RI Long Read: What is happening to scale up the voluntary carbon markets?

As Carney-led Taskforce consults on scaling the market, RI explores the pros and cons for companies and investors of ‘offsetting’ in a two-part series.

This is the second part in a two-part series on the voluntary carbon markets. The first part can be found here

The largest airline in the world, Delta, plans to be the first carbon neutral airline, after pledging to invest $1bn in achieving the goal over the next decade. 

Delta’s long-term journey includes new technology such as sustainable aviation fuels and operations efficiencies. But, given that many technologies are not yet available or cost-effective, carbon offsets “enable it to take climate action today”, says a spokesman. 

Delta is a member of the new Taskforce on Voluntary Carbon Markets, that opened a consultation this week on scaling up the carbon offsets market, which it says is an essential part of getting the world to net zero. 

Not everyone shares this view, however – with some companies and investors publicly deciding not to use offsets as part of net zero commitments (see part one). Dom Potter, founder and CEO of materials management platform Halo, favours this approach, arguing that organisations should invest in solutions to lower carbon emissions, rather than “buying offsets to mitigate damage”. In a recent LinkedIn blog, he expands on this idea, claiming offsets can be useful for wiping out historical emissions.

Potter is an expert in sustainability systems-change at scale. He has worked intensively with multinationals, most famously IKEA, where he acted as its first “entrepreneur-in-residence” to help it build a commercial strategy towards a circular economy.

Although the new Taskforce points out that “voluntary carbon markets must not undermine incentives for emissions mitigation”, Potter feels there is still a “poverty of ambition” given the urgency of the climate crisis. 

“It essentially comes down to a question of leadership. I understand the challenges of being in an incumbent industry and operating at scale, but bold leadership, driven by people with real conviction, can say it’s not good enough. And we have to realise that there isn’t going to be a painless transition from one model of industrial progress to the next.”

He says the Taskforce – which he describes as comprising the “usual suspects” – sends the wrong signal to start-ups and entrepreneurs, suggesting they focus on carbon markets when tackling the climate crisis, rather than re-imagining how industrial processes work.

Natural Climate Solutions 

Manuel Piñuela is one successful serial entrepreneur whose latest venture is focused on the voluntary carbon markets. His previous impact ventures include a clinical AI company, an energy harvesting technology, and a solar lighting solution for rural Mexico. He’s now turned his attention to the climate crisis and biodiversity loss. 

“Very simply, nature-based solutions can provide at least 30% of the CO2 mitigation goals by 2030” he says, adding: “We hope the incentives developed by the Taskforce place a high value on schemes that also protect biodiversity and improve livelihoods.”

Cultivo seeks to develop “ecosystem” activities to regenerate biodiversity and sequester carbon, generating credits to sell in the process.   

Broadly, this involves analysing a piece of land using AI algorithms, to work out what regenerative processes are needed to restore biodiversity – which, in many cases, also sequesters carbon. 

Soil regeneration, where the science on its vital role in sequestering carbon is largely proven, is fundamental to all of Cultivo’s projects. But, it can also include reforestation,  developing regenerative grazing practices with communities, or wetland restoration, depending on the area.

These different projects around the world are pooled into investment products dubbed “nature generators” by Cultivo. They allow for investment at scale, and in certain projects, finance for communities working on regenerative farming practices that will generate carbon credits.  

The lack of finance for project developers in the voluntary carbon markets is highlighted by Carney’s Taskforce, which recommends supply chain financiers provide lending collateralised by carbon credits. But projects can often take years to generate carbon credits. In a market that is currently opaque on prices, it is difficult for banks to finance against an estimated future price for these credits. 

Nevertheless, Cultivo is working with start-up TerViva on helping farmers in the US West Coast finance the costs of growing pongamia – a 1000-year plant protein that has similar properties to soy, but is a less intensive crop. The sustainability benefits of pongamia crops can translate into carbon credits and create a new revenue stream for these farmers. 

To further develop the market, Piñuela says greater transparency in the voluntary carbon markets on the characteristics of buyers and sellers is essential to ensure high quality and scale. 

Pricing and liquidity

XCHG, a global market for ESG-centric commodities, addresses this transparency challenge through its voluntary carbon trading platform CBL Markets, which generates a real-time carbon price based on actual transactions.

CBL hosts the Global Emissions Offset (GEO) that allows vetted buyers and sellers to trade carbon credits that meet standards developed by the aviation industry. In general, the voluntary carbon market is mostly bespoke, over-the-counter transactions with little transparency.

“The GEO makes it easy to purchase offsets without having to perform time-consuming, resource-intensive due diligence on a project-by-project basis,” says Andrew Pisano, XCHG Vice President of Market Development. “The GEO represents a transparent, benchmark price signal for carbon, enabling intraday price monitoring and a reliable daily settlement price.”

It is one of a growing number of platforms building price discovery in the voluntary carbon markets.

Pricing transparency is the first thing Annette Nazareth, a former Commissioner of the US Securities and Exchange Commission and operating lead for the Taskforce, highlights in an interview with RI. “With any market, the more liquidity you have, the more transparency you have in pricing, and there is more confidence. It buildings integrity in the market,” she says. A major goal of the Taskforce is to help get to a global carbon price through scaling the voluntary carbon markets. 

