In this report
- COMPLIANCE: EU’s CBAM changes the economic landscape, as bloc’s carbon market linkage talks stall with UK
- VOLUNTARY: Integrity issues continue to plague demand for credits, but efforts to develop voluntary carbon market move forward
- FINANCE: UAE offers to host next UN climate summit, U.S. govt commits to carbon removal purchases
COMPLIANCE: EU’s CBAM changes the economic landscape, as bloc’s carbon market linkage talks stall with UK
As the EU’s carbon border adjustment mechanism (CBAM) came into effect at the start of October, exporters to the region are gearing up to measure their carbon impact and bracing for levies further down the line, with several jurisdictions already moving to ramp up the development of their own carbon pricing measures.
Emissions trading scheme linking talks between the EU and UK remain stalled however, the European Commission’s top climate official said, warning that market signals, such as a collapse in the UK permit prices, point to diverging climate policy ambition.
Power generation covered by the EU ETS fell by more than one-fifth over the first nine months of 2023, compared to the same period last year, with weak demand and rising low-carbon output crushing fossil fuel burn. Morgan Stanley slashed its EUA price forecast by 11% for 2023 to €75/t amid a more bearish outlook, with larger reductions in its predictions in subsequent years out to 2027.
Iceland agreed to buy 3.4 million sovereign carbon units from Slovakia in order to fulfil its legally binding obligations under the Kyoto Protocol’s second commitment period, which spans 2013-20.
EU co-legislators reached a provisional agreement on a consumer rights bill that includes banning companies from promoting products using environmental claims based on carbon credits.
A recent deluge of biomass-based diesel does not worry the U.S. Environmental Protection Agency (EPA), according to an agency official, despite the tumbling of RIN prices over the last two months. The EPA’s 2023-2025 renewable volume obligations (RVOs) under the Renewable Fuel Standard (RFS) were based on feedstock availability in 2022, which saw shortages that have since been settled. The director said that a rulemaking process would need to be completed to adjust the RVO, which is unlikely to happen, but that excess RINs can be used in the future when quotas are more ambitious.
Biomass-based diesel (D4) RIN prices under the RFS may experience countervailing influences in the next couple years that could pull them either up or down, while the market for the D3 category largely filled by renewable natural gas should remain tight and maintain high prices, analysts said at the OPIS RFS, RINs, and Biofuels Forum in Chicago.
RGGI Allowance (RGA) prices temporarily skyrocketed following a programme review webinar in which various officials detailed updated modelling scenarios for the achievement of net zero by either 2035 or 2040. During the webinar, officials confirmed that they had not modelled future banking adjustments in the scenarios, nor had they updated Cost Containment Reserve (CCR) or Emissions Containment Reserve (ECR) trigger prices. Officials also reaffirmed the pre-established timeline for the Third Program Review, although some have expressed doubts about the feasibility of this.
California regulator ARB provided updates on its upcoming Low Carbon Fuel Standard (LCFS) rulemaking and has proposed raising its 2030 carbon intensity (CI) target, as well as an auto-acceleration mechanism (AAM) to adjust the CI target under specific conditions. These ideas received much public support. However, representatives from the dairy and renewable natural gas industries expressed concern over proposals to phase out avoided methane crediting, while aviation workers and community members living near airports were worried about the lack of aviation industry regulation.
The Chilean government published regulations setting out the rules for utilising offsets against the country’s $5/tonne carbon tax, including restrictions on geography and expiry.
The price for China’s CEA allowance reached an all-time high in late September, trading at 76.13 yuan ($10.42). Demand is building up in the market ahead of participants’ first compliance deadline in two years. The final deadline for 2021 and 2022 compliance is Dec. 31, but the central government has asked provincial regulators to make sure emitters surrender 95% of their total by mid-November.
