This report was written by the team at Cypher Carbon Brokers Limited. It does not seek to achieve any form of academic standard but hopes to educate clients, employees and website visitors of CCB.
For a PDF version of this file, please view below:
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Contents
Summery ……………………………………………………………………………………………………………………………….
Background ……………………………………………………………………………………………………………………………
Global: ……………………………………………………………………………………………………………………………….
UK: …………………………………………………………………………………………………………………………………….
UK Markets: …………………………………………………………………………………………………………………………..
Carbon credits: ……………………………………………………………………………………………………………………….
Voluntary purchase of carbon credits: …………………………………………………………………………………..
Defining greenhouse gas removal approaches: ……………………………………………………………………….
Purchasers of carbon credits: ……………………………………………………………………………………………….
VCM Size and value: …………………………………………………………………………………………………………….
Market growth: …………………………………………………………………………………………………………………..
Policies and frameworks: …………………………………………………………………………………………………………
Basics and understandings: ………………………………………………………………………………………………………
Net Zero commitments: ……………………………………………………………………………………………………….
The Woodland Carbon Code: ………………………………………………………………………………………………..
The Peatland Code: ……………………………………………………………………………………………………………
Soil …………………………………………………………………………………………………………………………………..
Price: ……………………………………………………………………………………………………………………………….
Demand: ………………………………………………………………………………………………………………………………
Outlook for the UK market: ……………………………………………………………………………………………………
Landowner guidance: …………………………………………………………………………………………………………….
Market Activity:…………………………………………………………………………………………………………………….
Negatives/risks of VCMs to the net zero target:………………………………………………………………………..
A global insight: …………………………………………………………………………………………………………………….
USA: …………………………………………………………………………………………………………………………………
New Zealand: ……………………………………………………………………………………………………………………
Conclusion: …………………………………………………………………………………………………………………………..
Glossary ……………………………………………………………………………………………………………………………….
Definitions: ……………………………………………………………………………………………………………………….
Bibliography …………………………………………………………………………………………………………………………
Summery:
This report seeks to provide an overview of the carbon market, how it has evolved, and where the
market currently is in terms of legislation and market activity. After initially discussing the markets
background, the report will then go on to analyse both the woodland and peatland (and briefly soil)
carbon codes to understand sequestration rates, verification processes, price and key participants.
Following this, the report will examine why the demand for carbon credits/offsets is expected to rise
so dramatically in the UK and how the market must shift and adapt to prepare and handle this
demand. Through Strutt and Parker, some key advice to landowners will then be laid out discussing
the best ways to navigate this young, unpredictable marketplace. The report will then highlight the
market activity over the last few years and the potential dangers/risks that voluntary carbon markets
pose to net zero targets. Finally, it will provide a global insight, drawing what I hope to be an
informative and useful market report to a close.
Background
Global:
Since the United Nations Protocol in 1997 international carbon credits have been available for
purchase under the Clean Development Mechanism (CDM) and the Joint Implementation (JI)
mechanism, allowing host countries to sell the credits from their emission reduction projects to
other countries. These credits were used to count towards the purchasing countries’ emission
reduction targets. By the early 2000s the main voluntary standards for carbon credits were Verified
Carbon Standard (VCS)/Verra, Gold Standard, Climate Action Reserve (CAR) and American Carbon
Registry (ACR).
Compliance schemes such as cap and trade schemes and carbon taxes are also increasing in
prominence and can interact with carbon credits. Global crediting activity rose rapidly until 2012,
crashed in 2013 (due to a drop in demand from the EU ETS following the exclusion of almost all
Kyoto credits for compliance in phase 3) and has stabilised since the Paris Agreement in 2015.
UK:
In 2011 the UK closed its ‘Quality Assurance Scheme’ (QAS), a government-led initiative that sought
to provide consumers with a quality kitemark for carbon credits, due to limited uptake by carbon
credit providers. The QAS mostly included credits from the CDM, and emissions trading schemes.
Although it was open to independent carbon credits such as those from Gold Standard or VCS to
participate, these independent standards did not apply.
