Benchmark Introduced for Voluntary Carbon Offset Credits
Stylized Construction of the GER Over Time
Source: NetZero Markets
Key Points: An effort to bring liquidity and transparency to voluntary carbon offset credits, known as the GER, was introduced June 17. The GER is a composite and as such, creates a way for a company to easily buy offsets that are “as good as industry average” over time; it doesn’t address criticisms about offset quality.
Introducing the Global Emission Reduction (GER) contract. A GER is a composite instrument, comprised of a weighted average of four “buckets” of offset credit types currently traded on Voluntary Carbon Markets (VCMs):
- Base Carbon Credit (BCC); emissions avoidance, consisting of renewables and energy efficiency projects
- Forestry Carbon Credit (FCC); emissions avoidance, consisting of Land Use, Land Use Change and Forestry projects
- Prime Carbon Credit (PCC); emissions avoidance, with projects that have other benefits such as contributing to the UN’s Sustainable Development Goals
- Carbon Capture Credit (CCC); emissions removal, to include CCS and Direct Air Capture projects
Recent trading in VCMs have demonstrated differentiation by price across these project buckets, with CCCs the most expensive and BCCs the least. Early trading in GERs settled at $7.23 to $7.70 per contract.
The GER functions as follows: carbon credits representing each of the four buckets are bought and “retired” — retiring credits ensures that the carbon benefit is only “used” once and cannot be resold. A GER is then issued as a new instrument underpinned by those retired credits. The details of contributing credits (i.e. the projects) are transparent to buyers, addressing a criticism regarding the opacity of current VCMs.
The representation in a GER from each of the four buckets is based on the volume of trading in each over time. Thus, GERs intend to reflect the market and reflect “an average” offset. Currently, the GER’s mix is approximately 45% BCC, 1/3 FCC, 20% PCC and 1% CCC (see Exhibit).
As an intended industry benchmark, a GER does not have its own inclusion standards for projects and instead accepts all established verifying agency practices and all offset types that are currently traded. (This differs from some others’ products, which seek to offer a portfolio of higher quality offsets, see discussion about quality in the explainer below.)
Over time, GER mix is expected to first include more FCC and gradually, as removal activity grows, to be entirely comprised of CCC (see Exhibit) (again this reflects how the offset markets are expected to evolve). This transition to all CCC is consistent with the Oxford Principles for Net Zero Aligned Carbon Offsetting, which excludes emission avoidance offsets by 2050.
The GER contracts are being administered by NetZero Markets, which has partnered with exchanges AirCarbon Exchange (for spot contracts) and European Energy Exchange (EEX) and Nodal (both for futures contracts).
Carbon offset credits explained. A carbon credit offset is a certificate that one ton of CO2 is not being emitted to the atmosphere. The certificate is issued by a verifying agency for approved types of projects that conform to established practices. The certificates can then be sold to buyers seeking to offset their own carbon emissions to meet emission reduction goals. Proceeds from the sale of the offsets go to the project developer to help provide financial incentive for the project (as well as to market makers). As suggested above, the most common project types include those related to construction of renewable energy and investments in energy efficiency and land use (such as preserving forests such that they continue to absorb CO2).
Carbon offsets have been criticized for exaggerated claims of contributing to climate mitigation. A key feature of this criticism is an idea known as “additionality.” If a project works on its own economic merits, then that project should not qualify for carbon offset credits because the project developer would have executed on the project anyway. One example of this is developing solar or wind-based energy; since the cost of generating electricity with RE is often lower than that of generating it with fossil fuels, such projects make economic sense and thus shouldn’t also receive support from offset credits.
A separate criticism is that carbon offsets hinder global carbon emissions reduction efforts. This stems from the view that offsets are a cheaper and easier way for corporations to represent that they have lowered their carbon footprint vs. changing (investing in) their own operations. Emerging best practices encourage that companies only use offsets to address the portion of emissions that they cannot reduce “organically” (i.e. by their own actions).
6/25/2022