We need to hammer in the message that most carbon credits are *Made To Order*. Credits, regardless of whether CDR or other types, are not primarily something you buy over-the-counter; it's something you order years in advance, and help pre-finance. The business model where suppliers create credits and then seek buyers is very challenging to execute, and puts the risk on developers. This is something Andrea Maggiani highlights in this great post. If buyers understand that they have a responsibility in creating the credits too, that will make a big difference.
This is the key to unlocking the quality characteristics that buyers want: if you want a unique, high-integrity credit from a project whose biodiversity and community values speaks to your unique values as a company, then get involved early and help the developer craft their project to your needs. As developers, we all want to build the highest impact projects possible, and if we know we have the partner-buyer that values that high impact we will deliver those high impact projects.
100% - the project developers effectively carry all the risk, all while they are under pressure to reduce prices. The risk-reward is not aligned. The industry simply can't scale under these conditions.
Very true indeed! We do see large buyers willing to take risk, e.g. Nestlé‘s Global Reforestation Program, or the Symbiosis Coalition advance commitments. A liquid spot market of interchangeable credits would be best, but is probably unrealistic for some years due to the REDD+ crisis of confidence
I agree that this is the case in the current market environment, where the VCM is small and fragmented. But to really scale-up, I think there is no way around having a liquid spot market, and a strong regulator defining rules and quality benchmarks. The reason is that only very few buyers can take the risk and invest / commit upfront. Compare this to any other market (cotton, coffee, textile,…): The vast majority of buying happens once the product is de-risked.
From Agriculture, to Energy, from Infrastructure to Oil, from Gold to Bitcoin, all industries have Planning, Engineering, Quality standards and Continuous supervision, and we project developers must meet those standards and ensure the right level of supervision and report. The point we need to clarify, is that detailed design, high quality implementation, technical control, professional management, continuous supervision, are all elements to guarantee project success and they have a cost. This approach of Minimum cost - Maximum quality must end. It is wrong. In the same way investors in the oil industry, infrastructure, or gold mining must pay for projects' costs and accept risk levels, investors in Carbon capture projects must also do. It's up to us, project developers if we do not consider all the costs and risks of our projects. But this excesive bargain control from investors must come to an end. We, project developers, must try to work only with investors who clearly understand this point: Emmisions are expensive. Otherwise, we must look for alternative funds. We are at the beginning of the value creation process of an entire new economy, that of natural value capture. Risk is an intrinsic element of all beginnings.
Carbon credits aren’t just a product to be passively purchased; they’re part of a long-term, collaborative process that requires early commitment and shared responsibility.
The following sentence (half joking & half serious) summarizes the current situation with Carbon markets: "...we now have more platforms to sell credits than actual projects producing them". #If we are really serious about the climate change crisis, we shouldn't leave the carbon credit managed by a purely for-profit ecosystem. #Just compare the health system in advanced countries when it is managed by for-profit and non-profit entities. #MRV and carbon market should learn from the ESG fate and build a more sustainable ecosystem.
Legal, Markets, and Operations at CarbonPool | Harvard Law School
5moGreat article Andrea Maggiani and thanks for sharing Robert Höglund. One big solution here that goes unmentioned is insurance, which is increasingly coming online for developers to mitigate the delivery, political, and reversal risks that they are expected to bear. By its nature, insurance is a risk-transfer mechanism - and when incorporated into financing discussions, its cost can be accounted for just like any other line item in the developer's financials that set the ticket price for investment / purchase. If buyers want guaranteed delivery and investors want guaranteed returns, then they should be willing to pay for it, rather than continue the fiction that the developer can somehow mitigate all risks if the project is "high quality" enough (which of course no one can!). That's one way to transfer and mitigate risk that has been used across other mature industries for centuries.