Carbon Market Round Up: January 2023

Continued Growth…

The voluntary carbon market continued to grow in 2022, albeit at a slower pace than the prior year. Total retirements for 2022 grew by 2% year-over-year after a late year run up. This is despite a strong drop in crypto token related retirements which were banned from participation by most of the major registries earlier in the year. We also saw a strong shift in the average vintage year of retired carbon, moving from 2015 during the 2021 year up to an average vintage of 2018 in 2022⁽¹⁾.

…but Questions Around Quality Emerge

On the back of this growth, questions around offset quality have become a source of intense focus. Recently, certain types of credits (e.g., REDD+) have come under scrutiny by major media outlets. While the report received swift rebuttals from several market participants, this did not stop pricing from weakening across voluntary futures and, to a lesser extent, OTC markets.

Of note, the nature-based solution futures contract traded on the CME, known as "N-GEO", saw the December 2023 contract fall by over 50%. Part of the weakness of the N-GEO contract is a function of its structure, whereby the sellers can deliver offsets from a variety of projects, vintages, and geographies, with the buyer remaining unaware of what they are buying until actual delivery takes place. This has become a challenging proposition for many voluntary offset buyers. Additionally, the spread between the N-GEO December 2023 and CME GEO December 2023 contracts collapsed down to near parity. The GEO contract has remained resilient likely due to it being deliverable within the CORSIA aviation offset trading program.

While OTC markets have also declined in January, they have been much more resilient as the desire by end users to choose specific projects has become a priority. End user clients are clearly still willing to pay higher prices for specific projects that meet their criteria.

Integrity to the Rescue?

The Integrity Counsel for the Voluntary Carbon Market (IC VCM) aims to create a "definitive global threshold standard for high-quality carbon credits" through a set of "Core Carbon Principles and Assessment Framework." The IC VCM expects to begin publishing standards in March of this year with the first "labels in the market" in Q3. It is hoped that this work will address the current headwinds faced by the market, bring greater coalescence to the disparate standards and, in so doing, enable to the market to scale.

Alberta TIER Market

Regulatory amendments to the TIER program, announced in December 2022, came into effect on January 1st. Changes include aligning with the Canadian federal carbon pollution pricing benchmark through to 2030, convergence and shortening of EPC and EOC expiry from 8 and 9 years respectively to 5 years for both and increasing target stringency to 4% for oil and gas and 2% for all other sectors.

Washington Cap and Invest

The Washington Cap and Invest program commenced on January 1st. While the program currently only covers Washington state, its scope and structure bear many similarities to the Western Climate Initiative (WCI) including being multi-sectoral in its coverage, allowance allocation through quarterly auctions and the use of the CITSS registry, suggesting potential future linkage with the WCI. The initial auction is scheduled for February 28th.

New York Cap and Invest

On January 10th, Governor Kathy Hochul announced that state agencies will immediately begin working to implement a cap and invest program designed to allow the state to achieve its 40% emissions reduction target by 2030, and an 85% reduction by 2050 (1990 baseline). The program is expected to place compliance obligations on transportation and heating fuel suppliers, in addition to other large-scale greenhouse gas emitters. The regulations will be released for public comment in H2 2023 and should be finalized by year-end. Based on initial comments, the program is expected to be compatible with the existing RGGI multi-state cap and trade market.

EU ETS January Pricing Dynamics

In the first half of January, EUA prices moved higher with supportive gas and power prices and a colder weather forecast. At month end, EUAs rallied sharply, driven largely by technical buying and speculators covering their short positions. Prices reached a five-month high and closed out the month of January with a 10.8% increase from December's closing level, also setting the highest month end price for any front-December EUA contract⁽²⁾.

1. Trove Research – VCM: 2022 in Review
2. TD Securities, Bloomberg

As part of TD Securities' ESG Solutions Group, the Carbon Advisory team provides comprehensive ESG and capital markets solutions for corporates and carbon market participants.

TD Securities' Energy Trading platform provides solutions for compliance / voluntary carbon and environmental commodity markets.