INTERVIEW: Lack of climate finance could create carbon credit supply deficit: RVCMC

A shortage in carbon credits is a bigger threat to the voluntary market than a current lack of demand, with the dearth in issuances linked to scarce climate finance, the CEO of the Regional Voluntary Carbon Market Company (RVCMC) told S&P Global Commodity Insights in an interview.

Speaking on the sidelines of the UN Climate Change Conference in Baku, RVCMC CEO Riham ElGizy expressed concern over the lack of finance in the Global South and emerging countries, highlighting the key role carbon credits could play in reversing this trend.

"This is something that we are trying to do by coming here to COP, bringing Saudi companies to draw attention to climate finance and carbon markets, and to instill confidence," ElGizy said.

On Nov. 12, RVCMC launched Saudi Arabia's first carbon trading exchange in Riyadh and held a carbon credit auction in Baku.

The auction saw 2.5 million mt of carbon credits sold at a clearing price of Riyal 37.50/mtCO2e ($10/mtCO2e), with 23 companies buying offsets.

Market deficit

While slack demand for VCM credits has been an industry-wide concern for some time, ElGizy said tight supply in the coming three to four years means this is in fact a market that could soon be in "deficit."

"The problem in the market right now is not soft demand, it is supply... because of the [limited] number of the issuances," she added.

Launching a carbon project typically takes two to seven years, and with issuance of credits languishing near two-year lows, the market needs an urgent injection of finance, she said.

The voluntary carbon market is undergoing a significant transition after two turbulent years.

Media and academic comment has focused on the questionable quality of some carbon projects, resulting in low liquidity and a steep fall in offset values.

ElGizy conceded that securing high-integrity credits for RVCMC's Nov. 12 Baku auction had been a challenge, noting an ambition to offer more durable removal credits.

Most of the credits auctioned were sourced from projects in the Global South, including Bangladesh, Brazil, Ethiopia, Malaysia, Pakistan and Vietnam.

RVCMC has held previous auctions in Nairobi and Riyadh.

The Platts Nature-Based Avoidance price from S&P Global Commodity Insights, which reflects the most competitive internationally fungible carbon credits issued by nature-based projects such as REDD+ projects, has been trading at low levels for most of 2024.

Platts assessed the Nature Avoidance 2024 price at $4.35/mtCO2e on Nov. 12, up from the record low of $2.70/mtCO2e seen in most of February, Commodity Insights data showed.

Price discovery

ElGizy said the purpose of the exchange is twofold, helping the kingdom meet its climate targets and, more widely, building a stronger, scalable, more credible carbon market.

"Why is an exchange important in our market? Because it helps price discovery. The majority of the trades are done over the counter, 80% almost. So, you need to have a price discovery point and that would enable the buyers to know what to buy at what price," she said.

It would also help project developers secure finance.

RVCMC plans to broaden its business via the launch of an investment arm to help scale up project supply, and an advisory service helping companies decarbonize.

The company is backed by the kingdom's sovereign Public Investment Fund and the Saudi Tadawul Group.

The PIF has driven Saudi Arabia's investment in renewables under the kingdom's Vision 2030 plan to diversify its economy. Saudi Arabia, the world's largest exporter of crude, remains heavily dependent on its oil revenues.

The kingdom has committed to cut its carbon emissions to net zero by 2060. It also plans to raise its crude production capacity to 13 million b/d by 2030, from around 11.5 million b/d now.