Category: Carbon Markets

The Energy Transition Accelerator’s Potential

The Energy Transition Accelerator’s Potential














Source: Forbes

Key Points: The recently announced Energy Transition Accelerator has promise as another funding avenue for the energy transition in developing economies. Such additional funding is likely necessary given vested interests. The mechanism may be complicated by determining baseline emissions rates. We encourage lower thresholds for more company buyer participation.

Overview. The U.S. Government/Rockefeller Foundation/Bezos Earth Fund proposed Energy Transition Accelerator (ETA) envisions awarding credits for emissions reductions tied to transitioning a developing country’s power generation to clean/renewable from fossil fuel-based. These credits can be sold, through fixed price advanced purchase commitments, and thus can secure financing from a source, corporations, that would not otherwise be able to help fund the necessary investments. It is hoped this can catalyze activity, helping to mobilize private lenders and investors that will provide the bulk of the funding given the support it can give to projects’ economics.

Integrity framework. Particularly given the cloud overhanging voluntary carbon offset credit markets, the ETA seeks to ensure integrity with some key provisions:

  1. Jurisdictional scale. The ETA is envisioned as operating at either a national or sub-national scale, as opposed to on a project basis. In so doing, it can avoid concerns of leakage, e.g., that the avoided emissions from closing one fossil-based power plant might simply be shifted to a different fossil-based plant in the country’s network. In this way, the concept is like approaches gaining in traction in forest preservation including the ART-TREES standard.
  2. Funder constraints. First, it is being considered that only companies that have committed both to have Net Zero greenhouse gas emissions by 2050 and that have set interim targets in line with the Science Based Targets Initiative (SBTi) will be allowed to participate. Second, it is to be considered if the company can only use these new credits to support mitigation above their interim targets.
  3. Including social safeguards. The ETA is committing that the participating jurisdictions will have to demonstrate energy transition strategies that include social safeguards for affected communities (aka Just Transition support). It also seeks to help countries develop Sustainable Development Goals, including greater energy access within the jurisdiction.

Retiring fossil-based plants lends themselves to emissions reduction credits. We have held for some time that retiring fossil-based activities can serve as a basis for emissions reductions crediting. Accurately determining emissions reductions is more straightforward than it is for nature-based solutions. That is particularly true at the jurisdictional level since, as noted above, it obviates leakage risk.

It is also logical that some additional financial support will be necessary to effect retirement. Different existing ownership structures all raise challenges and the cost of retirement. To offer just one example, plants owned by Independent Power Producers (IPPs) that have long-term contracts with their utility “off-takers” will expect remuneration in line with what their contracts provide for. This suggests that concessional, i.e., lower interest rate, funding may not adequately support the economics of a retirement scheme.

However, setting the baseline (to compare to the reductions) is harder. A country’s “business as usual” case for its emissions from power generation will have to be decided, or more accurately, agreed upon. Developing countries prioritizing economic growth and greater energy access are assuming greater energy consumption over time, which fossil-rich countries argue can justly be met at least in part with fossil-based power. On the other hand, some countries are taking steps that might end up lowering their emissions; one key example is liberalizing power markets, i.e., opening them up to more competition, from which one should expect declining coal-based consumption given that it is often more expensive to produce than energy from renewables. Thus, we submit determining how many credits to award will be a political decision/negotiation vs. a science-based one.

Our bias is to allow more companies to participate rather than fewer. We can appreciate the sensitivity of any carbon offset program to accusations that it lets emitters avoid pursuing their own emission reduction. Yet it is the role of transparent reporting rules to make it clear that a company isn’t reducing its self-generated emissions and thus overly relying on offsets. We would rather be able to attract larger pools of capital towards ETA and other emission reductions tools and thus would prefer to not limit participation to, for example, SBTi signatories.


Gabon’s REDD+ Credits’ Permanence Concerns

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 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 — 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.


Key Carbon Offset Technology Enabler Expands

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).




IFC Seeds Blockchain Fund for Carbon Offsets

IFC Seeds Blockchain Fund for Carbon Offsets


Source: South Pole

Key Points: The International Finance Corporation’s sponsorship of blockchain-based offsets in its new Carbon Opportunities Fund has potential to be an important catalyst for nature-based offset voluntary market growth. The Fund is stressing its project selection and MRV processes to provide reassurance to offset and blockchain skeptics.

