New policies. More media attention. Better technology. These are just a few of the myriad elements that affect the rapidly-evolving voluntary carbon market (VCM).
We sat down with Matt Tetreau, Aspiration’s Vice President of Capital Markets, to better understand the current state of VCM, and what its future might hold.
Carbon Markets: Still in a State of Flux
They say change is the only constant — and that’s been especially true of the carbon markets over the last few years.
As Matt puts it, “The market has started grappling with speed bumps related to maturity and progression.”
Take 2021, by all metrics a banner year. The VCM saw explosive growth with a total value reaching almost $2 billion — a nearly fourfold increase over 2020 — while the compliance markets surpassed $850 billion in value. But 2022 was a different story: a 4% decline in offsets purchased, driven in part by weakening investor confidence in the quality of the credits they’re receiving, and the halting of tokenization demand pathways.
The roller-coaster ride is understandable. Carbon markets are young, after all, and the volume of carbon assets grows as unpredictably as demand for them — a recipe for volatility.
So before we get into predicting the future, let's look at how the market got to where it is now:
Perhaps the clearest example of that volatility is in the price of assets.
“There’ve been benchmark contracts that traded all the way up to $15 or $16 per tonne early in the year,” explains Matt, “only to turn around and close the year trading around $3-4/ton.”
“[It’s] a reflection of the markets trying to figure themselves out,” he explains. “They’re trying to understand: what’s the quality benchmark that will be acceptable for buyers?, or how much supply is needed in the short term from project developers and sellers?”
False Starts on the Blockchain
Another major development this past year has been the tokenization of carbon assets, like carbon credits.
The what? ‘Tokenization’ means creating a digital representation of a carbon asset on a blockchain. This allows these assets to become secure, tradable financial assets — if done correctly.
“Blockchain can bring transparency to markets and it can help with double counting risks,” says Matt of the growing interest in tokenization, noting that the World Bank and other entities have subscribed to this as well.
Unfortunately, there have been a few false starts.
Initially well intentioned, carbon tokenization communities began tokenizing and trading already-retired credits last year, with momentum building to 'sweep the floor' - essentially, aiming to remove older, lower quality credits from the carbon trading ecosystem and leaving a clean, higher quality slate to build on. When these initiatives resulted in the further issuance of lower quality credits, Verra and the other major carbon standards were forced to halt tokenization of some of the credits on their registries.
Matt believes that part of the problem can be traced to the lack of what he calls a “two-way carbon bridge” — a way of ensuring two-way communication between the registry and the owner of the credit. “The technology wasn’t there for that two-way bridge,” he says. In addition, the lack of buyer transparency via a KYC process also added risks to the tokenized carbon credits.
Despite these initial challenges, there’s still significant value that can be added from tokenization — more on that a bit later.
Increased Scrutiny of Project Quality
Recent media reports have criticized the quality of various carbon projects, with some even arguing against the concept of carbon removals altogether.
But we know how critical tackling unavoidable emissions will be to limiting global warming. So as the market keeps growing and more companies invest, it will need to mature in ways that help potential buyers (and the general public) feel confident about the quality of the carbon projects and their real climate benefit.
How can it do that? Proponents point to standardizing benchmarks of quality (like permanence or additionality); bringing more transparency to pricing; and improving project monitoring and engagement.
Armed with the knowledge of what’s come before, we can now look to the future. What’s coming next?
Matt’s 7 Predictions for the VCM in 2023 & Beyond
1. More regulation and quality alignment will bring more legitimacy.
Given increased scrutiny in the carbon markets, Matt expects that “establishing market trust, especially in this market where it's historically been a little bit opaque, will likely involve increased regulation to a certain extent.”
But then who regulates, and how?
With their Core Carbon Principles — new threshold standards for high-quality carbon credits — we can expect the Integrity Council for the Voluntary Carbon Market (ICVCM) to play a major role. Matt explains that getting a nod from independent third-party assessors like the ICVCM “can surely help buyers stand behind, and feel comfortable with the quality of the projects that they're owning.”
Other third party rating agencies — think Sylvera, BeZero, and Calyx — are also helping to build legitimacy.
But ultimately a fractured approach to determining quality won’t be as effective as national and international regulation.
For instance, consistency around corporate reporting — and requiring public companies to disclose their climate impact — could go a long way to building legitimacy and abating concerns around greenwashing.
In 2022, the SEC unveiled just such a plan: the ‘Enhancement and Standardization of Climate-Related Disclosures for Investors’ would, as the name suggests, require public companies to disclose their business’s climate impact to investors.
Unsurprisingly, there’s been some pushback, but some form of the plan is likely to move forward. And soon.
“The SEC said they were aiming for this spring to put out final guidance for public companies and what disclosures they're making in terms of climate commitments,” Matt says.
All VCM players — buyers, investors, developers — must be ready to adapt to (and in many cases should welcome) new and stronger ‘rules of the road,’ as the SEC and other government and standard-setting bodies (including VCMI, etc.) around the world step in.
2. Don’t count blockchain out.
Despite the false starts with blockchain technology mentioned above, Matt says to count on it making a comeback. Why?
- Blockchain can bring much-needed transparency to the market.
- It can help with the problem of double-counting assets.
- The demand channel has the opportunity to become a significant price discovery ecosystem for both buyers and sellers.
“That technology is evolving. So the viability of these markets, of blockchain and tokenization, of liquidity avenues, I think will grow this year,” Matt says. “It's just going to take some time for technology to catch up and for project developers, and other market makers to understand and grow with it.”
