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Making Returns from Carbon Markets
406 Plays11 months ago
We dive into the carbon offset market, covering definitions and technicalities and exploring the outlook for the sector. Izzy Jensen is the founder of Kakariki Capital, an Australia-based asset manager that focuses on investments in environmental and carbon commodities.
The Alpha Females Invest is a financial podcast for those who want to elevate their investing knowledge. We host a series of experts to navigate a technical deep dive into their field of expertise.
We aim to promote gender diversity by having at least an equal representation of female guests on our show.
Thank you for listening and supporting The Alpha Females Invest.
Disclaimer: The views expressed in this podcast are those of the speaker. The content is not financial advice. You should seek the assistance of a professional who can take your personal circumstances into account prior to making any investment decision.
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Transcript
Introduction and Disclaimer
00:00:00
Speaker
As usual, any information discussed in this podcast is not financial advice. All opinions reflect those of the individuals and this podcast is for educational purposes only. You should always read the PDS and talk to a financial advisor who can consider your personal circumstances before you invest.
Meet the Hosts
00:00:20
Speaker
Welcome back to the Alpha Females Invest podcast. Two females working in the finance industry searching for alpha. My name is Emily.
00:00:28
Speaker
And today we're excited to bring you the first episode that we've recorded in some time. I would also like to introduce our new co-host, Maddie, who'll be joining AFI to help us deliver some amazing new episodes to you. Welcome, Maddie. Thanks, Emily. Really looking forward to getting involved with AFI. I've been an avid listener for some time, so it's really exciting to be joining you and hosting some wonderful speakers.
00:00:56
Speaker
Amazing. And if you like listening to AFI, we would love your support on Instagram at alpha females invest. And you can also find us on LinkedIn. If you want more information about our send out episodes or sponsorship information, you can visit our website at www.alphafemalesinvest.com.au. And please note that our episodes may be supported by our guests. Great. So let's get started and welcome our guests today.
Guest Introduction: Izzy Jensen
00:01:25
Speaker
Izzy Jensen is the founder and chief investment officer at Kakariki Capital, a specialist fund manager with a focus on carbon and environmental assets. Izzy founded Kakariki Capital after identifying what she believes will be one of the biggest and most important investment opportunities of our time, the decarbonization of our planet. Previously, Izzy spent seven years at Morrison & Co, a leading global alternative asset manager with excess of $25 billion of funds under management.
00:01:54
Speaker
where she was responsible for research and origination in carbon and environmental markets. Izzy has experience across a range of disciplines, including portfolio strategy management and unlisted and listed investment management. Izzy's also a non-executive director of Blue Carbon S2C and a director and the treasurer for the Montessori East Foundation. So welcome, Izzy. We're really looking forward to having you on the podcast today. It should be super interesting.
00:02:23
Speaker
Thanks for having me, Maddie and Emily. I really appreciate it. To get started, we thought we'd ask you a question typical of every previous AFI episode. These have been some pretty good answers. So Izzy, could you please tell us what your most embarrassing career story is? Sure. Probably my most embarrassing
00:02:50
Speaker
career story would be I had just started working full-time at Morrison & Co. in the Sydney office. I started off in their Wellington office but moved to Sydney and I was still living at home with my parents and someone in the team was leaving so we had a leaving dinner and
00:03:14
Speaker
I had forgot to tell my mum that I was going to be home late and then my phone died. And then my phone died. And so it got to, I think like 10 o'clock at night and my parents were like, where is Izzy? They called the office. No one's answering all this because we were all out at this dinner. And then they decided to go over to like my boss's boss's boss. He was like the most senior person in the office in his house. They knocked on his door at 11 o'clock at night and his wife came to the door.
00:03:44
Speaker
and was like, what are you doing here? And they were like, Izzy hasn't come home. We're just really worried about her. We can't get a hold of her. So then she had to call Will, who was out at the team. And he was like, no, it's OK. Izzy's here. But then after that, every time I had to work late, everyone in the team would be like, Izzy, have you told your parents that you're working late?
00:04:08
Speaker
Oh my gosh, that is... Because I assumed you were early 20s at that stage. I was like 21 or 22. And yeah, no, it was super embarrassing. Oh, you have very cute parents though, that's really sweet. That's really sweet. One to remember for sure. And every late night in the office afterwards, you're reminded.
