In the current environment of sustainable investing, we encounter two nearly interchangeable terms: carbon offsets and carbon credits. Both could be thought of as a digital trade against carbon emissions. Of course, digital transformation is a dominant force today in all areas of business and commerce, and as investors, we must recognize and adapt to digitalization as a new classification in a portfolio asset mix. Carbon offsets and carbon credits are key aspects of the digital asset class, as are the hotly debated cryptocurrencies.
Simply stated, when someone buys a carbon offset or credit, CO2 corresponding to that credit or offset is “retired” and cannot be used or sold again. The main difference between the two is that carbon offsets remove greenhouse gases while carbon credits reduce greenhouse gases. Consider a manufacturing plant that discharges pollution into a local river. The offset would be to remove the pollution from the river. The credit would be to pay another manufacturing company to release fewer pollutants into the river so that the level of pollution does not increase. Another example: An airline could purchase carbon credits from a timber project to offset their aircrafts’ fuel consumption during flights.
Another key distinction between the two is that carbon offsets are typically initiated by companies, while governments issue carbon credits. When a company buys a carbon credit from the government, they gain permission to generate one ton of CO2 emissions. If a company makes less pollution than their limit, it can sell the excess credits to other companies that can’t stay within their limits. As such, companies that have been issued maximums but cannot reorganize their operations to accommodate them have to buy carbon credits.
Carbon Offsets in practice: In 2021, JP Morgan made headlines by acquiring timber management company Campbell Global for $500 million with the goal of selling that company’s carbon offsets. In essence, by owning and operating a large tract of timber, J.P. Morgan is essentially pulling or removing CO2 emissions from the atmosphere, creating a carbon offset.
Carbon Credits in practice: Tesla is a prominent player in this field. In 2019, Tesla recorded more than $350 million in carbon credit sales to other automakers. Those Tesla competitors bought from Tesla to meet their regulatory emissions standards. This past year in 2022, Tesla carbon credit sales were up more than 40 percent year over year. Selling carbon credits is not only a profitable venture for Tesla, but has provided a competitive advantage.
A key to both offsets and credits is that a company can effectively reduce emissions even if it does not actually change its processes to eliminate its own emissions.
The need to comply with regulatory emissions standards is an ever-evolving landscape. The potential benefits of sustainable investing from financial, digital, and environmental perspectives will only continue to grow.
1. Sustainable investing -Directs investment capital to companies that seek to combat climate change, environmental destruction, while promoting corporate responsibility.
2. Carbon offsets – a reduction or removal of emissions of carbon dioxide or other greenhouse gases made in order to compensate for emissions made elsewhere. Offsets are measured in tonnes of carbon dioxide-equivalent (CO2e).
3. Carbon credits – a tradable certificate or permit representing the right to emit a set amount of carbon dioxide or the equivalent amount of a different greenhouse gas (tCO2e).
Source: Global Sustainable Investment Review 2020
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