4 Key Takeaways from the State of Carbon Credits Webinar 2023
It’s been a difficult year for carbon markets. Faced with a surge of media scrutiny and challenging macroeconomic circumstances, many predicted that the voluntary carbon market (VCM) would enter into ‘crisis mode’. However, 2023 may well be the year that ushers in a new era of transparency, quality, and buyer commitment for the VCM.
Our latest webinar, The State of Carbon Credits 2023, explored the major developments in the VCM this year, and what the future may hold. Here are our top four takeaways.
1. How has the VCM been affected by this year’s media coverage?
Small, temporary drops in price and retirements
As was to be expected, the VCM was not entirely unaffected by the negative media attention it garnered early in the year. “It’s fair to say that prices have moved a bit this year,” says Ben Rattenbury, Sylvera’s VP of Policy. “But from our analysis, across all project types, it seems that prices have dropped in most cases only to where they were, approximately, in the summer of 2021.” It’s a noticeable shift, but “maybe not quite the kind of catastrophic collapse that some might assume from the reporting,” Rattenbury concludes.
A dip in prices is a factor of low liquidity (available capital) in carbon markets. And while media coverage certainly played a role in reducing demand and buyer spend, inflation and broader macroeconomic circumstances are also responsible. “Yet when we look at other data,” Velasquez explains, “retirements seem fairly resilient.” Retirements are down 15-20%, which, compared to historical levels, is a relatively minor drop. “I think that’s a really positive signal for the market,” he says. “Corporates have not left in droves. They’ve maintained their commitments.” The ‘crisis’ many predicted was, in the end, a minor setback for the BVM, and one which may have positive implications.
Greater interest in quality and transparency
“High scrutiny right now is definitely driving attention towards the higher end of the quality spectrum,” says Rattenbury. “We’re seeing a bigger focus on integrity.” Buyers are not just searching for higher-quality credits; they’re also willing to pay a premium for it, says Velasquez.
Despite the scrutiny over REDD+ projects this year, Sylvera’s analysis finds that there is high-quality supply in the market. In fact, 36% of rated REDD+ projects are AA- or A-rated (AA is our highest rating; we have never issued an AAA rating for a project).
2. How can new buying strategies offer buyers greater control over quality and supply?
Invest across project types
“We’re seeing an emergence of a more balanced portfolio approach,” Roberts says. “Buyers are deciding which risks they’re willing to take with certain project types and balancing that across their portfolio.” For example, they may look to cookstove projects for community benefits, and to REDD and avoided deforestation projects for accounting integrity, biodiversity, and scale.
Velasquez reminds buyers that climate impact is not solely the domain of nature-based projects. Methane-related projects like landfill gas and biogas, and removal projects such as biochar represent significant carbon impacts as well. Since price drops across the VCM have applied to all project types, there is opportunity for buyers to make significant climate impact at a reduced cost.
Invest for the long term and the short term
A balanced portfolio might contain a range of project types, but also a variety of investing timelines. “We see plenty of interest in REDD and other nature-based solutions being sustained upstream,” says Roberts. This, Roberts believes, is a positive indicator that buyers aren’t losing faith in the market as a whole. Moving upstream, such as investing in projects before they’ve issued credits, and investing in projects for the long term gives buyers more control and assurance over credit quality. However, long lead times for new projects can make it difficult to see immediate impact. “We don’t want everyone to abandon current projects and just focus on upstream,” says Roberts. Combining upstream investments with high-quality spot purchases offers the best of both worlds for buyers, securing long-term supply while making an immediate climate impact.
3. How can we encourage greater participation in the VCM?
Clarity on claims may be the incentive buyers need
“The work the ICVCM has been doing on the Core Carbon Principles is fantastic,” says Haurie. “The main drawback we’ve experienced is that it has taken a long time to come out,” she explains. Meanwhile, on the demand side, “there’s been a real nervousness to step into [the VCM], because you just don’t know what you can say,” Haurie says. Stronger guidance on claims will “solve a lot of issues around both greenhushing and greenwashing.”Though the VCMI released its Claims Code earlier this year, Haurie believes the framework is overly complex for corporate buyers. “We just need something that’s really for businesses,” she says; “something that’s really clear and simple” A stronger business case for carbon credits is key to driving the scale of funding required to meet global mitigation targets.
Convergence with compliance markets will unlock the VCM’s potential
Policy initiatives could be the key to faster convergence between compliance and voluntary carbon markets. Such convergence would, according to Haurie, unlock the VCM and the climate action it is trying to achieve.
“Under the Paris Agreement, we see countries implementing their own compliance systems,” Velasquez elaborates, citing Singapore, Colombia, Korea, and Japan as examples of countries creating fungibility (interchangeability) between voluntary and compliance markets. Compliance mandates stimulate demand and allow project developers to gravitate towards the highest price points, Velasquez explains, turning carbon markets into an “arms race” that will allow for “higher liquidity across the market, greater levels of transparency, and higher scrutiny by the regulator.”
4. In the interest of the planet and meeting their climate targets, where should buyers focus in 2024?
Making immediate impact at scale
“I’d be thinking about scale and timeliness,” says Roberts. “Buyers should look for opportunities to secure large volumes with an immediate impact,” she explains. Data providers like Sylvera can offer buyers the assurance they need to make credible spot purchases for immediate climate impact. “A lot of the projects that exist right now are performing perfectly well on additionality (the core element of credit quality),” Roberts says, “and just have over-crediting risks.” The strategy here is to leverage the data available to invest in additional, high-quality legacy projects in ways that account for over-crediting risk. For example, buyers might consider “discounting” — purchasing more than one credit to account for a single ton.
Securing supply ahead of time
“You’re starting to see more savvy corporates thinking, Okay, I know there’s a supply/demand imbalance coming, particularly as net zero target deadlines draw ever closer,” says Haurie. “Increasing pressure through reporting, transparency regulation, and potential convergence [with compliance markets] means that you want to ‘go long’ on carbon credits,” says explains, by securing long-term contracts. ‘Going long’ will help buyers hedge supply and also hedge price risk over the next 5-25 years.
A pivotal year for carbon markets
While many worried that the early events of 2023 would send the VCM into a tailspin, significant industry efforts this year have accelerated much-needed progress and innovation. As 2024 rolls around, there is real opportunity for corporate climate leaders to leverage price shifts and innovative buying strategies to make a lasting impact on the planet and their own climate targets.
With more buyer focus on credit quality to drive impact and this year’s introduction of many new initiatives to improve market functions, 2024 is poised to be another important year for carbon markets. Stay tuned for more of Sylvera’s expert coverage.
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