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.

Introducing the Panel Session - Carbon Credits: The Next Financial Instrument

On the 08^th December 2023, I 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 Clmate Change 28^th Conference of Partners (COP28), in the Green Zone, at Expo City, Dubai, United Arab Emirates.  The title of the session is “Carbon Credits: The Next Financial Instrument.” 

The panellists for the session are as follows:

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

2.      Dr. Vincent Lim Boon Heng; Chief Financial Officer, Asia-Pacific; DataLogic

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

According to the OECD Environmental Outlook to 2050: The Consequences of Inaction - Key Facts and Figures, climate crisis is expected to cost the global economy 5.5% of GDP by 2050.  The number varies according to sources, but as of COP21 according to the World Bank, US$23 trillion will be lost in lost GDP output.  At this point, emission reductions are not enough, and the world is looking for alternative solutions.  We need to find a way as a united world to make this work.  For carbon credits to work, we need to consider expanding the compliance market to include high-quality investment-grade carbon offset credits.  Given the recent greenwashing scandals, coupled with the existing rating agencies that are not uniform in their processes, established global financial rating standards need to be set up for carbon credits in both the compliance and voluntary markets. 

All stakeholders should work towards a sustainable framework to create investment-grade, rated carbon credits, so that we can support a secondary market as a source of revenue.  Carbon credit derivatives would generate interest in the trade, create a new class of financial instruments, and attract a new influx of funding.  The capital injection could be the start of the 5^th industrial revolution: a post climate change world.  We need the buy in of the private sector through an appeal to self-interest, not altruism, as we move away from traditional sources of energy into renewables.  One of the fastest ways to achieve this is through a mature carbon trading market. 

Our goal for this session is to provoke a deeper conversation with stakeholders on the need for investment-grade carbon credits, a unified global rating system, and pivoting carbon trading towards high-quality investment-grade offsets.

COP28 Goals & Agenda

From the 30^th November 2023 to the 12^th December 2023, the United Nations Climate Change 28^th Conference of Partners (COP28) will convene at Dubai.  Red Sycamore will be attending.  As President of the Board, and Chief Executive Officer of Equinox GEMTZ, I will be chairing a panel on “Carbon Credits: the Next Financial Instrument”.  Ng Kin Foong, Chief Executive Officer of Red Sycamore, will chair the panel on “ESG & Startups”.  The panels will be in the Green Zone, under IEEE. 

Hopefully, this event will be a milestone and address the contentions raised in previous iterations of this event.  We are past the point of “climate change”, and we should call it what it is: a climate crisis.  We are not meeting our climate goals, and this is the time for us to come together, get on track, and invest in coastal communities, ocean initiatives, and blue carbon.  The Red Sycamore position is that investing in blue carbon credits addresses many other issues such as preserving biodiversity, securing food security, and mitigating salination of water tables.  Blue carbon refers to the carbon stored in coastal and marine ecosystems. 

The intent is for our conversation to build on the developments of the Kunming-Montreal Global Biodiversity Framework.  The Kunming-Montreal Global Biodiversity Framework is a document that was adopted by almost 200 countries at the 15^th Conference of Parties to the UN Convention on Biological Diversity in December 2022.  It is a plan to protect and restore nature by 2050.  The framework includes targets for reducing threats to biodiversity, ensuring that ecosystems are resilient, and enhancing the benefits derived from biodiversity and ecosystems.  It also emphasises the importance of mainstreaming biodiversity across government and society, and the need for adequate financial resources, capacity-building, and technology transfer to implement the framework.  This should be addressed in tandem with the agreement on a new UN High Seas Treaty. 

COP28 is especially significant because we will have our first Global Stocktake (GST).  The GST is a critical process under the Paris Agreement that aims to assess the state of our planet and chart a better course for the future.  It is an inventory of everything related to where the world stands on climate action and support, identifying the gaps, and working together to agree on solutions pathways to 2030 and beyond.  The GST is intended to evaluate progress on climate action at the global level — not the national level — and identify overall gaps to achieve the Paris Agreement as well as opportunities to bridge them.  The first stocktake got underway at COP26 and will conclude at this COP28.  Each stocktake is a two-year process that happens every five years. 

The initial findings of the GST are that there has been limited progress on our climate goals, and significantly more financing, more action, and most importantly more political will, is needed if the world is to meet its Paris targets.  We are so far behind.  COP28 will also look to adopt a framework to implement the Global Goal on Adaptation.  The desire to see progress in the development of funding mechanisms and commitments for addressing Loss and Damage.  The Loss and Damage Fund is a significant focus at COP28.  This fund is intended to compensate vulnerable countries for natural disasters caused by climate change.  The concept of “loss and damage” broadly refers to economic or other losses caused by climate change that go beyond a country’s ability to adapt.  This could include sudden damage caused by extreme weather linked to climate change, or longer-term consequences of sea level rise.  We are hoping to see countries adopt a consensus proposal reached by negotiators earlier, but any country could choose to reopen the issue.  The current consensus relies on compromises on several issues that have divided developed and developing countries. 