The Woodland Carbon Code (WCC) was established in 2011 as the UK’s government backed standard
for quantifying emissions reduction from woodland and forestry projects. Projects must
demonstrate successful woodland establishment, with tree growth and sequestration rates assessed
at year five, thereafter at a minimum of ten-year intervals.
The Peatland Code (PC) was established in 2018, designed specifically for peatland restoration
projects. Credits can only be used to ‘offset’ UK based emissions.
Agricultural soil carbon credits are an area under active development with a number of initiatives
operating in the market, but at present no standardised code is established.
UK Markets:
Regulated market:
The UK emissions trading scheme (ETS) is set by ‘cap-and-trade’ regulations. This scheme was
introduced on 1st January 2021 after the UK withdrew from the EU ETS. Each company operating
under this programme is issued a certain number of carbon credits each year (based on their size
and the efficiency of their operations relative to industry benchmarks). The scheme is focused on
companies operating in energy intensive sectors.
Voluntary market:
Voluntary carbon markets (VCMs) are markets where carbon credits are purchased, usually by
organisations, for voluntary use rather than to comply with legally binding emissions reduction
obligations such as an emissions trading scheme or carbon tax. Credits can be bought from public
international crediting mechanisms, international crediting mechanisms, and domestic crediting
mechanisms.
The Greenhouse Gas Protocol defines three “scopes” of emissions for companies. Scope 1 emissions
are direct greenhouse gas emissions occurring from sources owned or controlled by the company,
such as from company boilers or vehicles. Scope 2 emissions are emissions arising from the
generation of electricity that the company purchases. Scope 3 emissions capture all other indirect
emissions that occur as a consequence of the activity of the company, such as the extraction of
materials, transportation of purchased fuels, or use of sold products and services.
Carbon credits:
A carbon credit is a token representing the avoidance or removal of greenhouse gas emissions,
measured in tCO2e. One carbon credit enables a company (or the credit owner) to offset 1 tonne of
CO2 emissions. Buyers use carbon credits to enhance their climate credentials and sellers use them
to finance activities to reduce emissions.
Article 6 of the UNFCCC Paris Agreement includes guidance on what carbon credits can be used for:
- Article 6.2 establishes a reporting and accounting framework that enables countries to
voluntarily trade international “mitigation outcomes”. This allows buyers to claim the
emissions reductions when accounting for their Nationally Determined Contribution (NDC),
while the seller relinquishes the right to them. In this way, double counting between the
two targets is avoided.
The different types of carbon credits:
Carbon credits can come in several forms, broken into reduction/avoidance credits and removal
credits.
- Reduction/avoidance. Examples of carbon credits that reduce/avoid emissions that would
have been produced include: displacement of fossil fuel generated electricity with electricity
from renewable sources; avoiding deforestation or preventing peatland degradation; and
carbon capture and storage at industrial facilities. - Removal. Examples of carbon credits removing carbon dioxide from the atmosphere include:
biological removals, such as afforestation, soil carbon enhancement, peatland restoration;
and engineered removals, such as direct air carbon capture and storage (DACCS).
Voluntary purchase of carbon credits:
Carbon credit markets today are dominated by forestry and renewable energy projects, with
biological removals increasing rapidly.
- Supply. Previously many carbon credits were focussed on renewable energy, but global
carbon credits are increasingly comprised of projects that focus on biological removal.
Forestry credits were 42% of the global total in the last 5 years. - Demand. Most global demand for carbon credits comes from financial services, oil, gas &
petrochemical and consumer goods organisations. Demand is driven by Net Zero targets or
offering consumers the opportunity to ‘offset’ their purchases. There is also interest from
public institutions and consumers in ‘offsetting’.
Defining greenhouse gas removal approaches:
Removals can be engineered or biological. Nature-based solutions are biological removals which are
people-led and biodiversity-based.
