Voluntary Carbon Market Rankings 2022

The voluntary carbon markets have matured and evolved despite a turbulent year, reports Madeleine Jenkins

The voluntary carbon market (VCM) demonstrated its resilience over the past year, according to market experts, as the Ukraine war and soaring inflation rocked global markets.

Corporations eager to make good on net-zero promises continued to drive demand and helped push a niche market onto the global mainstage.

Demand for nature-based carbon offsets grew significantly, and high-integrity projects with social co-benefits were increasingly valued at a premium, said winners of this year's Voluntary Carbon Market Rankings. The Rankings are 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. (See box for how the poll is conducted.)

The market is evolving rapidly, with UN-ordained guidance and several new contracts having been launched. Within the past year, winners have embarked on new projects, opened offices in new geographies, and in some cases even 'tripled' their workforces.

Also reflective of the market's growth was the number of completed responses from market participants, which doubled from some 2,000 in 2021 to almost 4,000 this year, up from 1,500 two years ago.

Prices robust, nature in demand

While pricing dynamics in the VCM are complex, winners agreed that prices did not maintain the rapid growth of 2021, when the value of some carbon offsets doubled or even quadrupled. They were hit by the sell-off in financial markets caused by the invasion of Ukraine and soaring inflation, yet they remain stronger than two years ago.

Chris Halliwell, Asia Pacific head of renewables, energy & carbon markets, at CORE Markets, previously known as TFS Green, noted: "While Verra-verified carbon standard (VCS) prices saw an incredible run-up during 2021, prices came off significantly following the invasion of Ukraine and the subsequent global economic uncertainty."

However, in contrast to most other tradeable commodities, the VCM has so far weathered the economic storm of post-Covid, post-invasion inflation surprisingly well, according to Marcelo Labre, CEO at Viridios AI.

Labre said: "I was surprised to see that carbon prices held up really well, given the situation. It's not the type of thing I saw in 2011, when the European crisis hit, and carbon prices dropped from $12.50 to $2.50 within a week."

Labre summarised: "Last autumn, there was a real jump in price from August all the way to January. Prices increased overall by about 120% in general, which is an unprecedented level of appreciation in a financial market.

"Then, around February or March, all assets collapsed in prices...carbon prices declined like everything else, but less so than most other assets.

"More recently, the market has started to pick up again. Prices are increasingly pretty significantly from even a month ago.

"We have probably seen the worst that could happen to an asset class like this, and still the asset class is holding quite strong."

Viridios AI is winner of the award for 'Best Market Innovation'. Viridios AI is a pricing platform that launched earlier this year. It is innovative because it claims to have historic prices for individual projects rather than just types of credit.

Experts attributed the overall market "robustness" to living in a 'post-Paris era' (2015 to now) rather than the 'Kyoto era' (2005 to 2015), which was riddled by claims of greenwashing and loose international guidance.

In the wake of the Paris agreement and subsequent climate change conferences, carbon offsets look set to become a key part of fulfilling net-zero promises from governments and companies.

There remains an "excess of demand", according to Vaughan Lindsay, CEO at Climate Impact Partners, winner of 'Best Project Developer, Public Health'.

Lindsay said: "Previously, there was a lot of supply in the market, but not much demand. So, the markets have gone from long to short...there is an overall sense of rapid growth, a changing dynamic from long to short [of supply], and a particular focus on demand for nature-based solutions."

Carbon prices contrast dramatically – from between $1 to over $100 – depending on the project's technology type, location, vintage and voluntary carbon standard used.

CORE Markets' Halliwell added: "Prices for nature-based VCS units have held up better, trading at an average of $8.75, a dollar higher than last September," he added. "Renewables units have not fared as well, trading at $4.25 on average, dollars below last year's levels."

In general, nature-based removal projects are the most highly sought-after carbon offset type. Blue carbon projects, such as those involving mangroves or seagrass, command the highest premium.

Indus Delta Capital, which was named 'Best Project Developer, Blue Carbon', said it sold around 300,000 of uncontracted credits for over $30 per tonne of carbon removal on the spot market. It plans to deliver its first 3.1 million credits within the next month. Indus Delta Capital has received support from the government of Sindh since 2013 for its project to plant 74,000 hectares of mangrove trees alongside the Indus River Delta, in Pakistan.

