Carbon Credits FAQ Part 2: How and When to Get Started

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Carbon Credits FAQ Part 2: How and When to Get Started

Understand carbon credits in concept but don’t know how to get started on your journey?

This two-part FAQ explores some of the most common carbon credit questions to help enable organizations to effectively explore carbon markets in pursuit of decarbonization goals. Part 1 lays the foundation: what carbon credits are and why they matter. Part 2 gets practical: how to strategically identify credible and cost-effective carbon credits, and when to invest in them.

If you already have the basics covered, let’s move into action!

HOW DO I KNOW THAT WHAT I AM BUYING IS CREDIBLE?

Today, VCMs are unregulated and highly differentiated markets where supply is limited and not all carbon credits are equal. Confusion and concern over the quality of carbon credits, market transparency, and reputational risk has caused some corporations to shy away from credit purchases, at least temporarily. Recently published guidance standards aim to help countries and companies navigate VCMs, and regulation is being explored or under development in several jurisdictions, including the U.S.

The Integrity Council for the Voluntary Carbon Market (ICVCM) is an independent governance body that has worked to define global standards for high quality carbon credits, called the Core Carbon Principles. Companies seeking to purchase credits should build these principles into their due diligence process, considering them a credible floor for quality. Additionally, the Voluntary Carbon Markets Integrity Initiative (VCMI) has developed a strategy to guide policymakers and recently published a Claims Code of Practice — a rulebook to support companies on credible use of high-quality carbon credits and associated climate claims.

HOW MUCH DO CARBON CREDITS COST?

The price of carbon credits is a function of the supply and demand within voluntary carbon markets. Historically, purchases and pricing on VCMs have reflected a race to the bottom, with buyer demand and supply concentrated in low-priced credits of varying quality. Many corporate buyers are beginning to signal increased demand for high-quality credits, and a willingness to pay. Note that while price may be a strong indication of quality, a higher price does not necessarily correlate to a high-quality credit.

Buyers can currently purchase credits for as low as a few cents per metric ton carbon dioxide (MTCO2) for avoidance credits, to $25-$90 for nature-based removal credits, to hundreds or thousands of dollars for technology-driven removal solutions such as direct air capture. While market pricing forecasts vary, most agree that pricing will remain unpredictable in the near term, and increase, potentially substantially, in the years ahead as corporate buyers draw closer to their 2030 target year. This prediction is in part what has driven increased interest in forward purchasing of credits, as buyers look to lock in volume and price while supply is still available.

SHOULD I INVEST IN CREDITS NOW OR LATER?

Companies that wait to purchase credits close to their target year are likely to face long learning curves with navigating a new market, as well as volatile pricing and potential supply shortages. Many companies are now looking to forward purchasing as a means of mitigating these downside risks, and/or as a means of pursuing upside through a hedging strategy, securing credits for a lower price that can later be retired, or can be sold at a higher price. Between 2020 and 2021, forward purchases on VCMs increased substantially. For example, Meta pre-ordered 6.75 million metric tons of carbon removal credits through a partnership with Aspiration with an expected delivery from 2027 through 2035.

HOW DO I MITIGATE REPUTATIONAL AND DELIVERY RISK?

Purchasing credits on VCMs includes risk. While credit failure is a low-frequency occurrence, it can have high-severity impacts.

For companies considering purchasing carbon credits, the first and most important step to take is to conduct due diligence and ensure that the credits being purchased are of high quality. Many companies work with consultants or brokers to complete this step. At Stok, we support clients in developing a sourcing strategy that combines existing global guidance, best practices, and company and/or project values, while balancing budget and risk tolerance.

For companies considering forward purchasing, insurance products are now available to cover third-party fraud, negligence, and loss, as well as the underperformance of credits. Policy limits are determined by volume of credits and monetary limit per credit, which is based on expected replacement cost for a credit of similar vintage and value. Insured credits that are not delivered are reimbursed as cash.

HOW CAN STOK SUPPORT MY COMPANY AROUND CARBON CREDITS?

Stok’s services can help you enhance your knowledge of voluntary carbon markets and the application of carbon credits to targets and public claims, establish practices to guide strategic decision-making, and procure credits that align with best practices and your company’s and/or project’s values and budget.

Get in touch to discuss your carbon credits needs to learn more.