© Reuters. FILE PHOTO: European oil companies see profits in boosting carbon offset market projects
By Susanna Twidale and Shadia Nasralla
LONDON (Reuters) – An anticipated attempt by large corporations to hit their climate goals through offsets has led financial exchanges to launch carbon futures contracts to capitalize on a potentially multi-billion dollar market.
It's a step change. Carbon offsetting payments that result from emission reduction projects such as tree planting or the switch to less polluting fuels have had problems gaining credibility for years. However, as climate action has become urgent, their market is expected to grow to as much as $ 50 billion by 2030.
Unilever (NYSE :), EasyJet, Royal Dutch Shell (LON 🙂 and BP (NYSE :)) are some of the big companies that expect to use them to offset emissions they can't get out of their operations and products Climate goals.
Singapore-based digital exchange AirCarbon told Reuters that it plans to enter into an offset futures contract by the second quarter.
"The whole concept behind carbon trading and offsetting is to use the profit motive to drive climate change mitigation decisions (we make sure you find the cheapest offsets," said William Pazos, co-founder of AirCarbon .
The futures market would allow companies to buy a simple loan, a promise to cut a ton of emissions without specifying where it would take place, unlike the existing market which gives direct access to certain offset projects.
Proponents like AirCarbon say the resulting liquidity and transparency are positive.
Critics, including some environmental groups and some project developers, say that increasing the market size may make it cheaper for emitters with no guarantee that it will support the projects that will most effectively reduce emissions.
"There is a risk that … switching from something where a large proportion of over-the-counter shoppers show at least some interest in what they are buying and the quality of it will result in large wholesale transactions that are not that easy to unpack . "said Owen Hewlett, technical director at Gold Standard, one of the largest carbon offsetting registries.
SMALL AND OPAQUE
Carbon credits are currently traded in small, bilateral and usually project-specific deals.
An issuer can buy a forestry or clean cooking stove project credit for a ton of carbon emissions that the project prevented.
The buyer uses these credits to offset past or future emissions and the credit is "withdrawn" or removed from the system.
The retail price for an offset can vary from 50 cents for a renewable energy project in Asia to $ 15 for a clean cooker project in Africa to $ 50 for a plastic recycling project in Eastern Europe.
(Graphic: Carbon Offset Wholesale Prices: https://fingfx.thomsonreuters.com/gfx/ce/rlgvdexlgpo/WholesaleOffsetPrices.png)
(Graphic: Retail prices for CO2 compensation: https://fingfx.thomsonreuters.com/gfx/ce/ygdvzenwdpw/OffsetPricingB2C.png)
These voluntary trades differ from compliance cap-and-trade markets like the European Union Emissions Trading System, which is based on the legislature setting a carbon budget and allocating a limited number of allowances that can be traded by issuers or market participants.
The underlying principle mirrors the carbon offset market in that those who have emitted too much carbon can buy pollution permits from those who have allowances left over.
With increasing demand to limit CO2 emissions, CO2 prices in the EU ETS have risen to a record high of over 40 euros per ton this year.
In the bilateral over-the-counter carbon offset market, some say they have difficulty managing the proliferation of standard setters, registers, verifiers and criteria.
"The market today is very small. It is difficult to be sure that the product you are investing in is credible," said Bill Winters, CEO of Standard Chartered Bank (LON 🙂 and chairman of a private sector task force aiming to create a billion dollar offset market in the coming months.
(Graphic: How small is the market for voluntary carbon offsetting ?: https://graphics.reuters.com/CLIMATE-CHANGE/OIL-CARBONCREDITS/oakvexkkmpr/chart.png)
This year should, in theory, mark the coming of age for carbon markets as decades of United States talks about combating climate change reach a crucial stage.
Delegates to the United Nations Climate Change Conference in Glasgow, Scotland, in November, are expected to work on shaping a market where money will be used for offset and zero-emission projects to keep global temperatures from rising by more than Jan. .5 degrees Celsius (2.7 degrees Fahrenheit) above the pre-industrial value rise on average.
Some players like AirCarbon are eager to get their financial products to market earlier.
Global Exchange CME, home of the main oil benchmark contract, will launch an offset futures contract in March.
"It's a brand new market for a lot of gamers," Peter Keavey, CEO of CME, told Reuters. "We can help provide standardized price benchmarks and improve pricing in the voluntary offset market. That is our goal."
In advance of the market design discussions later this year, both CME and AirCarbon plan to use standards set as part of the CORSIA offset program for aviation. Many environmental activists have stated that these are not strict enough as they allow the aviation sector to use most types of projects to meet its emissions targets.
They fear a repetition of the problems affecting the offset market of the Kyoto Protocol, the Clean Development Mechanism (CDM).
The market under Kyoto, a forerunner to the Paris Climate Agreement, was flooded with cheap loans from industrial gas projects, mostly from Asia. This led to price crashes and made it difficult for other projects to raise funding.
(Graphic: Spot price for certified emission reductions: https://fingfx.thomsonreuters.com/gfx/ce/yzdpxwqokvx/Pasted%20image%201613645738271.png)
"CORSIA allows many project types and does not have particularly strict criteria, such as forest projects with durability problems and old CDM credits (Kyoto) with little environmental benefit," said Gilles Dufrasne, policy officer at the non-governmental organization Carbon Market Watch .
When asked about the criticism of CORSIA, the International Civil Aviation Organization (ICAO), which had developed the system, said in an email that CORSIA was agreed by a consensus of the member states and is "constantly under review".
Some project developers, brokers, and environmental groups also question the wisdom of decoupling carbon units from their underlying project.
They say that combining emission-oriented projects with projects where other issues like community engagement, education, or biodiversity might be a priority could lead to a price race.
This could make it more difficult for more capital-intensive projects to attract buyers.
In general, green groups fear that companies are placing too much emphasis on offsets, which if prices are too cheap, could lead them to focus less on reducing their own emissions.
There are no rules for how many tons of carbon a company can offset each year.
Issuers like Royal Dutch Shell, BP and Unilever, as well as project developers, say reducing emissions must be a top priority.
"We have always recognized that offsetting can only be an interim solution while emission-free technology is developed," EasyJet said in an email.
The private sector task force, led by Winters and sponsored by former central banker Mark Carney, aims to encourage a range of participants including bankers and trading houses, as well as issuers, to join the market to increase liquidity.
"Markets work best when they are efficient, and that efficiency comes from more than less liquidity, so it is important to have as many participants as possible from different backgrounds," said Abyd Karmali, managing director of Climate Finance at the Bank of America (NYSE :), who is also a member of the private sector task force.
Others question the role of speculative trade in a climate context.
"There may be a place for a number of traders tilting margins on some futures contracts, but ultimately I don't see how trading volume (exchanges) has a positive impact on climate change," said Wayne Sharpe, CEO and founder of E -Commerce website Carbon TradeXchange.