#214 An Introduction to the voluntary carbon market

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No business can operate with zero emissions, there’s only so much you can reduce before you need to look at offsetting the remainder to truly achieve Net Zero.

Carbon offsetting comes in many forms, but the ones people will be most familiar with include purchasing carbon credits for nature restoration projects and tree planting efforts.

Historically, the voluntary carbon market has been troubled by project developers who haven’t operated their carbon offsetting projects to the environmental and social standards expected by buyers. With the use of offsets on the rise, it’s clear that there is a need for transparency and standardisation within these voluntary markets.

In this episode Mel is joined by Tiffany Cheung, the Corporate Engagement Lead at AlliedOffsets, to explain what the voluntary carbon market is, how carbon credits work from purchase to retirement and what quality controls are in place to ensure they are reliable.

You’ll learn

●       Who are AlliedOffsets?

●       What is the voluntary carbon market?

●       What are carbon credits, and how do they work?

●       What quality controls are in place for carbon credits?

●       How will the voluntary carbon market affect future regulatory requirements?

●       What does it mean to retire a carbon credit?

●       What services do AlliedOffsets offer?

 

Resources

●       AlliedOffsets website

●       AlliedOffsets LinkedIn

●       Carbonology

 

In this episode, we talk about:

[00:30] Episode Summary – Tiffany Cheung joins Mel to discuss the voluntary carbon market, explaining the carbon credit lifecycle and what quality controls are in place to ensure they are reliable.

[01:40] Who are AlliedOffsets?: AlliedOffsets aggregates data from over 30 carbon registries and compliance schemes as well as off-registry transactions to present the most comprehensive dataset on carbon offsetting activity globally.

Their data has been featured in publications such as the Financial Times, Forbes, The Guardian and many more.

[03:20] How did Tiffany get involved in carbon markets?: Tiffany has been working with AlliedOffsets for over a year, and a lot of their role as Corporate Engagement Lead includes talking to a variety of stakeholders on the buying side of the carbon market, understanding what their motivations for being in the space are, what their strategies are going into the future and their wider decarbonisation process. Tiffany also looks at their transactional activity and how that has changed over time.

Prior to their position at Allied Offsets, Tiffany worked in a major environmental advisory and brokerage firm based in London. There they gained a knowledge of both voluntary carbon markets as well as renewable energy markets in that space, this in addition to learning more about the accompanying compliance trading and risk side of things.

[06:00] What is the carbon market?: Carbon markets describe markets where carbon is translated from a greenhouse gas into an asset, or a commodity that can be traded. These tend to represent actual tonnes of atmospheric carbon dioxide that have been sequestered somewhere else in the world through various projects.

Compliance carbon markets work differently from voluntary carbon markets. Compliance carbon markets provide regulated ways of pricing carbon, both in terms of reducing emissions and generally making polluters aware of the environmental impact of their emissions in a financial way. They may be associated with the voluntary carbon market, also known as the VCM, or they may be referred to as a kind of carbon tax.

[07:05] What’s the difference between a voluntary carbon market and a non-voluntary carbon market? If you are engaging in the voluntary carbon market, there is no legislative impetus for you to be involved in it. It’s mostly driven by a business’ own desire to offset emissions.

The offsetting of residual emissions is done through the purchase of carbon credits, which are representative of 1 tonne of CO2 equivalent removed from the atmosphere.

If you offset all of your remaining emissions, then you may be able to claim carbon neutrality for the year that the credits apply to.

The benefits of carbon credit-issuing projects aren’t always related to solely greenhouse gas removal, and depending on a businesses motivations, you can help to fund a wide range of beneficial projects such as clean water provision or improved cook stoves which improve air quality in domestic settings.

[09:25] What type of organisations are leading the way with carbon credit purchasing? – AlliedOffsets has unique access to the transaction history across 30 different global registries, enabling them to provide an up to date and wide ranging view on the voluntary carbon market.

There is a very strong relationship between how polluting a sector is and how well engaged it is with the voluntary carbon markets. So major players include energy producers, aviation, maritime, ground transportation and mining and materials.

There is also an increase in financial services, technology and telecommunications services entering the carbon market. Tiffany expects this trend to continue with increased data centre usage and artificial intelligence driving up energy consumption across these sectors.

[11:10] How does the voluntary carbon market operate?: When a company first decides they want to buy carbon credits, ideally they would engage with a well-established broker or intermediary who can source a variety of carbon credits.

