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Carbon Finance

Groundbreaking Principle for Carbon Finance is Emerging as Article 6 Negotiations Unfold

Policymakers meeting at the United Nations Climate Change Conference, or COP26, in Glasgow in November will face a subject set to change the future course of the voluntary carbon markets: the corresponding adjustment.

A decision on this outstanding issue could be so strong it would cement a new core principle for carbon finance and may possibly trigger a split in the market.

Under the Paris Agreement, governments worldwide have pledged nationally determined contributions to put in place mitigation efforts to reach specific targets in the fight against climate change. The ultimate goal is to collectively limit the global temperature increase by the end of this century to 2-degree Celsius compared to pre-industrial levels, with an attempt to further limit the increase to 1.5 degrees.

The draft Article 6 of the Paris Agreement allows countries to achieve their mitigation goals in several ways: by setting up compliance instruments such as carbon taxes or industry-wide emission trading schemes, by resorting to a yet-discussed new crediting mechanism akin to the UN Clean Development Mechanism, and by exchanging voluntary carbon credits among each other.

While countries have already put in place the first two types of actions, they haven't been able so far to also resort to voluntary carbon credits—which have been used only by the private sector to compensate their greenhouse gas emissions. Voluntary carbon credits are financial tools issued by projects that avoid or remove GHG emissions from the atmosphere. Each carbon credit demonstrates that 1 mt of carbon dioxide (or equivalent GHG) has been avoided or removed from the atmosphere.

Governments have been unable so far to use these credits to meet their NDCs because of the lack of a mechanism to keep track of where credits go to avoid the same credit from being counted by both the host country and the purchasing country.

For example, a credit produced by a forestry project located in Brazil (the host country, in this case) could be used by the UK government to reach its own NDCs.

But the exchange will only be possible after a framework is put in place to prevent that same credit to be counted by both Brazil and the UK against their NDCs.

COP26 in Glasgow will be where discussions on how to set up such a framework will happen.

Voluntary Carbon Markets: How They Work, How They’re Priced and Who’s Involved

2021 will probably be remembered as the year when carbon finance emerged as a talking point among a wide range of industries.

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Carbon Offsets Prove Risky Business for Net Zero Targets

To meet ambitious net zero targets, many companies plan to neutralize a large chunk of emissions by buying carbon offsets — credits generated by projects that are reducing carbon emissions elsewhere.

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Carbon Offsetting Goes Mainstream as Producers Set Sights on Net-Zero

In the race to hit booming net-zero emissions pledges, carbon credits are seeing a surge in interest from oil and gas producers keen to offset the climate footprint of their fossil fuels.

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Commoditization of Carbon Credits Proves Bearish for Prices: Sources

The commoditization of voluntary carbon credits on exchanges worldwide is increasingly proving to be bearish for the prices of those credits, due to the lower level of specific information offered on the credit itself or the underlying project, market participants have said.

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Larger Buyers of Carbon Credits Buying Entire Projects

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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Electric Vehicle Carbon Credits Spark Interest in Global VCM

Developers in the global voluntary carbon market have said in the last few weeks that the supply of EV credits has been increasing globally and are expected to come to market soon, once they are certified.

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Nature-Based Credits

Soil Carbon Credits: The Realities on the Ground

In 2005, when Louisa and Michael Kiely began talking to farmers about soil carbon in New South Wales in Australia, they were met with incredulity.

More than 20 years later, Carbon Farmers of Australia—the advisory they founded—has licensed projects spanning 750,000 hectares with a 3,700 sq km project in South Australia.

"We persevered and are now dealing in Paris Agreement-compliant credits," Louisa said. "Things have changed. Carbon trading now has a gold-rush feel to it."

In a landmark deal earlier this year, Australian-owned Wilmot Cattle Co. announced the sale of $500,000 worth of soil carbon credits to Microsoft, which has pledged to become carbon negative by 2030.

Soil carbon sequestration involves removing carbon from the atmosphere and storing it in soil. The process relies primarily on land management practices like preventing overgrazing and tilling, better water management practices and composting.

A number of factors, however, impede the popularity of soil carbon as a credit. And compared to the soaring popularity of forestry and household credits, it's hard to find registered soil carbon credits on popular standards like Verra and Gold Standard.