But, not everyone thinks the Taskforce is taking the right approach to developing robust voluntary carbon markets, with one observer – who asked not to be named – describing it as “packed full of people who want to sell their shoddy offsets and a bunch of traders that only really care about liquidity of markets so they can trade, when these are not necessarily the right features”.

Another notes the offsetting agenda is “very political and economic”, adding: “We're talking about how listed companies around the world will report (voluntarily or not) their climate contributions. I suspect that private initiatives, consulting firms and governments want to position themselves in this market.”

Sarah Leugers, Communications Director at Gold Standard, one of the first organisations to launch a “quality label” for carbon offsets, also has concerns. “We really welcome the crowding in of private sector finance and providing more infrastructure to do that,” she says. “The key concern we have is to make sure we are not scaling at the sacrifice of quality. We can’t look at the voluntary carbon market as strictly homogenous. It’s not fully a commodities market, and it would be a mistake to look at it as such. 

“We do think there’s an opportunity to set a bar for, let’s say, minimum quality standards, as we see a lot of new standards popping up lacking core principles like additionality, for example.”

Policy uncertainty 

As Carney’s Taskforce consults on the right approach to scaling a private sector carbon market, the UN is also trying to agree with countries on a new carbon market as part of the Paris Agreement, to replace the flawed Clean Development Mechanism (CDM). 

The CDM market, where countries trade “certified emissions reduction” units (CERs), has been dogged with controversy. It crashed in 2012, with the value of CERs collapsing and thousands of projects struggling to sell credits. It is estimated that the value of these dormant carbon credits range from 1.5bn tonnes to several billions of tonnes of CO2 – around one year’s worth of European emissions. 

The fate of these credits – not seen as credible by many buyers – is still a sticking point in the Paris Agreement, where an agreement on a new carbon market operated by the UN has been delayed as part of the postponement of COP26.

David McNeil, lead analyst on carbon markets at ratings agency Fitch, says uncertainty over the new UN global scheme and the dormant credits should not be an impediment to growth in the voluntary carbon markets, because demand drivers are beginning to be dictated by corporates’ net zero pledges. 

According to a recent paper on the topic, Fitch expects demand for carbon offsets to oustrip supply by 2025, and says growing corporate demand for voluntary credits is likely to lead to an increase in the average price of these credits over time. McNeil says this is also evidenced by increased hedging and speculative positions on some offsets by corporates and investors.

McNeil says work from the new Taskforce around robust mechanisms to ensure the quality and consistency of offsets, together with better technology for monitoring their effectiveness, will also help drive price increases – although it starts from a low baseline. 

Growth of market and NGO concern 

One person close to supranational negotiations on carbon markets, who also asked not to be named, says while he welcomes the taskforce, the markets have shown that self-regulation is not the most effective way to pursue sustainability. This idea is built on in a recent report co-authored by the Paulson Institute and the Nature Conservancy, which suggests that some voluntary offsets could start to come under regulation, as countries decide on what types of emissions reductions will be included in their NDCs under Article 6 of the Paris Agreement. 

The report, Financing Nature: Closing the Global Biodiversity Financing Gap, makes the economic case for financing nature, including the use of nature-based carbon offsets. It predicts capital flows to nature-based solutions and carbon markets will rise to $24.9bn by 2030 at a lower estimate and to $39.9bn at a higher estimate. 

A recent PRI analysis finds corporate demand for forest-related carbon removal could generate $800m in annual revenues by 2050.

But some economists are raising concerns about the ethics of nature-based finance products. Political scientist Benjamin Braun says “nature is the last, vast refuge for financial capital in search of yield” and warns the trend could see public goods such as water converted into private assets, with perverse consequences. 

Bronson Griscom, Senior Director of Natural Climate Solutions at Conservation International, says he often has debates with NGO colleagues on these issues. In 2017, Griscom published a landmark study that found natural climate solutions provide over 30% of the emissions reductions needed by 2030 to keep global temperatures under 2℃. That study has been cited by the Intergovernmental Panel on Climate Change and a number of other studies have shown similar findings developing a consensus around the numbers. 

He feels there is often not a strong technical or scientific basis for those questioning the science of nature-based solutions providing carbon emissions reductions. He adds: “Some are also coming from a position of what I would refer to as the moral hazard argument.”

“We as a group, tend to be pretty righteous, and have a strong sense of what is the right way to behave. There is a strong history of distrust in corporations, with good reason in some cases. You don’t want to go easy on polluters and let them have illegitimate bragging rights for ‘saving the rainforest’.”

He says rigorous standards and verification systems developed over the last decade, and set to advance even faster on the back of efforts including the new Taskforce, should help tackle the trust issue. 

“My concern is that as an environmental movement, we can be a little too judgmental and not see an opportunity when it is sitting in front of us,” he explains. “I would argue there’s a much bigger moral hazard in resisting the financial flows needed for conservation and restoration to be a major solution to climate change and biodiversity loss. We have run out of time for tribal distrust. We need more trust, and more scientific verification, of private sector action.”