Compliance market fungibility bolstering VCM confidence: Viridios AI

Global carbon market data and technology firm Viridios AI's Andrew Glass was upbeat on the outlook for voluntary carbon markets this year in a Q&A interview with S&P Global Commodity Insights on Feb. 13.

As Viridios AI's Head of Partnerships, Glass was instrumental in setting up the Platts-Viridios CARBEX Carbon Credit Indices.

The indices, which have climbed 17% in value on average since the start of 2024, represent credit types ranging from soil, deforestation avoidance and reforestation projects to "blue carbon" coastal and marine ecosystem projects.

S&P Global: What is the outlook for voluntary carbon credits this year?

Andrew Glass: Anchoring on 2023 as a baseline, we have significant head room for a brighter outlook.

Scrutiny on quality and integrity across many sectors of the VCM, while welcome, was relentless and often overly pessimistic, eroding the critical foundation of trust and confidence. Rebuilding trust is critical in 2024 and beyond. This is being addressed with numerous initiatives from central bodies such as Integrity Council for Voluntary Carbon Markets (ICVCM), Voluntary Carbon Markets Integrity Initiative (VCMI) and others.

On the same theme, a focus on regulation and compliance market fungibility is high on the agenda. Even though COP28 failed to reach agreement on Article 6 negotiations, we expect to see exponential bi-lateral agreements embracing Article 6 compliance, enhancing confidence.

We're already seeing evidence of this with the first government backed ITMOs, or internationally transferable mitigation outcomes, transacting in December under Article 6.2.

Additionally, we expect to see the discussion around removals versus avoidance recognize it's an "and" not an "or" debate. We need both to continue evolving, generating credits and benefits in unison to have the highest chance of succeeding.

Related to this, attention and value attributed to projects' co-benefits is rising, especially for those with robust and defendable data to back sustainable development goal claims in recognition that they do what they say, ultimately benefiting involved communities.

This year will certainly have its challenges, with macro headwinds from geopolitics, wars, polarizing elections and the consequences of climate change gathering pace. However, with interest rates forecast to fall, significant investment capital under pressure to deploy and 2030 targets looming, financial institutions are accelerating infrastructure development for their client base to participate in the VCM. Further, with national governments increasingly leveraging VCM to meet their nationally determined contributions (NDCs), we have an overall optimistic outlook for 2024.

S&P Global: You were in Dubai for COP28. What was your take on the main summit outcomes?

Andrew Glass: Several key themes emerged. Reestablishing trust within the marketplace is the fundamental driver. Many conversations anchored on how to do this, enhancing and scaling dMRV (digital measurement, reporting, verification), along with the digitization of projects, including the concept of digital twins -- Carbon Markets 2.0. There is an emphasis on fostering more enduring demand with a regulatory framework and preferably increased fungibility with compliance markets. Then the most immediate pain point was expressed in search for buyers.

S&P Global: The talks failed to reach agreement on market-based mechanisms under Article 6.4. How has the market reacted to this?

Andrew Glass: There was significant disappointment that no agreement was reached for neither 6.2, nor 6.4. However, it is encouraging to see bilateral state agreements (A6.2) forging ahead regardless. For example, the first A6.2 trade between Switzerland and Thailand, Chile building a compliance market by leveraging existing VCM infrastructure, and countries like Malawi and Rwanda committing to applying corresponding adjustments for projects in their jurisdictions.

We feel that the trajectory of these transactions will continue through 2024 to enable agreement at COP29.

S&P Global: We're now seeing projects seek authorization for corresponding adjustments (CA). How will this impact the market?

Andrew Glass: We already see this play out in significant price increases for such projects, like in Rwanda where the project saw an almost threefold increase in $/tCO2e upon the issuance of the letter of authorization.

Projects with a higher probability of hurdling the CA requirements will be highly sought after, hence likely to create a further pricing tier in the VCM, which may well become the quality standard. However, market and price response to CA accreditation will also be impacted by specific host nation's political risk and transparency of the issuance of LoA.

S&P Global: What new products or initiatives are Viridios AI pursuing this year?

Andrew Glass: We are in constant development, relentlessly driving transparency for the international carbon markets to scale, ensuring that our development plans align to solve immediate and forecast customer and market requirements.

Article 6 eligibility at the project and vintage level was recently made available on the platform.

We are also working on more granular visibility for projects and vintages that organizations are transacting and/or retiring. Additional self-service analytics, broader coverage of registries/standards, along with select compliance market projects, such as Australia's ACCU, further service clients' needs.

S&P Global: ICVCM is due to start releasing core carbon principles approvals to programs and methodologies in 2024. What impact do you expect these approvals will have on the market?

Andrew Glass: Assuming the text is well received by the market, it will bring objectivity to the question of quality, fueling trust and clarity for corporations. Regarding price impact, while it will depend on the specificity and scope of guidelines, CCP projects will most likely command a premium (further amplified if the supply is low).

S&P Global: What type of carbon projects are most likely to obtain a corresponding adjustment over the next couple of years?

Andrew Glass: So far, we have only seen LoA for projects that distribute cookstoves and water filters. The greater the number of credits a selling country distributes, along with the CA, the reduced capacity they have to assert emission reductions or removals against their own NDCs. This incentivizes selling countries to retain cost-effective mitigation measures for their own use while providing more expensive mitigation options to buyers.

S&P Global: Which regions are most likely to give a corresponding adjustment, and which are least likely to do so?

Andrew Glass: Developing and least-developed countries are in most need of capital, hence highly likely to be interested in prioritizing financing projects and their co-benefits via the carbon markets than to meet their NDCs in a timely manner. So far, we have seen letters from Malawi and Rwanda, and announcements from Laos and Cambodia. It is plausible that other nations with low emissions per capita (compared with the global average) may adopt a comparable approach.