00:04:35
Speaker
Yeah, no. It was definitely a double standard though, because I've got three brothers and one of them, like, he used to, like, be, like, uncontactable for, like, days on end. My parents didn't really stress at all. And they, like, couldn't find for a few hours. And they're like, where is she? It's a really funny one. Well, I'm glad you're here. Safe today with us, is it?
Understanding Carbon Markets
00:04:58
Speaker
Well, let's jump straight in to what you do because it's really interesting and a topic that Maddie and I care deeply about and also think is super relevant in the context of everything that's going on in Australia and worldwide around decarbonization and the carbon markets, which brings us to, I guess, why are you passionate about carbon and how did you get into this space? Because it is still at the moment, a little bit of a niche area.
00:05:27
Speaker
Yeah, no, it's a great question. So, I mean, I think as Maddie said, when she introduced me, when I was at Morrison & Co., I led their origination and decarbonization outside of renewables. So we looked at everything from like green hydrogen, carbon capture and storage, carbon farming, basically just anything that was decarb related. And it was there, I kind of, I guess, fell in love with carbon and environmental markets. For me, I think it was a combination of, I really liked the idea that
00:05:58
Speaker
we're starting to price the positive externalities of land and of nature in the fact that it can sequester carbon, it has huge biodiversity benefits and up until now that hasn't been the case. And then I think what also attracts me is the fact that it is a nascent market, it is ever changing and so it's kind of exciting to go along that journey as the market's developing and trying to figure out where it's going to land and end up.
00:06:30
Speaker
Great. Thanks, Izzy. Super interesting career experience to date and looking forward to hearing more about Kakariki. But curious to know your thoughts around like what type of background and experience is required to get involved in carbon investing and the type of work that you do. Do you think that financial knowledge is something that is required?
00:06:55
Speaker
Yeah, I think people can kind of come into the space from two backgrounds. I mean, I don't have a degree in environmental science or in the environment at all. I've got a degree in finance. So I obviously am coming up from more of a financial perspective. And then I've learned a lot about the markets as it goes. And I'm by no means a technical expert around, like, how do you specifically
00:07:20
Speaker
measure the carbon sequestration of this specific mangrove tree and so those people kind of tend to come more from a scientific background but I think in terms of investing in carbon markets it's definitely useful to have some kind of financial background just because in many ways it's the same as investing in any asset or asset class right you're just looking at what are the demand drivers what's the pricing looking like in the market so
00:07:50
Speaker
I guess financial experience in that sense is helpful, but you can also learn that if you come from more of an environmental or sustainability background and look at the market.
00:08:02
Speaker
Well, that's right. I mean, look, you're making a market. So, you know, in a way it very much falls under financial, typical financial markets as well, which kind of brings us to, I guess, the current market landscape that's happening in the world at present and how that kind of weaves into the decarbonization and transition story for, I guess, some of our listeners who aren't
Carbon Markets Overview
00:08:30
Speaker
deep into the carbon markets as much as you are or as much as Maddie and I are, we'd be really interested just to get a brief overview of a very complicated system. Definitely. So I think the easiest way to break down carbon markets is there's compliance markets, which are backed or regulated by the government. And then there's voluntary market, which is it's not backed by government and
00:08:58
Speaker
it's regulated or there's independent third party crediting bodies. And then the Australian market is this kind of weird quasi-compliance voluntary market because it's combination of the two. At Karkariki, the way we think about the two markets is there's actually quite a big distinction between the two. So compliance markets, we tend to think of like a fiat currency. So the credits or allowances which are issued in those markets aren't actually backed
00:09:26
Speaker
by physical sequestration. So there's theoretical unlimited supply. The government can create as many of those allowances as they need to. They say that they limit it and that they intend to reduce it over time, but there's nothing to stop them from doing that. So in many senses, it's like a fiat currency. In the voluntary market and in the Australian market, every credit is backed by one ton of carbon that's been avoided or removed from the atmosphere. And so there are physical supply
00:09:56
Speaker
side constraints on that and so in that sense it's more like gold or any physical commodity which has supply constraints on it. Obviously in compliance markets on the demand side demand is regulated so it's much easier to forecast demand there whereas in the voluntary market demand is in its name voluntary but more and more what we're seeing is
00:10:22
Speaker
more and more companies are making voluntary commitments and they're now being obligated to keep to those commitments or targets, which means that while it's still called the voluntary market, it's not really voluntary anymore. Great. Thanks, Izzy. That was a really helpful overview. Breaking down such a complex topic. Maybe it might be helpful to, if possible, kind of
00:10:51
Speaker
explain what a carbon credit actually represents. So perhaps in terms of, you know, air travel emissions or something a bit more, something that our listeners can relate to a bit more easily. Yeah, definitely. I think before that it's probably worth pointing out that there's a bunch of terminology which is used interchangeably. So like carbon credit, carbon offset, carbon unit, carbon allowance.
