2022 was no doubt a year that left all participants in the voluntary carbon markets with more questions than answers. Some key issues that remain top of mind for us as we look into 2023:
- Will concerns around quality be resolved for this market to operate with integrity? Will regulators play a larger oversight role?
- Will corporate carbon credit demand return to growth backed by increased certainty around use of claims or will there be a change of narrative towards “climate mitigation” (as opposed to “offsetting”)?
- How severe will the implications of Article 6 be for the voluntary carbon market, and how will existing players interact with it?
It is hard to summarise in a few year-end thoughts what happened in 2022. The market is still experiencing an erosion of trust, which culminated in the British comedian John Oliver’s video calling out issues of quality with some projects.
The attention of the market has been turning to regulators, with cautious optimism that greater oversight can rebuild trust and scale.
Another notable trend over the last year, was the lack of consensus on how corporations may be able use carbon claims against their net zero emissions targets. The debate on how ISO, VCMI, UN and SBTI guidance may align in the future continues. This is all occurring as companies must prepare to disclose several new carbon metrics and targets starting in 2023, including the use of offsets.
Such delays in reaching consensus has put the market in a precarious position, despite a clear acceleration of net zero pledges over the year that continues to suggest the fundamental role that the VCM plays for corporates’ hard-to-abate emissions.
IPCC guidance continues to confirm the large climate change mitigation potential for non-conversion of forests and carbon sequestration in soils, all of which are business models which rely on carbon credits monetisation. Further, the stage is set for continued policy support towards the decarbonisation agenda, with the landmark Inflation Reduction Act passing in the US this year.
This is another proof for the need of private capital to complement public incentives for the accelerated deployment of carbon removal solutions.
Record year for investment
2022 was also a record year for investment funding going into carbon credit generation, with more private sector players looking to invest in the VCM.
Abatable estimates that over $10bn worth of deals were announced over the year, with a substantial level of funding into carbon removals and avoidance projects. A large supply acceleration may face a slowing demand as a result of even more uncertain macroeconomic conditions, leading to what could be a temporary supply surplus in the VCM.
The announcement of the global framework during COP15 in Montreal may lead to renewed interest in biodiversity with good tailwinds for the continued investments towards nature and related ecosystems, supported by both corporate and public-private partnerships.
From offsetting to climate contributions
A change of narrative around corporations wanting to claim “climate contributions”, rather than simply “offsetting” (as a result of the negative press around offsets), may emerge even clearer in 2023, as these corporations continue to re-up climate ambitions and find a way to nest into government’s net zero or Article 6 programs. New clarification in the Article 6.4 text during COP27 this year defined for the first time new “mitigation contribution” credits and could open up some Article 6 units to the voluntary carbon markets.
Governments are also looking closely at this market, with some waking up to the need to regulate carbon credit flows in-and-out of their country. Some have been imposing a temporary moratorium on transfers of credits while operationalisation of national carbon accounting infrastructure is put in place. We also saw moves from rainforest nations to apply pressure to allow their forest carbon to be sold internationally in the VCM - with over 200 million sovereign carbon credits expected to be sold by a UN accredited platform called REDD.plus, as countries find alternative ways to monetise credits.
Standardisation vs differentiation
The jury is still out around whether standardisation and performance ratings can be solutions which answer real corporate needs. We feel there is a high level of disconnect between financial intermediaries, looking to bring financial sophistication to this market, and Chief Sustainability Officers who care about project narratives and impact on nature and livelihoods.
It is not surprising to see price and liquidity of standardised or pooled carbon credit instruments move significantly down, while over-the-counter bilateral agreements between corporates and project developers continue to fetch higher market prices. We continue to observe the need for project developers on the ground to sell their unique narratives to buyers, with some developers now ready to invest in their own sales team and distribution efforts, in what we think will be a continued trend against intermediation and the commoditisation of this market in 2023 and beyond.
What is clear from 2022 - is that it has been a year full of lost opportunities to drive real consensus around quality, and raise climate ambition. 2023 must be different if the market wants to prove its ability to deliver large-scale action for climate, nature and livelihoods - something that the world desperately needs.
As the year comes to an end, we at Abatable are hard at work on the second annual edition of the Carbon Project Developer Ecosystem Report. This year’s report highlights how the developer ecosystem is fundamentally transforming - in line with the market.
Although the market remains a highly fragmented and dominated by local players, the broader availability of financing options has allowed existing and experienced developers to upsize their ambitions and execute expansion plans into new project types and adjacent regions.
If you wish to stay updated on the release of the upcoming report (available in the second half of January), please do get in touch or sign up to our newsletter below.