Surging demand has transformed a buyer's market into a seller's market, reports Madeleine Jenkins
It has been a "watershed year" for the growth of the voluntary carbon market, according to market experts.
Demand for carbon offsets has sky-rocketed, and what has historically been a buyer's market is now in control of the seller.
That was how the market was summed up by the winners of this year's Voluntary Carbon Market Rankings – Environmental Finance's annual poll of the market, in which market participants vote for the leading companies and initiatives that exhibit best practice and innovation.
This transformation in the level of demand inevitably impacted the pricing of offsets.The range of different types of credits on offer in the market can make pricing trends complicated to summarise. While some prices have more than doubled over the past year, others have more than quadrupled, market observers said. But the general trend has been a sharp rise in recent months.
The surge in demand was driven by corporates setting net-zero targets, amid mounting consumer awareness of climate change. Offsets often form part of their plans.
With demand outweighing supply, Vaughan Lindsay, CEO at ClimateCare and Natural Capital Partners, winner of Best Project Developer in Public Health, said it had been a "fantastic year".
The surge in demand was welcomed by experts as a signal of a transitional growth period for the voluntary carbon market.Yet some warn that carbon prices still aren't at the levels needed to meet the goals of the Paris agreement, and that prices should continue to rise to between $30-$100 per tonne of carbon, compared to current prices which are often around $3-6.
While the growing demand for offsets is a sign of the market's growing maturity, teething problems remain – such as clarifying market guidance and standardising credit issuance documents.
The ongoing evolution of the market is reflected in the winners' table (see opposite). Environmental Finance hailed winners in new categories this year, including Best Monitoring/Impact Report (won by BioCarbon Partners); Best Carbon Exchange (ACX (AirCarbon Exchange)); and Best Innovation (The CBL Global Emissions
The winners also involved names that are stalwarts of the voluntary carbon market, and have won numerous awards in these market rankings in previous years, such as South Pole, which this year was again voted Best Project Developer in numerous categories; Verra, which won Best Registry Provider; and Numerco which was named Best Broker.
Also reflective of the market's growth was the number of completed responses from the market participants, which rose from some 1,500 last year to more than 2,000 this year.
|Best Trading Company||Redshaw Advisors||Vertis|
|Best Advisory Consultancy||Kanaka Management Services||Redshaw Advisors|
|Best Law Firm||Gabeiras & Asociados||Baker McKenzie|
|Best Verification Company||EPIC Sustainability Services||SGS|
|Best Broker||Numerco||Redshaw Advisors|
|Best Project Developer, Renewable Energy||South Pole||Sustainable Carbon Projetos Ambientals|
|Best Project Developer, Energy Efficiency||South Pole||EcoAct|
|Best Project Developer, Forestry and Land-Use||Kanaka Management Services||BCP (BioCarbon Partners)|
|Best Project Developer, Public Health||ClimateCare||South Pole|
|Best Project Developer, Blue Carbon||South Pole||EcoAct|
|Best Project Developer, Overall||Kanaka Management Services||BCP (BioCarbon Partners)|
|Best Offset Retailer||Redshaw Advisors||ClimateParner|
|Best GHG Crediting Programme||VCS (Verra)||ProClima|
|Best Registry Provider||Verra||EcoRegistry|
|Best Monitoring/Impact Report||The BCP Impact Report 2020||South Pole|
|Best Carbon Exchange||ACX (AirCarbon Exchange)||CBL Markets (Xpansiv)|
|Best Market Innovation||The CBL Global Emissions Offset (GEO)||N/A|
|Best Individual Offsetting Project||BCP's Luangwa Community Forest Project||N/A|
|Best Corporate Offsetting Programme||Microsoft: Carbon negative by 2030||N/A|
|Best Initiative||The LEAF Coalition||N/A|
|How poll was conducted: Companies were emailed and asked to nominate the leading service providers active in the voluntary carbon markets, 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 2,000 completed responses were received.|
William Pazos, managing director & co-founder at ACX (AirCarbon Exchange), said 2021 had been a "watershed year" for growth in the market, reflected in rocketing prices.
At the beginning of 2021, The CBL's Global Emissions Offset (GEO) spot contract was trading at around $0.80 on its exchange platform CBL, on volume of more than 25,000 tonnes. By July, this price had more than quadrupled, to $3.55.
