Although its genesis goes back about 25 years, unlike the tech sector, it’s safe to say carbon markets are not very mature. The voluntary market has run hot and cold, though it received some good news recently with Microsoft announcing it is doubling its internal carbon fee to $15 per metric ton. The increased fee is intended to provide Microsoft’s business units a greater incentive to directly reduce emissions by reducing their internal tax bill. Those fees collected internally, are generally used to purchase offsets to help the company meet its carbon reduction targets.
The California compliance offset market also experienced positive news recently with the first exchange traded futures offset transaction. Typically, offsets are traded over the counter on a customized basis between buyers and sellers, so the market has reliable data on current pricing, but actual market data is lacking on how the compliance market values offsets a few years down the road.
On April 8th, the International Continental Exchange, which clears over six million over-the-counter and futures contract daily, announced it had traded the first California carbon futures contract. ICE’s role is a strong signal that a key player in facilitating market activity sees an opportunity for compliance entities to integrate offsets into their long-term compliance portfolio strategy. An actual futures trade sends a price signal for how compliance entities should think about the future value of offsets.
The specific transaction involves the December 2021delivery of CCO-Zeros, California Carbon Offsets with no invalidation risk. The price is $16.66 per CCO-Zero, which based on current futures price data, is 13% below the value of a California Carbon Allowance delivered in December 2021.
For landowners interested in pursuing offset projects, this transaction provides the first piece of data on how the market is valuing offsets in the future, as opposed to trying to forecast based on today’s prices. This is important to know, as it can take anywhere from 1-3 years from project inception to when the first tranche of offsets can actually be delivered to a buyer. For the market as a whole, this product and transaction show that the market for offsets is expected to be robust for years to come.