Climate Impact X, a Singapore-based startup whose shareholders include prominent “Singapore Inc.” institutions, is building a series of markets with the intention of creating scale in voluntary carbon trading.
The company has recently partnered with Nasdaq, which will supply the trading engine for a spot market now under construction. The spot market is the final of three venues, along with the already-built corporate sustainability market and an auction venue for new projects.
“The voluntary market is currently playing around the edges of national compliance schemes, and we need it to grow quickly,” said Tom Enger, head of product.
He told DigFin the voluntary carbon market today represents 350 million tons of emissions that have been issued as credits – a kind of permit that represents 1 ton of carbon dioxide removed from the atmosphere, either naturally (for example, representing forest conservation) or through technology.
The world needs to reach closer to 10 billion to 20 billion tons of biomass removed from the atmosphere annually if it is to achieve net zero emissions.
Climate Impact X is being designed to help speed up the process by making the markets for carbon offsets get much bigger, quickly – turning it into a major asset class. Its shareholders are DBS, Standard Chartered Bank, Singapore Exchange, and Temasek, which places the startup at the forefront of Singapore’s bid to play a leading role in carbon finance.
“None of these institutions could build this alone,” Enger said. “The carbon market needs integrated solutions, including money, project development, credit analysis, product design, contract definitions, and platforms for trading, matching and settlement. It needs buyers and sellers.”
Enger was previously a commodities strategist at SGX. “The carbon market, in the long run, is going to be the mother of all commodities markets,” he said.
Voluntary carbon markets work like this: according to Standard and Poor’s, voluntary carbon markets allow emitters (such as oil and gas companies) to offset their unavoidable emissions by purchasing carbon credits by projects targeted at removing or reducing greenhouse gasses from the atmosphere.
Each credit corresponds to one metric ton of reduced, avoided, or removed carbon dioxide, and once a credit is used, it must be retired and never traded again. McKinsey estimates the market for carbon credits could reach $50 billion by 2030 – a key year when many governments are meant to have reached milestones towards becoming net-zero emitters.
Building the ecosystem
The voluntary market today is small. It needs both supply – new tech initiatives to capture carbon, as well as measure and report those results – and more investors, which today includes oil-and-gas companies, commodities traders, and corporate treasurers and financial institutions.
“We’re not looking to be just another intermediary in a niche market,” Enger said. Growing it requires products and venues – but also information, because it’s difficult to value projects that include intangibles such as protecting biodiversity or local communities. And solutions need to be transparent and liquid, so as to mitigate against greenwashing.
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Climate Impact X is building a trading platform where corporations can buy credits to retire them, and meet their sustainability goals. It is building an auction house for new types of credit or projects, so buyers and sellers can make prices on them. Finally, the spot market – the one using Nasdaq tech – is meant to create a liquid market to provide tighter spreads and lower fees on standard contracts for traders.
Enger hopes the spot market will develop to the point that it can also offer futures and options, to help desks manage their carbon risks.
Both traditional tech vendors and digital-asset providers pitched for the spot market mandate. Climate Impact X opted for the safer, reliable choice of Nasdaq, partly because the carbon market is still limited to professionals.
Climate Impact X did consider a blockchain-based solution, with an eye to a future in which carbon assets can be fractionalized and sold to retail investors. But this wasn’t practical for today, as most corporates and traders aren’t set up to handle tokenized digital assets. “There wasn’t any obvious benefit to using blockchain,” Enger said.
Nasdaq, on the other hand, brings a long list of institutional clients plus a partner, Puro.Earth, a Finnish fintech that operates a register of carbon tech credits.
Tech plus nature
Enger says what will make Climate Impact X stand out is its combining credits from tech projects (such as ways to suck carbon out of the air and store it) and from “nature” projects, such as protecting rainforests.
He says tech credits are expensive, while nature credits are affordable – deploying tech and running a business, versus protecting real estate from deforestation. Climate Impact X’s markets are designed to allow participants to buy nature-based credits for immediate impact, and tech-based credits for future scaling.
“Many institutional investors are wondering how they offset their portfolio,” Enger said. “Do they do it now, or do they wait until 2030? When does the ‘E’ in ESG become a Hard E, requiring actual sequestration? At some point, everyone will have to decarbonize their portfolios.”
He says Climate Impact X’s spot market will go live in early 2023. The company is opening an office in London and may consider raising additional funds from new sources – to be determined, Enger says.