00:11:18
Speaker
And they all theoretically represent one tonne of carbon that's been avoided or removed or one tonne of carbon that's been paid for. In terms of what does one tonne of carbon actually represent? So as an example, 10 trees in a year will likely sequester one tonne of carbon. There's a whole lot of assumptions that go into that around species of trees where the trees are and stuff, but 10 trees will sequester one tonne of carbon.
00:11:48
Speaker
return flights from Sydney to Melbourne is equivalent to you emitting about one tonne of carbon from your travel emissions, or it takes about one tonne of carbon to produce 10 kilos of base. So, I mean, there's kind of a few different metrics to try and make it understandable. That's definitely helpful. Yep, that's really useful. So you kind of touched on it just then, but you said there's
00:12:15
Speaker
maybe slight differences between, you know, all the different terminologies. So specifically, I mean, carbon credit and carbon offset seem to be used really interchangeably. Is there a difference between those two concepts? So carbon credit tends to be a catch-all term that lots like carbon offsets, carbon allowances and carbon units will sit under. Carbon offsets
00:12:41
Speaker
needs to have a physical project sitting behind it to sequester carbon because if you think about it you're offsetting your one tonne of carbon that you've emitted into the atmosphere so you have to have been removing or avoiding one tonne of carbon on the other side whereas the carbon allowance it may not actually be offsetting your emissions you're just paying a price for your emissions but that doesn't mean that your emissions have actually been removed or sequestered from the atmosphere so
00:13:08
Speaker
When we refer to carbon credits, we're basically referring to any of those credits, so allowances, offsets. It might be helpful to maybe discuss the regulatory environment that's driving the growth of the market in Australia specifically, any policy changes recently and just, yeah, what the key drivers in that space might be.
Regulatory Environment in Australia
00:13:35
Speaker
Yeah, definitely. So as I mentioned, the Australian market is this quasi compliance and voluntary market. So the safeguard mechanism is the compliance aspect to the Australian market. So any facility in Australia which emits more than a hundred thousand tons of carbon a year is obligated to surrender ACUs to the government or ACUs are Australian carbon credit units to the government for their emissions.
00:14:01
Speaker
which they haven't reduced in line with baselines which are set with the government and so that's a legal obligation that they have to do. That currently makes up actually quite a small percentage of demand for Accus in the Australian market. The majority of demand is actually coming from the voluntary space so that's basically companies who have committed to being carbon neutral or net zero and so they're buying
00:14:27
Speaker
accused to offset their emissions. So companies say like Woolworths, Telstra, all of those companies, they're actually at the moment making up more of the demand side on that. As I said as well in the Australian market, all credits are backed by one ton of carbon that's actually being removed or avoided. And there's a range of methodologies which that covers. There's been scrutiny of some of those methodologies in the last
00:14:57
Speaker
six to 12 months. And so at the moment, the Clean Energy Regulator, which is the government body which regulates the Australian carbon market, they are currently, I guess, updating some of those methodologies and removing them or sunsetting some of those methodologies. So there's a bit of change happening on the supply side of the credits. And then there's also some change happening on the demand side with the safeguard mechanism.
00:15:20
Speaker
Gosh, safeguard mechanism is just a little bit of a handful there. But in a simple way, it seems like those large emitters in heavy industrial sectors are basically being asked to reduce their emissions in line with Australia's emission reduction targets and where they're going above what they're allowed to, they basically have to pay the
00:15:48
Speaker
the carbon oversight is more or less how I'd summarize the safeguard mechanism. Would you say? Yeah, no, that's a good summary. I think there's a few things to note there. One of the changes that came out was a price cap for facilities covered under the safeguard mechanism. So there was a lot of lobbying from the mining industry and the coal industry saying it's unfair for us to have to go and buy these carbon credits.
