13 September 2019

Rising to the challenge

While the mandatory carbon markets await new rules, the voluntary market remains buoyant and is pushing into new areas. Katie Kouchakji talks to this year's winners of our Voluntary Carbon Market Rankings to find out what's cooking.

Ten years ago, when Environmental Finance first conducted its voluntary carbon market rankings, the market was in many ways still in its infancy: the Kyoto Protocol’s first compliance period was only two years old and negotiations about its successor were underway (before collapsing in Copenhagen in December 2009). Over the next six years, while the international process reset and budgets were squeezed, the voluntary market saw a dip in activity.

Now, on the cusp of a new era of international climate change policy responses – including the aviation sector’s CORSIA market – the voluntary market is poised for its third successive record-breaking year. Already, as of 21 August, standards body Verra had issued 67 million verified carbon units (VCUs) – up 35% on last year’s entire issuance. (See Table)

Voluntary Carbon Markets Rankings 2019
Best Trading Company South Pole Natural Capital Partners
Best Advisory Service/Consultancy Natural Capital Partners EcoAct
Best Law Firm Baker McKenzie Latham & Watkins
Best Verification Company EPIC Sustainability Services Environmental Services Inc
Best Wholesaler Climate Care First Climate
Best Broker Numerco BGC
Best Project Developer - renewable energy South Pole Enking International
Best Project Developer - energy efficiency South Pole EcoAct
Best Project Developer - forestry and land-use Biofilica South Pole
Best Project Developer - public health Climate Care South Pole
Best Project Developer - overall South Pole Natural Capital Partners
Best Offset Retailer Natural Capital Partners Climate Care
Best Registry Provider IHS Markit APX
Best Voluntary Standard VCS (Verra) Gold Standard
Best Individual Offsetting Project Sudan cookstoves (EcoAct) N/A
Best Corporate Offsetting Programme Delta Airlines N/A
Best Initiative Forest Carbon Partnership Facility (World Bank) N/A
How the poll was conducted: Companies were emailed and asked to nominate the leading service providers active in the voluntary carbon makets, via an online survey. Voters were asked to make their judgements on the basis of: efficiency and speed of transaction; reliability; innovation; quality of service provided and influence on the market, not just the volume of transactions handled. More than 1000 completed responses were received.

“We’re in a totally different reality now than a couple of years ago,” says David Antonioli, CEO of Verra, which was voted Best Standard for the seventh time in eight years. While there are various suggestions as to what’s driving the increased activity – including preparations for CORSIA (the International Civil Aviation Organization’s ‘Carbon Offsetting Scheme for International Aviation’) – Antonioli says more people are looking to cut their emissions since the 2015 Paris Agreement was finalised.

“People are looking at everything concrete and tangible that we can do today,” he says. “I hope it’s off the back of people making internal reductions first.”

Increased shareholder awareness of climate change issues and more businesses taking on voluntary commitments, such as the RE100 group of companies committed to using only renewable power, are also boosting the market, says Martijn Wilder, global head of Baker McKenzie’s climate change practice, which again topped the poll as Best Law Firm. “We’re seeing a lot more people wanting to be carbon neutral.”

Verified Carbon Units (VCUs) Issued
Year/DateTotal VCUs IssuedVCUs Issued in Year% Change
31/12/2009 22,105,243 22,105,243  
31/12/2010 49,423,137 27,317,894 24%
31/12/2011 76,970,957 27,547,820 1%
31/12/2012 113,029,059 36,058,102 31%
31/12/2013 142,112,355 29,083,296 -19%
31/12/2014 159,881,904 17,769,549 -39%
31/12/2015 180,283,091 20,401,187 15%
31/12/2016 198,420,687 18,137,596 -11%
31/12/2017 241,910,321 43,489,634 140%
31/12/2018 291,476,163 49,565,842 14%
21/08/2019 358,504,566 67,028,403 35%
Source: Verra

Research by Natural Capital Partners (NCP) – voted Best Advisory Service/Consultancy and Best Offset Retailer – found the number of Fortune 500 companies committing to carbon neutrality by 2030 had doubled since the Paris climate talks. “The impacts of climate change are more and more obvious, so you’ve got more businesses responding to that and taking action,” says Mark LaCroix, the firm’s executive vice president, client solutions.

