At COP28 in Dubai, banks like Goldman Sachs, Citigroup, JPMorgan Chase, and Barclays are gearing up for a surge in carbon offset deals. They aim to finance carbon sequestration projects, trade credits, and aid firms in buying offsets. 

This move supports smaller projects in emerging markets lacking financial backing. Sonia Battikh from Citi highlights the struggle of many developers in securing funds, emphasizing the role banks like Citi can play in bridging the financing gap in carbon markets.

Rushing in The Trillion-Dollar Carbon Market

This rush reflects a market poised to hit $1 trillion, aiding companies in achieving net zero without fully cutting emissions. However, the market faces controversies, with some credits receiving criticism for not meeting environmental claims. 

The chief of South Pole, the world’s largest seller of carbon offsets, resigned amid greenwashing allegations, prompting a reevaluation. Balancing speed and understanding market norms will be crucial for Wall Street’s success in this evolving voluntary carbon market (VCM).

In 2022, climate commitment from major banks, including Citi, JPMorgan, Barclays and HSBC, have reached over $5 trillion. 

• RELATED: Climate Commitment from Four Major Banks Reach $5.5 Trillion

Last month, the World Bank announced plans to establish a mechanism for certifying forest carbon credits in the coming months. Their mission is to revolutionize the bank’s operations while boosting the credibility and transparency of VCMs.

Canada’s largest bank, RBC, also supported a global carbon markets company with $8 million to grow its platform.

According to Carbon Growth Partners’ CEO, with growing demand, there would be an under-supply of high-quality credits. 

Bankers warn against allowing criticism to undermine confidence in carbon offsets’ future, emphasizing the need to avoid hampering funding for these projects.

Goldman Sachs sees fragmented markets that lack efficiency and transparency. They focus on expanding trading across sustainable commodities, including carbon and renewables. JPMorgan, significantly investing in carbon trading, hired its first voluntary credits trader this year and expanded its carbon capabilities.

However, the arrival of global banks in an underregulated market raises concerns. Michael Sheren warns about the shortcomings of voluntary forest carbon projects, cautioning against relying solely on offsets for net zero emissions. 

Despite criticism, offsets play a crucial role in tackling residual emissions in challenging sectors.

Voluntary Carbon Standards at COP28

Reaching the 1.5C global warming target demands substantial carbon reductions and the VCM has a big role to play.  

During the first week of COP28, major voluntary carbon standard setters pledged to align best practices and enhance transparency, aiming to establish a robust integrity framework for carbon crediting programs. 

The US Commodities Futures Trading Commission (CFTC) revealed standards for high integrity carbon offsets futures trading. UN officials in Dubai expected to unveil new safeguards around VCM based on experts’ drafted rules last month.

• RELATED: Whistleblower Alert: Carbon Markets Tipsters Wanted By CFTC

In the final stages of COP28, observers await the finalization of rules for a United Nations-governed carbon market under Paris Climate Agreement Article 6.

Carbon prices are in historic lows – 12% dip in demand last year and a projected 5% decline in 2023. Yet, drivers of demand persist. 

Factors include companies’ reliance on offsets to meet net zero targets and potential national regulations. These set the stage for a substantial price rise by mid-century, according to BNEF’s research.

In a report by the Ecosystem Marketplace, the average prices of VCM credits hit their highest point in 15 years. 

Though the volume of voluntary carbon credits fell by 51%, the average credit price surged significantly by 82%, from $4.04 per ton in 2021 to $7.37 in 2022, which hasn’t been seen since 2008.

• READ MORE: Voluntary Carbon Credit Buyers Willing to Pay More For Quality

Banking Green and Financing Net Zero

Citi’s carbon markets team includes four London-based traders and four salespeople focusing on the voluntary carbon market. The banking giant aims to reach net zero emissions for operations by 2030 using carbon credits. It also pledges to hit net zero for financing by 2050, with the following sectoral emission reductions targets.

Citi 2030 Emissions Reduction Targets

Barclays also recently brought in an industry expert to lead its carbon trading operations.

The future of the carbon offset market holds uncertainties, especially regarding technological advancements that could transform carbon removal efforts. But this potential innovation introduces a risk similar to “venture capital-style risk,” said a Citi executive.

