The war in Ukraine has sent shockwaves across markets around the globe, including the voluntary carbon markets. But the fundamentals remain extremely bullish for carbon as an asset class. Justin Cochrane from The Oregon Group explains where the carbon credits are currently headed and what investors should be thinking about.
“We’re probably even still just warming up into what is going to be a carbon market that is around for decades and decades and decades. And, frankly, it’s probably the asset class of our generation, our kids generation and beyond.”
Justin Cochrane, The Oregon Group.
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Transcription
Presenter / 0:09
Welcome to the Oregon Group podcast. We at the Oregon Group are big fans of anything related to climate transition, the greening of global energy and transportation, environmental commodities and, of course, carbon credits. And its carbon credits that we’re here to focus on today, specifically by asking some tough questions about the prospects for this relatively young but popular asset class. Here to answer those questions is one of our co founders, Justin Cochran. Now, by way of introduction, Justin was a high-flyer in the investment banking world before jumping the fence to found and run public companies in the natural resource space. He is raised over $2 billion for various commodities businesses over the years and what makes him perfect for diving right into the heart of the carbon credit sector is that he’s the co founder and CEO of Carbon Streaming Corp. Justin before I get into the hard questions, let me start with this. You’ve gone from success to success as an investor, why did you choose to get into carbon credits?
Justin Cochrane / 1:01
That is a wonderful question. Why carbon credits carbon credits because we just saw a wholesale movement from individuals, from investors, from companies and corporations, from governments, around recognizing climate change was a real issue. And the best way, in my opinion, in order to really have a transformational impact on fighting climate change is access to capital and access to the funds needed to invest in these climate fighting, climate projects around the world. Carbon credits, frankly, is the only way that we can really put a price on carbon emission and expresses a view on pollution and on helping to fight pollution. And, it just was, there was no public company doing this at the time. We saw an opportunity to launch a carbon credits investment company focused on voluntary projects and it’s been extraordinarily well received.
Presenter / 2:07
Okay, let’s start things off. If we were talking six months ago, I’m not sure I’d have any tough questions to ask you because with carbon credits the story was basically growth, growth and more growth. But here we are in spring 2022 and the most obvious question for me to ask is: what has happened to carbon credit pricing?
Justin Cochrane / 2:24
Well, we really saw when Russia invaded Ukraine was what I would call just, you know, a risk off appetite in the market and given that carbon credits is still certainly from a North American perspective considered a relatively new asset class. We saw a pretty dramatic decrease in the price of carbon credits, both in compliance markets and regulated markets around the world and in the voluntary carbon offsets where Carbon Streaming is primarily transacting. So there was a fairly significant reduction in the neighborhood of 30% to 40% immediately in that sort of risk off mode, I would say. Now we’ve seen those prices recover most of their losses wedding night might now be down 50% to 20% from their peaks, but nowhere near the the eye of the storm that we saw you know, a few months ago, still extremely bullish on the long term fundamentals for carbon as an asset
Presenter / 3:26
You point to the fact that we’ve had a strong but still incomplete recovery. When do you think we’re going to see prices returned to their former highs and in fact when are we going to surpass those levels? How high do you think prices could eventually reach?
Justin Cochrane / 3:39
When you look at the analysis around around the world that’s done by several independent organizations in terms of what carbon price is needed to effect the change that needs to come about in order to reduce global emissions by 50% by the end of this decade. I mean, that’s a massive, massive undertaking, remembering that it took us 35, almost 35 years to double emissions up to you know, over 50 billion tons today. To cut that in half by the end of this decade is a massive, massive undertaking. So the expectation is the average voluntary carbon price needs to be close to $100 a credit to build up the incentives to develop projects and reduce emissions. That is up from an average price today that’s probably close to around $10. And so really a massive, massive increase. It’s forecasted by the end of this decade to meet the global demand and provide the incentive to reduce emissions. What I love about this commodity is that price is being regulated around the world such that we do achieve those kinds of prices and we do reduce global emissions. And of course, you know, almost 200 countries around the world have signed up to the Paris Agreement commitments to reduce emissions and putting a price on carbon is the best way to do that.
Presenter / 5:03
Let’s get into perception. Every industry has its pros and cons, its fans, its haters. What strange to me is this: carbon credits are a pretty simple concept. And they work. I mean, this is a sector that is deploying corporate wealth to combat climate change. And sure there’s always going to be some bad actors, but the world doesn’t have a lot of time here. We need to deal with emissions like carbon and we need to do it now. Yet every so often another negative piece crops up in the media. So why does the carbon sector still have a challenge with perception?
