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COP26: INTERVIEW: Carbon credit demand set to overwhelm supply: Vertree

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COP26: INTERVIEW: Carbon credit demand set to overwhelm supply: Vertree

Highlights

Investors creating pressure on companies to decarbonize

Supply side may not be able to react quickly to surging demand

COP26 to boost finance, confidence in voluntary carbon market

  • Author
  • Frank Watson
  • Editor
  • Kshitiz Goliya
  • Commodity
  • Coal

Global demand for carbon offset credits is set to overwhelm the available supply, Ariel Perez, head of Environmental Products at environmental services company Vertree Partners said in an interview Oct. 29.

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"The sheer volume of emissions credits that will be needed by companies to achieve net-zero emissions goals means the supply from projects is unlikely to be able to keep up," said Perez.

"We are seeing more demand than there is supply, and more capital wanting to come into the market than there are opportunities," said Perez.

"It is becoming more transparent, and more credibility is coming into this market," he said.

The value of the global Voluntary Carbon Market rose to $473 million in 2020 and is on track to exceed this value substantially in 2021, analysis company Ecosystem Marketplace said in a report Sept. 15.

The group said issuance of credits -- representing the supply side of the market -- has begun to dramatically outstrip retirements, suggesting an oversupplied market.

However, this is a short-term phenomenon, according to Perez at Vertree, as demand is likely to ramp up significantly in the next few years.

"The world's largest institutional investors are creating pressure on companies to cut emissions," said Perez.

"The nature of developing emissions reduction projects means that supply will not be able to quickly respond to rising demand," he said.

Carbon markets have moved from being a "footnote in an ESG report to becoming a serious commodity market" and could in future become the world's largest traded market, he said.

The Voluntary Carbon Market, or VCM, is likely to get a further boost if the upcoming UN Climate Change Conference in Glasgow, running Nov. 1-12, leads to agreement on Article 6 of the Paris Agreement, he said, which deals with international emissions trading.

"Voluntary commitments are a result of a lack of progress with carbon compliance markets. According to Vertree's estimates, only 20% of global emissions are covered by emissions trading. The VCM is filling that void," he said.

"Hopefully COP26 will bring much needed finance and confidence to this market," he said.

"In short, we expect to see more ambition, and more progress on the technical aspects of Article 6," said Perez.

"Countries need to understand what their options are; whether a corresponding adjustment is needed," he said.

Corresponding Adjustments refer to the suggestion that a government transferring emissions reduction credits across borders would need to revise its national emissions tally if the reductions are being claimed elsewhere.

This is one of the key issues creating uncertainty in the market for carbon credits.

"The uncertainty limits the amount of capital coming into the markets," said Perez.

"Even if the negotiations around Article 6 get stalled for another year, the VCM is now expanding under its own momentum, driven by corporate demand," he said.

"Overall, we're very optimistic that this market will continue to grow. The VCM exists as a complement to compliance markets," he said.

Carbon credit prices have shown a clear upward trend in most of 2021, although September and October saw a relatively flat trend, possibly reflecting uncertainty ahead of the COP26 summit.

S&P Global Platts assessed CORSIA-eligible Carbon (CEC) credits at $7.25/mt CO2 equivalent at the close Oct. 28, compared with an all-time high of $7.60/mt Sept. 10.

Meanwhile, Platts assessed nature-based credits at $9/mt Oct. 28 –- an all-time high since launching the assessment on July 12.