COMMENT: Transparency holds the key to a $100 billion opportunity

Published 17:07 on July 29, 2022  /  Last updated at 18:18 on July 29, 2022  /  Aviation/CORSIA, Conversations, Nature-based, Paris Article 6, Views, Voluntary Market  /  No Comments

Today’s voluntary carbon market (VCM) and the use of carbon credits to support net zero are at a crossroads. Embracing transparency offers a way forward, argues Tommy Ricketts of BeZero Carbon.

By Tommy Ricketts, Co-founder and CEO of BeZero Carbon

Today’s voluntary carbon market (VCM) and the use of carbon credits to support Net Zero are at a crossroads. Embracing transparency offers a way forward. 

The VCM is where anyone seeking to, and not otherwise obliged to, can offset their emissions by purchasing carbon credits. Each credit is supposed to represent a tonne of carbon dioxide equivalent avoided or removed from the atmosphere.

Since the 1990s, thousands of projects have issued more than a billion credits from activities such as forestry, renewable energy, and cookstoves. For many, they are an essential part of the net zero transition, used for emissions that can’t readily be reduced or substituted.

This summer, the VCM is bristling with confidence. Blackstone invested a record $400 million in Xpansiv, a leading carbon exchange, and Carbon Engineering just closed the biggest ever deal for direct air capture removal credits. More and more organisations are signing up to net zero targets. The supply-side remains constrained. A multi-year bull market seems inevitable.

Yet public scrutiny of the VCM’s climate credentials, and ESG strategies in general, are at fever pitch. The leading net zero transition framework, known as the Science Based Targets initiative, recommends removal credits only be used for the last 10% of emissions. Avoidance credits should be shunned altogether. Critics say low quality credits create bad incentives and legitimise greenwashing.

A flurry of market-based initiatives have set their sights on reconciling these contradictions.

The Integrity Council for the VCM and the Oxford Offsetting Principles are trying to establish basic standards for quality. More traditional players, such as the London Stock Exchange and the Commodity Futures Trading Commission, are running public consultations on how best to formalise market structure.

Their intervention is timely. The VCM is unregulated. Market mechanisms are immature. Liquidity is sparse. Disclosure and reporting requirements are unstandardised. Access to data is patchy and erratic, at best. The existing system is barely able to accommodate $2 billion of activity, let alone the $100 bln forecasted by 2030.

To a large extent, the current VCM market structure relies on accreditors for determining what they need to disclose. They are essential, but their rules and requirements vary widely from one to another.

The missing ingredient is equal access to a minimum standard of detailed information. In a well functioning market, its flow ensures prices are correlated to quality, and the best projects attract the most capital. For the VCM, this will mean carbon credits actually accelerate the net zero transition.

Fortunately, best practice in public markets offers a well thumbed playbook to follow.

In established financial and commodity markets, ratings, research and data analytics providers form an important information infrastructure. They complement the issuers, auditors, exchanges, reporting bodies, and regulators. Their role is essential in improving market function and facilitating information and price discovery, risk management, and easier decision making.

But they also require translation. The diverse nature of carbon credit projects makes for a uniquely heterogenous asset class. Mangroves and fugitive emissions projects are unusual bedfellows. Each has an array of financial, policy, and scientific fundamentals that need to be understood in their own right, and at the same time made comparable to one another.

There is a tried and tested way to build confidence in market mechanisms, to allay concerns about quality, and to gain widespread adoption for a new product. Transparency.

To truly live up to its potential, every facet of the VCM needs independently verified information that is easily accessible in standardised formats. Developers need to understand how their projects differ, investors need to manage and price risks, companies need to be confident the credits they purchase live up to climate claims.

A new breed of carbon ratings agencies, such as BeZero Carbon, are starting to emerge as flag bearers for this agenda.

Starting with defining a common approach for how developers should disclose essential project information. This includes a strict qualifying criteria for ratings: applying an additionality test, having project data audited by a recognised third party, and ensuring that information is made public on an ongoing basis.

For context, one in four projects in the VCM that have issued credits today do not even meet these basic requirements. And the good news is that in many instances it’s as simple as asking for the relevant information. This provides a roadmap both for today’s and tomorrow’s projects.

It is important that ratings agencies also bring transparency to the market itself. Similar to credit rating agencies, all assigned ratings and a summary view should be publicly available. All technical ratings criteria and methodology papers should be open source. All developers should be engaged with, and all ratings treated as dynamic.

The prize for getting this right is creating a market that accelerates the net zero transition. It will also usher in a new form of capitalism that rewards positive environmental actions. But only if we embrace the power of transparency.

Tommy Ricketts is co-founder and CEO of BeZero Carbon, a global carbon ratings agency.