Rising to the challenge

While the mandatory carbon markets await new rules, the voluntary market remains buoyant and is pushing into new areas. Katie Kouchakji talks to this year's winners of our Voluntary Carbon Market Rankings to find out what's cooking.

Ten years ago, when Environmental Finance first conducted its voluntary carbon market rankings, the market was in many ways still in its infancy: the Kyoto Protocol’s first compliance period was only two years old and negotiations about its successor were underway (before collapsing in Copenhagen in December 2009). Over the next six years, while the international process reset and budgets were squeezed, the voluntary market saw a dip in activity.

Now, on the cusp of a new era of international climate change policy responses – including the aviation sector’s CORSIA market – the voluntary market is poised for its third successive record-breaking year. Already, as of 21 August, standards body Verra had issued 67 million verified carbon units (VCUs) – up 35% on last year’s entire issuance. (See Table)

“We’re in a totally different reality now than a couple of years ago,” says David Antonioli, CEO of Verra, which was voted Best Standard for the seventh time in eight years. While there are various suggestions as to what’s driving the increased activity – including preparations for CORSIA (the International Civil Aviation Organization’s ‘Carbon Offsetting Scheme for International Aviation’) – Antonioli says more people are looking to cut their emissions since the 2015 Paris Agreement was finalised.

“People are looking at everything concrete and tangible that we can do today,” he says. “I hope it’s off the back of people making internal reductions first.”

Increased shareholder awareness of climate change issues and more businesses taking on voluntary commitments, such as the RE100 group of companies committed to using only renewable power, are also boosting the market, says Martijn Wilder, global head of Baker McKenzie’s climate change practice, which again topped the poll as Best Law Firm. “We’re seeing a lot more people wanting to be carbon neutral.”

Research by Natural Capital Partners (NCP) – voted Best Advisory Service/Consultancy and Best Offset Retailer – found the number of Fortune 500 companies committing to carbon neutrality by 2030 had doubled since the Paris climate talks. “The impacts of climate change are more and more obvious, so you’ve got more businesses responding to that and taking action,” says Mark LaCroix, the firm’s executive vice president, client solutions.

“I don’t think anyone saw this coming, this big jump,” says Renat Heuberger, Switzerland-based CEO of project developer South Pole, which won Best Project Developer for renewable energy and energy efficiency as well as Best Project Developer overall and Best Trading Company. He sees the student strikes, led by Swedish teen activist Greta Thunberg, and the resultant media coverage as a major driver for corporate action – partly, he says, to build brand loyalty and identity, both for consumers and as a recruitment tactic. “People are motivated if they see this company is part of the solution,” he says.

“Increased media awareness from the climate strikes, Greta Thunberg movement, declarations of climate emergencies from state actors and the recent Amazon fires have accelerated a global trend for companies to take action to neutralise their value chains,” agrees Gareth Turner, co-founder and director at Numerco, which retained the title of Best Broker.

“Divestment from climate impacting businesses is once again making the market an attractive proposition for investors and non-traditional participants – momentum which was lost following the financial crisis of 2008,” he adds.

“In a way, it feels like 2007 on the climate [issue], where it is the top of the agenda,” says Ed Hanrahan, CEO of UK-based ClimateCare, voted Best Wholesaler and Best Project Developer – public health. “People want to talk about this and what they can do.” However, he adds, as in 2007, there is concern that a recession is on the way, which could stifle interest.

And despite the higher levels of demand and enquiries, prices have remained fairly static, says Hanrahan, with credits from renewable energy projects fetching less than $1 per tonne of carbon dioxide (CO2) equivalent. “For large-scale buys, we’re in the low dollars across most project types,” he says. “The cost of abatement is around $4-$5 [per tonne] for new cookstoves [projects], and for UK [forest] planting it’s around $12-$13.”

In its 2018 voluntary carbon market report, US analysts Ecosystem Marketplace found that voluntary offset credits traded at an average of $2.40/tonne in the first quarter of last year, with a wide price range of below $1 to $70.

