Oct 1, 2024

Share Illuminate Financial was excited to participate in this year’s NYC Climate Week, held from September 23 to 27. The week of events complemented the 79th UN General Assembly to address topics around the 17 Sustainable Development Goals. The week brought together leaders from various sectors to discuss pressing climate issues and innovative solutions. Below are a few reflections from our team members Alex Gheorghe , Rezso Szabo , and Julie McCrimlisk . The State of the Carbon Credits On Tuesday, September 24th, Illuminate hosted a breakfast alongside BeZero , JP Morgan , and Bloomberg to discuss the state of carbon markets. The breakfast featured a panel discussion with Kyle Harrison , Head of Sustainability Research at BloombergNEF, Jerome Rouphael , Commodities Institutional Sales & Structuring at JP Morgan, and Sebastien Cross , Co-founder and Chief Innovation Officer at BeZero Carbon. The discussion was moderated by Alex Gheorghe , Investor at Illuminate Financial. The conversation focused on several core themes: The Role of Regulation Regulation continues to be an unlock for both the voluntary and compliance markets. While there are many initiatives at the local level, global regulatory frameworks such as the Carbon Border Adjustment Mechanism (CBAM) and the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), are driving price transparency and liquidity for buyers and sellers of these credits. The role of these regulatory frameworks pushes carbon credits from entirely voluntary markets, into current compliance markets, which represent a $249 billion market size. In the case of CBAM, the legislation has several key implications for supply chains and for establishing carbon as a new cost factor in international trade. The regulation works alongside the EU Emissions Trading System (EU ETS) and extends existing carbon pricing from domestic producers to imports. While this may lead to reconfiguring of international trade patterns as some non-EU producers may seek alternative buyers with less stringent carbon policies, incentives for low carbon producers and carbon reducing technologies will increase. By mirroring the EU ETS allowance price which has been trading above $100/tonne CO2e, CBAM extends the need for producers to incorporate and solidify a price on carbon. CORSIA requires airlines to purchase carbon credits to offset emissions growth above 2020 levels and represents the first global market-based measure for any single industry sector. The framework is projected to create demand for 60–160 million carbon credits during its first voluntary phase, which began in 2024. The implications will be especially profound in the demand for high-quality carbon credits as only two standards have been approved by CORSIA thus far. Many corporations outside of aviation are now adopting CORSIA eligibility as a minimum threshold for their credit portfolios, which will further increase overall demand. However, these current limitations may also have significant impacts on available credit supply and pricing. Quality Over Quantity In August 2024, BeZero announced its first AAA-rating to the Orca plant operated by Climeworks . The debates surrounding carbon credits often pit cost against quality. As corporations navigate the complex landscape of carbon credits, the challenge lies in understanding the associated risks. Ratings provide a critical metric for comparison for risk and, therefore, quality of credits, allowing the market to reflect the true value of these assets. These ratings are a first step in allowing corporates to make informed decisions about which credits to purchase. A diversified portfolio of high-quality carbon credits is essential. While the latest focus in the carbon markets has been towards engineered carbon removal projects, such as Direct Air Capture (DAC), there is a role for nature-based solutions in these diversified portfolios. While these may be more difficult to quantify due to lack of access to nature-based and geospatial data sets, as well as questions around additionality, these nature-based solutions constitute almost half (46%) of the current voluntary carbon market. While companies are participating in offsets, companies should also focus on internal emissions reductions, whether through investment into renewable energy, retrofits for their physical real estate, and/or changes to existing manufacturing and supply chain processes before pursuing external projects. Renewable Energy, Discussions on the Grid, and 24/7 CFE Renewable energy adoption remains a critical focus. In conversations throughout the week, corporates highlighted the role of the Inflation Reduction Act (IRA) in driving direct investments into renewable energy projects, alongside Scope 2 management through Renewable Energy Credits (RECs). This was complemented by discussions on grid technology, the political challenges impacting deployment, the role of battery technology to co-locate with renewable energy sources and manage load growth, and interest in time-based energy attribute credits. Technological disruptions can occur quickly, especially in sectors with existing distribution capacity. Historical adoption and cost curves for solar and wind can serve as valuable predictors for future trends in the battery segment , a space that we have been spending quite a bit of time in. Financial Innovation and Private Credit for enhancing Bankability Climate tech is 6x more capital intensive than regular technologies. The conversation around climate investment went from a “do good” outcome, to quantifiable CapEx reductions and ROI (and NOI) benchmarks. The public and private sector are poised to play pivotal roles in achieving these financial hurdle rates to bring new infrastructure projects online. In the case of the public sector, the Inflation Reduction Act has outlined substantial grants, subsidies, and transferable tax credits to impact the unit economics of projects. For example, the Greenhouse Gas Reduction Fund (GGRF) is a $27 billion program created through the IRA to support clean energy deployment and infrastructure investments, particularly in low-income and disadvantaged communities. Climate tech is 6x more capital intensive than regular technologies. However, bankability of these projects remains in question, particularly for those projects smaller than $100 million in size. This is where private sector involvement and financial innovation come into play. During Climate Week alone, we heard of several innovative ways to realign financial incentives, including new Purchase Power Agreement (PPA) structures for batteries, backstop structures to enhancing certainty in offtake agreements, tranching credit with specific climate-alignment goals, subscription and gross lease models for tenants and commercial customers, and private credit allocators turning to become LPs in Venture Capital and Mid-Market Funds. A sense of Optimism and Urgency Our team left NYC Climate week with renewed energy as to the progress and path ahead. However, this optimism is tampered with a sense of urgency as to the pace with which innovation, both technological and financial, needs to occur. The emphasis on high-quality carbon credits, renewable energy, standardized data, and financial innovation presents a pathway forward. As we move beyond discussions into actionable steps, the insights gained from this week must translate into tangible progress. Together, we can create a sustainable future, addressing the climate crisis with urgency and responsibility. If you are a like minded investor or early-stage company building at the intersection of finance and climate, we would love to chat with you. Illuminate Financial is a thesis-driven enterprise fintech venture capital fund looking to partner with companies building technology solutions for financial services.