With the voluntary market growing rapidly, new buyers and sellers often have misconceptions, says Michael BerendsManaging Director at ClearBlue Markets
Environmental financing: ClearBlue was voted best advisor/consultancy on voluntary carbon markets by the readers of Environmental Finance. What kind of customers do you serve and what kind of support are they looking for?
Michael Berends: Historically, we have focused on compliance markets due to the higher number of participants and volumes, although the voluntary market has always been on our radar. As interest in the voluntary market grew, we were able to once again leverage our expertise in this area. We have seen an increasing number of customers entering or considering the Voluntary Market, and they include corporate buyers looking to achieve net zero goals, traders and other financial players who use our market analytics and price predictions. , and developers around the world looking to bring offset projects to market. It’s the full spectrum of the market.
EF: What are some of the misconceptions buyers of voluntary offsets tend to have in the market?
Mo: A key misconception is that the higher the compensation price, the better. Our view is that as long as an offset is approved by a reputable registry – like Verra, the Gold Standard, the American Carbon Registry or the Climate Action Reserve – then it reduces a ton of carbon dioxide. If you’re concerned about fighting climate change, this is high quality. Other elements of the price of compensation are linked to the co-benefits that the project could bring: drinking water, gender equality, aid to poor communities, for example. All of this is really important, but if your goal is to fight climate change, as long as the offset comes from a reputable registry, which deals with additionality carefully, then it’s a good offset. Other factors, such as type of reduction – i.e. avoidance vs. deletions – impact price due to specific buyer preferences, but none are inherently better than ‘other.
EF: What challenges do developers face in bringing offset projects to market?
Mo: The first challenge is that what developers think are compensation projects very often are not. In some cases, it turns out that when you properly examine the project boundaries, a proposed project may in fact lead to increased emissions. More often than not, the developer will not be able to demonstrate additionality – that the project could not have gone ahead without the revenue from carbon offsets – and therefore is not eligible as an offset project. . Another key issue to consider is that if there is a regulation, or a carbon price signal, or any other carbon incentive for project-related activities, then it is not an offset. This is often location specific: what might be eligible for compensation in one location may not be eligible in another location due to such regulations or incentives.
For eligible projects, they often find that they generate fewer credits than expected. Auditors and registries always tend to be extremely rigorous. They go through long processes, applying methodologies and protocols that have been evaluated from a very conservative point of view. This is a very good thing, as it helps to maintain the environmental integrity of the offset market.
Basically, the main challenge is that offset projects are very difficult to develop. It takes time and effort. Offsets are not handed out like candy. Developers should be prepared for this process and the challenges they are likely to face. However, this means that when an offset comes to market from these reputable registries, the buyer can be extremely confident that it comes with a high level of environmental integrity.
EF: Compared to mandatory markets, there is much less standardization in the voluntary market. Do you foresee this likely to change, with the introduction of various codes of practice and similar initiatives?
MB: There is still room for greater standardization, and it is important that we all speak the same language when it comes to developing projects and issuing offsets. And there is also an important role for voluntary market exchanges to offer standardized contracts that can provide some degree of price discovery and transparency.
However, the inherently bespoke nature of the voluntary market means that it will never be completely standardized. As long as it responds to demand from businesses to meet their own specific needs, with buyers having different objectives, then you will see unique types of compensation coming to market, and that has implications for the amount of liquidity on exchanges in all these different compensations. types.
EF: What other expectations do you have regarding the probable evolution of the voluntary market?
MB: As demand and prices increase, the voluntary carbon market will support new types of projects and new technologies that are not viable today or have been rejected so far. For example, we are seeing considerable interest in new nature-based solutions such as blue carbon and new technologies such as direct air capture technologies, although I think the latter solution is more of a solution to longer term.
But the market’s main role in the short term will be to reduce emissions in countries and activities where it is not yet appropriate to put regulation in place – especially in parts of the world that have historically not caused the climate problem and must be able to grow their economy. Credible offsets from reputable registries and verification processes will play a vital role in helping to incentivize faster reductions in these venues than would otherwise be the case, and sending a price signal to facilitate cost reduction projects. higher that will occur in the long term.