Traditionally, December is the month for market reflections and industry projections. The fast-moving voluntary carbon market (VCM) warrants more frequent checkups. June concludes the first six months of 2023, which seems the perfect moment to take stock of the state of the market and draw a deep breath before diving into the year’s second half.
The Carbon Market Past
Last month, the World Bank published its annual review of carbon markets. The State and Trends of Carbon Pricing 2023 covers international progress in carbon markets (both compliance and voluntary), as well as their supporting frameworks, including the recently implemented Article 6 of the Paris Agreement and recently issued Core Carbon Principles (CCPs) by the Integrity Council for the Voluntary Carbon Market. The VCM has transformed since the first carbon pricing State and Trends report was published in 2014. Carbon markets, in general, are unrecognizable from those first explored by an earlier iteration of the report, published annually beginning in 2003, with the report’s focus shifted from markets to pricing in 2014. In just one decade, notes the World Bank, “ … voluntary action around carbon markets has proliferated as corporations have become the biggest source of demand for carbon credits.” Today, “voluntary demand from companies remains the primary driver of market activity.” Of the 196 million credits retired in registries in 2022, the vast majority represented voluntary demand. Notwithstanding the backdrop of major macroeconomic, geopolitical, and market-specific upheaval (latterly in the form of supply-chain bottlenecks), the World Bank anticipates “a decade of significant growth” paved by “new investors, financial products, technological platforms, and service providers” in the VCM. Its findings tally with those of the (likewise, just-released) GHG Market Sentiment Survey 2023. Canvassed by the International Emissions Trading Association (IETA) in partnership with PwC, market participants estimate the VCM will be worth $10-$40 billion by 2030. Tailwinds include surging corporate net-zero pledges, compliance obligations from markets that accept voluntary credits (such as CORSIA), and difficulty reducing hard-to-abate emissions from value chains. Can existing infrastructure cope with booming corporate demand? Yes, say 71% of survey respondents — though serious concerns remain about the quality of carbon credits available for offsetting.
The Carbon Market Present
Both reports shed light on the scale of damage wrought by negative publicity in recent months. IETA found “public perception and negative press coverage” and “quality of carbon credits” were the two most significant challenges impeding buyer demand (Fig. 1). Similarly, the World Bank cited public concerns relating to carbon credit integrity as the greatest obstacle to VCM growth, noting that negative publicity “may be causing buyers to delay purchasing and retiring credits.” . Fears have not halted trading activity entirely, of course, but they do shape buyer behavior in more than one way: The World Bank notes that companies seek to mitigate risk by sourcing credits through specialized intermediaries exclusively, which could delay price standardization. While the CCPs are expected to help foster credit quality, IETA’s respondents “noted the need for complementary measures and tools to support the CCPs to drive integrity across the market.” Cue carbon credit insurance, endorsed by the World Bank, among other risk-mitigation solutions designed to foster confidence. “New products are emerging to help participants manage both familiar and novel risks, tackling currently existing barriers to expanding the market,” the State and Trends report concludes.“Carbon credit markets have always involved risks for both sellers and buyers. For sellers, the number of credits generated from a project is often lower than expected, impacting its financial performance. The credits a company buys may be subject to external criticism, causing reputational damage. New products are now being developed to insure against different risks faced by buyers, such as losses due to third-party negligence or fraud. Such measures aim to encourage more investment into emission-reduction projects.”
– World Bank, The State and Trends of Carbon Pricing 2023
The Carbon Market Future
The market dynamic described by both reports is the reason and catalyst for our first carbon credit insurance solution announced last month. Carbon Protect™ replaces or augments carbon credits in the event of several high-risk scenarios, on top of additional benefits, such as reputation defense and proactive risk monitoring. This will be increasingly beneficial as the VCM becomes more sophisticated. Unlike most markets built on fungible assets, the promise of the VCM lies in not just whether it grows but how it grows. Liquidity can unlock a wide variety of climate solutions with their own unique risks and challenges. Though the current supply is concentrated on credits from renewable energy activities, the World Bank anticipates the rapid rise of nature-based sources, such as agriculture and forestry, which offer unique social and environmental co-benefits. Carbon dioxide removal (CDR) is another promising source of credits, the rapid deployment of which was recently identified as climate-critical by the Intergovernmental Panel on Climate Change. (Oka CEO Chris Slater has publicly endorsed CDR-supportive legislation.) Bringing capital to socially and environmentally beneficial nature-based projects and large-scale emissions-removal technologies could, quite literally, change the world, but carbon-credit prices must converge with project incentives and technology costs. There is no time to wait.Given the urgency of the climate crisis, we cannot afford to have this same conversation in December 2023. The best time to de-risk the VCM was yesterday. The next best time is now.
Corresponding Adjustment Protect™
Carbon Protect™
