Russell Blinch, for the CME Group
AT A GLANCE
- Energy company US Venture is entering the CO2 futures market to hedge forecast emissions for customers and secure CO2 certificates for their own needs
- Standardization through futures “gives end-users the confidence to use voluntary carbon credits as part of their sustainability plans”
The race for CO2 neutrality is on. Businesses and countries alike are joining a climate initiative to transition to a decarbonized economy, driven by governments and demand from green consumers.
Experts agree that companies will need a Swiss army knife of solutions to tackle the carbon problem, including public and private collaboration, innovative but affordable technology and carbon offsets that help companies reduce their carbon footprint.
US Venture, a Wisconsin-based company focused on transportation and sustainable energy solutions, is a company that is taking a multifaceted approach to meeting carbon emission reduction goals. The company uses the carbon futures market to hedge projected emissions for customers and secure offset payments for its own needs.
“As a project developer for farmers, forest owners and landfills, we use futures to manage risk and monetize loans for customers,” said Alex Haas, US Venture’s green credit manager, in an interview.
Dealing with carbon risks
CO2 offsets that have been in use since at least early 2000s, are transferrable instruments, usually certified by independent bodies or governments. Each credit often corresponds to a reduction of one ton of carbon dioxide or an equivalent greenhouse gas.
Read more about global carbon offset futures
The credits come from projects that reduce greenhouse gas emissions, such as B. ousting the burning of fossil fuels from a factory or even developing a carbon sequestration project. A company supporting a project would withdraw the carbon credit it had purchased to claim a gain on its own greenhouse gas reduction targets.
In a report commissioned by the Taskforce on scaling voluntary carbon markets calculated that demand for carbon credits could increase 15-fold by 2030, creating a market value of over $50 billion. “Voluntary carbon credits direct private financing to climate protection projects that would otherwise not get off the ground,” the report says.
Among other things, US Venture supports customers in taking climate protection measures for their transport fleets through alternative fuels and voluntary CO2 certificates.
As private companies like US Venture work to remove carbon from their complex supply chains, they often turn to offsets to accelerate the carbon reduction process, and it helps to know the risk to the bottom line in advance.
“A clear price signal is important for businesses and gives them the confidence to move forward,” said Sarah Leugers, chief strategy officer of Gold Standard, a registrar that certifies carbon offset projects. In an interview, Leugers said futures contracts and other spot markets could contribute to the “stability of the price signal.”
acceleration of mitigation
US Venture’s Haas notes that both the spot and futures carbon markets are important for companies managing their greenhouse gas emissions.
“When CME Group first announced that futures for voluntary carbon credits would be created, we took the signal that this evolving market would grow rapidly as more market participants could gain access. We believe that the voluntary carbon market is a valuable tool to accelerate the implementation of environmental projects as the timeline for government programs is uncertain.”
CME Group launched the GEO or CBL Global Emissions Offset Futures contract in 2021 with the goal of making it a global benchmark while providing clients with a way to manage risk. The derivatives marketplace then launched the CBL Nature-based GEO Futures (N-GEO) in 2021 and the CBL Core GEO Futures (C-GEO) in 2022.
The combined total trade in these products recently exceeded 200,000 contracts, equivalent to 200 million tons of CO2 emissions. In July of this year, trading hit a record with an average of 1,200 contracts traded daily per month.
“Only a small percentage of voluntary carbon credits meet the standards set by GEO and N-GEO contracts. So buying these certificates ensures that a meaningful contribution is made and a price signal is sent to environmental project developers that we need more,” he told Haas.
US Venture also taps the futures markets with its 4,000 employees to secure credits for its own carbon emissions. The company sells alternative and conventional fuels and a range of transportation products. It releases more than 26 million gallons of renewable natural gas annually into transportation and voluntary markets and has proprietary software that helps companies manage fleets including their emissions.
For many companies, the first hurdle to reducing carbon emissions is figuring out the extent of their emissions problem. “With such a diversified and rapidly expanding company, with operations throughout the United States, we can tell from experience how difficult it is to calculate and constantly update emissions from complex operations,” he said. Technologies are being developed to speed up this process.
Breakthrough, a division of US Venture, uses proprietary software to help companies manage fleet emissions.
Once companies have calculated their greenhouse gas inventory, they develop a plan to reduce and offset any remaining emissions. Using carbon offsetting offers certain advantages for US Venture and other companies as they can lock in a price with a simpler transaction process. “Reducing counterparty risk, avoiding manual contracts, clear standards, and the ability to use margin instead of cash are some of the benefits of these futures contracts,” Haas said.
Certifiable standards
With GEO futures, corporate investors can be sure of a certifiable standard.
Gold Standard’s Leugers said standards are critical in the marketplace, and even within the standard-setter community, there are still issues to be resolved.
“The technical complexity of the market is quite challenging for buyers,” she said. “And even traders who have been in the market for a while may not even appreciate the level of detail that they should. Standard contracts can help with this, as can the Integrity Council for the Voluntary Carbon Market and its proposed “Core Carbon Principles” to provide a credible basis for quality.”
She added, “I think standard contracts are useful from there to define different pools of credit worthwhile for those seeking higher impact and sustainable development or those technologies to lower the price curve for new technologies.”
Haas agreed, adding that CME Group’s contracts are becoming increasingly trusted, which will help the market become more liquid.
Looking ahead, Haas said that despite global economic headwinds, the carbon offset market must strive to maintain its recent momentum in what is still a relatively young and still developing company.
“During this bear market, we need standard setters to set clear and sensible standards that give end users the confidence to use voluntary carbon credits as part of their sustainability plans,” he said. “The practice of offsetting not only supports environmental projects, but also bridges the cost gap between the status quo and direct emission reductions. This is an important market to develop and continue to support.”
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