At a time when companies’ CSR practices are under intense scrutiny, there are two practical approaches to purchasing quality carbon credits: purchasing project-specific credits, or purchasing credits using a benchmark contract with a clearly defined quality threshold .
As the world struggles to find a trusted, reliable path to net zero, the need for scalable, reputable solutions is at the forefront of carbon market evolution.
In recent years, we have seen exponential growth in carbon credit markets as companies accelerate their decarbonization commitments.
This momentum has fueled the rapid maturation of the emission allowances market, which features liquid spot and futures markets for transparent pricing and liquidity generation, new benchmarks and robust market data.
As the supply of carbon projects increases to meet demand, quality has become the focus for business leaders, sustainability professionals and carbon transaction brokers.
The need for speed
Solving the world’s carbon problem requires a balance of power: The world is witnessing an accelerating climate catastrophe, so speed is of the essence. The primary challenge of reducing emissions from corporate operations and supply chains is currently constrained by a lack of low- and zero-carbon energy sources, highly efficient processes, and technologies that simply aren’t available at scale.
The Net Zero program for international airlines, for example, relies heavily on replacing conventional fuel with Sustainable Aviation Fuel (SAF) to meet 2050 emissions targets. The industry predicts that by 2025 there will be enough SAF to fuel just three percent of global flights.
To meet climate targets while perfecting and deploying these solutions, companies are turning to high quality carbon credits to offset residual emissions, i.e. emissions that cannot be reduced with currently available solutions.
There are two practical approaches to buying quality carbon credits: buying project-specific credits or buying credits using a benchmark contract with a clearly defined quality threshold.
Just like building a stock portfolio, selecting individual climate protection projects requires extensive research and due diligence. While this approach offers the buyer a greater degree of flexibility and quality control, the resources and expertise required are significant.
ensure sustainability
Before entering the carbon market, companies have clearly defined strategies to select the offsetting projects that align with their climate goals.
The role of sustainability leaders has become more sophisticated, in line with rising expectations that companies adhere to ethical operating models.
This is a catalyst for the paradigm shift towards a net-positive carbon economy and an important step towards meeting aggressive net-zero requirements. This enables companies to take the calculation and implementation of their climate protection activities more seriously.
Many companies enter the market with the right intentions, but without realistic budgeting expectations. As a result, they run the risk of not meeting their expectations.
For this reason, benchmark contracts are an attractive tool as they help reduce the cost of developing internal bottom-up carbon research resources while freeing up budget for bespoke individual projects that may have unique characteristics together with the buying company.
Project-specific credits will continue to account for a significant portion of the voluntary carbon market. Credit preferences are driven by criteria alongside net-zero commitment compliance – companies wanting to join certain types of projects (e.g., benchmark contracts for bulk purchases.
The rise of voluntary carbon benchmarks coincides with the growth of transparent, liquid spot and futures markets, rating services and industry initiatives aimed at ensuring greater market integrity and utility.
Benchmark contracts offer market participants a clear path to achieve their climate-related goals with greater quality, transparency and efficiency.
Carbon markets are growing rapidly and quality controls are constantly being improved. With a basic understanding of the market, participants can leverage solutions routinely used in traditional commodity markets, including benchmarks, to make demonstrable progress toward environmental goals.
The rise of voluntary CO2 benchmarks
The development of robust benchmarks is an important milestone in the development of the commodity and financial markets.
In 2020, the Global Emissions Offset (GEO) benchmark contract was developed by global exchange platform Xpansiv CBL. The uptake and trading volume of the contract has spawned a family of benchmark contracts including N-GEO, C-GEO and SD-GEO, each aiming to provide the investor with certified quality in the natural-based, technology and household appliance market sectors or.
In order for standardized instruments such as GEO, N-GEO and SD-GEO to evolve into reliable benchmarks, market participants need to be able to understand their underlying methodology and the range of credits that can be delivered through the contract and act on it to trust.
It is crucial that companies scrutinize such claims to ensure that the underlying projects meet high standards and deliver the promised impact of carbon reduction or elimination.
To achieve this, the team conducted extensive consultations with market participants before developing their respective standardized tools. In any case, it should be ensured that credits with high integrity are eligible for delivery into the contracts.
To be eligible for GEO and N-GEO, project-specific credits must meet strict, recognized quality standards and deliver significant co-benefits, including United Nations Social Development Goals (SDGs). For example, the SD-GEO standard contract calls for a total of five SDGs.
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