The newly appointed President of the World Bank, Ajay Banga, unveiled plans to launch a mechanism for certifying forest carbon credits in the coming months. His mission is to revolutionize the bank’s operations while enhancing the credibility and transparency of voluntary carbon markets.

Banga emphasized the urgent need to redirect resources from affluent nations to less prosperous regions to address climate-related challenges. 

In his address to a substantial audience at the Singapore FinTech Festival, he stressed that achieving this goal cannot solely rely on taxation or calls for financial contributions from wealthier countries due to political barriers. Instead, Banga proposed that reinforcing the trustworthiness of voluntary carbon markets holds the key.

Revamping Forest Carbon Credits for Credibility

The World Bank’s imminent certification mechanism for the forestry sector aims to establish reliable carbon credits. It also seeks to ensure proper pricing and direct resources appropriately.

Banga highlighted the significance of incorporating safeguards against deforestation and misleading reforestation practices to enhance the credibility of these markets. 

During a conversation with Ravi Menon, the head of Singapore’s central bank, Banga emphasized that endorsing certified green credits could potentially streamline the carbon pricing process. 

This strategy is meant to facilitate the flow of funds from companies and investors in developed nations to developing countries. The latter often provide the forest carbon credits that rich nations are buying.

Carbon credits have been a mechanism for companies and governments to mitigate greenhouse gas emissions. However, recent incidents such as the case with South Pole, a major carbon offsets player, have tainted the industry’s reputation. 

Renat Heuberger’s exit as South Pole’s CEO followed accusations that the company exaggerated the climate impact of its products. Ajay Banga’s initiatives aim to address such credibility issues and instill trust in the carbon credit markets.

• READ MORE: South Pole Cuts Ties with Zimbabwe Carbon Offset Project Kariba

It’s important to note that major companies are also trying to rebuild confidence in these markets. Large asset managers and investors such as Manulife and Stafford Capital have raised millions of dollars in closing their forest carbon credit funds. Also, the likes of Oak Hill Advisors are also spending billions to reduce logging and boost forest carbon deals.

Redefining World Bank’s Focus

Ajay Banga’s leadership at the World Bank has introduced innovative proposals. The major one is expanding the institution’s focus on poverty alleviation to address urgent global issues like climate change. 

During his address at the FinTech Festival, Banga advocated for the repurposing of subsidies that contribute to environmental harm. He highlighted the necessity to redirect subsidies, which presently support fossil fuels, towards initiatives that combat climate change. 

Emphasizing the significance of allocating resources more thoughtfully, he expressed the need to reconsider how public funds are utilized, saying that:

“Repurposing these subsidies can be enormously helpful in the fight on climate…We must find a better way to spread the peanut butter.” 

According to a World Bank report, the global expenditure on sectors like agriculture, fishing, and fossil fuels amounts to a staggering $1.25 trillion annually—equivalent to the size of a major economy such as Mexico. 

Banga also stressed the role of multilateral development banks (MDBs), including the World Bank, in mitigating risks associated with climate-related projects. He proposed the idea of absorbing initial losses from projects like wind and solar, making them more appealing to investors.

In 2022, about $61 billion of MDB climate finance was given to low-income and middle-income economies. 63% ($38 billion) of this total was for climate change mitigation finance and 37% ($22.7 billion) for adaptation finance. 

Mitigating Risks in Carbon Markets

However, Ravi Menon, Singapore’s central bank chief, cautioned that using public capital to reduce project risks has practical challenges and lacks universal acceptance. Concerns about political and foreign exchange risks could deter Western funds from investing in emerging market climate projects.

But Banga countered by underscoring the importance of MDBs in addressing regulatory risks. These financial institutions could offer risk guarantees and insurance to incentivize private investment. 

The World Bank’s insurance arm protects investments from non-commercial risks, enhancing access to funding with better financial terms. The new president believes that the bank’s expertise is crucial in this space. Their backing will bolster private sector investments.

Recently, companies like Kita Earth are also introducing insurance products to protect carbon credit purchases. This safeguard has never been more crucial in building trust to scale this essential market that helps combat climate change.

• READ MORE: Carbon Credit Purchases in Canada Are Now Protected With Kita

Backing carbon markets underscores a strategic shift in the World Bank’s role. It positions the institution as a key player in steering financial resources towards sustainable and climate-resilient initiatives while navigating the challenges associated with global investment in climate-related projects.

