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INTERVIEW: Carbon credit prices reach biting point in Brazil's land sector: Carbonext

Highlights

Nature-based avoidance credits driving change in Amazon

Prices allow standing forests to compete with cattle farming

Landowners see increased profits from switching land-use

Something important happens when nature-based carbon avoidance credit prices reach $10/mtCO2e: landowners in Brazil start maintaining areas of forest instead of clearing them for cattle farms.

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That's because at $10/mtCO2e, earning carbon credits from nature-based carbon sequestration activities is more profitable than selling beef, according to Carbonext – a Brazil-based forestry carbon project developer.

"It's happening now. At $10/mtCO2e, carbon credits breakeven with cattle farms. And at $40/mtCO2e they breakeven with soy," said Luciano Correa da Fonseca, a co-founder at Carbonext, in an interview May 17.

Nature-based carbon avoidance credit prices broke through the $10/mtCO2e mark in November 2021 – a level that drives corporate changes in land-use that successfully lock up carbon, helping to slow the process of climate change while boosting profits for farmers and landowners in the Amazon region.

Nature-based carbon avoidance credit prices gained 98% in 2021 overall and reached a high of $16.20/mtCO2e on Jan. 21, 2022, according to price assessments by S&P Global Commodity Insights.

"Prices went up very sharply last year. We started the year selling credits at $3 or $4 [per mtCO2e] and closed the year selling credits at $15. So prices did go up significantly," said Correa da Fonseca.

"Considering that demand is way above the supply, prices will continue to increase. In our projections, we estimate that prices will be around $20/mt by year end. This is how we view the market," he said, in reference to carbon credits from REDD+ projects – Reducing Emissions from Deforestation and forest Degradation.

Since the January high, nature-based carbon avoidance credit prices fell back to as low as $11.50/mtCO2e in March before edging back up to $13.95/mtCO2e by May 16, holding well above the critical breakeven price for cattle farming in Brazil.

Strong fundamentals

Long-term fundamentals indicate further price gains could be on the cards for carbon credits, according to Carbonext.

"We say there is a limit on the supply of credits because of integrity and quality of carbon credits. It's a long path to deliver those credits. We have a team of 50 people working on methodologies, process, social development of communities, GIS information and analysis, and most important: additionality, an issue we are very focused on," said Carbonext CEO Janaina Dallan.

Additionality is a requirement that carbon reduction or removal projects can only qualify for credits if the projects would not have taken place in the absence of carbon finance.

"If you have a huge forest, probably 20% of the forest shows additionality. So for the rest of it, you have no projects, you have no carbon credits. So it's a very high threshold," said Dallan.

Other complications in developing projects provide further constraints on the supply of credits, she said.

"You have land titles issues; you have community issues; you have government issues. So it is very difficult to do projects and you have this limit on supply," she said.

On the company's figures alone, carbon credit prices would need to exceed $40/mtCO2e to push soy out of the market in Brazil.

However, the picture is already starting to look favorable on that front, according to Carbonext.

That's because clearing forest to make way for a soy plantation takes time, effort and carries risks.

"Soy makes more money, but you have all those issues. If a landowner establishes a partnership with us, we do all the work. It's a win-win," said Correa da Fonseca.

On the global level, the supply/demand fundamentals for the voluntary carbon market suggest higher prices in future, according to Carbonext.

The total number of carbon credits issued worldwide in 2021 stood at around 360 million mtCO2e, the company said.

"But when you compare that to the emissions that need to be neutralized, it's actually quite absurd. You have about 50 billion mt/year of global emissions," said Correa da Fonseca.

"About 20% of that is being neutralized by the regulated carbon markets. The difference is enormous. There is an enormous need to increase the supply of carbon credits. So we should see increasing prices in the next couple of years in particular, as long as we do not have available technologies," he said.

Avoiding risks is key

Some early REDD+ projects ran into problems over alleged indigenous peoples' rights violations and forest use rights. Forest projects that clearly address those issues will attract demand among the corporate CO2 emitters, he said.

Carbon credits from projects that are well put together in terms of environmental integrity and inclusive of local community needs should see strong demand and higher prices as major companies seek to achieve net-zero emissions goals with high quality credits, he said.

"We have big traders, oil companies, mining companies – they're all looking for long-term carbon credit supply contracts where you have prices locked in," he said.

On the question of project additionality, the reality of deforestation is clear to even a casual observer on the ground in Brazil, Correa da Fonseca said.

"Think of it like this: if you do not establish REDD+ projects in the Amazon rainforest, it will be deforested. We need to act now because deforestation is a reality. Protecting the area stops deforestation immediately. It works," he said.