It has been two years since the start of a price plunge that roiled carbon markets, a trough that industry players have been anxious to get out of while signs of recovery remain hazy.
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Early this month, the price for nature conservation carbon credits hovered at near-record lows of just over US$3, a drop from US$15 around March 2022, according to analyst S&P Global Commodity Insights. Carbon project developers – especially those working on forest protection – are plugging losses with financial reserves. Businesses are still hesitant on offsetting their emissions amid greenwashing accusations.
Yet local communities involved in conservation projects might not understand the depth of troubles carbon markets are facing. Observers are concerned that these participants are not updated on the risks that now surround forest carbon projects. Nor is the market sufficiently prepared for developers or traders going bankrupt, a scenario that remains plausible today, they say.
Missing safeguards?
“The information on pricing is obviously affecting the markets but not necessarily being felt or affecting the decision-making of communities just yet. The awareness around market pricing does not extend that far,” said Regan Pairojmahakij, senior programme officer at the Regional Community Forestry Training Center for Asia and the Pacific (RECOFTC).
Part of the challenge is in helping project participants understand complicated numbers on uncertain market pricing, and how carbon credits are generated through modelling deforestation rates.
“It is quite tricky connecting these two points and coming to a practical understanding of financial benefits,” Pairojmahakij said, noting that formal education is often limited in stakeholder communities. Such a situation impacts informed decision-making on fair payment and involvement in new projects.
Colin Moore, Mekong regional carbon advisor at Wildlife Conservation Society, a nonprofit partner in a 166,000-hectare forest protection project in Cambodia’s Keo Seima wildlife sanctuary, said information on market dynamics is shared with “closer partners” the group works with in local villages, which together number about 20,000 residents.
Despite facing financial losses, Moore said WCS is keeping up payments to communities from its reserves, adding there hasn’t been concerns raised on future earnings.
“What we have communicated, and they do know, is that there is money for now, and [keeping up payments] is what we are going to focus on,” he said.
The continued remittances are needed to maintain trust and goodwill, Moore said, despite money also sorely being needed elsewhere, such as for maintaining land tenure and funding law enforcement. At present, the reserves could last about five years, he estimated.
The war in Ukraine, which started early 2022, has tightened the pursesprings of corporates, in turn affecting carbon credit demand. Allegations that credits from a set of forest conservation projects have little real impact on cutting greenhouse gas emissions have also tarnished the credibility of the mechanism.
Globally, there isn’t a consensus on how arrangements for local payments and safeguards should be baked into carbon projects. Some developers agree to a price floor, so that their beneficiaries are buffered against severe market downturns. Others simply stick to providing a cut of each carbon credit sold.
On the part of carbon credit certifiers, Plan Vivo, which verifies under 1 per cent of credits issued globally, mandates that 60 per cent of sales income after tax be for project participants and other local stakeholders. Such specific requirements appear uncommon, though most certifiers call for project developers to properly discuss terms with local communities, and provide grievance mechanisms.
Verra, which verifies the bulk of carbon credits placed on the voluntary carbon market, has rules that projects do not negatively impact local communities. But “the specifics of payment arrangements can vary based on project design, local context and stakeholder agreements”, a Verra spokesperson told Eco-Business.
Sandeep Choudhury, director at India-based carbon project developer VNV Advisory Services, said a pricing structure which fairly rewards beneficiaries could be helpful in convincing carbon credit buyers of a project’s worth.
“Markets will go up and down, that is the nature of it. So long as you’re fairly transparent about it with both communities and [buyers], it will help to build more trust in the system,” Choudhury said.
“Communities being left in the lurch is a bigger problem. If you promise them something and then not deliver, they are going to turn back and say…let’s not even work at it,” he added.
But Choudhury, who is also accreditation committee member at offsets provider group International Carbon Reduction and Offset Alliance, and advisor at the Voluntary Carbon Markets Integrity that sets rules on corporate use of carbon credits, acknowledged that balancing losses with fair payment is easier said than done, with forest conservation prices dipping down to US$2 at times per credit.
Expect lawsuits
As it stands, observers say that project developers are not yet at the brink. Pairojmahakij said most developers RECOFTC works with have diversified portfolios and the low price of forest protection credits is “not necessarily a dealbreaker”.
Choudhury added that the good years before the current price plunge has helped soften the blow of the more recent losses on developers.
Still, with recovery far off in the horizon, and many newcomers having already invested significant capital into now-stalled projects, Choudhury believes it is a matter of time before distressed stakeholders head to the courts.
“I see a lot of legal hassles coming up in the future. It has to happen,” he said.
Such a scenario could be particularly bruising for the carbon market, especially as key legal concepts surrounding carbon credits are still in their infancy.
For instance, few countries have clarified if carbon credits count as property, which makes it tricky for corporate buyers to lay claim to their purchases if a project developer becomes insolvent. Meanwhile, funders may also struggle to take over a distressed investees’ carbon credits during bankruptcy proceedings.
These points were raised in a report last month, co-authored by Genzero, a sustainability-focused financier owned by Singapore’s state investor Temasek.
“Without legal clarity, carbon markets, taken as a whole, face fragmentation, inefficiency, and diminished trust among participants, undercutting their strength as a tool for driving climate action,” the report said, while calling on the Singapore government to provide more detailed guidance.
For now, project developers are hoping that a flight to quality by carbon credit buyers can direct demand to the best ventures out there. Industry efforts to define quality and set rules for offsetting could also rebuild market confidence and silence greenwashing allegations.
But reality has tempered expectations.
“I do not think we are going to remain in the situation now, I do think demand will pick up. But whether we will ever achieve some of the lofty predictions of the McKinseys or KPMGs of where things might be in 2030…that’s hard to say,” said WCS’s Moore.
Consultancies have in past years said that carbon markets would grow multifold from the current US$2 billion by the end of the decade.
Moore said he had no regrets getting involved in a forest conservation project.
“Conservation costs money, and there has never been sufficient funding. The carbon markets have always been a scalable avenue to put money into conservation,” he said.
