Fixed price deals from 'carbon cowboys' still common in VCM - panel
Quantum Commodity Intelligence - So-called 'carbon cowboys' are back in the market trying to finance projects with little additionality and few benefits to local communities amid the price appreciation seen in the past year, a panel heard on Wednesday.
The carbon market has sometimes been likened to the Wild West as the prospect of juicy profits attracts developers and financiers with little expertise in the field.
There is no indication that this is a widespread phenomenon due to the existence of carbon standards and other market safeguards, but industry sources say this remains an issue, especially in the nature-based sector where prices are higher than for other classes of credits.
The past year has seen a rush of investments, with traders and funds often competing for deals as few credits are available in the spot market.
Sources stress that the market could have been several times larger by now, but corporates remain wary of investing in the VCM due to reputational risk and amid regulatory uncertainty linked to the Paris climate change agreement.
"In my experience, selling voluntary credits to corporates remains a challenge. They're very concerned about scandals with their credits and find forestry investments very risky," one broker told Quantum recently.
Panellists at the Corporate Investments into Forestry & Biodiversity conference in Amsterdam said fixed price offers from financiers remain all too common, even as new contract structures have emerged to manage price uncertainty modelled on other commodities.
Fixed deals typically guarantee a certain price to local communities but offer limited upside if the carbon price increases later.
They have come under increased scrutiny in the past year as prices have risen. BP was recently criticised for concluding a fixed price deal for improved forest management (IFM) projects in Mexico.
A more sophisticated market involving futures contracts has emerged since last year, opening the possibility for deals done on a floating basis, where contracts are concluded at a premium to a benchmark such as the N-GEO.
"It's definitely an exciting time right now because there's far more money available to investments we want to do," says Jenny Henman, the founder of NGO Plant Your Future, which operates nature-based projects in the Peruvian Amazon.
"I get to see what offers are being made to non-profits... and quite a common offer I get is 'we'll pay for the tree planting and then you can ask the smallholders to give us all the carbon rights.' In that situation, there would be no sharing of upside."
"I feel quite a big responsibility as a project developer to make sure that we are negotiating fair terms for smallholders."
Monocultures involving fast-growing species such as eucalyptus are increasingly criticised as they do not foster biodiversity.
The additionality of such projects has also been questioned as timber companies routinely grow fast-growing species in the tropics for timber harvesting.
"You have a lot of companies, especially in Brazil now, we call them the carbon cowboys... These are... serious investors and they start coming up with new business models around only carbon farming in the Amazon," says Fernando Russo, co-founder of an 'impact fund' called Meraki Impact.
"Often these people promise they're going to plant whatever many hectares in one year without any local capacity to do so. There are no nursery facilities to provide all the seedlings they need and then they go to this easy solution of just planting eucalyptus."
Developing a project with native species is more time-consuming and more costly, as seedlings may not be available locally but have more benefits in the long term, said the panellists.
There is also a need to invest in more research into native plantings, they added.