- Engineered: technological approaches that use chemical and physical processes to remove
carbon dioxide, including directly from the atmosphere (e.g. DACCS) or from biomass, and
store it in geological isolation from the atmosphere on a very long-term basis. Geological
storage can be a more permanent removal option than other methods. - Biological: enhances or manipulates living systems to promote the net removal of carbon
dioxide from the atmosphere, storing carbon in vegetation, soils and sediments. Ecosystems
can be affected by societal and climate impacts in the future, so these removals are
generally considered less permanent.
– Nature based solutions: are a subset of biological removals that provide local
benefits for biodiversity and people. Examples include protection and restoration of
native forests and wetlands, including peatlands and mangroves. - BECCS: bioenergy with CCS combines biological uptake of CO2 with geological storage via the
combustion or fermentation of harvested biomass and capture of the resulting CO2. This
could be considered engineered or biological.
Purchasers of carbon credits:
Carbon credits are voluntarily purchased in the UK by businesses, cities/councils/regions and, to a
lesser extent, citizens.
Businesses:
- Most global demand for VCMs comes from the private sector, driven by their voluntary Net
Zero commitments and products offering consumers the option to ‘offset’ the emissions
resulting from their purchases. - There has been a substantial rise in Net Zero commitments. 60% of FTSE100 companies had
committed to a Science Based Target in 2021 (one third in 2020).
A third of FTSE350 firms include ‘offsets’ in their published emissions reduction plans. Of the
FTSE350 who disclosed the size of reliance on ‘offsets’ in their latest report, it is estimated
the ‘offsets’ cover a significant proportion of their emissions (between 36% and 80%,
depending on estimation methods).
Councils, cities and regions:
- Nearly two thirds of local councils in England aim to be carbon neutral by 2030. Aggregated
data on demand for ‘offsetting’ from local authorities is limited, but anecdotally many are
seeking to use ‘offsets’ in their Net Zero plans. Around 15% of cities and around 30% of
states/regions globally planned to use ‘offsets’, out of those reviewed by ECIU and
University of Oxford.
Citizens:
- Aggregated data on demand for ‘offsets’ from individuals is limited. Studies have found a
high consumer willingness to favour products claiming green credentials, but a very low
willingness to pay to ‘offset’ emissions from flights.
VCM Size and value:
Compared to global compliance schemes, VCMs are small in terms of both emissions and financial
value.
- Ecosystem Marketplace estimates the global VCM volume for 2021 was around $2 billion in
value (as of Dec 2021) and almost 300 MtCO2e in terms of emissions (as of Nov 2021). This is
equivalent to 0.8% of estimated global CO2 emissions in 2021. - In 2018 voluntary carbon market volume was around 2% of global emissions trading
schemes and global carbon tax coverage in terms of emissions coverage.
VCM Size and value:
Compared to global compliance schemes, VCMs are small in terms of both emissions and financial
value.
- Ecosystem Marketplace estimates the global VCM volume for 2021 was around $2 billion in
value (as of Dec 2021) and almost 300 MtCO2e in terms of emissions (as of Nov 2021). This is
equivalent to 0.8% of estimated global CO2 emissions in 2021. - In 2018, voluntary carbon market volume was around 2% of global emissions trading
schemes and global carbon tax coverage in terms of emissions coverage.
(Climate Change Committee, 2022).
Ambitious projections?
Some estimations suggest demand for global carbon credits could grow by up to a factor of 100 by 2050. However, this is based on large assumptions about business behaviour and how the policy
landscape will develop.
- For example, growth projections are largely derived from assumed future carbon credits
demand from oil and gas companies and the aviation sector. Also, business emissions
reduction plans are not binding and the level of reliance on carbon credits may change due
to regulations, costs or reputational pressures.
Low prices:
Prices for carbon credits remain relatively low, although UK land-based credits are more expensive
than global averages.
- Global carbon credit prices are estimated at around $3/tonne on average although prices
vary between $1 – $15/tonne based on type, size, location and accreditation standard. - In the UK, land-based carbon prices are based on Pending Issuance Unit (PIU) prices, rather
than verifiable carbon units. PIUs under the Woodland Carbon Code range between £10 –
20, and £10 – 12 under the Peatland Code. To compare, the cost of a carbon permit contract
under the EU ETS has ranged between roughly $50 – $100 in the last year, while the
Committee’s Sixth Carbon Budget analysis expected peat restoration to cost £5-40/tCO2 and
afforestation £65-105/tCO2 in 2035.