Plinio Ribeiro, Biofilica: “A lot of companies have approached us to start projects to offset all their emissions in five to ten years’ time.” (photo credit: Daniela Tovianski)“I don’t think anyone saw this coming, this big jump,” says Renat Heuberger, Switzerland-based CEO of project developer South Pole, which won Best Project Developer for renewable energy and energy efficiency as well as Best Project Developer overall and Best Trading Company. He sees the student strikes, led by Swedish teen activist Greta Thunberg, and the resultant media coverage as a major driver for corporate action – partly, he says, to build brand loyalty and identity, both for consumers and as a recruitment tactic. “People are motivated if they see this company is part of the solution,” he says.

“Increased media awareness from the climate strikes, Greta Thunberg movement, declarations of climate emergencies from state actors and the recent Amazon fires have accelerated a global trend for companies to take action to neutralise their value chains,” agrees Gareth Turner, co-founder and director at Numerco, which retained the title of Best Broker.

“Divestment from climate impacting businesses is once again making the market an attractive proposition for investors and non-traditional participants – momentum which was lost following the financial crisis of 2008,” he adds.

“In a way, it feels like 2007 on the climate [issue], where it is the top of the agenda,” says Ed Hanrahan, CEO of UK-based ClimateCare, voted Best Wholesaler and Best Project Developer – public health. “People want to talk about this and what they can do.” However, he adds, as in 2007, there is concern that a recession is on the way, which could stifle interest.

And despite the higher levels of demand and enquiries, prices have remained fairly static, says Hanrahan, with credits from renewable energy projects fetching less than $1 per tonne of carbon dioxide (CO2) equivalent. “For large-scale buys, we’re in the low dollars across most project types,” he says. “The cost of abatement is around $4-$5 [per tonne] for new cookstoves [projects], and for UK [forest] planting it’s around $12-$13.”

In its 2018 voluntary carbon market report, US analysts Ecosystem Marketplace found that voluntary offset credits traded at an average of $2.40/tonne in the first quarter of last year, with a wide price range of below $1 to $70.

“Because the market has been on the floor for so long, there are expectations of low prices,” says Hanrahan. This makes it hard for new projects to get off the ground, despite the surge in demand, he continues. “We need to get people to understand the true cost of abatement.” However, Turner notes that the scarcity is prompting some buyers to get involved earlier in the project cycle, rather than just buying issued credits.

Proposed changes to Verra’s Verified Carbon Standard (VCS) programme may help. In its fourth iteration – which is expected to be finalised in the coming weeks – grid-connected renewable energy projects, except those in least developed countries (LDCs), would be excluded, with Verra’s consultation documentation pointing out that these project types, in many cases, no longer need carbon instruments as a source of critical, early-stage finance.

“We need to ensure that climate finance goes to the places that need it the most,” says Antonioli. “This could raise the price of offsets, and enable the market to find new opportunities.”

Going forward, new opportunities could spring from what appear on the surface to be challenges. For example, the international community is set to finalise rules for new market mechanisms under Article 6 of the Paris Agreement at climate talks in Santiago, Chile in December, and national governments are expected to increase their emission reduction goals via updated Nationally Determined Contribution (NDC) plans next year.

“The challenge, really, is to what extent do we think the Paris rules will slow that [voluntary market growth] down, even if temporarily,” says Wilder. “There is an intersect between the compliance and voluntary markets.” How the Santiago talks address the risk of double-counting when emissions Kathy Benini, HIS Markit: “We expect to see strong growth in our business.”reduction units are transferred across borders will be key, he says.

Heuberger at South Pole remarks that a common misconception in the past was that voluntary climate action might decrease with the advent of NDCs, because these would soon make climate action mandatory everywhere. However, it has now become clear that while NDCs set the targets and the ambition, “the action has to come from somewhere … I wouldn’t call it the voluntary carbon market – I’d call it voluntary climate action.”

“As sectors are covered by NDCs, we will continue to assess the additionality of individual project activities,” says Antonioli.

“I would love it if, tomorrow, every sector was covered,” he adds. “Ultimately, our vision is we’re wanting to drive change in the world, and we are open to a world where you no longer need offsets.”