00:16:17
Speaker
particularly with a rising price. So we want to know that we're not going to be exposed to huge financial penalties if the price ends up at $200 or $500. So as part of the safeguard mechanism reviews, the government came out and said, OK, we'll put a price cap of $75 on carbon credits for facilities covered under the safeguard mechanism.
Global Carbon Pricing
00:16:42
Speaker
The honest truth is a lot of those facilities covered under the safeguard mechanism, it's going to be really hard for them to reduce their emissions. Like so some of the companies we talk to at most, they can reduce their emissions by 10%. And that means that they will just continually be going and buying carbon credits to surrender to the government. My honest view around that $75 price cap is that it will be lifted at some point just because to incentivize decarbonization, we need a carbon price higher than $75.
00:17:11
Speaker
kind of to appease those lobby groups. Yeah. I mean, look, I think we could do a, we could do a whole episode on the safe card mechanism. I mean, 75 Australian dollars is on a global scale, not a huge amount for carbon. I'm not sure exactly what the EU carbon market or the, you know, pricing is currently at, but I believe it's higher than 75 Australian dollars. Is that right? Yeah, it's much higher and it's a good point, right? Because there's like,
00:17:41
Speaker
Decarbonization and climate change is a global problem and more and more countries are trying to push other countries to decarbonize to also protect their industries if they are pushing them to decarbonize. So the EU, which has a compliance market, they have introduced carbon border adjustment mechanisms to not disadvantage their own industries. So basically if we want to export coal from Australia and we're only paying $75 and we're not even paying that today,
00:18:10
Speaker
then we would have to pay the difference between what we're paying in Australia and what the European carbon price is basically at the border. And that should theoretically incentivise us to increase the price in Australia because the Australian government would rather keep that money in the Australian economy rather than paying it to the EU. Yeah. I mean, look, it all ties into a conversation we'll briefly having offline, but just, you know,
00:18:36
Speaker
having a global carbon price is probably really critical as we move towards net zero.
Role of Carbon Offsets in Net Zero
00:18:43
Speaker
But I guess that leads us to a question of, can we get to net zero without carbon offsets? Because it seems to me that under the safeguard mechanism, you're already skeptical that companies may be able to reduce their emissions, which is a gradual process over time. So
00:19:02
Speaker
you know, can we get to net zero without carbon offsets? Or is it always going to be part of the system? My view is it's always going to be part of the system. And there's a few things that go into that. So a lot of the work that I was doing at Morrison and co looking at these lower emissions technologies as part of decarbonisation, we're a long way off from having those technologies either be commercial or viable at scale. And
00:19:32
Speaker
until we have those lower emissions technologies, we're going to keep emitting carbon into the atmosphere. I think it's unrealistic that we're going to shut down all the coal plants in Australia. It's unrealistic that we're going to stop flying internationally or domestically on flights. And so we're continuing to emit carbon into the atmosphere beyond our carbon budget. And we've now reached the point where we need to remove a lot of carbon that we've emitted into the atmosphere. And so we need to remove that and we need to incentivise
00:20:02
Speaker
I guess the world to remove it and the way to do that is through carbon credits or carbon offsets where we're paying people to remove it, then there will always be sectors which we might need, but there is no viable low emissions or net zero solution. And most companies will always have a small bucket of residual emissions that they can't eliminate anyway. So there's always going to be a role for carbon offsets.
00:20:30
Speaker
In the short to medium term, the role for them will be quite large, but hopefully as we get closer to 2050, the role for them will become smaller and smaller because we will have decarbonized a lot of those sectors and industries which are hard to abate currently. Thanks, Izzy. And I guess given the large role that carbon offsets and credits will be playing, particularly in the short to medium term, would it be possible for you to
Carbon Credit Standards
00:20:58
Speaker
please provide an overview of the different types of standards of carbon credits and maybe discussion of the quality of different carbon credits. Yeah, definitely. I think I should just add one more thing there though. Just back to the, sometimes people accuse carbon credits of enabling companies to kind of kick the can down the road and not decarbonize. The truth is carbon offsets or
00:21:26
Speaker
next race carbon as a solution can only ever sequester 30% of global emissions. So it can, it can only ever be part of the solution. It's not the solution. So we do need to focus on those other technologies. Um, it's just that it's going to make up a larger percentage of that solution in the short to medium term onto kind of the different quality of credits and standards. So, uh, if you look at the voluntary market, um,
00:21:54
Speaker
There's four main crediting bodies. There's VARA Gold Standard, the American Carbon Register and the Climate Action Reserve. There's a whole lot of other crediting bodies out there, which basically they have the rules and the processes and the methodologies around if you want to generate carbon credits. But those four are the largest in terms of the number of projects and the volume of credits that they're issuing. And they're all independent, not-for-profit,
00:22:23
Speaker
systems and they've been around the longest, I'd say, and they all have slightly different, I guess, they focus on slightly different areas or different qualities about them. Vera and Gold Standard are the largest and they're global and they'll have their own methodologies and sometimes they'll have competing methodologies.
