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INTERVIEW: Lack of clarity, guidance for corporates holding back voluntary carbon markets

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INTERVIEW: Lack of clarity, guidance for corporates holding back voluntary carbon markets


Use case for offsetting 'needs to align' with corporate strategies

Improved governance 'essential' for growth of VCMs

Prices for nature-based credits tumble amid intense scrutiny

  • Author
  • Eklavya Gupte
  • Editor
  • Jonathan Loades-Carter
  • Commodity
  • Energy Transition

Better governance and clear guidance for corporates to navigate carbon credits is key to the development of voluntary carbon markets, an official from the International Emissions Trading Association (IETA) said.

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Speaking to S&P Global Commodity Insights, Andrea Abrahams, Managing Director at IETA, said establishing a use case for carbon offsetting in a company's net zero strategy is essential in scaling up the market.

"We need to land in a place where companies are applauded and recognized for their contribution towards investing in carbon crediting programs. Without that incentive, you will struggle to get the demand to be pulled through the value chain," she said in an interview. "Companies need to be rewarded, they need to be incentivized, they need to be encouraged to participate in the market. And I think then we will continue to see growth and demand because net zero delivery for corporates is a license to operate these days."

The voluntary carbon markets have endured a rocky few months as increased scrutiny over the efficacy of some carbon offsets and projects has led to a steady fall in liquidity and confidence.

Prices of several carbon credits have fallen as a result. Platts CNC, an assessment that reflects the most competitive nature-based carbon credit prices, was assessed at $1.93/mtCO2e April 11, only slightly up from Feb. 3's all-time low of $1.70/mtC02e, and averaged $9.55/mtCO2e in 2022. Platts is part of S&P Global.

Abrahams said companies should not be panicked by recent scrutiny in voluntary markets, and should get more involved as carbon offsets were crucial to achievement of net zero goals.

"A [voluntary] market needs checks and balances. It needs principles and it needs rules of the game," she said.

Prior to now VCMs had largely flown under the radar "but as more money and more participants come into the market, so it attracts more potential. And it's right that a market needs to stand up to challenge checks and balances," she said.

IETA is organization dedicated to advancing international cooperation in emissions trading. Abrahams is also managing director of the International Carbon Reduction and Offset Alliance, which is a non-profit initiative housed within IETA. ICROA runs an accreditation program for offsetting service providers that defines and promotes best practice in financing high-quality emissions reductions and using carbon credits as a carbon management tool.

Many in the industry believe recent criticism is part of the growing pain that a nascent market goes through.

In a recent report, IETA acknowledged the VCM needed to evolve with a reinvigorated definition of quality at its core.

"The antidote to a lack of trust is quality. The market needs to evolve with a reinvigorated definition of quality at its core. For this to happen, there needs to be an open dialog between all market participants so that the VCM as a whole can come to a mutual agreement and understanding of what 'good' looks like," the report said.

Continuous improvement

The Integrity Council for the Voluntary Carbon Market finalized its Core Carbon Principles March 30, bringing some much-needed clarity as to what constitutes a high-quality credit.

The CCPs include 10 codes that are broadly based under three groups: governance, emissions impact and sustainable development. These will help identify carbon credits that "create real, additional and verifiable climate impact with high environmental and social integrity, based on sound science and evolving best-practice," according to the ICVCM.

Abrahams said the initiatives set the markets up for "continuous improvement."

"Ensuring that credits are fungible and standardized and all work to the same rules of the game allows for a far more liquid market and much greater ability to expand," she said.

"If we get the rules around the use of credits right, that will create a very strong demand signal leading to an increase in supply. And projects have the ability to ramp up. At the moment the market is still long relative to demand," she said.

The ICVCM is also to publish the category-level Assessment Framework in Q2 and initiate its assessment of carbon-crediting programs shortly after. CCP-eligible programs and CCP-approved categories will be announced in Q3, enabling approved carbon-crediting programs to issue the first CCP-labeled carbon credits soon after.

"I think the other thing that we could do is make sure that carbon crediting standards that work in voluntary carbon markets are fungible across various initiatives and crediting approaches including compliance schemes," added Abrahams.

Analysts at S&P Global Commodity Insights expect the publication of the credit-type principles in Q2 to "create some long-term turbulence in the market, giving rise to potential distortions between different credit types."

On the supply side, another governance body, the Voluntary Carbon Markets Integrity Initiative (VCMI) is also reworking a draft consultation aimed at bringing integrity to corporate claims made about the use of carbon credits.

The value of the VCM quadrupled to around $2 billion in 2022 and is widely expected to grow by a factor of at least 15 by 2030, as governments and companies seek to use offsets to help achieve net-zero emissions targets.