Wall Street Gets Ready to Cash In on $1 Trillion Climate Market
Bloomberg News
,(Bloomberg) — As the carbon offset market gets a new lease on life from the COP28 climate summit in Dubai, bankers from Wall Street and the City of London are positioning themselves to get a chunk of the dealmaking they say is coming.
Banks that have been building up carbon trading and finance desks include Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co. and Barclays Plc. They’re looking to finance the development of carbon sequestration projects, to trade credits and to advise corporate clients buying offsets. They’re also keen to support local projects in emerging markets that currently lack the financial clout to scale up their work.
“A lot of project developers don’t have huge balance sheets and have difficulty raising money,” said Sonia Battikh, Citi’s global head of carbon offsets trading. “Working out how to bridge that financing gap and channel money to projects is where a bank like Citi can play a role.”
Wall Street is racing to get a foothold in a market that has the potential to reach as much as $1 trillion, as offsets offer a way for companies to hit net zero without actually eliminating all their emissions. Rich Gilmore, the chief executive of investment manager Carbon Growth Partners, said it’s already clear there’ll soon be an acute under-supply of high-quality credits, given the demand.
Against that backdrop, “the Wall Street giants will need to balance speed to market with a deep understanding of the rules, norms and expectations” of how the voluntary carbon market is evolving, he said.
For now, it’s a market that’s still trying to emerge from a long list of controversies.
Many of the credits generated have drawn criticism from climate scientists for their ostensible failure to live up to the environmental claims made by those selling them. Last month, the chief executive of South Pole — the world’s biggest seller of carbon offsets — stepped down as the company pledged to look into allegations of greenwashing and “learn from the experience.”
Bankers studying the market say such episodes can’t be allowed to erode confidence in the future of carbon offsetting. “It would be a shame if the criticism, though well-meaning, undermines money flows to these projects,” said Kiru Rajasingam, head of European power, gas and emissions trading at Citi.
And speaking at the COP28 summit in Dubai, John Kerry, US climate negotiator, described himself as “a firm believer in the power of carbon markets to drive ambition and action.”
Ingmar Grebien, who runs the Commodities Sustainable Solutions unit at Goldman Sachs, said the markets he looks at “remain fragmented and in their infancy in terms of efficiency and transparency.”
At Goldman, which hired former Gazprom executive Leigh Smith last year with a remit that includes trading carbon credits, the “focus is on expanding trading and financing solutions across sustainable commodities such as carbon, renewables and other nascent environmental products,” Grebien said.
JPMorgan hired its first trader for voluntary credits in Houston earlier this year, according to a person familiar with the matter who asked not to be named discussing information they’re not authorized to disclose. A JPMorgan spokesperson, who declined to name the new hire, said the firm is “adding carbon trading capabilities.”
The biggest US bank offers trading in carbon credits along with capital, advisory and market-making services. It’s an “increasingly significant” area of focus for JPMorgan, the spokesperson said.
For some, the arrival of global banks in a market that has yet to be properly regulated marks a worrying development.
“After a year of revelations about how awful the voluntary forest carbon projects have been,” it is “amazing people are again saying we need this without a complete overhaul,” said Michael Sheren, a former senior adviser at the Bank of England who’s now a fellow at the Cambridge Institute for Sustainability Leadership.
“The VCM is like a multi-headed serpent that rose again at COP28,” he said.
Though climate scientists have long warned against relying on offsets to achieve net zero emissions, they also acknowledge that such products are critical when it comes to tackling residual emissions in hard-to-abate sectors.
And in the name of exorcising the ghosts of the past, a new era of collaboration took hold during the first week of COP28. The biggest voluntary carbon standard setters agreed to align best practices and improve transparency, while key organizations plan to establish a comprehensive integrity framework for carbon crediting programs.
The US Commodities Futures Trading Commission, which regulates derivatives markets, used the COP28 summit to unveil standards for high integrity carbon offsets futures trading. United Nations officials at the talks in Dubai are expected to announce new guardrails around the voluntary carbon market that will be based on guidelines drafted by experts last month.
Voluntary carbon credits “aren’t going to solve the climate crisis,” Rajasingam said. “But at the same time, we don’t want valuable projects to go unfunded because of reputational stigma.”
For now, carbon prices are at historic lows. Last year saw a 12% slump in demand, with a further 5% decline seen in 2023, according to BloombergNEF.
“But the fundamental drivers underpinning demand haven’t changed,” BNEF’s Layla Khanfar wrote in a recent research note.
Drivers include the mere fact that many companies will be unable to meet net zero goals without using offsets, along with the prospect of national restrictions. Such dynamics set the stage for a considerable price bump by mid-century, BNEF estimates.
How Do Offsets Work:
The point of the voluntary carbon offset market is to generate carbon credits, which are then generally bought by companies to offset their emissions. A carbon credit is a paper security that’s supposed to represent one ton of CO2 reduced or removed from the atmosphere, generated by projects like wind farms or planting trees. Project developers team up with middlemen such as South Pole to sell the credits. Buyers can trade the units or use them to offset their own emissions, in which case they must retire the credit to avoid it being used twice.
Citi’s carbon markets team currently consists of four traders based in London and four sales people covering the voluntary carbon market. Barclays hired an industry veteran from Shell Plc, Oliver Morning, to run its carbon trading operations, Bloomberg reported last month.
Among the long list of unknowns surrounding the carbon offset market is the element of technological innovation, which may suddenly turbo-charge the field of carbon removals. That can make some of the project finance feel more like “venture capital-style risk,” Rajasingam said.
“Carbon credits are best when prices and methodologies are established, and not for technologies that are still emerging,” he said. “That said, we intend to be very actively involved in removals when it scales.”
Michael R. Bloomberg, the founder and majority owner of Bloomberg LP, parent company of Bloomberg News, is the UN secretary general’s special envoy for climate ambition and solutions. Bloomberg Philanthropies regularly partners with the COP Presidency to promote climate action.
Bloomberg LP, the parent of Bloomberg News, partners with South Pole to purchase carbon credits to offset global travel emissions.