FEATURES
GETTING YOUR CARBON CREDITS VOLUNTARILY
CARBON CREDITS ARE TRADABLE CERTIFICATES REPRESENTING A PARTICULAR QUANTITY OF GREENHOUSE GAS , TYPICALLY A TONNE . IT IS POSSIBLE FOR AN ENTITY THAT MAY BE STRUGGLING TO REDUCE ITS OWN EMISSIONS TO PURCHASE ONE OR MORE OF THESE CERTIFICATES EITHER COMPULSORILY FOR EXAMPLE FOR REGULATORY REASONS , OR VOLUNTARILY IN ORDER TO OFFSET ITS OWN EMISSIONS . BY GORDON STEWART , OLIVER IRWIN AND MARK KAHN , BRACEWELL ( UK ) LLP .
Carbon credits can be generated by entities that successfully reduce their carbon emissions or remove greenhouse gases from the environment . Carbon reduction projects that create carbon credits can sell them on the voluntary market to generate revenue . The ability to purchase carbon credits voluntarily ( VCCs ) from a project that has generated and accumulated them provides voluntary market participants with a means to offset their greenhouse gas emissions outside a formal regulatory or compliance framework .
Because they are tradable in this way , carbon credits can be thought of as a type of commodity . However , a credit generated by a particular project is inherently tied to the characteristics of that particular project – there is no uniformity or particular commonality between credits or between projects , so the common characteristics of this commodity are hard to ascertain . This means that the voluntary market is illiquid and non-uniform , creating hurdles for carbonreduction projects that wish to raise debt finance , and obliging financiers to look through the generated credits to the robustness of the project itself in making the decision to lend and structure financing , which significantly reduces the ability of aggregators or traders to finance large pools of VCCs .
Market aspirations However , the appetite and the use-case for debt financing in this area are manifest . In a January 2021 article , McKinsey estimated that the overall market for carbon credits could be worth more than US $ 50bn by 2030 and predicted that the market would help drive private financing towards climate-action projects and foreign direct investment in the global south , where the potential for emission-reduction projects is strongest . So the VCC market has the potential to achieve powerful results in the fight against climate change .
Thus , many have aspirations for the VCC market to function with sufficient efficiency and liquidity to make it financeable on similar terms to other commodity markets , giving it the potential exponentially to increase the capital available for carbon reduction projects and thereby speeding up global decarbonisation efforts . This article will look at some of the impediments to significant scaling of financing for VCCs by reference to the bankability features of other classic commodity and certificated / derivative finance structures .
Types of commodity finance There are many types of structured commodity finance , but some of the more sophisticated include borrowing base , pre-export and prepayment facilities . Borrowing base – known in the case of hydrocarbon financings as reservebased – facilities operate by linking the amount of available finance to the value of a fluctuating pool of underlying assets – in the case of a reserve-based facility the commodity forming the “ borrowing base ” will be hydrocarbon reserves , but a borrowing base could also be built around metal ore , for example .
The lenders in these types of facility will take security over the assets forming the borrowing base , and are thus assured that in an enforcement scenario , there are sufficient assets that can be sold to discharge the debt . Because the debt is sized by reference to the borrowing base , lenders can also be comfortable that at any given time sufficient commodity is available for the borrower to sell , generating revenue for debt service .
In a pre-export facility , a lender will provide working capital finance to a producer to enable it to produce and then sell commodities . A preexport facility is discharged by the proceeds of sale of those commodities . Lenders will look to take security over the borrower ’ s rights under the offtake contracts between the borrower and its buyer counterparties , as well as over the commodities themselves and the bank account ( s ) into which the proceeds of sale are paid .
In prepayment facility structures , a trader will often prepay the miner / producer in advance for the commodity , with the delivery of cargos then
Carbon credits can be generated by entities that successfully reduce their carbon emissions or remove greenhouse gases from the environment
62 Project Finance International May 9 2024