Climate Impact X’s spot exchange to feature heavily curated basket of nature-based projects for a start
Wong Pei Ting
CARBON credits from forest offsetting projects will be traded in lots of 1,000 under standardised contracts when the spot trading platform by Temasek-backed global carbon marketplace Climate Impact X (CIX) goes live sometime before July.
But the contracts will only draw from a heavily curated basket of projects that avoids “specific characteristics which adversely affect their tradability, broad-market acceptability, or price”, it said, in an apparent workaround given the controversy that has marred such projects of late.
In January, investigative news reports argued that more than 90 per cent of projects certified by leading verifier Verra for forest conservation under the United Nations programme to reduce deforestation and forest degradation (Redd+) do not represent genuine carbon reductions.
With the additional criteria, only 11 Redd+ projects will make it into the delivery basket of the contracts, called CIX Nature X, at their launch.
The other considerations are the projects’ size by volume of issued and unretired credits, recognition among active market participants and by independent carbon-rating agencies, and level of traded activity in the spot market.
The parameters are to ensure confidence and certainty in the project credits delivered, while keeping the remaining pool broad enough for ample liquidity, CIX said. It noted that the 11 projects combined will account for close to two-thirds of all global Redd+ market volumes.
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They are also set to mitigate any potential concentration risk, or sudden market or regulatory developments, added the Singapore-based joint venture among DBS, the Singapore Exchange, Standard Chartered and Temasek.
The goal is to deliver a daily global pricing benchmark that is more tightly representative of the market value of leading nature-based projects, specifically for vintages of 2019 to 2022, it stated.
Going deeper into why more tightly defined contracts are preferred, CIX said a focused selection helps to reduce market information asymmetry. It also “mitigates distortive price signals” that can occur when sellers have a wide choice of deliverable projects, and when buyers are less familiar or have fewer resources to do active due diligence on many new projects globally, it pointed out.
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CIX’s pricing director Julien Hall said the spot contracts, at 1,000 carbon credits each, are more fungible as it reduces the risk of buying and selling recently issued credits. Each carbon credit represents a tonne of carbon dioxide reduced or avoided.
Turning to how price discovery will work on the platform, he said market value will be set by having professional traders, brokers and financial institutions put in bids, offers and trades in a concentrated daily trading session.
“This nexus of price formation and liquidity will underpin a robust and representative nature-based spot benchmark, which should build confidence in fairly priced project differentials, forward contracts and, ultimately, futures,” he said.
CIX’s head of product Tom Enger said Redd+ credits, despite the negative attention they are receiving, are an essential part of global decarbonisation.
They “will serve long term as a critical market for all nature-based credits” as the largest single category of voluntary market carbon credits by volume of credits issued and retired, he said.
The contract mechanism, which he said will be supported by CIX’s “best practice contract governance”, makes the trading of such credits clear and simplified, he added.
“These elements are cornerstones for a robust spot market, which in turn is fundamental for funnelling investment, confidence and new participants into the carbon market to help it scale,” he said.
In the name of transparency, CIX listed the 11 projects from across the Americas, Africa and Asia that will go into the contracts for a start. Four are selections from Indonesia and Cambodia – the Rimba Raya Biodiversity Reserve project, the Katingan Peatland Restoration and Conservation project, the Southern Cardamom project, and the Keo Seima Wildlife Sanctuary project.
As the voluntary carbon market matures and evolves, projects will be added or subtracted to ensure their ongoing relevance and contract integrity, CIX noted.
Nature-based credit types currently out of the mix are carbon removal by afforestation, reforestation, revegetation, improved forest management, sustained grassland management and soil carbon, blue carbon, wetland restoration, and emerging jurisdictional Redd projects.
Blue carbon refers to the restoration of mangrove forests, tidal and salt marshes, seagrass meadows, seaweed aquaculture and kelp forests.
Jurisdictional Redd projects are those that consider deforestation across the whole jurisdiction, rather than a defined area of forest, to reduce risk of inflated baselines and over-crediting and cater for leakage monitoring.
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