Category: Carbon Markets

Buyer Beware with Startup Carbon Offset Offerings

Sources: Company Websites

Key Points: Startup firms in the carbon offset space are issuing their own credits and providing marketplaces for them. Using blockchain technology, they offer the promise of transparency, and are addressing opportunities for large scale carbon emissions avoidance. But buyers must pay attention to wide variability in methodologies and inconsistent information.

Last week, carbon trading platform CarbonKerma launched a blockchain-based marketplace for carbon offset credits it is generating from Carbon Capture and Storage (CCS). A similar model is appearing for other offset types; for example, there have been at least three blockchain-based initiatives launched in the last year targeting the shutting in of oil and gas wells (CarbonPath, ZeroSix and Onyx Transition).

Blockchain promises transparency and immutability, which can help address integrity concerns (such as the “double selling” of credits). It has become firmly rooted in the carbon market, with use in leading exchanges, namely ACX (formerly AirCarbon Exchange). And it has been embraced by global development institutions, including working to build bridges and interoperability across different (countries’) blockchain-based marketplaces.

What blockchain also appears to be fostering, however, are initiatives in which one company assumes multiple roles in what is traditionally a more fragmented chain in the voluntary carbon market (VCM). In other words, some of these startups, using blockchain, are assuming the role of offset project developer, standard setter/registry, issuer, and marketplace.

This consolidation of roles isn’t inherently bad or dangerous from a product quality (i.e. offset integrity) perspective. But the startups, with their respective methodologies, do make things more complicated if nothing else, as they are bringing divergent approaches.

An environment with a small number of established standard setters (firms such as Verra, American Carbon Registry (ACR) and Climate Action Reserve (CAR) are over 15 years old), brings a consistency and discipline to the standards-setting process. These firms implement and publish protocols and methodologies developed to establish the integrity of any carbon offset issuances. And, perhaps counter to public perception of low offset integrity and accusations that these entities suffer from conflicts of interest, they proceed with considerable care to oversee individual project applications. This measured approach has led to frustration on the part of would-be developers, who see the established registries as being overly conservative (slow) in accepting new sources of offsets as well as delays in processing individual applications.

The startups, on the other hand, are manifesting a wide range in their approaches and disclosure of their procedures. This can easily create confusion. To illustrate in the oil well plugging space, ACR’s recently issued methodology applies only to orphaned wells and only credits for avoided Scope 1, i.e. methane, emissions; CarbonPath and ZeroSix have methodologies that address producing (owned) wells and issue credits for leaving oil in the ground, i.e. Scope 3 avoidance.

But even these two have divergent methodologies. CarbonPath credits only ½ of its calculated avoided Scope 3 emissions, reserving the other half to address leakage concerns (that there will be another well drilled to offset the lost production from shutting down the target well); ZeroSix takes no such discount (it offers a different take on the economic theory behind price elasticity and argues that it is “very conservative” in its crediting).

As for disclosure, the three have their methodologies available on their websites. But CarbonKerma, has not disclosed its methodology, claiming that it is proprietary.

In a market that is unregulated, it falls on buyers to decide what standards are adequate (and there is an ecosystem of ratings agencies and others offering input). And the startups are to be lauded for bringing fresh resources and opportunities to the offset crediting space, particularly for industrial activities that hold great promise for decarbonization.

But if one thing has been made clear by the controversies in the VCM over the last year, the details of what lies behind offset crediting — in terms of determining baseline, additionality and leakage, as well as the rigor applied to measuring the impact — are anything but simple. One carbon offset often simply doesn’t look much like another (although the industry desperately needs credible categories of credits to simplify matters). And with the “jury still out” in terms of much of society’s comfort with offsets, primed in part by press coverage that appears openly hostile to them, issuers and corporate buyers would be wise to carefully consider the specifics from these startup sources.

June 26, 2023

VCM Pricing Stronger Than Standardized Contracts Suggest 

Exhibit: Standardized Contract (the lines) and Individual Trade (the circles) Price History, $/Ton CO2e, 2021-2022

Source: Xpansiv

Key Points: Well-publicized integrity concerns have weighed on the VCM, including on offset credit pricing. But the dramatic decline in pricing of standardized contracts, which are more easily tracked than project-specific trades, is somewhat misleading. Corporates continue to pay up for specific offsets, particularly from projects sanctioned since 2019.

