25 September 2017
Developments in international policy, new standards and the promise of future demand from the aviation industry are pushing the voluntary carbon market forward, the top firms in Environmental Finance’s 2017 rankings say
"I think the market is taking off, I think we're at an inflection point."
Kathy Benini, IHS Markit
A 31% decrease in the amount being spent on offsets in the voluntary carbon market has not harmed sentiment among leading industry figures, Environmental Finance’s 2017 survey has found.
The amount spent fell in 2016 to $191.3 million, which offset 63.4 millions of tonnes of carbon dioxide equivalent (MtCO2e), compared with $278 million to recover 84 MtCO2e in 2015, according to Ecosystem Marketplace.
Ecosystem Marketplace, an initiative run by US not-for-profit Forest Trends, said in its State of the Voluntary Carbon Markets 2017 report that oversupply led to many sellers being unable to find buyers for their offset credits.
The rise of compliance markets, such as the California cap-and-trade programme which began in 2013, were identified by the report’s authors as another factor behind the decline in offset purchases.
However, Environmental Finance’s 2017 survey, which polled the market as to who are the most highly regarded players across 16 categories, found market sentiment to be generally positive, with winners agreeing the future for carbon offsets is bright.
|Best Trading Company||South Pole Group||First Climate|
|Best Advisory/Consultancy||Natural Capital Partners||EcoAct|
|Best Law Firm||Baker McKenzie||Norton Rose Fulbright|
|Best Verification Company||EPIC Sustainability||SCS|
|Best Wholesaler||First Climate||South Pole Group|
|Best Broker||Numerco||Evolution Markets|
|Best Project Developer, Renewable Energy||South Pole Group||EcoAct|
|Best Project Developer, Energy Efficiency||EcoAct||South Pole Group|
|Best Project Developer, Forestry and Land-Use||South Pole Group||Clean Air Action / Terra Global Capital|
|Best Project Developer, Public Health||Climate Care||South Pole Group|
|Best Project Developer, Overall||South Pole Group||Clean Air Action|
|Best Offset Retailer||South Pole Group / Natural Capital Partners||Climate Care|
|Best Registry Provider||IHS Markit||APX|
|Best Voluntary Standard||Gold Standard||VCS|
|Best Offsetting Project||Wildlife Works – Kasigau Corridor Project||Livelihoods Fund/ Climate Pal - Hifadhi cookstoves project|
|Best Corporate Offsetting Programme||Qantas – Future Planet scheme||La Poste|
Project developer South Pole Group, the winner of five of this year’s awards, said it was excited to see new industries such as the IT sector, and corporate clients based in new geographies, seeing offsetting as a crucial part of their corporate social responsibility (CSR) strategy.
South Pole was voted Best Project Developer Overall, Best Project Developer in Forestry and Land-Use, Best Project Developer in Renewable Energy, Best Trading Company, and was joint winner of the Best Offset Retailer category, alongside Natural Capital Partners.
Nadia Kahkonen, head of communications at the company, says that over the past 12 months there has been growing demand for community-based projects such as cookstoves and water filters, as well as forestry projects.
K. Sudheendra, director at Epic Sustainability, which won Best Verification Company, predicts demand for offsets will increase in the coming years, and says that the market is “generally performing well”.
Edward Hanrahan, director at Climate Care, which claimed the title of Best Project Developer in Public Health, says the outlook for the market is healthy partly because buyers are becoming more sophisticated, and are increasingly looking to what he calls “blended financing”.
Climate Care has seen this part of its business grow between 10% and 15% in the past year as a result, he adds.
“Buyers are increasingly integrating pure carbon-related and environment-related activities into general sustainability. Projects that would previously have been seen as carbon projects, which deliver verified carbon credits, have become climate and development projects,” Hanrahan says.
“The buyers are also making more of the opportunity to pre-invest in projects, rather than just saying they're going to buy carbon outcomes, or carbon credits, merging CSR or the UN’s Sustainable Development Goals (SDGs) and carbon budgets, and they’re much more interested in the underlying projects,” he adds.
"CORSIA will definitely be a very important source of demand for carbon credits."
