GREEN CAPITALI$M REDUX
The Quiet Comeback of Voluntary Carbon Markets
- Voluntary Carbon Markets (VMC's) though still small, are poised for a major resurgence.
- High-quality, engineered carbon removal solutions, such as mineralization, require large investments to scale and reduce costs.
- Experts believe a revitalized VCM could fund these breakthroughs and significantly boost global decarbonization efforts.
It is widely agreed that a large part of decarbonization will occur through market-based solutions that put a price on carbon.
A growing part of the world’s carbon emissions are covered by mandatory carbon markets – regional or national – the so-called compliance markets. But market watchers see an ongoing need for voluntary markets, in which companies and organizations purchase carbon credits to offset their carbon emissions.
In fact, a convergence of voluntary and compliance markets is beginning to appear, potentially opening new demand for credits from projects around the world, including carbon removal projects through technical and natural methods.
This growing convergence opening large sources of new demand for carbon credits promises to provide essential funding for breakthrough technologies in carbon-free energy.
The voluntary carbon market (VCM), which has at times been on the verge of extinction over the past two decades, may well be on the cusp of a resurgence that draws private capital into promising technologies and projects, especially projects in lower-income countries.
Tiny market, huge potential
Compared to compliance markets, the VCM is quite small. Yet around it has developed a remarkable infrastructure of registries, standard-setting bodies, project developers, rating agencies and brokers. Its basic unit is a ton of carbon permanently removed or not put into the atmosphere.
“It’s a tiny market, covering perhaps 0.3 percent of global emissions,” says Lars Kroijer, Managing Director, AlliedOffsets, a UK-based data and market intelligence provider for the VCM. “It’s a rounding error of a rounding error.”
With his company tracking thousands of projects from some 8000 developers listed on numerous registries, for corporate clients worldwide, he’s gained global perspective and sees enormous potential in the VCM.
“This space has tremendous potential, it can be a hundred times bigger and still be small,” he says.
He thinks the voluntary market can play a key role to spur investment in tech solutions, specifically carbon dioxide removals (CDR). Such solutions extend beyond nature-based tree-planting, which cannot scale enough. They require sustained investment in research and engineering.
Now, engineered CDR projects are the most expensive in the market, their credits costing up to $500 and more. The key factor for any breakthrough technology is that it must scale quickly at much lower cost.
AlliedOffsets has created a database of what it calls ‘moonshots’; projects that are underway now.
“It’s a way to keep track of where we are with potentially huge, game changing solutions, in addition to some of the less scalable stuff,” says Kroijer.
“Because we need a lot of money to go into this space, not just planting trees,” he says. “It needs a lot of investment and costs to come down by a large factor, more than solar did, for it to be competitive decarbonization.”
Now, with the expansion of national and regional compliance markets, he says there’s a huge incentive to allow voluntary credits into compliance markets, creating new demand for projects that could potentially, with enough funding, change the world.
As an example, Kroijer suggests mineralization; a rock combined with a chemical process that can capture and hold carbon. There are actual projects like this. If one breakthrough project could be made to scale, to become 1000 times more efficient, it could bring the cost of a captured ton of CO2 way down.
“It’s why CDR can be so exciting,” he says. “But one problem is that it's so tiny, that so few credits are generated, and they're still incredibly expensive.”
He believes the voluntary market can generate significant investment for new ventures across a range of technologies.
Factors fueling demand
“The voluntary carbon market has had to weather multiple storms over the years, but it’s evolving not collapsing,” says Xavier Pye, an associate at Correggio Consulting Ltd. in Abu Dhabi. He gained insights on the VCM while leading business development at AirCarbon Exchange (ACX), which briefly operated an exchange in Abu Dhabi’s financial district.
“Governments are waking up to the opportunity the VCM offers in directing private finance, provided they adopt the right eligibility criteria for credits, and the project methodologies are sound.
“They see the value of the VCM for reducing the cost of mitigation activities and allowing private sector involvement to meet net-0 targets,” he says.
He also sees the growing convergence of voluntary and compliance markets potentially fueling new demand for credits.
“Voluntary carbon credits are being increasingly accepted in compliance schemes that provide a ready market for them,” he says.
Currently, some 40 percent of emissions trading schemes worldwide allow for some form of offsets, mostly domestic, to be used within their compliance regimes. An example is Singapore, where companies under its carbon tax scheme can meet up to 5 percent of their liabilities with eligible carbon credits.
Other factors should fuel rising demand in the VCM.
An important one is CORSIA, the Carbon Offsetting and Reduction Scheme for International Aviation, now in Phase 1. It compels airlines to purchase carbon credits in the voluntary market to offset emissions associated with international flights. The standards for these credits are quite high, ensuring their quality, while the market for them is anticipated to expand after 2027 when most countries are expected to join Phase 2.
There is also the emerging UN framework for international trade of carbon credits. Article 6.2 of the Paris Agreement governs bilateral agreements for carbon transactions between countries. Article 6.4 will go further to provide a centralized UN registry allowing transfers between countries.
“The development of the Paris agreement’s Article 6 framework is turbocharging the merge between voluntary and compliance markets,” says Xavier Pye.
A good example is Switzerland, which is a leading buyer of carbon offsets under Article 6. The country has entered into agreements with Ghana and Thailand, which have authorized the transfer of cross-border carbon credits. In Ghana, a Swiss foundation is supporting a cookstove project and an electric bike startup.
The credits, expected to prevent hundreds of thousands of tons of CO? emissions by 2030, are known as Internationally Transferable Mitigation Outcomes (ITMOs) under Article 6.2.
There are great expectations for this emerging global market.
“It provides an amazing tool for climate finance, because countries will be receiving hard currency in the form of project investment,” says Pye.
“And they’ll also earn hard currency through sale of credits, all the while hopefully getting improved environmental outcomes within their national boundaries.”
“It’s perhaps one of the best exports a developing country can have,” he says.
Get your carbon credits now
For firms anticipating the need to acquire carbon credits in the near future, possibly before 2030 when national net-0 targets kick in, Pye offers some advice. For companies not under a compliance scheme, he urges them to purchase credits now while they’re relatively inexpensive and building a portfolio from diverse projects.
“Come 2030 there’s going to be a lot of companies rushing to buy carbon units, and they will need to continue to purchase offsets for years,” he says.
“Naturally, with the uncertainty of the market, early movers will be rewarded.
“Of course they are taking risk in investing in projects, because the credits may not be eligible under compliance schemes in the future,” he says. “But having a diverse portfolio will help to abet such risk.”
He thinks that as carbon offsets gain more access to expanding compliance markets, the VCM will become a crucial piece in the world’s decarbonization toolbox.
By Alan Mammoser for Oilprice.com
No comments:
Post a Comment