The Carbon Offsetting Rush: Wall Street Banks Gear Up for COP28 Boom
As the second week of COP28 in Dubai gets underway, the buzz surrounding the rejuvenated carbon offset market is sending bankers from Wall Street and the City of London into a frenzy as they position themselves to take advantage of what they see as a major upcoming dealmaking opportunity.
Banks investing in carbon trading and finance desks include Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co., and Barclays Plc. They’re all gearing up to be at the forefront of financing the development of carbon sequestration projects, trading credits, advising corporate clients buying offsets, and supporting local projects in emerging markets that currently lack the financial clout to scale up their work.
“A lot of project developers don’t have huge balance sheets and have difficulty raising money,” said Sonia Battikh, Citi’s global head of carbon offsets trading. “Working out how to bridge that financing gap and channel money to projects is where a bank like Citi can play a role.”
The stakes are high, with the market potentially reaching a valuation of $1 trillion. However, the market is still facing immense scrutiny and has to overcome a series of controversies. Many of the credits generated have drawn criticism from climate scientists for their failure to live up to the environmental claims made by those selling them.
In light of this, John Kerry, US climate negotiator, sees carbon markets as a driving force for action despite the controversies surrounding it. Additionally, during the COP28 talks in Dubai, original carbon standard setters agreed to align best practices and improve transparency, while the United Nations is expected to establish new guardrails around the voluntary carbon market.
The complex nature of the market raises concerns among some experts. Michael Sheren, a former senior adviser at the Bank of England, expressed concerns about the onset of global banks in an unregulated market, warning that the voluntary carbon market “rose again” at COP28 without a complete overhaul.
In the midst of this, there’s also a renewed emphasis on the importance of voluntary carbon offsets in tackling residual emissions in hard-to-abate sectors. The climate crisis demands significant carbon reductions, and the voluntary carbon market “is an important tool in bringing carbon dioxide solutions to scale,” as stated by Carbon Direct, a carbon management firm.
For now, carbon prices remain at historic lows, but the fundamental drivers underpinning demand haven’t changed. The prospect of national restrictions and the fact that many companies will be unable to meet net zero goals without using offsets sets the stage for a considerable price bump by mid-century, according to BloombergNEF.
Amidst the emerging opportunities and challenges, only time will tell how the carbon offset market develops in the wake of COP28. With the volatility of the market and the potential for significant growth, Wall Street and the City of London are positioned to play a substantial role in shaping the future of the carbon offset market.