"Do you not think I could be accused of greenwashing?” asked the oil major, with regards to my suggestion that they invest today in nature-based removals (tree planting, for the rest of us). Followed by: “What do oil companies know about planting trees?” A surprising amount.

Launching a carbon project requires origination skills, operating in high-risk countries, financing it, securing and negotiating long-term offtake agreements, liaising with multiple, sometimes thousands, of stakeholders and doing so in a changing regional, domestic and global regulatory and political environment. Starting to sound familiar? How about if I tell you the Democratic Republic of Congo, Cameroon, Papua New Guinea, Cote D’Ivoire, Kazakhstan, Brazil, Tanzania, Mozambique… are all host countries seeking international finance and partners to support the export of carbon to developed countries.

Energy companies also have the balance sheets required, risk appetite, hard-to-abate emissions to compensate and abilities to warehouse or hedge price exposure. However, for many we speak to, investing in renewables, decarbonisation technology and carbon capture on facilities is proving a more comfortable first foray into carbon credits than investing in nature.

Investment in nature-based solutions—such as afforestation, improved forestry management, mangrove restoration and preserving our remaining rainforests—might not feel relevant but protecting and growing biodiversity is critical to climate stability. Prices of REDD+ projects in particular have been hit in 2023 by hyperbolic media articles homing in on the worst projects.

And by worst we don’t mean spewing trillions of barrels of oil into the sea, we mean overestimating the baseline assumptions of deforestation rates should the project have not happened. The way to think of the early carbon projects though is the way you think of the first Nokia: it’s incomparable to an iPhone but at the time it was revolutionary.

REDD+ refers further to the role of conservation, sustainable management of forests and enhancement of forest carbon stocks in developing countries

Carbon markets are critical for not just scaling climate finance, but sending the price signals we need to decarbonise faster. In a 2023 report by Ecosystem Marketplace, the following conclusions were reached: “Companies engaging in the voluntary carbon market are reducing their own emissions more quickly than their peers. They are 1.8 times more likely to be decarbonising year-over-year; 1.3 times more likely to have supplier engagement strategies; and the median voluntary credit buyer is investing 3 times more in emission reduction efforts within their value chain.”

Voluntary carbon buyers were also found to be more likely than non-buyers to have more ambitious science-based targets to address climate change. They were also 1.2 times more likely to have board oversight of their climate transition plans.

The takeaway being that quality is important, but action is more so. Nonetheless, a huge amount of work is underway to ensure the next generation of credits are maximising climate impact. Key examples include the Integrity Council for the Voluntary Carbon Market, which is launching the Core Carbon Principles in 2024 to provide a quality assurance label for buyers. Digital measurement, reporting and verification is being adopted by project developers and carbon standards. There has also been an emergence of rating agencies to centralise the task of stringent due diligence on projects and simplify the outputs. These initiatives have brought some inertia and led demand to feel lacklustre throughout the year, but the impact on growth should be short term and pave the way for a more effective and robust carbon market in the future.

As well as a shift towards higher quality, future buyers are searching for removals, both nature-based and engineered. If procuring in size, you have the option to invest in projects at an equity level or through a pre-payment structure, where your investment amount is drawn down on as credits are issued and transferred to you. You will often find project developers open to option structures and upside-sharing models with the communities the projects serve once the initial investment has been recovered. It’s worth noting, a good deal in carbon is one where everyone benefits; if the deal is too in the favour of the offtaker, the resale value of the credits is reduced.

When buying credits, our Emsurge platform sets out to make it easy and maps out all the considerations that should factor into your decision and price paid—whether spot or forward, the carbon standard, the additional attributes (things like the sustainable development goals), the programme eligibility, the fungibility of the credit, the vintage, the project specification, the quality, the size and the location. For assistance, please reach out to our team of specialists at Emstream.

Melissa Lindsay is the founder and CEO of Emsurge and Emstream.

This article was published as part of PE Outlook 2024, which is available for subscribers here. Non-subscribers can purchase a copy of the digital edition here.



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