The GEO was launched in August 2020.The buyer of a GEO receives a credit from a specific underlying project that meets ICAO-CORSIA criteria.
Best Carbon Exchange
To read more about ACX (AirCarbon Exchange) projects click here.
The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) was established by the International Civil Aviation Organization (ICAO) in 2016. The scheme is the first global mechanism designed to reduce greenhouse gas emissions (GHGs) from the international aviation sector. Its objective is to cap emissions at 2019 levels beginning in 2021 through 2035.
Elizabeth Willmott, carbon programme director of Microsoft, winner of Best Corporate Offsetting Programme, commented: "Over the last year, demand for high-quality carbon removal has heated up considerably. It has been a seller's market, with a 15-fold increase in demand for carbon credits expected by 2030, equalling up to $50 billion."
Gareth Turner, co-founder and director of carbon and renewables at Numerco, said: "The market has expanded hugely from where it was 18 months ago. It's now a seller's market, as opposed to a buyer's market, which it was for maybe eight or 10 years."
Commenting on why 2021 has seen such a spike in growth, Turner said: "I think everyone thought Covid would have a huge impact on these markets but, ironically, I think it's concentrated the mind onto climate change – it's given people the time to assess the wildfires and flooding.
"Net-zero commitments are also driving a lot of new project generation, whereas we saw a stagnation in new projects when demand was low.
"There seems to be a movement towards combatting climate change, but I suppose the mechanisms for that are still not decided, so everyone's eagerly awaiting the outcome of Glasgow," he added, referring to the COP26 climate summit to be held at the end of October.
Eron Bloomgarden, executive director and founder of Emergent Forest Finance Accelerator, agreed it had been a good year, but added a caveat: "Prices in the REDD+ and voluntary carbon space broadly have always historically been too low, let's say between $3-6. We know that's too low, and we know that prices need to between $30-100 per tonne – at least – to achieve the goals of the Paris agreement.
"If you just look at the compliance market, they're trading between $30-40. We all know prices have to go up."
Emergent Forest Finance Accelerator, is co-ordinator of the LEAF Coalition, winner of Best Initiative.The LEAF Coalition was established to provide payments for programmes that reduce tropical deforestation and forest degradation or restore tropical forests.
The spot market dries up
Much of the increasingly "sticky demand" for offsets has been reflected in activity in the 'spot market'.The spot market involves trading in carbon offsets for immediate delivery. As a result of increased demand, the spot market is running dry, which has resulted in a trend of large corporate buyers seeking to buy offsets en masse directly from projects, or even buying entire carbon offsetting projects.
Sascha Lafeld, head of carbon offset & green energy services at ClimatePartner, winner of Best Wholesaler, said: "People are moving [in] with their deep pockets. They're putting more money into more projects than ever before.
"It's not sufficient any more being an intermediary and buying from the spot market because the spot market has already dried out quite dramatically. The spot market will always be there, but it's different now. In terms of pricing, it will be far higher compared to if you develop your own projects. The downside of project development is that project development is capital-intensive and always comes with risks that need to be managed very thoroughly.
"Project development is cumbersome, it requires a lot of people, expertise and time. But you can control the project much better than if you go to the spot market [where] prices are increasing quite dramatically."
Louis Redshaw, CEO and founder at Redshaw Advisors, winner of Best Trading Company and Best Offset Retailer, also noted the changes to the spot market: "We have a market that is widely reported as having run out of spot volume – availability of spot carbon credits – and that's just not happened before. Across the board we've seen price rises.
"The voluntary carbon market has always been very much a 'negotiated contract' type market: no one could see what the prices were, there was often more supply than demand, so prices were depressed.
"But now the trends are: prices have gone up and existing participants in the market have all the experience of project development and selling to customers, but they don't have experience of trading proper, which includes volatility, trading price risk and having a view of future prices."
The result is a lack of professionalism in the market, he argued: "I've seen contracts from people that have been in this market for years that are not worth the paper they're written on – there's simply no standardisation, and this pushes costs up.
"Compared to the compliance market, where [there are] standardised trading agreements, that just doesn't exist in the voluntary carbon market."