Pakistan has been ravaged by climate-induced floods in the past few weeks, leaving behind a "humanitarian crisis of biblical proportions", according to Khan. See box "Mangrove project provides flood protection in Pakistan" for more information.

Khan said: "In the coming year we are expecting to see a surge in growth of mangroves, delivering more carbon to the project. This was the case in 2011 following the catastrophic floods of 2010. Our teams are currently in the field documenting the impacts on our communities and lands as well as distributing aid where required."

Cleaner cookstove projects are increasingly sold at a similar rate, which project developers attribute to clients' increasing attention to the social co-benefits these projects offer.

Nic Mudaly, CEO of Biocarbon Partners (BCP), winner of 'Best Monitoring/Impact Report', said: "We officially sold out late 2021 on all of our prior vintages and are currently exploring potential options to scale... Currently prices of carbon in the US and European markets are up to 10 times higher than in Africa."

Viridios AI's Labre added that the value of projects in the 2016-2017 vintage has declined, as the methodologies that underpin later vintages are generally viewed as more credible. Nature-based, REDD+ projects from this vintage would sell from between "$9-11". But for blue carbon or regenerative agriculture projects of the same vintage, credits are sold at "$20+". The upper-most vintages, such as 2019 and onwards, are being sold at the highest prices.

Principles on the way

Doubts around integrity are still holding the market back, experts said. Over the past year, for example, there have been greenwashing concerns related to corresponding adjustments, cryptocurrency, as well as a lack of data around social ratings.

The Integrity Council for the Voluntary Carbon Market (ICVCM), winner of 'Best Initiative', set out its draft Core Carbon Principles (CCPs) in July. The CCPs aim to identify carbon credits that deliver additional, high-quality emissions reductions with real environmental and social impact and will allow the market to scale with integrity.

But questions remain over how much influence the council can and should have over the market, and whether it is evolving into a regulatory body.

The council clarified to Environmental Finance that it sees its role as "that of a standard-setter and ombudsman". And it seeks to maintain an "ongoing oversight role" following the final draft of its CCPs next year.

William McDonnell, chief operating officer at the ICVCM, said: "Our mandate is to set and enforce a global threshold quality standard. [Our mandate] is not just to come up with some principles, it's actually to see that those are applied in the market."

Commenting on a public, ongoing consultation for the draft CCPs, which closes on the 27 September 2022, McDonnell said: "We will digest all of the responses and revise the proposals, and then we look to publish Version 1.0 of the core carbon principles and the assessment framework, by the end of this year.

"Then, we will be assessing the existing carbon crediting programmes that have their different sorts of standards at the moment. We'll be assessing the methodologies that apply to each particular credit type.

"There'll be an assessment and an ongoing oversight role. So, there are aspects of that that are akin to being a regulator or a quasi-regulator, and I'm not sure I regard that as a criticism. I think that is part of the mandate that we've been given under the under the TSVCM."

The Taskforce on Scaling Voluntary Carbon Markets (TSVCM) is a private sector-led initiative working to scale an "effective and efficient" VCM. It was launched in 2020 by Mark Carney, UN Special Envoy for Climate Action and Finance, and chaired by Bill Winters, Chief Executive of Standard Chartered.

The TSVCM formed the Integrity Council in September 2021.

Sascha Lafeld, chief carbon officer at ClimatePartner, winner of best wholesaler both in 2021 and 2022, said the CCPs are "an excellent opportunity to shape the market towards more integrity and transparency".

Lafeld added: "The attempts for best practice guidelines eg. by the VCMI and ICVCM are important cornerstones to streamline the understanding in the market about best-practice, may it be in view of eg. corresponding adjustments in the VCM or carbon neutral claims.

"However, the Quality Standards (mainly VERRA and Gold Standard) also need to urgently improve their actions and processes and need to stop being one of the main bottlenecks that prevent the VCM from further growth. This is currently one of the biggest pain points of the market, in my view."

However, some viewed the actions of the ICVCM less favourably.

William Pazos, co-founder and managing director at ACX (AirCarbon Exchange), winner of 'Best Carbon Exchange', said: "In my mind, the Integrity Council has [set out proposals that would] create a "bottleneck" in the market by... creat[ing] a top-heavy infrastructure that audits and acts as a policeman in the market. In my mind, that is not necessary.

"We have something that legislates [carbon credit] quality and it's called 'price'. Price is a sufficient signal to the market in terms of quality. There is no other commodity in the world that has a similar governing body. I don't think it's necessary for us to have this very expensive, top-heavy, regulatory body.

