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The move away from traditional fuel sources towards new greener fuel sources offers many exciting prospects and many challenges that will need to be overcome which has meant that the transition has now become the priority at every board table. Younger generations are passionate about the transition and shareholders are demanding change to business strategies.

Net zero does not mean the same as zero so there will be a need for carbon to be removed from the atmosphere. This is likely to be in the form of both technology, such as Direct Air Capture (DAC) as well as Nature Based Solutions.

 

The energy transition

 The world is changing. Many of us will have views on how the transition should and should not happen and it can be debated whether it is changing fast enough, but we must agree that the world and we must change.

The world is changing, and the energy sector is at the forefront of this change. The move away from traditional fossil fuels towards new, cleaner sources of energy is a complex and challenging process, but it is also an essential one.

There are a number of factors driving the energy transition. One is the need to address climate change. The burning of fossil fuels releases greenhouse gases into the atmosphere, which contribute to global warming. Another factor is the need to improve energy security. Fossil fuels are a finite resource, and their prices are volatile. By diversifying our energy mix, we can reduce our reliance on fossil fuels and make our energy system more secure.

The energy transition is not without its challenges. One is the cost of new technologies. Renewable energy sources, such as solar and wind power, are often more expensive than traditional fossil fuels. Another challenge is the need to develop new infrastructure. Renewable energy sources are often intermittent, meaning that they do not produce electricity all the time. This means that we need to develop new ways to store and distribute renewable energy.

Despite the challenges, the energy transition is an opportunity for businesses. By investing in new technologies and infrastructure, businesses can position themselves to take advantage of the growing demand for clean energy. They can also benefit from the economic growth that is associated with the energy transition. And ensuring that the energy transition is done in a just manner is only one thing amongst many that corporates need to consider when figuring out their Agenda 2030 and future corporate strategy. Other considerations include;

  • What will customers need in the future? 
  • How to continue to service clients if their needs don’t fit the new “acceptable” world?
  • How will financing change and at what cost?
  • What will markets look like?
  • And most importantly, how to move the corporation with the evolution?

The energy transition is a complex and challenging process, but it is also an essential one. Businesses that embrace the energy transition can not only contribute to a more sustainable future, but they can also gain a competitive advantage.

Towards lower carbon

The world is trying to find a way to provide secure, affordable, and sustainable energy. One way to do this is to transition to lower-carbon energy sources. This transition will impact existing power, natural gas, crude oil, and LNG businesses in the coming decades.

In order to price these commodities going forward, it is important to understand and be involved in environmental products markets. These markets are expanding as countries and companies set targets to reduce their carbon emissions.

Mercuria is involved in most global carbon markets, including the voluntary offset space and the widening clean fuels markets. We provide new and existing customers with access to carbon-free or low-carbon products to help fulfill the increasingly growing demand for environmental commodities.

In the voluntary space, Mercuria is building a global portfolio of voluntary carbon offsets to help satisfy growing corporate demand. We expect this demand to steadily increase over the coming decade as companies seek to deliver on their Net-Zero commitments.

Mercuria is also active in most of the carbon trading markets around the world. As more investors enter these markets, greater liquidity will be created in the various contracts offered. This will ensure a functioning contract that can serve as a hedging tool for those with physical obligations.

We are also positioning ourselves to help countries reach their Paris Agreement goals. The UN COP26 led to an agreement on Article 6, a key Paris Agreement provision that would enable international trading. We have signed memorandums of understanding with country environmental agencies to collaborate on operationalizing Article 6 carbon trading.

To develop and expand lower carbon fuel supplies, Mercuria is utilizing existing businesses and working with counterparties to develop and expand renewable natural gas (RNG) and biogas projects. For example, we are active in numerous sub-national and national clean fuels programmes in the US, including California’s Low Carbon Fuel Standard.

The company is producing biogas that can be deployed to end users seeking supply for voluntary or compliance purposes in domestic and international markets. These nascent markets are expected to grow as utilities chart a path to long-term net zero goals. Mercuria has also started to focus on various other projects to further its achievements against the UN SDGs in the areas of de-forestation and other social projects in more rural communities relating to cookstoves and solar power.

Nature restoration and biodiversity

In the years since the Paris Agreement, numerous governments and public and private companies have pledged to achieve net zero by 2050. We are ambitious as we see the urgent need for both the provision of low carbon energy as part of the energy transition described above, as well as the protection and restoration of nature. Both are key if the world is to achieve net zero. It will also require the use of carbon credits as the world reduces emissions and scales low and zero carbon energy solutions.

To demonstrate our commitment to the restoration and protection of nature, we recently established a US$500 million investment vehicle called ‘Silvania’. This will be used to invest in projects and activities that will help restore and protect land and forests. We initially aim to support areas totalling 10 million hectares (for context Scotland is 7.7 million ha and Switzerland is 4.1 million ha).

The investments will provide tangible environmental, biodiversity, and social benefits by investing capital across the value chain, providing technical and financial support in diverse projects and platforms across multiple geographies. Silvania’s investments are expected to generate high-quality carbon credits and co-benefits from reducing or sequestering emissions or increasing biodiversity from Agriculture, Forestry, and Other Land Use (AFOLU). Silvania will therefore bring local environmental and social benefits through its projects whilst also delivering positive global climate change impacts and biodiversity benefits overall.

Amongst the activities targeted initially, the vehicle will invest in:

  • Innovative carbon sequestration projects with small private landowners and restoration of degraded peatlands in North America,
  • Sustainable forest management, restoration of forests and degraded mangrove ecosystems in Latin America,
  • Reduction of methane emissions from agriculture, avoided deforestation and peatland conservation across Africa and Asia,
  • Forest restoration and conservation programs in Australia and New Zealand, and
  • Support of large-scale programs to stop deforestation through jurisdictional REDD programs globally.

Nature-based solutions are a crucial element of the efforts to meet the Paris Agreement’s goals on climate change and underpin many of the UN’s Sustainable Development Goals and it’s 30×30 initiative, which aims to protect 30 percent of Earth’s land and ocean area by 2030. However, according to a 2021 UN and World Economic Forum report, annual investment in nature-based solutions falls far short of the more than US$500 billion required annually by 20501.

The origination and execution of Silvania’s investments will draw on the extensive capabilities of Mercuria’s Environmental Products team, who have deep expertise in low-carbon investments and the global carbon markets and is already active in over 15 countries on 6 continents. Investments will be made globally across various nature-based solution categories, such as direct land purchases to manage existing forests, reforestation, and restoration projects, or equity investments in project development and operating companies, targeting avoided emissions, removals, and biodiversity benefits.  It will also leverage the unique technology and remote sensing capabilities of Mercuria to support the identification, monitoring, reporting, and verification of projects.   The Mercuria digital innovation team has been developing a range of tools using remote sensing technology and machine learning with a specific focus on nature.

We hope that the Silvania initiative will act as a catalyst to drive large-scale investment in nature by funding a variety of project types. Achieving the large-scale restoration and conservation outcomes we aim to target requires capital and expertise, which we are perfectly positioned to provide.

1 United Nations Environment Program May 2021: State of Finance for Nature

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