In a time when companies’ CSR practices are under intense scrutiny, there are two practical approaches to purchasing high-quality carbon credits: purchasing project-specific credits or buying credits using a benchmark contract with a clearly defined quality threshold.
As the world scrambles to find a trusted, reliable path to net zero, the need for scalable, reputable solutions is at the forefront of the carbon market’s evolution.
Over recent years we have witnessed exponential growth in carbon credit markets as companies accelerate decarbonisation commitments.
This momentum has driven the rapid maturation of the carbon credit market, which has liquid spot and futures markets for transparent price discovery and liquidity formation, emerging benchmarks, and robust market data.
As carbon-project supply increases to meet demand, quality has become the focal point for business leaders, sustainability professionals, and carbon-transaction facilitators.
The need for speed
Solving the world’s carbon conundrum involves balancing forces: the world is experiencing an accelerating climate emergency, so speed is paramount. The primary challenge of reducing emissions from company operations and supply chains is constrained currently by a lack of low and zero carbon energy sources, ultra-efficient processes and technologies that are simply not available at scale.
For example, the net zero program for international airlines relies heavily on replacing conventional fuel with sustainable aviation fuel (SAF) to reach 2050 emissions goals. The industry projects that by 2025, there will be sufficient SAF available to fuel just three percent of global flights.
To fulfil climate goals while these solutions are perfected and deployed, companies turn to high-quality carbon credits to offset residual emissions, that is emissions that can’t be reduced with currently available solutions.
There are two practical approaches to purchasing high-quality carbon credits: purchasing project-specific credits or buying credits using a benchmark contract with a clearly defined quality threshold.
Just like building a stock portfolio, the selection of individual carbon-offset projects requires extensive research and due diligence. While this approach offers the buyer a greater degree of flexibility and quality control, the resources and expertise required are considerable.
Ensuring sustainability
Before entering the carbon market, companies have well-defined strategies for selecting the offset projects that align with their climate goals.
The role of sustainability leaders has become more sophisticated, in chorus with rising expectations that corporations adhere to ethical operating models.
This is a catalyst for the paradigm shift to a net-positive carbon economy, and a key step toward meeting aggressive net zero requirements. This allows corporations to take the calculation and execution of their carbon offsetting activities more seriously.
Many corporations enter the market with the right intentions, but without setting realistic expectations around budgeting. As a result, they may be at risk of not fulfilling their expectations.
That’s why benchmark contracts have been an attractive tool, as they help reduce the cost of developing bottom-up, internal carbon research resources, while freeing up budget to spend on bespoke individual projects that may have unique attributes along with the buying entity.
Project-specific credits will continue to comprise a substantial share of the voluntary carbon market. Credit preferences are driven by criteria in addition to meeting net zero commitments – companies that want to affiliate with certain types of projects (such as projects with co-benefits that help elevate developing communities) can retain that flexibility, while still leveraging the scale and integrity of benchmark contracts for bulk purchases.
The rise of voluntary carbon benchmarks is occurring in tandem with the growth of transparent, liquid spot and futures markets, ratings services, and industry initiatives designed to ensure greater market integrity and utility.
Benchmark contracts provide a clear path for market participants to achieve their climate-related goals with greater quality, transparency, and efficiency.
Carbon markets are growing rapidly, and quality controls are constantly improving. With a fundamental market understanding, participants can leverage solutions used routinely in traditional commodity markets, including benchmarks, to make verifiable progress to environmental goals.
The rise of voluntary carbon benchmarks
The development of robust benchmarks is a key milestone in the evolution of commodity and financial markets.
In 2020, the Global Emissions Offset (GEO) benchmark contract was developed by Xpansiv global exchange platform CBL. The contract’s uptake and trading volumes spawned a family of benchmark contracts that includes the N-GEO, C-GEO, and SD-GEO, each of which aims to assure the investor of certified quality in nature-based, technology, and household device market sectors, respectively.
For standardised instruments, such as the GEO, N-GEO, and SD-GEO, to develop into reliable benchmarks, market participants must be able to understand and trust in their underlying methodology and the range of credits that are deliverable via the contract.
It’s vital that businesses scrutinise such claims to ensure underlying projects meet high standards and deliver the promised carbon reduction or removal impact.
To deliver this, the team held extensive consultations with market participants prior to developing its respective standardised instruments. In each case, the message received was to make sure that high-integrity credits are eligible for delivery into the contracts.
To be eligible for GEO and N-GEO, project-specific credits must meet rigorous, recognized quality standards as well as deliver significant co-benefits, including UN Social Development Goals (SDGs). The SD-GEO standardised contract for example requires a total of five SDGs.
