Xpansiv’s CBL exchange is the largest carbon offsets marketplace in the world and accounts for more than 40% of voluntary carbon market trade by volume. Its benchmark contracts are now the industry standard for carbon credit pricing and liquidity, used by the likes of S&P Global Platts, CME Group and others. Energy Monitor caught up with Russell Karas, Xpansiv’s head of commodities, to discuss what lies ahead for the voluntary carbon market after a year of strong headwinds.

Russell Karas, head of commodities at Xpansiv market CBL. (Photo courtesy of Xpansiv)

What were the key developments in the voluntary carbon market last year?

The market grew massively in 2021 [the year before last] and it was a huge learning experience for us. From 2020 to 2021, our total carbon-offset volume transacted quadrupled from 30 million tonnes to 120 million tonnes. We [now] cover over 40% of the voluntary carbon market’s [traded] volumes, so our activity is a pretty good indicator of the overall market. We have spent a lot of time educating firms about what a carbon offset is and how you get set up with registries and so forth.

In 2022, we had a record number of onboards. Firms were ready to start transacting, but we also had a tremendous number of challenges. The number of firms that made carbon-neutral commitments doubled in 2020 [during Covid-19]. Then in Q1 2022, we had the Ukraine War, and energy prices and volatility going pretty crazy, which impacted trading across all commodity markets. It was a real test and we saw some price movement – but we did not see a decline in activity. We did not see any firm saying: ‘We're going to put this on hold’. I think we realised, just like with Covid, how deep the roots of this movement are, how companies are investing in long-term projects [and] building teams [to realise them]. They're taking out long-term loans with ESG metrics behind them.

A lot of firms have set 2025 and 2030 [decarbonisation] targets and they are still determining the right mix in their energy transition, but we are incrementally seeing more firms take action and we have not seen firms really step away from those commitments.

Some of our onboards last year are really large end users of voluntary offset credits. They will have a significant impact on the market. Some companies want nature-based credits, some want tech-based ones, some have balanced portfolios of both. It's a really diverse mix.

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We saw [carbon offset] prices decrease with the invasion of Ukraine, [stay] more or less steady over the summer and then rally into the fall when companies were starting to buy-to-retire [to comply with climate targets] at the end of the year. We have seen a steady decline [in price] since, but the long-term confidence is there.

What do you expect to be the prevailing themes and trends in the voluntary carbon market in 2023?

A lot is carrying over from 2022. Again, we have a very full pipeline of companies that are still getting set up. Towards the end of the year, we expect to see a strengthening of volume and pricing. We are also getting closer to 2025, for which some companies have set goals. Another batch have set goals for 2030. As we get closer to those dates, we will see retirements pick up and ultimately that will impact supply and price.

The macro headwinds are what they are. But […] 50% of the world's GDP has made net-zero commitments and as we get closer to the defined dates we will see a pickup in [carbon offset] activity. AlliedOffsets published a recent report predicting retirements would increase by 45 million tonnes this year, from about just over 200 million tonnes to 250 million tonnes.

One thing that's interesting about the headwinds: some of the critical articles [about the credibility of various carbon credits] have actually pushed some companies to purchase higher-price offsets. Things like “co-benefits” with SDGs [Sustainable Development Goals] have become more discussed throughout the market. We listed our first SDG-linked product, which incorporated five SDGs, in December [2022] and it opened at as high as $11. It was in very challenging market conditions yet ended up being the largest launch we have had. We also had a significant number of blue carbon credits [from projects that capture and sequester carbon in coastal or marine ecosystems] transact in the high-$20s–30 range. Not every firm is going to buy a $11 or $30 credit, but we have seen end users paying a premium for more co-benefits because they want to have an additional impact beyond just mitigating carbon emissions.

What would you like to see agreed on the Article 6 carbon trading rules at COP28 in November?

From our standpoint as a marketplace, we would just like as much clarity as possible. The registries are prepared, or are preparing, to list credits with "corresponding adjustments" [a tool that ensures carbon offsets are not double-counted when they are transferred or sold internationally] and to make sure that those are tagged and clear to the market. I think the main question still is: which specific projects will qualify under Article 6? Once that is finalised, it is going to be an incremental process where different countries set up their own internal checks and balances and registries around Article 6 to make sure they can account for corresponding adjustments and their own national carbon accounting. Different countries are going to work at different speeds.

