Simplifying the complex carbon credit market, and infographic of the week

This week, we're diving into a topic that's been buzzing around the sustainability circles: the carbon credit market. As we become more conscious of our environmental footprint, understanding carbon credits and their role in mitigating climate change is crucial. Let's explore what’s happening in this market, the key players, their offerings, and the gaps that need addressing.

Why are we talking about this topic, this week?

According to several news outlets, Microsoft recently entered into two carbon credit agreements marking the largest CO2 removal transactions on record.

1. Microsoft entered in to an agreement with BTG Pactual Timberland Investment Group (TIG), which has committed to provide ~8 million carbon removal credits (nature-based). These are part of TIG’s reforestation strategy in Latin America.

2. Microsoft also agreed to buy 40,000 agricultural soil carbon credits from Indigo Ag. These credits were verified and issued by the Soil Enrichment Protocol of Climate Action Reserve (CAR).

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Understanding Carbon Credits

First, a quick refresher. Carbon credits are permits that allow the holder to emit a certain amount of carbon dioxide or other greenhouse gases. One credit typically equals one ton of CO2. Companies buy these credits to offset their emissions, essentially paying for projects that reduce or capture emissions elsewhere. Carbon offsets are traded on a voluntary market. There are no regulations governing the voluntary market which is also open to individuals. For example, your manufacturing company might be based in Texas while emissions (directly proportional to) are being offset by trees planted in Jakarta.

Types of projects that generate carbon credits

Carbon credits are generated from a variety of projects including renewable energy projects, the protection and reforestation of forest land, biochar production (which is a form of charcoal produced when organic material such as wood, crop residues, or manure is heated in a controlled process called pyrolysis), kelp farming, direct air capture, concrete mineralization, or energy efficiency projects.

Where do you start and what does the process look like?

The process to get on a carbon registry - that serves as a repository of carbon credits from different projects - is a slow and an expensive process that can take anywhere between 6 months to 18 months, depending on the type of project, the documentation that is available to quantify the claims, and access to key resources including third party qualified verifiers as well as completion of a thorough life cycle analysis (LCA) for the product or the project. A very typical process is mapped below:

a) Project developer has a scalable product or a solution that can do a few things including demonstrate reduction in emissions, preserve forest land, reduce energy consumption, or promote and preserve biodiversity. Typically these benefits align with the UN sustainable development goals (SDGs).

b) The project developer will need to develop an LCA for its product which is a comprehensive model that factors every aspect of the product from cradle to grave. Given the spectrum of technologies and flavors of solutions, existing LCA models may or may not exist and will need to be co-developed. This service alone can cost anywhere between $5,000 to $10,000 (or more).

c) This LCA is then verified along with various other attributes of the project and the product by a carbon offset registry such as Verra, Gold Standard, Climate Action Reserve (CAR), or Clean Development Mechanism(CDM). Once verified (against a standard set of attributes and their frameworks), these agencies approve and list these credits to track issuance and retirement. There is a cost associated with this effort as well and could be a percentage of the value of the carbon credit or some other mechanism.

d) The carbon credit buyers can either purchase these directly from the exchanges or work with brokers or negotiate directly with the project developers. Carbon credit exchanges include the European Energy Exchange (EEX), Chicago Climate Exchange (CCX), Climate Impact X (CIX), AirCarbon Exchange (ACX), Carbon Trade Exchange (CTX), and REDD+ Environmental Markets Ltd. Some exchanges specialize in a particular flavor of carbon credits. Buyers should ensure that credits traded here are verified by reputable agencies such as Verra and Gold Standard.

A good carbon credit should possess several key attributes to ensure its effectiveness, credibility, and positive impact on both the environment and society. Here are the essential attributes of a good carbon credit:

1. Additionality

• Definition: The emissions reductions achieved by the project would not have occurred without the carbon credit funding.

• Importance: Ensures that the carbon credit contributes to genuine, incremental reductions in greenhouse gases.

2. Permanence

• Definition: The emissions reductions are long-lasting and not reversible.

• Importance: Guarantees that the benefits of the carbon credit are sustained over time, preventing future emissions from negating the reductions.

3. Verifiability

• Definition: The emissions reductions can be accurately measured, monitored, and independently verified.

• Importance: Provides transparency and confidence in the effectiveness of the carbon credit, ensuring that claimed reductions are real.

4. Avoidance of Double Counting

• Definition: The same emissions reductions are not claimed or sold more than once.

• Importance: Maintains the integrity of the carbon credit market by ensuring that each credit represents a unique reduction.

5. Co-Benefits

• Definition: The project delivers additional environmental, social, or economic benefits beyond carbon reductions.

• Importance: Enhances the overall impact of the project, contributing to sustainable development goals such as biodiversity conservation, community development, and health improvements.

6. Transparency

• Definition: The details of the project, including methodologies, data, and verification reports, are openly accessible.

• Importance: Builds trust and allows stakeholders to evaluate the credibility and impact of the carbon credit.