(Climate Change Committee, 2022).
Policies and frameworks:
UK specific policies are nascent but starting to emerge:
- Net Zero Transition Plan Standard. The UK will require listed UK companies to disclose their
Net Zero transition plans from 2023. It remains to be seen what the guidance will be for the
use of carbon credits for net emissions claims. - UK Environmental Reporting Guidelines. Guidance asks firms to report gross emissions as a
headline figure, and although they cannot consider credits from UK woodland projects as
‘offsetting’ their emissions, they can report emissions savings from these. If they have
purchased and retired emissions reductions meeting the guidelines’ ‘good quality emissions
criteria’ these can be reported in their net emissions. - Evidence gathering. In 2019 the Government gathered evidence on whether to require
transport providers to offer customers the option to ‘offset’ their carbon emissions. In 2021
the Government’s Decarbonising Transport strategy stated this would not be required, to
maintain a focus on reducing direct emissions. - CMA Green Claims Code. The Competition and Market Authority (CMA) published a Green
Claims Code in 2021 to ensure businesses comply with the law in communicating their green
credentials. They committed to carrying out a full review of misleading green claims in 2022
and have recently announced investigations in the fashion retail sector. For future claims
(such as ‘Net Zero’ claims) businesses are expected to demonstrate clear specific pathways,
with milestones, and be clear on the level of reliance on ‘offsets’. The prices of carbon
credits are substantially lower than other carbon prices, particularly for carbon credits from
overseas. There are some policies being developed in the UK and internationally relating to
carbon credits and ‘offsetting’. - Ecosystem Market Framework. The Government is soon expected to announce details of the
Ecosystem Market Framework, developed to underpin integrity in existing and developing
nature-based codes. Standards that outline the minimum requirements for codes to be
considered ‘high integrity’ will act as the core of the Framework.
Devolved Administrations. UK Environmental Reporting Guidelines cover the UK. Voluntary
carbon markets are an area of reserved policy, for both UK voluntary carbon markets (such as UK
land-based codes) and for international codes operating in the UK.
Basics and understandings:
Net Zero commitments:
60% of the FTSE 100 have voluntarily committed to reach net zero by 2050 under the UN’s Race to
Zero pledge, requiring them to reduce and/or compensate emissions partly by supporting UK climate
action. In 2019, the top 10 companies by revenue emitted 90 million tCO2e (Scope 1 and 2) alone.
The Woodland Carbon Code:
Since 2011 the WCC has been the UK standard for quantifying emissions reduction from woodland
creation projects. The WCC provides a rigorous set of methodologies and procedures for landowners
and developers to follow, to ensure credibility of carbon units. Projects must demonstrate successful
woodland establishment, with tree growth and sequestration rates assessed at year five and then
every ten years. Woodland Carbon Code schemes may last between 35 and 100 years.
Additionality:
Under the WCC, projects must be judged as additional in order to be granted any carbon credits.
This is a crucial rule that massively narrows the scope for successful project developments.
Additionality is used to mean carbon sequestration over and above that which would have
happened if no payments had been made for carbon credits. This principal is critical to the credibility
of the WCC. They argue that buyers of carbon units want to know that their input has enabled more
carbon sequestration than would otherwise have happened under existing legal, financial and
business circumstances.
Under the financial additionality test, a project is only ‘additional’ if it requires carbon income to be
financially viable. Where new woodlands have little or no revenue opportunities, it is much easier to
show that payments for carbon credits are needed to make them viable. However, where a project
has significant revenue opportunities, say from timber production, it is vital that due diligence is
applied as to whether carbon payments are needed. Within this additionality test, carbon revenues
need to be at least 15% of development costs and the project seen as being economically unfeasible
without carbon finance unless other barriers to implementation exist. These tests, currently under
review by the WCC, could impact the eligibility of some commercial forestry projects, which have
become popular amongst new carbon-focused institutional investors.
