A number of major carbon traders are finding that offsets they bought may now be valueless.
Trafigura Group, the world’s largest trader of carbon removal credits, has suspended a consignment as it awaits the results of an investigation into the forestry project behind the units. The situation has led the company to replace the offsets in a contract with a corporate client and instead keep the stranded credits on its own books.
Hannah Hauman, global head of carbon trading at Trafigura and a former oil trader, says the complete loss of value seen in some corners of the voluntary carbon market is unlike anything she’s witnessed in oil markets.
Oil traders “see distressed or off-spec cargoes,” but they “don’t see defunct assets,” she said.
It’s the latest in a string of cases in which traders handling carbon credits are having to treat such assets as stranded. Just over 75 million carbon credits lie dormant on the accounts of Vitol, the world’s largest independent commodity trader. And Dutch trader Act Commodities Group and Act Financial Solutions, which are units of SMS Holding, wrote off about 1.5 million credits last year.
Since the first carbon credit was traded roughly 35 years ago, the market has been hit by a steady stream of scandals that have led to wild price swings and even collapsing valuations. That has implications not just for firms trading such credits, but also for companies that use them to underpin green claims to customers and regulators.
A carbon credit is a paper security representing one ton of carbon dioxide reduced or removed from the atmosphere, generated by projects such as wind farms or tree plantings. Buyers can trade the units or use them to offset their own emissions, in which case they must retire the credit to prevent it from being used twice.
But independent scientific analysis of a project’s carbon dioxide reduction claims often lags behind the issuance of the corresponding credits, leaving buyers in the $2-billion market exposed to losses.
Unlike its regulated equivalent in the compliance market, the voluntary carbon market lacks oversight, and buyers can find that promises made by sellers don’t always hold true.
Trafigura recently bought credits from the Southern Cardamom forestry project in Cambodia and had a contract to sell these to a large retailer. In June, carbon credit certification body Verra halted issuances from the project, pending an investigation into “stakeholder comments.” The allegations surrounding the project led Trafigura to offer its client the option to switch to different credits, which the client accepted. That left Trafigura with the units suspended on its books.
And at least one company has written off credits tied to a forestry project in Zimbabwe called Kariba after discovering that too many had been issued relative to the emissions reductions actually achieved, according to a person familiar with the matter who asked not to be identified discussing sensitive information.
According to Hauman, such problems have led buyers to seek closer contact with offset projects to keep an eye on how they’re run. But she said that’s actually adding to the risk of getting lumped with defunct credits, as buyers focus on fewer projects and lock into longer-term contracts.
“Customers are wanting to get increasingly close to their projects, and the only way to get close and to have that forward steady stream of procurement is to go for more term off-takes,” Hauman said, referring to long-term contracts for future supply, as opposed to a one-off spot transaction.
That means “these transactions have a lot of capital at risk,” she said.
Vitol’s and Act’s stranded offsets are known as emissions reduction units. These were first issued under an old United Nations program that has since faced heavy criticism, with roughly 75% of the units issued now thought to be useless.
The 75 million credits stranded on Vitol’s books are equivalent to a third of last year’s global issuance, or twice Switzerland’s annual carbon dioxide emissions. A spokesperson for Vitol said that the company doesn’t intend to trade or retire any emissions reduction units it holds, and that these were written down to zero years ago. Act told Bloomberg that it “destroyed” about 1.5 million reduction units last year after realizing they were valueless.
Still, there’s a market for junk carbon credits as sellers find new buyers and distributors. A client of Act retired 750,000 units last year, ostensibly to claim emissions had been offset. When Verra and Gold Standard, the world’s leading offset registries, issued restrictions on some renewable energy offsets, a new registry opened in Qatar to absorb that supply.
Prices in the voluntary carbon market vary wildly, with factors such as the age and location of a project affecting the perceived value. Emissions reduction units once traded at close to $20 per unit, but then crashed to roughly $2 in 2012 and a only few cents shortly thereafter. Credits from the Southern Cardamom and Kariba projects sold for about $10 last year, according to broker data compiled by BloombergNEF.
Hauman says buyers of credits should be reassured by new standards such as those set by the Integrity Council for the Voluntary Carbon Market’s core carbon principles, as well as the United Nations’ new Article 6 market, particularly when those units come with an accounting adjustment to ensure they aren’t used more than once.
“We urgently need to make it easy for investors to recognize and price a high-integrity carbon credit,” Annette Nazareth, chair of the council, said in a statement. “That is what our CCP label is designed to do.”
Hauman says the trend is that “instead of ‘buyer beware,’ really the onus is on the seller to deliver quality as per those specifications. That’s extremely important for buyer confidence.”
Mark Lewis, head of climate research at commodities focused hedge fund manager Andurand Capital Management, says the U.N.’s Article 6 system “gives credibility to credits outside compliance schemes” such as the European Union Emissions Trading System.
But, he said, “the risk is definitely there for credits that don’t have that quasi-compliance status.”
Lewis expects the offsets market to eventually split in two.
“There’s going be a market of credits with a very high value because they have quasi-compliance status, and there’s going be a market that doesn’t,” he said.