We obviously track it closely to see how it might impact what type of products we can offer once the registries start tagging those types of credits. That information can then flow to our platform or an exchange and as we monitor those transactions, we will start to get an idea of, say, what a forestry project might be worth, […] with or without a corresponding adjustment. It will be really interesting also to see how other parties value those credits with corresponding adjustments, even if they are not being retired and used towards NDCs [Nationally Determined Contributions].

How can carbon avoidance credits and carbon removals credits be better integrated?

So you have avoidance and you have removals, and then you have some projects that have both. We need both. Removals tend to be more expensive and [the projects] have longer lead times to develop. Naturally the credits are priced higher due to the higher project costs – it can take 6–7 years to get reforestation project credits. Also, the registries are just starting to tag removals versus avoidance, and you need that data to price them.

We need everything right now: we need avoidance and we need removal. There's a massive challenge that we need to overcome and it's going to be an incremental process, but we really need both project types.

A recent investigation into Verra, the world’s leading carbon standard for the voluntary offsets market, has found that more than 90% of its rainforest offset credits are likely to be “phantom credits” and do not represent genuine carbon reductions. Following a spate of similar scandals, does this call into question the validity of carbon offsetting?

I think the detriment of some of these articles is that they are applied to the market as a whole. There are a lot of high-quality projects where there has been significant due diligence done by large teams, and companies have had the confidence to buy these credits.

But it is all part of a transition. The problem with the environmental markets is [if] you give up the good in pursuit of perfection. In 2019, this market was 12 million tonnes, then 30 million, then 120 million, and now there are futures markets that are regulated by the Commodity Futures Trading Commission on offsets. We've made all these strides and it has been impressive, but we still need to develop. So in some sense I think it is good that this is being investigated, and that there are taskforces and rating agencies – not just the media – digging into the projects, like you see in a variety of other markets.

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My only concern is that some of these investigations have looked at one project and applied outcomes to the whole carbon offsets market. [In that case] you are grouping together a lot of things that are distinctly different: different project types, different locations, different methodologies, different technologies. I think we do need to continue to see how we can improve the market but we would not agree that a company should not think about using carbon offsets just because someone said they are not 100% part of the solution to climate change.

If we are still using only offsets [to decarbonise] in 15, 20 or 30 years, then we have not achieved our goal. If you look at the CORSIA programme that airlines have developed through a specialised UN agency, they foresee the use of offsets at the beginning and sustainable aviation fuels and technological improvements make up a larger percentage of the [emissions] savings over time. That's the blueprint. I don't know why, as people that care about the environment and the climate, we wouldn't want to keep pushing a market-based mechanism that allows the most choice, flexibility and price discovery [for emissions reductions].

What changes need to be made to the voluntary carbon market to ensure that carbon offsets actually deliver the emissions savings they promise?

All projects require third-party verification. I think what has been really powerful about the voluntary market is that, in the absence of regulation, a global market has emerged and companies and universities and other entities have all said: 'If my government is not going to tell me to do something specific, I'm going to set my own target – and here's a market-based mechanism to help me understand what tools I can use and what they will cost.'

It is hard to see there is going to be a global regulator of the voluntary carbon market. We just need more consensus amongst industry about what projects the market deems suitable. There is a variety of different taskforces working on this. From our standpoint, anything that provides clarity and consensus on what are deemed quality credits is welcome.

The ICVCM [Integrity Council for the Voluntary Carbon Market] was a positive development. They just announced they are going to incrementally put out their findings this year. They are not going to come out with a specific programme or registry recommendations until Q3, but the overall exercise is positive; it is a good example of how the private sector and nonprofits can come together.

How much do you expect the voluntary carbon market to grow in 2023?

We do not do forecasts, but based on the growth of our onboarding last year, and our onboarding pipeline today, it has not slowed in terms of the number of companies that are setting up. I firmly believe that this market will continue to grow in a significant way. We are just scratching the surface in terms of new companies that have set goals. We have had large end users retiring credits for years, but new users have been setting goals and we are going to see them come in in a meaningful way. So we should see growth in 2023 and beyond.