Annual Market Rankings 2022

An evolving voluntary carbon market

Pioneering environmental markets broker Evolution Markets won a raft of categories in the 2022 Environmental Finance Market Rankings. Here, its CEO Evan Ard and president and head of brokerage services Peter Zaborowsky review developments in voluntary carbon

Environmental Finance: A growing number of large corporates are turning to the carbon offset market to underpin their net-zero strategies. What sort of offsets are they looking for?

Evan ArdEvan Ard: In general, we have seen a flight to quality in terms of corporate offset interest in the past year. This contrasts somewhat with previous years, when buying tended to be more dictated by cost budgets. Aside from compliance with CORSIA [the global carbon offsetting and reduction scheme for airlines], corporate buyers have shifted somewhat away from renewable energy offsets in developing economies such as China and India.

Instead, they are showing increasing interest in forestry-based emission avoidance and reduction projects, especially those with community and biodiversity benefits (specifically, those that are eligible under Verra's Climate Community & Biodiversity Standards).

There is also interest in heat and cooking efficiency projects in undeveloped regions (for example African cookstoves projects). Of particular interest at higher price levels is demand for offsets that blend in voluntary portfolios 'blue carbon' from watershed projects, such as mangrove restoration.

EF: Some voluntary buyers are also getting more granular with the geographic sourcing of their offsets, preferring to support projects in regions where they have business activities. How is the supply side of the market responding?

Peter ZaborowskyPeter Zaborowsky: There is a pipeline of substantially sized forestry projects in South America. Numerous cookstove projects are under development and, in the US, we have seen a growth of industrial process change applications on the American Carbon Registry [ACR]. For example, ACR offers methodologies to incentivise the substitution of HFCs, potent greenhouse gases, from foam manufacture and use. We're also seeing increased interest in domestic US forestry and land use project applications. In general, the supply side of the market has definitely responded to the surge in demand over the past couple of years.

EF: The lack of regulation is both a strength of the voluntary carbon market and, potentially, a source of risk for buyers. What advice do you give clients entering the market?

PZ: We inform buyers that they need to purchase offsets that match their corporate needs and the profile of their operations and to seek the highest quality and most credible projects at their budgeted price point. In the end, bigger companies in particular will need to defend their purchases in front of their stakeholders, the media and the public at large. Secondary market participants are concerned with liquidity in this nascent marketplace and, likewise, we inform them of liquidity limitations and reasonable expectations around trading this market.

EF: How are you expecting the voluntary market to evolve going into 2023?

EA: The global macroeconomic picture will dictate demand in the coming year. We hope to see strong growth in market participation from new entrants and see certain trends emerging with larger companies that are well on the way to attaining their ESG goals. Notably, we expect growing interest from buyers to participate in the offtake of new projects and forward vintage purchases. This may be in the form of true carbon finance or direct investment in projects themselves, or through pre-purchasing future strips of credits to support development. These structures will be key to supporting the growth of the market.

EF: COP27 was a disappointment from the point of view of carbon markets, in that it failed to notably progress discussions around Article 6.4, which is to create a centralised body to oversee a UN-run emissions crediting system. What are the implications for the voluntary market?

EA: Of course, financial markets thrive on certainty. More clarity on the rules that will shape Article 6 markets would have been welcome. Regardless, there is enough ambition in voluntary markets to drive sustained investment in carbon reductions and removals in the short term.

The lack of progress on Article 6, however, is impacting investment in long-term offtake agreements, which we would have expected to be more advanced at this point in our net-zero journey.

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