Carbon markets: Going once, going twice, sold!

Published on
January 4, 2023
December 8, 2022

Our team just returned a few days ago from visiting clients in Tokyo and one of the key discussion points amongst our (institutional) relationships was carbon markets + where the market is going and access to quality deals. This happens to be right in our wheelhouse as we leverage our global network to support our clients with strategic access to get deals done.

For that reason this week a high-level overview on some interesting developments in market and high level insights on the carbon markets.

Did you know that Saudi Arabia’s Public Investment Fund (PIF) auctioned 1.4 million tons of carbon credits recently? This happened during the 6th edition of the Future Investment Initiative (FII) conference in Riyadh in November 2022.

Carbon markets

International carbon trading markets are not completely new. They have been around since the Kyoto Protocol that was established in 1997. This Protocol is based on the United Nations Framework Convention on Climate Change. It commits industrialized countries and economies to their goals on limiting and reducing greenhouse gases, with individual targets for each country. The Kyoto Protocol places a heavier burden on developed countries who happen to have a bigger chunk of worldwide GHG emissions.

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Even though carbon markets have been around for > 25 years, there has been a renewed interest lately. With the surge of new regional markets, investment appetite is significantly increasing. The market value of global carbon credits in 2021 was with $851 billion, 164% increase vs 2020.

Carbon markets allow investors and corporations to trade both carbon credits and carbon offsets simultaneously. Carbon credits allow entities to emit a certain amount of CO2 or other potent gases and are designed for the purpose of reducing emissions. One credit equals one ton of emissions. A carbon offset is an instrument that represents the reduction of one metric ton of carbon dioxide or GHG emissions.

National carbon markets don’t exist in every country. The United States for example has none, only California has a cap-and-trade program in place. In Saudi Arabia the Public Investment Fund opened their Voluntary Carbon Market late last year.

From mega polluter to Green Kingdom

Saudi is putting efforts in its objective to become NetZero by 2060. In March this year the Kingdom announced The Saudi Green Initiative with the objective to reduce contribution to carbon emissions by > 4% and the commitment to generate 50% of energy from renewables by 2030. In order to achieve this, KSA opened the first renewable energy plant in April and its first wind farm in August. Plans for a $5 billion hydrogen plant are being rolled out as we speak. There's still a lot of work needed to be done, but it's a good start.

The Voluntary Carbon Market (VCM) was initiated by PIF, together with the Saudi Tadawul Group to facilitate the "green" ambition. The VCM provides companies, non-profit organizations, governments, and individuals the opportunity to buy and sell carbon offset credits. The new VCM company, headquartered in Riyadh, will offer guidance to firms and industries in the region on their path towards net zero, and provide them with the best resources.

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As mentioned earlier the mega carbon auction was another initiative to reach Saudi’s sustainability goals. During the 6th edition of the Future Investment Initiative (FII) conference in Riyadh, 1.4 million tons carbon credits were auctioned. A total of 15 firms from Saudi and the rest of the region took part in this auction. Of all the participants, oil giant Saudi Aramco, mining firm Ma’aden, and Olayan Financing Company bought the largest number of carbon credits. Other winning bidders included ENOWA (NEOM subsidiary), ACWA Power Co., Gulf International Bank, SABIC, Saudi National Bank, Saudi Motorsport Co., and Yanbu Cement Co.

The Carbon credits that were auctioned are CORSIA compliant. CORSIA, “Carbon Offsetting and Reduction Scheme for International Aviation”, is the first global market-based measure for sectors. It offers a harmonized way to reduce emissions from international aviation, minimizing market distortion, while respecting the special circumstances and respective capabilities of its members. The pilot of the CORSIA program started in 2021 and will run till 2035. Until now, a number of 115 states and countries are participating.

Another highlight from the FII conference is the announcement by Aramco that they will launch a $1.5 billion fund, managed by Aramco Ventures, to support the global energy transition. The fund targets global investments in support of energy transition and will initially focus on carbon capture and storage, GHG emissions, hydrogen, ammonia, and synthetic fuels.

According to Saudi officials the shift will take decades and will need continuous investments in conventional resources. However, there's a number of climate experts that aren’t convinced when it comes to Saudi’s sustainability approach as the country is still the leading oil producer globally...

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