A quick look at the price history of most types of voluntary carbon credits in 2021 and 2022 will reveal a sort of bell-shaped curve sloping to the right.
It’s a shape that tells a very simple story: much of the value that carbon credits quickly gained in 2021 was slowly but surely lost in 2022. It’s a shape that leaves market participants wondering what which was to follow – and the same line might offer the answer.
Too expensive to hold
The start of the Russian-Ukrainian conflict and the energy crisis were the main trigger for the bearish sentiment that prevails in the voluntary carbon market.
In the immediate aftermath of Russia’s invasion of Ukraine on February 24, 2022, several market players were heard leaving their positions in the VCM as they were drawn to more volatile and lucrative oil and gas markets. At the same time, cash-strapped companies rushed to reduce their exposures.
But after hitting a low in March, when the United States announced a ban on Russian oil imports, VCM prices appeared to have found stability in April and early May. So after this period of stability comes something worth considering if one wants to assess what awaits the VCM.
At the beginning of June, a new downtrend began on the VCM, including the more liquid nature and renewable energy segments. This coincided with the period when the US Federal Reserve was about to announce something that trading desks hadn’t heard of in a while: an interest rate hike.
Interest rate hikes have changed investment scenarios. In the voluntary carbon markets, higher rates meant that it suddenly became too expensive to hold onto VCM positions taken by secondary market players in the hope of further price appreciation. Since carbon credits do not expire and can be traded multiple times until they are eventually used to offset certain emissions and upon retirement, secondary market players, such as traders or financial players, have got into the habit of buying recent vintage credits and holding them until they can sell for a higher price.
While the overall market perception over the next few years remains bullish, with demand from companies committing to net zero targets expected to increase, higher interest rates mean that this “holding game” has now become more risky or more expensive.
The extent to which secondary market players expand their market positions in 2023 – and how far VCM emerges from the swamp it appears to have fallen into – will still largely depend on developments in interest rates and the cost of holding. positions.
It’s time for regulators to shine
Another section of the 2022 price curve brings us to an even more important factor to consider for the 2023 projections.
In the fall of 2022, as the United Nations Climate Change Conference, or COP27, approached, a new downtrend emerged in the VCM.
After a few late summer weeks of high hopes for the arrival of new demand on the market, very much in line with what happened the previous year at COP26, market players began to face a harsh reality. They began to realize that their expectations of clear rules on carbon credit mechanisms set out at the UN summit would not be met and that amidst this regulatory uncertainty, most buyers were choosing to delay their purchases.
This resulted in slower market activity and price losses seen across all segments.
Players had hoped to see COP27 delegates make decisions on what kind of projects would be allowed under the yet-to-be-launched Article 6 credit system, and clear definitions on what constitutes a high quality carbon credit. But none of that came as delegates felt it necessary to allocate more time to make those decisions and vowed to continue their conversations in 2023.
The voluntary carbon market has yet to recover from the impact of this regulatory uncertainty. Much of what happens in 2023 will largely depend on greater clarity on what makes a carbon credit a good quality credit as well as when companies are allowed to engage in carbon markets. carbon volunteers without risking being accused of greenwashing.
A number of organizations are working to provide guidance, including the Voluntary Carbon Market Integrity Council, the Voluntary Carbon Market Integrity Initiative and even the International Organization of Securities Commissions – which at COP27 , launched a 90-day public consultation on the role of a potential financial framework to promote market integrity.
Rating agencies will play an increasingly important role in assessing the effectiveness of carbon projects in avoiding, reducing or eliminating carbon and therefore in assessing the quality of the carbon credits issued by these projects.
But the sooner a clear and mandated framework is available, the better for VCM. In particular, only clear and binding rules on when companies can use carbon credit mechanisms and offsetting practices to achieve their net zero goals will create this space where players can confidently engage in the market. .
Requiring by mandate that end buyers commit to a serious, science-based program to reduce their avoidable emissions before resorting to carbon credits to offset unavoidable emissions will be key to ensuring that voluntary carbon market mechanisms are there to deliver the necessary flexibility net zero targets without hampering the transition to a cleaner economy.
With clearer rules in place, VCM will thrive in 2023 and beyond. Otherwise, it may be destined to remain in “limbo” a little longer.
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