The problem is the packaging, not the tonne.
Roughly thirty years after Kyoto, capital has not moved into carbon at anything approaching the scale the transition requires. The usual explanations point at integrity, at methodology, at price. We think the binding constraint is somewhere less interesting and far more fixable.
Carbon inherited a frame that cannot move investment capital
The first movers into carbon were commodity desks, and they papered it the way they paper commodities. That was a reasonable default at the time and it has enormous traction now. But a consumption frame values a unit at the instant it is consumed, which means nobody standing between the producer and the retiring buyer is offered anything worth holding. There is no owner in the middle. In every functioning market, the owner in the middle is the market.
An investment frame values the same tonne differently
A carbon project is also a productive enterprise, and finance has a well-developed apparatus for the output of productive enterprises. Under that frame the same unit is a store of value, a physical climate risk hedge, and a transition risk hedge, at the same time as it remains an environmental benefit. Neither frame is wrong. They do different jobs, and only one of them mobilizes investment capital.
Everything required to make the switch already exists
Holding an asset governed by foreign law: depositary receipts, since 1927. Ownership without a certificate: book-entry settlement. Separating a production stream from the risk attached to it: tranching, since the early 1980s. Distribution to institutions: Rule 144A. Sovereign authorization of a transferred outcome: Article 6 of the Paris Agreement. Measurement an institution can carry: current carbon fair-value accounting. None of it was built for carbon. All of it works for carbon.
What a correspondingly adjusted unit actually is
It is a pair of promises. The sovereign covenant, under which a government authorizes a use other than its own Nationally Determined Contribution and adjusts its national account accordingly. And the permanence obligation, which traces from the Cancun Agreements through Paris into Article 6 and which the issuing registry cannot waive. Sovereign promises are priced every day by bond yields, credit default swap spreads, and currency markets, and underwritten by political risk insurers, treaties, and export credit agencies. None of that machinery asks what the promise is about.
Investment grade carbon
Carbon in investable form requires a novel assembly of non-novel parts. Read the entire series to learn how that is done and what it unlocks.
Read the full series