What do cryptocurrencies and carbon credits have in common? It's not the beginning of a joke… Instead, there are genuine similarities that one fund manager has eluded to. Much like digital assets, carbon credits are an emerging financial instrument, one that hopes to solve a problem our society faces.
Tribeca Investment Partners CEO Ben Cleary believes carbon credits could follow in the footsteps of crypto and go mainstream in years to come.
So, what does that mean for potential investors? Let's take a look.
Investing in the future with carbon credits
When cryptocurrency first surfaced to investors it was seen as a novelty. Initially kicked off in 2009 with the creation of Bitcoin (CRYPTO: BTC), it has taken over a decade of building an entire ecosystem to bring crypto to the masses. Similarly, Cleary thinks carbon credits are on the same path — just a little further behind.
The concept of carbon credits was first originated with the introduction of the Kyoto Protocol in 1992. However, it wasn't until 2012 that Australia brought in the Carbon Pricing Mechanism, which is the country's form of an emission trading scheme. Today, companies and investors trade in what's known as Australian Carbon Credit Units, or ACCUs.
Following a few years after the origination of crypto, Cleary expects carbon credits will likely take a similar route to adoption. At the same time, the fund manager foresees this being a massive opportunity for Australia. He said:
It's [carbon trading markets] got a long track record of project development, particularly on the mining side. And it's got a great climate, particularly for nature-based projects … so I'm really bullish on Australia and Australian carbon credit units generally.
Currently, the process to trade and invest in ACCUs is fairly convoluted. It involves a tedious process of searching for potential sellers and then reaching out to these organisations. That's much like the early days of Bitcoin trading, which would sometimes involve meeting in person and exchanging details.
The Tribeca fund manager highlighted that being able to trade carbon credits on a mobile device will be a pivotal moment.
It's probably three or four years behind. You can buy crypto on your iPhone, you can get derivatives, margin, open accounts in minutes. That really was the inflection point for crypto a couple of years ago. We need to build products that are going to become more available to retail investors.
Where it differs to cryptocurrency
While Bitcoin has a fixed total supply of 21 million that will ever exist, ACCUs are even more deflationary as its supply decreases over time.
This is more akin to Ethereum's (CRYPTO: ETH) burning mechanism, introduced with the EIP-1559 update on 5 August 2021.
In explaining this, Cleary mentioned that 80% of all carbon credits are retired by corporates every year. That would be the equivalent of cancelling 80% of issued shares each year.
For this reason, carbon credits have a deflationary mechanism built into the market structure. In turn, the price is driven higher if demand stays constant.
