For buyers and sellers, the voluntary carbon market (VCM) can be a financial and reputational minefield. In recent blogs and articles, Oka the Carbon Credit Insurance Company™ has outlined the various risks facing participants. Risk, of course, is a frustrating but inevitable feature of any maturing market. Two compounding factors make this young market particularly opaque and thus challenging to navigate.
The first factor relates to the transaction framework itself. Without a centralized marketplace, credits are traded over the counter (OTC). The decentralized nature of the market can make determining quality and price a complex and time-consuming process that may be contingent on buyer relationships with various market participants.
The second factor relates to the underlying asset transacted. Unlike commodities or securities, carbon removal or reduction projects lack uniformity, and their credits lack fungibility. No two are the same, making credit quality variable. To paraphrase Climate Impact Partners: In commodity terms, carbon is more diamond than gold. This, too, complicates quality and price discovery.
Intermediaries bring integrity to the VCMThough transactions can be executed directly, identifying an interested counterparty requires significant initial time and research. Even in the event of an existing relationship, the volume of credits required by a company could supersede what is feasibly delivered by an individual project. Conversely, a non-centralized marketplace, while providing benefits of ease and scale, may yield less project-specific information with which investors and corporations can make informed decisions.
Most importantly, because they represent the best interests of parties on either side of a transaction, brokers introduce confidence and liquidity to a market in dire need of it. Securing integrity, however, does not always come cheap. Many intermediaries will shoulder the upfront fixed cost of and commensurate risks attached to a project and its credits, the price of which can fluctuate dramatically depending on rapidly changing market dynamics.