Justin Cochrane / 5:34
The biggest reason why I believe there’s still a challenge from a reputational standpoint for carbon is twofold. The first one, probably most relevant one, in the early days of the carbon market going back about 15 years ago, there were certain conservation projects that issued carbon credits that never should have issued carbon credits. Either years later, they were eventually deforested or projects that were never under any threat of deforestation, issuing carbon credits. And so there was this quality concern from the buyers and investors standpoint of how do I know if I buy a carbon credit that it’s real, verifiable, permanent, and this concept of additionality, real additional carbon credits of what would have happened in a base case scenario. The rules around issuing carbon credits have gotten much more vigorous. It’s much harder to get a carbon credit issued today than it was 15 years ago in there by the quality of the projects that are issuing the credits and the credits that are now issued, I would argue are significantly higher quality now than they were in the early days. But the market still, you know, has some lasting impacts from from those earlier days in the carbon market. So that’s one. The second one is this view which I don’t completely understand but I you know, let me the share the view, which is that allowing for corporations to buy carbon offsets rather than than absolutely requiring an end to all emissions is a way of what people call corporate greenwashing, you know, allowing a polluter to continue to pollute, while, they buy a carbon offset, and where that argument completely falls apart is that there’s absolutely no scenario where global emissions can go to zero overnight, there is a path a well understood path that is going to take at least three decades to get us to a net neutral position, net neutral being sorbing as much carbon from the atmosphere as we are emitting on an annual basis and that, by definition would be net zero. That is a path that’s going to take three decades. Between now and then, having corporations around the world supporting forest conservation projects, reforestation projects, carbon capture projects, mangrove restoration and marine ecosystem projects, renewable energy projects in the developed world where power consumption is obviously increasing at, you know, almost exponential rates. Arguing that those are negative activity from a climate perspective to me just doesn’t make any sense at all. We have to throw everything but the kitchen sink at this issue, even the kitchen sink, if we want to truly tackle climate change, and we should have been doing it a decade ago. And so the carbon offsets that corporate buyers are buying is providing economic incentive to have these projects developed around the world. And you know, as much as we might like to say altruism should prevail and these projects should need an economic incentive, the reality is we’re talking about almost $10 trillion of annual investment required to fight climate change, there needs to be an economic factor behind that $9 trillion in investment in carbon credits, carbon offsets. Carbon allowances are the way to kind of start
Presenter / 9:11
I was chatting with the CEO of ERA the other day, and for our listeners, ERA runs a huge carbon project protecting a large chunk of Brazil’s biome. tThis is someone who has dedicated her entire career to protecting our climate, and carbon credits are essential for that project. She brought up an interesting point. The carbon sector is growing so fast, it’s in danger of outstripping available skilled workers. How big a problem is manpower sector and what is the industry doing to solve it?
Justin Cochrane / 9:40
It is a real issue. There’s no question about it. We are seeing timelines for validation and verification of projects in the issuance of credits being stretched much longer than any project developer ever would have hoped. We need people who do environmental sciences to do the audit and verification you work. We hire consultants to help us conduct due diligence and quite extensive due diligence on projects around the world. The registry bodies need people to review the information and issue. At the same time, we’ve got this work under way globally to bring more transparency and exchanges in the blockchain and other other technologies as a way of improving price, transparency and liquidity in this market. That is all going to take a lot of manpower. And so what you do see is that the major organizations organizations like Verra, who’s by far the world’s largest issuer of carbon credits, now taking active steps to streamline their business and bring in new people to reduce the bottleneck that exists in parts of the value chain. But, also, I believe, and the industry is moving this way, to adopt satellite imagery and LIDAR based remote sensing technology into our carbon reports, our carbon accounting, our forest loss data as an example and you’re talking about forest conservation projects. So to bring technology solutions that frankly have not been utilized heavily in this industry, it’s been a very manual process of counting carbon and measuring carbon in dense forests, in mangroves, which as you can imagine, is a very intensive and costly process. Again, utilizing some more technology based solutions to help us get there. But, as an industry, I do believe we are very, very short of manpower and it will take a couple of years to properly adjust to this new reality that we have which is a new focus and interest level in carbon and carbon credits and carbon projects around the world. And I do believe that that will adjust, it will just take some time
Presenter / 11:55
Final question. What can investors expect to the carbon sector over the next 12 to 24 months?
Justin Cochrane / 12:00
First off the SEC a couple of weeks ago did announce a proposal to require public companies in the US to report scope one, scope two and, if material, their scope three emissions. That is a very, very significant outcome for the voluntary carbon market. What it means is that companies around the world if they are disclosing their emissions, their emission levels, the next natural question is going to be: well, what are you doing to either reduce or offset those emissions? I do believe that the SEC report, and we’re gonna see the same thing happen in Canada, is a big big event for our market in driving incremental demand. We already see massive amounts of demand that have come into this market over the last 12 months that we didn’t see 12 months ago. I expect that is going to continue to occur. We’re also going to see lots of new supply, lots of new projects coming online and being developed around the world to meet this forecasted increase in demand. And at the same time, we’re going to continue to see more government regulations and intervention I’ll call it but intervention in a positive way, who support the development of domestic carbon projects around the world to help meet their Paris Agreement commitments, reducing carbon emissions and I think it’s going to be a very, very exciting next couple of years. I think we all know this market. 10 years from now is going to look very different than it does today. That’s what presents the opportunity. It’s a very exciting asset class in a regulated commodity where that commodity is being regulated to go higher. So we are very much in the early innings I believe, we’re probably even still just warming up into what is going to be a carbon market that is around for decades and decades and decades. And, frankly, it’s probably the asset class of our generation, our kids generation and beyond.
Presenter / 14:00
Today’s episode, thanks for listening and if you’re interested in what we have to say make sure you connect with us on social and subscribe to our newsletter.