“The purpose of carbon markets is to drive additional action towards climate change targets.
Without additionality, they have no purpose.” – Pat Snowdon, Head of Economics and Woodland
Carbon Code at Scottish Forestry (Scottish Forestry, 2022).
On top of this, projects will not be given the go-ahead if timber harvesting is predicted to generate
more money than the carbon credit sales. This leaves broadleaf trees as the only viable option which
are not nearly as appealing to plant for profit seeking landowners and forestry companies. Should a
forestry owner wish to sell the carbon credits on spruce for example, they would have to leave the
timber standing well beyond its harvesting window to ensure proceeds would not exceed that of the
credit sales.
Verification and PIU-to-WCU Conversion:
The UK WCC allows landowners to monetise projected carbon benefits of their project soon after
their project has been implemented rather than waiting for future verification events. Pending
Issuance Units (PIUs) can be sold to buyers as soon as the project start date.
A PIU corresponds to a promise of a carbon credit to be delivered in the future (also known as “exante” issued credits). PIUs cannot be used for carbon offsetting purposes until they are converted
and retired after verification events into Woodland Carbon Units (WCUs).
To account for a level of uncertainty in carbon outcomes over long periods, the UK WCC and PC
(peatland code) requires each project to hold approximately 20% of volumes as a reserve pool (or
insurance buffer) known as the PIU reserve or W/PCU reserve, when converted. These units are
stored in a ‘bank’ of unclaimed units to cover losses should a woodland or peatland project fail.
Projects under the WCC contribute 20% of their net carbon sequestration, while PC projects
contribute 15% of net GHG emissions reductions over the project duration. This safeguards the
investment made by purchasers of carbon units and helps the amount of carbon claimed to persist
for the long-term.
Verification occurs initially five years after planting and thereafter up to every ten years. At each
verification, the auditor verifies claims made by landowners and developers, approving the
conversion of PIUs to WCUs and PIU reserve to WCU reserve. Thus, all of the units generated will
initially be classed as PIUs. As the woodland grows and sequesters carbon dioxide a growing
proportion of these PIUs are then converted into WCUs.
PIUs enable carbon project developers to monetise all the ex-ante carbon credits over the (up to 100
year) project lifetime. This can create an incentive misalignment between developers and corporate
buyers. Risks include developers no longer interested in or able to afford project monitoring,
maintenance or verification in later years, causing the project to fail.
Whilst project developers budget for a 20% risk buffer and a level of conservatism in assumptions of
carbon delivery over such long project timelines, there remains a risk that buyers may never see all
of their PIUs converted into verified credits.
The below chart illustrates the conversion of PIUs to WCUs on a 100-year project (first 100 years).
The blue line shows the total PIUs generated from the project, the green line shows the annual total
WCUs generated from the project and the red line shows the cumulative WCUs generated from the
project. WCUs are verified PIUs. Once the woodland has reached its carbon sink period (year 5 to
year 100), WCUs can be generated.
Moreover, most tree species are at the peak of their carbon sequestering capability when they are
between 16 and 25 years old, hence the sharp rise between 2036 and 2046 followed by a
subsequent decrease in WCUs generated thereafter (see below) (Strutt & Parker, 2022).
Sequestration rates:
Annual carbon sequestration rates of new woodlands in the UK are lower relative to other
geographies. Forests in the UK sequester an average of 5tCO2e per hectare per year, three times less
than fast-growing tropical forests.
Trees do not sequester carbon at a steady rate. There are three carbon sequestration cycles in the
life of a tree:
- Carbon source period = 0 – 5 years – tree releases more carbon than it sequesters.
- Carbon sink period = 5 to 100 years – tree sequesters more carbon than it releases (with 16 –
25 years being the peak of carbon sequestering capability for many tree species). - Carbon store period = Year 100 onwards – amount of carbon released equals that
sequestered (see example diagram below).