He emphasized that established prices and methodologies are best for carbon credits, but cautioned against using them for emerging technologies. However, he highlighted Citi’s intent to actively engage in removals once it is scaled.

The banking industry stands out in its capacity to help companies transition to a low-carbon economy by financing sustainable projects. If funds from banks are channeled into emission reduction efforts, it would help scale carbon markets faster toward net zero.

The year 2023 marks a pivotal moment in the volatile journey of the carbon credit market. Once hailed as a cornerstone of corporate climate action, voluntary carbon markets are now grappling with a crisis of confidence and a significant downturn in price and demand.

A Rapid Rise and Troubling Slowdown

Voluntary carbon markets (VCMs), a key tool in the global fight against climate change, experienced exponential growth from 2019 to 2021. 

As seen above, VCM credits jumped by 86% in 2021 compared to 2019 level. This surge was fueled by escalating corporate net-zero commitments and optimistic forecasts about the market’s potential size.

For instance, Citibank committed to reach net zero emissions by 2050, while using carbon credits to tackle unavoidable emissions. One of the world’s largest biopharmaceutical companies, Pfizer, also pledged to achieve net zero emissions by 2040. The US’ biggest utility, Pacific Gas and Electric (PG&E), also aimed at hitting net zero by 2040 while reducing Scope 1 and 2 emissions by 50% from 2015 levels by 2030. 

However, 2022 witnessed a stark slowdown in the VCM’s growth, a trend that continued into 2023. Various factors, including the increasing complexity of market mechanisms and the role of carbon credits in broader sustainability strategies, have contributed to this decline​​.

The Offset Decline: An Erosion of Confidence

Several high-profile corporations, such as Shell, Nestlé, EasyJet, and Fortescue Metals Group, have recently retreated from carbon offset schemes. This withdrawal stems partly from growing skepticism about the effectiveness of these projects, with concerns about their actual climate benefits and accusations of greenwashing. 

1. Shell: The MIT Technology Review reported that corporations, including Shell, announced they were backing away from offsets or the claims of carbon neutrality that relied upon them. This shift reflects a broader trend of companies moving away from credits that simply claim to prevent emissions, particularly in light of increasing awareness about the challenges in proving the actual environmental impact of these projects​​.
2. Nestlé: Reuters detailed Nestlé’s decision to move away from investing in carbon offsets for its brands, such as KitKat, to focus more on programs and practices that help reduce greenhouse gas emissions within their own supply chain and operations. This change is part of their strategy to reach their net-zero ambitions, indicating a shift from offsetting to direct emission reductions​​.
3. EasyJet: According to the MIT Technology Review, EasyJet was mentioned as another corporation that had decided to wind down its offsetting program. Instead, EasyJet is now focusing on cutting emissions from its operations, signaling a shift in strategy towards more direct measures of reducing environmental impact​​.

A significant decrease in demand for offsets was observed, with estimates suggesting a 25% decline from 2021 levels by the end of 2023​​.

Carbon Price Collapse

The downturn in demand has had a dramatic effect on prices. The Xpansiv market CBL, the world’s largest spot carbon exchange, saw prices of carbon offsets fall by over 80% in an 18-20 month period.

• Note: You can view the daily price changes and charts of carbon prices right here.

This price decline reflects the broader challenges facing the voluntary carbon market, including questions about the actual environmental impact of the credits and the integrity of projects claiming to offset emissions​​.

While the VCM prices have been hit, the decline in NGEO (Nature-Based Global Emissions Offsets) prices stands out due to the premium they were trading at over the other offsets last year. With increasing scrutiny on forestry projects, NGEO prices sharply dropped from around $15 in June 2022 to $1 in June this year.

It even declined to below $1 at the time of writing. 

One major reason for the downward trend of NGEOs was the tough macroeconomic environment, causing stagnation in demand in 2022. Moreover, the poor outcome for the VCM at COP27, which carries over at the recent COP28, further casted doubts on how carbon offsets fit in corporate net zero plans.

Mark Kenber, VCMI’s Executive Director, commented that though there are many encouraging developments on carbon markets at COP28, agreements “fell short of the mark”. He further stated that:

“For the market to fully develop in the next two years, policymakers can draw on the foundational work of the VCMI and IC-VCM, developing high-integrity VCM and Article 6 markets that deliver the finance that makes ambitious global action possible.”