The Loss and Damage Fund will be administered at first by the World Bank, and will draw on funding sources including large developing countries as well as the US, the EU, and the UK.  No firm target has been set for how much money the fund will disburse, but countries most affected by the climate crisis hope it will reach hundreds of billions of dollars within a few years.  Regardless, this is still inadequate when projections are that the cost will be in the trillions.  According to the Swiss Re Institute, the impact of climate change could wipe off up to 18% of the GDP of the worldwide economy by 2050, if global temperatures rise by 3.2°C.  The global economy could lose 10% of its total economic value by 2050 due to climate change.  The impact of climate change has been forecasted to be the hardest hit for Asian economies, with a 5.5% impact to GDP in the best-case scenario, and 26.5% impact in a severe scenario.  These projections are based on current trajectories and could change if more aggressive climate action is taken.  It is a reminder of the urgent need for countries around the world to take decisive action to mitigate the impacts of climate change. 

In light of these alarming figures, Red Sycamore wants to use its platform at COP28 to push for the prioritisation of blue carbon solutions, supported by concrete financial commitments and pathways.  There should be significantly scaling of finance commitments and an acceleration of climate finance initiatives to fund mitigation and adaptation actions that support the preservation and restoration of coastal areas within national jurisdictions. 

We also want to advocate for government commitments to new and more ambitious Nationally Determined Contributions (NDCs) and national climate action plans that include the rights of coastal communities.  We need to support these communities in helping to restore the maritime capacity to sequester and store blue carbon.  Seagrasses are marine plants that form dense underwater meadows in coastal areas around the world.  These ecosystems play a crucial role in sequestering carbon and providing various ecological benefits.  Seagrasses are considered one of the most effective blue carbon reservoirs.  Seagrasses, along with mangroves and salt marshes, are important contributors to blue carbon storage. Seagrasses sequesters carbon dioxide (CO²) from the atmosphere and store it in their biomass and in the sediments where they grow.  The carbon sequestration capacity of seagrasses is relatively high compared to other ecosystems.  Seagrasses capture and store carbon in their above-ground and below-ground biomass. The below-ground structures, such as rhizomes and roots, trap organic carbon in the sediment, preventing its release into the atmosphere.  The organic matter produced by seagrasses contributes to the accumulation of carbon in coastal sediments.  This stored carbon can remain locked away for extended periods, acting as a long-term carbon sink. 

Seagrass meadows help stabilise coastal sediments, providing protection against erosion.  This stabilisation helps to maintain the integrity of the carbon-rich sediments and prevents the release of stored carbon into the water.  Seagrass ecosystems are rich in biodiversity, providing habitats for various marine organisms.  The diverse community of organisms in seagrass meadows contributes to the cycling of nutrients and the overall health of the ecosystem.  Although seagrass meadows cover only a small percentage of the ocean floor, they are estimated to be responsible for a disproportionately large share of carbon sequestration in coastal areas.  Seagrass meadows are under threat from various human activities, including coastal development, pollution, and climate change.  When seagrasses are degraded or destroyed, the stored carbon can be released back into the environment.  Recognising the importance of seagrass ecosystems in carbon sequestration, conservation efforts are underway to protect and restore seagrass habitats. These efforts involve sustainable coastal management practices and the establishment of marine protected areas. 

Seagrasses are vital contributors to blue carbon storage, playing a crucial role in mitigating climate change by sequestering carbon in their biomass and sediments.  Protecting and restoring seagrass ecosystems is not only important for carbon sequestration but also for the overall health and resilience of coastal environments.  We need to ensure that the role of coastal blue carbon ecosystems is recognised.  That is why we are pushing for more ESG startups in this area, and the pivot towards the compliance market for the trading of what will eventually be fungible blue carbon credits.  For this to happen, these discussions need to be integrated across UNFCCC negotiations for the mitigation, adaptation, and growth of these initiatives.  This includes a bolstered understanding of financing options for restoration of coastal ecosystem, including through Article 6 of the COP, Article 6 which regulates voluntary cooperation among countries to achieve their NDCs to reducing emissions.  This Article incorporates market mechanisms and non-market approaches, including cooperation in areas such as finance, technology transfer and capacity building.  As an extension for preserving the ocean, we support a moratorium on deep-seabed mining, pending further study on their effects on the environment and the carbon footprint caused from releasing CO₂ sequestered in the seabed. 

In summary, there is much work to be done.  There is much riding on this panel discussion, and how we shape this conversation, and bring it back to Singapore.  To address this climate crisis, to advocate for true sustainability, it is necessary for us to save the oceans, because that is the key to our continued quality of life.