09 Jul 2020

Navigating the road to Paris

carbon offsets

As more companies hit the road to their net-zero destinations, it’s worth taking a look at some of the key carbon market risks that need to be managed to ensure a smooth journey. An experienced navigator by your side is critical.

We’ve written a lot about the role carbon offsets are playing and will play in an organisation’s net zero pathway. However, many organisations now find themselves driving into the darkness when it comes to understanding the different market risks that need to be managed. Below I highlight a few of these, and the approach TEM takes to navigate them.

Knowing where you are going – the cost of offsets in the future

Anyone who has spent enough time in the carbon market has driven the rough road around prices and availability of offset units.

Offsets will be priced according to different market factors, including supply, demand, quality, geographic location, standard type and the value placed on the other benefits generated by the offset project (e.g. employment, biodiversity etc.). Recent months trading has shown how quickly demand influences price. Take renewable energy credits in Asia for which some have reported 200% increases in prices across the last two months. New Zealand offsets have also jumped about 25% in the last month following domestic policy changes. Meanwhile the Australian market has been relatively stable.

Managing this price risk is critical for companies to be able to properly forecast the cost and ability to meet their voluntary carbon commitments.  Unfortunately, there are no sophisticated models developed to predict the forward cost curve of offsets. Instead, at TEM we take long-term forward positions with offset projects and lock-in pricing for our clients in order to manage this risk on their behalf. This provides the roadmap needed by CFOs and other decision makers to know with absolute certainty what the cost of carbon commitments will be without needing to pull over and ask for directions from people that may not know the local area.

Fuel in the tank – supply risk

We are so often asked: “Are there enough offsets being generated to meet the demand?”. There are two risks underpinned in this question:

  1. Can we continue to service our commitment going forward, and
  2. Will the offsets we buy be delivered when we need them?

Supply will obviously be driven by demand, and already the growth of the voluntary market is catalysing a whole new suite of projects across the globe, including through our own Climate Positive business. But timing is also key. Project supply can be de-railed by a number of factors, including policy changes, amendments to standards and natural events.

The way we manage this for partners is to build a portfolio of offsets from projects we know well and have a good line of site on supply. This allows us to flex the portfolio to adjust to unforeseen circumstances. Think of this like having a hybrid car that can switch between fuel and battery to optimise the outcome for you to get from A to B.

Looking under the hood: Counter-party risk

Having seen how different projects operate on the ground across many countries, I can’t emphasise enough the importance of knowing who you are dealing with and what you are buying when it comes to carbon offsets.

The due diligence process TEM undertakes for our portfolio of offset projects is extensive and includes site visits, a deep relationship with the project developers and annual checks on audit reports and validation documents.

The importance of this process can’t be underestimated, especially for projects where you have community payment systems involved often involving smaller, marginalised groups of people and also where an understanding of land tenure and other legal rights is critical to project integrity. Such information isn’t typically available on public registries and is frequently brushed over by organisations selling the units. This risk is therefore transferred to the purchasing organisation, and coming unstuck in this area can be very costly, especially from a brand perspective. It therefore pays to look under the pricing hood and make sure that the offset provider has a robust due diligence process.

None of these risks are particularly unique to the carbon market, nor should prevent companies from hitting the highway to Paris. But hopefully this sheds some light on the value of having an experienced team navigating by your side.

We’ve got the keys. Meet you in the car.

Adrian Enright is General Manager Corporate; passionate about surfing, family and the unrelenting quest for a healthier future planet.