With Carbon Credits from Hazer technology emerging as a key future revenue source I feel we need a new thread for this topic.... as it will only grow more relevant over time.

I just found this article in the AFR. Very interesting reading.... particularly the idea that not all credits are created equal..... Proximity to emission source and removal of carbon from the atmosphere ( carbon negative ) activities both appear to be well recognised as quality carbon credits.

I'll watch this space with interest as it develops.......

Australian made: a premium label in carbon market chasing quality

Katrina King

Aug 22, 2021 – 5.00am

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It’s not often that finance professionals get to witness and help deliver the birth of an entirely new market, and I’m lucky enough to have experienced this twice.

The first was in the late 1990s at 60 Wall St, New York, when I worked in fixed income derivatives at JPMorgan. From the third floor, we created and traded the first credit default swaps, watching a Bloomberg screen as our bespoke contracts turned into standards and resulted in a range of risks and prices being focused down to the “cheapest to deliver”.

Katrina King. Attila Csaszar

Which brings me to the second new market I’m experiencing today: the voluntary carbon credit market.

Decarbonisation is, without a doubt, the predominant global market theme of this decade. While the market today is largely made up of fragmented, bilateral trades, history shows us a tradeable and liquid market will develop over time.

According to the World Bank, there are currently 64 regional, national and sub-national carbon pricing schemes across the globe, including Australia’s registration of Australian Carbon Credit Units (ACCUs). Projects which generate ACCUs are verified via the Emissions Reduction Fund, which is managed by the federal government’s Clean Energy Regulator.

The spot price has now moved 33 per cent or $5.55 since the start of the year, a result of growing secondary demand. Momentum is high, with a $2.70 increase (14 per cent), in the month of July to finish at $22.

Even in the current climate of high listed market returns, ACCU growth has far surpassed the S&P/ASX 200 year-to-date return of 15 per cent. And the demand for ACCUs is forecast to grow dramatically, thanks in large part to the 2030 emissions reduction targets set by corporates and state governments.

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But are all carbon units created equal?

When the 26th United Nations’ Climate Change Conference of the Parties (COP26) takes place in Glasgow later this year, one of the agenda items will be agreeing the rules for an international carbon market. As these rules are determined and carbon markets continue to develop, it’s anticipated that there will also be growing rigour required around the integrity of offsets.

I believe there are five key factors which determine the quality and hence the price premium achievable from a carbon credit unit. Firstly, the scheme it’s registered under. Some regulators are simply stricter than others, setting higher benchmarks for verification and ongoing reporting.

Secondly, the location of the project generating carbon credit units. Proximity to the place of emissions is favoured by those seeking carbon credit offsets. Building a story for co-locating credits and emissions is seen as beneficial to the surrounding communities.

Thirdly, project type. Nature-based solutions of creating carbon credits -- for example human induced regeneration -- is currently supplying most of Australia’s credits as they are the most cost efficient to produce. Biodiverse tree planting projects are currently more expensive but may be the next major source of credits under higher carbon prices.

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Further, many of the methods which capture and remove carbon
rather than just avoid producing it are more attractive to buyers. Any additional co-benefits given to the land or the community from the project is the fourth beacon of quality.

Finally, the age of the project (or its vintage) is important. Purchasers want to demonstrate their carbon credit purchase is benefiting the land now. It is less advantageous to spend money on a project that was actually done five years ago.

Many prices for carbon

Taking these factors into consideration, it’s difficult to see how there can be one price for carbon globally. But this should be viewed as an advantage for Australia, as we have an abundance of opportunities to produce high quality units.

While the market and traders may base price on “the cheapest to deliver”, an
ACCU has many idiosyncratic features which can enhance its value. We are seeing the beginning of price stratification in the Australian market. In more mature international markets where this divergence has already occurred, nature-based projects that remove emissions trade at premium.

The challenge of a stratified carbon credit market is integrating variations of carbon credits into a standardised exchange model.

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There are a number of groups worldwide attempting to tackle the challenges outlined above. The Taskforce on Scaling Voluntary Carbon Markets is a private sector initiative working to scale an effective and efficient voluntary carbon credit market to help meet the goals of the Paris Agreement.

Led by former Bank of England Governor Mark Carney, the taskforce is currently exploring the establishment of a new umbrella governance body to oversee the growth of voluntary carbon markets. It has also recently
developed a set of core carbon principles in response to the issues of carbon quality and credit assessment by scheme administrators.

The work of this body will help lead greater demand for high quality carbon credit units generated under robust methodologies and supported by legislative frameworks – all good news for ACCUs and the Australian market.

While a deeply functioning market requires liquidity and homogeneity of product, I do believe the carbon trading market will develop to form a base “tradeable” product. But premium product will exist too and ACCUs, nature-based projects and projects with biodiversity or social engagement benefits are likely to fall into this category.

As with the birth of the credit default swap market over two decades ago, I’m excited to be on the threshold of another new market developing and look forward to seeing it evolve and contribute to the building of a sustainable future.

Katrina King is the general manager for research and product innovation at QIC.