INTERVIEW: Xpansiv banking on latent demand to relieve voluntary carbon markets

Latent demand and a more rigorous approach to quality standards will help the voluntary carbon markets emerge from their current slump, a senior official from Xpansiv said March 15.

Speaking to S&P Global Commodity Insights, Andy Bose, market development and policy lead at Xpansiv, said the exchange is having active conversations with countries in Asia and Africa to develop carbon products and trading instruments for these nascent markets.

"We have conversations with the countries that have progressed their own thinking the most. Then we help them understand how we can provide an infrastructure for them," he said in an interview. Bose did not specifically name any countries but said they were located in Asia, the Middle East and Africa.

This comes as many Asian countries, in particular, are taking steps to set up national carbon infrastructure and international credit trading agreements. India, South Korea, Singapore, Indonesia, Malaysia, Saudi Arabia and the UAE are all looking to increase ownership in VCMs and meet their Nationally Determined Contributions as part of the Paris Agreement.

Preparing for change

Xpansiv, which owns the world's largest spot carbon credit exchange CBL, accounts for around 40% of voluntary carbon market trade.

These markets have witnessed a sharp fall in activity in recent months as prices of carbon credits have been weighed down by macroeconomic pressures and concerns of credibility over the quality of some carbon offsets.

But with several quality initiatives likely to be the introduced in 2023, the market is forging a way forward, according to Bose.

"What I would suggest is that as [quality initiatives] are put forward, as the standard bodies themselves continue to indicate where they're going with their methodologies, our view is with the number of participants who are coming onto the marketplace, we should see an uptick in demand," Bose said.

Around 200 companies currently trade on Xpansiv's CBL, but more than 500 companies are "onboarding" to join the exchange, which should result in an uptick in activity.

"It is unabated in terms of the number of participants that are going through [onboarding]," he said. "So, we have that kind of latent demand to come, [and] we don't see a reversal on it."

He said market players were conducting a lot more diligence, paving the way for a more rigorous and competitive sector.

"They're beginning to understand how they're going to want to interact in this market, and I think we're going to start to see market participants providing that voice as to where they think value is going to be," he said.

The Integrity Council for the Voluntary Carbon Market will introduce high-integrity carbon credit labels in the third quarter of 2023, and it will publish its final Core Carbon Principles in March to create a more transparent, liquid, and high-integrity voluntary carbon market. Meanwhile, the Voluntary Carbon Markets Integrity Initiative is reworking a draft consultation aimed at bringing integrity to corporate claims made about the use of carbon credits.

Price, trading volumes dive

The intense scrutiny around the credibility of carbon offsets, particularly nature-based credits, has hurt prices and demand in 2023.

Xpansiv's N-GEO, which is a spot standardized carbon contract for nature-based carbon credits traded through CBL, settled at $3.10/mtCO2e on March 15, up from an all-time low of $1.70/mtC02e on Feb. 2. This contract averaged $9.45/mtC02e in 2022.

Similarly, Platts CNC, which reflects the most competitive nature-based carbon credit prices, was assessed at $2.35/mtCO2e March 15, up from an all-time low of $1.70/mtC02e on Feb. 3. Platts CNC averaged $9.55/mtC02e in 2022, according to data from S&P Global data.

A similar decline has been seen in liquidity on Xpansiv's CBL. Trading volumes on the New York-based exchange fell to 116 million mtCO2e in 2022 from 121.5 million mtCO2e in 2021.

However, volumes in 2021 were nearly four times as much as the previous year, driven by a surge in demand linked to corporate net-zero emissions targets and environmental, social and governance concerns.

But Bose said open interest for carbon futures contracts was at record highs despite a fall in liquidity, underscoring the resilience of this market.

However, analysts at S&P Global expect demand to remain subdued in 2023, as companies prioritize cost-cutting and delay climate commitments in response to economic headwinds.

"Several technology firms, including Microsoft, Google and Amazon, which have been among the main VCM retirers to date and drivers of short-term interest, have already announced substantial layoffs," they said in a recent note.

Credit issuances fell to 289.96 million mtCO2e in 2022 from a record high of 366.35 million mtCO2e the previous year, data compiled by S&P Global showed.