OPINION: What interest in future project financing signals about the road ahead for the VCM?

Quantum Commodity Intelligence – Sam Gill is president and co-founder of UK-headquartered Sylvera, a global carbon markets data provider and carbon credit  ratings agency

In the past few weeks the voluntary carbon markets have seen a seemingly conflicting media cycle, from Barclays releasing predictions that it will reach $1.5 trillion in value by 2050 to traders reporting that carbon credits are being held as "stranded assets".

But, how can both be true? What these two disparate trends reveal is that we're seeing the major signs of market alignment on quality, and a growing wave of future project investment is set to further drive alignment.

The voluntary carbon markets had minimal oversight or transparency for far too long: Participants bought credits with little insight into the effectiveness of what they were investing in, but that did not stop them from investing. 

As a result, quality varied and buyers made claims off the back of carbon credits that may or may not have made their climate impact. Now, for the better, stakeholders agree that quality is critical and behaviours are shifting as a result.

Better tools to assess quality

Participants now have better tools to assess the quality of carbon credits, but higher-quality supply has not yet caught up with the demand for it.

On the surface, it appears like that has led to a temporary stall in market activity – but that is not the case. Instead, more and more participants are looking to invest in high-quality future supply of carbon credits.

In time, this approach will help to stop the issues with quality at the source and strengthen the market overall, and eventually lead the market to the robust size many predict and that our climate change emergency demands to drive investment toward real impact. 

"Up until recently, organisations bought carbon credits, assuming all of the emissions removal or reduction had occurred and that a bar for quality was inherently met via validation and verification by the registry"

Investing in carbon credits on the spot market means the buyer paid in full for the credits and they were delivered immediately. Credits may or may not have been retired immediately thereafter.

Up until recently, organisations bought carbon credits, assuming all of the emissions removal or reduction had occurred and that a bar for quality was inherently met via validation and verification by the registry. We now know this hasn't been the case and it's well accepted that quality is a spectrum.

With more reliable, accurate carbon data, buyers began to learn that in some cases not all of the reduction or removal claimed to take place had actually happened, rendering  their claim or progress on their net zero journey inaccurate.

Pause on spot investing

The newly-created spotlight on quality, and an uptick in lawsuits and scrutiny over the claims made about carbon, has put a pause on spot investing for many until more high-quality credits emerge, at prices that reflect their real market value. That doesn't mean buyers have disappeared – instead they're looking to invest earlier, before projects have even issued credits.

We define a high-quality carbon credit as a unit representing one tonne of carbon dioxide equivalent emissions avoided or removed from the atmosphere for an environmentally significant period of time, as a direct result of project activities, aka it is additional. Broad alignment around this definition buyers seek credits that meet these criteria.

Increasingly, the most sophisticated carbon market participants want to work with developers to invest in their projects while they're still being scoped to ensure that they'll produce high-quality carbon credits, and, most importantly, real climate benefits that will drive net zero progress forward. Moving investment upstream provides more control and confidence where it had previously been eroded.

With the recent proliferation of oversight and transparency into the voluntary carbon markets, buyers finally have the tools to direct their money to the projects having the most climate impact.

As a result, future investors want to see the same qualities in projects not yet created as they do in credits readily available – highly additional activities along with strong baselines, permanence, and strong co-benefits, ensuring prior and informed consent from communities and land rights.

Some buyers have shown a preference for removals, while others are eager to invest in avoided emissions, particularly reducing tropical deforestation, as the  Science Based Targets Initiative recommends. For developers of any project type, this shift presents a unique opportunity to secure more funding for more impact.

An increase in future investment will spur the issuance of more high-quality carbon credits, creating an uplift of quality on the voluntary carbon markets overall. The resulting uplift in quality means more buyers will be able to participate in the spot market with increased confidence in the quality and benefits of their investments.

"An increase in future investment will spur more high-quality carbon credits issued, creating an uplift of quality on the voluntary carbon markets overall"

The increased confidence will lower the barriers to entry to participating in the voluntary carbon markets and also help to facilitate their expansion.

As carbon data providers dispel uncertainty, buyers no longer have to invest a tremendous amount of time and resources building up expertise in order to adequately conduct due diligence. That means more funding flowing from private firms to the natural and technological solutions we need to protect our environment and make progress on net zero targets.

The growing interest in investing earlier demonstrates a strong future ahead for the voluntary carbon markets – there is already $3billion committed to investments in carbon projects in 2024 and 2025.

More focus on due diligence earlier in the buying process will fix some of the most pressing problems for already active participants and provide many more opportunities for future participants. And ultimately, it will achieve what they're meant to: driving funding from the Global North to the Global South, and most importantly, delivering real benefits for the climate.