00:22:47
Speaker
So to give you an example, there's a methodology for cook stoves, which is basically putting clean cook stoves in developing countries. Vera has a methodology and gold standard has a methodology. The market consensus is that gold standards methodology is better than Vera's methodology. So it tends to be if you're a project developer and you use Vera's methodology, your credits will trade at a discount to credits which are issued under gold standards methodology.
00:23:17
Speaker
I should probably go back up another level. So basically the way their methodologies are broken down is they have nature-based methodologies or project types, and then they have technology ones. So nature-based is things like doing environmental planting, so going out, or aforestation, so going out and planting new trees where trees have been cleared before. It could be going and doing, um, restoring mangroves where mangroves have been cleared or how to die back event.
00:23:43
Speaker
There's also Red Plus, which is basically protecting existing rainforests from being cleared. Then on the technology side, you've got everything from efficient cook stoves, replacing LED light bulbs. A lot of those methodologies, obviously, are only valid in developing countries, like direct air capture, biochar.
00:24:10
Speaker
a huge range of methodologies. But the bulk of credits historically were issued from renewables projects, renewables projects in developing countries. So that methodology is being phased out because it's no longer additional. It's probably worth covering a carbon credit needs to be additional. That is the carbon sequestration or removal or avoidance would not have occurred if it weren't for the revenue attached to the carbon credits.
00:24:39
Speaker
And more and more credits are being issued for nature-based solutions like REDD+, Aforestation, and the like. Yeah, there's a lot of projects there and lots of different methodologies. So I guess, and you brought up the principle of additionality. There's also the principle of permanence as well in the offset market.
Need for Regulation in Carbon Markets
00:25:07
Speaker
And I guess there seems to be a lack of standardization or acceptance of what this all means across the globe. So does that bring us to a point where we need more regulation in the market? Is that something that the offset market requires? Because you do hear, and there is a lot of negative press around the use of offsets. And I think a lot of that could relate to lower quality projects, which under a uniform standard, perhaps we don't need to have these lower quality.
00:25:38
Speaker
offsets. Yeah, I think it it's I mean, carbon markets complex and they're evolving and which makes it hard for them to it makes it hard for the market to address all of those problems at once. So there's a few I mean, there's a whole range of criticisms that happen on them in the carbon market. One is that it's
00:26:05
Speaker
some carbon projects might be over-crediting or under-crediting. What does that mean? It means that for a project, the carbon credit might not actually represent one ton of carbon that's been avoided or removed. Why does that matter? Because if your coals or Woolworths on the other side, and you're buying those carbon credits to offset your emissions, if the carbon credit only actually represents 0.8 tons of carbon, then you should be buying 20% more to offset your emissions.
00:26:36
Speaker
On the supply side, though, it is really hard. It will improve because with technology and the like, but carbon isn't a perfect science, right? In the same way that it's very hard to measure emissions 100% accurately. So at the moment, say in Australia, a lot of the methodologies are model-based. So there's models which basically forecast what the estimated carbon sequestration is. And assuming you hit a whole lot of criteria or meet those criteria,
00:27:05
Speaker
you get issued a certain number of credits. That means that some projects are over-crediting and some projects are under-crediting, but net-net, it should be the right amount of carbon. And my honest view is that we're never going to get to a carbon market where every single credit we can 100% know represents one ton of carbon, and carbon markets won't be able to scale if that's what's required.
00:27:29
Speaker
because we just don't have the resources to get auditors out on the ground to do physical measurements of every single tree to make sure that tree is sequestering the amount of carbon that it says it is. There are definitely improvements that we can put in place, and we're always better, I think, to be more conservative than not. So the biggest criticism is there's two types of carbon credits or carbon offsets. There's avoidance and removal. So removal is very clear. Like you've planted a tree, it's very clearly removed a ton of carbon from the atmosphere.
