Geopolitical Risk in Carbon Markets
Diversification is crucial for carbon project developers.
A common issue investors need to be aware of in commodity markets is the potential for various geopolitical risks to pop up across the globe…
Resource nationalism, shifting regulatory structure/political parties, hostility from local communities... the list goes on.
Even jurisdictions traditionally considered “first-world” are not always safe for resource development.
For example, Spain is considered one of the worst areas in the world to try to permit a mine, grouped in with the likes of China, Venezuela, and the Democratic Republic of Congo.
While some might not realize it, carbon offsets are akin to any other commodity.
With that said, the development of carbon projects is certainly less capital-intensive, and combined with the incoming tidal wave of demand…
The carbon sector offers the most attractive investment proposition of any commodity, in my opinion.
Perhaps even any possible investment we could make right now, if things turn out how we think they will- that’s why I’ve positioned all of my content around the space.
Regardless, we will see an influx of geopolitical risk emerge across the planet as carbon offsets grow in popularity and value.
We’ve already seen this trend continue in the carbon markets over the last few years.
Indonesia
Indonesia, already known for having a checkered past in the commodity space, has extended its problematic nature here as well.
An issue that has already affected one of the very few public companies operating in the voluntary carbon markets. Carbon Streaming (NETZ).
The company’s flagship royalty asset, Rimba Raya, had all of its potential carbon offset issuances halted last year.
Indonesia’s government provided little guidance to project developers and other key stakeholders as they were mulling over potential policy changes.
With that said, we know Rimba Raya was now obligated to be validated under Indonesia’s carbon registry (SRN) instead of Verra. Which it was, but the future of the project is uncertain.
Information is difficult to gather, as Carbon Streaming themselves have provided little communication to investors about the situation…
And what news is out there, is likely behind a paywall on Carbon Pulse, which isn’t particularly SEO-friendly to begin with.
Anyway, Indonesia was likely just the start of this behavior.
Zimbabwe
In May 2023, Zimbabwe came out and declared all carbon offset deals in the country “null and void.”
Additionally, the government would take a staggering 50% revenue split on any future deals.
A situation that caused experts in the space to think other countries might’ve followed suit, taking an opportunistic view.
Now, after heavy backlash, Zimbabwe backed off of the policy in just five days… but this is a clear sign of the country’s hostile attitude toward foreign investment.
Tanzania
Adding fuel to the fire, our latest geopolitical hazard happened in Tanzania.
The country rolled out new fees that effectively added an 18% tax on gross revenue from any carbon project.
Several projects were immediately put on hold because of the news, and protests erupted.
That is supposedly falling on deaf ears... we'll see how the situation evolves.
So what are the implications of all of this?
Ideally, we want to invest in companies that are either diversified throughout multiple jurisdictions or operating in the first world.
Given how the availability of capital is greater for developers of carbon projects in comparison to mining developers…
In most cases, as retail investors, we will have to rely on diversification to dampen the impact of any potential regulatory issues.
(Companies like Apple are directly funding carbon projects… you would rarely ever see something like that in the mining space. This leads to developers/royalty companies focusing on funding projects in the third world to find better opportunities)
Over the longer term, this difference between carbon and other commodity markets may lead to the irrelevance of the royalty/streamer business model.
With large institutions readily funding projects across the globe… there would be no need for capital from royalty businesses.
And even if they did find quality projects to fund, the returns could be poor in comparison to mining royalty companies.
This is why I am starting to open up more to developers like Klimat X (KLX) as potential investments. But this is a problem for another time.
In summary, we will see more geopolitical risks emerge over time. It is inevitable.
Many times, the countries engaging in this behavior would've already done this in other commodity markets.
So if you’re going to invest in a carbon-related company, ensure you research the history of the jurisdictions they operate in.