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Feature: Electric vehicle carbon credits spark interest in global VCM

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Feature: Electric vehicle carbon credits spark interest in global VCM

Highlights

Voluntary carbon market to see increase supply of EV credits

Interest in EV credits primarily in Asia, US

Developers struggle with lack of clarity on prices, registration process

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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EV credits are carbon credits generated using EV charging systems, where greenhouse gas emission reductions are achieved by replacing vehicles that use traditional fossil fuels with electrified vehicles.

In 2018, global carbon standard, Verra, approved a methodology for EV charging systems that provides parameters to calculate emissions reduction. The methodology establishes default factors for project parameters in the US and Canada and is project-specific in other areas.

"EV is a sure-shot market and it's bound to expand. First movers will benefit tremendously," a project developer based in India, who is developing EV credits, said. Many sources have been calling it an "Asian phenomenon". However, there is substantial supply being built in the US as well.

Despite the build up in supply, there are not too many credits actually being traded in the global voluntary carbon market as the concept is still relatively new.

"EV credits might not be too popular now. But, we already have pre-commitments from buyers," Matt Macunas, associate director at Connecticut Green Bank, said. Last year, the bank had announced a collaborative carbon credit project with other players registered under Verra's EV methodology.

One of the reasons for Asian interest is the prevalence of two-wheeler and three-wheeler transportation that has potential for electrification.

"The concept of two- and three-wheelers becoming electrified is gaining popularity. At the same time, capital expenditure in the charging/swapping networks is expensive. A charging, or a swapping station, can take anywhere from 1 lakh ($1,345) to a few crore [Rupee 10 million] rupees to set up. If you are the owner of a charge point, or a battery swap network, then you will take several years to make money. You will get Rupee 15-20 ($0.20- $0.27) per unit every time someone charges their vehicle, or Rupee 35-50 ($0.47-$0.67) for a swap. When you have this kind of an imbalance, carbon credits can be very meaningful as accruing credits can provide an additional revenue stream," Vasudha Madhavan, founder of Ostara Advisors, an electric-mobility-focused investment bank, said.

Other participants said it was important that the value of the credits made a salient contribution to the business.

"Else it makes no sense. The credit has to have value, EV carbon credits can generate up to 5%-25% of incremental capital costs," Sue Hall, CEO of Climate Neutral Business Network, a sustainability consultancy, said. Climate Neutral Business Network also worked with Verra on their EV charging methodology.

There has also been interest shown by corporates for whom transportation forms the mainstay of their business, like those who focus on last-mile delivery.

"Companies usually want to buy credits in the sectors they operate in. If you are like a ride-share, or taxi app, and you can see electrification is going to be part of your system, EV credits are a no-brainer," Hall said.

Viability

With EV credits, it also makes sense to have economies of scale. When smaller groups come together and register their credits, it is more feasible as costs are shared. Overheads are high and registration is otherwise expensive. An aggregated project makes better sense, Hall said.

Despite the substantial interest in India, credits generated are comparatively lower because the power-grid is dependent on coal for generation. As a result, companies that are interested in developing EV credits often struggle as the current methodology cancels out credits when the electricity source is not clean. This plays out very differently in a country like the US, where the sources are more diverse.

"In Connecticut, for instance, a lot of the grid is nuclear-powered. Based on my observations, you can earn double the credits in such a case. Decarbonizing the power grid is important," Macunas said.

Prices

Market sources indicated that prices of EV credits depended on a number of factors. Geography plays a significant role and who is selling impacts the price as well. Smaller developers struggle to get good prices.

A US-based EV developer said: "Based on conversations with buyers, we are expecting our credits to sell in the $5-$10 range. We are playing the waiting game; playing one bidder against the other."

A second source indicated that $2-$3 was the price of credits generated from India.

Future outlook

Like other voluntary carbon credits, the lack of clarity on registration, emissions reduction and prices plague the EV credits market as well. There is some confusion as to who can claim credits. If a company replaces their regular car fleet with electric vehicles, can they claim credits? Or is it only the charging company that can claim? Market sources said that this was a concern and could lead to potential leakages impacting the quality of the credits.

"More trading is not happening because of where we are. There is too much friction and the process is too difficult. Clients get shot down in the registration process. It would help if prices can be discovered afresh. The whole process is currently excruciating," Madhavan said.