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Removals credits see high retirements despite low supply reflecting buyer preference in offsetting carbon emissions

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Removals credits see high retirements despite low supply reflecting buyer preference in offsetting carbon emissions

Highlights

2021 data shows low issuances across vintages for removals credits

Buyers look at mix of old and new vintage credits for portfolios

N-GEO changes, CCP guidelines to impact 2022 vintage trends

  • Author
  • Vandana Sebastian
  • Editor
  • Haripriya Banerjee
  • Commodity
  • Energy Transition LNG Metals

Natural carbon capture credits saw high retirements despite low issuances across vintages in 2021, reflecting buyer preference in offsetting emissions using these credits despite their limited supply.

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Issuances of natural carbon capture credits was much lower than retirements across vintages, an analysis of data compiled by S&P Global Commodity Insights from Verra, Gold standard, Climate Action Reserve and American Carbon Registry -- the four standards that certify a significant proportion of credits in the market -- showed.

A vintage is the year carbon emissions have been certified to have been offset. For example, a 2010 vintage credit implies that the credit offsets emissions for the year 2010. However, a 2010 vintage credit can be issued after 2010 as well.

Participants in the carbon credit market pointed to difficulties in developing nature-based removals credits, or natural carbon capture credits, as a reason for their fewer issuances, when compared to avoidance credits. A major factor is the longer maturity period of removals credits.

Carbon credits can be grouped into two large categories or baskets: avoidance projects -- which avoid emitting greenhouse gases completely therefore reducing the volume of GHGs emitted into the atmosphere; and removals projects -- which remove GHGs directly from the atmosphere.

End-buyers prefer removals credits to ground their emissions reduction claims resulting in higher retirements. Avoidance credits, in comparison, tend to stay in the market without being retired longer.

"Removals projects are much more dependent on carbon revenues than any other kind of project type. One can argue that an avoidance project is also dependent on carbon revenues, but they are less capital intensive than a reforestation project. That's why most reforestation projects are commercial reforestation projects," a market participant said.

Generation of income was much quicker in avoidance projects, while removals projects took too long to develop, he added.

"Imagine you plant a tree. It takes time until it stores carbon. But for a REDD+ [reducing emissions from deforestation and forest degradation] project, you can use the deforestation rate of the project on the existing area," said a second market source.

Retirements of removals credits were highest for vintages 2014 and 2013, followed by 2018 and 2019..

"Removals credits for 2016 vintage and above are at a premium, especially [for vintages for] 2018 [and beyond]," the source added.

Despite the low issuances, retirements of removals credits topped avoidance credits in 2021. Over 36.54 million removals credits were retired in 2021, while about 30.87 avoidance credits were retired in the same year, according to data from the four standards.

"Retirements for these credits may be higher than issuances, but they are aligned with the overall retirement volume for avoidance credits. This indicates that incumbent [companies] are retiring credits for offsetting claims [either for net-zero or other uses]," the first source said. "Removal credits are more popular [for offsetting], so companies holding these credits may be more incentivized to utilize these assets [by means of retirement] rather than taking longer positions."

A third source had a similar view, saying that unlike avoidance credits which were often purchased for speculative reasons, removals credits were used primarily to offset carbon emissions.

Avoidance credits

Issuing of avoidance credits were highest for vintages from 2015 to 2019, with 2019 vintages seeing the highest issuances. Retirements were mixed, with the highest retirements seen for 2015 vintage credits, followed by 2012 and 2016 vintage credits.

Credit buyers often look for a mix in vintages, a trader said. "Sometimes they want a portfolio of different vintages. [Recently], a buyer was requesting newer vintages for his net-zero targets but he was sourcing older vintages to offset his LNG cargoes for which he had a lower budget."

"However, we get most demand for 2017-2018 vintages or newer vintages, which are perceived to be of higher quality," the trader added.

2022 vintage trends

Since January 2022, there has been increased selling of 2016-2017 vintage avoidance credits and and possible retirements of the credits as well. Participants attribute the trend to the change in vintage requirements for New York-based Xpansiv CBL exchange's Nature-based Global Emission Offset, or N-GEO, contract, which came into effect Jan. 2, 2022.

The requirement states that from 2023, vintage credits for 2016 and 2017 will not be deliverable to the N-GEO spot contract.

The market is also awaiting decision on the Core Carbon Principles and Assessment Framework expected to be announced by the Integrity Council for the Voluntary Carbon Market later this year, another trader said.

If the council gave an indication that credits of vintages of the last five years are preferable for offsetting, then retirements of those vintages will increase. "However, if there is an indication that credits of vintages of the last 10 years are acceptable, then retirements will be according to that," the source said.