Prices down, but optimism up

Channels: Carbon, Markets

Companies: South Pole Group, ClimateCare, EcoAct, Kanaka, The CarbonNeutral Company, Baker & McKenzie, Dentons, Ludovino Lopes Advogados, Epic Sustainability, SCS, First Climate, Numerco, Evolution Markets, FReMCo, MGM Innova, Biofilica, Climate Friendly, GreenTrees, Markit, APX, Verified Carbon Standard, Gold Standard, TIST, Microsoft, Aviva, Natura

People: Stefan Rösch, Mark LaCroix, Peter Chant, Alfredo Nicastro, Edward Hanrahan, Martijn Wilder, Gareth Turner, William Theisen, David Antonioli, K Sudheendra, Pinio Ribeiro, Kathy Benini

Prices have come under renewed pressure, say the winners of this year’s Voluntary Carbon Market Rankings, but growing interest from corporates offers reasons for hope. Peter Cripps reports

The voluntary carbon market continues to march on but, for many, it is a hard slog.

The good news is that more companies are choosing to offset their carbon emissions, even though they are not required to by legislation.

But the bad news – at least for players who are selling these offsets – is that these companies are increasingly buying at lower prices, as supply continues to outstrip demand.

Figures from Ecosystem Marketplace’s State of the Voluntary Carbon Markets report show that average prices fell to “an all-time low” of $3.80 per tonne of carbon dioxide (CO2) in 2014, marking their fourth consecutive year of decline. This is well down on highs of $7.30 seen in 2008.

Overall, it’s difficult to paint a true picture of the market because it is disparate and rapidly evolving.

For some players, the market has become too tough to operate in and there are reports of companies continuing to walk away from carbon offsetting, choosing instead to focus on other activities.

Yet it is not difficult to find areas of growth and success stories. Forestry projects are increasingly popular, while demand for clean cookstove projects continues to burn brightly.

"We see sustainability as a megatrend" Stefan Rösch, South Pole Group

The winners of this year’s Voluntary Carbon Market Rankings (see box) generally say that the market is slowly expanding. But prices are still coming under pressure, which is causing many offset providers to feel the squeeze.

The successful players are having to adapt to a market which is evolving as demand for co-benefits, such as social and health improvements often command a higher, more sustainable, price.

Corporate interest grows

Underpinning the market is the ongoing demand from corporates. This is a market driven by companies that are choosing to offset their greenhouse gas emissions by buying credits generated by a plethora of different projects including renewable energy generation, clean cookstoves, or even water purification.

Overall, Ecosystem Marketplace figures suggest that demand rose 14% to 87Mt CO2 in 2014. These figures are backed up by anecdotal evidence from many of this year’s winners.

“We see sustainability as a megatrend,” says Stefan Rösch, the Zurich-based codirector of the account management team at South Pole Group. “The awareness and willingness of companies to measure environmental performance and then to take action is constantly increasing. Often, this leads companies into the voluntary carbon market.”

South Pole is in a good position to comment on the market as a whole, having been voted Best Project Developer - Overall, for the fifth year in a row. It also won the gongs for Best Trading Company, Best Wholesaler, and Best Project Developer - Renewables.

Rösch says there are numerous reasons for offsetting, such as public relations benefits, boosting employee engagement, or to help differentiate a business or its products.

He points to a CDP report that finds that more companies are putting an internal price on carbon to help their business prepare for compliance obligations. He believes this trend has potential to bode well for the voluntary market.

"In terms of corporate participation, the market is definitely in an upswing" Mark LaCroix, CarbonNeutral

South Pole is currently in discussions with “a good dozen companies” to help them apply an internal carbon price, he adds.

Many large corporates already back the voluntary carbon market, including Chevron, Disney and Google.

Some market players report anecdotal evidence of some big data centre providers joining the market this year, although they have yet to announce their activities.

Microsoft was again voted Best Corporate Offsetting Programme. A recent review of its internal carbon price saw it issue a callto- action to other corporates to follow in its footsteps.

