INTERVIEW: Carbon credits with corresponding adjustment yet to enter the market, says Xpansiv CCO

No carbon credits with corresponding adjustment have entered the market yet, and Xpansiv, which owns the world's largest spot carbon credit exchange CBL, has not started to deal with the trading of such credits, Xpansiv's Chief Commercial Officer Ben Stuart told S&P Global Commodity Insights in a recent interview.

Corresponding adjustment is a key requirement under Paris Agreement's Article 6, the set of rules that govern the cross-border trading of carbon credits.

If country A buys a carbon credit from a project's host country B and wants to use it to meet its national climate target, the host country B needs to provide an authorization to give up using that credit to meet its own national climate target. The authorized carbon credits are defined as being correspondingly adjusted and can effectively avoid the double-counting of decarbonization efforts.

"At the moment, I think there are no such credits that have been delivered into the market," Stuart said.

"No issuance has occurred that includes the corresponding adjustment decisions. We haven't seen any of those come to market with the relevant documentation tag. It's not something that's ever been relevant to our market," he added.

He said N-GEO contracts, which are standardized contracts for nature-based carbon credits traded through CBL, have enabled the corresponding adjustment process, while Xpansiv hasn't seen any carbon credits with corresponding adjustment come to market.

Domestic vs international markets

Stuart said trading of Australian Carbon Credit Units or ACCUs will be going live in early 2023 on Xpansiv's CBL, adding this was a big milestone for the company. ACCUs are carbon credits issued domestically by the Australian government.

On a broader scope, Stuart highlighted that domestic and international environmental commodity markets are not competing against each other.

"If you take the Australian context, they're buying domestic credits, ACCUs, but they're also buying international credits. It's a portfolio approach. Every company is different, and every buyer has a different view. That's the beauty of the market," he said.

"We have different solutions so people can align with their corporate sustainability goals or any other metrics. I think that's one of the interesting parts of the market – it's got a lot of flexibility," he added.

Standardized vs project-by-project trading

Xpansiv recently launched the SD-GEO, a standardized contract for carbon credits generated from projects revolving around household devices like stoves. "While socially-orientated carbon projects are interesting to us, I don't think there's a huge amount of scope for more standardization to come in," Stuart pointed out.

"I think if we have too many more standardized contracts, we lose the value of the standard contracts, because it'll go back to being fractionalized. So, it's a delicate model. There might be space for one or two more standardized contracts, potentially around carbon capture and removals, but it's a bit too early and there's a lot of work to scale [the respective market]," he added.

Stuart emphasized Xpansiv is an infrastructure provider that facilitates both standardized and project-by-project trading. "We did project-by-project trading for a decade before we did standardized trading," he added.

Besides supporting listed transactions, CBL also serves as a clearing house for offline, negotiated trades. "We think there are good opportunities for that sort of market to grow and we've seen significant growth in our volumes from that type of trading," he said.

Liquidity recovery amid turmoil

Stuart said the Ukraine conflict causing energy price surges globally had initially put a brake on the carbon market, but trade volumes have since returned to where they were pre-conflict.

"It was more of a pause [in trade volume growth] between April and July," he said.

"There are a lot of commitments made by the private sector for 2025 or 2030. The compliance programs like CORSIA [Carbon Offsetting and Reduction Scheme for International Aviation] are also getting closer. It's really not that short-term time pressure, but as it gets closer to 2024 and beyond, I think you'll start to see that time pressure start to take off," he said.

CORSIA is an international, industry-wide scheme to address emissions from international aviation that is currently voluntary. From 2027, international flights to and from most countries will have a mandatory obligation to offset their emissions, with only the least developed countries and those with very low international traffic exempted.

Despite limited time pressure for now, Stuart said traders are looking to start building portfolios, taking advantage of lower prices and of futures contracts like those offered by the CME Group, which give them hedging opportunities.

Stuart said the present-day buyers for carbon credits are highly diversified. "The buyers vary from corporates to financial institutions, oil and gas majors, hedge funds, family offices... It's probably more aligned to the foreign exchange market in terms of the diversity of customers than any other commodity. I think that makes it super interesting," he said.

"We saw a large uptake of those sorts of [speculative] trades in 2021. It's a good, healthy indication for the market that there's enough opportunity for speculators to be involved," he added.

Other environmental commodities

Stuart said that beside carbon credits, Xpansiv also traded an extensive scope of environmental commodities, like renewable energy certificates and energy efficiency certificates. He said Xpansiv also offers digital natural gas products, with a couple of trades completed.

He said the digital product provides certificates for natural gas that meets a certain level of criteria, such as low levels of methane leakage, which enables the market to differentiate between natural gas contracts, based on their environmental credentials.

"For digital natural gas, it's just at a very early stage. We think it has huge potential, but it is still finding its way and we'll see where it goes," he added.

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