Registries including the Gold Standard and Verra held consultations on the topic, and have started to map out plans to incorporate tokenization avenues into their ecosystems. If the tokenization community can maintain high-quality standards, we see this demand channel as potentially significant.
3. Recession fears will mean short-term price volatility (but that’s ok).
Despite mixed economic signals, fears of a recession have been rising. But whether or not it happens, macroeconomic concerns affect how people approach risk assets. Carbon markets are no different than any other demand-led market: when money becomes more expensive, balance sheets get tighter and decisions become more difficult.
But as Matt points out, “There are companies out there that have made serious commitments, that do have science-based targets, and are holding true to those.”
Matt argues that even if short-term price volatility occurs, this would actually be a good thing in the long run: “I think it will increase scrutiny of what's being purchased. And ultimately, I think that's a good thing for the market, as buyers just become more aware of what they're buying and the risks involved.”
4. Prices of (quality) assets will keep climbing.
In spite of the potential for reduced short-term demand, Matt still firmly agrees with the consensus that over the long haul, prices will continue to appreciate as demand, especially for high-quality projects, increases.
“I think that carbon prices will escalate over time for various reasons,” he says, expecting the markets to become more fragmented, and more selective. “In terms of what sees appreciation and what doesn't, I think the markets are currently grappling with what's an acceptable level of project quality to claim an offset for.”
He expects more scrutiny on the quality front, and as companies become smarter and more selective about it, “I think the high quality projects will see higher appreciation rates than other projects that may have baseline questions or other potential issues with them…or that don't have as many co-benefits.”
For Matt, that asset appreciation is ultimately a good thing for all players in the market.
“Like any equilibrium price market, escalating prices will incentivize more supply. The VCM market needs to show project developers that high quality credit supply production will be rewarded. So, I think the market needs to accelerate higher to buy more supply into the market, especially supply of high-quality nature-based removal projects.”
5. “Awesome” offtake agreements will be used more often.
Forward offtake agreements allow project developers and companies to agree to a future supply of a specified quantity of carbon credits, at a specified price, reducing risk.
Matt believes that these agreements will become a preferred option in the VCM, because all parties benefit.
For project developers, they amount to an “awesome tool” to bring finance into the sector. Developers have a valuable asset they’re bringing to market, and they’re looking for capital in order to scale. “It's just a matter of the financial markets connecting with those project developers,” says Matt. “That's not fluid yet, and that's a big part of what we're doing here at Aspiration. So it's a natural next step in the iteration of these markets.”
As for asset buyers, the big advantage is all about minimizing risk — locking in quantity and pricing while supply is still plentiful.
6. Nature-based assets will continue to dominate.
Matt notes that nature-based carbon credits are now the VCM’s primary asset as far as carbon removal goes, and he doesn’t expect that to change anytime soon.
“The technological removal space is not yet a significant portion of the market,” he says. “A large share of the credits that are retired today are from nature-based solutions,” such as forest conservation or reforestation projects, or ‘blue carbon’ projects where carbon is captured by ocean and coastal ecosystems.
“I think nature-based solutions continue to drive the bus in terms of the broad market,” Matt says, emphasizing benefits around price and scale — along with ‘co-benefits’ beyond carbon removal, like helping local communities or strengthening an area’s biodiversity.
“These projects not only bring a tangible, measurable carbon component, but they also bring biodiversity benefits that are going to become a larger part of financial markets,” noting the commitments on biodiversity established at COP15 late last year.
That’s not to so say technological solutions won’t have their place in the VCM — expect them to grow in importance over the coming decade: “Over time, you'll start to see a lot more of those technological projects, like direct air capture, start to bring some more volume to market as the costs of entry into those markets come down.”
7. Consolidation may come…just not yet.
“Most project developers have very local expertise that are specific to a region or a project type,” Matt says when asked about the possibility of eventual consolidation among developers. And that’s a tricky thing to scale.
Further limiting consolidation is the fact “capital is trying to find as many project developers as it can at the moment, to put money to work.”
But he predicts that could change down the road.
“Over time, once volumes ramp up and the markets become a little bit more streamlined, I could see consolidation happening,” he says. “I'm just not sure it's in the immediate term, like in the next three years.”
One possibility to watch out for though is vertical acquisition.
“Vertical players have announced large investments or relationships with project developers directly, including Aspiration,” he points out. “And I think that is a natural evolution for the point that we're at now, to help create a little more vertical consistency and efficiency.“
The Bottom Line
The VCM continues to evolve and adapt, with more major changes sure to occur in 2023 and beyond. Aspiration can help businesses prepare for the changing markets, and help them achieve their net zero goals. For more information, get in touch with our carbon experts today.
Matt Tetreau is the Vice President of Capital Markets at Aspiration. He has over 15 years of investing, trading, and capital markets experience, specifically in the commodity derivative and real asset space. He most recently led the Global Markets team at Indigo Agriculture, an ag tech and soil carbon project developer. Prior to that, he served as a portfolio manager and strategy leader at Manulife Investment Management’s Timber and Agriculture unit and J.P.Morgan Asset Management’s GFICC arm. Matt earned a BS in Engineering from the University of Massachusetts and an International MBA from Florida International University’s Chapman Graduate School of Business.
The views and opinions expressed in this program are those of the author and do not necessarily reflect the views or positions of Aspiration. The content does not constitute any type of advice nor does is it an offer to purchase or sell any financial instrument(s). Past performance is not an indicator of future results.