New Zealand has announced an annual few of NZ$30.86 ($17.90) per hectare for foresters participating in the ETS, as well as a long list of service fees to help cover the scheme’s cost. The move has infuriated foresters – the biggest source of supply in the market – with many threatening to leave and one forest industry group saying it will file a judicial review.
NZ has also announced it has cancelled 21.5 million Kyoto-era carbon credits. Some 6.5 million went towards the country’s own Kyoto target, while the rest was cancelled to make sure they could not be used towards New Zealand’s Paris target, the Labour party government said.
Australia’s ACCU scheme continues to spark controversy, with a group of scientists publishing an essay where they raised “serious concerns” that credits from soil carbon projects could be overinflated and based on non-additional activities. After a slow start for soil carbon, one Australian project last month received nearly 100,000 ACCUs. At the same time, ANU professor Andrew Macintosh has written to the government, saying landfill gas operators are concerned with the lack of a clear framework for redesigning crediting baselines for their projects.
VOLUNTARY: Integrity issues continue to plague demand for credits, but efforts to develop voluntary carbon market move forward
Negative media coverage continued to dominate discussions during the IETA North America Climate Summit held in New York in September, as stakeholders in the voluntary market reacted to fresh reports from a newspaper that has persistently criticised corporate credit use, with fears of reputational risk threatening to further depress buying activity.
This followed on from another expose by the Guardian newspaper, which earned a stern rebuke from standards bodies Verra and Gold Standard, after it claimed that the majority of credits generated from the market’s most prolific projects are “junk” when assessed purely through the lens of emissions reductions.
Experts on the UNFCCC process expressed scepticism that buyers are immediately lining up to buy Article 6-ready REDD+ results, which are expected to be offered to the market in the near future by rainforest nations Suriname, Belize, and Honduras. They suggested however, that there may be significant future demand for such jurisdictional units if their use is fully established for transfer under the Paris Agreement.
Public-private initiative LEAF Coalition expects to announce its first transactions of forestry credits in the coming months, including a pre-payment fund offering supplier nations with upfront capital to help overcome technical challenges in finishing deals.
Global companies need clearer guidance on what “beyond value chain mitigation” is and which claims they can make based on their actions, according to a consultation process carried out by the Science-Based Targets initiative (SBTi).
Futures contracts for carbon credits tagged with its Core Carbon Principles (CCP) moniker could appear soon, as the cross-stakeholder group has introduced working groups that could fast-track some offset categories for labelling.
However, carbon credit ratings agency BeZero Carbon has warned against a headlong rush into commoditising offsets as the Integrity Council for the Voluntary Carbon Market (ICVCM) prepares to tag the first categories of units with its CCP integrity label, which is expected to reassure corporates that each credit is worth a tonne of CO2.
Zimbabwe has backed down on forcing carbon offset project developers to hand over a quarter of their share of proceeds from credit sales to local communities following a backlash from investors and market participants.
Mozambique will prioritise community benefits and greater clarity for carbon credit buyers when drafting comprehensive regulations to support the development of offset projects in the country, the country’s environment minister said, as it readies almost 50 million units for the market.
The Monetary Authority of Singapore and consultants McKinsey have released a working paper on “transition credits” that would be issued to coal-fired power plants that retire early.
Indonesia’s domestic carbon market has gotten off the ground with the launch of a voluntary carbon trading platform by the country’s main stock exchange IDX. Coal-fired power plants are expected to be the main buyers in the market. Some 460,000 units traded on the debut day, but not much has happened since. Late September also saw the official start of voluntary carbon trading on Bursa Malaysia.
Japan launched its voluntary carbon market, the GX League, earlier this year, but have yet to make a decision on which carbon credits will be eligible for use. The regulator has now established a new working group that will consider which units that can be used under the scheme.
NGO Wildlife Alliance, one of the developers of the Southern Cardamom REDD+ project in Cambodia, has denied allegations made by local news outlet Camboja News that it has destroyed homes and private property, accompanied by military police and environment ministry officials, near the project area.