It’s helpful for the broker to know what sort of carbon credits or projects a company is looking to invest in. There’s a lot of different options, including:

●       Forestry

●       Alternative land use

●       Blue Carbon

●       Engineered carbon dioxide removal

The company will let the broker know how many tonnes of carbon credits they’d like to buy, attributed to a certain period of time or activity based on their quantification and existing carbon reporting.

Market prices will range quite significantly based off of what technology type or methodology you're going with, but most carbon credits are currently sub $15.

Once agreed, your intermediary will secure and retire the credits for you, from the registry and project developer.

Retiring a carbon credit means they are taken entirely off the market and they're considered to be “spent” or used. Nobody else can use those as an investment or offset at that point, and the purchasing company can consider their carbon footprint to have been neutralised for the specified period.

[12:00] What quality controls are in place for the voluntary carbon market? While there isn't a master registry, there are several registries across the world that generally dominate the market. They vary in terms of the methodologies that they may or may not specialise in, as well as with geographies. The biggest ones that you're most likely to see in the market are known as VCS, GS, ACR, and CAR. These account for about 80% of the total market volume by retirement and issuance.

The way that these registries work is that they perform a bookkeeping function within the space. Projects will register their sequestered tonnes of CO2 removed with these registries, who will then check to see if these projects have complied with their methodology, which would have been set by a Standards Body.

Once approved, those project developers can sell their credits as a commodity. When a business wants to buy credits, the type of projects they want to engage with will dictate the sort of registries they’ll be engaging with.

There are also checks in place set by the registries to ensure that project developers use third parties to further validate their project activities.

[16:45] What are the methodologies used in the voluntary carbon market? A methodology refers to the way in which a specific project should be undertaken in order to ensure that the pace of carbon sequestration and storage is consistent throughout the project's life.

Registries are ultimately responsible for issuing the appropriate methodology, and the project developers need to be able to evidence compliance to that methodology.

The process for a project to be registered is quite complicated, and it generally takes 2 – 3 years from concept to being in a position to issue credits.

There is also a requirement to have their work validated by a Verification and Validation Body (VVB). These are third party auditors who check the evidence provided by project developers to ensure they comply with the necessary methodology. This may include the VVBs undertaking a site visit.

[19:30] Will regulatory requirements be introduced within the voluntary carbon market?  – Tiffany states that there is definitely a demand for regulatory requirements in the space. There a two key drivers for this:

The need for integrity among buyers – There are many sectors where engaging in a more unregulated space can be risky. Sectors such as the legal and financial sectors need a certain level of oversight to ensure they are making sound investments.

Convergence of compliance and voluntary markets – This is a change that’s been happening over the past few years. This is being driven by governments taking part in the voluntary carbon market space and realising that they can yield returns for the country. Additionally, when they’re spending public funds, there needs to be a certain level of assurance in the projects they’re engaging with.

There is also a growing appetite for businesses engaging in this market to ensure that they are doing the best thing possible ahead of the curve. There’s been a lot of negative press around greenwashing projects, leading to potentially tarnished reputations, to the need for proper checks and regulation is becoming a necessity. 

[22:45] What does it mean for a carbon credit to be retired? – The point at which a carbon credit is retired is when it has been taken totally out of circulation for the market. That means that no other broker, intermediary or end buyer would be able to use that credit in any kind of capacity.

It's like having the receipt to say this person has purchased this product, it belongs to them now and nobody else can use it.

 

[24:30] How are stakeholders using the data provided by AlliedOffsets? – AlliedOffsets has a very wide data set, with an equally wide range of stakeholders.

Some particularly interesting use cases include:

Benchmarking against the competition – Corporate buyers use their data to compare how their activity measures up to competitors or peers within their sector due to AlliedOffsets long view of historic activity. It highlights what projects are being favoured by their competitors and what kind of price points they should be looking at as well.

Project developer research - Another common use case is that project developers will want to see who is active in the market and who they should be targeting for funding. AlliedOffsets can see specific buyer activity broken down by region as well as methodology, which means project developers have a really good chance of being able to engage with buyers who are entering the space and might not have established those direct procurement relationships.

Government consultation - Markets can be a huge source of income from the private sector into the public purse. For example, you might have a voluntary carbon market scheme that's associated with a compliance scheme, which can mean tax benefits for complying businesses alongside socio-environmental benefits for the country.

If you’d like to learn more about AlliedOffsets, visit their website or reach out to Tiffany for more about buyer activity in the VCM!

If you’d like any assistance with carbon standards, get in touch with Carbonology, they’d be happy to help!

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