Focus within the private sector has turned increasingly towards the voluntary carbon markets over the last several years, with many large corporations setting ambitious carbon neutrality goals and expecting to rely heavily on carbon credits to offset emissions. Biden’s environmental agenda is ambitious, as demonstrated in him recommitting the United States to the Paris climate agreement immediately upon starting office.
April 14, 2021. By News Bureau
As evidence of progress in energy transition, the International Civil Aviation Organization introduced its CORSIA programme, through which airlines can reduce their carbon debts through the use of credits from the voluntary markets. Carbon credits are generated by specific projects that avoid, reduce or remove greenhouse gas (GHG) emissions, and are verified and validated by a set of independent standards that have been created by coalitions of NGOs and market participants over the last few decades. These are not the regional compliance markets, such as the European Union’s Emissions Trading Scheme or North America’s Regional Greenhouse Gas Initiative.
These voluntary markets have grown up around the world over the last few decades in arenas that fall outside of the compliance jurisdictions defined by the United Nations Framework on Climate Change. We are now seeing a significant volume in trade in voluntary carbon credits, which are set to grow exponentially. The global voluntary carbon markets have evolved and now encompass a large range of project types, geographies and standards ranging from renewables in India to forestry in Brazil. India is at the forefront of these markets with renewable projects in the country now accounting for the largest share of trading in these credits.
New Carbon Standards
The new carbon Standards have created their own methodologies and systems to define and certify projects across the world that work to either limit, completely avoid, or remove greenhouse gas emissions from the atmosphere. Project developers have been able to draw on the expertise of those Standards to turn ideas into projects and from there, turn these projects into carbon credits. And the credits have been verified, validated and held in the registries of those same Standards for trade in the open market.
A technology company might want to look for credits from a project that uses new tech, whereas a food company might want to invest in those that use soil management techniques. Hence, they are described as the voluntary carbon markets – because they have resulted from the free choices of a myriad of companies to engage with the environmental challenges ahead without the compulsion of regulation.
Focus within the private sector has turned ireasingly towards the voluntary carbon markets over the last several years, with many large corporations setting ambitious carbon neutrality goals and expecting to rely heavily on carbon credits to offset emissions. Biden’s environmental agenda is ambitious, as demonstrated in him recommitting the United States to the Paris climate agreement immediately upon starting office. With the Democratic Party in control of the presidency and both houses of Congress for the first time since 2010, it now has a mandate to pursue its climate goals in a way it has been unable to in more than a decade. This has the potential to be bullish for some environmental markets, although the full impact on the voluntary carbon market in the medium to long term is far from certain.
It remains unclear how supply is expected to meet growing demand, with the voluntary market still small in relation to expected demand growth over the next several years, particularly for high-quality, recently issued credits with strong project co-benefits. Further, the voluntary market remains diffuse, with a wide range of prices reported for different types of credits.
Airlines lead the way
The complexity of voluntary markets presents its own set of challenges given a lack of standardization. The efforts by the airline industry is one of the more lauded approaches. The International Civil Aviation Organization introduced its CORSIA programme – short for “Carbon Offsetting and Reduction Scheme for International Aviation”- through which airlines can (initially voluntarily, and later under a mandate) reduce their carbon debts through the use of credits from the voluntary markets.
The set of specifications contained within CORSIA provides a framework for aggregating together credits. A buyer can pick any of a range of project types, from a range of Standards, and use their credits to meet its obligations. It is a simplification that has already started to generate increased liquidity in the global carbon markets. And it is a simple place to start for producing price benchmarks. That’s why S&P Global Platts has announced that it will start assessing CORSIA-eligible credits, the ‘Platts CEC’ from January 4, 2021. A single number, from a world of complexity.
While the voluntary component of the project has taken effect for 2021 – with mandatory compliance set to kick in later in the decade – the coronavirus pandemic has meant that many airlines have not yet fully engaged with it.
The Platts CEC, which does not account for co-benefits or geographic premiums, is typically assessed at a slight discount to other types of voluntary carbon credits, which may be for projects that reflect specific geographies pricing at a premium or include additional co-benefits. However, Platts CEC also does not reflect all of the standards reflected within the CORSIA scheme, which means it has so far been assessed at a slight premium to other parts of the market.
Opportunity in India
India is one country that is actively participating in this programme. Indian Carbon Reduction projects are a key driver for the value of CORSIA-eligible credits with voluntary carbon projects developed in India forming the largest share of credits traded in 2019.
Indian renewables projects have become the mainstay of the CORSIA program, providing a baseload of supply that should ensure stability. Out of a total traded volume of 104 million mt (metric ton) of CO2 equivalent in 2019, 23.1 million mt were from projects in India. This includes projects like Vaayu’s 50-MW windfarm in Rajasthan that has saved almost 90,000 mt of carbon emissions each year over the last decade, or the Value Network Venture Advisory Services’ biogas project in Madhya Pradesh that is saving over 50,000 mt of carbon emissions each year.
Despite COVID having weakened eligible credit demand for CORSIA, the number of commitments to reach net zero emissions from businesses and local governments has doubled in less than a year. Engaging carbon markets to offset emissions credibly is increasing becoming a strategy adopted by leading entities to help achieve their goals. S&P Global Platts Analytics forecasts strong credit volumes from eligible projects. But there is plenty of opportunity ahead for India to move beyond renewables and support the wider array of carbon projects – many of which command a premium value.
- Jonty Rushforth, Head of Price Group, S&P Global Platts
Demand and Willingness to Pay More for High Integrity Credits has Increased in the Market