(Scottish Woodlands, 2022).
To calculate predicted carbon sequestration from a project registered under the WCC, the WCC
Carbon Calculation spreadsheet can be used. The results are checked at validation and re-assessed
at the verification stage. Further guidance on carbon calculation from woodland projects is available
on the Woodland Carbon Code website.
An example under the WCC:
If 10 hectares of arable land was converted to native woodland under the WCC, the sequestration
over 100 years would be circa 7,900 tCO2e, of which 6,320 tCO2e can be sold (as 20% or 1,580
tCO2e would go to the WCC Buffer).
The Woodland Carbon Guarantee is available for woodland planting in England only. It provides a
guaranteed index linked price for verified Woodland Carbon Units (WCUs), until 2055. If an owner
prefers, units can still be sold on the open market rather than to the government. It operates by
reverse auction with various auction rounds throughout the year (Scottish Woodlands, 2022).
Current projects under the WCC:
- 18.5 kha of woodlands have been validated and verified under the WCC. The 2019
Woodland Carbon Guarantee led to a significant uptick in the registration of woodland
creation projects in 2020. Over 30 kha are listed as ‘under development’. - If successfully delivered, the current registered WCC woodland projects could sequester 15.4
MtCO2 over their lifetime (up to 100 years). - If registration of WCC projects continue at the current trend, and are aligned to UK tree
planting targets, then the Code could support establishment of around 260 kha of new
woodland by 2050 (Climate Change Committee, 2022).
With no changes to the existing supply, total predictable credit volumes account for 6.26 million. If
including new projects under development, the market is expected to see another 19 million credits
over the next 100 years (17.43 million from woodland and 1.57 million from peatland) (Maxwell,
2022).
See here for current WCC project developers, location and further information:
https://www.woodlandcarboncode.org.uk/buy-carbon/woodland-carbon-projects.
Maxwell (2022) clearly shows the highly concentrated project developer ecosystem:
The top 2 developers, Forest Carbon and British Petroleum (BP), account for 61% of total issuances
and retirements to-date. The top 20 account for 92%.
Largest portfolios are held by organisations who were key early contributors to the development
and creation of the Woodland Carbon Code since its inception in 2011.
The developer ecosystem has seen recent market entrants. Out of 168 developers, only 55 have
issued or retired credits. The remaining 118 have submitted projects which are still considered under
development.
Forest Carbon, BP and Scottish Woodland Ltd are expected to solidify their market share, however
large investment funds and landowners are also on the rise.
The Peatland Code:
The majority of the UK’s peatlands are no longer sequestering and storing carbon. Due to decades of
unsuitable land management practices, it has instead become a significant net source of Greenhouse
Gases (GHG) currently emitting approximately 16 million tonnes of carbon dioxide equivalent (CO2e)
each year. This is equivalent to around half of all the reduction efforts made annually in the UK.
Preventing further damage and restoring healthy ecosystem function can therefore play an
important role in climate regulation within the UK. Conserving and restoring peatlands also prevents
loss of biodiversity and helps to enhance water quality.
The Peatland Code was developed in 2015 and managed by the IUCN Peatland Programme. Projects
use established emission factors to estimate baseline emissions and restoration abatement. Field
surveys at year 5 and every 10 years that follow are required for verification. The peatland code
works almost identically to the WCC as it sets out a series of best practice requirements including a
standard method for quantification of GHG benefit. Independent validation to this standard provides
assurance and clarity for buyers with regards the quantity, quality of emissions reductions
purchased. Recognising that carbon benefits arise for many years after the initial restoration
activities are implemented, the Peatland Code also ensures the carbon benefit will be regularly
measured and monitored over the lifetime of the project (minimum 30 years). The emissions
reduction benefit from restoring peatlands is permanent and linear therefore the carbon yield is the
same ever year for the whole duration of the project. Buyers can therefore be confident in
purchasing peatland carbon units upfront, enabling the restoration project to take place. Peatland
credit volumes are tied to the emission reductions from peatland restoration and can be available in
large volumes, however development of peatland projects has only begun as of 2018.
