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INTERVIEW: Voluntary carbon market trade volume may grow on year in 2022 despite headwinds, says CBL

Highlights

Carbon market liquidity expected to rebound in Q4

New national registries could take 5-6 years to establish

Exchange-based carbon trading to grow to 40% of market from 25%

  • Author
  • Ivy Yin
  • Editor
  • Wendy Wells
  • Commodity
  • Energy Transition

The global voluntary carbon market could end up maintaining growth through 2022 despite a decrease in trading volumes in the second quarter due to the Russia-Ukraine conflict and high energy prices, Rene Velasquez, Head of Global Carbon Markets with carbon exchange CBL, said in a recent interview.

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"Considering the significant headwinds because of the war and broader macroeconomic complex, if this year ends up in terms of greater liquidity than what we had last year, then even in the face of all of these headwinds, the [carbon] markets stayed buoyant as opposed to retreating," Velasquez said. "And that should be borne out in the data," he added.

CBL, a spot exchange for carbon credits and other environmental commodities, recorded a trade volume of over 120 million mtCO2e of carbon credits on its platform for 2021, and Velasquez said this could touch 130 million mtCO2e for 2022. CBL year-to-date transactions are nearly $750 million, more than $200 million over full-year 2021's total of $550 million.

Post-COP26 euphoric market sentiment had carried into Q1 before giving way to extreme volatility following Russia's' invasion of Ukraine, resulting in a record Q1 trade volume of 47 million mtCO2e on CBL's platform, equating to about a third of the full year total in 2021, Velasquez said.

However, Q2 was a completely different story as market participants moved away from carbon to oil and gas products vital to energy security, he said. "We saw a decrease in pricing and a decrease in volume; Q2 volume was about 20 million mtCO2e, halving the transactional volume in Q1," he said.

Despite the significant decrease in prices and volume in Q2, the market saw signs of recovery with 27.7 million mt traded in Q3, and the rebound is expected to continue in Q4, he said.

"We saw pretty steep recovery in Q3 and we're expecting Q4 to continue that recovery," Velasquez added.

CBL is a subsidiary of Xpansiv, whose Environmental Management Account (EMA), a multi-registry portfolio management system that consolidates data from various physical registries, saw more than 1 billion credit transfers in 2021, including exchange-based and OTC trades, Velasquez said.

CBL's 2021 traded volume of 120 million mtCO2e accounted for more than 95% of globally exchange traded spot carbon credits, making it the single largest exchange for carbon credits.

Exchange vs OTC Trades

Velasquez expects the share of exchange-traded voluntary carbon credits to grow to 40% from the current 25% share because of lower counterparty risks as exchanges have rigorous procedures for screening market participants, full transparency, same-day settlement and other features that large companies and financial institutions often prefer.

As the carbon market evolves, he said another key factor supporting the development of exchanges is the speed at which transactions can be conducted, without having to conduct multiple negotiations on volumes and prices.

The third factor was efficient price discovery. Velasquez said that when prices were negotiated on OTC trades historically, prices were scattered all across the chart, but when benchmark contracts and price assessments by price reporting agencies were introduced, there was a clear correlation.

"You then start to see [pricing] basis start to emerge; things trade at a premium or discount. So, there is market correlation and discernability where the price becomes a lot more reflective as the market develops," he said.

Velasquez also said the impact of speculative capital on the carbon market has been overhyped, and while trade growth in 2021 was driven by large energy companies, trading houses and financial intermediaries, it was done to fill customer orders and acquire inventory for companies setting up new carbon trading desks.

"I don't think it's rampant speculation like you see in crypto assets. The speculation wasn't speculation per se. They were essentially getting positions in the market," he said

"There was a significant increase in the actual retirements, and the retirements were only done by the end corporates. The financial intermediaries were not just building their book, but they were also servicing their client base [with net zero commitments and offering carbon neutrality products]," he added.

Bridging sovereign, voluntary markets

Velasquez said the voluntary and compliance carbon markets were two roads at very different development stages that would eventually intersect into some form of public-private market model, but until then the sovereign market will have to sort out the significant challenges of setting up a new market mechanism.

"One of these roads is just being built. That's the sovereign market," he said. "It has taken six years to get agreement on the Article 6 rulebook. I think it'll take another five to six years on the implementation side," he said, noting bureaucratic decision-making procedures, and the complicated infrastructures needed.

Velasquez said exchanges such as CBL and voluntary market registries were already preparing for the implementation of corresponding adjustments or CAs, which will allow countries to buy and sell carbon credits without double counting under the Article 6 rulebook.

This is being done by data sharing between national systems and the registry ecosystems and data hubs, like the Climate Warehouse, initiated by the World Bank and to be hosted in Singapore, will play an important role in connecting global registries in future.