Standardized contract trades double in 2022 to 28% of Xpansiv’s volume. In a report issued in the beginning of March by Voluntary Carbon Market (VCM) trading leader Xpansiv, trades of standardized contracts (SCs) on its CBL exchange doubled in 2022 to 32 Million tons of CO₂-equivalent (CO₂e); the proportion of SCs of CBL’s trades slightly more than doubled to 28%. For reference, CBL’s total volume declined 5% year-over-year in 2022, to 116 Million tons CO₂e. See below for more discussion about SCs.

As has been noted previously, ongoing integrity concerns weighed on the market through the course of 2022 relative to 2H2021, in various ways. Pricing slid through the course of the year, as represented in the trajectory of SC pricing (see solid lines in the Exhibit).

Standardized contract pricing has become the floor for the trades in their project type; buyers paying a premium for specific project offsets. Despite the share growth of the SCs noted above, the ongoing integrity concerns in the market have made many companies less willing to give up individual project scrutiny. Thus a large majority of companies are not buying SCs and rather are buying project-specific offsets after due diligence is performed on the specific project and its attributes.

Xpansiv avers that SCs have emerged as important reference points for these project-specific trades and that the SCs have become the baseline, or the floor, in their respective categories. From that floor, individual project attributes, such as vintage or co-benefits, drive a price premium to their “reference” SC.

This can be seen in the Exhibit. Each circle denotes a trade; its color reflects that it would qualify as one of the SCs (GEO, N-GEO, C-GEO) — but the seller elected to sell it as a specific project vs. putting it into the standardized pool.

The largest discrepancies in prices vs. the SCs are of the N-GEO-type projects (in green), which are derived from nature-based activities. As can be seen in the Exhibit, trades of nature-based project contracts by year-end 2022 were as high as $15/ton CO₂e whereas the N-GEO SC had sunk to $2.00-2.50/ton.

In particular, buyers paying more for newer vintages of carbon credits. The Xpansiv report notes that credits issued from N-GEO-qualifying projects in 2019-2021 all carried premia of $12+/ton to the SC in 4Q22, while N-GEO credits issued in 2016-2017 traded below a $4/ton premium. In other words, the vintage of the project was the distinguishing attribute for credits as a later vintage is associated with more stringent rules and thus higher quality.

Background on the Standardized Contract. The SC was introduced in the VCM in 2020. Its intent was to simplify the purchase for corporate buyers — by obviating the need for project due diligence — and to foster the development of a futures market and thus allow buyers to lock in a cost for their offsetting commitments.

Exchanges have added various SCs to “fine tune” their offering. Xpansiv’s CBL, which is thought to be the carbon industry’s largest exchange, is among them. In addition to its original Global Emissions Offset (GEO), CBL now offers three SCs for carbon offsets (one, the SD-GEO, is not shown in the Exhibit).

More information on SCs is available in the Payne Sustainable Finance Lab VCM Primer.

3/14/2023

Voluntary Carbon Markets Softened in 2022

Exhibit: Carbon Offset Credit Issuance by Project Type, 2021 and ~10 Months 2022

Source: Berkeley Voluntary Registry Offset Database (VROD)

Key Points: With data through early November, VCM offset issuances (supply), retirements (demand) and pricing are poised to have weakened in 2022 vs 2021. The reasons vary but include processing logjams and correlation with equity markets. A more than doubling of corporates making decarbonization commitments in 2022 supports an outlook for strong multi-year growth.

2022 YTD credit issuances down 19% vs. the same period in 2021. Voluntary Carbon Market (VCM) issuances of 217 million tons of CO₂-equivalent (CO₂e) offset credits year-to-date (YTD) in 2022 are down for two reasons (for details on the database see the last paragraph). First, there is a logjam in processing project approvals. Per Trove Research, a consultancy, the pipeline of projects pending approval from the VCS and Gold Standard registries had risen 118% year-over-year (yoy) by the end of 3Q22 to 421 million tons. Second, there have been moratoria put in place by certain countries in issuing Forestry & Land Use credits as these countries assess the impact of issuing voluntary credits on their ability to meet their future decarbonization (Nationally Determined Contribution or NDC) commitments.

