Wall Street’s Green Rush: The Billion-Dollar Race to Dominate the Carbon Market

"Major Banks Prepare for Carbon Offset Surge at COP28, Boosting Financing for Global Climate Projects"

Goldman Sachs, Citigroup, JPMorgan Chase, and Barclays are preparing for a surge in carbon offset deals at COP28 in Dubai. These banks aim to finance carbon sequestration projects, trade credits, and assist companies in purchasing offsets. The goal is to support smaller projects in emerging markets that lack financial backing. Sonia Battikh from Citi emphasizes the struggle many developers face in securing funds and highlights the role banks can play in bridging the financing gap in carbon markets.

The rush towards the trillion-dollar carbon market reflects its potential to help companies achieve net zero without fully cutting emissions. However, the market has faced controversies, with some credits receiving criticism for not meeting environmental claims. The chief of South Pole, the world’s largest seller of carbon offsets, resigned amid greenwashing allegations, prompting a reevaluation of the market. Balancing speed and understanding market norms will be crucial for Wall Street’s success in this evolving voluntary carbon market (VCM).

Major banks, including Citi, JPMorgan, Barclays, and HSBC, have committed over $5 trillion to climate initiatives in 2022. The World Bank recently announced plans to establish a mechanism for certifying forest carbon credits in the coming months. Their mission is to revolutionize the bank’s operations while boosting the credibility and transparency of VCMs. Canada’s largest bank, RBC, has also supported a global carbon markets company with $8 million to expand its platform. According to Carbon Growth Partners’ CEO, the growing demand for carbon credits will lead to an under-supply of high-quality credits. Bankers warn against allowing criticism to undermine confidence in the future of carbon offsets and emphasize the need to avoid hampering funding for these projects.

Goldman Sachs sees fragmented markets that lack efficiency and transparency. They are focused on expanding trading across sustainable commodities, including carbon and renewables. JPMorgan, which has made significant investments in carbon trading, hired its first voluntary credits trader this year and expanded its carbon capabilities. However, the arrival of global banks in an underregulated market raises concerns. Michael Sheren warns about the shortcomings of voluntary forest carbon projects and cautions against relying solely on offsets for achieving net zero emissions. Despite criticism, offsets play a crucial role in tackling residual emissions in challenging sectors.

Reaching the 1.5C global warming target requires substantial carbon reductions, and the VCM has a significant role to play. During the first week of COP28, major voluntary carbon standard setters pledged to align best practices and enhance transparency, aiming to establish a robust integrity framework for carbon crediting programs. The US Commodities Futures Trading Commission (CFTC) revealed standards for high integrity carbon offsets futures trading. UN officials in Dubai are expected to unveil new safeguards around VCM based on rules drafted by experts last month. In the final stages of COP28, observers await the finalization of rules for a United Nations-governed carbon market under the Paris Climate Agreement Article 6.

Carbon prices are currently at historic lows, with a 12% dip in demand last year and a projected 5% decline in 2023. However, drivers of demand persist, including companies’ reliance on offsets to meet net zero targets and potential national regulations. These factors set the stage for a substantial price rise by mid-century, according to BNEF’s research. The average prices of VCM credits reached their highest point in 15 years, as reported by the Ecosystem Marketplace. Although the volume of voluntary carbon credits fell by 51%, the average credit price surged significantly by 82%, from $4.04 per ton in 2021 to $7.37 in 2022, a level not seen since 2008.

Citi’s carbon markets team, consisting of four London-based traders and four salespeople, focuses on the voluntary carbon market. The banking giant aims to achieve net zero emissions for its operations by 2030 using carbon credits. It also pledges to reach net zero for financing by 2050, with sectoral emission reduction targets. Barclays has recently brought in an industry expert to lead its carbon trading operations. The future of the carbon offset market holds uncertainties, especially regarding technological advancements that could transform carbon removal efforts. However, this potential innovation introduces a risk similar to “venture capital-style risk,” according to a Citi executive. He emphasized the importance of established prices and methodologies for carbon credits but cautioned against using them for emerging technologies. Nevertheless, Citi intends to actively engage in removals once they are scaled.

The banking industry has a unique capacity to help companies transition to a low-carbon economy by financing sustainable projects. If funds from banks are channeled into emission reduction efforts, it would accelerate the scaling of carbon markets towards achieving net zero.

Matt Lyons

Matt Lyons

Matt Lyons is the founder of Forestry & Carbon. Matt has over 25 years as a forestry consultant and is invoilved in numerous carbon credit offset projects.

Leave a Replay

Scroll to Top