00:28:00
Speaker
avoidance methodologies are avoidant methodologies like red plus or savannah burning where basically you're so for red plus you're saying this project area or this forest is at risk of deforestation because the local community who lives in that area that's their source of income and we know that every year they through slash and burn or just through clearing activities they on average have cleared 100 hectares a year and so that's basically the assumption that you put into
00:28:29
Speaker
the model around how much emissions are you avoiding by stopping them from clearing that. But that's a counterfactual methodology. We'll never actually know if they were going to clear 100 hectares. And that's where the criticism comes into the market. It's around, was it going to be 100 hectares or 80 hectares or 50? Or was it going to be 500 hectares? We don't know. And so there does need to be just, I think, some acceptance that carbon markets aren't perfect. And it might end up being that
00:28:57
Speaker
for corporates who are using it to offset their emissions, they need to either, they should be using a certain percentage of removal, where it's very clear what the carbon has been removed from the atmosphere, or that we ask corporates to open compensate. So they always have to offset 20% more than their emissions or something. But it's a complicated area. And I think if we're looking for the market to be perfect, we'll be disappointed.
00:29:27
Speaker
But we do need to improve, I think, the transparency of the market for it to be viable. Great. Thanks so much, Izzy. That was super, super helpful and great, great insights into the, into how complex, complex the carbon markets are and lots of different terminologies and acronyms to be navigating as well. I think maybe to pivot towards
00:29:56
Speaker
your perspective on investing in carbon markets. We'd love to hear a bit about your investment strategy at Kakariki and how you see carbon as an investment opportunity and how can we go long in carbon?
Investing in Carbon Markets
00:30:11
Speaker
Great question. So, I mean, there's a few different ways you can get exposure to carbon markets. I mean, part of the reason I set up Kakariki was I was obviously super passionate about carbon markets and I was trying to invest myself
00:30:26
Speaker
And it was really hard. Um, and it was also really hard to do, um, just kind of like an individual, uh, cause they're wholesale markets. Um, so, and there's also a whole range of different markets. So compliance markets, uh, you can invest in them. Basically you're taking a regulatory bet because they're backed by governments and you're basically betting that governments are going to stick to what they've said they're going to do.
00:30:52
Speaker
which has reduced the number of allowances so the price of those credits goes up. I think that's a very valid strategy but for me where we see the most upside and also need for investment is in the voluntary market because we think they're the most mispriced and so the way there's a few ways you can invest in the voluntary market you can just buy carbon credits which have been issued by projects in the spot market
00:31:22
Speaker
You can do project finance. So basically, you're providing the upfront capex, say, to plant the trees. And in return for that, you'll get a percentage of the credits, or you'll get a fixed number of credits over a certain period of time. And that's basically how you pay back your upfront investment. Or you can do off-take contracts. So basically, you say to a developer, we agree to buy a certain number of credits from you every year for the next 10 years. And you might agree at a certain price today.
00:31:52
Speaker
And so that's what our first fund does. We basically invest across the compliance market, the Australian market, and the international voluntary market. And we do everything from project finance, off takes, or just buying credits in the spot market. Another way to, I should say, that can be quite volatile. Carbon markets are nascent, and so carbon prices are moving around quite a lot, particularly as there's market criticism. So you definitely need to be able to take a long-term perspective from that.
00:32:22
Speaker
Our second fund that we have is asset backed. So we are buying Australian farmland and then we're developing carbon projects on that farmland with a focus on environmental planting. So that's another way to get exposure to the carbon price, but probably with less volatility and reduced risk because in a worst case scenario, say carbon markets cease to exist.
00:32:51
Speaker
We can sell the land, whereas in our first fund, if carbon market ceased to exist, basically all those credits that we hold and projects that we've invested in, there's not really any value sitting behind them unless the market or the world believes that there is value in a ton of carbon that's being removed or avoided.
00:33:13
Speaker
Yeah. I mean, look, hopefully it doesn't get to land value, but on that comment, I mean, we spoke a little bit about pricing and obviously CBAM's put, you know, a cap on the pricing with the potential to increase that cap over time. But I mean, what is the current price of carbon credits and where do you see it going?
Carbon Price Dynamics
00:33:38
Speaker
Like, what's the upside here?