For context, although the comparisons are imperfect because we compare all of 2021 with YTD 2022 (through November 9^th), the reduction in total credits issued in 2022 is led by Renewable Energy (down 35% yoy) and Forestry & Land Use (down 33%) (see Exhibit).

With respect to the project logjam, Verra has cited labor scarcity as a factor, as is the rapid increase in number of project requests. Verra’s efforts to ‘break through” the logjam include training new hires, establishing a new verification oversight team and implementing new automation to streamline the project review process for faster as well as proper substantiation. Verra is the parent of VCS, which is the largest project registry (with approximately 2/3 of issuances this year in the database).

2022 YTD retirements down 24% vs. all of 2021 at 122 million. The decline in retirement demand can likely be attributed to lack of company confidence generally — Trove, for example, has calculated a strong correlation between retirement demand and equity market (S&P500) performance over the last two years — as well as to possible concern regarding quality of the credits given the very public conversation about raising overall project integrity in the market.

Pricing also looks to have fallen. From an average of $9.50/ton of CO₂e in Dec-2021, average offset credit prices fell more-or-less steadily (barring spikes related to project mix) to $6.40/ton by late October 2022. This decline occurred despite a consistent trend of “younger”, i.e., more recent, vintages being purchased through the course of 2022, which, all else equal, command higher prices as they are perceived to be of relatively higher quality than older vintages.

Increase in corporate commitments to decarbonize suggests medium term demand growth. The total number of companies This suggests significant growth in demand for carbon offsets through the current decade as most, if not all, of these companies will take action to neutralize residual emissions beyond their value chains by purchasing high-quality credits for removal.

Background on the VCM data. The Berkeley Carbon Trading Project recently released the latest version of its Voluntary Registry Offsets Database (VROD), with data through November 9th, 2022. The VROD contains all carbon offset projects, credit issuances, and credit retirements listed globally by the four largest voluntary offset project registries: American Carbon Registry (ACR), Climate Action Reserve (CAR), Gold Standard, and Verified Carbon Standard (VCS).

December 19, 2022.

Hess’ Massive Guyana Carbon Offsets Commitment 

Exhibit: Hess Operated and Equity Scope 1&2 Emissions, 2019-2021

Source: Hess

Key Points: Hess committed $750MM over 15 years to buy forest preservation carbon offsets in Guyana. The annual purchase is to equal Hess’ operated Scope 1 CO₂e emissions in 2021 and 2% of last year’s entire Voluntary Carbon Market value. Hess is taking 30% of this first jurisdictional REDD+ credit issuance under the ART-TREES standard, which has claimed an integrity high ground.

Hess Corporation commits to US$750MM+ in carbon offset purchases from Guyana. Announced in early December, Hess is to purchase 2.5 million (MM) carbon offset credits per year for the years 2016-2030 (each credit of a carbon offset reflects 1 metric ton (tonne) of CO₂ equivalent [CO₂e] avoided or reduced). The company has committed to minimum pricing, which starts at US$15/tonne for the first five years (2016-2020), $20/tonne in 2021-2025 and $25/tonne in 2026-2030; Hess also agreed to pay to Guyana 60% of the difference between the minimum price and a “market price” in any given year. Further the company has committed to buy its 12.5MM allotment of the credits covering 2016-2020 within 18 months.

Annual purchase commitment = Hess’ 2021 operated Scope 1 CO₂-equivalent emissions. Hess reported 2.5MM tons of operated Scope 1 CO₂e emissions in 2021, a decline of 0.7MM from a year earlier, and 0.4MM tons of operated Scope 2 CO₂e emissions (flat year-over-year). See Exhibit. As a point of reference, on an equity-ownership basis the company had 3.8MM tons of Scope 1 + 2 emissions and 43.4MM tons of Scope 3 emissions. This Guyana commitment goes well beyond its stated commitment in its most recent Sustainability Report (2021) to offset its Scope 2 emissions with either Renewable Energy Credits or carbon offsets.

Hess is buying 30% of the authorized/expected credits being issued from 2016-2030. The Guyana program anticipates issuing a total of 125MM carbon offset credits through the 15 years ending 2030 (Hess is committing to buy 30%, or 37.5MM). The first block of credits, covering 2016-2020 and totaling 33.47MM, were issued earlier this month.

