The voluntary carbon market in 2023 has been defined by turbulence and instability as carbon credit projects have faced considerable scrutiny by the media and academia throughout the year.
Ensuring and protecting the integrity of carbon credits in the voluntary carbon market was one of the main themes that delegates heard at the 2nd Global Carbon Markets Conference by S&P Global Commodity Insights in early November. Maria Choudhury, Jamila Phillips report.
How market participants across the whole breadth of the value chain, from project developers to traders and brokers, react to such developments will define the future of the carbon market in the years and even decades ahead.
The keynote speech given by Kris Nathanail, Chief of Staff at the International Organization of Securities Commissions (IOSCO), aptly set the tone, noting that what should be a $100 billion market cannot act like a $100 million market. Tackling the issue of integrity is crucial to growing and strengthening the voluntary carbon market.
Mitigating Risk Discussions of market participants throughout the conference highlighted one of the most crucial topics surrounding the voluntary carbon markets – risk. How is it possible to manage risks while also enabling users to trade carbon credits on a global basis?
When asked of the main risk in the market currently, Jeff Swartz, Vice President Strategy, Regulatory Affairs & Partnerships, bp, responded that customers are the main risk.
"We are buying carbon credits to offer those to our customers and retire on their behalf if they choose to do so. That is the main risk right now – who is going to be buying these credits in the future?" he said. The speaker added that a strong belief in offsetting as a tool to help companies reach their goal is needed to generate demand from ideal customers.
Chris Webb, Global Head of Carbon Markets, HSBC, said there are three types of risks plaguing the voluntary carbon markets, and insuring against these risks is essential.
The first risk Webb highlighted was credit invalidation. This is when a credit will stop being recognized as a credit, i.e., a tool that can be used by someone to offset their emissions. Webb noted that a relevant authority can invalidate a credit for reasons such as fraud or negligence.
Webb further pointed out delivery risk, which buyers mostly face. This is the risk that a credit you buy today may not be issued on time for you to take the original delivery planned.
The third risk Webb mentioned was political risk, feeding into regulatory and policy risk. "[There are] really interesting new tools that are being developed that can assess or address the risks we’re seeing," Webb added regarding insuring against this factor.
Role of rating agencies in managing risks Both speakers spoke on the role of rating agencies in managing multiple risks involved in the voluntary carbon market.
Rating agencies provide a granular level of data while ensuring that projects being invested in are fulfilling safety and compliance principles, Swartz said. Although costly, agencies are required to create a sizable business in the industry, he added.
However, end buyers also need internal due diligence teams who work directly with organizers and traders to ensure the quality of the credits purchased in addition to rating agencies, Swartz continued. Although this scale of expertise is not applicable for all buyers across the market, Webb pointed out.
Both speakers also noted that rating agencies are new and have not covered the entirety of the carbon markets. They also use methodologies which continue to evolve.
Despite using a rating agency to mitigate risk, projects may still suffer reputational risk. As projects fluctuate in ratings, the challenge will be to guide customers to comfortably take that risk on board, Swartz said.
Convergence or go our separate ways Another key topic highlighted at the conference was the future interaction and role of the voluntary carbon market alongside the compliance markets. Discussion at the leaders’ panel turned its attention to the possibility of convergence between the two markets.
Responding to a question regarding which market will be the primary market for project developers to sell their credits into by 2030, Dirk Forrister, President and CEO of the International Emissions Trading Association, said, "I think there has been some misplaced emphasis in recent times on the voluntary market, that for most of us was always thought of as a waystation to compliance markets, not as the destination."
Echoing this sentiment, William Pazos, co-founder and CEO of ACX, added, "the integration of Article 6 credits into the compliance story will overshadow the voluntary carbon markets."
However, speakers also highlighted the fact challenges faced by governments when attempting to speed up the implementation of compliance markets.
"I don’t think we’re in a position whereby in 2030, the compliance [market] will be overtaking the voluntary carbon market," said speaker Hugh Salway, Senior Director for Market Development and Partnerships at The Gold Standard Foundation, pointing to the protracted time it takes for government policy to be put into place.
CORSIA – a race against time for supply The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), a scheme set up by the aviation sector to offset its greenhouse gas emissions, was a popular topic among market participants during the Global Carbon Markets Conference.
Rob Stevens, Director of Product Development, Climate Impact Partners, said that there are no CORSIA eligible credits available in the voluntary carbon markets currently despite an extremely strong demand. The market has approximately 15 months to respond to this lack of supply, he added.
There is too little activity in the markets for host countries to be providing corresponding adjustments which is what is required for CORSIA-eligible credit demand, he continued.
Article 6.2 is still being operationalized while host countries are expressing interest in CORSIA-eligible credits. However, host countries are still at a cost benefit analysis stage where they are assessing how exporting credits will interact with their commitments, Stevens said.
Project developers are grappling with mitigating risks while host countries are still forming their legislation, and there is a potential for CORSIA rules to change between now and first phase compliance in 2028.
Concerns around the timing in bringing CORSIA-eligible credits is also prevalent in the market, along with the capacity of forestry and removal projects to develop CORSIA-eligible credits at a large scale by 2028.
This concern was called a "timing problem rather than a systemic problem" by a panel including Stevens, Audrey Goldstein, Director, Carbon Markets Development, Standard Chartered, and Roman Kramarchuk, Head of Futures Outlook, S&P Global Commodity Insights.