With more businesses setting climate and decarbonisation targets towards net-zero goals, purchasing carbon credits as a decarbonisation strategy to offset emissions is gaining more attention. Many types of carbon credit projects are available in the voluntary carbon market (VCM) for businesses to offset their greenhouse gas (GHG) emissions. According to S&P, carbon credits can be grouped into two broad categories:

1. Avoidance projects: Projects that avoid emitting GHG emissions, such as renewable energy projects, cookstove projects, and forestry and farming emissions avoidance projects.

2. Removal projects: Projects that remove GHG emissions directly from the atmosphere, such as reforestation and afforestation projects, wetland management and tech-based projects like direct air capture or carbon capture and storage.

Factors influencing the price of carbon credits

1. Demand and supply fluctuations

ike other markets, carbon credit prices are driven by demand and supply interactions. Low availability and high demand for specific projects will boost the prices of those carbon credits. Conversely, a market oversupplied with carbon credits will drive down prices. There has been an oversupply of energy generation and avoided deforestation credits, contributing to low prices for these project types. This has been exacerbated by decreased demand over the past year because of factors including (i) the Russia-Ukraine conflict and the resultant energy crisis that created a bearish sentiment in the VCM and (ii) uncertainties regarding the legitimacy of carbon credits because of recent controversies in the media.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='https://www.theedgesingapore.com/capital/environmental-social-and-governance/oversupplied-and-under-scrutiny-voluntary-carbon-markets?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>Oversupplied and under scrutiny, voluntary carbon markets 'urgently' require consistent framework: OCBC</a>

2. Underlying technologies

The price of carbon credits varies depending on the underlying technologies implemented in the projects. Projects that simply avoid releasing further GHG emissions typically trade at lower prices, while removal credits trade at a premium to avoidance credits. This is because removal credits are considered to have a greater decarbonisation impact, with higher levels of investment and sophistication required for such projects and higher demand for them.

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='https://www.theedgesingapore.com/news/environmental-social-and-governance/voluntary-carbon-market-body-publishes-rulebook-credible?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>Voluntary carbon market body publishes rulebook for credible use of carbon credits</a>

Another key factor influencing carbon credit prices is project quality, where high-quality projects command higher prices for the carbon credits they produce. Project quality can be assessed by the standard through which the project was certified. Comprehensive standards usually have more stringent safeguards and transparent measurement, reporting and verification (MRV) processes, thereby commanding a premium for carbon credits whose claims have been assured by a credible third party to be genuine and quantifiable.

4. Project scale and location

The scale and location of the project can also influence carbon credit prices. Small-scale projects are usually priced at a premium as they have higher implementation costs to produce smaller volumes of carbon credits. Projects in regions or countries lacking the necessary infrastructure and resources are often priced higher due to higher implementation costs.

The vintage of carbon credits refers to the year the carbon credits were issued, which is also when emissions reduction occurred through the project. The vintage of a carbon credit can indicate the project quality, whereas carbon credits with newer vintages tend to be higher quality because MRV protocols and methodologies have improved over time. Therefore, carbon credits with older vintages are typically priced lower on the market. According to BloombergNEF, carbon credits with older vintages are sold for a 24% discount on average across different sectors and geographies.

However, old vintages do not indicate low-quality carbon credits. Some argue that because of the lasting impacts of carbon emissions in the atmosphere, emissions avoided or removed in the past are even more valuable, and carbon credits with older vintages may have a greater decarbonisation impact.

6. Value of Sustainable Development Goals (SDGs)

For more stories about where money flows, <a class='gtm_see_also_3_inread' style='text-decoration: underline;' href='/section/capital?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>click here for Capital Section</a>

Carbon credits from community-based projects that bring additional benefits to society and ecosystems may be priced higher, as these projects are usually localised and managed by local groups, and it is more expensive to certify and produce fewer carbon credits.

Gold Standard reported that prices for community-based clean cookstove projects are generally higher than large-scale renewable energy projects because of the additional health benefits the former brings to communities and United Nations SDGs met through the project. These projects deliver value beyond carbon credits by positively impacting vulnerable communities’ lives, health and employment opportunities.

The case for high quality carbon credits

Given the variety of carbon credits and prices, businesses may find it challenging to navigate the market. Businesses should not default to the cheapest carbon credits. There is increasing scrutiny on the integrity of carbon credits purchased by businesses, highlighting the need to choose high-quality carbon credits to avoid greenwashing accusations and reputational risks.

While cheap credits are tempting, businesses should prioritise high-quality carbon credits with robust MRV processes and ensure permanent emissions reduction or removal. Newer projects also tend to produce carbon credits of higher quality because of more stringent MRV methodologies in recent years.

Recently, new convergent industry standards to encourage a high-integrity VCM were launched. The Voluntary Carbon Markets Integrity Initiative (VCMI) launched its Claims Code of Practice to bring integrity to the demand side of VCMs. It provides guidance for organisations to make credible climate claims and build confidence in engaging with VCMs.

These guidelines provide much-needed guidance for companies looking to integrate high-quality carbon credits into their decarbonisation strategies. In addition, the Integrity Council for the Voluntary Carbon Market (ICVCM) released an Assessment Framework that sets out the criteria that carbon-crediting programs and categories of carbon credits must follow to qualify for the Core Carbon Principles (CCP) label, which assures buyers that the carbon credit they are purchasing is high-quality.

With the expected increase in demand for high-quality carbon credits, the Assessment Framework and the CCP label aim to help resolve credibility issues that VCMs are currently facing. The market may also be incentivised to adopt the CCP label, as high-quality credits command a premium.

These industry standards provide some clarity to VCMs, but an upswing in prices and improved liquidity may not happen so soon as market participants await further clarity on which carbon credit categories and crediting methodologies will qualify for the CCP label. This is amidst existing impediments to the growth of VCMs, such as the present economic climate, bad press and quality issues.

At the national level, efforts are also to raise the bar in the quality of carbon credits. In efforts to operationalise companies’ use of high-quality international carbon credits to offset 5% of taxable emissions in Singapore starting in 2024, the Singapore government has signed agreements with Verra and Gold Standard to develop a local framework of acceptable carbon credits.

Stakeholders are awaiting the whitelist of eligible carbon credits to be published at the end of the year. This can also be used as a reference for the rest of the market on what constitutes a high-quality carbon credit, taking into account eligible host countries, carbon crediting programmes and methodologies.

These industry and national standards are a step forward towards high-integrity carbon markets. Market participants remain hopeful that these standards can boost liquidity in the VCMs and lead to more high-quality carbon reduction and removal projects.

Ong Shu Yi is an ESG analyst with OCBC’s Global Treasury Research and Strategy Team

Why do carbon credit prices vary for different project types?

Related News

Highlights

US stock faithful ride US$7 trillion rally as market timing backfires

Related News

Shopping in the Garden City this Christmas

OCBC's Wong reaffirms One Bank vision with eyes firmly on shareholders’ returns

Singdollar credit market may finish the year strongly