Carbon Outlook

Newsletter Issue 20/10/23

Pressure on US companies to disclose emissions is increasing. So how does this relate to the carbon market? The answer can be summed up in three steps.

Step one, customers and shareholders will be able to spot climate related financial risk by looking into company data. Step two, companies will be required to reduce climate related financial risk, of which emissions are a leading factor. The result, companies will invest into carbon removal and biodiversity to make up for the emissions that are entirely unavoidable.

Proof of the correlation between carbon credits and reporting requirements might be found in the latest Ecosystem Marketplace study. The research found that companies who purchase credits are more than three times as likely to have a science-based emissions reduction target.

California, the state of sunshine and traffic, is taking the lead on disclosure requirements in the US. SB253 will require companies earning over $1B in revenue to report on emissions. In addition to that, SB261 will require companies earning over $500M to report on climate related financial risk.

The bills will have the greatest impact in the voluntary carbon market, where investment in carbon removal and biodiversity is the key function. This is because the number of companies that will fall under this regulation is greater than the number of companies mandated to participate in compliance markets.

It is estimated that over 8000 companies in California alone will be affected by these changes. This number is drastically higher than the 450 companies required to participate in compliance markets, where the main function is to tax heavily polluting companies.

In addition to disclosure, the Air Resources Board is drafting new requirements for the conservation of deserts, wetlands, grasslands, and forests that maintain up to 10% of the state’s carbon sequestration potential. Pressure on companies to disclose emissions combined with increasing public investment in ecosystem restoration is great news for project developers in environmental markets.

Beyond California regulatory requirements in Europe, like the upcoming carbon border tax, will push even more US companies to invest in emissions reductions. Companies that need to invest in removal will inevitably contract with project developers to get the work done, further boosting demand for their work.
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