FinTech for the Future: Meet the world’s best-performing commodity
Carbon credits — a rapidly emerging asset class
The EU started introducing a carbon pricing scheme back in 2005 (calling it the “Emissions Trading System”, or “ETS”). Since then it has been expanded to cover more than 11,000 power stations, industrial plants and airlines, which currently cover around 45% of the EU’s greenhouse gas emissions.
Under this system, a cap is set on the total amount of certain greenhouse gases that can be emitted by installations covered by the system. The cap is reduced over time so that total emissions fall.
Within the cap, companies receive or buy emission allowances (“credits”), which they can trade with one another as needed. The limit on the total number of credits available ensures that they have a value. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances.
After the 2008–09 financial crisis and ensuing recession, a glut of carbon credits built up and led to a permanent oversupply and low prices. This surplus was removed aggressively starting in January 2019, when the EU’s market stability reserve (MSR) came into effect, acting as a “central bank for carbon”.
From a 2017 low of €4.38 a ton they rose more than 500% to an all-time high of €29.46 on July 25th, 2019 (the day when the extreme 2019 summer heatwave in Europe peaked). At the outset of the corona pandemic in March 2020, they lost up to 40% of their value, but then quickly rebounded. Thus, EU carbon allowances have been the world’s top-performing commodity over the past three years.
Carbon credit schemes similar to the EU’s have been introduced in California, South Korea and New Zealand. Pilot schemes are underway in several Chinese provinces.
The EU is planning to introduce “border carbon adjustments” (BCAs), whereby imports from countries without a carbon credit scheme will be taxed based on their carbon intensity. This will add pressure on more countries to introduce such schemes.
Carbon credits is an emerging global asset class. Given the limited space in the atmosphere to store more CO2, carbon credits have scarcity value and will be priced accordingly. Unsurprisingly therefore, investor interest is on the rise.
Emerging asset classes spawn ecosystems of related products, services and enabling technologies. The ecosystem that has developed around cryptocurrencies over the past few years is an apt example.
Startup opportunities around the emerging carbon credit asset class include:
- Tokenization of carbon credits
- Carbon credit exchanges, custody and brokerage
- Carbon credit investment & trading data, indexation
- Investment products based on carbon credits for institutional and retail investors
- Funding of carbon reduction technologies and projects to generate saleable carbon credits
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If you are building a FinTech or InsurTech company helping to Decarbonize our economies, we at CommerzVentures would be happy to hear from you. CommerzVentures is an independent venture capital fund sponsored primarily by Commerzbank Group.