The Supervisory Body overseeing Article 6.4 of the Paris Agreement has recently released a preliminary draft document outlining proposed methodologies for carbon reduction projects. This is important as the most anticipated climate conference, COP28, will take place starting this November 30 in Dubai.

The methodologies are integral for projects aiming to claim Article 6.4 emission reduction credits, also called 6.4 ERs. The focus of the draft recommendation centers on the requirements set for projects aimed at curbing greenhouse gas (GHG) emissions.

Supervising “The Mechanism” 

The Conference of the Parties (COP), serving as the meeting of the Parties to the Paris Agreement (CMA), during its 3rd session held in Glasgow, made a significant decision by adopting Decision 3/CMA.3. The COP timeline is shown below, alongside the rising global carbon emissions.

The decision captures the rules, procedures, and operational framework for the mechanism established by Article 6, paragraph 4, of the Paris Agreement, commonly referred to as “the mechanism.”

In line with this decision, the CMA has appointed a Supervisory Body responsible for overseeing and administering the mechanism. It operates under the authority and guidance of the CMA. 

The Supervisory Body also works with full accountability to the COP. 

Comprising 12 members from Parties to the Paris Agreement, the Supervisory Body ensures a wide and fair geographical representation. Its members aim for a balanced representation, with this composition: 2 members from each of the 5 United Nations regional groups, 1 member representing the least developed countries, and 1 member representing small island developing States.

The term of service for the newly appointed members begins from the first meeting of the Supervisory Body this year.

Key Principles for Emissions Reductions & Accountability

Central to the Body’s proposed methodologies are several key principles and features of carbon projects. 

For instance, the methodologies advocate for a cautious approach in estimating a project’s emission reductions or removals. This is to ensure the credibility of the credits and to promote greater ambition in emissions reduction efforts. 

• RELATED: ICVCM’s New Framework: Raising the Bar for Carbon Credits

It involves establishing emission baselines below the scenario of business-as-usual GHG emissions that would have occurred without the carbon project. 

Moreover, to uphold increasing environmental ambition, the draft suggests that the baseline should “evolve or lead to a downward adjustment of creditable emission reductions over time”. 

Additionally, stakeholder involvement throughout the methodology development process and accounting for potential uncertainties associated with the underlying data are crucial aspects emphasized in the draft.

Demonstrating a project’s additionality is another pivotal requirement within each methodology. It requires an assessment showing that the project activity would not have taken place without the incentives from the mechanism. But this should consider all relevant national policies, including legislation.

Mechanism methodologies will also need to address project leakage. This refers to a change in GHG emissions outside the project boundary linked with the project’s activities. 

Finally, the document touches upon non-performance and reversal aspects. These pertain to the potential reversal of emission removals or the risk that the carbon avoided or removed might not remain so for the duration of the project. An example would be a wildfire, which has been reversing the carbon removals of the trees under a carbon project. 

The draft mentions the ongoing need for the supervisory body to further develop guidance in these areas.

What Comes Next?

Some market players have commented on the draft prior to its release. An accredited observer organization highlighted the need to come up with an agreed definition of “removals”. They refer to clearly identifying exact removal of greenhouse gasses (GHG) versus carbon dioxide (CO2).

The Supervisory Body responded accordingly, adopting this final definition on its recently published draft:

“Removals are the outcomes of processes to remove greenhouse gasses from the atmosphere through anthropogenic activities and durably store them…”

Others also noted that until the credits are issued under the Article 6.4 mechanism, the voluntary carbon market (VCM) remains the primary avenue for private capital investment in activities aimed at GHG mitigation or removal.

Given the timelines associated with investments in project activities and the preparatory period for project implementation, the VCM is expected to remain the predominant platform for investment. This is likely to persist until 2025, if not longer, as frameworks and methodologies for the mechanism are established.

Therefore, the VCM will continue to attract investments until the Art 6.4 mechanism drafted becomes fully operational. 

• RELATED: Voluntary Carbon Credits Market Can Be Worth $1 Trillion in 2037

Nonetheless, the Supervisory Body’s focus on key principles such as cautious estimation of emission reductions, stakeholder involvement, and addressing uncertainties reflects a commitment to credibility and accountability. The preliminary draft outlining methodologies for carbon reduction projects signifies a pivotal step in establishing frameworks for emission reduction credits.