“Because the market has been on the floor for so long, there are expectations of low prices,” says Hanrahan. This makes it hard for new projects to get off the ground, despite the surge in demand, he continues. “We need to get people to understand the true cost of abatement.” However, Turner notes that the scarcity is prompting some buyers to get involved earlier in the project cycle, rather than just buying issued credits.

Proposed changes to Verra’s Verified Carbon Standard (VCS) programme may help. In its fourth iteration – which is expected to be finalised in the coming weeks – grid-connected renewable energy projects, except those in least developed countries (LDCs), would be excluded, with Verra’s consultation documentation pointing out that these project types, in many cases, no longer need carbon instruments as a source of critical, early-stage finance.

“We need to ensure that climate finance goes to the places that need it the most,” says Antonioli. “This could raise the price of offsets, and enable the market to find new opportunities.”

Going forward, new opportunities could spring from what appear on the surface to be challenges. For example, the international community is set to finalise rules for new market mechanisms under Article 6 of the Paris Agreement at climate talks in Santiago, Chile in December, and national governments are expected to increase their emission reduction goals via updated Nationally Determined Contribution (NDC) plans next year.

“The challenge, really, is to what extent do we think the Paris rules will slow that [voluntary market growth] down, even if temporarily,” says Wilder. “There is an intersect between the compliance and voluntary markets.” How the Santiago talks address the risk of double-counting when emissions reduction units are transferred across borders will be key, he says.

Heuberger at South Pole remarks that a common misconception in the past was that voluntary climate action might decrease with the advent of NDCs, because these would soon make climate action mandatory everywhere. However, it has now become clear that while NDCs set the targets and the ambition, “the action has to come from somewhere … I wouldn’t call it the voluntary carbon market – I’d call it voluntary climate action.”

“As sectors are covered by NDCs, we will continue to assess the additionality of individual project activities,” says Antonioli.

“I would love it if, tomorrow, every sector was covered,” he adds. “Ultimately, our vision is we’re wanting to drive change in the world, and we are open to a world where you no longer need offsets.”

In Turner’s view, a lack of clarity on Article 6 guidelines and the future of the Kyoto Protocol’s Clean Development Mechanism (CDM), combined with “more stringent rules from the voluntary standards and market fragmentation due to differing country interpretations of NDC rules, have led many to believe there will be a bottleneck for volumes in the short term,” he says. “However, it has done little to slow the pace of demand and optimism in the market going forward, post-Paris.”

And NCP’s LaCroix sees a crucial role for voluntary action in a post-Paris world. “Corporate action will play a bigger role in closing the ambition gap than it ever has done,” he says. “There’s enough interest, there’s enough demand, we’re going to figure this out, just like we did after Kyoto.”

Wilder also raises the question of what will happen to projects if their industry sector is suddenly included in an expanded NDC in future and, if countries develop their own mandatory carbon trading programmes, whether they would look to leverage existing standards. Antonioli cites the Colombia carbon tax as an example of how a compliance mechanism has meshed with voluntary initiatives. The national policy adopted the voluntary market infrastructure, he notes. “It’s really given us credibility,” he says, adding that South Africa is pursuing a similar approach.

The aviation sector’s CORSIA initiative, which begins its pilot phase in 2021, is taking a similar position. The programme aims to help the industry achieve carbon neutral growth from 2020, using average emissions from 2019 and 2020 as its baseline. Emissions in excess of this baseline will need to be offset.

This is where the voluntary market could come in: earlier this year, CORSIA’s Technical Advisory Body laid out ‘emissions unit’ criteria and invited programme and standard administrators to apply to service the sectoral scheme – which is expected to see demand for 3 billion units (each representing one tonne of CO2). In August, the body published the 14 submissions it had received, which included Verra’s VCS programme, the Gold Standard, the CDM, American Carbon Registry and Climate Action Reserve. The latter two have already had their protocols adopted for use in California’s cap-and-trade market.

Here too, Hanrahan sees an opportunity to go further. “Airlines are understanding that the whole carbon neutral growth element of compliance, when you set it out there on its own, is not a great story,” he says.