Over in compliance markets, the EU carbon prices have broken records in February this year, surging past 100 euros. But the EU allowance prices also dipped back to its low levels this month at 78 euros, close to its November 2022 average price. 

The region, which has the largest carbon market EU ETS, plans to phase out its free carbon allowances while gradually phasing in its newly introduced carbon tax, known as the Carbon Border Adjustment Mechanism. CBAM will ensure that companies operating inside and outside the bloc remain on the same page in terms of carbon pricing and environmental impact. 

• RELATED: CBAM Carbon Pricing (EU’s 1st Cross-Border Carbon Policy)

Following the EU footsteps, the UK is also set to launch its own CBAM version. It aims to ensure that imported goods from carbon-intensive industries like iron, steel, and cement face fair carbon prices. 

A couple of African nations are also gearing up to participate in the carbon arena. New carbon credit exchanges are created in Zimbabwe and Tanzania while Zambia and Kenya have plans to do the same. 

Several countries in Asia are also joining the carbon market bandwagon. Indonesia had launched a carbon credit trading market through IDX as part of its 2060 net zero goal. Japan’s first exchange-based carbon market opened in October this year.

Amid all these, the future of carbon markets now stands at a critical juncture. They face the challenge of regaining credibility and functionality amidst growing scrutiny and regulatory changes. How these markets evolve in response to these challenges will significantly impact their role in global climate strategies.

The Inflection Point: What’s Next for Carbon Prices and Trading?

Not all carbon news is grim here in 2023.

On Dec 13th, 2023, Xpansiv’s CBL spot exchange hit a daily trading volume record of 2.13 million tons of carbon credits, signalling robust corporate engagement in carbon offset markets. This surge aligns with the final day of COP28, reflecting an uptick in year-end corporate purchases for sustainability goals. 

New transparency requirements in the U.S., Europe, Australia, and California are driving this demand, pushing companies to disclose more about their carbon offset activities.

Allister Furey, CEO and co-founder of Sylvera, noted the fact that regulators are now seeing the critical role of carbon credits in financing the net zero transition. He further said that:

“Disclosures at every step of the carbon journey and for all involved stakeholders will become increasingly important. From the SEC’s coming climate disclosure rules to California’s AB1305, there are significant incoming regulations which should dramatically improve data availability in net zero–and we will begin to see the price of carbon ripple throughout value chains, slowly but surely.”  

Since 2020, CBL has traded over 300 million tons, dominating over 95% of the global spot exchange-traded carbon offsets. The record day underscores a heightened market activity during the UN’s COP event.

• READ MORE: The Big News from COP28: Nuclear Energy’s Triumph

Meanwhile, the Compliance Credits market has not only attracted immense investment dollars – especially in carbon capture projects – but countries like Canada and the UK are setting higher and higher compliance prices.

NASDAQ Enters the Carbon Credit Market Arena

The NASDAQ Exchange, recognizing the growing importance and potential of the carbon credits market, has recently launched an innovative technology to revolutionize the industry. This new system, aimed at digitizing the issuance, settlement, and custody of carbon credits, is set to enhance the scalability of this nascent market. 

Nasdaq’s approach uses smart contracts for secure transactions and promises to bring much-needed standardization and liquidity to attract diverse investors​​​​.

Moreover, Nasdaq’s collaboration with Climate Impact X (CIX) marks a significant stride towards developing the global carbon market. This partnership will power CIX’s spot exchange for quality carbon credits, intending to improve price transparency and liquidity in the voluntary carbon credit market. 

Addressing the inefficiencies and inconsistencies in the market, this move by Nasdaq and CIX is poised to create a more resilient and scalable trading environment, demonstrating Nasdaq’s commitment to pioneering market transformations in the carbon credit sector​​.

It’s clear that change is in the air. Companies are not just looking to buy credits; they’re looking to buy credibility and real impact. And as the market matures, it’s becoming more about quality than quantity.

Amidst a challenging year for the climate, a recent Carbon Market Watch (CMW) report uncovered a concerning trend among the EU’s top 30 emitters, referred to as “Emissions Aristocracy”. 

