What are the Investment Opportunities in the Carbon Credit Market?

You’ve likely heard references to your carbon footprint and that as a country, we are attempting to be carbon neutral, but what does this really mean? Your personal carbon footprint is measured by things like how often you drive your car, how much electricity you use, how much rubbish you throw away and even how many children you have.

The carbon credit market spells an opportunity

Carbon Positive Australia states that the average Australian household of 2.6 people has an annual carbon footprint (Co2e) of approximately 15-20 tonnes. Basically, Co2e measures carbon dioxide emissions that we are told are bad for the environment. The UN tells us that we need to limit our per-person carbon emissions to 2 tonnes per year, which is around 1/3 of our current output. While this may seem a lot, the carbon footprint for the mining, energy, and transport industries is significantly more, which spells an opportunity for astute investors. Let me explain.

Carbon capture and carbon credits are a growing market in which you have the opportunity to invest. Carbon capture involves capturing the CO2 from sources, such as power plants or even directly from the atmosphere. Once the carbon has been captured, it is typically stored underground in geological formations, such as depleted oil and gas reservoirs. Companies that undertake these projects can then be certified to create carbon credits based on the amount of CO2 captured.

What’s interesting is that these carbon credits are then sold or traded in carbon markets. Transport companies, such as airlines, can’t easily reduce their carbon footprint and are therefore major purchasers of these credits to offset their emissions. If you ask me this is a pretty good deal for those capturing the carbon.

So, you’re probably asking which listed ASX companies are participating in this growing industry. According to Worley Parsons, there are currently 20 commercial carbon capture and storage (CCS) facilities operating in the world, as the industry is facing challenges designing, engineering, and constructing these facilities, not to mention their negative public perception. That said, Worley Parsons is already playing a major part in the investment, consultation, and servicing of these projects.

One facility is being built in Australia and is on track for completion in 2024. The Moomba CCS project is being built 800km north of Adelaide and is being spearheaded by Santos and Beach Energy. This ambitious project is not only aiming to reduce the duo’s own emissions but also looking to reduce emissions from companies in other sectors. With the global CCS market projected to be worth a total of $14.2B USD by 2030 with an expected compound annual growth rate of 21.5 per cent, these projections certainly make this a space to watch.

What were the best and worst-performing sectors last week?

The best-performing sectors included Utilities up 5.09 per cent followed by Energy up 3.78 per cent and Information Technology up 2.87 per cent. The worst-performing sectors included Healthcare down 2.50 per cent followed by Consumer Staples up 0.16 per cent and Industrials up .066 per cent.

The best-performing stocks in the ASX top 100 included Allkem up 9.35 per cent followed by Domino’s Pizza up 8.13 per cent and Newcrest Minng up 7.13 per cent. The worst-performing stocks included Fisher & Paykel Healthcare down 6.52 per cent followed by Resmed down 5.82 per cent and Bluescope Steel down 4.90 per cent.

What's next for the Australian stock market?

In a stark turnaround from previous weeks, the All Ordinaries Index rose strongly last week trading up over 2 per cent before finishing the week up 1.41 per cent with the top 20 stocks leading the charge. When markets turn you will generally see these big stocks lead, as they start heading down near market peaks and rise near market bottoms, which is why I strongly recommend investors always keep an eye on them.

While the market seems to be finding support, this is not confirmed and as I mentioned last week nor is it guaranteed. The All Ordinaries Index had a short bullish move up closing higher over six days straight and was up over 3 per cent on the low of 4 October 2023.

Given this, it was not unexpected that it fell away slightly on Friday. In fact, it may continue to fall for a few more days to test the recent low and in doing so give us a strong indication that the down move the market has been in since July is now over. While it is possible we may see further falls below the 7,000-point support level, I do believe the move down has finished and is very close to being confirmed.

While the market is looking better, we are not out of the woods just yet, so patience is still the best strategy as there will be plenty of time to profit when we can confirm the direction of the market.

For now good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.