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