These companies span various sectors like power generation, steel, cement, oil refinement, and petrochemicals. And collectively, they contribute to 50% of the emissions accounted for by the EU Emissions Trading System (EU ETS).

Free Allowances Are Polluters’ “Freebies”

The EU ETS is a pivotal component of the European Union’s fight against climate change. Launched in 2005, it holds the distinction of being the world’s premier and most extensive transnational emissions trading initiative. Designed to curb greenhouse gas emissions, the system aligns with the EU’s overarching plan to fulfill climate objectives and global agreements like the Paris Agreement.

The CMW report, built upon existing research, sheds light on companies significantly polluting under the European carbon credit trading scheme. It identifies those not paying for their GHG emissions and sectors failing to meet their decarbonization commitments. 

The European Commission (EC) had reported on the performance of the EU ETS for 2022 focusing on installations and sectors. But it didn’t reveal the entire story, according to CMW. Their new analysis promises a deeper understanding of emissions data, unveiling startling truths on free carbon allowances. 

A policy expert at CMW and the report’s author, Lidia Tamellini, stressed the fact their analysis revealed:

“The EU ETS allows an Emissions Aristocracy to pollute without footing the bill. This report spotlights how these already hugely profitable companies are granted freebies. Rather than the polluter paying, it is the planet and society left carrying the tab.”

Under the EU ETS, the companies in the Emissions Aristocracy, despite generating substantial revenue, benefit from ‘free allowances’. That means they’re avoiding payment for the environmental harm caused by their planet-warming emissions.

The EU ETS is a market-driven climate policy, geared toward heavy industry and the power sector, that follows the ‘polluter pays principle’. It means emitters must pay for the environmental and social costs of their GHG emissions.

The Lion’s Share of EU Emissions is From Top 1%

CMW’s investigation found that while the power sector is responsible for most of the emissions, it pays for its pollution. However, companies in other sectors like steel, cement, and petrochemicals are among the top 30 polluters that receive huge amounts of free pollution permits. 

The identified businesses are dominant players in their respective sectors. 

The EU ETS is dominated by a small fraction of companies. In particular, the top 30 emitters alone account for over 50% of the scheme’s emissions in 2022, despite comprising less than 1% of total covered companies: 3,515. This highlights the huge responsibility of those companies in driving the climate crisis, underscoring greater accountability in their climate actions. 

Given the total amount of EU emissions in 2022 and that covered by the ETS, only 30 businesses are accountable for generating about 25% of the total EU carbon footprint for last year. 

However, within the EU carbon trading mechanism, major contributing sectors face minimal pressure for swift emission reductions, the report said. More remarkably, these sectors received about €47.6 billion in free allowances in 2022, essentially granting them a free-to-pollute pass.

As can be seen in the chart, giving out free allowances especially favored the heavy industries. Prior to 2016, some sectors received more allowances than their carbon emissions. For the last 3 years (2020 – 2022), free allocation covered industrial emissions by 104%, 89%, and 95%, respectively.

The redirection of auctioning revenues toward climate-related purposes under the recent EU ETS revision signifies a loss in vital funding for innovative technologies, support to vulnerable households and small businesses, and climate mitigation efforts.

• READ MORE: EU Makes New Deal to Reform its Carbon Market

A handful of prominent companies are featured in the report’s list. RWE, a multinational energy corporation, holds the title as the largest emitter in the EU. Additionally, heavy industry entities like ArcelorMittal, ThyssenKrupp, and HeidelbergCement secure their presence within the top 10 of the listed emitters.

The report delves into the continued use of free allowances within specific sectors, hindering the European economy’s path to decarbonization. The analysis also highlights how the free allocation system has failed in fostering an efficient decarbonization path for heavy industry.

Make the Emissions Aristocrats Pay 

The European Commission is in the process of formulating its post-2030 climate framework. Addressing how polluters evade paying the complete cost of their emissions should be a top priority of the EU ETS.

Carbon Market Watch advocates for a more robust EU ETS aligned with achieving climate neutrality by 2040. This entails phasing out free allowances for heavy industries and promptly implementing an auctioning system ahead of the current plan, which extends free allocation until 2034. 