Marion Verles, Gold Standard
Hanrahan says that, overall, there has been more investment into projects but the financing is taking a different form, and the carbon credit instrument on its own is being utilised less. This may help explain the 31% decrease in the amount being spent on offsets quoted in the Ecosystem Marketplace report, he argues.
Similarly, as the voluntary carbon offset market matures, distributive projects such as those that distribute cookstoves continue to expand. The number of projects may not have grown hugely in 2016, but the number of offsets within these projects has, according to Hanrahan.
IHS Markit, which was awarded Best Registry Provider for the eighth straight year, has seen a 61% increase in issuance of credits from Verified Carbon Standard in the first six months of this year compared to the same time last year.
Kathy Benini, managing director at the company, says: “I think the market is taking off, I think we're at an inflection point.
“We're consistently going to see increased demand for corporate offsetting because of the number of companies committing to achieve SDGs along with carbon neutrality. It's a really strong movement which will shift us toward a much more robust market.”
Among the reasons for positivity cited by many of the winners were advances in international policy that have, in many cases, been sparked by the Paris Agreement.
Climate Care’s Hanrahan says that as the Agreement’s framework undergoes adjustment by the UN FrameworkConvention on Climate Change (UNFCCC), he expects a framework where climate change “comes back onto the agenda” for companies.
“Since about 2008, it hasn’t been the primary risk issue on the agenda of business: climate change is seen as an annoying longer-term issue. There are some corporates taking it very seriously but it hasn’t been a number one risk management issue for a number of the corporates. It should at least be in the top three,” he says.
However, Gerald Maradan, chief executive of France-based EcoAct, which was voted Best Project Developer in Energy Efficiency, is sober in his predictions as to what extent the Paris Agreement will be a driver of growth in the market.
“More and more companies have pledged to be carbon neutral by 2020 so we know there will be an increase in demand up to 2020. But there will be no big boom, it will be moderate,” he argues.
Maradan hopes the “general framework” that exists in the Agreement today will be clarified to better define the tools and instruments surrounding offsets and to promote climate finance, as part of changes to the Paris Agreement rulebook that are scheduled for adoption by 2018.
Accurate counting of Nationally Determined Contributions (NDCs), the national targets which, as part of the Paris Agreement, set out the extent of a country’s carbon emissions reductions, was cited by Ecosystem Marketplace as the biggest risk to voluntary offsetting post 2020.
"More and more companies have pledged to be carbon neutral by 2020 so we know there will be an increase in demand up to 2020."
Gerald Maradan, EcoAct
This is because a country could in theory count all carbon savings towards its domestic emissions reduction commitment, which as a result would prevent the sale of offset credits to overseas buyers in the voluntary carbon market as this would result in them being counted as offsets by the foreign buyer’s country.
Martijn Wilder, partner at Baker McKenzie, the winner of Best Law Firm for the eighth year in a row, says this process, known as ‘double-counting’ is “something that's out on the horizon as a point of uncertainty” for the future of the voluntary carbon offset market.
Gareth Turner, co-founder and director of Best Broker winner, Numerco, agrees the Paris Agreement creates some uncertainty for the voluntary market. “Until 2020, or until the rules are made clear, many people are in a holding pattern,” he says.
“Nonetheless, there are lots of positive signs from some of the proactive elements that have signed up to the Agreement - we now hope some of the less willing countries come to the table, too.”
Within the policy space, Wilder also sees the recommendations made in June by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) increasing demand from companies for carbon offsets.
“As it becomes more transparent what companies are doing on carbon, what tends to happen is there is a big increase in shareholder activism and pressure placed on those companies.
“The companies then start to develop a climate change strategy, which quite often includes offsets,” Wilder says.
The Ecosystem Marketplace report highlighted aviation as a promising emerging market for voluntary carbon offsets, as the International Civil Aviation Organization looks to create its own scheme, known as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).
Under CORSIA, aircraft operators will be required to purchase offsets, or “emission units”, for the growth in CO2 emissions covered by the scheme.
From 2021 until 2026 the scheme will apply only to international flights between states that volunteer to participate. From 2027, participation will be mandatory for states meeting certain criteria related to their level of aviation activities.
