Carbon Credit Suppliers Eye Market Upside in System on Cusp of Demand Surge

Opinion, news, analysis by Mathew Carr

Markets are finally starting to take shape as the world battens down on a global agreement to slow the pace of global heating.

Amid much backslapping, UN envoys heralded the carbon-market rules they agreed under the Paris climate deal in 2015. Those were sealed in a wishy-washy fashion a year ago at the global climate talks held in Glasgow, Scotland. Now, envoys are meeting again this week in Sharm el Sheikh in Egypt to make them more solid.

Money has indeed started to trickle into market-based climate finance of various forms in a bigger way. Still, the pace is painfully slow amid unfair criticism.

One green shoot of success stories is LEAF, the $1.5 billion Lowering Emissions by Accelerating Forest Finance (“LEAF”) Coalition program, which is coordinated by Emergent Forest Finance Accelerator, Inc., a non profit.

The LEAF program, supported by the U.S., U.K. and Norway governments, allows corporate buyers of carbon credits (as well as country purchasers including South Korea) to sell the credits they purchase only once, but not profit from any increase in their value.

Any profits from that single sale are then returned to the forest countries / projects supplying the credits — this boosts climate justice and stops brokers and other middle agents from taking a disproportionate share of the carbon-value chain.

Too much profiteering has been a criticism levelled at the carbon market, while similar behavior in fossil-fuel industries is seen by many governments and big business as acceptable. These stances seem completely inconsistent.

Because there’s potentially no real secondary market for the carbon credits created, there’s no big increase in supply that might swamp the so-far limited demand for them.

The result is that forest-heavy countries could get access to more of any profit from a deal that protects their trees.

Source: LEAF proposal terms

How it works

LEAF’s proposal-submission window for emission reductions for crediting years 2022-2026 had a floor price of US$10 per ton of CO2 equivalent. Emission reduction credits must be validated and verified against the ART TREES standard. Verification and validation can take two years, so the money would be delivered 2024-2028.

This $10 price is about double the current market price in the open voluntary carbon markets, or a 38% discount on the futures price for 2026.

Whether that’s a fair price is hotly debated, and you can’t rule out that it will rise as deals are set in stone.

Should carbon prices generally reach $100 per ton say by 2030, the supplying country could get as much as $90 per ton, with profit share seen more likely, in my opinion.

At $10 a ton, the $1.5 billion is the equivalent of 150 million tons of CO2 reductions.

Under LEAF, corporations from automaker Volkswagen to retail-giant Amazon to customer-relations specialist Salesforce, have agreed to buy emission credits from saving the forests.

To win the credits, countries seeking them must, for instance, demonstrate deforestation has substantially slowed. That’s why the verification takes as much as two years.

Countries, or regions, must be open to outside scrutiny by ART Trees. They must invoke a credible financial institution to ensure there is no graft or corruption.

Now, the U.S. climate envoy John Kerry has announced the formation of an Energy Transition Accelerator intended to inspire private capital to accelerate the clean energy in developing countries.

Still, anything that prevents heat-trapping gas from new coal, oil and natural-gas generation will be nice for the climate. And nice for future generations, as well of those suffering right now from the deadly impact of global climate change. But details are thin about how ETA would work.

“I do think that this (LEAF) model is able to be replicated,” said Allan Traicoff, Emergent’s chief commercial officer, in a phone interview. He didn’t comment specifically on the U.S. plans.

People skeptical of the new U.S. plan might consider looking at the tightness of LEAF’s rules.

In theory, climate-protection projects should get carbon credits only when there are not enough other incentives already in the economy to make the activity happen. They must be “additional”. What’s additional changes over time as governments bring in new laws.

Traicoff argues LEAF’s environmental and social credibility is hard to beat.

 Traicoff continued: “It is the promise of private sector finance for results that makes these results truly ‘additional’. Of the more than $1 billion in private sector financial commitments under LEAF, the majority of credit purchase pathways reflect the dual-pronged aim of stimulating additional emissions reductions that support forest countries in reaching their NDC (nationally determined contribution, essentially a Paris climate deal target of the country) while securing high integrity credits that can be used against voluntary targets.”