Another encouraging sign is that once companies start buying offsets, they don’t leave, says Mark LaCroix, executive vice president of business development at The CarbonNeutral Company, which scooped the Best Offset Retailer gong.

“Rarely do we run into corporates that have offset and say: ‘We don’t think this is valuable’. Once they’re in, they’re in,” he comments.“In terms of corporate participation, the market is definitely in an upswing.

Corporate offsetting is not commonplace but it is growing, particularly in the US where climate is back on the agenda and there’s a realisation that it’s important to talk about this and manage it.”

Edward Hanrahan, ClimateCare: Bullish about demandEdward Hanrahan, a director at ClimateCare, takes a similarly optimistic view.

“For the first time in two years, I’m quite bullish about demand,” he says. “We are having many in-depth conversations with corporates, whereas two years ago it was hard to get these conversations going.” ClimateCare won the award for Best Project Developer - Health, but Hanrahan points out that it is also one of the largest offset retailers.

However, Martijn Wilder, head of Baker & McKenzie’s global environmental markets practice, says that while some companies continue to purchase voluntary offsets, overall there has been limited growth in demand.

“Those corporations with commitments to purchasing offsets have, in many cases, made long-term commitments, and their programmes are well established but not expanding. There is not the steady supply of new buyers one would hope for,” he says.

While there are a number of reasons for this, he adds that one is the malaise in the EU’s Emissions Trading System and the UN’s Clean Development Mechanism (CDM), which continues to cast a shadow over the voluntary market.

In addition, the overall uncertainty about carbon regulation means companies are “often waiting to see how this will play out” as well as exploring other options to reduce their emissions, he believes.

In terms of the future market demand, many project developers are looking for demand growth to come from investments in forestry, and plans to embrace a marketbased mechanism to offset global aviation emissions, which is to be agreed by the International Civil Aviation Organisation in 2016, he adds.

Baker & McKenzie was voted Best Law firm, for the sixth year in a row, thanks to its strong focus on environmental issues.

Prices under pressure

Although corporate demand generally seems to be growing, most people agree that prices have come under pressure in recent years.

Best Offsetting Project

The carbon market has extended its reach to the shipping industry thanks to this year’s winner of the Best Offsetting Project award.

An innovative methodology will see emission reduction credits awarded for ships whose hulls are coated with a special type of advanced coating that reduces the build-up of unwanted organisms.

This improves the hydrodynamic performance of the ship over a period of time, improving its energy efficiency and reducing fossil fuel consumption, which in turn results in emission reductions.

The concept was introduced by FReMCo to AkzoNobel’s marine coatings business, International, the manufacturer of the advanced hull coating. FReMCo then teamed up with MGM Innova to develop the Reducing vessel emissions through the use of advanced hull coatings methodology, which has been approved under the Gold Standard.

Helping cargo ships clean up their act. Flickr/Daniel RamirezAkzoNobel has shown that typical fuel economy can be improved by up to 9%, while 4,000 to 6,000 tonnes of CO2 a year can be saved by a typical vessel.

The methodology, approved in 2012, is pioneering because it is the first to cover the maritime industry, which has largely evaded the clutches of the international climate negotiators.

The product is applied by the ships’ owners, but in some cases these companies are too small to go through the process of applying for carbon credits, so AkzoNobel can then act as an aggregator.

It is hoped that the value of any carbon credits will help offset the higher price of the advanced coating.

FReMCo was responsible for the overall project and its management. It worked with MGM Innova, which carried out the technical work and the methodology development.

“This is the first shipping methodology,” says Peter Chant, president at FReMCo. “It was extremely complex, and pushed the envelope at every step, so everything has taken longer than usual.”

Alfredo Nicastro, senior vice-president for operations at MGM Innova, says: “This is innovative – the product helps you reduce your carbon footprint. It’s a concept that could be applied to other products, which is very interesting for the industry.”

Again, the picture is not straight forward because voluntary offsets are not commoditised as they are in compliance markets. As a result, they trade at different prices depending on the characteristics of the project.

Voluntary offsets trade in a broad range between $0.50 to $20, depending on project and volume, says Rösch at South Pole.

