During our recent webinar on the Carbon Market Forecast to 2050, we received a large number of questions from the audience. To keep the conversation going, we’ve taken the time to put together Part 1 of our responses, which you can find outlined below.
Didn't get the chance to join live? Watch the full webinar below:
Question:
“On the project type slide, I notice afforestation projects continue to occupy a relatively small slice of the overall mix. I understood that this kind of NBS project represented a much higher percentage of what is needed to meet Paris goals. I am curious to know more about why you think it should or will be so modest as opposed to increasing substantially over time.”
Answer:
All of our assumptions are sort of a mix of a bunch of input we got from various sources. Perhaps a better way to frame that would be to ask how much it changes things if those kinds of projects are going to be much more prevalent in 10 years than they are today. Does that change the overall composition of the market in a meaningful way? What kind of capital is needed to do that and so forth? ARR is also being looked at very much in terms of the NDCs, especially 3.0, as countries are becoming very clear in terms of wanting to include nature in the carbon markets. There are a lot of these things that are really hard to model. People have been talking about biodiversity credits for a long time and it’s never really taken off, but if it were to, that would indirectly impact the composition of the VCM. It is important to have the flexibility, but also the humility to say no one knows.
Question:
“What sort of returns do you anticipate per credit segment: or is there a standard markup between cost vs. revenue?”
Answer:
We assume that projects will be created if prices rise above the setup cost for a certain project type in a given country. Therefore, as prices rise, projects that have lower setup costs gain higher returns. Note, however, that in a global model we look only at average cost and price for a given project type. There may be variations in cost to set up, as well as price premiums, for certain quality accreditations. Specific cost and price premiums can be modelled in custom scenarios.
Question:
“When considering demand from companies to meet SBTi targets, are you assuming only removal credits will be applicable for Scope 1 residuals emissions?”
Answer:
Yes, and we only include scope 1 residual emissions in our demand calculations for SBTi. This becomes particularly important when we run custom model scenarios, e.g. forecasting supply and demand for the UK GGR market.
Question:
“When you model future demand from compliance markets, what compliance markets have you included in the forecast e.g. removal credit inclusion in the EU ETS?”
Answer:
We begin by looking at compliance schemes that today allow the use of offsets towards compliance purposes. We cover 11 national and subnational carbon pricing instruments including carbon taxes (e.g. Colombia carbon tax, Singapore’s carbon tax) and emissions trading systems (ETSs, such as California cap-and-trade, Korea ETS).
We will shortly be including forecasted demand from schemes that are considering the use of offsets under schemes, including the EU’s proposal to allow CDR as a flexibility mechanism from homegrown removal projects within the EU, under the Carbon Removal Certification Framework (CRCF). The Forecasting tool can be customized to look closely at what market-sustained supply would be available to meet the threshold of credits to be used by corporates towards meeting compliance liabilities.
Question:
“Do you calibrate the forecasting demand / pricing regularly? At what cadence?”
Answer:
We run the model regularly, and every time we have an assumption that we tweak, we’ll run it again. Our demand data set is essentially live, and our corporate buyers data set is continually being updated. We also have emissions estimates, as well as real emissions data, coming in continually from our team. We match those companies to their targets and run that analysis every time we run the model, to make sure it's as up to date as possible at all times. We ran this iteration (as seen in the webinar slides) a week or two ago, and our pricing estimates are based off of our current day pricing.
Question:
“Do you take into account the different types of companies (profit,size..) to calculate their willingness to pay? And are labels (CCP, SDGs) taken into account to determine the prices?”
Answer:
The short answer is yes, we’ve looked at that quite a lot. Not only have we looked at individual ratings providers, but we’ve also examined various metrics of quality in the market. For example, some kind of accreditation, a CCP label, or really anything that serves as a stamp of approval that we can track in our database. We have essentially assigned a quality indicator for that, and we’ve been able to plot it against price.
Question:
“For the A6.4 prices: is there an assumption of a penalty upwards of $150/ton in some countries?”
Answer:
Penalty costs north of $150/ton may only be met by very few jurisdictions, notably under the European Union Emissions Trading System (EU ETS), United Kingdom’s Emission Trading System (UK-ETS) and the California Cap-and-Trade scheme, we have seen jurisdictions such as Singapore forecast carbon tax prices. We forecast that Article 6.4 Emission Reduction units (A6.4ERs), which can be used towards voluntary climate action, to rise as demand for them increases closer to 2050, as companies aim to meet net-zero targets.
With increased liquidity and fungibility across voluntary and compliance (both sectoral in the case of CORSIA, and domestic in the case of carbon taxes and emissions trading schemes), Article 6.4ERs are units which could be forecasted for both use cases.
This is part 1 of our Q&A, we’ll be publishing part 2 soon with additional insights. In the meantime, explore our Carbon Market Forecasting 2 pager for a snapshot of the key data and trends.
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