Sponsoring new tokenized carbon offsets. Last week, the International Finance Corporation (IFC), a member of the World Bank Group, announced it would sponsor development of the Carbon Opportunities Fund (the Fund). The Fund will invest in carbon offset credits that are to be tokenized for sale through blockchain. It has teamed up with Cultivo, which builds portfolios of “natural capital” and will identify the projects; Aspiration, a fintech that will be one of the anchor investors along with the IFC; and Chia, which is providing the blockchain for the World Bank’s Climate Warehouse that will track the tokenized credits.

Continuation of endorsement of carbon markets and the potential of blockchain. The IFC’s funding of this initiative appears consistent with previous efforts to support carbon markets, including using blockchain. The World Bank introduced the Climate Warehouse in 2019, piloting the linking of registry systems using blockchain to store information (the pilot included Chile and Japan and used Verra-registered projects). This integration of the Warehouse into the Fund comes at a time in which the tokenization of carbon offsets has been criticized for facilitating the sale of lower quality projects; the Fund’s “closed system” with curated projects seeks to obviate that concern.

The Fund could prove one of the more successful Blended Finance efforts. The World Bank has embraced a number of Results-Based Finance efforts but, like its more general development initiatives, they frequently do not spur much Western private capital co-investment. Instead, the World Bank and other development institutions seek to create a heralded “multiplying effect” by de-risking projects, in which private capital vastly supplements the amount of money the government-backed institutions have invested. The Fund reflects an example of a different type of de-risking — in this case of carbon offset project quality — which is similarly intended to spur much more private capital to co-invest.

Resources to develop quality projects and Measurement, Reporting and Verification (MRV). Recognizing the reputational challenges to carbon offsets/emissions reduction credits, the World Bank’s efforts have included developing local capability to develop projects and implement MRV systems. For example, $0.4B of the $1.3 Billion raised in the World Bank’s Forest Carbon Partnership Facility is dedicated to “The PCPF Readiness Fund,” which works with countries to develop reference emissions levels, MRV systems and management arrangements. The World Bank further is looking to implement digital MRV in order to help “expand the use of smart sensors, satellites and drones, cloud computing, artificial intelligence, and blockchain encryption.”


Addressing Impermanence Risk in the Voluntary Carbon Market

Addressing Impermanence Risk in the Voluntary Carbon Market


California Carbon Buffer Pool and Estimated Reversals













Source: CarbonPlan

Key Points: A new study of CA’s “insurance” for its carbon offsets highlights the rising risk for nature-based offsets of re-releasing CO2. This can help inform ICVCM’s recently launched push for higher standards in voluntary markets. It also supports our proposed “point” system for corporate disclosures, which devalues offsets, in part, on impermanence risk.

Study warns 100-year buffer to compensate for carbon reversal risks may be inadequate, particularly as a result of climate change. A CarbonPlan study released in early August concludes that California’s “insurance”, or buffer pool, of forest-project carbon offsets is not nearly large enough. The buffer pool is designed to compensate for release of CO2 back into the atmosphere (i.e., “reversal”) from the premature (< 100 years) demise of forests. The study’s assessment of each of the four categories of risk for which the buffer seeks to compensate (see Exhibit) varies in empiricism, yet it highlights the vulnerabilities of nature-based offsets to reversal. Climate change is exacerbating the natural and perhaps the financial and management risks. Please see summary comments of the study further down.

Integrity Council on Voluntary Carbon Markets (ICVCM) issues draft principles and protocols; ensuring adequate buffers for reversal risk is one element. In late July, the ICVCM issued its draft Core Carbon Principles and Assessment Framework and Procedures along with initiating a 60-day public consultation period. One of the 10 Core Carbon Principles is that the carbon storage must be either “permanent” or have measures in place to fully compensate if the offset is reversed prematurely. The Council accepts the use of buffer pools as an insurance mechanism for reversal; it simply notes that whatever mechanism must be robust enough (e.g. must have enough credits in the buffer pool) to fully compensate for it.

