grey market of opportunity for startups.  The panel aims to explore some of the opportunities at length, and tap on the experience of the panel.  It is possible to fight this climate crisis as well as make a return.  This was a summary by Ng Kin Foong, Chief Executive Officer, Red Sycamore. 

The Panellists

De’Angelo Harris (Moderator); Partner; Think & Grow

Eric Tanoto; Chief Executive Officer; USP Group

Tali Goldman; Founder & Managing Director; Market for Good

Terence Kenneth John Nunis; President; Red Sycamore

Introducing the Panel Session - ESG & Startups

On the 07^th December 2023, Ng Kin Foong, our Chief Executive Officer for Red Sycamore, will chair a panel discussion for the Institute of Electrical & Electronic Engineers GreenTech, Sustainability, & Net Zero Policies & Practices Symposium.  This is a programme in alignment with the United Nations Climate Change 28^th Conference of Partners (COP28), in the Green Zone, at Expo City, Dubai, United Arab Emirates.  The title of the session is “ESG & Startups.” 

The panellists for the session are as follows:

David Chen C. Y.; Chief Executive Officer; AgriG8

De’Angello Harris; Partner; Think & Gro

Dr. Victor Tay; Group Chief Executive Officer; RHT Consulting Asia 

The climate crisis is real, and several government and large multinational corporations worldwide have declared that they will be unable to meet their pledges.  Given that the top-down approach to solving climate crisis is not working as intended, we need to democratize the process by encouraging and enabling more people to be active stakeholders in solving the climate crisis, and explore this blue ocean of opportunity.  Many great ideas and solutions die undiscovered for several reasons.  These reasons include lack of funding, the lack of public acceptance because it runs contrary to common convention, or simply being too far ahead or behind the curve due to the rapid rate of technological advancement.  We need new perspectives from all stakeholders, not just those with access to resources. 

Yet, in the push towards renewables and saving the environment, we often fall short on the social aspect. Lithium batteries are championed for their role in EVs, but the outcomes on the people impacted by lithium mining have been discounted. If such climate initiatives negatively impact peoples’ livelihoods and health, we will lose support from people in the conversation to avert the climate crisis, especially from people on the ground. 

Our goal for this session to for us to have a discussion to arrive at more perspectives for all stakeholders to address problems of climate crisis by democratising the process of looking for solutions.  People need to be sufficiently excited by the opportunity to change the world for the better.  What we should address includes the uncertain international regulatory environment, political interference, and siloed economic agendas hampering funding efforts, as well as the social aspect of environmental initiatives.