Tardy response to Amazon fires singe nature-based credits from Latam

The global surge in devastating and destructive forest fires over the last several years has raised questions about the quality of nature-based carbon credits, which has had an impact on the prices of credits generated in areas that are at high-risk of potential carbon reversal.

The largest proportion of nature-based carbon credits are generated from avoided deforestation projects, which are dependent on the existence and sustainability of standing forests. In the voluntary market, forestry credits are effective if they sequester carbon for around 100 years. However, the rise in fires can present a serious threat to the efficacy of the offsets.

Recent widespread devastation in the Amazon, much of it generated by illegal clearing, has raised question over the security of many of the avoided deforestation credits issued by several projects in the region, particularly in parts of Brazil, which has impacted the tradable value for some of the credits issued by these projects in the spot market, data collected by Platts shows.

January to September data from Platts showed in some Latin American countries, REDD+ credits with a 2016 vintage have been priced at as low as $2.75/mtCO2e. Older vintages have been indicated even lower.

"The problem with Brazil is the fires and lack of government's efforts. Why will people pay the same for these credits, the quality is compromised, so there goes the premium," a Europe-based source said.

On June 8, several trades took place for Brazilian forestry credits, with trades for 2015 vintage credits heard as low as $2.64/mtCO2e.

The vintage of the credit – or the year the emission was certified as offset – can often have a large impact on the tradable value for different types of voluntary carbon credits. Platts' nature-based carbon credit assessments reflect vintages from the last five years including current year, currently 2017 and above,

However, in the case of some credits from Brazil, even newer vintages issued by some projects have been trading at lower levels when compared to similar projects in other regions. Over the same period, Platts saw 2017 vintage credits offered as low as $3.15/mtCO2e. Many of the trades seen by Platts in May and June were shy of $4/mtCO2e mark.

While prices have climbed for nature-based credits over the last several months, market sources indicate there is still a difference in the offer levels for some Latin American-based projects when compared to those from other countries.

For 2018 vintage credits from a Brazilian avoided deforestation project, the indicative price on Aug. 10 stood at $4.00/mtCO2e, a project developer told Platts. Another 2016 vintage credits was offered for $5.50/mtCO2e on Aug. 19, while similar credits from Africa were offered for nearly $8/mtCO2e.

"There is a lack of credibility in these projects due to the fires," another developer said.

Another problem is the verification of credits. Data used in the story points that all the carbon credits that have Verified Carbon Standard and Climate, Community, and biodiversity standards certification, have seen higher prices than credits with only VCS certification.

While VCS ensures that credits represent real quantifiable, additional, and permanent project-based emission reductions, it doesn't include safeguards related to ecosystem services or biodiversity.

"Our projects are VCS certified, but we are only getting around $4/mtCO2e for them, while projects with CCB certification are getting much higher. We have now held back all credits and will only sell them after we get CCB certified," a project developer based in the US told Platts.

Another US-based source that Platts spoke with said that concerns over forest fires was of course there, but it was not as bad as some market participants make it to be.

"Brazilian project developers have taken ample steps to not let the quality be deteriorated. Although some offtakes have disappeared because of the fires but I won't be worried because we have enough reserves," he said.

Most of the forestry-projects certified by different standards are required to generate more credits than they can sell in order to maintain a reserve or "buffer" in the event of carbon reversal through either fire, disease, or man-made activity. These credits remain live, but cannot be bought, sold or used as offsets by buyers, and are only retired in the event of forestry destruction.

"The comments on the quality of these offsets are laughable because we have the most high-quality credits. We fulfill at least 11 of the 17 sustainable credit goals set by the United Nations," the source added.

Data from Platts market heards also indicated that prices for some Brazilian avoided deforestation credits are as high as $10/mtCO2e, which is on par with similar projects in other countries.

Platts CNC, which reflects the prices of the nature-based credits (both avoidance and removals), has risen over 58% since June 14, indicating the same trend. On Sept 9, Platts CNC was assessed at $7.45/mtCO2e.

"These forest fires have made people aware that this is a problem, it needs to have a solution, which is (also) generating investments," said an India-based market expert.