Looking at the market as a whole, supply continues to outstrip demand, exacerbated by the collapse in prices in the CDM, which has caused some of these compliance credits to be sold on the voluntary market.

“The price of some offsets is already below the cost of abatement for some projects,” says Gareth Turner, co-founder and director at Numerco. “There’s very little room to squeeze prices further.” London-based Numerco was voted Best Broker for the second year in a row, since it was spun off from commodities trading house Armajaro.

William Theisen, business development director at EcoAct, which won Best Advisory Service, deposing last year’s winner ICF International, argues that prices have been remarkably resilient considering the oversupply blighting the EU ETS and CDM.“There’s still robust demand out there and people are paying significantly more than they are paying in compliance markets,” he says.

This is the second year that the French company, whose clients include French postal service La Poste, has won an award in our survey.

The market may be oversupplied, but issuance of credits under the Verified Carbon Standard (VCS) was down in 2014. VCS CEO David Antonioli says this was probably because projects have been choosing not to issue credits because prices are too low.

“I think there’s concern out there about the low prices,” he warns. “Some projects are vulnerable and if they can’t see any decent prices, they may have to think about shutting down and that would be a real tragedy.” However, like many in the market, he is relentlessly upbeat. He points to continued issuance from projects in the US and landbased projects such as those that reduce emissions from deforestation and forest degradation (REDD+) as reasons to be cheerful, and says projects that have “good stories to tell” continue to command higher prices.

One of the pervading trends in the voluntary market in recent years has been the growing demand for so-called charismatic carbon offsets, which provide ‘non-carbon benefits’ alongside the emissions reductions.

Buyers are often willing to ‘pay up’ for these offsets, which typically have narratives that translate well into corporate social responsibility reports or PR material, such as health benefits created through clean cookstoves, or projects that create jobs.

The VCS, which won Best Voluntary Standard, now manages the Climate, Community and Biodiversity Standards (CCBS) which provide developers with the ability to demonstrate that their carbon reduction projects also generate important non-carbon benefits such as employment, community engagement and biodiversity conservation.

Antonioli points out that Ecosystem Marketplace’s report states that in the case of CCBS, buyers are willing to pay $2.70 more per labelled verified carbon unit (VCU).

David Antonioli, VCS: Some projects are vulnerableEPIC Sustainability Services of Bangalore, which was voted Best Verification Company, stealing the position from DNV GL, says it has increasingly been verifying projects that incorporate these non-carbon standards.

K Sudheendra, director and head of operations at EPIC, says that this, and the firm’s “special focus on emerging geographies and project areas including community, forestry and agriculture projects”, was key in helping it win the award.

Health considerations are growing in importance among these so-called cobenefits.

The category of Best Project Developer - Health, was added to these awards three years ago, and has been won all three times by ClimateCare.

ClimateCare’s Hanrahan says not only is there growing interest in carbon projects that also have health benefits, but demonstrating these benefits can help projects to attract much needed finance.

He says ClimateCare is increasingly looking at projects that derive separate revenue streams from carbon and from co-benefits such as health, which he believes could ultimately prove more valuable than the carbon offset itself.

The company has already taken part in two projects which were funded principally on their health benefits, with the emission offsets sold as a byproduct.

ClimateCare is currently working on one project in East Africa, funded by an unnamed government, where clean cookstoves and solar panels are being installed to reduce the need for burning firewood and kerosene to help reduce health problems such as respiratory and eye diseases.

However, he points out that measuring the health impacts is often difficult because they are long-term in nature and the results will often be seen in decades rather than years. More work needs to be done to develop robust methodologies to measure results, he says.

He points to an International Carbon Reduction and Offsetting Alliance report that found that offsetting one tonne of carbon dioxide can bring an additional $664 in benefits to the communities where carbon reduction projects are based, as evidence that health projects and other co-benefits have the potential to be monetised further.

“At the macro-level, you can’t separate climate and development issues,” he adds.