Nearly all participants are choosing pathway three of these four following options:

Source: here, FAQ . ER = emission reduction credit, NDC defined immediately above

Demand Problem

The problem is, it’s still unclear how corporations will be able to use credits to achieve their interim “net zero” targets in say 2025, 2035, 2040, 2045. Many corporate net zero targets are for 2050. (Both corporations and countries potentially need credits to hit targets, potentially creating two competing layers of demand.)

But a powerful collaboration called the Science Based Targets Initiative, formed partly by environmental groups World Wide Fund for Nature and World Resources Institute, are banning participant members from using credits for interim targets.

More than 1000 companies are now committed to securing SBTi-validated science-based net-zero targets.

I asked SBTi CEO Luiz Amaral for an interview on whether the SBTi should make carbon credit purchases mandatory for interim targets. I was referred to blogs that the SBTi has written.

“We are developing our guidelines on Beyond Value Chain Mitigation [emission cuts outside the company’s immediate realm], which will be launched next year,” said a spokeswoman, by email. In the meantime, “we strongly recommend that all companies progress BVCM activities,” the group said in one of the blogs.

Lack of demand is one problem. Muted market incentives is another.

Removing “profiteering” from carbon markets also reduces the impulse to invest in emission-reduction projects, so a balance is needed because of the need for trillions of U.S. dollars of investment each year.

And right now the “limit profits” crew seem to be winning the debate, which threatens to erode that spending.

UN moves are also squashing demand, according to some people familiar with the situation. See this:

Another carbon-market operative familiar with corporate thinking, who wanted to remain anonymous because he was speaking very plainly, said:

“It’s inconsistent with the Paris Agreement [which allows use of markets on a voluntary basis]. [It’s] not the first time we’ve seen such inconsistencies – but this is coming from the UN, so the potential for confusion and further delay to corporate action is credibly increased.
“It’s also inconsistent with everything that developing countries are saying – that they need finance for mitigation, whether market based or not.
“Such positions simply create a barrage of barriers to action when we should be removing them. And as for the contextual statement in this report – that ‘an increasing number’ of companies are using offsets. This simply isn’t true. Most companies don’t have a target. [The] vast majority don’t offset. Far too many have started and stopped, are too confused to consider it or in some cases won’t publicly acknowledge for fear of being attacked (in the media for greenwashing).
“This is a $2 billion market. Yet the secretary general of the UN (Antonio Guterres) felt it appropriate to endorse a position akin to cancel culture.” (see below)

So those in the market continue to hold off.

Getting Demand Up

What is shocking to some is that the SBTi and the UN seem to be encouraging expensive climate action (within value chain), when that same money could cut many more heat-trapping emissions in emerging nations, immediately.

And that money could better expand climate justice, rather than see investment stay mainly in rich countries.

The first responsibility for climate action lies with government, which is collectively failing to deploy better policy as it grapples with the electoral cycle — however many years it is, it’s much shorter than the 30-year 2021-2050 period.

With the G20 meeting today and tomorrow, some sort of G20 climate deal can’t be ruled out. Germany is seeking to create a climate club which would ease trade and bolster green growth. The G7 has invited the G20 to join in. But the Ukraine war is a big spanner in the works of that.

There could be another year of delay, or more. Here is a more positive view on the state of play:

In the absence of regulation, chief executives have no place to turn to, other than documentation and guidance that is created by civil society.

So, like never before, civil society has a very weighty, meaningful role to play.

SBTi, for right or wrong, is the go-to place to get corporate guidance in the western world and increasingly in the developing world.

SBTi’s Amaral has the weight of the world resting on his shoulders. Whether it’s him or World Resources Institute or the WWF; these folks need to appreciate their role.

And they need to make it as pragmatic as possible, so that they unlock private-sector ambition, because that enthusiasm is there. To fail to do so will probably mean the world will heat up too much, given the government inaction.

If the SBTi doesn’t feel it can get its head around it because too complex or it’s still mired in too much controversy, then it won’t properly live up to the responsibility it has placed on itself.

And when you have SBTi (and the GHG Protocol btw) that don’t lend seamless ambition to boards, then you end up going slow.

Now’s the time for civil society to go bold, to say clearly that beyond-value-chain mitigation is mandatory.

For corporates, don’t stop doing what you’re doing in your value chain — get your emissions down as quickly as you can. Go for net zero as quickly as you can.

But there’s no room in the world for companies unwilling to go beyond their value chain at a time when carbon-credit-supplying nations are ready to cut emissions or remove them.


LEAF press release:


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