A Century of Precedent

Emissions are counted at the corporate and national levels, not the personal one. The incentive to retire a credit sits with entities, so demand is entity-scale, and the capital that finances production at climate scale is institutional too. Carbon credits have to be investable for institutions.

Institutional investability does not hinge on a settled legal definition of the carbon credit’s environmental benefit. It depends on how carbon is packaged under securities law. At first glance, two key characteristics of the carbon credit appear to prevent that packaging: it is an intangible right recorded on a registry, and its value depends on performance still to come, with every risk attached to that performance bundled into a single unit. Securities markets solved each of those, decades ago.

The first was owning something intangible. A royalty interest, bought and sold for more than a century, is a share of production the owner never sees or possesses; a patent is property that exists only in law. By the late 1960s, with the securities industry drowning in paper certificates, the law changed: an entry in a book is not evidence of ownership, it is the ownership, transferable by entry, enforceable against the intermediary holding it, and capable of sitting in a custody account. A carbon credit is an intangible of exactly this kind.

The second was dividing risk, not just cash. An equity share is a bundle: whoever holds it takes every risk the enterprise carries, priced into a single number, and the only way to shed any part of it is to sell the whole share. The insight that arrived in the 1970s was that one stream of payments could be split into claims carrying different risks. Pool ten thousand mortgages and the payments are unchanged, but a senior claim is paid first while a junior claim absorbs the first losses and earns more for taking them. A raw credit carries delivery risk, authorization risk and permanence risk, and each of those can be placed with a holder equipped to price it.

These two are a sample of what a century of solving market access problems produced, both of them decades old, tested in court, and running at scale. They also do not work in isolation. Each becomes useful when it is built into an instrument: a container of settled law, issued in book-entry form, referencing verified credits, structured so each holder takes the risk it wants, and sold to institutions through channels built for that purpose. Carbon is simply the latest novel asset to arrive, and it does not need new solutions. It needs the existing ones assembled properly.

Next up: Custody, Clearing, and Settlement.

Part of No New Parts, a sixteen-part series by Andrew Gilmour.