Investable projects are key to growing the voluntary carbon market. Xpansiv President John Melby shows how it’s done.

As urgency around climate action continues to grow, stakeholders across the global economy are looking for better ways to mobilize finance as part of a low-carbon transition.

Major corporates are adjusting their business models, committing to strategies to achieve net zero or net negative emissions, and developing credible plans to implement them. Today, more than 1,000 companies have committed to achieve net zero by 2050 to align with the Paris Agreement.

Voluntary carbon markets (VCM) are a critical piece of global emissions reduction efforts, enabling buyers to purchase credits that support emissions-reducing projects, and contributing to a smaller overall global carbon footprint. Companies will need to offset these emissions as they achieve their decarbonization goals, creating a surge in demand for credible offsets.

“What’s really driving the voluntary carbon market is what's happening in the boardroom--the investors, the customers, the clients,” John Melby, President and Chief Operating Officer at Xpansiv CBL Holding Group (XCHG), told NPM. “That's why these corporates are making these commitments. There’s a lot of pressure on them from a lot of different directions. In the past, I would have said that the voluntary carbon markets were kind of getting ahead of compliance markets because companies were trying to make sure they were showing the right thing, doing the right thing in the compliance market. Companies are now moving forward more as a function of what their customers want them to do, what their investors want them to do, what their boards want them to do. It's a very different feel to me.”

But the voluntary carbon market has plenty of work to do. In November, a special taskforce revealed that voluntary carbon markets will need to grow by more than 15-fold by the end of the decade in order to support the investment required to deliver Paris Agreement targets.

There are also structural challenges--buyers currently jostle with various standards to find high-quality carbon credits at transparent prices. And co-benefits of those credits add yet another layer of complexity.

“I think the hardest thing for the market has been the lack of standardization,” Melby said. "And for very good reasons the protocol standards have evolved separately. But the reality of them evolving separately is that it's difficult as a buyer to figure out what to buy. Solving that piece is what we’re trying to do with the Global Emissions Offset (GEO). A lot of what the taskforce points to is creating some kind of benchmark-type contract. The lack of standardization historically has caused a bifurcated market, so you have carbon that trades at very low prices, some trade at very high prices, and there are all different kinds of questions you have to ask yourself as a buyer.”

Last year, XCHG launched its GEO, based on parameters defined by the International Civil Aviation Organization (ICAO) for CORSIA—the Carbon Offsetting and Reduction Scheme for International Aviation. The GEO enables the market to effectively set a price on carbon based on real-time transactions of carefully vetted offset projects.

Carbon offset projects offer a variety of attributes like project type and geography, which can influence their value, thus adding confusion to transactions. A lack of a clear price signal to inform investment decisions can make carbon offset buyers wary, potentially disincentivizing investment altogether.

“That confusion leads to a harder buying process, and then that leads to not having a standard price,” Melby said. “And if you don't have a standard price, then you can't finance projects because investors don't know what they would expect to see in the future because there’s wildly different pricing. Getting that standardization and having a standard contract creates a mechanism by which people can finance projects.”

Creating benchmarks

The launch of XCHG’s GEO offers what the voluntary carbon market has been pining for-- a global benchmark providing a reliable price for carbon backed by credible emissions-reducing projects. This benchmark gives buyers assurance that offset products above this benchmark will result in measurable results, offering a viable path to compliance.

“As we started working with CORSIA, we found that a lot of the big energy companies and corporations saw that vetting process that ICAO and CORSIA had gone through as a great tool for them,” Melby said. “And that was a major breakthrough. That's when we started thinking about how to make it even easier for people to develop projects or to buy offsets by itself. Major companies like Verra, ACR, and Climate Action Reserve’s projects connect directly in, and that then enables us to create a single product that alternatively has a single price. And that's where the really interesting thing happens from a market perspective. When you have a single price, you can develop a forward curve, you have a price signal. And that enables investment in those projects.”

In October, XCHG announced the first trades of the GEO contract on CBL Markets, seen by the company as a signal of market acceptance of the GEO contract as a credible benchmark.

“Without that settlement process and clear price signal, you really can't do forward and futures contracts in the same way,” Melby said.

Dealing with legacy credits

The issue of legacy credits and how to deal with them continues to muddy the waters for the voluntary carbon market, pitting early-stage VCM investors against an evolving system.

A report released last year reveals that the nearly 700 millions tons of old carbon credits currently available--many of which are no longer considered valid in terms of offsetting--are actually putting legitimate carbon reductions at risk.

“It’s oddly one of the most significant near-term issues in the voluntary carbon market,” Melby said. “It's really important to frame it up on both sides. On one side, you have the early actors, so it's hard to think about punishing early actors. If someone’s got the money to develop a project and they're stranded with that project if they're not able to get to market with that as the market matures, it scares away other investors from investing in projects now. On the other hand, there’s pushback. The standards have evolved over time, the market has definitely matured. How many years are vintage, how many years do you go back?”

Clearing out old offsets from the system will enable future projects to be more investable, says Melby, and this reset can actually respond to both sides of the legacy credit conundrum.

“The ideas that have been put forward--none of them are perfect from what I've seen," he said. "Basically telling companies that they can't buy something on a voluntary basis is a hard way to push forward a market or the right behaviors. I think giving guidance as to what is qualified or what's out there and making it easier for people to make decisions if they want to buy is a really good idea. There are some possibilities of mechanisms where maybe some of those could effectively be bought out and taken out of the marketplace. Those are still in the early stages, but I think those may have a good opportunity in the public--private approach. It is one of the areas that drives a lot of disagreement in the voluntary carbon market, and one that hopefully is a problem for today but hopefully not further down the road.”