Papua New Guinea is expected to lift its moratorium on new REDD+ projects for the voluntary carbon market once it gets its domestic regulations in place. However, a group of NGOs has warned about the lack of stakeholder input on the process, saying the government is in breach of its own rules by not consulting publicly.
China has seen the issuance and trade of its first carbon credits from salt marshes. Tech giant Tencent’s Carbon Neutral Laboratory bought almost 2,000 credits from the Jiangsu Yancheng Wetland National reserve at an undisclosed price.
Japanese trading house Marubeni has teamed up with Tokyo-based software provider AdIn to use a 3D measurement system for MRV for forestry-based projects. The companies intend to use the tech in the generation of more than 10 million J-Credits.
Policymakers around the world are getting it wrong on carbon removals and temporary carbon storage by placing them too high on the hierarchy of required climate action, non-profit Carbon Market Watch warned in a pair of complementary reports.
A coalition of developers and academics have developed a framework, the Reykjavik Protocol, for addressing structural risks that represent barriers to scale in the CDR industry.
Proving marine CDR in the field is necessary to scale the nascent technology, but further private sector funding and government support are needed for the development of research projects, an expert panel said at NY Climate Week.
Soil carbon projects could prove a cheaper alternative to DAC technology for CDR buyers, according to developers in the space, who say testing of ground storage is making older sequestration methods more reliable.
FINANCE: UAE offers to host next UN climate summit, U.S. govt commits to carbon removal purchases
The UAE has offered to host the annual UN climate summit for a second consecutive year with Russia blocking Armenia and Azerbaijan’s proposals for the 2024 event, as the Middle Eastern nation’s state oil company doubles its carbon capture goal.
The U.S. government will allocate up to $35 million for a pilot CO2 removal (CDR) purchasing programme that will allow private entities to sell CDR credits directly to the Department of Energy (DOE).
Britain’s Drax and Swedish energy company Stockholm Exergi announced they will launch a methodology for voluntary bioenergy with carbon capture and storage (BECCS) projects, with those involved hoping it will become an industry standard for the issuance of carbon credits from the technology.
French private investment house Ardian and nature-based carbon project developer Adryada have announced details of their plan to invest €1.5 billion in forest carbon projects that will sequester an estimated 150 MtCO2.
Swiss climate-tech firm Neustark announced the opening of its first commercial site for permanent CO2 storage in the EU, located in Berlin.
Bulgaria’s government has submitted plans to the EU detailing how it will help coal-reliant regions phase out the fuel, aiming to run the country’s coal-fired power units until 2038 without setting dates for when each plant will be retired.
Amidst sentiments of distrust in nature-based solutions and a stuttering voluntary carbon market, once-billion-dollar-valued agtech company Indigo Ag remains confident in its plan to scale up soil carbon offset generation, while others in the sector forecast more conservative economics.
CDR project developer Deep Sky and London-based direct air capture (DAC) company Mission Zero Technologies announced plans to demonstrate DAC technology at a facility in Quebec.
Toronto-headquartered offset financier Carbon Streaming announced an agreement to provide 10,000 tonnes of biochar removal credits annually to Microsoft to meet the organisation’s carbon negative target.
South Korea has formalised its Paris Agreement Article 6.2 partnership with Vietnam and Uzbekistan and has announced four new projects in the two countries that will generate more than 10 million credits over their lifetimes.
Indonesian state oil company Pertamina and the provincial government of East Kalimantan have signed a “Green Economy” agreement, which includes plans to identify and develop nature-based solutions to generate carbon credits, though no specifics have been announced yet.
Singaporean tech firm noco-noco said it aims to develop 5.3 million hectares worth of avoided deforestation projects in PNG, expecting it to generate as many as 159 million credits annually. It has now signed an offtake agreement with the LNG Alliance to buy some of that, though for the time being, the VCM REDD+ moratorium in PNG remains in place.
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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.