Carbon credit have grown in reputation especially within the crypto community. So what is carbon credit? It is a tradable permit or certificate that provides the holder of the credit the right to emit one ton of carbon dioxide or an equivalent of another greenhouse gas.

There are two types of carbon credit: Voluntary emission reduction (VER) and Certified emission reduction (CER).

What are the difference between both of them?

1. CER is regulated, controlled and issued by the government and VER is not *
2. CER’s supply is capped each year while VER has an unlimited supply **
3. VER cannot be used to achieve obligations under most country CAP and Trade requirements ***
4. Size of the market: CER - $300BN | VER - $300m
5. VER pricing is opaque and CER price is transparent ****

Explanations(*):

*VER is verified by Non-Profit Carbon registries

**VER can be produced through various project (carbon reduction, tree planting, etc) which gives them an unlimited supply while CER is capped and issued by the government

***Companies cannot in most Cap-N-Trade systems, use VER to offset its governmental carbon obligations (or capped amount)

****VER credits could range from $0.25 to $600, which is due to the lack of centralisation of registry standard.

Why Carbon Credits (CER specifically):

Governmental efforts have been rampant in solving climate issue as nations continues to shouts “net-zero" religiously. It is not a hypothetical phenomenal but one that is happening in reality.

Inferences that points to a growing trend:

1. CAP and TRADE is a Carbon phenomenal, as of now 27 countries have adopted it, this includes big countries like China, Europe, US, Mexico, UK, Ukraine, Korea and Japan.
2. Europe have recently proposed carbon import tax *
3. Pressure on political parties to act now (Biden’s electric car executive order, Russia environmental mandate, China to include more types of carbon emitting categories)
4. China launched the largest national emission trading system - making it the largest carbon market
5. Carbon Credit search trend is an “up only” trend - not an exponential amount

*This implication (if it goes through) will incentivised countries to adopt a similar tax system as the cost to not adopt is expensive. (I.e it could potentially cause Russia to lose up to 7.6 Bn from it, if Europe adopts it)

CER’s decreasing supply trend and increasing demand

As the year come closer to 2050 (net-zero year) with current system (cap-n-trade), this means that Government will have to keep cutting CER to force lower emission till desire outcome (net-zero) is achieved.

Lower supply → constant/higher demand = Price increment

Higher demand could come from physical commodities contract fulfilment or prevention of carbon emission fine (if over-emitted). It could also be a companies form of competitive advantage to corner the permit market.

Its a hedge against market

Carbon Cap Management did a correlation study across Global Commodities, US REITS, Euro Equities, US Equities, Global Equities and find it (Euro Carbon) to have the lowest correlation among all of them.

Correlation range from 24% to 31% compared to other asset class which range from 34% to 96%.

Why not Voluntary Carbon Credit (VER)?

The opacity of the market is one that makes its hard to determine expected value.

Opacity includes: Regulatory issue, differing standards of carbon measurement, data falsification and many more.

But what truly matter the most is that it cant be use to fulfil regulatory cap-n-trade requirements.

Conclusion

Market is reflecting a sentiment beyond “conspiracies” and “fantasies”, this is reality. CER is currently at a $300BN market cap, which is 5 times lower than a Crypto market cap and 0.0003 of the total Commodities market.

This makes it highly undervalued in comparison to the reality where supply ought to decrease, demand ought to increase and people (on your left and right) aren’t talking about investing in it.