The credits are being issued to Guyana under the ART-TREES jurisdictional framework. The Architecture for REDD+ Transactions (ART) registry is issuing these ART REDD+ Environmental Excellence Standard 2.0 (TREES) credits to Guyana. Conditions for ART-TREES credits include independent verification of meeting United Nations social and environmental safeguards. (For further reference, REDD+ is an acronym for Reducing Emissions from Deforestation and forest Degradation plus sustainable management of the forests.) This marks the first issuance by ART of credits for successfully preventing forest loss or degradation.

Note that this is not the first issuance of jurisdictional REDD+ credits. A different registry run by the Coalition for Rainforest Nations, a little confusingly called REDD.plus, has now issued this type of credit to Papua New Guinea; REDD.plus expected to issue credits to Gabon in November. The REDD.plus registry has been criticized for lacking some of the safeguards of the TREES standard, including how baselines for comparison are set, not provisioning for unexpected forestry loss (e.g. with set-asides of credits) and Gabon’s use of proceeds.

The credits contribute to funding Guyana’s LCDS 2030. Guyana has committed that proceeds from the sale of ART-TREES credits will be invested in the country’s Low Carbon Development Strategy (LCDS) 2030. The strategy prescribes that funds will be put toward, among other areas, renewable energy for specific communities, land titling for indigenous communities, repairing canals, climate adaptation and community-led programs.

December 14, 2022

Gabon’s REDD+ Credits’ Permanence Concerns

Exhibit: Stylized Sensor Coverage of Gabon for Ongoing Monitoring of Forestation Levels

Source: Coalition for Rainforest Nations

Key Points: For Gabon’s planned massive 90 million carbon offsets program, jurisdictional (vs. project) scope avoids leakage risk and the methodology for baseline determinations appear defensible. But implied permanence of carbon absorption, even though the credits reward past success, suggest more conservatism (like buffer pools) is necessary.

Gabon poised to issue 90 million offset credits. Gabon is planning for the imminent sale of its first installment of credits — a proposed 10% of the total issuance, or 9 million. The credits are based on a process of recognizing past emissions removals. They are associated with a Reducing Emissions from Deforestation and forest Degradation (REDD+) methodology that was developed by the United Nations Framework Convention on Climate Change’s (UNFCCC). This methodology operates at the jurisdictional level and, in Gabon’s case, measures forestation levels from 2010 through 2018 vs. a baseline established from 2000 to 2009. As such, the credits avoid some of the risks associated with other credit offset programs, including leakage (this is obviated by working at the country level) and crediting in advance of achieving the results (more on this below).

The credits are to be marketed into the Voluntary Carbon Market (VCM) by the country’s sovereign wealth fund and sold through the REDD.plus platform, which opened in 2021 and was developed by the CBL commodity exchange and the Coalition for Rainforest Nations (CfRN). The intended timeframe to place the credits is 10 years. Papua New Guinea was the first country to issue credits through REDD.plus — 9 Million to date, although per Trove Research only 20,000 of the credits have been sold; Trove blames the weak interest on lack of trust in the crediting process. Ghana and Honduras have also registered interest in using the platform.

Challenges focus on integrity but seem to under-value the multi-year and iterative approval process. Criticism surrounding the Gabon issuance focuses on:

• Independent verification agents can’t reject the methodology,
• The process wasn’t designed around credits and therefore the credit derivation is somehow flawed
• The baseline, i.e. the amount of CO2 absorption against which to compare the REDD+ activities, is likely too generous because the period in which it was determined (nine years) exceeds that of voluntary standards including Architecture for REDD+ Transactions (five years).
• The credits lack safeguards for permanence

As to the first three criticisms, which are related, Gabon supports the rigor of UNFCCC verification by highlighting that the three year process included independent bodies approved by the UNFCCC and multiple iterations of data gathering, scope definition and changes in estimation procedures. It notes that the long baseline period was a function of inadequate data gathering and analysis capabilities that have since been developed and so now the country can perform annual evaluations.