• RELATED: EU to Auction €8 Billion Carbon Credits Earlier this 2023

The EC must establish stricter regulations for major emitters to ensure genuine accountability and responsibility for polluting. For Tamellini, “Closing the loopholes in the EU ETS is essential…the Emissions Aristocracy has had it easy for too long.”

Carbon Market Watch report sheds light on the stark reality of the EU’s emissions landscape. Going beyond the surface, their analysis pinpoints key companies, sectors, and emission trends within the EU ETS, highlighting the urgent need for accountability and stronger decarbonization strategies.

Sylvera, a prominent carbon data provider, is collaborating with the Singapore Government to facilitate high-quality carbon credits for meeting its commitments under the Paris Agreement. Alongside this initiative, the company opened an office in Singapore to bolster its presence in Singapore’s thriving carbon trading ecosystem.

The London-based company builds software that independently and accurately assesses carbon projects aimed at capturing, removing, or preventing emissions. This technology aids organizations in making impactful investments toward achieving net zero emissions. 

With the company’s suite of data and tools, businesses and governments alike gain the confidence to invest in, measure, deliver, and report genuine climate impact. 

Empowering Climate Action

Despite the Paris Agreement’s inception in 2015, many signatory countries are currently falling short of their climate goals. Purchasing carbon credits stands out as a well-established and scalable approach to channel funding towards impactful climate outcomes. These credits support projects worldwide such as safeguarding rainforests from deforestation and clean energy initiatives. 

Article 6.2 of the Paris Agreement lays the groundwork for countries to exchange carbon credits through a market mechanism. This approach helps nations in their climate goals post-emission reduction efforts.

Singapore, the leading Southeast Asia in instituting a carbon pricing system, actively seeks partnerships for carbon credit projects. These initiatives offer host countries various benefits, including investments, job creation, and progress towards sustainable development goals.

Benedict Chia, Director General for Climate Change at the National Climate Change Secretariat in Singapore, highlighted the nation’s commitment to fostering a high-integrity carbon market. To achieve that, the official particularly noted that:

“…we need to leverage data and innovative technologies to monitor emissions reductions and removals in carbon credit projects. We welcome the launch of Sylvera’s regional office in Singapore to provide solutions on this front.”

Sylvera will aid Singapore in identifying top-notch carbon credits (referred to as ITMOs under Article 6.2) from other nations. This collaboration aims to swiftly allocate climate finance to areas making tangible climate impacts and use these credits in alignment with Singapore’s Paris Agreement objectives. 

In October, the Asian country set a criteria for international carbon credits to ensure that they are of high quality. 

• READ MORE: Singapore Sets Higher Standards for International Carbon Credits

By marrying cutting-edge technology with premier carbon measurement methodologies, Sylvera offers ratings that evaluate climate action investments, like carbon credits. This empowers organizations and pioneering nations like Singapore to confidently execute their climate strategies and progress towards achieving net zero.

Singapore Raises the Bar for High-Integrity Carbon Credits

Singapore has recognized the advantages that carbon markets offer in achieving net zero targets with its ambitious goals. It’s crucial for global leaders to embrace the benefits of high-quality credits to make substantial progress on their climate commitments. 

Thus, governments are increasingly emphasizing the need for independent assurance to ensure the credits they purchase are “driving real climate action and societal net zero progress,” said Samuel Gill, Co-founder and President of Sylvera.

Last July, the carbon rating company raised $57 million to incentivize businesses to confidently invest in carbon credits.

• READ MORE: Sylvera Raises $57M to Help Companies Invest in Carbon Credits with Confidence

According to Trove Research, a total of $36 billion was invested in voluntary carbon credit projects within 10 years, 2012-2022. Of that, $7.5 billion was raised in 2022 alone.

In terms of share, the East Asia and Pacific region bagged the largest investment, amounting to $2.7 billion.

Still, global efforts remain short of about $90 billion to meet the 2030 carbon reduction targets. 

Sylvera’s advanced software will contribute to strengthening Singapore’s position as a key emissions trading hub in Asia. Through this collaboration, the country may set a benchmark for environmental integrity, setting an example for the global community.

The announcement coincides with Sylvera’s expansion into the region, establishing a local presence and office in the country. This development is backed by support from the Singapore Economic Development Board (EDB). 

Sylvera’s new office will serve clients not just in Singapore but also in the broader APAC region.

