Daily Update: May 20, 2024

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Indonesia’s Rimba Raya Highlights Risks of Nature-based Carbon Credits

The Rimba Raya Biodiversity Reserve on the island of Borneo was intended to be a showpiece. Rimba Raya’s carbon credits derived from the preservation of 64,000 hectares of tropical lowland peat swamp forests that are home to endangered orangutans and stunning biodiversity. These nature-based carbon credits commanded a price premium compared to other carbon credits in the market. Then, on March 2, the Indonesian government revoked Rimba Raya’s license. The move has caused considerable uncertainty in the carbon credits market, with market participants unsure what Rimba Raya credits are worth. After all, what is the benefit of a carbon credit tied to a hectare of forest if a government revokes the license that protected that forest? 

To operate a nature-based carbon project and create carbon credits, Rimba Raya needed a Forest Utilization Business Agreements license issued by the Indonesian government. The license, like all business licenses, can be revoked if Indonesian laws are violated. When announcing that it was revoking Rimba Raya’s license, the Indonesian government accused the project of “several violations.” Indonesia has complex rules regarding carbon credits, following the government’s 2022 ban on the export of credits. This ban was interpreted as meaning that new credits created in Indonesia could not be transferred to non-Indonesian companies without specific approval.

"The company had transferred its permit to third parties without the approval of the Ministry of Environment and Forestry,” a government statement announcing the ban said. “Rimba Raya is also reported to have conducted carbon trading transactions exceeding the licensed area, including violating cooperation agreements with Tanjung Puting National Park. Additionally, PT Rimba Raya Conservation is accused of not paying nontax state revenues in accordance with prevailing laws and regulations." 

Between June 2023 and April 2024, Verra, the world’s largest carbon credit issuer, issued about 33.63 million carbon credits from Rimba Raya. These credits accounted for about 6.84% of all nature-based avoidance credits issued by Verra, making their uncertain status a considerable concern to the market. A large part of the market has exposure to Rimba Raya credits, including Volkswagen Group, Gucci and Delta Air Lines, according to S&P Global Commodity Insights data. 

Rimba Raya credits are scheduled to be delivered under existing contracts. If those credits are no longer available or Verra certified, and if replacement credits are not available, those contracts would need to be voided or arbitrated under force majeure provisions.

The lack of clarity on the status of the license for Rimba Raya may affect the nature-based carbon credit market for years to come as market participants are forced to account for regulatory risk and political upheaval in carbon credit issuing countries. "I think people will think twice about doing carbon projects in Indonesia going forward," a Singapore-based trader told S&P Global Commodity Insights.

Today is Monday, May 20, 2024, and here is today’s essential intelligence.

Economy

Week Ahead Economic Preview: Week of 20 May 2024

The attention on when the US Fed will lower rates is expected to heighten in the new week with the release of FOMC minutes and appearances by various Fed speakers. According to the latest S&P Global Investment Manager Index survey, risk appetite in the equity market has risen to the highest level since late 2021, in part reflecting confidence in the health of US corporate earnings as well as the belief that the Fed will proceed with lowering rates before the end of the year. Additionally, flash US PMI data will be updated on Thursday, providing insights on whether inflationary pressures have further eased in May, following the cooling of both output and selling price growth in April, which will be crucial to the interest rate outlook.

—Read the article from S&P Global Market Intelligence

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Capital Markets

Nordic Public Finance Credit Outlook 2024: A Mixed Picture

Nordic local and regional governments (LRGs) should post larger funding gaps. In the aftermath of the COVID-19 pandemic, during which all Nordic central governments provided extensive support to their subnational governments, S&P Global Ratings expects that LRGs' funding gaps will generally widen as investment needs in public infrastructure remain sizable.

—Read the article from S&P Global Ratings

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Global Trade

Tight Conc Supply Ends Sideways Movement In Moly Oxide Prices

Molybdenum oxide powder spot prices are expected to soften in the short term while downstream spot demand in Europe remains slow, according to market participants, but currently sit well above the sideways pricing seen in the first quarter due to tight molybdenum concentrate supply. Most sources said they considered $21.30/lb Mo to be a realistic floor price in May for molybdenum oxide, substantially higher than Q1 price levels.

—Read the article from S&P Global Commodity Insights

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Sustainability

'Show Your Homework', Urge Lawyers Advising Corporates On ESG Claims

Companies need to be more circumspect when making claims about their environmental credentials, especially those based on carbon offsets which are facing a barrage of greenwashing accusations, lawyers from international legal firm Vinson & Elkins told S&P Global Commodity Insights. "Show your homework" is the most consistent advice being doled out to clients, said Matthew Dobbins, a partner in the environmental and natural resources group of the Houston-headquartered Vinson & Elkins.

—Read the article from S&P Global Commodity Insights

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Energy & Commodities

Listen: How Are Crude Prices Reacting To A Lengthening Atlantic Basin Market?

As European refineries return from seasonal maintenance, ample prompt supply in the North Sea, Mediterranean and West African crude markets suggests that the demand side of the equation remains firmly in the red. Joel Hanley is joined by crude editors Sam Angell, George Delaney and Joey Daly to discuss the implications of a crude-saturated Atlantic basin for prices in the major oil markets west of Suez.

—Listen and subscribe to the podcast from S&P Global Commodity Insights

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Technology & Media

Strong Electric Motor Growth And eAxle Development Will Power The Next Decade Of EVs

The eAxle is a compact, integrated assembly that combines the motor, power electronics and transmission essential to an electric vehicle's (EV) infrastructure. S&P Global Mobility estimates over 122 million e-motors will be produced by 2035, with over 70% of them using eAxles, driven by advancements in power density and efficiency.

—Read the article from S&P Global Mobility

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