Marion Verles, chief executive of Gold Standard, which claimed the crown for Best Voluntary Standard, says CORSIA “will definitely be a very important source of demand for carbon credits”.
“However, there is a risk that the level of ambition is not going to be sufficient. There is enough supply of good quality projects so there’s no need to look at lower quality projects to ensure demand is met. It’s a view that's shared by many of the key civil society stakeholders involved in shaping CORSIA,” she says.
“We will be keeping a very close eye on the eligibility criteria. We hope to see very stringent criteria for environmental integrity, paired with sustainability development considerations.”
Qantas took the title of Best Corporate Offsetting Programme for its Future Planet voluntary offsetting scheme, which allows the airline’s customers to opt in to support projects that counter the greenhouse gas emissions from their flights. Since 2007 the scheme has offset more than 2.5 million tonnes of carbon emissions.
The Paris Agreement was a "turning point" and a "landmark moment" for forestry carbon offset projects.
Mike Korchinsky, Wildlife Works
“Qantas has been deeply involved in the development of CORSIA since its inception, as a representative of the International Air Transport Association and [in discussions with] the Australian Government in the negotiation of its design,” a Qantas spokeswoman told Environmental Finance.
The airline says significant growth potential exists in carbon offsets, within and outside the aviation industry. It already partners with businesses including General Electric and Tesla to share its knowledge and experience of carbon offsetting, it adds.
While CORSIA will eventually become mandatory, it could include offsets from sector-specific carbon credits such as Reduced Emissions from Deforestation and Forest Degradation (REDD+).
IHS Markit’s Benini says REDD+ is likely to be included as an acceptable offset in CORSIA, and will in turn increase demand that is already strong, she says.
In the past year, 78% of the registry provider’s issuances were from REDD+ projects, while 19% were from renewable or non-renewable energy.
Sascha Lafeld, founder of First Climate, voted Best Wholesaler, and chief executive of First Climate Markets, says his position in negotiations and workshops to help develop CORSIA gives him a good view of its development, but there are major details that remain unresolved.
“CORSIA is still in the making. We’re well informed about discussions, but even we are still uncertain what project types will be eligible. There should be greater clarity from 2019 onwards.
“It is hoped that REDD+ projects will be included, which makes sense because the market needs a lot of volume from big projects,” he says.
Lafeld agrees with Benini’s assertion that REDD+ projects are representing an increasingly large share of the market. “Since the price for Gold Standard-accredited projects has decreased we have seen much bigger uptake from these project types.
“They were previously marginalised because they were far too expensive. Buyers purchased only in small levels - but that has changed.”
REDD+ projects, including the winner of 2017’s Best Offsetting Project, the Kasigau Corridor forestry project in Kenya (see box) developed by Wildlife Works, accounted for the most offsets on both the primary and secondary markets, according to Ecosystem Marketplace. Wind and landfill methane projects were also responsible for a lot of offsets in the secondary market, with clean cookstoves featuring prominently in the primary market.
Mike Korchinsky, founder of Wildlife Works, says the Paris Agreement was “a turning point” and a “landmark moment” for forestry carbon offset projects.
“It confirmed the inclusion of REDD+ as a mitigation option post-2020, and that's made a significant difference to the level of interest in REDD+ in the last two years,” he says.
Among the reasons REDD+ projects are so popular is backing from buyers who realise that, post-2020, the finite supply of suitable forest sites will be subject to increasing demand.
“Those that have realised are looking to sign long term agreements with REDD+ entities now,” Korchinsky says. “In the last 18 months we've seen a move towards longer term contracts, which is extremely helpful for the projects.”
The Kasigau Corridor initiative, led by US-based REDD+ project developer Wildlife Works, was voted Best Offsetting Project for avoiding deforestation in east Kenya.
It enables thousands of rural farmers to benefit from a voluntary agreement to protect an important migration corridor for endangered elephants.
The project was supported by the International Finance Corporation, which issued a $152 million bond in October 2016 to support the project.
Investors can choose to have the coupon paid in cash, or in carbon credits, or a combination of the two. Investors who opt to receive the REDD+ credits can either retire them to offset their carbon footprint or sell them in the voluntary offset market.
