Carbon as a Currency

By James Wall

With COP27 upon us Atom Consulting has been working with a number of innovative start ups looking at how to address the Climate crisis 

As we have delved deeper into the challenge that the world faces, a few key questions emerge.  If net zero is the goal, then what is the path?  There are competing views on this based around one’s opinion on carbon offsets - basically: Net Zero vs Zero.

Being the pragmatists we are, we see that Net Zero is the immediate tangible goal and are focussing our efforts in this area.   The dynamic in a net zero path involves both the generation of clean energy and the cultivation of carbon sink projects to reduce carbon in the atmosphere. 

Examining both sides of this equation we see the common factor being Carbon Credits.  Voluntary or Regulatory, Carbon Credits are the key measure of a Net Zero strategy.  Projects will generate cash flow on generation assets or harvesting, but in terms of carbon reduction, the carbon credits generated are the measure of success in achieving the net zero goal. 

We believe that this assumption is a key factor in developing an implementable path forward. In assuming Carbon Credits are the measure of success, we are effectively creating a value and a market for those credits. Supply side being the entities generating Credits. Demand coming from the entities looking to offset their carbon footprint. For example this could be solar renewable energy as the supplier and an Airlines being the demand side of the equation.  There are a number of industry initiatives already underway seeking to formalise this market, such as Carbon Place and Air Carbon Exchange

Within this dynamic it is apparent that demand is likely to outstrip supply in the transition phase of the market.  If one believes this, then in the absence of alternatives emerging the the price of carbon is likely to rise.  Based upon the trend in the traded price of EU Carbon permits the price has risen from €7.40 in Nov 2017 to €77.84 in Nov 2022 a more than 10x increase (Trading EconomicsTrading Economics)

This brings us to a question that the market appears to be grappling with:  should we view Carbon as a commodity or a currency?  Based upon trading behaviours it looks like a commodity.

However at Atom we think that there is more to this and sought to delve into the "Carbon as a currency" question. Looking at the fundamental view of money we see that it is variously defined as:

• "money is something that holds its value over time, can be easily translated into prices"  - IMF
• "money is anything that serves as a medium of exchange" Principles of Economics - University of Minnesota
• "Money is any item or medium of exchange that is accepted by people for the payment of goods and services, as well as the repayment of loans".  - Investopedia

In the exchange between a carbon credit generator and a carbon credit consumer, carbon credits are the medium of exchange. In this exchange there is no underlying commodity, no carbon is held as collateral - the carbon credit is a ledger entry in recognition for a task performed, it is a medium of exchange of value.  That is starting to sound like money??

We think that based upon there being no physical carbon held be either party and no exchange of physical commodity involved in the transaction the rationale of Carbon as a commodity is plausible and that the recent trading history is simply a reflection on the nascent market and short supply side in the market equation.

This opens a whole realm of possibilities that we plan to explore in this blog over the coming weeks.