As a result carbon credit prices have been increasing significantly across the board, while varying largely dependent on quality and standards.
Natural is premium
Removal and sequestration credits (incl. NCS) generally trade at a premium to avoidance credits, due to higher levels of investment required as well as high demand based on the view that they are more effective against climate change. This is, since ultimately, not all processes will be able to be operated at zero emissions so there needs to be removal or sequestration in order to reach net-zero. Furthermore, NCS allow for significant potential for co-benefits such as bio-diversity and ecosystem functioning allowing for further differentiation and premium pricing (marketed separately).
Within NCS, goodcarbon focuses specifically on ocean-based solutions, which poses incredible potential, since about 25% of CO2 emissions are being absorbed by the oceans. It is estimated that ecosystems including seagrass, salt marshes and mangroves can store >2x the carbon compared to land-based forests, while being largely untapped by project developers so far.
Corporates react to a lack of supply
Large emitters have been looking to hedge against the risk of future price increases by buying entire carbon projects, or large stakes in them, as soon as they are certified and able to issue credits.
Demand is projected to further increase 15x by 2030 and 100x by 2050. 30% of this demand is estimated to be able to be covered by NCS, at a reasonable cost of $10-$40/tonne.
However, in order to mobilize this supply by a significant increase in project development (and connected long lead-times), a lack of funding needs to be solved at scale and fast.
Overall, the market is characterized by low liquidity, scarce financing, inadequate risk-management services, and limited data availability.
Suggested improvements to make the market more efficient:
- Strengthen verification methodologies & streamline verification processes
- Clearer demand signals to give suppliers more confidence in their project plans and encourage investors and lenders to provide financing.
- Creating shared principles for defining and verifying carbon credits.
- Standardized contracts — reference contracts would combine a core contract, based on the core carbon principles, with additional attributes priced separately.
- Resilient and flexible trading and post-trade infrastructure — to accommodate high-volume listing and trading of reference contracts (and contracts reflecting a limited, consistently defined set of additional attributes). Structured finance products for project developers can be built on top.
- Mechanisms to safeguard market integrity: establishing a digital process by which projects are registered and credits are verified and issued
- Verification entities track project impact at regular intervals, not just at the end
- Digitize process: lower issuance costs, shorten payment terms, accelerate credit issuance and cash flow for project developers, allow credits to be traced, and improve the credibility of corporate claims related to the use of offsets.
- Effective ways for buyers of carbon credits to signal their future demand to encourage project developers to increase the supply.
goodcarbon connects the dots
The team behind goodcarbon is building a compelling solution to the problems in the space by issuing tokenized and standardized financial assets which are subject to German financial regulation on a platform that covers the full lifecycle of funding offsetting projects incl. reporting, governance and secondary market trading.