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Understanding Opportunities Across Carbon Markets

Contributed by Lucie Tepla and Karen Fawcett

Non-executive directors are faced with the daunting task of ensuring their businesses achieve net zero emissions by 2050. Efforts will focus primarily on reducing a company’s own emissions, through a transition to clean energy and decarbonisation of operations. However, many companies, especially those in “hard to abate” sectors, will face the need to offset residual emissions, not only during the transition period, but possibly also on a longer term basis.

The session provided NEDs with the opportunity to hear advice from four of the most experienced professionals globally in carbon offset markets. Following a keynote by Bill Winters, a panel of experts representing the carbon offset eco-system provided insights into the workings of voluntary carbon markets.

Contributors were:

· Bill Winters, Group CEO Standard Chartered Bank and Chair of the Taskforce Scaling up Voluntary Carbon Markets (TSVCM)

· David Antonioli, CEO Verra. Verra’s VCS is the world’s largest voluntary carbon offset certification programme.

· Ken Newcombe, CEO CQuest Capital. Ken is a pioneer of project based carbon offsets having developed the first carbon fund while at the World Bank.

· Bill Pazos, COO Air Carbon Exchange; an exchange for trading carbon credits recently launched in Singapore.

· Lucie Tepla, Senior Affiliate Professor of Finance at INSEAD

What role should NEDs play in a company’s carbon offsetting programme?

NEDs must first stress the importance of developing, publishing and regularly reporting on, clear net zero plans that prioritise company emission reductions over offsetting. For many companies this is still work in progress. While management teams face many short-term pressures and distractions, boards of directors are able to take the medium and long-term view that is required for addressing the company’s net zero transition. As intermediaries between management and owners who are becoming increasingly vocal and demanding around the transparency and credibility of companies’ net zero transition plans, NEDs will themselves be under pressure to insist that these plans are credible, verifiable and consistent with company strategy.

What issues should NEDs be aware of ?

· Avoiding greenwashing and over-reliance on offsets: Companies will be deterred from over-relying on carbon offsets by pressure from stakeholders, including boards, employees and, in particular, owners. Investor coalitions, such as the Net Zero Asset Owners Alliance (NZAOA), representing over $5 trillion of AUM are working closely with companies to set specific decarbonisation targets, including critical medium term (2030) milestones.

· Timing - the cost of carbon offsets is already rising rapidly: While some voluntary carbon offsets are currently priced as low as $2-$3 per tonne, elsewhere the cost of carbon is much higher. Carbon allowances in the EU’s ETS compliance market have traded over $45 per tonne in 2021 and direct air carbon capture is expected to cost over $200 per tonne. High quality thresholds for carbon offsets, as advocated by the TSVCM, combined with increasing demand, will push prices up substantially. Therefore, companies should not delay and start offsetting now.

“scarcity is setting in…. in the last six weeks, Corsair contracts went from $1.25 to $2.50” Ken Newcombe CEO CQuest Capital

· Maximising the broader impact of the offsetting dollars: The money flowing to carbon offset projects can have a significant impact beyond reducing emissions. It can be targeted at poorer countries to boost development finance, or used to fund transformational technologies. NEDs should also consider the co-benefits of projects that address other SDGs, such as biodiversity or health.

“Clean cooking - giving women many more hours a day, better education and better health and everyone will be looking at you” Ken Newcombe CEO CQuest Capital

Choosing projects related to a company’s value chain, as recommended by the TSVCM, can have further advantages. For example, an oil producer buying carbon offsets backed by clean cookstove projects in the same less developed country in which it extracts oil can add legitimacy to that company’s business and presence.

· Exploring the full range of purchase options: The market has evolved rapidly from bespoke to over-the-counter trades and now the role of exchanges is expanding. Exchanges are expected to bring price transparency, content standardisation, reduce transaction costs, all leading to liquidity. Brokers are expected to continue playing a critical role for very bespoke needs of the largest corporates e.g.improving carbon neutrality in cotton growing.

“ There are so many great projects it is hard to choose from - - currently too many items on the menu, where do we start ?” David Antonioli, CEO Verra

· Understanding the evolution of standards: Beyond the current verification and certification standards, NEDs should be aware of the core carbon principles for standardised contracts being developed by the TSVCM that will likely become an important market standard. It will be possible to add attributes such as the SDG co-benefits mentioned above to these contracts, something that Verra’s SD Vista programme already does within its VCS approach.

“I sleep well at night because of Verra and Gold standards.. the process is extremely robust and transparent” Bill Pazos

As technologies improve (e.g. cheap solar power) or regulations get tougher (e.g. compulsory landfill gas capture) then certain types of project will no longer qualify for carbon offsetting.

“Would this project exist in the absence of carbon credits? if yes, then it is not a carbon project” Bill Pazos, COO Air Carbon Exchange

Finally, the panel argued that key decisions around carbon offsetting only need to be made once. A company needs to agree a quality standard which they want to put their brand to, then hand over to the treasury department. It should not be on a project by project basis – that is a waste of a board’s time.


How the voluntary carbon market can help address climate change, McKinsey, Dec 2020 voluntary-carbon-market-can-help-address-climate-change

Final report of the TSVCM, Jan 2021 which will be refined by July 2021

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