Voluntary carbon market needs to explain an ‘imperfect product’: CIX CEO
Wong Pei Ting
AMID heavy scrutiny over the validity of voluntary carbon credits, price benchmarks tracked by Temasek-backed carbon marketplace and exchange Climate Impact X (CIX) paints a depressing story, said its chief executive officer Mikkel Larsen.
“It is true that benchmarks that we look at today will suggest that the carbon prices are very low. No doubt, they are too low,” he remarked, speaking at two panels on Thursday (Jun 8), during Temasek’s flagship event Ecosperity Week.
But instead of saying that market players will have to better validate the credits being produced, he said the major challenge faced by the market today is educational in nature. The market has to be able to explain an “imperfect product”, Larsen stated.
This is part of the process of rebuilding trust in the market, which he said is needed for prices of carbon credits to recover. To aid in this recovery, regulatory bodies should also look into inserting the right incentives for corporates, he added.
Fellow panellist Allister Furey, CEO of London-based carbon rating agency Sylvera, said that trust comes through scrutiny, which he called a “completely healthy” and “entirely natural” phenomenon, given carbon credits’ status as a new asset class.
He noted: “Sometimes, I think there’s a kind of magical lens applied to carbon, as though it is some kind of intractable or completely different kind of financial instrument. But if you look back to the early days of fixed income and bonds, you had many decades of scandal, fraud, and default in the bond sector before there were even credit ratings. Then, several decades again, before you had the Wall Street Crash and the formation of the US Securities and Exchange Commission.”
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He continued: “It’s good to have these conversations. It’s good to raise the bar, it’s good to build the institutions. And that will engender trust.” Trust precedes corporate buyers’ engagement in long-term contracting mechanisms that can make carbon projects bankable, investable, and able to drive the finance to where it is needed, he added.
Furey also said the voluntary carbon market, which is currently US$2 billion in value, is trying to accomplish what the oil market had achieved over 90 years – from exploiting the first mechanically-drilled well to logging half a gigatonne of trades – within a third of the time.
Pointing out that oil took nine decades to achieve this even though it is essentially “black gold” extracted from the ground, he said that the predicament for carbon is that it has only until 2050 to scale to 10 gigatonnes, even as its foundations are still being worked on.
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Another panellist, scientist Max Holmes, CEO of Woodwell Climate Research Center, said that complications arise because a carbon credit’s quality is influenced by many variables. For example, these include calculations on how much carbon there could be in a degraded landscape, how additional the carbon packed back into a landscape is, and threats to the credits’ permanence as climate change unfolds. The measure of quality also depends on how well project developers engage the indigenous communities who live near the forests, he noted.
Liquidity pools
Still, Larsen contended that the market – while “not very mature” at the moment – is ready for transparency, and a level of liquidity. “It takes seven to nine years to make these things mature, but we’ve got to start somewhere. If you don’t create liquidity pools now, we are really never going to get the capital to move,” he said.
The harmonisation of compliance with voluntary markets, such as Singapore’s upcoming option for companies to use high-quality international carbon credits to offset up to 5 per cent of their taxable emissions from 2024, is expected to set the wheels in motion. The offset mechanism was highlighted as Singapore announced the raising of its carbon tax to S$25 per tonne of greenhouse gas emissions in 2024 and S$45 per tonne in 2026, from S$5 currently.
Larsen said that creating such incentives for corporates would set in motion a “natural price setting” to levels close to the tax prices. He pointed out that there is already a flight to quality, with buyers paying a premium two to four times the price of standardised carbon contracts.
But it first begins with trust, he said. “If you build the trust, then naturally countries will be more willing to integrate them into their national systems. Once we have that, we will have a market that is much more global, and has a much clearer price signal.”
McKinsey partner Vaibhav Dua, who was also a panellist, said that this harmonisation is often at the top of his clients’ minds, and that they often ask if the credits they buy can count towards their regulatory requirements. Unlike Singapore, many countries in the region are yet to achieve that clarity, he added.
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