The GERM Report

This is a special feature from Jonty Rushforth, senior director, price group, S&P Global Platts

In the realm of energy transition, there are a host of environmentally favorable, lower-carbon projects popping up worldwide, which are outside formal governmental trading schemes and regional initiatives. As you might guess, there are hosts of companies eyeing those projects, hoping to buy their carbon credits to offset their own carbon emissions. But to do so, there must be a way of creating a level playing field in terms of “valuing” the credits. S&P Global Platts, with its century-plus history of developing methodologies and providing independent benchmarks to the energy and commodities markets, is doing just that, with its Jan. 4 launch of price data for the global voluntary carbon markets. If you’re not acquainted with them, there’s reason to get acquainted. 

These aren’t the energy-industry-familiar regional compliance markets, such as the EU’s Emissions Trading Scheme or North America’s Regional Greenhouse Gas Initiative. Instead, voluntary markets are those that have grown up globally over the last few decades in arenas that fall outside of the compliance jurisdictions defined by the United Nations Framework on Climate Change.

New Carbon Standards

These are the markets that have risen without government definitions and structures. They’ve been defined not by national allocations but by private organizations, in many cases created by partnerships between non-governmental organizations (NGOs) and corporations. These Standards (with a big ‘S’ for emphasis) have created their own methodologies and systems to define and certify projects across the world that work to either limit, completely avoid, or remove greenhouse gas emissions from the atmosphere. Project developers have been able to draw on the expertise of those ‘S’tandards to turn ideas into projects and, from there, turn these projects into carbon credits. And the credits have been verified, validated and held in the registries of those same Standards for trade in the open market.

As you’d imagine, a world of ideas leads to a world of projects, and with them a huge range of types, benefits, geographies and timelines. Some are as local and simple as providing clean-burning cook stoves to people that would otherwise be burning charcoal in open fires. Others are as ambitious as rebuilding forests, with a premium for ensuring biodiversity and persistence. And that range of outcomes and approaches means a range of prices. For example, avoiding the creation of a new coal-fired plant through investment in renewables has one price, while pulling carbon dioxide out of the air and locking it up as a mineral has quite another.

This world of value has been met by a different kind of commodity buyer. Instead of buyers looking for a commodity to use or process, the buyers of carbon credits have been voluntarily looking to manage their carbon debts in order to offset the emissions they have themselves produced. But many of them have also been looking to not just wipe the ledger clean but to invest in something that resonates with their company culture, with their philosophy and with their customers. So, a technology company might want to look for credits from a project that uses new tech, whereas a food company might want to invest in those that use soil management techniques. Hence, they are described as the voluntary carbon markets – because they have resulted from the free choices of a myriad of companies to engage with the environmental challenges ahead without the compulsion of regulation.

This is the open-source system for tackling climate change. It stands in stark contrast to the cap-and-trade approach of compliance markets, in which a government sets a limit and gives out allowances. An allowance can be traded to meet targets, and as its price rises it creates an incentive for those within the scheme to find new ways to reduce carbon. But by design, it is neutral on solutions. There’s no allowance that guarantees a social benefit, or protection of biodiversity, such as that you would find in the world of carbon credits. There’s no way for a buyer to know what effect their transaction has had on the world.

Standardization Needed to Address Pricing Complexities

The complexity of voluntary markets presents its own set of challenges. One of the more lauded standardization efforts has come from the airline industry. The International Civil Aviation Organization shepherded into being the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) through which airlines can (initially voluntarily, and later under a mandate) reduce their carbon debts through the use of credits from the voluntary markets.

The set of specifications contained within CORSIA provides a framework for aggregating credits. A buyer can pick any of a range of project types, from a range of Standards, and use their credits to meet its obligations.

It’s a simplification that has already started to generate increased liquidity in the global carbon markets. And it’s a simple place to start for producing price benchmarks. That’s why Platts announced in December it would start assessing CORSIA-eligible credits (CEC), to be known as Platts CEC, starting Monday – creating a single value from a jungle of projects and a world of complexity.  Platts will reflect credits from projects certified by such as: The Gold Standard, Climate Action Reserve (CAR), Verified Carbon Standard (VCS), Architecture for REDD+ Transactions, and American Carbon Registry.