Despite rapid growth, it’s fair to say the carbon market still has an uphill battle on pricing clarity.
As Peter Fernandez, chief executive of Brazil-based fund manager Mombak, tells affiliate title Agri Investor: “The market doesn’t quite realise that carbon pricing is accelerating dramatically, and the reason the market doesn’t realise that is because there aren’t clear price signals.”
He’s not wrong – the majority of credits on the voluntary carbon market (VCM) are traded over the counter, where for the most part, the market doesn’t even know a transaction has occurred, let alone at what price.
The closest thing we have to central exchanges are the regulatory emissions trading schemes operated by the likes of California, the EU and New Zealand, among others.
Across these three exchanges, the EU has seen the highest price for carbon so far, which hit €101.25 per tonne in February (a single carbon credit is equivalent to one tonne of carbon). New Zealand’s most recent closing price is NZ$70.25 ($41.73; €40) and California’s ETS is trading carbon at $35.20.
Now, given ETS schemes are government backed and form a central pillar of the issuing jurisdiction’s climate strategy, the price they are able to command is usually significantly higher than what a buyer would expect to pay on the voluntary market.
According to Trove Research, the average price on the VCM for all credit types in August was $5.21, while the price for nature-based credits was $14.87.
This is where Mombak’s recently closed $100 million Amazon Reforestation Fund gets really interesting – the firm has been able to command a price of “more than $50” per carbon credit on the VCM through offtake agreements, Fernandez confirmed to Agri Investor.
That’s a price point bettered only by the EU’s ETS. The latter is currently trading at closer to €80 per tonne in comparison with the highs seen at the start of the year, which was fuelled by an April deadline to acquire enough credits to cover 2022 emissions.
The closed-end 10-year vehicle has “secured the sale of 30 percent of its production for the next 10 years”, added Fernandez, and the firm hopes to get to one million tonnes of carbon removal per year by 2030.
The reason buyers are willing to pay the high price is simple, says Mombak’s CEO: “We’re able to command that price because of the integrity of our carbon removal itself. We went to the world’s most rigorous buyers of carbon removals, the ones who have scientists internally who publish reports on what good carbon removal looks like, and we said we want to do customer-led product development with you.
“We want you to tell us exactly what you want and then we’re going to do it. And so our scientists and their scientists built high integrity carbon removals.”
This includes “unquestionable additionality, the lowest possible leakage or zero leakage and very long durability”, all of which are catered for by the fact the fund will reforest large tracts of the Amazon, employ measuring protocols developed in collaboration with the prospective buyers, and a permanent and legal commitment to preserve all of the reforested trees.
The fund will also use assisted natural regeneration, which involves identifying areas where the Amazon can regrow naturally without tree planting, and removing any barriers that would get in the way of that, such as invasive plant species and farmed livestock.
The firm will be audited on 24 impact indicators that cover things such as impact on Indigenous people, endangered species, sustainable water use and gender equity, among others, all of which combine to add value to Mombak’s carbon credits, says Fernandez.
Despite all this, $50 per carbon credit on the VCM still seems incredibly high, especially given that so many other stakeholders seek to model themselves in a similar way in regard to using the most robust carbon removal practices.
Is it the case then, as Fernandez says, that the market doesn’t realise how rapidly carbon pricing is accelerating due its opaque trading mechanisms, or is Mombak simply an outlier that has got ahead of the game?