Traders in CO2 Credits Saddled With Vast Stranded-Asset Pile

A number of major carbon traders are finding that offsets they bought may now be valueless.

(Bloomberg) — A number of major carbon traders are finding that offsets they bought may now be valueless.

Trafigura Group, the world’s largest trader of carbon-removal credits, has suspended a consignment as it awaits the results of a probe into the forestry project behind the units. The situation has led the company to replace the offsets in a contract with a corporate client and instead keep the stranded credits on its own books. 

Hannah Hauman, global head of carbon trading at Trafigura — and a former oil trader — says the complete loss of value seen in some corners of the voluntary carbon market is unlike anything she’s witnessed in oil markets.

Oil traders “see distressed or off-spec cargoes,” but they “don’t see defunct assets,” she said in an interview. 

It’s the latest in a string of cases in which traders handling carbon credits are having to treat such assets as stranded. Just over 75 million carbon credits currently lie dormant on the accounts of Vitol SA, the world’s largest independent commodity trader. And Dutch trader ACT Commodities Group BV and ACT Financial Solutions, which are both units of SMS Holding BV, last year wrote off about 1.5 million credits. 

Since the first carbon credit was traded roughly 35 years ago, the market has been hit by a steady stream of scandals that have led to wild price swings and even collapsing valuations. That has implications not just for firms trading such credits, but also for companies that use them to underpin green claims to customers and regulators.

A carbon credit is a paper security representing one ton of CO2 reduced or removed from the atmosphere, generated by projects like wind farms or planting trees. Buyers can trade the units or use them to offset their own emissions, in which case they must retire the credit to avoid it being used twice. 

But independent scientific analysis of a project’s CO2 reduction claims often lags behind the issuance of the corresponding carbon credits, leaving buyers in the $2 billion market exposed to losses.

Unlike its regulated equivalent in the compliance market, the voluntary carbon market lacks oversight, and buyers can find that promises made by sellers don’t always hold true. 

Trafigura recently purchased credits from the Southern Cardamom forestry project in Cambodia and had a contract to sell these to a large retailer. In June, carbon credit certification body Verra halted issuances from the project, pending an investigation into “stakeholder comments.” The allegations surrounding the project led Trafigura to offer its client the option to switch to different credits, which it accepted. That left Trafigura with the units suspended on its books.

And at least one company has written off credits tied to a forestry project in Zimbabwe called Kariba, after discovering that too many had been issued relative to the emissions reductions actually achieved, according to a person familiar with the matter, who asked not to be identified discussing sensitive information.

According to Hauman, such problems have led buyers to seek closer contact with offset projects, to keep a closer eye on how they’re run. But that’s actually adding to the risk of getting lumped with defunct credits, as buyers focus on fewer projects and lock into longer-term contracts, she said.

“Customers are wanting to get increasingly close to their projects, and the only way to get close and to have that forward steady stream of procurement is to go for more term off-takes,” Hauman said, referring to long-term contracts for future supply, as opposed to a one-off spot transaction. 

That means “these transactions have a lot of capital at risk,” she said.

Vitol and ACT’s stranded offsets are known as emissions reduction units (ERUs). These were first issued under an old United Nations program that’s since faced heavy criticism, with roughly 75% of the units issued now thought to be useless. 

The 75 million credits stranded on Vitol’s books are equivalent to one third of last year’s global issuance, or twice Switzerland’s annual CO2 emissions. A spokesperson for Vitol said the company doesn’t intend to trade or retire any ERUs it holds, and that these were written down to zero years ago. ACT told Bloomberg it “destroyed” about 1.5 million ERUs last year after realizing they were valueless.

Still, there’s a market for junk carbon credits as sellers find new buyers and distributors. A client of ACT retired 750,000 ERUs last year, ostensibly to claim emissions had been offset. When Verra and Gold Standard, the world’s leading offset registries, issued restrictions on some renewable energy offsets, a new registry opened in Qatar to absorb that supply.

Prices in the voluntary carbon market vary wildly, with factors such as the age and location of a project affecting the perceived value. ERUs once traded at close to $20 per unit, but then crashed to roughly $2 in 2012 and a only few cents shortly thereafter. Credits from the Southern Cardamom and Kariba projects sold for about $10 last year, according to broker data compiled by BloombergNEF.

Hauman says buyers of credits should be reassured by new standards such as those set by the Integrity Council for the Voluntary Carbon Market’s Core Carbon Principles, as well as the UN’s new Article 6 market, particularly where those units come with an accounting adjustment to ensure they aren’t used more than once.

“We urgently need to make it easy for investors to recognize and price a high-integrity carbon credit,” Annette Nazareth, chair of the ICVCM, said in a statement. “That is what our CCP label is designed to do.”

Hauman says the trend now is that “instead of ‘buyer beware,’ really the onus is on the seller to deliver quality as per those specifications. That’s extremely important for buyer confidence.”

Mark Lewis, head of climate research at commodities focused hedge-fund manager Andurand Capital Management, says the UN’s Article 6 system “gives credibility to credits outside compliance schemes” like the EU Emissions Trading System.

But, he said “the risk is definitely there for credits that don’t have that quasi-compliance status.”

Lewis expects the offsets market to eventually split in two. 

“There’s going be a market of credits with a very high value because they have quasi-compliance status, and there’s going be a market that doesn’t,” he said.

(Adds comment from ICVCM in sixth-to-last paragraph)

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