The growth of the market has led to increased scrutiny, which has highlighted some of the market's shortcomings.The credibility of some offsets – and the validity of offsetting as a response to climate change – has been vigorously questioned over the past year.
Ruben Lubowski, special advisor at Emergent Forest Finance Accelerator, added: "In terms of volume and prices, it has been fantastic. But there have been some clouds.The growth of the market has generated a lot more scrutiny.
"While the market is booming, the media narrative has been increasingly negative. On the one hand, there are agendas behind that, but it's also reflective of how there is inconsistent quality in the market, so there's been criticism of projects, and so on.
"I think there's a risk that if those problems don't get addressed, we'll miss the moment in being able to massively scale. I think there's been great momentum but it's stimulated backlash, which I hope leads to some healthy evolution."
Many in the market are eager for further guidance from The Taskforce on Scaling Voluntary Carbon Markets (TSVCM), which was initiated in September 2020 by Mark Carney, UN Special Envoy on Climate Action and Finance.
Commenting on the TSVCM, Hassan Sachedina, CEO and founder of BioCarbon Partners, winner of Best Individual Offsetting Project and Best Monitoring/Impact Report, said: "There is always room for methodological evolution as technology improves. However, I think the market is getting distracted by credibility concerns.
"Over the last decade, the voluntary carbon standards have continued to evolve. It's concerning to hear people say REDD+ projects lack credibility when we see household incomes and wildlife increase, and emissions and deforestation decrease.
Best Individual Offsetting Project
To find out more about BCP's Luangwa Community Forest Project click here.
"A possible catalytic role for the Taskforce is to drive higher prices for nature-based solutions. Price is a fundamental driver of future conservation and livelihood transformation in REDD+ projects working in areas with high poverty."
BioCarbon Partners is an African-headquartered, Africa-focused and majority African-owned social enterprise that develops and manages long-term forest carbon projects in globally significant biodiversity landscapes in Africa.
Demand for nature-based solutions
In 2021, growth in the market was felt most acutely in demand for nature-based removal projects. Nature-based removal projects typically fall under three categories: forestry, blue carbon and agriculture.
Experts point to mangroves as a "a super carbon asset", but there was also increased interest in soil carbon solutions, such as biochar and better tillage practices, as well as a greater popularity for emission removal projects compared to avoidance projects.
Lindsay, of ClimateCare and Natural Capital Partners, said: "There's a strong focus on removals projects – everyone wants to do tree planting – but over time there won't be enough land to do all these removals projects – this demand will dampen over time."
Currently, new technologies are too expensive to be preferable to more scalable nature-based solutions. But experts noted rising interest in air carbon capture technologies.
ClimatePartner's Lafeld reported "a strong move towards removals units".
"When you want to be net-zero as a corporate, it's not enough to use reduction units from renewable energy or forest protection, you really must make sure you remove carbon dioxide and, at this point, this is only really possible through reforestation.
"But the future, over the next five to ten years, is in technology solutions. So, the Climeworks of this world, they will hopefully have a big impact. Carbon capture and storage will play an important part; but not only technology solutions [will be important], I think nature-based solutions will come up, such as biochar. So, we will be seeing a lot of movement in the removal unit space."
Climeworks is a Swiss company specialising in carbon dioxide air capture technology.
Microsoft's Willmott said: "We've seen a convergence among buyers to align on criteria for what constitutes high-quality carbon removal, and an early uptake in promising technologies such as direct air capture and carbon mineralisation."
Direct air capture is a technology to capture carbon dioxide (CO2) from the atmosphere after which it can be permanently stored in deep geological formations or used in the production of fuels, chemicals, building materials and other products.
Carbon mineralisation occurs when CO2 in the air reacts with certain minerals to become a solid carbonate that permanently stores captured carbon.
Willmott added: “The [recent] IPCC report [on the physical impacts of climate change] underscored the importance of reducing emissions first and foremost. Decision-makers must have greater clarity on what constitutes carbon removal versus emissions reduction.
“Buyers will need to understand the differences in low-durability and high-durability carbon removal and take a more nuanced approach to investing in both, supported by stronger standards. Demand for carbon removal technologies will continue to increase, especially with increased awareness about the severity of the climate change crisis and its effects.”