Where next?

Looking forward, experts predicted a variety of trends, including greater premiums for co-benefits, technological innovation and greater convergence between voluntary and mandatory carbon markets.

Eddie Listorti, CEO of Viridios Capital and Executive Chairman at the Viridios Group, predicted a wave of investor interest in the market, as 'carbon hedging' becomes more widespread.

Viridios Capital came runner-up in three categories, in addition to Viridios AI's win for 'Best Market Innovation'. Commenting on future trends, Listorti said: "The main trend I am seeing is the adoption of voluntary carbon markets by financial institutions."

"I think that's what's coming now, is carbon hedging for your portfolio, for high carbon products and for high carbon businesses.

"Banks are seeing it as a big opportunity to be able to provide a new service. They're reaching out to companies like Viridios to provide them with price and project analytics.

"We're seeing the adoption of carbon-neutral products, such as gold. End buyers are looking for low-carbon products – clients are demanding a service for carbon offsetting. That seems like a game-changer to me. In the future, I see it being no different to...how there are derivatives for every other commodity – coal derivatives, oil derivatives, precious metals and base metals derivatives, which are used to hedge portfolios."

Elsewhere, the prospect of biodiversity credits has gathered increasing attention. Some fund managers have claimed they have the potential to follow the growth of the voluntary carbon markets, and could become a mass market in two or three years.

Zambia-based BioCarbon Partners commented sees potential for the market to help scale-up climate financing in Africa. It said: "The ideas of 'co-benefits' is a growing consideration for projects and the ability to show impacts for communities and biodiversity will be critical in helping scale and improve markets.

"Governments and projects in Africa need to be given the support and visibility to scale...when it comes to climate change, Africa is so often the 'forgotten continent', for it receives less than 3% of global climate finance. However, 30 out of the 40 most climate-vulnerable countries in the world are in Africa.

"The increased temperatures and a greater likelihood of extreme weather events resulting from climate change are projected to increase the threat of drought and increased water scarcity in Africa."

BioCarbon Partners aims to scale and reach its' '30-Cubed goal' by 2030: 30 million tonnes of carbon reduced annually across 30 million acres, benefiting 3 million people in Africa. The company aims to create the largest REDD+ project in the world, by creating a buffer zone that will surround the protected areas between Zambia's largest National Park; Kafue National Park, and Sioma Ngwezi National Park.

BioCarbon Partners added: "There needs to be more education and transparency around what this sector is actually doing on the ground every day to help communities. Revenue from REDD+ has so much potential to change and shape lives beyond what comes in through other revenue streams or donor funding."

New technologies could also help transform the market. Lafeld at ClimatePartner said: "New project monitoring and removal technologies are appearing, like Carbon Capture and Storage (CCS).

"We already see more and more methodologies emerging for technical removals, for instance the first biochar methodology was approved by the VCS. At the moment, there are only small volumes at high prices, but it's impressive how much research and finance is being put into developing CCS projects.

"I'm confident that those projects will soon be more widely available at more affordable prices, making a real difference in GHG emissions.

"On top of this, the strongly increasing individual project sizes require a much more sophisticated monitoring technology, especially in the nature-based solutions space. Here, we see huge technological progress over the last two years, which is being reflected also in the appearance of project rating agencies and the recent changes in some of the standards' nature-based solutions methodologies."

South Pole said it had seen the most "innovation" in tech removals this year. The winner of 'Best Project Developer, Renewable Energy' said: "Some exciting new types of projects will soon generate carbon credits due to some recent methodology developments...for example, a lot is happening in the biochar space [after the] release of the final version of the new biochar methodology, where South Pole is listed as one of the developers."

Louis Redshaw, CEO and founder of Redshaw Advisers, winner of 'Best Trading Company' and 'Best Offset Retailer', also argues that removals will have a key role to play in the market. He points out that, if net-zero targets are to be hit by 2050, an allowance under the EU ETS will have to involve the removal of a tonne of carbon dioxide rather than allowing the buyer to pay to pollute, as it does at present.

Redshaw is also CEO and founder of Net Zero Markets, which launched the Global Emission Reduction (GER) contract in June, an exchange-traded contract for carbon credits that aims to create a single, standardised reference price for corporates and traders.

