Introduction
Sustainability is the way of the future - that part is canon by now. So, what values can companies expect from the markets of this future? Well, the answer is right in front of us. The world is already witness to the emergence of a new type of market, where the highest valued ‘commodity’ is the decarbonisation solution of paramount quality.
Voluntary carbon markets (VCMs) are taking the baton forward from the cap-and-trade mandates of compliance carbon markets (CCMs) to dive into an ever-expanding scale of carbon offsets trading. This is a world where the biggest draw from investors comes for projects with the highest sustainability standards, and yet, not lacking in profitability. Quite the opposite, in fact. With growth to the factor of nearly 100 expected from the VCMs by 2050.
Industry majors have already announced their alignment with some very ambitious decarbonisation targets to meet Net Zero 2050 goals, and carbon offsets will play a key role in their sustainability strategies. Major announcements from the big players in various industries have had a top-down effect, encouraging individual investors as well as medium and smaller companies to also participate in the VCMs, spurring demand for carbon offset credits.
VCMs at a glance
There had been a slight slump in carbon credits demand owing to uncertainty over the global economic outlook. Temporary factors notwithstanding, with so much happening and pegged to happen in the VCM space in coming decades, we are witnessing the consolidation of new strategies, viewpoints, as well as the advent of forward-thinking investment trends with sustainability as key impact factor.
Key trends
Forestry vs Energy
Carbon offsets based on forestry and land-use projects had witnessed a major growth spike . During that period, offsets from forestry and land-use projects grew 264 percent compared with a modest 21 percent for other project types. At the time, the IPCC had highlighted the importance of the former through carbon sinks, which had spurred this massive growth phase. Since 2018, however, renewable energy projects have bounced to the top. This may well have been a factor of a surge in demand due to their lower pricing back then, as well as the entry of a lot of new investors that may have gone with the “inexpensive and popular” category. The trend continues today as REDD+, as well as renewables projects including solar, and wind enjoy the two biggest chunks of investments through VCMs.
Anonymity
In the age of online everything and cryptocurrency investments, anonymity has grown. Whether to protect identities, or simply to keep their investment strategies, or investors’ names away from the public eye and competitors, some carbon offset transactions have not disclosed who has invested in which projects through VCMs, or simply mention code names. In some markets, half or more transactions have been anonymous. This incidence is higher in the case of older offsets, and could change as VCMs expand.
Keen eyes
Of late, there has also been some criticism for carbon offsets trading. While a large chunk of potential investors sits on the fence to wait and watch, a fair number of early investors have made inroads with credit purchases at low prices. There has also been some talk of projects that may not offer the additionality that credits require, but are being added to VCMs as a small part of this now massive movement. The standardisation of VCMs and credit ratings definitely helps in such situations.
Co-beneficial
While the projects additionality is a key factor affecting the value of credits, there remains room for doubt from the investors as to its extent. However, with clear-cut co-benefits, those doubts can easily be put to rest. Hence, there is a greater value being assigned to projects that also offer co-benefits of the health, biodiversity and other community and employment development types.
Old is gold?
It is surprising what can be considered vintage in VCMs. Vintage offsets, based on projects from a few years ago, are quite popular with corporations. A BNEF analysis finds that more than half of all offsets retired (carbon credits that were purchased and claimed as offsets by the buyer) were from projects from before 2015. They are usually cheaper, and don’t carry as many co-benefits as newer credits.
VCM meets CCM
There have been some developments that could lead to an overlap of VCMs and CCMs. The state of California had been the first to standardise some voluntary credits as part of its Emissions Trading Scheme (ETS). There had been some movement from ICAO’s CORSIA on this front as well until 2019, which was impacted by the spread of COVID-19. More recently, ICAO has already identified seven voluntary standards in 2020, making them viable alternatives for carbon offsetting towards emission from international airlines.
Carbon Removal
Avoided deforestation and energy generation projects made up the two biggest chunks of offset types in 2021. Both these fall under the bucket of carbon avoidance and reduction. More recently, there has been a growing voice for demands of credits under the carbon removal and sequestration bucket. Chief among these are offsets that address carbon capture, through DACCS, BECCS, CCS and other aligned projects. Carbon capture-based offsets have seen a growth in recent years, being the third highest volume of offsets traded in VCMs, but still comprising only about 8 percent of the total. This is pegged to change as the need for carbon capture, utilisation, and storage (CCUS) becomes a priority across geographies to abate carbon emissions leading up to 2050 and beyond.
Consumer pressure
A big game-changer with VCMs is the advent of consumer-driven demand for sustainability. BNEF reports that of the total credits retired in 2021, about 64 percent came from B2C companies. This indicates that consumer-facing companies and brands are responding to the demands from companies to be more responsible, transparent and sustainability aligned.
Going forward
VCMs seem very much a part of the future of investing and markets on a global scale, and the fact that consumers, investors and stakeholders are all aligned and demanding more sustainable practices from industries and companies is driving the momentum further. There currently exist a variety of standards, based on the geographies where the respective markets are based and the locations of their investors.
Further, standardisation of VCMs will streamline and only allow for the highest quality credits to be issued and traded, leading to higher trust from potential investors and those on the fence. The key factor here is the proven advancement of technologies and projects that contribute towards climate change mitigation, while also serving the need for carbon emission-intensive industries to offset their emissions until their value chains have achieved complete decarbonisation. This is an active space and will be an exciting one to watch. As long as VCMs can stay agile, they will be able to tackle the challenges of a sustainable future.
Carbon Offset Platform: To tackle these challenges and gain all the advantages of participation in voluntary carbon markets, our team of experts at Evalueserve has developed our very own Carbon Offset Platform. This platform comprises a global database of projects from across various carbon offset registries, which helps you in analysing the best-fit project in terms of abatement as well as economics. To know more about how our Carbon Offset Platform can empower your decarbonization journey, please connect with our team of experts today.
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