Xpansiv’s CBL provided an update on its latest carbon markets results. The report provides an overview of recent activities in emissions, renewable energy credits, and compliance markets. It further details trading volumes, prices, and specific market movements across different regions and instruments.

In the space of renewable energy credits (RECs) trading, Maryland and New Jersey dominate. 

Trading Carbon Credits On The Rise

Last week witnessed a notable surge in spot and front-month CBL GEO futures contracts at 52%, surpassing the rise of the resurfacing CBL N-GEO at 40%. Both have experienced significant increases in trading volume and prices, with N-GEO poised to bounce back in pricing the broader nature-based sector.

However, the spot contract’s volume was traded OTC (over-the-counter) at higher prices. A substantial portion of CBL VCM’s volume was traded through its GEO benchmark contracts.

In particular, about 80% of CBL VCM 456,239-ton volume was traded. This included 207,863 tons via the N-GEO current and trailing vintage instruments.

• RELATED: Xpansiv’s Key Carbon Market Achievements for 1st Qtr of 2023

For other important results, here are the key takeaways:

Project-Specific Transactions:

There are various project-specific transactions that occurred. Indonesian AFOLU credits closed at $6.95 while 2018 Brazilian nature credits at $3.00. Older vintage Brazilian nature and vintage 2001 Indian fuel-switching credits settled much lower at $0.35.

Gold Standard’s Announcement:

Gold Standard highlighted Rwanda’s issuance of a Letter of Authorization for a cookstove project. This achievement is historical, marking the first recognition of credits issued by an independent standard with an Article 6 authorization.

CME Group’s CBL GEO Emissions Futures: 

December GEO and N-GEO, under the CME Group’s CBL GEO emissions futures complex, both saw a 38% rally. The total trading volume across CBL GEO futures was nearly 3 million tons, significantly higher than CBL N-GEO futures’ over 1 million tons. 

Overall, 4,461,000 tons were traded across futures, much lower than the previous week (9,897,000).

North American Compliance Carbon Markets

CBL works with environmental registries to facilitate the trading of both voluntary and compliance Renewable Energy Certificate (REC) contracts. It’s a type of carbon credits generated by choosing cleaner renewable sources over fossil fuels.

Xpansiv report’s highlighted the compliance REC market performance with the following results.

Maryland: Around 12,000 2023 Maryland solar credits were exchanged, with a closing price of $58.20 after multiple trades at $58.10. 

New Jersey: Active trading occurred for both 2023 and 2024 vintage solar credits, with trades surpassing 1,000 credits at $209 and $222, respectively, before closing at $220.75 due to falling offers.

Xpansiv’s recent report on environmental markets outlines a notable surge in spot and front-month CBL GEO futures and CBL N-GEO. Trading volumes and prices for both have increased, signaling potential growth in the broader nature-based sector. Despite some fluctuations, CME Group’s CBL GEO Emissions Futures witnessed a significant rally, indicating a continued interest in emissions trading.

• RELATED: Xpansiv’s Annual Carbon Market Review 2022

The dominance of Maryland and New Jersey in renewable energy credits trading, along with other transactions, underscores the diverse landscape within carbon credit markets.

A US-based Direct Air Capture (DAC) company, Heirloom, launches a novel climate solution that sucks in carbon dioxide from the air using limestone and locking it away in concrete. It is the first commercial DAC plant that opened in the U.S.

Capturing carbon from the air was once seen as unlikely. But today, it’s gaining traction as an important tool to fight the climate crisis. Funds from various sources are pouring into carbon removal initiatives and projects. 

In the U.S., the current administration has committed nearly $4 billion towards promoting DAC and other carbon removal initiatives.

How Does Heirloom DAC System Work?

Located in Tracy, California, Heirloom facility aims to capture up to 1,000 tons of CO2 per year using limestone. 

The DAC process involves heating the limestone to high temperatures, breaking it down into CO2 and calcium oxide using industrial kilns. 

The captured carbon dioxide is then stored in concrete for construction purposes. The remaining calcium oxide is spread on trays, exposed to air, and sucks in carbon naturally. After 3 days, the powder is saturated with CO2 and is returned to the kiln, where the process begins again.

Heirloom claims their system uses fewer energy-intensive fans, leveraging limestone’s natural carbon-attracting properties. Other DAC systems use giant fans to pull CO2 from the atmosphere. Heirloom’s modular facilities enable easy expansion by employing larger trays for limestone and adding more trays to the setup.