ICVCM sees a role for rating agencies and rating offsets; the Sustainable Finance Lab recommends taking it one step further. Separately, in its introduction of the public consultation period, the ICVCM welcomed the participation of public ratings agencies — and ratings for offset projects — to promote transparency. As the Sustainable Finance Lab has opined, we support taking a carbon offset rating system one step further. For the purposes of corporate reporting of offset purchases, we recommend allotting different amounts of “credit” per ton of CO2-equivalent based on each offset project’s rating. (The range of values could be 0-1, with a score of 1 reserved for permanent removal technologies; a project’s rating could be influenced by how conservatively offsets are created or the extent to which the offsets are reserved, similar to a buffer pool.) Thus, corporations buying offsets for the purposes of meeting decarbonization targets could only report an offset “value” commensurate with the independently-assessed climate (decarbonization) benefit.

CarbonPlan Study’s Buffer Pool analysis details. The buffer in the California forest offsets program (part of its Compliance Offset Program, see below) is comprised of offset “set-asides” — a portion of the offsets generated from forest management projects (which can actually come from across the U.S.). In different ways, the study concludes and/or warns that these reserves across the four categories of buffer pool offsets are either already “used up” or at risk:

  • Wildfires (19% of buffer pool). Since 2015 in California have likely already depleted the formal allotment of offsets to the Wildfire category (the blue section in the exhibit). Thus, the buffer that was intended to last 100 years appears to have been depleted in less than 10 (see blue bars in the Exhibit).
  • Disease & Insects (18%). The study estimates that even a single forest disease, “sudden oak death”, could result in enough tree mortality to use up more than the allotted offset buffer for the whole Disease & Insect category (orange bars).
  • Other (18%). The Other category is intended to include damage due to wind, flood, and ice. Yet the study notes that drought may prove to be more severely damaging (grey bar).
  • Financial & Management (44%). This relates to the non-natural risks to ongoing forest preservation/management, such as change in ownership. The study does not quantitatively assess if the allotment is adequate. Rather it notes that bankruptcy can discharge the liability for failing to perform and that separate studies of 100-year default probability point to higher rates of bankruptcy than is presumably provisioned for in the pool (yellow bar).

Background on the role of forest carbon offsets in California’s Cap-and-Trade program. In the California Cap-and-Trade Regulation that sets declining limits on Greenhouse Gas emissions for the state, the Compliance Offset Program offers use of carbon offset purchases to help entities meet a small portion (currently up to 4%) of their emissions obligations. Forests are one of six approved project areas for the Carbon Offset Program; the other project types are ozone depleting substances, livestock, mine methane capture, rice cultivation and urban forests.


Decarbonizing the pulp and paper industry: A critical and systematic review of sociotechnical developments and policy options 6/30/2022

Decarbonizing the pulp and paper industry: A critical and systematic review of sociotechnical developments and policy options

Dylan Furszyfer Del Rio,  Benjamin K. Sovacool, Payne Institute Fellow Steve Griffiths, Payne Institute Director Morgan Bazilian, Jinsoo Kim, Aoife M. Foley, and David Rooney write about how paper has shaped society for centuries and is considered one of humanity’s most important inventions. However, pulp and paper products can be damaging to social and natural systems along their lifecycle of material extraction, processing, transportation, and waste handling. The pulp and paper industry is among the top five most energy-intensive industries globally and is the fourth largest industrial energy user. June 30, 2022. 

Benchmark Introduced for Voluntary Carbon Offset Credits

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).


Voluntary Carbon Markets’ Uneasy Start With Blockchain

Voluntary Carbon Markets’ Uneasy Start With Blockchain


Retirement Demand 4Q21-1Q22 for Verra Project Credits, by Year (Millions of Tonnes)

Source: Carbon Direct (data from the Berkely Voluntary Registry Offsets Database)

Key Points: A new report, from Carbon Direct, concludes that blockchain-based buying of carbon offsets has had lower quality standards than traditional buyers (i.e. corporates), which bear more direct reputational risk. Meanwhile Verra is seeking to ensure transparency and bolster the perceived climate integrity of Blockchain tokens.

Blockchain-based demand emerges as relevant portion of traded credits. Per Carbon Direct, which analyzed trades on the Verified Carbon Standard (VCS) registry, Blockchain-based (digital) purchases accounted for 29% of the carbon credits that were retired in the six months of 4Q21-1Q22. (Note that Blockchain-based trades were a much smaller share of the total market as approximately 70% of trades in 2021 on the VCS registry were not retired. Non-retirement purchases are motivated by brokers, investor/speculators and corporates purchasing for planned commitments.)

