Ratings agencies' roles in carbon removal technologies growing; shaping demand, pricing

Carbon rating agencies are playing a bigger role for both developers and buyers as engineered carbon removal technologies become more prominent in voluntary carbon markets, impacting project demand and resultant credit pricing.

Independent rating agencies such as BeZero Carbon, Sylvera, Ronester and Calyx Global are crucial in building market trust and transparency in the carbon market, according to carbon market sources.

Their assessments focus on determining the likelihood that carbon credits from a specific project will effectively remove or avoid a metric ton of carbon, or its equivalents, from the atmosphere.

"By validating project claims and verifying climate impacts, rating agencies provide the foundation for legitimate price differentiation based on actual quality rather than marketing narratives," Jess Roberts, vice president of ratings of Sylvera, told Platts via email. "The most sophisticated market participants recognize that independent verification isn't just about risk mitigation -- it's about optimizing climate impact. Every dollar directed toward truly high-quality projects delivers more climate benefit, making rigorous assessment a fundamental component of responsible climate action."

Ratings utilize proprietary methodologies, including scientific and geospatial tools, to evaluate the efficacy of carbon projects across different project types and categories.

"In a market where quality has been difficult to decipher, ratings can help support carbon markets by creating demand signals for higher-quality credits." Donna Lee, co-founder of Calyx Global, said in an email.

Carbon credit ratings provide independent due diligence, aiding buyers and investors in making informed decisions, Lee added.

The proliferation of carbon rating agencies can also add significant value to credit prices, an industrial pollutants project developer that issues carbon credits said.

"Some buyers will not entertain a deal without high ratings from an agency," he said.

Project ratings are a significant driver of demand for specific credits, specifically driving "steady demand" for Katingan (REDD+) from buyers who focus on ratings for due diligence.

Rating assessments across project types

Rating agencies have influenced the shift toward more engineered and carbon removal projects, perceived as higher quality.

The substantial cost of engineered carbon removals necessitates a strong evidence base to showcase their impact and risks. Ratings are crucial in offering market transparency. Conversely, developers seek strong certainty and benefit from independent assessments when entering the market, Spencer Meyer, chief risk officer of Bezero Carbon, told Platts.

Carbon removal projects actively extract greenhouse gas emissions from the atmosphere. Platts' global tech carbon removal credits represent technology-driven initiatives that eliminate GHG, including biochar, mineralization, bioenergy with carbon capture and storage, and direct air capture.

"As market interest grows in engineered removal technologies, these [rating] assessments become even more valuable for comparing diverse approaches," Roberts said. "It's important to clarify a common misconception: there's no inherent quality hierarchy between removal and avoidance projects."

Removals represent just one component of a comprehensive climate solution, she added.

"A well-designed, rigorously implemented avoidance project can deliver more verifiable climate benefits than a poorly executed removal project," Roberts said.

Carbon avoidance primarily focuses on preventing additional greenhouse gas emissions by reducing emission sources. Platts offers pricing information on various carbon avoidance strategies, including nature-based solutions, industrial pollutants, and household devices.

There is an increased interest in removal projects, but the emphasis is a bit exaggerated, Meyer said.

There are 100 times the number of highly rated avoidance projects selling credits in the market compared to removal ones, he added.

Carbon credits perceived value

Rating agencies are becoming essential for buyers, who increasingly seek project ratings and may reject those with poor ratings, a trader said.

Market data shows a strong link between quality ratings and carbon credit prices, Roberts said. "When buyers can access reliable, comparable quality metrics, they naturally allocate capital toward higher-quality projects, creating appropriate price differentiation."

"For example, credits from well-rated afforestation, reforestation, and revegetation projects can fetch $5 more per rating band," Roberts said, noting that this differentiating expands to avoidance credits, as REDD+ projects increase value by around $2 per additional rating notch.

Platts, part of S&P Global Commodity Insights, assessed the global price for tech carbon capture for the current year at $145/mtCO2e May 12, unchanged day over day and down $5/mtCO2e month over month.

There is a strong correlation between credit price and project rating, as well as higher-rated projects fetching a 40% premium, Meyer said.

This promotes investment in projects with higher emission reductions, benefiting the ecosystem by rewarding excellence and encouraging continuous improvement, according to two rating agencies.

Removal credits, like other market credit types, Lee said, range in quality from high to low: "Some are highly additional and durable, while others exhibit overcrediting or risks to additionality."

Natural carbon capture for the current year was assessed at $15.20/mtCO2e on May 12, flat day over day but 30 cents lower month over month.

These credits are linked to removal projects aimed at reducing GHG emissions that fall within the agriculture, forestry and land use category, which includes reforestation and afforestation projects, soil sequestration -- not including biochar -- and wetland restoration.