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Voluntary carbon market trading: Slowing Q2 may reflect broader market caution

© Shutterstock / 3rdtimeluckystudioImage representing social value.

Investing in carbon credits may be the primary route to achieving near-term carbon-reduction goals, yet the offset market faces challenges. It’s not just the type of credit or when to use it that’s a concern, but the underlying market also faces price, volume and demand fluctuations and variances.

CBL’s latest carbon trading market update reflects several issues for purchasers to consider. Price volatility rose towards the end of Q2 on increasing concern about recession, while technology-related credits fell furthest in price. Overall however trading activity remains well above the same time last year.

Premiums attaching to higher quality credits

Corporate market participants on CBL helped extend the premium in high-quality carbon credits based on spot market activity, as seen by the $5.20 paid for 250K Gold Standard India wind project credits, nearly 80% above the GEO close price of $2.90.

This is reflective of the increasing scrutiny of the use and type of credits purchased to meet carbon reduction goals. Yet Xpansiv reported a moderation in price and volumes in Q2 relative to Q1, as overall global economic challenges and the slump in equities seen in the first half bled into the commodity markets as well.

A drop in Verra registry credit issuances were blamed for the 8% drop in carbon credits issued in the second quarter, bringing the decline in total issuances from all registries to 31% year-over-year. Verra retirements were also responsible for a 25% drop in retirements in the quarter – retirements totalled 33 million tons from the four major registries, Verra, Gold Standard, Climate Action Reserve (CAR) and American Carbon Registry (ACR).

Technology-based credit prices lag nature-based credits

Nature based credits seemed preferred to technology, reflected by a 2.6% decline in N-GEO prices compared to a 4.7% slip in a broader pool of technology credits aligned with defined Core Carbon Principles (CPP). Concern about the impact of nature and biodiversity loss combined with a broadening understanding of the role of nature-based solutions are providing ongoing support for this part of the market.

While prices have fallen year-to-date, they maintain a healthy rise from year-ago levels, with GEO and N-GEO credits above 2021 levels by 57.9% and 48.9%, respectively. The largest regional declines quarter-on-quarter were seen in Europe (-20%), and Asia (-15.4%), while prices in Latin America (-7.1%) and North America (-12.6%) narrowed the least, with Oceania showing the only increase (2.8%). Compared  to last year, however, Africa showed the highest price increase at 465%.

Volatility among tech credits, reflected by a near 100% reading for C-GEO prices, which is likely to be a reflection of wider tech-based sentiment in the (equity) markets. GEO volatility ramped up to 76% in June, while N-GEO volatility jumped to 42% at quarter-end despite being below 20% into mid-June. Volatility is a measure of the daily closing price variance relative to a 20-day close-to-close price for N-GEO, GEO and C-GEO as assessed by S&P Global Platts.

Energy efficiency remains most popular project type up 484%

By project type, fugitive emissions saw the largest price decline (-43.7%) in the quarter, followed by energy industries (-10.3%), although the latter accounted for the highest volume. Compared to 2021, prices for energy efficiency credits remain a healthy 484% higher despite being 8% lower in Q2 vs. Q1, followed by Industrial Process (282%).

World Bank reiterates importance of global carbon pricing

The World Bank has stated that less than 4% of global emissions are currently covered by a direct carbon price, relative to the range needed to meet 2030 goals. In its annual report on carbon pricing development around the world, State and Trends of Carbon Pricing, it cites cross-border approaches to carbon pricing, challenges and opportunities from rising energy prices, and new technologies and governance frameworks shaping carbon markets, which may likely account for the variations in pricing across the globe.

The 2021 report listed 68 direct carbon pricing instruments in operation around the world, of which 36 relate to carbon taxes and 32 to Emissions Trading Systems (ETS). Four new carbon pricing instruments were implemented since publication, one in Uruguay and three in North America (Ontario, Oregon and New Brunswick), with planned new pricing policies being announced in Botswana, Israel, and Malaysia. The World Bank reiterated its view of the importance of carbon pricing as a means of unlocking inclusive global decarbonisation.

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