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FEATURE: VCM buyers show increased interest in customized carbon credits

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FEATURE: VCM buyers show increased interest in customized carbon credits

Highlights

Increased interest, commitment fuel demand for customized credits

Project prices can either be at premium or discount to spot credits

Customized credits buyers tend to be involved from initial stages

As interest and a better understanding of the voluntary carbon market builds among various participants, buyers are now taking an interest in the development of projects from the initial stages. A number of developers S&P Global Platts spoke to in the last few weeks have said they are customizing credits according to buyer requirements.

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In a market driven by spot transactions, this marks a shift in buyer interests. The commitment on the part of the buyer is much more in a customized project as credits are often issued up to two years later. Costs can vary according to the project and contract with the developer. Customized projects can either be at a premium to regular spot credits or at a discount if it is at a predecided, fixed price.

Credit categories

There are three broad categories of credits, according to Germany-based global carbon offset project developer ClimatePartner. The first kind is dependent on spot volume purchases.

"Buyers belonging to this segment are looking to fulfill their basic offsetting requirements through spot purchases. These buyers are pretty price-sensitive and often look for the cheapest credits from the market. There is usually little or no room for customization or a deeper connection with the project," said Bhushan Trivedi, who is part of the team leading project development and in charge of the premium project developments at ClimatePartner.

The second category of credits are those with an exclusive claim. In a traditional market, a project developer can sell to multiple buyers. But in an exclusive agreement, an understanding is reached where the buyer has exclusive rights over the credits. The buyer gets involved during the project cycle before the issuances, with or without a preinvestment made in the project. This is just one step ahead of regular spot transactions.

In the third category, under which the projects are customized according to the company's business, buyers are involved right from the beginning. Company representatives are involved in project development from the initial stages. This process increases ownership and commitment.

"There is an elevated sense of ownership between the buyers and the project right from the start. A deeper and empathetic understanding of the project helps the buyers to see the project from a new perspective, experience the impact first hand, and communicate about it effectively. This is definitely the future of carbon offset project development, and we're already seeing promising traction in premium project development at ClimatePartner," said Trivedi.

Risks and benefits

A second source, who is a large developer, said 40%-50% of his clients were interested in customized projects. A third source said demand for customization is quite buyer specific. "Some of the more credible buyers (older aggregators selling to end-users) have always wanted this and now are willing to pay a premium for it," said the source.

A fourth trader source said customizations have worked for buyers as they could get cheaper prices except for when the market faced a downturn.

"Customers are very interested in customized credits as they can get fixed prices. There is often a sharing model with the seller depending on the agreement. But often the fixed model is not beneficial as well as if the market crashes, the buyer loses out. That's what happened when CDM [Clean Development Mechanism] crashed. Buyers were at a loss," the trader told Platts.