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INTERVIEW: Rise of 'carbon nationalism' can be tackled by fairer distribution of profits: GenZero

Economic incentives are crucial to resolve the rising trend of "carbon nationalism", especially fairer distribution of profits from carbon trading to benefit local communities in host countries, Frederick Teo, CEO with GenZero, told S&P Global Commodity Insights in a recent interview.

In the past couple of years an increasing number of countries that host carbon credit generating projects have become wary of exporting carbon credits to foreign buyers. While some regulators introduced domestic registries and exchanges instead of counting on international ones, others have directly halted all carbon credit exports.

"Countries want to control better, tighten restrictions, and put in place more robust regulation... It is a good thing. The one thing that we need, in the private sector as we deploy capital, is not lax rules. We just need consistent rules," Teo said.

"With consistent policies, it will be easier for us to determine whether this is doable or not, and when we invest, we have certainty over the returns and the operating environment," he explained, adding that what's happening today in carbon has been seen in other sectors before, like fossil fuels or even renewables.

"We need to encourage countries and organizations to work towards being able to have fair trades between those that have and those that do not have [resources]," Teo said.

Host countries have complained that local communities received a very small share of earnings from carbon trading, with most of the profits going to middlemen, resulting in controversies that hinder carbon trading.

"What will happen if local communities give us all the carbon credits, and over 10-15 years the prices skyrocket and then we as investors or project developers pocket all the profits?" Teo said.

"Today's best-in-class practice is, as profits ratchet up, a proportion of that goes back to the local community as opposed to having a fixed payment, so they can benefit from the upside of the carbon market. I think that's a fairer way of making those arrangements," he added.

Carbon strategies

GenZero, an investment vehicle focused on decarbonization projects established by Singapore's state investment company Temasek, is building a business in the MRV [monitoring, reporting, verification] space, and it also plans to undertake rating of carbon credits.

Teo said the company is also keen on nature-based solutions, not only in protecting and replanting forests, but also sustainable agroforestry projects to decarbonize certain aspects of agriculture.

"One area that we have invested in over the past few months has been rice decarbonization," Teo said, adding such projects are expected to reduce methane emissions from paddy fields by 30-50%.

GenZero is still in discussions for the issuance of carbon credits for these projects as some methodologies related to rice decarbonization are being reviewed by the standards company.

"We do hope that, once the review is done, we will come up with even more robust methodologies to be able to credit credibly," Teo said.

He said today's carbon market is going through an introspection phase, during which market rules are being re-evaluated, and various methodologies, like the rice decarbonization ones, are being reviewed.

"Out of this review, I think will come a much better framework," he said. "You are also likely to see, in the later part of the decade, a growing supply and demand [of carbon credits]," Teo said, adding that the key driver will be national climate targets for 2030 and beyond.

"To meet our commitments, we almost certainly need to overinvest into nature in the near term," he said.

Patient capital

GenZero's portfolio includes technology-based solutions which aim to decarbonize emission-intensive industries, especially hard-to-abate ones.

"We are looking at solutions that will not wait 30 years to realize. But we also don't invest in solutions that already exist today. For example, we don't do renewables like solar, because they are already commercially viable. Neither are we looking at fusion power, which might take another 30 years," Teo said.

He said focus areas are carbon capture, utilization and storage or CCUS, sustainable aviation fuel or SAF, and low-carbon materials. The company is also looking into intersections between technology and nature, such as biochar, engineered timber and some types of biofuels, which are solutions from nature that feed into technology-based decarbonization processes across industries, he explained.

Solutions like SAF could have significant commercialization opportunities in the next five to 10 years, he said. "For some pathways, we could be investing into unlocking the feedstocks. For other pathways, we could be investing in the technology companies to make the production more cost-effective," he added.

Teo added there's a significant difference between aviation and shipping industries' decarbonization, despite both sectors being international and hard-to-abate, as SAF is likely to be the dominant answer for the foreseeable future, but maritime is seeing a multi-fuel future.

"I would say that for us, the immediate focus will be much more on aviation fuel, because the answer for us is a little bit clearer," he said.