Carbon Market Round Up: February 2023

Regulated Markets – Are we there yet?

The first-ever Voluntary Carbon Convening occurred in June of last year. The purpose of the meeting was to discuss issues relating to supply and demand for high quality offsets and what would be necessary to support market integrity. Nine months after that convening in February 2023, the CFTC Chairman confirmed the regulatory body's intent to play a role in voluntary and compliance carbon markets. This is the first time the CFTC has provided a clear action plan for regulation, with the Chairman noting that carbon markets "must have integrity and adhere to basic market regulatory requirements." The likely near-term outcome of this is that the CFTC will become active in prosecuting fraud and market manipulation within the voluntary market (i.e., Greenwashing, or fraudulent claims). This is a potentially important development for the voluntary market where criticism of offset quality and integrity are a recurring theme.

Putting a Price on Risk

As a cautionary eye is increasingly cast on voluntary offsets, buyers are searching for avenues to address some of the risks associated with purchasing them. In response, several carbon offset insurance products have emerged to address this confidence void. Insurance providers have begun offering insurance solutions to help mitigate a variety of risks including physical losses, environmental liability, political risk, and technology performance. While it remains to be seen whether large corporates will begin leveraging these new products, they represent an innovative new solution for companies looking to manage some of the operational risks currently inherent within the voluntary carbon market.

Canadian Government to Release Several Protocols Under Offset System in 2023

The Canadian government published its second protocol under Canada's Greenhouse Gas Offset System this February. The protocol, Reducing Greenhouse Gases from Refrigeration Systems v1.0, provides financial incentives for companies to transition to less harmful refrigerants. In addition to reducing GHG emissions it will help Canada meet its commitment to the Kigali Amendment to the Montreal Protocol, which compels countries to reduce hydrofluorocarbon production by 80% over 30 years. More protocols including those for improved forest management and direct air capture are anticipated to be released in 2023.

Changes Coming to WCI Market

The California Air Resources Board announced they will be voting on a regulatory package to strengthen the WCI carbon market by the end of 2024, with changes potentially coming into effect by 2025. Amendments are expected to align the cap-and-trade regulation with California's 2030 GHG reduction target of 48% below 1990 levels. Both the California and Quebec governments have issued notice of their plans to amend the program, with key areas of focus being the strengthening of annual emissions caps and evaluating banked allowance supply. These changes come off the back of a report released by the California government stating that the current programme structure will fall short of the state's emissions reductions goals.

RGGI States Set Date for Programme Review

The 11 participating RGGI states announced that they will begin reviewing the cap-and-trade programme in March. While the third programme review commenced in 2021, this will be the first meeting since then, with intentions to assess the success, impact, and design elements of the scheme. States have outlined several key areas of focus including potential adjustments to the 3% linear reduction factor in the RGGI markets CO2 caps before and after 2030. This initiative has a high likelihood of resulting in more stringent emissions caps, which will affect entities covered by the programme. Any changes will go through each state's legislative or regulatory update process and as a result are unlikely to take effect before 2025. Regulatory uncertainty from this is likely to leave the RGGI market range bound, with limited catalysts for price volatility.

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