00:33:42
Speaker
Good question. There's not one price of carbon. So like in Australia, the current carbon price is on average $35. In New Zealand, it's currently $70. In the EU, it's just over 100 euros. In California, it's about $35. There's no one carbon price. In the voluntary market, you've got some credits trading at $30, some credits trading at $1. So a huge spread.
00:34:08
Speaker
There's a few ways to think about where you think the carbon price is going to get to and across all those markets. One is you can look at what's the marginal cost to decarbonize those industries, right? And so you need to drive up the carbon price to incentivize that decarbonization. So if you look at airlines, their marginal cost to decarbonize is between $300 and $800. So until the carbon price is at $300 to $800, airlines will keep buying carbon credits or carbon offsets to offset their emissions.
00:34:38
Speaker
And so we know that the market is incentivized to keep pushing that up. On the other side, you saw a whole bunch of big consultancy groups like McKinsey, BCG, Bain, they've all done forecasts on the demand versus the supply of carbon credits. In like a worst case scenario, only 7% of demand for carbon offsets will be met. In a best case scenario, it's like 80%. Either way, there's not enough supply to make demand. So we know carbon prices are going to increase.
00:35:08
Speaker
We're confident carbon prices will get to above $100 or $150 in the medium term. There was an IPCC report which had one forecast of carbon prices out at $12,000. But that's basically at $12,000, almost every single sector or industry has decarbonized because it's cheaper to decarbonize than to be paying $12,000 per ton. So I don't think we're going to get to that price.
00:35:39
Speaker
I can see the price getting in the long term to $500. I think there will definitely be volatility and the biggest risk is snap regulatory, like regulatory risk or governments making snap decisions, which basically changes pricing in the market.
00:36:03
Speaker
I think you'd be getting a few excited people at a $500 carbon price. And some disappointed companies who have to pay it. That's right. Yeah. Obviously, I'm super high conviction on carbon, but I also genuinely believe we need a high carbon price to decarbonize. So all of that is prefaced on the belief that as a society, we will continue to drive decarbonization. There is a risk that
00:36:31
Speaker
it just becomes too expensive and we abandon those attempts. And that's kind of the absolute downside scenario, right? Is that we just decide it's too hard. We'll just kind of go forward putting up with more and more natural disasters, crazy climate and whatnot. I hope not, but we definitely need a higher carbon price
00:36:59
Speaker
aligned with a two degree world. Thanks, Izzy. And you've touched on this before, but it might be helpful to kind of delve into the supply demand dynamics a little bit more of the different types of credits, particularly within the Aussie market.
Australia's Carbon Credit Market
00:37:21
Speaker
Yeah, definitely. So in the Australian market, as I said, every credit is backed by
00:37:27
Speaker
physical project that has either removed or avoided one ton of carbon. Current or up until now the bulk of those credits have been like avoided clearing or avoided deforestation. Those credits have been phased out because of questions around their integrity and whether or not they were additional. So that's removed a whole chunk of future projects that could potentially be delivered in credits. Going forward
00:37:57
Speaker
where we'll see credits coming from is likely environmental planting, mangrove projects, and then the IFM methodology, which is basically improve farm management or soil carbon and integrating a whole bunch of methodologies into that. Then there's also some more like technical or not land-based methodologies like landfill gas and the like, but where the bulk of the potential will come from is from nature-based solutions.
00:38:27
Speaker
In the short term, there's currently more supply than there is demand on the market. But that's expected to flip. And there will be constrained supply relative to demand. And that will obviously push up prices, which then also opens up more supply. So if you say you're looking at a property at the moment at a calm price,
00:38:54
Speaker
$35 it might not make sense to do a carbon project on that property but if the carbon price is $100 it now makes sense to do a carbon project on that property and so that increases the supply of credits coming onto the market.
00:39:08
Speaker
Thanks, Izzy. That's a good background. I wanted to, with all of that context now that our listeners have on the carbon markets, I wanted to pivot to your business, Kakariki.
Vision and Opportunities with Kakariki Capital
00:39:21
Speaker
And I guess the first point of call is where did the name come from? So Kakariki means green in Maori. And it's also the name of a New Zealand bird, which
00:39:34
Speaker
is becoming endangered because of loss of biodiversity and climate change. So that's kind of the meaning behind the name. It was really hard to come up with a name, one of the hardest things I had to do. Yeah, not easy at all. And so I guess what was your vision when you founded Kakariki? Is it where you thought it would be or where you can get it to?