7. Compliance with Standards

• Definition: The project adheres to recognized international standards and methodologies (e.g., Verified Carbon Standard, Gold Standard, Clean Development Mechanism).

• Importance: Ensures consistency, reliability, and acceptance in the carbon market.

8. Social and Environmental Safeguards

• Definition: The project respects human rights and minimizes negative impacts on local communities and ecosystems.

• Importance: Protects vulnerable populations and natural habitats, ensuring that the project does not cause harm.

9. Financial Integrity

• Definition: The project is financially viable and uses funds efficiently to achieve its goals.

• Importance: Ensures that the project can sustain its operations and deliver promised emissions reductions over time.

10. Scalability and Replicability

• Definition: The project can be scaled up or replicated in other locations.

• Importance: Enhances the potential for wider impact and the ability to contribute to large-scale emissions reductions.

Key Players in the Carbon Credit Market

1. Verra

Verra is one of the most established players in the carbon credit market. Their Verified Carbon Standard (VCS) is the world's most widely used voluntary GHG program. Verra’s projects range from forest conservation to renewable energy.

Offering: Verra offers credits from a diverse portfolio of projects, ensuring that there's something for every company looking to offset their carbon footprint. Their rigorous validation and verification process instills confidence in the quality of the credits.

Gaps: While Verra is comprehensive, their processes can be cumbersome and time-consuming, which may deter smaller companies with fewer resources from participating.

2. Gold Standard

Gold Standard, backed by NGOs including the WWF, is another heavyweight in the space. They focus not only on carbon reduction but also on sustainable development goals (SDGs).

Offering: Gold Standard’s credits are often considered premium due to their dual impact on climate and development. Projects include clean cookstove initiatives and solar power installations.

Gaps: The higher cost of Gold Standard credits can be a barrier for smaller firms or those with tight budgets.

3. Nori

Nori is a newer, innovative player that’s shaking things up with blockchain technology. Their platform focuses on soil carbon sequestration.

Offering: Nori's marketplace is transparent, with blockchain ensuring the credibility of each credit. Farmers are incentivized to adopt regenerative practices, directly benefiting from the sale of credits.

Gaps: Being relatively new, Nori’s market penetration and project variety are still growing. There’s also a learning curve associated with understanding and trusting blockchain-based solutions.

Comparing and Contrasting Offerings

• Project Variety: Verra and Gold Standard offer a wide range of project types, from renewable energy to reforestation. Nori is more specialized, focusing on soil carbon sequestration.

• Cost: Gold Standard credits tend to be pricier due to their dual impact, while Nori’s innovative approach can potentially offer more cost-effective solutions in the long run.

• Verification Process: Verra and Gold Standard have rigorous, established processes, which can be both a strength (in terms of credibility) and a weakness (in terms of accessibility for smaller companies). Nori’s blockchain verification is innovative but still gaining trust.

Gaps in the Industry

Despite the progress, there are significant gaps in the carbon credit market that need addressing:

1. Accessibility for Small Businesses: Smaller companies often find it challenging to navigate the complexities of purchasing carbon credits. Simplifying the process and lowering costs could encourage broader participation.

2. Standardization: The lack of standardized methodologies across different verification bodies can lead to confusion and inconsistencies. A unified framework could enhance transparency and trust.

3. Market Transparency: While blockchain offers a promising solution, broader adoption and understanding are required to make the market more transparent and accessible.

4. Long-Term Impact: Ensuring that carbon credits lead to long-term, sustainable environmental benefits rather than short-term gains is crucial. This requires ongoing monitoring and adjustment of projects.

5. Price over value. Most prices of carbon credits are below the $40-80 per metric ton of carbon dioxide emitted needed to keep global warming within a 2-point degree, as provided by the Paris agreement. Even if the quality of a carbon credit might be higher because of the value it provides in preserving biodiversity or the habitat as an example, the reality of the market today is that price trumps value. This makes it challenging for project developers looking to offer higher-value credits or fully monetize the value of what their projects/products can offer.

6. Standard frameworks don’t exist for every flavor of technology. Biochar as an example, a relatively new technology, did not have industry standard framework to assess its value in the carbon credit market. Since 2019 some of the early movers in this space such as PlanBoo as an example laid the foundation for some of this work in the industry. This makes it challenging for product developers who need to find industry experts as early as possible to develop these frameworks.

7. The credit market is mostly focused on carbon. Despite the concerns around other potent GHG gases such as methane, and the need to preserve biodiversity, the overwhelming focus of the carbon credit market today is on carbon. This could certainly change and it should as this market evolves with time.

Infographic of the week - Mapping the Grid Enhancing Technology landscape

The U.S. grid is expected to see skyrocketing demand particularly with a rapid growth around data center demand which is on track, according to McKinsey, on track to double from 2022 levels by 2030. This infographic, from Powerhouse, is a snapshot of the key players innovating to cope with this demand.

Are there any that this infographic does not capture? Leave your comments.