The GER categorises carbon credits into four sub-contracts – or 'buckets' – that trade independently and represent the main pricing brackets in today's VCM. These buckets are Base Carbon Credits (BCC), Forestry Carbon Credits (FCC), Prime Carbon Credits (PCC) and Carbon Capture Credits (CCC). Read more here.

Redshaw described the GER contract as "a bridge between the voluntary markets and the compliance markets" because by 2050 GERs will be entirely focused on removals, and will gradually increase their focus on removals until then.

"That's the objective of [GER]. It's to bring commoditization and attract financial market participants to be involved...in the removals element, which is just not getting any money otherwise, because it's not allowed into the EU ETS today."

VCM and the Paris Agreement

The nature of the VCM has the potential to be radically changed by its role in helping meet the Paris Climate Agreement.

Under the Paris Agreement, each country must regularly submit its climate action plans through Nationally Determined Contributions (NDCs).

Countries can participate in carbon markets under Article 6 of the Paris Agreement, as part of their plans to tackle climate change. The rules for Article 6 were mostly finalised at COP26 last year, creating greater clarity in the market.

This means that sovereigns – or sovereign-run schemes – could become the biggest buyers of carbon credits.

Ken Newcombe, CEO at C-Quest Capital, winner of 'Best Project Developer, Energy Efficiency', said: "Emerging markets are increasingly looking to deal with voluntary carbon units in their sovereign markets. They can take advantage of the voluntary market's capacity [to mobilise projects], which is currently much vaster than the UN system, or anything an individual country could set up.

"Emerging markets can be very selective about what kind of carbon they buy and, as long as they're correspondingly adjusted, they can credit it to their NDCs.

The UNFCCC Article 6.4, which will create its own mechanisms for crediting offsets, "will take years to be operational," he added. If a country sells carbon credits generated in another country, then a 'corresponding adjustment' must be made, so the 'mitigation outcome' of the carbon project is not double-counted.

Governments can have a registry account with Verra to record their corresponding adjustment transactions transparently, Newcombe said. The carbon registry has the facility to add a corresponding adjustment label to VCUs, meaning they will be in compliance with Paris Agreement commitments.

In March, Gold standard agreed to help Sweden with its Article 6.2 transactions. In August, Singapore agreed to let firms pay part of their carbon tax obligations with Gold Standard credits to help the country achieve its yearly climate goals.

Newcombe added: "CQC are already structuring deals that correspondingly adjust VCUs to make them eligible for trading in a Sovereign defined cap and trade regime where regulated entities have the opportunity to use CA [labelled] VCUS to meet a portion of their emission reduction obligations.

"I believe that it's expedient and justified that sovereigns will trade in VCUs and VERs, so long as they're correspondingly adjusted."

Boundaries between voluntary and government-run carbon markets are already blurring, claim some market participants.

This year, several governments are setting up national emission trading schemes (ETS) and considering using voluntary carbon credits.

Nicolas Girod, founding partner and managing director at ClearBlue Markets, winner of 'Best Advisory/Consultancy', said: "We believe you will see more examples of what happened in Colombia, where international offsets were allowed for a period of 1-2 years before the local market supply became ample.

"What we are seeing in Indonesia is also interesting – project developers might have to sell some of their credits locally at a certain price before selling internationally. This is what we mean when we talk about more and more links between compliance and voluntary."

India in August announced that it planned to ban the export of carbon credits, ensuring that Indian companies will be the buyers.

ClearBlue's Girod has observed more clients from the mandatory markets come to the voluntary markets, especially companies in the airline, energy and logistics sectors.

He said: "Three years ago, we started seeing more and more of our clients from the compliance market looking at the voluntary markets. We are starting to see those players in the compliance markets, like big energy companies, take a position on both markets.

"We expect in the future that those markets are going to be merging more and more going forward. But countries will be setting up more rules around it."

This is the first time ClearBlue Markets has won in the Voluntary Carbon Market rankings. ClearBlue has won 'Best Advisory/Consultancy' in the annual compliance market rankings for the last three consecutive years.

Nadeem Khan, CEO at Indus Delta Capital, winner of 'Best Project Developer, Blue Carbon' said the markets are "moving together, more than inching together, but haven't merged just yet."

It was also highlighted that decisions made at COP27 in Egypt in November will be pivotal for cementing confidence in carbon markets, as well as clarity on certain rules under Article 6.