00:40:03
Speaker
Yeah. So I mean, as I said, like part of the drive, I'm obviously super passionate about carbon markets and believe in them, but part of the driver was I just wanted to invest in them myself and I realized how hard it was. And so I was like, if I'm struggling, other people must be struggling. So, um, initially I just kind of, I said, you have to set up a company to invest in carbon credit. So I set up a company, um, to invest myself. And then I started talking to other people and they were like, Oh yeah, no, I'd like to invest. Um,
00:40:33
Speaker
in that. I think ultimately what I would like to do is to bring institutional capital to carbon markets. It's hard because they're nascent. And so a lot of institutional capital sees that as risky. But that's ultimately what we are trying to do because to scale carbon markets and to help them be part of the solution to net zero, we do need institutional capital to come in at scale to those markets.
00:41:02
Speaker
Great. Thanks, Izzy. I love that you set up a business. It's kind of crazy. Like when I set it up, I didn't really think that I'd have to run a business. I just thought I'd be investing in carbon and then I realized everything else like managing people for an admin. Such an amazing story. And maybe you just touched on how you'd love to bring in institutional capital into the funds, but maybe, um,
00:41:29
Speaker
an overview of how people can invest with you at the moment and what your typical client might look like. Do you need to be a wholesale investor? Great question. You do need to be a wholesale investor to invest with us. So we currently operate two funds. We've got one which invests globally and across compliance in the voluntary market. And then we've got our land fund, which is just Australia based. They're both unit trusts.
00:41:59
Speaker
Um, you can invest in them, but again, you do have to be a wholesale investor. And then we also operate IMAs or individual management agreements for investors who want more with spoke portfolio, but that does require a minimum investment of 5 million. So I'll chat with you offline about my, uh, I mean, obviously this is a really compelling investment opportunity.
00:42:25
Speaker
it sounds like you're really across the markets. You've got your finger on the pulse. I mean, it's a fantastic way to get exposure to carbon through your funds, Carbon Fund Wand and Land Generation Fund. But if there's someone listening who maybe thought, okay, carbon market sounds interesting, could I set up my own fund?
Advice for Aspiring Fund Creators
00:42:44
Speaker
How would you suggest people do that? Or is it really difficult? It's a good question. I mean, I've been very fortunate. I've been supported by a lot of people
00:42:54
Speaker
in helping me. I mean, to set up your own fund, you either need an AFSL or an Australian Financial Services license, or you need to be able to sit under someone else's AFSL. But once you've kind of got that legal or regulatory requirement out of the way, you can set up the fund, I guess. You basically just need to put together an information memorandum, set up a trust deed,
00:43:22
Speaker
uh, and all of that kind of stuff. Um, I, the one thing I'd say is it seems daunting, but I'd say go for it. Like the worst that happens is that it doesn't work out, but you'll learn so much along the way, um, which will just be invaluable. Thanks Izzy. Oh, it's really such an amazing, amazing career, career journey. And, and maybe with that, with all of the,
00:43:49
Speaker
good times at Morrison Co and building your own fund and creating a new fund to start investing in carbon markets. I'd love to know any career advice you have for our listeners or your top career tip. Excellent question. My top career tip probably would be is don't let anyone ever tell you that you can't do something
00:44:20
Speaker
um, or try and talk you out of doing something, particularly if you're a female. Um, like I had a lot of people, I had a lot of people who supported me, but I also had a lot of people who were like, what on earth are you doing? And basically I, I think I get a nice way, but also like kind of creating like fear in me that it was never going to work and that there were all these hurdles, uh, in my way.
00:44:47
Speaker
And I think, as I said just before, the best thing you can do is just have a go. You'll learn so much from it. And you'll feel like you're drowning for a lot of the time. But it's much more rewarding, I think, to have a go rather than just sit on the sidelines.
00:45:08
Speaker
Yeah, and I mean, look, that's a really important piece of advice for particularly for females who often do get less encouraged than their peers of other genders may. So I appreciate that advice. And I think it's obviously such an interesting sector. It's going to be increasingly important in an Australian and global context. So we really appreciate you coming
00:45:35
Speaker
on and chatting to us about it and sharing your wisdom. We're really excited for the future of Kakaraki and keen to see what you do going forward. Thanks. I really appreciate you guys having me on. It's been great to have a chat. Thanks so much Izzy. Thanks Maddie. Thanks Emily.
00:45:53
Speaker
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