Carbon credit buyers’ preferences shifting quickly

Price discovery and buyer preferences are signs of increased liquidity and mature markets. These elements are now present in the carbon credit markets. Within the nature-based solutions (“NBS”) space, there is an increasing preference for afforestation, reforestation, and revegetation (“ARR”) vs reducing emissions from deforestation and forest degradation (“REDD”). Meanwhile, large tech companies are showing a preference for carbon dioxide removal (“CDR”) technologies, with both direct air capture (”DAC”) and bioenergy with CCS (“BECCS”) remaining highly coveted. Within each category, a preference is developing for modular solutions to reduce execution risk further, giving buyers higher certainty that the projects will achieve their stated net-zero targets on time. Increased buyer preferences are helpful, as it makes it more likely the projects developed will have active offset buyers once completed, aligning incentives.

Specific nature-based solutions have recently come under fire, primarily those protecting existing forests. Lack of verification, exaggerated claims by certain participants, and an inability to halt broader deforestation pressures, leading to substitution, have been some of the problems. This is upsetting and probably most troubling for the names doing reliable work in the NBS space, as many don’t deserve this brush.

“Certainly, there are apprehensions on the REDD+ projects, however, I am seeing a trend towards ARR and Agri sector to compensate for REDD+,” said Anubhav Dimri, Executive Director, Carbon Check.

Michael Ackerman, the CEO of Ecoforests Canada confirmed, saying “NBS will be an integral part of netzero goals and decarbonization of the planet. Due to negative press in the REDD+ projects, there is a higher value and interest from ARR projects.” Michael went on to add “we don’t see a shift away from NBS, but rather a diversification by big tech companies into Technology-Based Solutions due to affinity of big tech firms for technology, making them more willing and interested to invest in novel technologies such as DACs, BECCS, CCUS.”

These large technology companies are likely to drive the majority of credit purchases long-term, given a consumer base that wants to see emissions progress, combined with an emissions footprint lower than industrial peers, making it not cost-prohibitive to offset. Higher-tech, durable carbon removal credits will likely make up more of their budgets as those projects become available. Removal credits will also naturally become the most significant part of the market since every day that goes by, more emissions will eventually have to be removed. “Most likely durable carbon removal credits (command a premium), given that the carbon markets should eventually develop into carbon removal markets,” said Eve Tamme, Managing Director, Climate Principles.

“More expensive technology-based credits such as DAC and hybrid systems such as BECCS will probably command the largest premium in the long term. Firstly, because these systems are still relatively expensive and only make sense if triple-digit dollar amounts are paid for these CDRs. Secondly, companies and governments have realized that the 1.5 °C or even 2 °C climate goal is only possible with the help of large-scale technology-assisted removal projects.”, said Michael Ackerman.

The increased carbon credit targeting will likely be further accelerated as more brokers enter the market and evaluate projects for verifiability, leakage, permanence, and additionality.

“Larger corporations with in-house due diligence teams are likely to continue at least with some direct purchases, especially for credits from more novel project types. Going through brokers will be the main way of engaging in all market sectors in the mid-term”, said Eve Tamme.

More precise projects may also be cheaper, as less insurance or buffer credits will need to be purchased to protect from incorrect calculations.

“Purchasing buffer is certainly one of the options. Recently an insurance product on the carbon credits has also been launched, the buyers may use such products or could customize existing insurances to cover such purchases,” said Anubhav Dimri.

“I expect we’ll see insurance products at the forefront in 2024 to address project and reversal risks,” added Amy Zell, Technical Director, Voluntary Carbon Markets at IETA.

The fastest accelerator of human progress has always been markets, and the rapid development of carbon markets is no different. While some may view reduced interest in certain types of offsets as a sign of weakness, it allows participants to incentivize the appropriate carbon removal projects at this critical time of investment. Cleantech funding was one of the few growth areas in 2023, and these dollars can now be deployed into the correct projects.

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