Evaluating Global Carbon Offset Opportunities

Carbon investing is on the cusp of massive growth. Consider this factoid: By some estimates, the global carbon offset could swell to $250 billion by 2050 up from just $2 billion in 2020. That’s the definition of “exponential growth.”

With more corporations and national governments leveraging carbon offsets to meet ambitious climate agendas, opportunity potentially grows with exchange traded funds such as the  KraneShares Global Carbon Offset Strategy ETF (KSET). The first ETF of its kind, KSET celebrates its first anniversary since inception later this week.

A momentous occasion to be sure, but KSET, which tracks the S&P GSCI Global Voluntary Carbon Liquidity Weighted Index, is pertinent for more important reasons.

“To reach the sustainability goals in the 2015 Paris Climate Accords and various national and company-level targets, Morgan Stanley Research estimates that the world must remove at least 1 gigaton of carbon dioxide per year by 2030, based on analysis of data from Network for Greening the Financial System, though the opportunity for avoidance or reduction credits could be up to 10 gigatons per year. Each carbon offset represents one metric ton of carbon dioxide removed, reduced or avoided in the atmosphere,” according to Morgan Stanley research.

 

Speaking of KSET’s potential growth prospects, citing CME Group data, KraneShares points out that the global carbon market needs to increase in size by 15 times to support the world’s carbon emissions reduction objectives.  It’s hard to find assets, particularly in the alternatives universe, with those type of growth projections. Other data points speak to the growth of the global carbon offset while highlighting potential long-term opportunity with assets such as KSET.

Morgan Stanley head of ESG fixed income research Carolyn L. Campbell and her group estimated “that about 4,000 carbon-offsets projects have issued credits for roughly 1.7 billion offsets (or 1.7 gigatons of carbon). With 3,800 more projects listed, pre-registered or registered and awaiting credit issuance, the voluntary carbon-offsets market is expected to grow from around $2 billion in 2022 to about $100 billion in 2030 and around $250 billion by 2050,” noted the bank.

Further adding to the allure of KSET from a long-term perspective is how the carbon offset market is evolving. As Morgan Stanley pointed out, avoidance and reduction are still important, but outright removal is gaining traction.

“Removal credits ameliorate the impacts of past emissions. Accounting for 5% of the market, removal credits are based on projects that directly remove carbon dioxide from the atmosphere–such as tree planting to sequester carbon or technology-based techniques for capturing carbon directly from industrial processes and fossil-fuel run power stations, for instance. (The remaining 13% of offsets represents a mix of avoidance/reduction and removal projects.),” concluded the bank.

For more news, information, and analysis, visit the Climate Insights Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.