By Henry Kronk | Dec. 18, 2024 9:05 am ET|WSJ Pro
Proponents look to shifting demand and backstops from compliance markets to turn things around. Meanwhile, industry stakeholders are struggling to stay afloat.
Businesses serving the global voluntary carbon market are reducing head counts, revising services and following buyer demand as they fight for survival in a market that has yet to rebound from a steep contraction that took hold in 2023.
Project developer and marketer South Pole has cut back its workforce from a high of over 1,300 in mid-2023 to below 1,000. The company faced a crisis in late 2022 through 2023 when numerous academics, media sources and the carbon- credit ratings agency Renoster claimed that one of its largest partners, the Kariba REDD+ Project in Zimbabwe, had issued millions of credits that represented no real emissions reductions. Verra, Kariba’s standard, subsequently suspended its registration and South Pole severed ties with the project.
“It’s never easy to take organizations through a transformation,” said South Pole CEO Daniel Klier, who stepped into the role in May following founder Renat Heuberger’s departure in October, 2023. “But sometimes a crisis is a good crisis.”
The company has since shifted its focus to other forms of carbon projects and claims to hold a 20% share of the voluntary carbon market by retired credits in the second half of 2024, Klier said.
A carbon credit represents one metric ton of carbon dioxide or carbon dioxide-equivalent emissions that have been mitigated by either preventing their release or removing existing gases from the atmosphere.
Criticism of carbon projects like Kariba REDD+ and others have tanked most credit prices. The average value for newly issued credits from REDD+ projects—which conserve standing forests and among the largest by available credit supply—fell from a high of $16.27/metric ton in early 2022 to a low of $8.06/mt in June, according to a benchmark from OPIS, a price reporting agency. OPIS and The Wall Street Journal are both owned by Dow Jones. By comparison, the price of carbon in government-regulated compliance markets, like the European Union’s emissions trading scheme, have gone above €70/mt ($73.59/mt) this year.
Credits from projects that have been directly criticized or bear weak scores from carbon-credit ratings firms can become stranded assets and transact on the secondary market at 50cts/mt or lower.
“Trading over the last six months has been pretty scrappy,” said Melissa Lindsay, CEO of credit trading platform Emstream. “The last year has been dominated by people winding down positions versus taking on new ones.”
A survey from Ecosystem Marketplace in May found the voluntary carbon market (VCM) contracted from $1.9 billion in 2022 to $723 million in 2023. Most sources reached for this article expected 2024 would roughly match or slightly exceed 2023 business.
Buyer interest has shifted in two key ways, according to Klier and others. The first is a move away from projects that reduce emissions to those that actively remove them from the atmosphere, such as projects that regrow forests on degraded land, enhance agricultural soil carbon stocks, or directly capture carbon dioxide from the atmosphere through chemical processes.
Buyers have also turned their attention to credits that will be accepted into carbon reduction efforts supported by national or international frameworks, often referred to as compliance markets. Examples include the Paris Agreement, emissions trading systems and carbon taxes, and the international air transport sector’s Carbon Offsetting and Reduction Scheme for International Aviation.
Several organizations are also pursuing efforts to improve project quality. The Integrity Council for the ICVCM has worked to assess both carbon crediting standards and the methodologies they oversee against its Core Carbon Principles, which is intended to be an industry quality benchmark.
Many corporate buyers expect to use at least some carbon credits to hit emissions reduction targets in 2030 and later. But the amount and application of carbon offsets in decarbonization plans has been the subject of intense debate this year. The Science Based Targets initiative, the standards-setting organization for corporate climate targets, drew outcry from its employees after its management announced it planned to adopt more lenient policies on the use of carbon credits to offset Scope 3 emissions, or greenhouse gases produced in a company’s value chain that are outside of its direct control.
SBTi released a tranche of documents considering potential avenues for incorporating carbon credits into emissions reduction plans this summer. The organization said in November that a draft version of the standard would be published “in the coming months.”
The market upheaval has affected data and service providers as well.
Carbon credit-ratings firm Sylvera initially provided third-party quality assessments of carbon projects. But the company has spent much of 2024 repositioning itself to advise clients who intend to invest in high-quality projects or purchase high-quality credits in advance, before projects are fully implemented. That activity has made up nearly half of the company’s new business, CEO and co-founder Allister Furey said. The company recently reduced head count from 150 to 120 as part of a restructuring.
Furey expected to see increased consolidation in the VCM over the near term.
“There’s a number of small actors who are likely to run out of cash,” he said. “And they’ll kind of be swallowed up. Data businesses reward scale. The more data you have, the more stuff you can sell, but your cost per product goes down.”
Even as carbon credit sales tumbled, investors have poured funds into projects. Developers took in roughly $22 billion in investments since 2021, according to research published by MSCI in November.
The new generation of removal projects coming online can command prices from $40/mt to hundreds of dollars, said Andrew Harris, managing director of Nature Broking, which focuses on building removal credit portfolios.
“The demand is there,” Harris said. “We see a slightly different end of this market, which is not doom and gloom. I think we’re seeing winding down positions from big companies who probably weren’t doing it properly before and are taking a pause, trying to work out what their new strategy will be, while the companies who always had a good idea of it are still coming and increasing.”
This dynamic has altered the way the VCM conducts business.
“A very large number of our clients are moving to a world where they start to procure removal credits for 2030,” South Pole’s Klier said. “That is very different from the current world, where people come to us on the 1st of December and say, ‘I need a million credits to be carbon neutral.’”
In addition to growing demand from compliance markets, the VCM is also eyeing the 2030 decarbonization pledges hundreds of businesses have made.
“The bigger challenge is that a number of companies may altogether step away from their climate targets,” Klier said. “We have many companies that set their targets around 2020 and 2021. You now get into the years when it gets really difficult. You need to make choices that may be more challenging than people have thought. And you now have a political climate that may be less supportive of climate action.” (Visit WSJPro for the original article)
Henry Kronk is the Senior Carbon Markets Editor at OPIS. OPIS and The Wall Street Journal are owned by the same parent company, Dow Jones.
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