Balancing Risk and Impact in the Evolving Carbon Market

As the voluntary carbon market (VCM) matures, its focus is shifting
towards measures of quality and integrity. It’s becoming clear, however, that
“quality” and “integrity” mean different things in different contexts, and that
standards and frameworks are needed to represent the broad spectrum of what
defines a “good carbon
credit.”

“It used to be that we treated this market like a binary,” explained Spencer
Meyer, Chief Ratings Officer at
carbon ratings agency BeZero, speaking at a recent
Sustainable Brands® (SB)
webinar.
“You either passed the test or you didn’t. … If you followed the methodology and
you got verified by a standard, suddenly they were carbon credits.”

Increasingly, however, carbon credit buyers are realizing that varying degrees
of quality are acceptable for varying needs. To that end, Meyer recommended that
corporate risk assessments view the carbon market in the same way they evaluate
other material risks to make their sure credit procurement strategies rigorously
align.

Antje-Susan Metz, Business
Development Manager at Deutsche Telekom, added
that values-based brands work to understand the impact their credit purchases
are making on the
ground
and integrate this work into branding and storytelling.

“When you’re looking at quality through that impact lens, you’re going to focus
on projects that have more meaningful co-benefits [apart from carbon removal],”
she said. “Similarly, if you are focused on scaling new tech … that view of
quality is going to be a bit different than what it looks like in a purely
nature-based removal
portfolio.”

Kathy Kearns, SVP of Business
Development at CEEZER, emphasized the importance of
proactive risk management in navigating the VCM. Notably, she said she has seen
a shift from reactive to proactive risk assessment, as organizations
increasingly recognize the need to understand and address their material climate
risks.

For companies looking to purchase carbon credits, especially in small volumes,
Ikarus Janzen, Chief Commercial
Officer at nature-based carbon credit provider
Varaha, suggested working with intermediaries. Metz
agreed, stressing that the complexity of the market necessitates finding
knowledgeable partners who align with corporate values and material risks, and
using resources such as the Integrity Council for the Voluntary Carbon Market (ICVCM)’s
Core Carbon Principles and the
Voluntary Carbon Markets Integrity Initiative
(VCMI) to vet credits suited to the individual buyer. She also recommended a
diversified portfolio approach to credit sourcing to help further mitigate risk.

‘A tonne is a tonne is a tonne’ is no longer enough

As the ICVCM works
to create
guidelines
for judging carbon credit quality and integrity, the risks and complexity of the
VCM remain for companies seeking to address their hard-to-abate carbon
emissions.

Still, awareness of climate change and broader market dynamics — such as ESG
investing and regulatory frameworks highlighting material corporate climate
risks — is growing. SB CEO Mike
Dupee described a “consensus view
that understanding and disclosing corporate climate impacts and mitigation plans
is material and necessary.”

A pressing challenge on this consensus, however, is the growing mismatch between
supply of and demand for quality carbon credits. Meyer pointed, for example, to
the market’s immaturity and lack of transparency as factors contributing to this
imbalance.

“The community is simply not producing what the buyers are looking for at the
scale they need,” he said. “That all sides of the market can’t really agree on
if [supply or demand] is driving this is a sign of an immature market. It’s a
sign of not enough transparency in the market.”

The growing demand for carbon-removal credits

The imbalance between credits available and desired is highlighted by the
current saturation of carbon-avoidance
projects
versus the growing demand for CO2-removal (CDR)
credits,
which focus on removing existing CO2 from the atmosphere. The demand for
nature-based removals and other CDR methods is already outpacing the supply,
Janzen said — leading to a shortage of affordable, high-quality credits.

In response, bigger companies are securing their own supply of reliable removal
credits by forking over upfront investments to get them off the ground, as well
as long-term offtake
agreements
paying for future removals. Developers, wary of market volatility, are only
creating new projects with massive upfront capital and security — effectively
shutting smaller buyers and developers from meaningful interaction in the
market. Still, Janzen expects pending policy and regulatory changes to help pave
the way for an open market capable of meeting the demands of small and large
buyers.

Until then, unresolved regulatory questions may lead many corporations to adopt
a “wait-and-see” policy for credit procurement, says Metz, who focuses on
purchasing carbon-removal credits to offset Deutsche Telekom’s scopes 1 and 2
emissions and eventually, its scope
3.
In this effort, Metz says she has come to know the CDR market in three words:
“Very buyer unfriendly.”

“The demand is outpacing the supply, and we don’t see a silver lining,” she
explained. “We expect if you are not prepared for this kind of market and don’t
enter it early on, it will have a huge impact on your bottom line if you want to
stick to your climate targets.”

Still, she’s optimistic the supply-and-demand side of things will be sorted out
soon, as 2030 goals increasingly loom over corporate ESG commitments.

The VCM’s biggest risk

The voluntary carbon market is at a critical juncture as it grapples with
challenges related to supply, demand, integrity and regulatory uncertainties. By
leveraging available tools, working with trusted partners and staying informed
about market trends, brands can better position themselves to meet their climate
goals and contribute to global efforts to combat climate change.

“I think the single biggest risk is not doing something,” Meyer asserted.
“This is a climate crisis. If the program or portfolio you’re investing in is
not having a climate impact, you need to change course.”

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Christian Yonkers

Christian is a writer, photographer, filmmaker, and outdoor junkie obsessed with the intersectionality between people and planet. He partners with brands and organizations with social and environmental impact at their core, assisting them in telling stories that change the world.

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Published Sep 18, 2024 8am EDT / 5am PDT / 1pm BST / 2pm CEST