The growth of carbon trading and offsetting is also a good opportunity for infrastructure suppliers, such as IHS Markit, again voted Best Registry Provider. “The trading markets in 2022 and 2023 are going to be bigger than we’ve ever had,” says Kathy Benini, managing director at the company. “We expect to see strong growth in our business.”

One sector which is expected to see a lot of interest under CORSIA is forestry – and specifically projects which avoid deforestation or lead to reductions in emissions from deforestation and forest degradation (REDD). Projects in this field are already well underway, and Biofílica’s Plínio Ribeiro reports that the Brazil-based firm has seen a 150% increase in volumes this year.

The company, which was voted Best Project Developer – forestry and land-use, is seeing a lot of interest from both domestic and international firms, he says. “A lot of companies have approached us to start projects to offset all their emissions in five to ten years’ time,” Ribeiro says. “This gives us the ability to expand the portfolio of projects.” At present, the firm manages 1.2 million hectares, but it is looking to double this. In total, he says, Biofílica’s portfolio has contributed to a 75% reduction in deforestation in the projects’ areas compared with the baseline predictions.

As a result of this interest, Ribeiro reports a slight uptick in prices, of around 10%-15% compared with early 2018. “We expect prices to go even higher, as we’re at the point now where they’re just barely covering the cost of protecting forests,” he says.

Fires in the Amazon could have an impact on the market, Ribeiro says, but he lambasts poor reporting on these fires. “[The fires] bring the Amazon conservation discussions to centre stage,” he says. “But for us, working a full day on those issues, it gets very annoying to see a lot of fake news and hidden interests.” He adds that the administration of Brazil’s outspoken president Jair Bolsonaro, who took office in January 2019, “has been clear that markets will have a role in our climate strategy”.

The co-benefits of REDD projects are well-known, and there are increasing requests to ensure that voluntary offset strategies are aligned with the UN’s Sustainable Development Goals (SDGs), says LaCroix. Tapping in to this, Antonioli says Verra expects its Sustainable Development Verified Impact Standard (SD VISta) to attract users, as project owners look to report outcomes beyond carbon. The first projects certified to this new programme are expected in the next 12 months.

Verra is moving toward bringing its registry – currently administered by IHS Markit and APX – in-house. But that may not slow down IHS Markit, with Benini saying she sees new opportunities in supporting national and jurisdictional compliance programmes – and new technologies. “I think the carbon markets are going to grow quickly and enhanced market infrastructure is needed to support the growth,” she says. “With this in mind, we’re looking at using Enterprise Distributed Ledger Technology (DLT) by the end of next year to provide a more efficient and less costly cash and position settlement process for carbon markets.”

The registry’s use of Pending Issuance Units (PIU) has also helped its growth, she says, by providing infrastructure to support forward sales, as well as allowing clients to monetise credits sooner. Serial numbers are tracked and converted to issued units once the credits are verified. “Some of our clients have used it as a way of supporting their trading business,” Benini says.

South Pole is also coming up with new ways to engage people in the climate fight. Back in 2011, the firm launched its climate credit card, which calculates the emissions associated with purchases and automatically offsets them. The initiative is being relaunched this year, Heuberger says, and will be rolled out to all Cornèrcard cardholders.

“A lot of people want to get active and do something for climate [change], but don’t know what to do – our job is to help them,” he says. Other developments in the pipeline include an app to offset mobile phone use and an add-on button for online shoppers to select carbon neutral deliveries, he says. “We always try to make climate action a part of your everyday activity.”

Other trends to watch include a possible increase in projects in developed economies, says LaCroix. “There’s a lot more interest in delivering local impact,” he says, building off the Paris Agreement’s sense of inclusiveness. But he acknowledges the challenge of establishing ‘additionality’ for projects in these regions.

ClimateCare’s Hanrahan suggests that a recent UK government consultation into compulsory offset offerings by transport companies is a good opening for further growth in the market. “It’s a great opportunity to use the voluntary market to drive ambition,” he says. “We need to take advantage of it to greatest effect.”

“Given the global feeling and temperature around climate change at the moment, we feel the voluntary market is in a better shape, from a demand point of view, than it’s ever been,” concludes Hanrahan. “The challenge now is for the industry to respond to that.”

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