All the credits were approved by the Verified Carbon Standard and the Climate, Community & Biodiversity Alliance.
The IFC bond incorporated an innovative $12 million ‘price support mechanism’ from mining giant BHP Billiton which ensures that the project can sell a minimum quantity of carbon credits every year until the bond matures.
The average global price of voluntary carbon offsets fell again during 2016, to $3.0 per tonne of carbon dioxide, down from about $3.30 in 2015, and pricing remains a concern in discussions about the long-term viability of the market for some observers.
The cheapest offsets were generally found in Asia, where prices averaged $1.6 per tCO2e, with those from wind projects being particularly cheap at $0.7 per tCO2e.
Asia was also responsible for the most offset transactions with 25 MtCO2e (46% of the total) followed by North America with 10.1 MtCO2e.
Gareth Turner, co-founder and director of Best Broker winner Numerco, says although prices “have been at historic lows which are not sustainable” his company is beginning to see an upward trend as more technologies, locations and participants come into the market.
“At the low prices many projects stopped producing voluntary carbon because it's not economical, which led to a reduction in the large pool of very cheap credits.
“We're seeing customers buying a varied portfolio to protect themselves from the reduction in available cheap volumes.
“An increase in the number of retirements of offsets is also reducing the pool of unsustainably cheap credits,” Turner says, “which should have a positive effect on pricing going forward.”
First Climate’s founder Sascha Lafeld points out that the number of retirements has doubled since 2012.
He agrees prices are too low because of historical oversupply. This might change, he says, with the anticipated introduction of China’s domestic carbon trading market late in 2017. He predicts the scheme could significantly reduce the supply of credits from China, as they will be transacted within the country’s own borders.
Mark LaCroix, of Natural Capital Partners, which was winner of Best Advisory/Consultancy and joint winner of Best Offset Retailer, with South Pole Group, says his company has seen price “becoming a bigger driver in the creation of portfolios, meaning lower quality, distressed assets are being included from time to time, which doesn’t bode well for the future of carbon finance.”
“There’s a lot of what we call ‘portfolio pricing’, that really degrades the value of the whole portfolio.”
However,more sophisticated buyers are increasingly scrutinising the viability of projects, he says, by looking at how good the management team on the ground is, and if the team has longevity in order to continue delivering emission reductions over the long term. The more experienced buyers are asking the right questions and seeing the broader benefits of these projects, according to LaCroix, which increases his confidence that prices are heading higher.
One of the ways developers can quantify the value of their projects is through standards, and particularly lining them up with the UN’s 17 SDGs, which Natural Capital Partners does with its own internal, SDG-compatible impact measurement tool.
Gold Standard for the Global Goals, launched by Gold Standard in August, measures the contributions projects deliver toward the SDGs, and is key in empowering investors to track the impact their investment delivers in terms of progress toward the SDGs, according to Gold Standard chief executive Marion Verles.
“Gold Standard for the Global Goals will enable those players to ensure their money contributes to SDGs in a meaningful, quantifiable way, and to crowd in new types of funding, above and beyond companies looking to offset their emissions.
“The lack of clarity on how markets will operate post-2020 means we need a new approach, to give our projects the most flexibility to navigate the post-2020 world.”
Verles argues that issuance of voluntary carbon credits is going to be limited after 2020 because of the risk of double counting, where projects can no longer issue credits because they are captured in the host country’s national inventory, and counted toward its NDC.
“However, the need to drive finance away from those who emit carbon to those who need to develop on a low-carbon pathway is not going away,” Verles says.
“Under Gold Standard for the Global Goals, projects will be able to opt for a different certification pathway, where the corporation can continue to finance the same project but instead of claiming carbon neutrality, they claim to have funded ‘X’ number of emission reductions, so it can say it has contributed to climate finance, through the NDCs.”
This also opens the opportunity for sustainable supply chain initiatives, Verles adds, which can allow companies to have their project-based emission reductions to be recognised within the Greenhouse Gas Protocol, a corporate accounting and reporting standard, as having reduced their Scope 3, or supply chain, footprint.