On the other hand, although Gabon’s credits have a different basis for value than traditional forestry preservation-related credits, permanence concerns are still relevant. Since the program is designed to issue credits for actions already taken and results achieved through the 2010s (ex-post crediting), it differs from forestry preservation-type programs that are purely forward looking (ex-ante crediting). As such, there can be an argument that concerns about the durability of the environmental benefit (also referred to as permanence) are lessened for the Gabon credits vis-à-vis most existing nature-based solutions. However, there is much that is implied about future behavior in the Gabon credits, including the aforementioned capacity building and allocations of anticipated proceeds from their sale into forest preservation and community support (as well as supporting a regulated logging industry). Thus, the country is not making a time-value-of-emissions-avoidance claim (“by delaying emissions through the 2010s we provided societal value”), but rather a permanent reduction one. It is because of that relationship to permanence that Gabon can argue that its credits are “worth” at least the $25-35/ton suggested by Environmental Minister Lee White.

As such, Gabon would do well to bring measures of conservatism practiced by other forestry preservation programs, including a buffer pool that can be tapped into in the event of unexpected losses (although studies have highlighted the risks in existing buffer pool practice). Alternatively, buyers could choose to apply a time value framework in setting their bids.

10/31/2022

Key Carbon Offset Technology Enabler Expands

Exhibit: Capturing Environmental Attributes for Traded Commodities

Source: Xpansiv

Key Points: Xpansiv appears poised to dominate the IT for tracking and trading environmental commodities. Thus it looks to be a key enabler for corporates’ decarbonization through supply chain management/procurement. In part with a $400 Million investment from Blackstone in July, Xpansiv closed two acquisitions in August and likely continues to grow aggressively.

An ecosystem to enable companies to put money to work in environmental commodities. Xpansiv appears poised to be the leader in enabling companies to buy low-carbon fuels and carbon offsets as well as to track and report emissions. The company is honing its “Digital Commodity Ecosystem™” — a suite of IT services that tracks the environmental attributes of commodities (see Exhibit for an illustration), supports their trading and underpins the carbon registries. Further, the company has a dominant share of exchange traded voluntary carbon transactions (its CBL Exchange claims 90% in 2021). And its war chest suggests the ability to continue to acquire customers and capabilities.

 New product development this year illustrates these capabilities:

• Digital Crude Oil™. Added to Xpansiv’s Digital Fuels™ program, DCO has certified Greenhouse Gas (GHG) and Environmental, Social and Governance (ESG) characteristics for crude and is designed to foster the ability to buy a lower carbon fuel. Its natural gas counterpart has gained traction quickly, as discussed in a previous Payne Financial Flow.
• Just last week, the company announced that it is introducing ESGclear, a tool designed to help companies’ GHG emissions reporting specifically for scope 3 emissions. This product supplements a company’s tracking abilities enabled through other Xpansiv products such as the Environmental Management Account (EMA) portfolio management system.
• CBL Core Global Emissions Offset Futures. The company launched a futures market for voluntary carbon offsets earlier this year, in partnership with the CME Group.

Blackstone’s $400 Million infusion in July… In July, Blackstone Energy Partners invested $400 Million in Xpansiv. A significant fundraise by the company had been telegraphed for much of 2022, including consideration of an IPO. Blackstone indicated support for organic and inorganic (i.e. acquisitions) with the capital.

…funded August’s acquisitions of Evolution Markets and APX. At least some of Blackstone’s investment went to two acquisitions that closed in August. Evolution Markets is a brokerage firm in carbon, renewable and energy markets. The acquisition brings customer breadth, with 2,000 customers spanning energy firms, utilities, corporations and financial institutions.

Xpansiv also bought the 80% of APX Group that it did not own (it took the 20% stake earlier this year). APX, established in 1999, develops “registry infrastructure”, i.e. the systems that form the IT architecture for carbon offset and other registries. The acquisition is intended to support integration of Xpansiv’s suite of environmental management services with its customers’ interaction with product registries.

Xpansiv’s exchange businesses. The company’s CBL Exchange, which was formed in 2009 and which Xpansiv acquired in 2019 (Xpansiv was founded in 2016), claims to have facilitated 90% of exchange-traded spot voluntary carbon transactions in 2021 and to have roughly 25% total VCM market share (i.e. the majority of voluntary offsets trade privately). Xpansiv launched the first standardized global carbon offset benchmark in 2020, the Global Emissions Offset (GEO), which trades on the CBL.

Xpansiv’s other exchanges are H2OX (water entitlements), Aviation Carbon Exchange (trades CORSIA units) and OTX (compulsory stockholding obligations of oil products).

9/9/2022