The voluntary market undoubtedly needs to scale, but its unclear whether the commodification of offsets will be sufficient.
With growing recognition that direct emission reductions alone are not sufficient to achieve the Paris Climate Agreement goal of staving off an increase in temperatures by more than 1.5 degrees Celsius, offsets are now poised to grow exponentially. This is why I was with so excited to review the Taskforce on Scaling Voluntary Carbon Markets Consultation Document that was released this month.
The global voluntary carbon market needs to grow fifteenfold this decade to make a meaningful contribution to the Paris Climate goal. That translates into doubling about every two and half years. The Taskforce report calls out six core principles for meeting that goal and makes 17 recommendations that address the challenges both buyers and sellers face.
There are several recommendations like taxonomy and anti-money laundering guidelines where consensus should be easy to achieve. There are, however, several recommendations that ignore the diverse nature of offsets, and the financial reality on the supply-side of the equation. The Taskforce correctly points out that price discovery can be important for both buyers and suppliers but suggesting a singular base price in a common contract and negotiating a price increase based only on project attributes misses the mark. It’s hard to see how buyers and sellers can negotiate a transparent price for forestry offsets if the base is largely weighted by, say landfill offsets, which cost a fraction to generate. This approach could have the risk of substantially under-valuing certain types of nature-based offsets and impede their uptake in the market, which runs counter to the objective of the Taskforce.
The document also suggests the majority of offsets should be exchange-traded but doesn’t provide much insight into what can be done to ensure cost-prohibitive credit assurance requirements aren’t placed on project developers. Developers generate the majority of offsets by developing and selling offsets on behalf of project owners such as forest and facility owners.
The most challenging aspect of the document is that it does not discuss the greatest stimulant to accelerating supply and that is price growth. While standardization is part of the equation, the larger part is what can be done to convince, say forest landowners en masse, that there is value in sequestering carbon in a forest over harvesting it for board feet. By not recognizing the fact that carbon prices compete with pricing in other markets, the massive effort to establish a commodity trading infrastructure and global standardization of carbon products might not be enough to meet the challenge at hand.
News + Resources
Voluntary Carbon Markets: A Blueprint
White & Case LLP, LLP, Lexology, November 13, 2020
INTERVIEW: Carney-led voluntary CO2 market taskforce “barking up the wrong tree”, says South Pole boss
CarbonPulse (subscription required), November 9, 2020