With the voluntary market undergoing rapid growth, new buyers and sellers often come with misconceptions, says Michael Berends, managing director at ClearBlue Markets
Environmental Finance: ClearBlue was voted Best Advisory/Consultancy in Voluntary Carbon Markets by Environmental Finance readers. What sort of clients do you serve, and what sort of support are they looking for?
Michael Berends: Historically, we've been focused on compliance markets due to the higher number of participants and volumes, though the voluntary market was always on our radar. As interest has risen in the voluntary market, we were able to leverage our expertise in this area again. We've seen a growing number of clients enter or consider the voluntary market, and they include corporate buyers looking to meet net-zero targets, traders and other financial players who use our market analysis and price forecasts, and developers around the world looking to bring offset projects to market. It's the full spectrum of the market.
EF: What misconceptions do buyers of voluntary offsets tend to have about the market?
MB: One key misconception is that the higher the price of the offset, the better it is. Our view is that as long as an offset is approved by a reputable registry – such as Verra, the Gold Standard, the American Carbon Registry or the Climate Action Reserve – then it reduces a tonne of carbon dioxide. If you're concerned about fighting climate change, that's high-quality. Other elements of the price of an offset relate to co-benefits the project might deliver: clean water, gender equality, helping impoverished communities, for example. These are all really important, but if your goal is to address climate change, as long as the offset is from a reputable registry, that prudently addresses additionality, then that is a good offset. Other factors, such as the reduction type – i.e. avoidance versus removals – impact price due to specific buyer preferences, but neither one is inherently better than the other.
EF: What challenges do developers face in bringing offset projects to market?
MB: The first challenge is that what developers think are offset projects very often aren't. In some cases, it turns out that, when you look at the project boundaries properly, a proposed project may actually lead to increased emissions. More often, the developer won't be able to show additionality – that the project would not have gone ahead without the revenue from the carbon offsets – and is thus not eligible as an offset project. Another key issue to consider is if there is a regulation, or a carbon price signal, or any other carbon incentive for the activities related to the project, then it's not an offset. This is often location-specific: what might qualify for an offset in one location may not in another location due to such regulations or incentives.
For projects that qualify, they often find that they generate fewer credits than they expect. The verifiers and registries always tend to be extremely rigorous. They go through lengthy processes, applying methodologies and protocols that have been assessed from a very conservative perspective. This is a very good thing, as it helps maintain the environmental integrity of the offset market.
Basically, the main challenge is that offset projects are very difficult to develop. It takes time and effort. Offsets aren't given out like candy. Developers need to be prepared for this process and the challenges that they will likely face. However, that means that, when an offset does come to market out of these reputable registries the buyer can be extremely confident that it comes with a high level of environmental integrity.
EF: Compared with mandatory markets, there is considerably less standardisation in the voluntary market. Do you anticipate this is likely to change, with the introduction of various codes of practice and similar initiatives?
MB: There is still room for greater standardisation, and it's important that we're all talking the same language when it comes to project development and offset issuance. And there's also an important role for exchanges in the voluntary market to offer standardised contracts that can provide a degree of price discovery and transparency.
However, the inherently bespoke nature of the voluntary market means that it will never become fully standardised. As long as it's meeting demand from corporates to meet their own specific needs, with buyers having different aims, then you'll see unique types of offset coming to market, and that has implications for the amount of liquidity on exchanges in all these different offset types.
EF: What other expectations do you have for how the voluntary market is likely to develop?
MB: As demand and prices increase, the voluntary carbon market will support new project types and new technologies that aren't viable today, or have been spurned thus far. For example, we're seeing significant interest in new nature-based solutions such as blue carbon, and new technologies such as direct air capture technologies, although I think that latter is more of a longer-term solution.
But the main role of the market in the near- term will be in reducing emissions in countries and activities where it isn't yet appropriate to put regulation in place – particularly in parts of the world that historically haven't caused the climate problem and need to be able to grow their economies. Credible offsets from reputable registries and verification processes will play a vital role in helping to incentivise faster reductions in these places than would otherwise be the case, and sending a price signal to facilitate higher cost abatement projects that will take place in the long term.