The New Market For Carbon Offsets

Corporations fighting to cut their carbon footprint have for years focused on internal reduction measures. Many are now adding to that effort by turning to carbon credits, a process that is becoming more navigable as verification and registration tools mature.  But behind every effort to deploy voluntary carbon offsets stands two things: an unassailable third-party standard and a registry that tracks the climate mitigating projects.

The private sector is in search of effective climate tools as pressure mounts from investors and consumers for more progress on fighting rising emissions. Carbon dioxide in the atmosphere hit another record in May this year, rising to 419 parts per million, a jump of about a half of a percentage point from the same month in 2020.

With the climate clock ticking, companies and individuals are expected to pour $100 billion into the carbon offset market by the end of this decade, up from about $300 million in 2018, according to Mark Carney, who is heading up a major private-sector task force on how to improve carbon offsets.

Carbon Offsetting Options

A carbon credit is a transferable instrument certified by independent entities or governments, and each credit represents a reduction of one metric ton of carbon dioxide, or an equivalent greenhouse gas. 

The credit represents an environmentally sound project that helps to mitigate climate change — such as preserving a forest that was slated to be cleared. After purchasing a credit, a company can “retire” it to claim a reduction in their own greenhouse gas reduction goals.

The process, however, is complex, especially when companies buy off exchanges.

The Verified Carbon Standard (VCS) program, administered by Verra, is a greenhouse gas crediting program with over 1,700 certified projects under its belt, which have collectively reduced or removed more than 714 million metric tons of carbon and other GHG emissions from the atmosphere. It is one of four major GHG crediting programs in the market, along with the Climate Action Reserve, the Gold Standard and the American Carbon Registry.

Verification And Registries

Companies seeking authentic projects can invest in VERs, or verified emissions reductions, which are audited under third-party verification standards. These projects promote activities such as reforestation, better forest management, and switching to green energy from fossil fuels.

Greenhouse gas crediting programs run by independent entities perform three primary functions: they develop standards to ensure the high quality of any credit, they review offset projects against their criteria, and they maintain a registry that manages and retires the credits.

It is complex. Xpansiv, however, also offers a multi-tracking tool called the EMA that aims to help companies track multiple projects. The tool gives participants a single account to track their entire environmental asset portfolio, allowing real-time transfer initiation and settlement of credits, including retirements from originating registries.

Another key component of crediting projects is the registries that issue, transfer and retire the offset credits. The registries also help ensure the projects are actually occurring and that there is no double counting.

Verra, for example, says its registry is the “cornerstone” in ensuring transparency behind its standards and programs. Listing on the Verra registry requires projects to upload all relevant information relating to registered projects, including project descriptions, monitoring and auditing reports, and the status of all units (e.g., issued vs retired). Credits can be traded amongst account holders on the registry.

The Gold Standard has its Impact Registry; it tracks carbon credits on a public site where any interested party can drill down by country, project type, status, or other details. For instance, a user on the site could navigate to the country of Sri Lanka and review the status of two wind power projects in various states of completion.

"A World Of Possibilities"

When companies consider investing in carbon credits, they often work with one of the main third-party GHG crediting programs and their established registries.

Another difficulty in carbon offsetting is how to price the credits. In March, CME Group launched the Global Emissions Offset (GEO) futures contract, with the aim of the contract becoming a global benchmark, giving customers a way to manage risk in emissions trading, and helping in price discovery.

The GEO futures contract – each of which represents 1,000 offsets – sparked “massive interest” from investors on the CME Group and spot market on CBL, according to Andy Bose, head of XSignals, Xpansiv’s market data and analytics business.

“The announcement validated the idea of a global benchmark contract for high-quality, recently issued credits across all regions and project types,” Bose said via email, adding that the idea of a carbon benchmark was reinforced when Carney’s task force mandated benchmarks as a core principle, with specific mention of the GEO contract.

So far, the CME Group contract has seen a variety of participants out of Europe and the U.S., including commercial firms, banks, and liquidity providers. It has traded nearly 500 contracts across five contract months with more than 240 contracts in open interest. Starting August 1, the CME Group offset offering will expand with a nature-based (N-GEO) futures contract. That contract will be underpinned by Verra’s Verified Carbon Standard for Agriculture, Forestry, and Other Land Use projects. The contract goes beyond simply reducing emissions as it supports local communities and biodiversity conservation by requiring delivered offset credits to include Verra Registry’s Climate, Community, and Biodiversity Standard.  

Verra CEO David Antonioli believes futures trading will spur greater investment flows into carbon crediting programs. “There's really a huge amount of potential that a number of corporations around the world can help finance this transition.”

“It's both about transparency and the confidence that you can actually invest in this sector. And if you have a sense of what that future price is going to be, that opens up a whole new world of possibilities.”

Image by marcinjozwiak from Pixabay