What are carbon credits? This simple question does not appear to have a simple answer. For anyone who believes that reality and objective truth exist, this fact alone should be a perilous sign.
Think about a typical transaction—perhaps the purchase of a tank full of gasoline. I go to the gas station. I hand over a certain amount of cash and receive the gasoline. The fuel is a tangible object I want because it enables my car to take me where I want to go.
Cloaked With Uncertainty
But what do people buy when they purchase a carbon credit, and how do they use it?
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According to Carbon Credits.com, “Carbon credits, also known as carbon allowances, work like permission slips for emissions. When a company buys a carbon credit, usually from the government, they gain permission to generate one ton of CO2 emissions.”
However, the United States government does not sell carbon credits, nor is there a national market regulated by the Securities and Exchange Commission. The State of California, always anxious to be at the forefront of environmentalism, operates such a scheme.
A three-minute YouTube video titled “The Ultimate Guide to Understanding Carbon Credits” begins, “There are several ways to purchase carbon credits offsetting your footprint.” It never explains why you might want to do so.
Troubling Questions
An organization called “One Tree Planted” provides some specifics. “As part of our Nature-based Solutions program, One Tree Planted offers carbon offsets from US-based third-party projects, certified by the Climate Action Reserve. These credits derive from projects focused on forest preservation and sustainable forest management, and prevent their conversion for agricultural purposes.”
The Environmental Defense Fund tries to explain the purpose of the credits: “The average American car emits about seven tons of CO2 in a year; the average American family, about 24 tons.”
Yet, such an explanation raises troubling questions. Breathing, the natural and involuntary process by which every animate creature emits carbon dioxide, is a necessary function of life. Should I be required to pay some faceless entity in order to exhale?
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No doubt, some environmental extremists answer affirmatively. As they see it, humanity is a drag upon the planet. The quicker we are extinct, the better. However, such thinking is beyond reason.
Why Buy?
So, why would investors buy carbon credit?
A website called “The Impact Investor” offers a heartwarming little tale of Kyle Kroeger, who owns the site.
“Several years ago, I began to get concerned about my carbon footprint. I travel frequently, and I realized that I was responsible for a great deal of carbon emissions. However, my work requires that I travel frequently, so I am not able to avoid taking flights and driving long distances.”
The dilemma is apparent, but Mr. Kroeger offers a solution—negating those emissions by purchasing carbon offsets. He enthuses. “While this may not be as good as not creating the greenhouse gases in the first place, it’s the best thing I can do for the environment.”
Entering the Carbon Marketplace
Mr. Kroeger then offers a six-step process to begin a world-saving investment odyssey.
My first step is to calculate the amount of carbon I emit. The site links me to another page with information about eleven different software packages that can assist me in the process, presumably for a price. Unfortunately, most of them seem to be designed for corporate customers who have concerns that far outweigh those of a single human family.
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After completing step one, I proceed to the second task—registering on a “Carbon Credit Marketplace.” This is where the actual purchases take place. Of course, the site has a favorite to recommend.
Having registered, I can examine several projects in which I might want to invest. If I am already knowledgeable about such things, I can enter my criteria—price, country, industry etc.—in a search engine and look only at projects that meet my goals. I can also browse until I find one that tickles my fancy. One key consideration at this step is certification. That means that a “verifier” has examined the project and ensures it is both legitimate and effective. Mr. Kroeger mentions three “established verifiers.”
Due Diligence
However, the mere imprimatur from a verifier is not enough because step four is research. Mr. Kroeger lists four areas of interest—the project’s location, focus, background, and year the company produced the credits. He prefers fresh credits produced recently.
Step five is the actual purchase. The usual increment is one ton of carbon dioxide savings, so—using the Environmental Defense Fund statistics above, the environmentally aware family needs about twenty-four per year.
Having purchased the offsets, the purchaser does get to move on to step six—printing a certificate. Mr. Kroeger likes to hang them in his living room, hoping to inspire visitors to “live a carbon-neutral lifestyle” as well.
A Wall Street Horror Story
However, there is a potential—and immense—downside, as a recent article in The Wall Street Journal explained.
The article tells the tale of Jorge Cantuarias, a Peruvian businessman who has heavily invested in carbon credits and wants to sell them. Since there are few purchasers, he anticipates being unable to purchase more during the coming year.
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Mr. Cantuarias purchased the credits from 700 families in the Amazon. The families, in turn, generated the credits by harvesting Brazil nuts, using an eco-friendly process that preserves the rainforests in which the nuts grow. Apparently, the Brazil nut business is not particularly profitable. According to the Journal, “Without the cash, the money for the families will dry up, making it harder for them to protect the rainforest. ‘We are passing through a very difficult time,’ Cantuarias said.”
A Marketplace or a Casino?
The Journal then provided a little history. The overall carbon credit marketplace boomed from 2018 to 2021—rising from an aggregate of $285 million to $2.1 billion over the three-year period. “Since then,” the Journal laments, “a wave of studies and news articles have shown that some projects had vastly overstated their impact on emissions…. The market fell to $723 million in 2023…and the credits gave up all of their 2021 gains.”
So now, Mr. Cantuarias owns roughly three million currently worthless credits.
It is hard to escape the sense that this is a totally artificial market. Its basis appears to be little more than faulty theories of “anthropogenic climate change” and the all-too-human motivations of pride and greed. In the world of investments, that is a dangerous combination.
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