Blockchain-traded credits perceived to be of lower quality. Versus traditional buyers, the mix of credits purchased digitally on the VCS over that six month period skewed to more renewable energy credits — 64% in the digital pool vs. 37% in the traditional — and to older credits — modes of 2009 and 2013 in the digital pool vs. 2015 and 2019 in the traditional (see chart).

Renewable Energy project-based credits have been criticized for often not being “additional,” as in the projects would have been viable economically without the credits and thus there was no additional climate benefit. Verra, the verifying agency behind VCS, for example, spoke to this issue when, in 2019, it limited credits for Renewable Energy projects to least-developed countries. Related to some degree, older projects are viewed as often having lower standards than newer ones.

Report argues that blockchain can be less discriminating. Carbon Direct argues that blockchain fosters “a willingness to commingle carbon sourced from a wide spectrum of project types” and that token holders have the incentive to grow and that there are “few restrictions on accepted credit project types.” By implication, corporates may feel more scrutinized in the nature of the credits they buy, and thus Carbon Direct implies some hope that (some of the) lower quality credits would not have been purchased. That said, corporates do not face regulatory constraints, nor is it mandated that they provide detail about the purchases, and as such develop their own sense of constraint based on perceived reputational risk.

Verra puts a restriction on; will seek public comment on working in other ways with crypto. In late May, Verra announced that it will prohibit the creation of tokens based on retired credits, an apparent move to shore up perceptions of integrity (so there aren’t two payments tied to one environmental benefit). It also indicated that it will engage in public consultation for its ongoing interaction with blockchain-based transactions, including to ensure adequate traceability and transparency.

Details about the VCS registry and Toucan Protocol. The Toucan Protocol “bridges” VCS credits to Blockchain, where the credit forms the basis for a fungible token. When users bridge these credits, they are retired on the VCS registry. Toucan, which launched in October 2021, comprised 94% of “on-chain” purchasing on the VCS registry in 4Q21-1Q22.


Voluntary Carbon Market Differentiating by Type of Offset

Price Trend by Type of Carbon credit, 1Q21 – 1Q22

Source: S&P Global via The World Bank (Report: State and Trends of Carbon Pricing, published May 2022)

Key points: The World Bank’s carbon pricing report includes an update on voluntary carbon markets (VCMs). Price differentiation of carbon offset credits shows preference for carbon removal activities. Demand for nature-based credits is also benefitting from buyers’ focus on co-benefits; and growing demand and market maturity bode well for higher prices.

World Bank report on Carbon Pricing. The World Bank (WB)’s State and Trends of Carbon Pricing report published this week includes discussion of global carbon pricing instruments, both taxes and trading systems, and the outlook and implications of new policy and agreements coming out of COP26. Among the key takeaways from the report is that global carbon pricing revenue increased 60% in 2021 to US$84 Billion, with emissions trading systems generating more than carbon taxes for the first time. The report also includes a review of voluntary carbon market trends, prospects and issues related to future growth.

Nature-based credits dominate VCM value in 2021. As noted in a previous Payne Financial Flow, Forestry and Land-Use credits comprised nearly 80% of the estimated US$1+ Billion VCMs’ value in 2021 (data as compiled by EcoSystems Marketplace remains unfinalized; our estimate reflects compiled data through November). This category of nature-based credits is largely comprised of projects to avoid deforestation, but includes some removal-type projects as well including afforestation, carbon sequestration in agriculture and improved forest management. The WB report notes that as demand grows overall, as there are more buyers adopting decarbonization targets and relying on offsets to meet milestones, some of these buyers are putting value on co-benefits of projects. Co-benefits can include achieving one or more of the Sustainable Development Goals.

However, removal-based credits command a higher price. The WB report cites S&P Global analysis pointing to removal-based credits trading at 2.5x the average price of reduction/avoidance-based credits in 4Q21-1Q22 (see chart). This stronger price appears to reflect buyers’ (1) desire to comply with Net Zero strategies (i.e. buyers view that credits related to projects that (only) avoid emissions don’t offset their internally-generated emissions) and (2) views of the potential for removal technologies. Removal technologies also avoid, as the WB report puts it, the  “polarized debates regarding additionality, permanence and baseline accuracy” of Forest and Land-Use credits.