State policy

Climate change policy has played a huge part in Australian elections and domestic policy over the last 15 years. The Carbon Farming Initiative Act 2011 encouraged Australian farmers to earn credits by changing land use practices to store carbon and reduce greenhouse gas emissions. The Australian government invested $9.6 million in its Soil Carbon Research Programme that concluded in 2012.

In 2011, the Gillard administration passed the Clean Energy Act through which a carbon pricing mechanism came into effect. This was repealed in 2014 by the Abbott administration, which introduced the voluntary Emissions Reduction Fund in its place. A large part of the trading under the ERF comprises soil carbon credits. The Morrison administration, in its 2021–22 budget, promised to deliver $233.6 million in new funding to improve and protect Australia's soil.

Speculative Capital Offers Growth Opportunity for Carbon Market – AirCarbon

Voluntary carbon credits are moving toward greater standardization and taking the form of traditional commodities, with speculative capital potentially the biggest growth driver for the carbon market in coming years, said William Pazos, cofounder and managing director of carbon trading platform AirCarbon, in a recent interview.

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Wildfire Carbon Reversal and the Question of Permanence in Nature-Based Carbon Credits

Jonty Rushforth, Senior Director of Markets & Energy Transition, and Paula VanLaningham, Platts Global Head of Carbon, talk about the devastating wildfires sweeping across the globe and the challenges facing nature-based carbon credits as the market reckons with offset permanence in the face of rising global temperatures.

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Turkey's Forest Fires Kindle Larger Questions on Offset Permanence

Forest fires have been raging in many parts of the world putting carbon credit projects at risk and posing a significant challenge to the permanence of the credits generated.

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Hype Around Nature-Based Credits Crowding Out Other Quality Credits: Sources

The current hype around nature-based credits within voluntary carbon markets is resulting in lower demand for other quality carbon credits such as household devices, industry sources have said.

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Recognizing Limitations and Potential of REDD+ Credits May Offer Way Out of a Destructive Debate

Carbon finance has just started to become a mainstream concept in business and industry, but it has for some time been at the center of very emotional debates, especially when it comes to carbon credits based on the protection of endangered forests

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S&P Global Ratings anticipates global sustainable debt issuance will surpass $700 billion in 2021. This comes after green bonds grew from virtually nothing in 2012 to $282.05 billion in 2020 and social bond issuance surged during the COVID-19 crisis.

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APAC Markets

China Launches National Carbon Market; First CO2 Trades at $8.20/mt

China's national carbon market started trading on July 16 with the first CO2 trade done at Yuan 52.80/mt ($8.20/mt), a relatively low carbon price compared with regulated markets in the US and Europe.

The highly anticipated launch of China's carbon market paves the way for the decarbonization of its industries, starting from the power sector, and will help meet the country's long-term 2060 carbon neutrality goals.

Initial carbon prices, however, were relatively low due to a generous allocation of allowances in an effort to familiarize the industry with carbon pricing. Going forward, allowances are expected to be tightened as China's carbon policy takes shape and after cost-effective abatement technologies are developed.

The first online transaction of China's Carbon Emission Allowances, or CEAs, was priced at Yuan 52.80/mt ($8.20/mt) and the transacted volume was 160,000 mt of CO2 at 9:30 am July 16, according to state broadcaster China Central Television's Weibo social media account.

China's nationwide carbon trading officially started at the Shanghai Environment & Energy Exchange on July 16, and the first transaction was done immediately after the official launch, according to CCTV.

"Shanghai Environment; Energy Exchange now manages the online trading. How the other pilot exchanges will participate; depending on the government's further announcements," the spokeswoman for Beijing Environmental Exchange, one of the pilot exchanges for China's carbon trading, said.

In comparison to the Chinese market's initial $8.20/mt CO2 price, European carbon prices were around $61.92/mt on July 15, while California's cap-and-trade prices were at $24.30/mt at the end of last week.

In voluntary markets, the S&P Global Platts CORSIA-Eligible Carbon Credits was assessed at $3.05/mtCO2e on July 15, while Platts Nature-Based Projects Carbon Credits and Platts Household Devices Carbon Credits were assessed at $4.79/mtCO2e and $6.17/mtCO2e, respectively.

