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Larger buyers of carbon credits buying entire projects


Whole or large part of carbon projects bought to secure supply

Oil and gas companies most involved in the trend

"Shouldn't impact liquidity in the market": trader

  • Author
  • Silvia Favasuli
  • Editor
  • Daniel Lalor
  • Commodity
  • Electric Power Energy Transition Natural Gas
  • Topic
  • Energy Transition Environment and Sustainability

Larger buyers of voluntary carbon credits looking to hedge against the risk of future price increases have been buying entire carbon projects, or large stakes in them, as soon as they are certified and able to issue credits.

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"It is a trend and I believe it will grow bigger," one carbon trader said. "It is a way to avoid having to fight over credits. When you have a multi-year commitment to net-zero, you need to make sure you have the supply in the long run."

Carbon projects are business activities -- such as reforestation -- targeted at removing or reducing greenhouse gases from the atmosphere. They issue carbon credits as a way of financing themselves.

"Most of these large buyers are from the oil and gas sector," a project developer said. "They have a preference to purchase nature-based projects."

The market, which was particularly strong a few months ago, has slowed a little of late. possibly because the players involved were busy finalizing deals, the developer said.

The purchase of an entire carbon project or large part of it makes sense from a financial perspective, a second carbon trader said, given the current price scenario.

"It really would depend on how [the project] is priced ... It makes sense if it is a quality project and a quality developer, and if [the project] meets certain parameters. I think that this has been happening over the past few months, but at some point the low priced volume will no longer be low enough. It is unclear when that stops," the trader said.

A "fear of missing out" may also be behind the strategy, a fourth source said.

Market impact

The recent trend may instead be beneficial to the market, the first trader said, because the big buyers, especially from the oil and gas sector, won't necessarily retire all the credits for themselves but may pass them along the supply chain.

"Let us say a big oil and gas company purchases an entire forestry project. They will still have the possibility to resell those credits or to use them to offer carbon-zero commodities. Companies like Shell or BP have contacts with airlines, they supply them with fuel. So they could sell them carbon neutral fuel for example," the trader said.

The actual purchase of a certified project by big buyers of carbon credits is not the only way they act to secure supply in the long run -- it is common practice for those biggest players to invest in a carbon project from its start by contributing to its initial financing.

"Most of the time the big buyers help with the financing of the project," the first trader said.

"And this helps developers, which otherwise will have to rely on loans from banks ... it takes at least three years for a forestry project to be certified because you need to wait for the trees to grow enough to allow the measurement of carbon removal. And during those years you have no financing coming in from the sale of credits."

The forms in which buyers of carbon credits invest in projects varies, ranging from the provision of initial financing in exchange for equity or carbon credits. Buyers could also provide financing in exchange for a discount on credits, sources said.

In order to be carbon credit eligible, a carbon project needs to be certified by standatrds, which are international organisations which certify that a particular project meets its stated objectives and its stated volume of emissions.

Standards have a series of methodologies, or requirements, for each type of carbon project. For example, a reforestation project will follow specific rules when calculating the level of CO2 absorption of the planned forest and therefore the number of carbon credits it produces over time.

Over the past few years many companies have announced plans to help finance carbon projects around the world, including, for example, Shell which selects nature-based projects only, or Total which announced in 2017 plans to set up credit-eligible biogas projects in India.

"This trend is already established and it will grow further," the trader said.