News
26/09/23
VCM demand shifting to term contracts
London, 23 September (Argus) — Large corporate buyers in the voluntary carbon
market (VCM) are moving towards planning procurement over multiple years to
secure long-term supply and manage risk, and demand is increasingly being shaped
by integrity, quality considerations and integration to compliance markets, Mo
Safdar, origination lead at project developer Climate Impact Partners (CIP),
said at an online event on Wednesday. The typical "large, multi-million tonne"
offtake deals span 15-year periods through to 2040, and corporations are willing
to pay a premium for guaranteed delivery that far out as they hedge their
positions for future years, when carbon credit prices are expected to rise,
Safdar said, speaking at a webinar organised ahead of the Carbon Markets Africa
Summit, which will be held in Kigali, Rwanda, on 13-16 October. Some companies
also trade options or seek other solutions to hedge, Safdar said. Buyers have
become more sophisticated, and now think of carbon credits from a price and risk
perspective, alongside the environmental aspects, Safdar said. They are looking
for clear delivery structures, replacement provisions, as well as manageable
country, export and foreign exchange risks when negotiating offtake contracts,
he added. End users are often seeking nature-based removal credits — including
agroforestry, improved forest management (IFM) and afforestation, reforestation
and revegetation (ARR) credits — and are increasingly aligning their choice of
credits within their value chain. A rising quality floor for projects is also a
key demand driver, Safdar said. Experts agreed that compliance mechanisms — such
as the Carbon Offsetting and Reduction Scheme for International Aviation
(Corsia) and Article 6 of the Paris Agreement — are supporting demand for carbon
credits. Clean cookstove and reducing emissions from deforestation and forest
degradation activities in Africa are seeing a reset as Article 6 schemes gain
momentum, global climate solutions provider 3Degrees' head of APAC, Shawn Woo,
said. But the need for more convergence in policy, regulation and standards is
critical for boosting carbon market liquidity, climate advisory body Climate
Focus co-founder Charlotte Streck said. We are seeing a lot more domestic
regulations recently, and supply-side rules come with significant fees and
costs, she said. Africa's largest potential to develop supply under the Article
6.4-regulated Paris Agreement crediting mechanism (Pacm) lies with the land and
rural sectors, but it would be "very difficult" for any of these to develop
feasible supply streams under Pacm's current rules, Streck added. The rules that
govern trading under Article 6.4 are agreed among all participating countries —
often a complicated process — and the mechanism aims to provide assurance among
stakeholders to deliver at scale, said Perumal Arumugam, manager for markets,
non markets and stakeholder interaction division at the UN Framework Convention
on Climate Change, which is the governing body for Article 6. Pacm is trying to
address many barriers to entry — such as quotas on the share of projects allowed
to be exported under Article 6.2 rules, for instance. Some supplying countries
are also "overly cautious" when deciding how many credits they are willing to
export while they are constantly going under review processes when reporting on
their own nationally determined commitments (NDCs), Arumugam said. He called for
all stakeholders — buyers, investors, philanthropic organisations — to assist
countries, particularly in Africa or other developing countries where human
resources are limited. Regulatory certainty and convergence and interoperability
among schemes and standards are key to attract investment in the Global South,
where most of the supply pipeline lies for carbon markets, experts agreed.
Investors will also be looking for projects that have already secured some
offtake, security of land, eligibility standards and criteria, as well as
co-revenue streams that give larger assurances to a project's feasibility,
Safdar said. By Alexandra Luca and Erisa Senerdem Send comments and request more
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