In Turner’s view, a lack of clarity on Article 6 guidelines and the future of the Kyoto Protocol’s Clean Development Mechanism (CDM), combined with “more stringent rules from the voluntary standards and market fragmentation due to differing country interpretations of NDC rules, have led many to believe there will be a bottleneck for volumes in the short term,” he says. “However, it has done little to slow the pace of demand and optimism in the market going forward, post-Paris.”

And NCP’s LaCroix sees a crucial role for voluntary action in a post-Paris world. “Corporate action will play a bigger role in closing the ambition gap than it ever has done,” he says. “There’s enough interest, there’s enough demand, we’re going to figure this out, just like we did after Kyoto.”

Wilder also raises the question of what will happen to projects if their industry sector is suddenly included in an expanded NDC in future and, if countries develop their own mandatory carbon trading programmes, whether they would look to leverage existing standards. Antonioli cites the Colombia carbon tax as an example of how a compliance mechanism has meshed with voluntary initiatives. The national policy adopted the voluntary market infrastructure, he notes. “It’s really given us credibility,” he says, adding that South Africa is pursuing a similar approach.

The aviation sector’s CORSIA initiative, which begins its pilot phase in 2021, is taking a similar position. The programme aims to help the industry achieve carbon neutral growth from 2020, using average emissions from 2019 and 2020 as its baseline. Emissions in excess of this baseline will need to be offset.

This is where the voluntary market could come in: earlier this year, CORSIA’s Technical Advisory Body laid out ‘emissions unit’ criteria and invited programme and standard administrators to apply to service the sectoral scheme – which is expected to see demand for 3 billion units (each representing one tonne of CO2). In August, the body published the 14 submissions it had received, which included Verra’s VCS programme, the Gold Standard, the CDM, American Carbon Registry and Climate Action Reserve. The latter two have already had their protocols adopted for use in California’s cap-and-trade market.

Here too, Hanrahan sees an opportunity to go further. “Airlines are understanding that the whole carbon neutral growth element of compliance, when you set it out there on its own, is not a great story,” he says.

The growth of carbon trading and offsetting is also a good opportunity for infrastructure suppliers, such as IHS Markit, again voted Best Registry Provider. “The trading markets in 2022 and 2023 are going to be bigger than we’ve ever had,” says Kathy Benini, managing director at the company. “We expect to see strong growth in our business.”

One sector which is expected to see a lot of interest under CORSIA is forestry – and specifically projects which avoid deforestation or lead to reductions in emissions from deforestation and forest degradation (REDD). Projects in this field are already well underway, and Biofílica’s Plínio Ribeiro reports that the Brazil-based firm has seen a 150% increase in volumes this year.

Edward Hanrahan, ClimateCare: “the voluntary market is in a better shape, from a demand point of view, than it’s ever been.The company, which was voted Best Project Developer – forestry and land-use, is seeing a lot of interest from both domestic and international firms, he says. “A lot of companies have approached us to start projects to offset all their emissions in five to ten years’ time,” Ribeiro says. “This gives us the ability to expand the portfolio of projects.” At present, the firm manages 1.2 million hectares, but it is looking to double this. In total, he says, Biofílica’s portfolio has contributed to a 75% reduction in deforestation in the projects’ areas compared with the baseline predictions.

As a result of this interest, Ribeiro reports a slight uptick in prices, of around 10%-15% compared with early 2018. “We expect prices to go even higher, as we’re at the point now where they’re just barely covering the cost of protecting forests,” he says.

Fires in the Amazon could have an impact on the market, Ribeiro says, but he lambasts poor reporting on these fires. “[The fires] bring the Amazon conservation discussions to centre stage,” he says. “But for us, working a full day on those issues, it gets very annoying to see a lot of fake news and hidden interests.” He adds that the administration of Brazil’s outspoken president Jair Bolsonaro, who took office in January 2019, “has been clear that markets will have a role in our climate strategy”.

The co-benefits of REDD projects are well-known, and there are increasing requests to ensure that voluntary offset strategies are aligned with the UN’s Sustainable Development Goals (SDGs), says LaCroix. Tapping in to this, Antonioli says Verra expects its Sustainable Development Verified Impact Standard (SD VISta) to attract users, as project owners look to report outcomes beyond carbon. The first projects certified to this new programme are expected in the next 12 months.

