13 March 2023
Top takeaways from our recent roundtable
There are some meaningful questions being asked of the Voluntary Carbon Market (VCM) at present as it seeks to scale and mature. From the technical elements of methodologies being implemented on the ground at a project level, all the way up to the integration of the VCM into the country level carbon accounting required to meet the targets set out in the Paris Agreement, the VCM is under a constant state of evolution, iteration and development.
At BeZero Carbon, we were privileged to be able to bring together a roundtable of some of the leading initiatives, academics, marketplaces and practitioners. Co-hosted with the London School of Economics’ Grantham Research Institute on Climate Change and the Environment, this event sought to spark a dialogue on some of the strategies and tools required to build the carbon market(s) of the future.
While the event was conducted under Chatham House rule, we have summarised our top 10 takeaways from the discussion below (note this is BeZero Carbon’s perspective only):
Greater transparency: while there is a relative consensus on what is needed to improve supply side disclosures, opinions are mixed on the level of transparency that should be sought on the demand side.
Retirement disclosures: while greater transparency may help to weed out cases of fraud and mis-selling, the question was raised as to how the ‘voluntary’ element should feature in what retirees are mandated to disclose.
Price disclosure of retired credits: discussion centred around what information the price would give as a data point in retirement data. While it may be able to ensure a sufficient proportion of revenues was going back to communities on the ground, there was concern about it being used as a proxy for quality given the lack of historical correlation with ratings and other metrics. Although price disclosure is not standard in other markets, such as power markets, in the case of carbon markets it could help scrutinise the extent to which corporates were taking full responsibility for the social cost of their emissions.
Co-benefit transparency: while the discussion focused largely on the carbon element of credits, co-benefits are also seen as an element requiring greater transparency around claims.
Moving beyond CSR: firms shifting their perception of purchasing carbon credits as a ‘good thing to do’ to management of a carbon liability was seen as key to unlocking greater demand in the market.
Modelling risk: as with financial risk in asset pricing theory, there is systematic and idiosyncratic carbon risk present in every carbon credit that should be taken into consideration when constructing strategies. If this risk cannot be reduced to match the risk profile of the liability, this poses a challenge to how credits should be used when making claims.
Portfolio theory: factors such as fire risk can be used to construct diversified portfolios of nature-based credits. This could be used to build structured products with characteristics very attractive to institutional investors with long dated liabilities to hedge such as pension funds and insurance companies.
The role of ratings: having grown in use across the market, participants are looking at other areas, such as insurance, where the integration of ratings and broader risk analytics can enable the next generation of product innovations in the market. The roundtable conversation showed that improving transparency at credit issuance would enable wider uptake both of ratings and of insurance.
Risk factor trade offs: there was a lively discussion around the potential trade off between additionality and market leakage - if a project is highly additional does that mean the activity it has displaced is likely to take place elsewhere? The VCM is a market built on interventions, each of which has an opportunity cost. If the price of credits in the market does not cover the opportunity cost of alternative economic activities in an area then the project faces sustainability risks.
Commodity versus commodification: as broader discussions continue on the appropriate structure of this market and the role regulation has to play, our conversation highlighted the balance that needs to be struck between making it easier to navigate and transact in this market while acknowledging its complex and heterogeneous nature.