The DAC company worked with another climate tech innovator CarbonCure which stores the extracted CO2 in their concrete plants near Heirloom’s facility. 

• RELATED: Amazon and Microsoft-Backed CarbonCure Raises $80M

The company’s CEO, Shashank Samala, shared that his motivation in developing the technology is the worsening effects of climate change he experiences in his home country, India. Emphasizing the need for impactful climate solutions, he noted that:

“For me, it’s really important to work on a solution that actually has a meaningful, scaled impact on climate change, to actually make a dent on this.” 

However, the DAC facility’s capacity to absorb carbon is limited, capturing only 1,000 metric tons of CO2 annually. That’s only a small fraction of what a gas-fired power plant emits yearly.

But the company has an ambitious goal of removing 1 billion tons by 2035, subject to considerable scale up challenge. The company plans to triple this capture capacity each year over the next 12 years to reach that goal.  

The Hurdles and The Hope in Carbon Capture

That level of scale up needs a lot of money and the good news is that tech companies are significantly supporting DAC. 

For instance, Microsoft has inked a long-term carbon removal agreement with Heirloom. Their deal is to capture up to 315,000 metric tons of CO2, offsetting its own emissions towards its net zero targets. Moreover, Frontier, a carbon removal fund, has pledged massive support to Heirloom and similar carbon capture ventures. 

• READ MORE: Microsoft’s $200M Carbon Removal Deal Advances Heirloom’s DAC Solution

Heirloom expresses its commitment to using renewable energy from local providers and refrains from accepting investments from oil majors. They asserted that the carbon captured from DAC won’t be used to enhance oil extraction, aligning with their principles of responsible environmental stewardship.  

The DAC firm’s latest achievement involves securing a substantial $600 million award from the Department of Energy to establish a processing hub in Louisiana capable of handling up to a million tons of carbon per year. The agency is also supporting the other DAC plant in Texas developed by Occidental Petroleum.

• However, despite such advancements, there are still obstacles in significantly reducing carbon dioxide levels. 

A mechanical engineer highlights that direct air capture technology remains costly and demands substantial energy. A scientist also underscores the economic challenges in relation to the scale of the atmosphere. He pointed out the uncertainty of entirely resolving the climate crisis, even with the application of all available solutions. 

Despite these challenges, Samala remains hopeful that the world increasingly recognizes the important role of DAC in tackling climate change. Comparing carbon capture with waste collection, he said that people should consider paying for removing carbon they generate. 

“We need to pay for the CO2 we are putting out there,” he asserts, highlighting the necessity for greater accountability regarding carbon emissions. 

Capturing Carbon and Generating Credits

Notably, climate-tech startups focusing on carbon emissions technology received $7.6 billion in venture capital funding in Q3 this year. This VC funding result is defying the downturn trend in fundraising.

Heirloom offers carbon credits that companies and government entities can purchase to offset their emissions. These credits represent an exchange where an individual or company pays for CO2 emissions removed by an entity specializing in carbon capture.

Prominent companies like Stripe, Shopify, Klarna, and Microsoft are among Heirloom’s initial buyers of these credits. The advanced purchasing model allows organizations to offset their emissions by investing in carbon removal initiatives.

• RELATED: Carbon Dioxide Removals (CDR) Purchases Jump 437% in First Half of 2023

Positioned as the first commercial DAC plant in the U.S., Heirloom’s system leverages natural properties of limestone that require fewer energy-intensive mechanisms compared to conventional DAC systems. Despite challenges, Heirloom has set ambitious goals, aiming to scale up its carbon capture capacity significantly by collaborating with tech giants and securing substantial funding. The company emphasizes the critical role of DAC in mitigating emissions and fostering a sustainable future.

The Attorney General’s office in New Hampshire is examining a plan proposed by Bluesource Sustainable Forest Company regarding the reduction of logging activities on a significant portion of the state’s forests as policymakers are working on bills associated with the use of carbon credits. 

The area, covering 146,000 acres, was initially safeguarded for logging and recreational purposes through a conservation easement. The plan did not anticipate revenue generation through carbon credit markets, a recent development in the industry.

Bluesource, the new owner, aims to curtail logging by around 50% on this massive tract of land in 2024. That area represents about 3% of the state’s landmass.

Though the plan’s intent is to increase forest carbon sequestration, it affects local mills, loggers, the region’s economy, and potentially taxpayers. 