The participating power companies collectively account for over 4 billion mt of CO2 emissions, according to the environment ministry. The European Union ETS has around 1.6 billion mt of circulating allowances, according to European Commission's official website.

Singapore Seeks to Tame Chaotic Voluntary Carbon Market

Singapore's carbon market, expected to launch by the end of 2021, could potentially play a vital role in overhauling the voluntary carbon market, which is fragmented and often criticized for not being robust enough to meet what is a lofty goal – to cap the world's CO2 emissions.

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South Korean Carbon Credit Provider Looks at Voluntary Carbon Markets

One of the oldest and largest carbon credit providers in South Korea, Ecoeye, has invested $100 million in projects globally focusing on forestry, cookstove and biochar credits and is an active participant in the K-ETS carbon market, but now finds itself at a crossroads.

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Japan's METI Aims to Start Demonstrative Carbon Credit Market in FY 2022-23

Japan's Ministry of Economy, Trade and Industry said Aug. 5 it aims to start a demonstrative carbon credit exchange market in fiscal year 2022-23 (April-March) as it considers means to monetize local companies' carbon emissions reduction in its push for carbon neutrality.

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Australia Starts Public Consultation to Enroll More Technologies in its Emissions Reduction Fund

Australia has begun public consultation in the week started July 25 to help identify five new technologies to be enrolled in its Emissions Reduction Fund, or ERF, by 2022, which would serve multiple goals of boosting investment in low carbon technologies, widen the base for producing carbon credits, and contribute to emissions reduction targets under the Paris Agreement.

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European Reform

EC Targets Transport Emissions in 2030 Decarbonization Drive

The European Commission is gearing up to target CO2 emissions from the transport sector as part of its plans to cut greenhouse gas output by 55% below 1990 levels by 2030.

The EU's executive arm is set to unveil a standalone carbon market for the road transport sector that will target upstream fuel providers, according to draft documents leaked in late June.

EU Carbon Market Extension 'High Risk, Low Reward for Consumers'

Extending the EU's Emissions Trading System to include road transport and buildings would be a high-risk, low-reward strategy for consumers, the European Consumer Organization BEUC said in a press briefing July 9.

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EC's Initial Carbon Tax Rules Set to Shift Trends, Raise Steel, Aluminum Costs

The European Commission's planned July 14 announcement of a proposal for its Carbon Border Adjustment Mechanism is set to direct future trends in steel and aluminum sectors, which account for 8% and 2% of global carbon emissions, respectively.

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Europe Needs Much Higher Carbon Prices to Reach Net-Zero in 2050: FT Summit Participants

Carbon markets are currently trading "comfortably" at around Eur50/mt but prices need to rise much higher if net-zero carbon targets are to be met and greenwashing avoided, participants in the Financial Times Global Commodities Summit said June 16.

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U.S. Activity

RGGI Carbon Market Could Soon Go From 11 to 13 States

On the same day that North Carolina regulators advanced a proposal to include the first Southern state in the Regional Greenhouse Gas Initiative, a similar and highly contentious plan in Pennsylvania cleared a critical threshold.

The Pennsylvania Environmental Quality Board voted 15-4 in favor of advancing Democratic Gov. Tom Wolf's signature climate initiative on June 13, despite fervent efforts by Republican legislators to keep their state out of the expanding cap-and-trade market.

CFTC Gauging Role as Carbon Markets Grow but Still Face Challenges Scaling Up

Despite growth in regional carbon markets and swelling demand for voluntary carbon offsets, there is a need for standardization to help scale up trading and a role for regulators in ensuring market integrity, participants in a US Commodity Futures Trading Commission advisory panel forum said June 3.

The CFTC's Energy and Environmental Markets Advisory Committee held a daylong session exploring the potential role of carbon markets in the transition to a low-carbon economy. The event featured updates about cap-and-trade programs in the US, EU and UK, and on the current state of exchange-listed carbon derivative products. The commission has stepped up attention to climate, with Acting Chairman Rostin Behnam in March announcing a climate risk unit within the CFTC focused on the role of derivatives markets in pricing and addressing climate risk.

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To facilitate long term, sustainable growth, it is imperative to analyze the environmental, social and governance (ESG) performance of companies and examine how activity in the markets influences the world in which we live.

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