Verra is moving toward bringing its registry – currently administered by IHS Markit and APX – in-house. But that may not slow down IHS Markit, with Benini saying she sees new opportunities in supporting national and jurisdictional compliance programmes – and new technologies. “I think the carbon markets are going to grow quickly and enhanced market infrastructure is needed to support the growth,” she says. “With this in mind, we’re looking at using Enterprise Distributed Ledger Technology (DLT) by the end of next year to provide a more efficient and less costly cash and position settlement process for carbon markets.”

The registry’s use of Pending Issuance Units (PIU) has also helped its growth, she says, by providing infrastructure to support forward sales, as well as allowing clients to monetise credits sooner. Serial numbers are tracked and converted to issued units once the credits are verified. “Some of our clients have used it as a way of supporting their trading business,” Benini says.

South Pole is also coming up with new ways to engage people in the climate fight. Back in 2011, the firm launched its climate credit card, which calculates the emissions associated with purchases and automatically offsets them. The initiative is being relaunched this year, Heuberger says, and will be rolled out to all Cornèrcard cardholders.

“A lot of people want to get active and do something for climate [change], but don’t know what to do – our job is to help them,” he says. Other developments in the pipeline include an app to offset mobile phone use and an add-on button for online shoppers to select carbon neutral deliveries, he says. “We always try to make climate action a part of your everyday activity.”

Other trends to watch include a possible increase in projects in developed economies, says LaCroix. “There’s a lot more interest in delivering local impact,” he says, building off the Paris Agreement’s sense of inclusiveness. But he acknowledges the challenge of establishing ‘additionality’ for projects in these regions.

ClimateCare’s Hanrahan suggests that a recent UK government consultation into compulsory offset offerings by transport companies is a good opening for further growth in the market. “It’s a great opportunity to use the voluntary market to drive ambition,” he says. “We need to take advantage of it to greatest effect.”

“Given the global feeling and temperature around climate change at the moment, we feel the voluntary market is in a better shape, from a demand point of view, than it’s ever been,” concludes Hanrahan. “The challenge now is for the industry to respond to that.”

Best Individual Offsetting Project – low-smoke cookstoves (Sudan)

Clean cookstoves in developing countries are among the most popular projects for generating carbon credits, largely because of the significant co-benefits they offer. 

According to the World Health Organisation, 4.3 million people die each year from illnesses triggered by pollution from biomass-based stoves – more than from malaria, HIV/AIDS and tuberculosis combined.

In addition, the demand for firewood causes severe environmental degradation. In Sudan, for example, 90% of households use biomass and for every 10 trees cut down only 1.5 are regrown, according to EcoAct, the developer of this year’s winning project.

Since 2012, the company has been replacing traditional firewood-burning stoves in the Darfur region of Sudan with much cleaner stoves using liquified petroleum gas (LPG).

It was the first registered carbon credit project in Sudan and the first to be developed in a conflict zone.

Practical Action, a UK charity, helped EcoAct identify the El Fasher community in Darfur as having a clear need with helpful networks on the ground. 

The stoves are made in Sudan and the LPG is sourced from other countries in the region, says EcoAct co-founder Gerald Maradan. The cost of a stove plus gas cylinder is currently around SDG2000 ($44) but a local microfinance initiative allows for a 12 -month repayment period.

EcoAct sells its carbon credits to various blue-chip companies across Europe but the current phase of expansion of the Darfur project is being supported financially by German energy company Friedrich Scharr which will also buy the bulk of the credits generated.

The Global Alliance for Clean Cookstoves estimates that cooking with efficient LPG stoves reduces most key pollutants by over 95% and halves energy consumption. Such stoves are also said to reduce cooking time by around 40% and allow women and children to spend less time buying or collecting fuel.

The Darfur project “uses the carbon economy as a lever to improve the livelihoods of rural communities,” and makes significant contribution to four of the UN’s Sustainable Development Goals, summarised one voter.

To date, about 12,000 stoves have been installed in the Darfur project, saving more than 232,000 tonnes of carbon dioxide. Maradan says EcoAct is now looking at the possibility of doing similar projects elsewhere in Africa.

