Voluntary carbon markets are closer in character to equities than commodities, and recognition of this would help improve understanding of the sector, the CEO of carbon ratings agency BeZero Carbon said.
Speaking to S&P Global Commodity Insights on Feb. 6, Tommy Ricketts said viewing carbon purely as a commodity misses the bigger picture as it cannot be physically delivered.
"You can't deliver carbon and you can't observe it. So, it is not like a commodity, it is like a credit contract," Ricketts said. "And it has got the characteristics of an equity because it is a story of a project expressed by a default instrument trading like a commodity."
"[In essence] the instrument is the credit, the project is the equity, and the good [reducing carbon] is the commodity in it," he said.
Carbon ratings agencies like BeZero Carbon, Sylvera and IDEAcarbon have emerged in recent years to help provide independent market intelligence on voluntary carbon markets.
Their goal is to build trust in a marketplace that has come under attack from a lack of uniform standards.
Continued enhancements
But besides standardization, the value and depth of information around carbon credits also needs to improve, according to these ratings agencies.
Ricketts said recent events highlight the flaws of carbon offsets, showing that the market required several "continued enhancements" to methodology, education, science and implementation.
"The quality of information, better transparency, disclosure -- and seeing quality not as a binary construct -- these are the big steps the market needs to take in our view," he said.
Further, the market needed "information infrastructure", the tools to assess and compare risks, "because your price for something is different to my price, and that's fine," Ricketts said.
In this context, seeking 100% standardization missed the point. "I don't think you can 100% standardize the outcome of a carbon credit. That's the problem."
The market is also gearing up for a suite of integrity initiatives in 2023.
The Integrity Council for the Voluntary Carbon Market will introduce high-integrity carbon credit labels in the third quarter of 2023, and will also publish its final Core Carbon Principles in March to create a more transparent, liquid, high-integrity voluntary carbon market. Meanwhile, the Voluntary Carbon Markets Integrity Initiative is reworking a draft consultation aimed at bringing integrity to corporate claims made about the use of carbon credits.
Price, ratings link
Rating agencies were only seriously adopted in the voluntary carbon markets in the past few years, and the correlation between prices and ratings is only starting to evolve.
The fundamental analysis for rating a project is not currently as influential in price formation but the company's goal is to rebuild that correlation, Ricketts said.
"Last year you saw when volumes rose, the correlation rose. So, the more money at play, the more people do start to care about fundamentals, which is a very interesting conclusion," he said.
Currently, attributes have an enormous impact on the price of a credit; whether that attribute is credit type, the co-benefits attached to the project, the geographical location of the project, the certifier of the project and the credit, or even the year that credit was generated.
Platts, part of S&P Global Commodity Insights, assesses a wide range of high-quality voluntary carbon credits that fund projects that demonstrate additionality, permanence, exclusive claim and co-benefits.
The value of these credits can vary from Corsia-eligible offsets (Platts CEC, $2.65/mtCO2e) to household device offsets ($6.50/mtCO2e) and tech carbon capture offsets ($136/mtCO2e), all Feb. 7 assessments.
BeZero Carbon has created a seven-point scale rating system. The rating represents a current opinion on the likelihood that a credit achieves one metric ton of CO2e avoided or removed.
An AAA+ rating represents a high likelihood that the credit truly achieves its carbon claims, while a rating of A represents a low likelihood. It currently has ratings for almost 300 projects, all of which are publicly available on its website. Of the projects rated by BeZero Carbon, only 14.2% of credits have a rating of AAA- or higher.
Information depth
Ricketts said the reaction to recent negative coverage of offsets in the press demonstrated a lack of information depth in the market, a key driver for setting up BeZero in the first place.
"Basically, if one [article] can do that, it shows you there's nothing on the other side to provide balance," he said.
"We have to provide people with access to this information so they can make decisions themselves and not be so spooked by the latest headline."
On Jan.18 the Guardian newspaper published an investigation alleging that 90% of registry Verra's forest-based credits overestimated their own climate impact and therefore the number of the credits issued.
Verra defended its credits and said the studies contained "multiple serious methodological deficiencies." But the fallout from this report continues to be felt in nature-based credits.
Ricketts said that such stories were bittersweet, and they can have an effect on demand.
"Buying [carbon credits] is supposed to be a good act, but that can massively backfire on you because you're trying to do good" he said. "So therefore, you're incentivized to show off about it and tell people about it. But if it's actually bad, then you're exposing yourself."
BeZero Carbon has grown sizably since it first launched its ratings platform in April last year. In November, it announced a $50 million funding round led by US firm Quantum Energy Partners, with investment from EDF Group, Hitachi Ventures and Intercontinental Exchange.