Investments in developing carbon credit projects are an essential market signal indicating levels of corporate climate action. Sylvera’s collaboration with the Singapore Government marks a crucial step toward ensuring high-quality carbon credits for meeting climate commitments. 

Voluntary carbon credits have faced a significant downturn in prices, casting the market under increased scrutiny. But compliance prices are set to soar, with Germany raising it to 50 euros while Canada also plans to increase in 2024. 

Expectations were high that the recent COP28 conference would address concerns on carbon credit reliability by establishing regulatory measures. Yet, the attempt fell short, leading to carbon prices dropping to their lowest levels, particularly Nature Based Carbon Offsets (NGEO).

The Meltdown of NGEO Carbon Prices

Amid rising commitments to reach net zero emissions, companies have been purchasing carbon credits to offset their emissions. However, the market is currently experiencing a breakdown. 

NGEO prices plummeted to a massive 81% in trading to its lowest level ever, at just $0.07.

Over the last 2 years, there has been a drastic drop in demand for credits, causing a sharp decline in prices. 

• READ MORE: The Collapse of NGEO Carbon Prices: An In-depth Analysis
  

The diminishing demand is attributed to the absence of standardized regulations governing carbon markets. Recent news and studies have raised concerns about the reliability of the system, emphasizing the lack of rules.

Carbon markets essentially enable the offsetting of carbon emissions through tradable entities – carbon credits. Each credit represents the removal or reduction of carbon dioxide from the atmosphere, achieved through actions like tree planting.

There are two types of carbon markets: mandatory and voluntary. 

Mandatory or compliance markets are regulated by governments or international bodies using instruments like carbon taxes to regulate energy-intensive industries. On the other hand, voluntary markets allow companies and individuals to trade credits without compulsion. It is this voluntary sector that is currently under scrutiny.

Compliance Prices Set to Surge

Things in the compliance sector are taking a different turn. Germany, in particular, recently approved their aim to increase carbon prices by more than previously planned. 

The country voted to raise a carbon levy on fossil fuels used in housing and transportation. The German government initially agreed to raise prices to 40 euros a ton in 2024. But the price is now set to reach 45 euros beginning next month, a 50% jump from its current price. 

That figure will further rise to 50 euros in 2025. This new carbon price is part of the German’s nation deal to mitigate a budget crisis. It will also help fund Germany’s climate and transformation fund. 

Over in Canada, the federal government also decided to bring up the carbon tax from $65 per tonne this 2023 to $75 in 2024. 

Canada’s carbon price jumped by the most this year, going from $50 to $65 a tonne of carbon emissions. And this will continue at the rate of $10 a year increase until it reaches $170 per tonne in 2030. 

• RELATED: Canada Insures Carbon Price Contracts with $7B Funding

Last month, the House of Commons was in a debate over an issue whether to ax the tax or not. 

Canada’s NDP moved to scrape the carbon tax from all forms of home heating. The debate between the political parties on carving-out the carbon tax will impact the country in achieving its climate goals.

Where Hope for Voluntary Carbon Market Lies

A BloombergNEF report projected that the total value of carbon credits issued and sold for companies to achieve their decarbonization goals could reach $1 trillion by 2037. Under stricter supervision, where companies can only purchase vetted carbon credits, offset prices could surge to over $250 a ton.

Some key players cautioned about the voluntary market’s reliance on bilateral transactions for inexpensive credits, which may jeopardize its future.

They stressed the need for transparency, clear quality definitions, and easier access to high-quality supply, warning that upcoming years could mirror the challenges seen in 2022.

Hopes were pinned on a resolution in this regard during the COP28 conference. The climate summit was intended to address the issue, yet it proved unsuccessful. 

• READ MORE: The Top 4 Important Highlights at COP28

The Paris Agreement’s Article 6, outlining rules for carbon trading, was anticipated to provide a solution. But countries failed to adopt these standards at the recent COP28 conference in Dubai.

As compliance prices set to surge in the near term, voluntary carbon credits, particularly the NGEO, face a crisis due to plummeting prices and lacking regulations. The COP28 conference failed to provide resolutions, leaving uncertainties around market reliability. Hopes are now betted on clearer regulations and greater transparency to stabilize these crucial markets amid mounting climate commitments.