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Platts nature-based avoidance, removals carbon credits spread reaches all-time low

Highlights

Rising prices of avoidance credits narrows spread

Limited supply, lack of standardized contracts slow rise in removals

Preference for avoidance credits leads to higher prices

There has been a significant narrowing of the spread between avoidance and removals carbon credits in the nature-based segment. On Nov. 30, the spread between the Platts nature-based avoidance assessment, which reflects avoidance credits, and the Platts natural carbon capture assessment, which reflects removals credits, was the narrowest ever at just 90 cents, showed an analysis of S&P Global Platts data for the last few months.

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On Aug. 9, when the Platts nature-based avoidance and the Platts natural carbon capture assessments were launched, they were assessed at $7.06/mtCO2e and $15/mtCO2e for current-year prices. The spread on that date was $7.94/mtCO2e.

Traditionally, removals credits have been much higher priced than avoidance credits because of their perceived higher quality and limited supply. However, the surge in prices of nature-based avoidance credits over the last month have led to a significant narrowing of the gap. On Nov. 30, the nature-based avoidance current-year price was at $14.05/mtCO2e while the natural carbon capture current-year price was assessed at $14.95/mtCO2e.

Spread between Platts Nature-based Avoidance and Removals assessments

The nature-based avoidance price has risen 45% through November to $14.05/mtCO2e on Nov 30 from $9.65/mtCO2e on Nov. 1. The same assessment had risen only 36% over the nearly three-month period from Aug. 9 to Nov. 1.

In contrast, the movement in the natural carbon capture assessment price has seen significant ups and downs in the Aug. 9 to Nov. 30 period. The price assessed at $14.95/mtCO2e Nov. 30 was not much different from the price assessed at $15/mtCO2e Aug. 9.

Several factors have contributed to the surge in prices of avoidance credits. Thin supply and a tilt in demand for nature-based credits had led to the strong price rise, Platts had earlier reported. Another factor talked about was fewer retirements by end-buyers and the holding of credits by traders on hopes of a further rise in prices.

Removals price growth slows

The removals space has, however, not seen the same strong increase. Supply of removals carbon credits is even more limited than that of avoidance credits. But the limited supply, instead of driving up prices further, has led to buyers switching preference to avoidance credits.

"Despite prices for both nature-based avoidance and removals credits rising, supply for removals is a key factor in the preference for avoidance credits. Demand for forestry projects overall is increasing. But because of limited supply of removals credits, market participants are shifting their focus toward forestry avoidance credits, causing prices to rise further in that space," said Abhishek Das, market analyst at Clear Blue Markets, a Canadian carbon trading and advisory firm.

Standardized contracts in the avoidance space are another contributing factor for prices rising faster in that segment. New York-based exchange Xpansiv's N-GEO contract as well as Singapore-based ACX's GNT and GNT+ contracts are based on underlying avoidance credits, resulting in their increased popularity.

"A standardized product is much easier to trade, especially when the trader is unfamiliar with the science and process behind how each different mtCO2e is generated. If you would create a standardized product for removals credits that is as popular as a GEO or an N-GEO, I would expect a similar rise," a trader said.