The Time Value of Carbon

Economic theory dictates that money in your pocket today is more valuable than money you receive in a year. The value difference between US$1,000 today and $US1,000 next year hinges on your best available opportunity. Receiving US$1,000 today can be saved, invested, spent wisely, or wasted. Whatever you do, having the money now rather than next year gives you a real option that has value.

Can we apply this concept to carbon as well?

A while back, Rich Gilmore from Carbon Growth Partners raised this question on Linked In, and it resonates strongly with how we think about #regeneration at Handprint .

Setting a regenerative target

Many of our clients at Handprint love our vision and approach.

We focus on the creation of positive (business and nature) impacts rather than on the reduction of negative impact. While the latter remains incredibly important, especially for those companies in the business of making, mining, and moving things, we seek to expand the interpretation of "environmental responsibility" beyond guilt accounting and damage done, towards a more equitably distributed shared responsibility. For those interested in how we think about this, I recommend you go the publications on our blog and download our report called "Nature Integrity".

One of the most common questions we receive from clients goes something like this:

"We love your narrative and approach to regeneration and love the idea of investing in natural capital rather than buying carbon credits, but how much should we contribute? What is enough?"

Here is our answer.

Let's start with a question: If the world is to achieve net zero CO2 emissions by 2050, how much should we reduce our carbon emissions every year? Add your answer in the comments below before reading on!

In 2023, global CO2 emissions were about 37.4 Giga tons.

One answer is an absolute annual reduction: we need to remove 37.4/26 = 1.44 GtCO2eq per year. This absolute reduction has the benefit of being simple but has the downside of not recognizing that removing or avoiding emissions will become progressively harder as time goes by.

To recognize this evolving difficulty, we could look at a relative decrease that remains stable over time, something captured by the Compound Annual Growth (Decrease) Rate. This would mean that every year, we will need to reduce the same percentage of remaining CO2 emissions.

CAGR = (end value / start value)^(1/n) - 1 with 'n' the number of years

This formula creates a few interesting observations when applied to the global emission goals.

1. We cannot use an end value of 0 emissions because this puts the CAGR at 1 irrespective of how many years 'n' we have left. A 99.999% reduction puts the CAGR at 35.77% per year!
2. Net Zero by 2050? If we assume we would be OK with 1% emissions remaining by 2050 (i.e. we would still have 0.31Gt CO2eq emissions by 2050), the CAGR is 16.23%. Let that sink in, we need to decrease or remove emissions at a compounded rate of 16.23% per year between 2024 and 2050 to achieve 99% CO2 reduction. Any company that does not hit this target year after year is simply not doing what science tells us is absolutely required to avoid catastrophic climate change.
3. 50% by 2030? Another common global goal is to reduce emissions by 50% by 2030. The CAGR for this objective is 10.91% and thus well below the CAGR for the 2050 goal, which creates an interesting result: The 50% CO2 reduction objective by 2030 is incompatible with the 2050 net zero goal. We would need to reduce emissions by 65% in the next 6 years to be in the same ballpark (CAGR = 16.05%)

What does this mean for Nature-Based Solutions (NBS)?

Companies can support NBS to remove carbon from the atmosphere through complementary mechanisms: The purchase of carbon credits or the investment in natural capital that will absorb carbon over time.

• Carbon Credits reflect historical carbon emissions that have been captured (or avoided). Whether they are sold or not has only an indirect impact on the future. Unsold Carbon Credits reduce access to finance for future carbon credit projects and hence undermine the long-term health of the market
• Investment in Natural Capital: Investment in natural capital for carbon sequestration is like buying a carbon forward. If the Natural Capital Asset remains intact, it will start generating carbon dividends over time that can contribute to the global climate goals. These investments directly affect whether or not a project will happen but are more risky because nature is unpredictable.

Imagine a company wants to remove 1,000 ton of carbon emissions. It could purchase and retire a high quality carbon credits (offsetting) or it could choose to invest in natural capital. But how much should they invest now?

The Net Present Carbon Value of future carbon sequestration must be at least equal to the amount of carbon emissions a company wants to offset

Applying this concept to Indonesian Mangroves

Under simplifying assumptions, this means that for

1. a restored mangrove forest in Indonesia,
2. with planting density of 2,500 trees per hectare,
3. an average biomass increment of 7.5 kg per tree (normal range between 5 and 10 kg per tree per year),
4. a linear growth pattern of 25 years (more complex S-shaped growth patterns can be used as well),
5. a carbon fraction of 0.48 (normal range is 0.46 to 0.50) and,
6. the ratio of molecular weight of CO2 to C is 44/12

The Net Present CO2 Value for 15 mangroves (i.e. 60 square meters) equals 1,009.6 kg, using the 16.23% time value of carbon as the discount rate.

The Total Future CO2 removal estimate is then 4.95 tons (so slightly below 300 kg of CO2 per mangrove tree; these estimates include above and below ground biomass).

Conclusion

There are many ways in which this approach can be enriched and some may question the simplifying assumptions made in the mangrove example but the key lessons are pretty daunting.

If we agree that we must accelerate carbon removal and that the goal of achieving near zero net emissions by 2050, the world must reduce emissions and increase carbon absorption at a compounded rate of 16.23% per year. Moreover, the -50% goal in absolute emissions by 2030 is incompatible with the 2050 (near) net zero goal. We should achieve 65% reduction by 2030 to remain in the same ballpark.