• Alessandro Vitelli

Standardising the un-standardisable?

Updated: Mar 4

By now you might have read a few headlines about the voluntary carbon market (VCM) and various efforts to scale it up and make it more transparent.


The effort is best highlighted by CBL Markets’ launch earlier this year of a spot voluntary offset contract, known as GEO. The GEO contract specifies delivery of offsets that meet the parameters set by the International Civil Aviation Organisation’s CORSIA market.


CME has lately launched a futures market based on the GEO contract, and this week we saw the first trades at $2.00 and $2.05/tonne for offsets delivered in June and September.


The development of liquid and transparent exchange-based markets for the VCM is foreseen by the Task Force on Scaling the Voluntary Carbon Market (TSVCM), headed by former Bank of England governor Mark Carney and Standard Chartered CEO Bill Winters.

TSVCM says the VCM could grow to 8-10 billion tonnes of carbon reduced a year, but first it needs to develop:

1. Core carbon principles – the attributes of a basic standard contract. In short, the CO2 specifications of an offset.

2. Reference contracts (exchange and over-the-counter) for that core carbon unit.

3. Infrastructure – Exchanges, clearing houses and registries that would facilitate scale-up of the VCM.

4. Agreement on the legitimacy of offsetting as a tool to help reach net zero.


5. Market integrity – oversight, regulation etc.


6. Demand.


All of this is excellent in principle and it largely follows the same route that was taken by the UNFCCC’s Clean Development Mechanism back at the turn of the century. The UN set up the CDM Executive Board, gave it a mandate and the EB went off and built an entire market, with the help of a secretariat and many dedicated stakeholders.

But shortly after the CDM came into being, it became clear that some buyers wanted a little more than just a tonne of carbon emissions reduced or avoided. We began to hear about “co-benefits”, added-value attributes that made certain offsets more “charismatic” than others. Things like contributing to community economic development, bringing power to remote locations, raising living standards and enhancing gender equality.


The VCM was quick to spot the growing trend for co-benefits. Project developers and standards organisations began to incorporate additional attributes into their offsets. The Gold Standard was established in 2003 to highlight the importance of these other elements.


The problem was that by building a liquid and efficient secondary market, the CDM had managed to squash the importance of those attributes in favour of focusing on the compliance value of the offset. Buyers of CERs in the EU ETS were primarily interested in the price differential between a CER and an EU Allowance: both instruments represented one tonne of CO2, but one was cheaper.


To be fair, some compliance buyers did make the effort to source higher-value-added CERs for their compliance, but they were always a minority. The global CER price was the lowest common denominator, the price paid by the largest market, the EU ETS.


And even in the voluntary market, it wasn’t uncommon to see a company “layering” its portfolio. The top couple of tranches would be made up of high-quality “charismatic” offsets – and these would be highlighted in the annual report – but the lower tranches were increasingly “grey”: Chinese HFC or wind, for example; there were so many Chinese and Indian HFC offsets floating around that it’d be hard to find someone in the EU ETS who didn’t end up with some.


And now there’s an effort to bring the same standardisation, the same commoditisation, to the VCM.

Voluntary offsets have never been an easy market to characterise. There are thousands of projects scattered around the globe, each with its particular cocktail of attributes and drawbacks. The offsets themselves are not backed by any government, but by the reputation of the standards organisation that approves them, so there is immense pressure on those standards to be as rigorous as possible.


It's clear that the costs cannot be the same. An Asian REDD+ project involving thousands of hectares of rainforest or a cookstoves project in Africa. Distributed solar power in India or a run-of-river hydro project in darkest Peru.


The cost of generating an offset from each one will be different. And yet this standardisation, commoditisation effort risks eliminating those differences in favour of setting a common value of 1 tonne of CO2. The danger is we forget the cost and focus on the value. If that happens, interest in producing high-quality offsets will shrink, hampering our efforts to get to net zero.


To be clear and fair to the TSVCM and others involved in this effort, there is no talk of setting a single overall price for all offsets. The TSVCM talks of a “core carbon” contract. In this case, “core” refers to the compliance value (that 1 tonne of CO2 again). All the additional attributes will need to be priced separately.


The problem is that if you give a corporate buyer the choice between paying $2.00 for GEO offsets, which, they will be told, do in fact represent a tonne of CO2 each, or the option to buy VCS offsets that bring with them six or seven different UN Sustainable Development Goal attributes at $8 or $10, it’s not a huge leap of imagination to guess which one they’re likely to pick.


This is arguably what happened to the CDM. Once futures contracts started, you could hide Chinese HFC right next to cookstoves under the title "Certified Emission Reduction". The quality distinction slowly vanished, as did much of the desire among buyers to be selective in their offsetting.


If the impact of carbon offsets was only ever meant to be in terms of tonnes of CO2 reduced, then co-benefits wouldn't exist, and nor would the immense range of offset prices that we currently see. The cost and the value of offsets are not the same.


There’s one potential ray of light in all this. S&P Global Platts are testing some AI software supplied by Viridios Capital that aims to establish the value of each separate co-benefit or attribute of a carbon offset. Take a look at this:



In some respects this chart resembles the way crude oil is priced, with a core contract (Dated Brent) acting as the global reference, and each other grade of crude oil priced at a discount or premium depending on its various attributes.


It looks like an elegant way to ensure that, while you could buy an offset that just represents 1 tonne of CO2, there is a relatively simple way to establish a fair price for all carbon offsets, depending on their attributes. It's absolutely essential if we are going to maintain some price disparity between offsets that do just the minimum, and offsets that do more.


This will be fascinating to watch.


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