Numerco’s Turner said: “Everyone’s looking to get to a stage where they’re removing carbon from the atmosphere rather than reducing emissions. But the pace of development hasn’t yet caught up with demand
"However, reducing emissions from existing standards and methodologies is extremely important. Buyers should assess the quality of the projects they're buying and focus on the social elements of the impact they're having, rather than simply attempting to get into these new asset classes.
"There's many, many projects that still have significant impacts for communities, health, social well-being, job creation that still exist."
Marco Magini, director of projects and markets at South Pole, winner of Best Project Developer in the Renewable Energy, Energy Efficiency and Blue Carbon categories, said: "With carbon credits gaining more attention in the mainstream media, there is also more discussion around timing: should companies purchase carbon credits to offset their emissions today, or only focus on reducing or avoiding emissions? The short answer to this debate is: we need both; we need offsetting today as well as a dramatic reduction in emissions in the next decade."
Magini added: "Also, we encourage companies to look at both nature-based as well as technological removals solutions. Most of our clients are looking to add (technological) removals step-by-step into their portfolios towards 2025 or 2030, and are investing in high-quality carbon offsets until certified removals become available. So, keep your eyes peeled for more removal technologies on the horizon."
A need for guidance and COP26
One of the major barriers in the market, according to this year's winners, is a lack of guidance on carbon offset standards and quality, as well as uncertainty over international guidance in Article 6 of the Paris climate agreement.
A key agenda item for the next climate summit, COP26, will be clarification of Article 6 and addressing uncertainty around countries allowing voluntary carbon market projects to contribute to Nationally Determined Contributions (NDCs). NDCs are the efforts by each country to reduce national emissions under the Paris Agreement, which must be resubmitted every five years.
Article 6 addresses the carbon markets under three operative paragraphs and outlines the need to avoid double- counting, whereby voluntary reductions are counted towards national, compliant mandatory targets as well as corporate targets, for example.
But there was an overall sense of scepticism about the upcoming COP26 talks in October. Redshaw expected "not a lot of change" to come from the talks, while South Pole's Magini said: "The UN process regarding Article 6 of the Paris Agreement on developing a global carbon market is too slow. It just won't deliver the scale and the required infrastructure in the time needed.
Best GHG Crediting Programme and Best Registry Provider
To read more about how Verra has helped facilitate the voluntary carbon markets, click here.
"If we have to wait on unanimous decision-making among countries, it will be too late to save our climate.
"The message from the last IPCC report was crystal clear: we no longer have time for epic debates, we need to be investing in results-based projects and solutions today as if our lives depended on it – because they do. And we simply cannot reach our global emission reduction targets without the help of businesses and investors."
Commenting on COP26, Numerco's Turner said: "We're hoping that there is a multitude of options available for buyers and for entities to achieve their climate goals.
"The beauty of the voluntary market has been its ability to fit around other systems. Many of those existing regulated systems or compliance systems haven't been perfect. They didn't necessarily provide the goals that customers were trying to achieve regarding social impact, tangibility and marketing and so on. So, we hope the voluntary space will work alongside any new systems."
Regardless of whether clarification of Article 6 emerges at COP26, this year's winners insist that the market must still expand rapidly in order to help meet the goals of the Paris agreement.
Redshaw said: "My predictions for the future are increasing commoditisation of this product.
"I think things like the CORSIA-eligible token is a symptom of the move and desire towards commoditisation. The problems with such a narrowly focussed set of criteria of what's eligible and what's not is that it leaves behind all of the other carbon credits that don't qualify.
"That's not very helpful when it comes to generating liquidity and a deeper and more efficient market. So, it's a step in the right direction, but it's not an answer to the problem."
A CORSIA Eligible Token represents a Carbon Emission Unit that is eligible under the 2021-2023 pilot phase of the CORSIA scheme.
South Pole's Magini commented: "The voluntary carbon market is still too small compared to the challenge, and carbon credit prices are [still] too low to make a big difference. We simply cannot unlock the full potential of climate finance at the scale needed at these prices. "There are many projects that require much higher revenue streams from carbon offsets to get off the ground.
"That being said, today's voluntary market is incredibly dynamic: we anticipate 2022 shaping up to become a potential tipping point for new solutions and innovations, particularly in the area of carbon removals. 2021 has been the year of making the transition from the Kyoto era to the Paris era, where we've begun a transition to net zero emissions."