David Hughes has been engaging and advising corporations on their decarbonization and renewable energy strategies and implementation objectives for over a decade.
The voluntary carbon market has reached a peak level of interest from corporations and investors as organizations around the world seek to meet their aggressive decarbonization goals. Many leading global corporations, including Maple Leaf Foods and Microsoft, have been leveraging carbon offsets as a key element of their broader environmental impact reduction strategy for years. As more companies step forward and set aggressive climate targets, demand for offsets has increased significantly from voluntary purchasers.
In our recent webinar, Moving to Carbon Neutrality: The Role of Carbon Offsets, the Schneider Electric team was joined by experts from Bloomberg New Energy Finance (BNEF), Maple Leaf Foods, and Virgin Voyages to share best practices for building a strategic carbon offset purchasing program.
We received dozens of questions during that webinar. In this 3-part series, we’ll answer the questions most relevant to the broader voluntary market.
Demand for offsets is surging. Is there a risk of a supply shortage, and if so, how will this impact companies’ pursuit of carbon neutrality?
Yes – there is a risk of a short-term supply shortage. Historically, there has not been as much transparency into market liquidity for carbon offsets like there is in other commodities markets, electricity, or natural gas. It has become much more of a seller’s market, as carbon offset project developers and marketers field increased interest from voluntary purchasers, many of whom desire multi-year offtake to lock in long-term supply. Project developers that may have struggled in the past to get their projects financed are now working to scale up their pipelines to meet this demand. However, developing well-functioning and credible offset projects takes time, and in the short term, the global supply might have a hard time catching up with the rising demand. Additionally, the increased interest in carbon removal projects, in reaction to the recently released SBTi Net-Zero guidance, is creating a new carbon offset project taxonomy that is steering demand toward projects that take longer to develop, constraining supply even more in the short term. The Taskforce on Scaling Voluntary Carbon Markets (TSVCM) is working to address this, among other issues, but it will take time.
As demand increases, so does the price. What has Schneider seen historically in pricing? How do you think the price will evolve? And, most importantly, how can my organization plan for the future?
Accessing transparency in pricing within voluntary carbon markets has always been a challenge. Pricing has increased significantly in the last 18-24 months across all project categories. It is also difficult to forecast, as various factors or scenarios across the supply and demand landscape could impact price – including emerging potential compliance market schemes (country, state, provincial), NGO guidance on project criteria, increasing corporate demand, investment and finance, and break-through technologies that may accelerate at scale. Our team has seen the price of carbon offsets more than double over the past 18 months and continues to show steady growth.
As discussed earlier and explained in the webinar, prices are also impacted by the elevated interest around the removal of carbon versus the prevention or avoidance of carbon, for both existing and new projects. Our experts are closely following market developments, guidelines, and verification implications on this front and are supporting our clients in developing the appropriate strategies to take into account all of these variables.
The best way an organization can prepare to manage an increase in demand for offsets with an increase in price is to actively engage in the market and stay up-to-date with developments as they arise. We are actively developing tools to help deliver greater transparency into project pricing, development pipelines, and emerging project verification methodologies to ensure clients have the most current knowledge to inform their implementation plans.
There are many nuances when managing a portfolio of offsets. Does Schneider recommend that companies have a diverse portfolio of projects or a limited one? What is an optimal contract length?
The optimal portfolio of offsets looks different for each company, depending on its goals and scope of commitment. Diversities exist in location, technologies, certifications, vintages, price, tenor of commitment, volume, etc. Many companies want to align their offset purchases with the most material issues within their business, including often desiring to align projects with UN Sustainable Development Goals.
The same sentiment applies to the length of the contract – it is highly dependent on what type of offset projects the company has selected, what stage of development they’re in, the volume being purchased, etc. Navigating the setup, management, and details of a carbon offset portfolio is complex and requires in-depth knowledge of market dynamics, project types, and certification guidelines, among other factors.
As more long-term purchasers enter the market, many project developers are adapting their offer structures to meet the emerging demand of corporations, providing increased opportunities for both the portfolio approach and contract length.