Best Initiative – Forest Carbon Partnership Facility

The Forest Carbon Partnership Facility (FCPF) has created“the only real demand for REDD+ programmes,” said one Environmental Finance reader whose vote helped the facility win the award for Best Initiative in the voluntary carbon market.

The FCPF was developed by the World Bank and The Nature Conservancy to help countries engage with the climate change mitigation concept known as REDD+ (Reduced Emissions from Deforestation and Forest Degradation). Around 25% of global greenhouse gas emissions come from forestry and land-use, yet only about 3% of climate finance is currently earmarked for this sector, according to FCPF fund manager Simon Whitehouse. 

The ten-year old facility operates via two complementary funds: 

  • The FCPF Readiness Fund helps countries prepare to implement REDD+. This includes designing national REDD+ strategies, calculating reference emission levels, designing measurement, reporting, and verification systems and setting up environmental and social safeguards. This fund is set to run until December 2020 and its current funding is $400 million.
  • The FCPF Carbon Fund pilots results-based payments to countries that have advanced through REDD+ readiness and implementation and have achieved verifiable emission reductions from their forests or other land-use sectors. It is currently funded with $900 million and is set to run until December 2025.

To date, 17 donors have contributed to the total funding of $1.3 billion. They include 14 national governments, the EU, The Nature Conservancy and BP. Beneficiary countries now number 47, of which 18 are in Africa, 18 in Latin America and 11 in the Asia-Pacific region.

The FCPF also has observers from representatives of indigenous people and civil society groups. The facility acknowledges that private sector capital will be essential in scaling up sustainable land use and, as countries start to develop larger-scale REDD+ projects, it aims to help find suitable private sector investments.

In addition to leveraging financing for REDD+ projects, the facility has also helped to create recognised standards, developed REDD+ tools and guidelines, and facilitated information exchanges and pilot studies on a wide range of REDD+ activities.

Among significant developments in the past year, the Democratic Republic of the Congo, Mozambique and Ghana have recently signed Emission Reductions Payment Agreements with the World Bank which will bring them results-based payments from the FCPF Carbon Fund. Together the three agreements will have a total contract value of $155 million. Over the coming months, other Carbon Fund countries are expected to sign similar deals.

Best Corporate Offsetting Programme – Delta Air Lines

"Delta Air Lines is the largest buyer in the voluntary market, sourcing 3.2 million [carbon credits] for their 2018 financial year."

"Their commitment to sustainable development is second to none".

These comments were among those that helped Delta secure the award for Corporate Offsetting Programme in this year's poll of the voluntary carbon market.

The company launched its offsetting programme in 2007 – the first US airline to do so – and since then it has bought more offsets than any of its peers. Since 2013 it has voluntarily purchased more than 12 million carbon offsets, which is equivalent to the emissions from 1.7 million cars or the annual electricity use of almost 2 million homes.

Its ambitions go beyond the goals of Corsia, the forthcoming carbon market designed by the International Air Transport Association to curb emissions growth across the industry. Corsia's target is to cap international aviation emissions at 2019/2020 levels from 2021, but Delta has been aiming to achieve carbon neutral growth compared to 2012 levels.

The company uses Ruby Canyon Engineering to provide third-party verification of its emission reductions and is keen to ensure that the offsets it buys also contribute to the UN's Sustainable Development Goals in regions that Delta serves.

Climate change strategy manager, Stephanie Zhu, says the airline has used multiple methodologies, including VCS and Gold Standard, and has sourced its offsets from more than 20 different projects over the last six years.

On 'Earth Day' (22 April) this year, Delta marked the occasion by buying almost 50,000 credits to offset the emissions of all that day's domestic leisure and business travel into and out of New York, Boston, Seattle, Los Angeles, Raleigh-Durham and Atlanta for over 300,000 customers.

This record daily amount all came from the 'Conservation Coast' project, which prevents the destruction of threatened rainforest and provides sustainable livelihood opportunities for communities along the Caribbean coastline of Guatemala.

Another project from which Delta buys offset credits is the Valdivian Coastal Reserve in Chile, a temperate rainforest property owned and managed by The Nature Conservancy (TNC).

The NGO purchased the property in 2003 to halt the threat of deforestation from construction of coastal highways and to conserve native forest. The project is estimated to have prevented more than 350,000 tons of CO2 emissions.