Forestry appeals

Forestry is another bright spot within the industry. A record 25 million tonnes of CO2 offsets were transacted in 2014 from REDD+ projects. It has now supplanted wind as the most popular project type.

Adoption of REDD+ has accelerated since 2007 when it was recognised by the UN climate summit in Bali.

Brazilian forestry firm Biofilica was voted Best Project Developer - Forestry, beating last year’s winner Wildlife Works.

Gareth Turner, Numerco: Very little room to squeeze prices furtherBiofilica co-founder and CEO Plinio Ribeiro attributes the company’s success to the fact that it has only recently started issuing at scale, having been formed just seven years ago. The company now has some two million hectares of forest under management.

REDD+ projects are proving increasingly popular partly because the benefits such as carbon emission reductions are easily demonstrable.

“Forestry is doing better than other parts of the voluntary market even though no compliance markets accept our credits.

These projects are truly generating cobenefits and it’s easy to communicate them,” he argues.

REDD+ has further potential for growth, particularly if the UN climate summit in December agrees policies that will further boost its acceptance. But Ribeiro also sees signs of hope for REDD+ in the actions of corporate lobbies such as the Consumer Goods Forum, which he believes indicates that corporates will increasingly invest in forestry programmes.

Antonioli at VCS agrees that forestry and land-based projects are now increasingly accepted by corporate buyers.

“One corporate told me that five or six years ago they would not have touched land-based projects, but it is now dismantling that policy,” he says. “They have more credibility now.” There are other new avenues into which the voluntary market can push.

The winner of the Best Offsetting Project is an innovative methodology for the shipping sector (see box). This is particularly important, as the maritime sector has so far largely escaped the clutches of climate regulations.

Water is another new frontier for the market.

Markit, which has held onto its crown as Best Registry Provider for the sixth year in a row, sees evidence that water credits have the potential to help carbon projects generate additional revenues.

Stacking water on top of carbon credits could be "the next step" in the evolution of co-benefits - Kathy Benini, Markit

The company is currently working with numerous water credit programmes in the US, including a pilot trading system for the Ohio River Basin and a trading scheme covering two rivers in Pennsylvania. These water credits are not for the reduction of water use, but for reducing harmful nutrients such as nitrogen and phosphorus that can lead to algal blooms and cause other problems associated with pollution.

Kathy Benini, managing director at Markit, says that “stacking” water on top of carbon credits, perhaps for forestry or landuse projects, could be “the next step” in the evolution of co-benefits in the voluntary carbon market.

She points out there are numerous states in the US that are implementing water quality programmes.“I think it’s innovative, and interesting to explore,” she adds.

Markit also points to its work providing infrastructure for the Stand For Trees programme – a NGO crowdfunding campaign that has led to consumers buying some 35,000 forestry credits – among its highlights for the year.

Optimism prevails

Looking ahead, market participants’ outlook is fairly upbeat.

Many are eagerly awaiting the UN climate summit in Paris, if just to send the right signals that carbon is important, though it is unlikely to directly impact the voluntary market.

“I think the market will continue to grow,” says EcoAct’s Theisen. “If there’s an agreement at the end of the year, that will give a real big push to the market and will encourage more companies to get on board, and could push prices up.”

Benini says Markit is in conversations with numerous Latin American countries that want to introduce carbon registries ahead of the Paris meeting, whether for voluntary or jurisdictional programmes.

“I think that’s a fantastic sign, because once you have some countries being actively involved, others won’t want to be left behind. Paris has provided impetus for these countries to move a bit quicker.” Many feel that, regardless of the outcome in Paris, corporate offsetting will remain an important part of the agenda and will underpin the market for years to come.

“We firmly believe that the market will continue to grow and we are bullish about its future,” adds South Pole’s Rösch. “It conforms with our more general observation that, while states and governments may be hesitant to take action on climate change, the corporate world is willing and able to move forward. They create momentum that will pinpoint the direction that government policy will follow. California and South Africa are examples where exactly this has happened.”

And, as Numerco’s Turner points out, many players remain emotionally attached to the market and will hang in there, no matter how hard a slog. EF