Biodiversity crediting will soon have to face up to the challenge of when to bundle or stack mitigation outcomes alongside carbon, experts have told Carbon Pulse, with the sometimes controversial practice expected to come to the fore of the conversation as the nascent nature market looks to scale.

The bundling of a biodiversity outcome within a carbon credit effectively means the creation of a premium unit whereby climate and nature outcomes are combined in the same asset.

Stacking a biodiversity unit on top of that of a carbon benefit keeps the two separate, but offers a combination of the two outcomes from the same project.

The voluntary carbon market (VCM), though troubled by recent scandals, is mature relative to nature markets and valued at around $2 billion.

Many expect that in order to scale biodiversity credits, the market will need to take a cue from the VCM, and many established carbon players, such as standards Verra and Plan Vivo, are already moving to develop methodologies and infrastructure.

One of the ways in which participants see biodiversity learning from carbon, is via the bundling or stacking of outcomes, which already takes place, to some extent, with many REDD+ forestry credits issued from projects in a biodiversity hotspot, and often trading at a premium to other forestry units.

Interest in biodiversity crediting is surging in the wake of the historic UN Global Biodiversity Framework (GBF), agreed last December in Montreal, which carved out a clear role for private finance including market-based solutions to help address the estimated $800 billion gap to meet the goals of the agreement.

IMMINENT QUESTION

Edward Pollard, strategic director, corporate services, at The Biodiversity Consultancy, believes the stacking and bundling topic will be a challenging conversation, but an important one to get right, and is one that is due to be imminently had in the biodiversity space.

“The conversation is going to move very quickly now to the stacking and bundling of credits,” he told Carbon Pulse.

“It is going to be another really critical issue to get right with biodiversity credits as to when it is appropriate to stack, and when it is appropriate to bundle.”

“We were always going to be piggy-backing to some extent on carbon, so there is always going to be a lot of interest in the potential for stacking or bundling from that market as well,” he added.

The fact that there is already such overlap also means that such discussions are perhaps inevitable.

In the past, climate and conservation finance communities have tended to work in silos, and not collaborate as efficiently as the could. This is embodied in the different UN bodies for the two fields – the UNFCCC and UN CDB for climate and conservation, respectively.

For this reason, the potential stacking and bundling of outcomes could be great to see, according to Edit Kiss, co-founder and CCO at specialist finance services firm Integrity Global Partners (IGP), who believes there needs to be better alignment and a more holistic approach to the twin goals of climate and nature.

“There is still a risk that some people try to create a competing narrative which can be dangerous. We need a holistic approach without creating a competition between carbon and biodiversity credits as potential tools for the ecological and climate transition,” she said.

“It is not an ‘or’ but rather an ‘and’ proposition and those thinking that biodiversity credits are going to be the new panacea replacing carbon markets might be up for some bad surprises in the future,” she continued, suggesting that carbon market participants must not feel a threat from the emergent biodiversity crediting market.

“In terms of design principles regarding governance, integrity, et cetera, the emerging voluntary biodiversity credit market is heavily building on the experiences and lessons from the voluntary carbon markets,” she added.

BENEFITS

One of the core benefits of bundling or stacking units is the creation of a more efficient market, given that many of the aims of those for carbon and biodiversity are interlinked. For example, climate goals cannot be achieved with the conservation of forests, and the sale of carbon credits already include some biodiversity-related outcomes.

By enabling the clear bundling or stacking of units, this could reduce fragmentation of these markets, particularly as biodiversity crediting starts to grow.

With fragmentation in carbon already an issue for buyers, creating an efficient integration of nature and climate markets could help scale demand, with multiple goals potentially achieved by the same project.

“Potential buyers are going to want those efficiencies. I can only assume that buyers are not wanting to buy carbon over here and biodiversity over there. They are looking for integrated systems,” Pollard said.

Another key motivation behind the idea is that landowners will be able to derive higher revenues from environmentally-friendly land management.

From the project developer perspective, this approach ahould also drive supply, with some carbon-only projects simply not economically viable unless biodiversity crediting could be integrated within the finance planning.

Laura Waterford, director at green investment firm Pollination, noted the “extraordinary shift to biodiversity” in the market seen this year and feeding the bundling and stacking conversation.

“Being able to monetise biodiversity is likely to create an incentive for project developers to do biodiversity work in locations where they’re doing nature-based solutions,” she said.

“Overall, that can generate better outcomes for nature.”

Furthermore, the approach might also expand the area of land suitable for projects, according to Waterford.

“This might also unlock the ability to do carbon and biodiversity projects on land that is currently not economically viable because the carbon revenue stream is simply not enough,” she said.

“That has to be a huge positive [to bundling and stacking]”.

CRITICISMS

The practice is not without its risks, with some stakeholders arguing that bundling or stacking is just a way of greenwashing and naturewashing at the same time.

Sophus zu Ermgassen, an ecological economist at the University of Oxford, published a lengthy thread on social media platform Twitter, arguing that the stacking model proposed by the UK’s nature and biodiversity net gain (BNG) legislation “benefits financiers, landholders, and consultants, and will most likely not benefit the environment”.

Citing other research, he points to additionality problems and the failure of accounting methodologies to deal with these issues so far.

“The additionality problem comes when you sell these credits into separate markets, but they’re actually funding the same thing. So a developer buys a nutrient credit from a piece of land management that delivered units for another developer’s BNG. The management would have happened anyway. So one of those credits has been used to strike a liability off a developer’s balance sheet, whereas in reality all it did was pay a land manager to do what they would have done anyway,” he wrote in April.

Others have also pointed to the challenges with putting biodiversity and carbon in the same conversation, given the difficulties with measuring species.

“Biodiversity credits are much more complex than carbon credits in terms of the possible metrics,” IGP’s Kiss told Carbon Pulse.

“We are seeing three different types of metrics emerging: habitat-based, expressed in hectares of land protected or restored; species-based, looking at reducing species extinction risk and restoring threatened species; and ecosystem integrity – while we have a single metric of tonnes for carbon,” said Kiss.

INVESTMENT RISK

From an investment perspective, there is a significant risk if currently-bundled credits are unbundled in future, which would leave investors with lower value carbon credits.

This could scare off some capital from the market, given the uncertainties around how precisely bundling in this instance would take place.

“The market is not able to price in yet these additional biodiversity premiums or future biodiversity credit values which creates a challenge for project developers to design and implement these next generation projects deploying the latest technology and science for biodiversity impact monitoring,” Kiss continued.

“But as the first pilots will start to materialise and the first credits will be issuing we hope that there will be a good price discovery for the biodiversity value whether in the form of premium on the carbon credits, bundling, or as a separate credit, stacking,” she added.

“Standards like Verra or Plan Vivo however will have to carefully design the rules as to when it is appropriate and additional to stack these various environmental units and ultimate unbundle them.”

It is expected that such standards will release methodologies towards the end of the year.

“The real question will be how the market responds on the demand side,” added Waterford of Pollination.

By Roy Manuell – roy@carbon-pulse.com

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