Further, removal-based credits are in short supply, in part because of the non-commercialized state of removal technology (such as Direct Air Capture) and slow development of sequestration projects. Financial sponsorship of removal technologies is also happening outside of marketplaces and rather through direct investment.

Market maturity points to greater liquidity. The report notes several signs that VCMs are maturing, including that (1) financial actors are stepping in to provide capital and to hedge risk, (2) standardized transactions are growing more common and (3) there are signs of speculative (i.e. non-strategic) buying. The report also notes the role that Blockchain is starting to play in tokenization of carbon credits to increase buyer access and highlights the potential issues this creates related to integrity (see here for a brief review of technology’s role in spurring greater environmental investment).

Regulator Declines to “Bless” Certified Natural Gas Given Varying Standards

Regulator Declines to “Bless” Certified Natural Gas Given Varying Standards


Expected Daily Volume of Responsibly-Sourced/Certified Natural Gas by Basin, End-2022e
Source: S&P Global

Key Points: The FERC’s recent rejection of Tennessee Gas Pipeline’s proposal to sell responsibly sourced/certified natural gas highlights the value in establishing (robust) measurement standards. Market-wise, TGP’s more recent proposal, which allows unbundling certification from the product, makes more sense than the company’s original physical (hub)-based plan.

The FERC rejects proposal to sell responsibly sourced gas. At the end of April, the Federal Energy Regulatory Commission (FERC) rejected Kinder Morgan subsidiary Tennessee Gas Pipeline (TGP)’s proposal to sell natural gas that is below a threshold for methane intensity. The FERC begged off taking responsibility for what constitutes so-called responsibly-sourced gas (RSG), noting that the market was nascent, that different standards were being set by different independent vendors and that methane emissions are unregulated (see more below).

Evolution of TGP’s proposal. TGP’s original proposal was based on a physically traded hub market, i.e. that the pipeline would source gas that had been certified as meeting methane intensity criteria. That proposal was met with protest from gas producers that had not pursued certified gas, that would be excluded from selling through the pipeline.

In response, TGP shifted its proposal to a “certification-based” market, which allows for the unbundling of the certification of methane intensity from the physical product. In other words, similar to Renewable Energy Credits in power markets, the natural gas sold through the pipeline could be sold separately from the methane intensity certificate for that gas, thereby allowing buyers other than those using the gas. TGP’s proposed gas “certifiers” included Project Canary (Trustwell Responsible Gas program), RMI/SYSTEMIQ (MiQ Standard) and Xpanisv (which in turn can use third party certification providers). Accentuating the FERC’s key objection, the third party certifiers have different methodologies/standards for certification, including frequency of monitoring. TGP’s revised proposal also met with objections, in this case that TGP would be too influential in determining what qualifies as certified gas.

Thus the pipeline company proposed to place criteria for RSG in its tariff, placing responsibility on the FERC. In rejecting this last proposal, the FERC indicated it was unclear how to evaluate TGP’s criteria given lack of Federal regulation on methane emissions and lack of standards in the industry.

The FERC further cited the risk that TGP’s tariff structure as proposed might stifle market-driven efforts to further reduce methane emissions. In other words, if the tariff only rewarded meeting a threshold, gas producers may lack the incentive to deliver even lower methane intensive gas. Other certificate schemes have incorporated such incentives — for example, the S&P Platt’s/Xpansiv’s recently introduced Methane Performance Certificate uses percentage-below-industry-average as a metric (issuing more certificates for natural gas with emissions further below industry average).

The FERC’s ruling was reported to have been positioned such that it is expected that TGP sorts out a way to proceed with its RSG plan. But the FERC’s point about varying standards reflects the challenge for buyers (and everyone else) in assessing the “true” methane intensity of the certificates and (therefore) of price discovery. This highlights the value in having a set of standards regarding ongoing measurement (frequency, number of points on site, nature of monitoring, etc.).

U.S. RSG market appears set to grow to 20 Bcfd. S&P Global reports that ~20 Billion cubic feet per day of U.S. natural gas production, or 21% of the U.S.’s total dry gas production, is set to have third party certification by the end of 2022 (see chart).