The Value of Keeping Trees Standing 

The shift towards less logging is due to the increasing value of preserving trees for carbon credits. It is a market-driven initiative aimed at reducing carbon emissions.

According to Energy Transitions Commission (ETC)’s report, the current price of carbon credits for avoiding deforestation isn’t enough to cover the marginal cost of avoiding commodity-driven deforestation.

The Attorney General’s office is assessing whether Bluesource’ planned reduction aligns with the original agreement established to protect the land.

• The plan outlines the company’s goals, which are subject to the easement.

The easement acts as a safeguard, ensuring that the land remains protected from development. It also dictates how it should be utilized while outlining the responsibilities of both the state and the landowner.

From the original 171,500 acres, 25,100 acres were allocated to the state. Out of this, 25,000 acres were set aside for wildlife habitat management, while an additional 100 acres were allocated to expand the Deer Mountain Campground.

The easement guarantees public access for various traditional recreational activities such as hiking, hunting, fishing, trapping, snowmobiling along designated trails. However, it limits “non-forest activities” to a maximum of 10% of the property.

In addition to preserving open spaces, protecting natural resources, and nurturing wildlife habitats, the primary objective of the easement is to maintain the property as a financially sustainable land area for timber, plywood, and other forest product production. It explicitly permits “forest management activities,” including various methods of cultivating, harvesting, and removing forest products.

Bluesource’s move to participate in the carbon credit market wasn’t foreseen when the conservation easement was formulated two decades ago.

Promoting Forest Carbon Credits in the US

For ages, forests have been valued mainly for the timber they provide. However, efforts to combat climate change have given them an additional value by recognizing their ability to absorb and hold carbon. 

Forests can trap nearly double the amount of carbon they release, acting as significant carbon storage. 

In 2020, the U.S. Forest Service calculated that per acre in New Hampshire, forests held around 87 tons of carbon by 2018. Approximately 42% of this was in above-ground growth, with 38% stored in the forest soils. 

When trees are cut down, processed, and used to create solid wood products like furniture or building materials such as plywood, their carbon remains stored within these products for potentially hundreds of years.

In 2003, there was no established carbon market in the US. Hence, the easement related to the Connecticut Lakes forest didn’t address managing the forest for carbon sequestration, storage, or carbon credit trading.

In 2022, Bluesource Sustainable Forest Company (BFSC) acquired the Connecticut Lakes Headwaters Working Forest, totaling a million acres managed. Thus, BFSC positions itself as “the largest private forestland owner entirely focused on addressing climate change.”

In 2021, Bluesource partnered with Oak Hill Advisors, a subsidiary of T.Rowe Price managing $500 billion in assets, to acquire forest lands, including those in New Hampshire. 

• READ MORE: $1.8 Billion Bet on the Carbon Markets

BFSC’s president, Roger Williams, said that the collaboration would transition the company from developing projects generating carbon credits to becoming a forest land asset manager.

Additionally, last year, BFSC merged with Element Markets, a majority-owned entity of TPG Inc., an alternative investment manager. Element Markets describes itself as the primary creator and promoter of carbon and environmental credits across North America.

Companies that want to reduce their carbon emissions can buy the credits to offset their footprint. Each credit corresponds to one tonne of reduced or removed carbon from the air. 

The Debate Goes On

Bluesource intends to reduce timber harvests by over half of what has been cut in recent years, particularly between 12,000 and 14,000 cords for the year ending April 2024.

Meetings, discussions, and proposed legislative actions are underway to address the broader consequences of the plan on the local economy. The potential outcomes could have a profound impact on the logging industry, the local community, and the area’s fiscal landscape.

In response to concerns, Bluesource is engaging with legislators and stakeholders, offering expertise and collaboration to deal with the situation. 

According to Patrick D. Hackley, director of the state Division of Forests & Lands, Bluesource had submitted its revised Annual Operating Plan, noting that:

“We are now in the review process… to ensure the new harvesting plan, based on the company’s participation in California’s Air Resource Board Compliance (Carbon) Offset Program, complies with the purpose and all provisions of the conservation easement.”

Bluesource’s initiative to reduce logging for carbon credit generation within a preserved land area is raising debate in New Hampshire. The company’s move intersects with the long-standing conservation easement, provoking discussions on economic impact and forest carbon credit strategies.

• RELATED: Urban Forest Carbon Credits: Potential Market for Climate Investors