Sequestration rates:
Peatlands are carbon-rich wetlands which occupy 3% (circa 4 million km2 ) of the global land surface
and 12% of UK land area. Worldwide, they store more than twice as much carbon as all existing
forests.
When peatlands are in their natural water-logged state, they capture CO2 from the atmosphere
through photosynthesis and their plant material only decomposes partly, meaning that it does not
release CO2 back into the atmosphere.
In the UK, it is estimated that peatlands alone store circa 3.2 billion tonnes of carbon. However, due
to past and present management of peatlands, they are at present sources of carbon emissions
(currently contributing to circa 4% of UK’s total annual greenhouse gas emissions) (Strutt & Parker,
2022).
(Scottish Woodlands, 2022).
Current projects under the PC:
The Peatland Code has seen recent rapid growth with a tripling in the number of projects registered
in the last year and all registered projects are now predicted to deliver WCU 4,681 tonnes of CO2e
emissions reductions over their project lifetimes
- As of April 2022, 12.4 kha of peatland are registered under the PC. Of this, 1.6 kha have been
validated (restoration in progress) and 10.8 kha are under development or pending review
(see Figure 3.5). - Twelve projects have been validated and could reduce emissions from degraded peatlands
by 0.25 MtCO2e over the project lifetime (averaging at 70 years). Projects under
development and forecast to start in 2023/2024 could abate 1.9 MtCO2e if successfully
established (average project length 85 years). - As of July 2022, the Peatland Code now has 100 projects registered under the UK Land
Carbon registry. These projects are securing 14,471ha of peatland restoration in Scotland,
England, and Wales. In 2022 alone, 36 projects have already been registered with many
more under development.
See here for current PC project developers, location and further information: https://www.iucn-ukpeatlandprogramme.org/projects-map.
Soil:
Soils codes tend to focus on regenerative farming practices aiming to diversify income streams for
farmers while keeping land in production. Six companies are currently engaging with UK farmers in
this area, but transparency is lacking, making it difficult to estimate the farmland area involved and
the credits generated.
In July 2021, the Environment Agency awarded a grant to a consortium of farmers, academics,
technology businesses and NGOs, including the Sustainable Soils Alliance, led by FWAG to develop
and pilot the UK Farm Soil Carbon Code.
In the UK, there is currently one operational scheme and various in development, for generating
carbon credits from regenerative agriculture practices. Other schemes are operational in Europe.
Sequestration process:
At the moment, there is no soil carbon code due to the complexity of the variation of soil carbon
sequestration rates, and therefore there is no UK template on how best to measure it. However,
different soil carbon dynamics models exist such as Henin-Dupuis, RothC, Century and AMG. Any of
these models can be used to assess soil carbon sequestration but long-term estimations are difficult.
Soils are made in part of broken-down plant matter. This means they contain a lot of carbon that
those plants took in from the atmosphere while they were alive. Especially in colder climates where
decomposition is slow, soils can store—or “sequester”—this carbon for a very long time. If not for
soil, this carbon would return to the atmosphere as carbon dioxide.
Cropland, which takes up 10% of the Earth’s land, is a major target for soil-based carbon
sequestration. Farmers can add more carbon to agricultural soils by planting certain kinds of crops.
For example, perennial crops, which do not die off every year, grow deep roots that help soils store
more carbon. “Cover crops” like clover, beans and peas, planted after the main crop is harvested,
help soils take in carbon year-round, and can be ploughed under the ground as “green manure” that
adds more carbon to the soil. Farmers can also do less intensive tilling. By breaking up the soil, tilling
prepares land for new crops and helps control weeds, but also releases a lot of stored carbon.
Limitations:
Climate change is also making it harder for soils to naturally store carbon. The warming of the planet
could lead to widespread soil carbon losses by speeding up the decay of soil organic matter. We are already seeing this happen in the Arctic as permafrost, or permanently frozen soil, thaws. This
release of CO2 to the atmosphere could become a self-reinforcing feedback loop, where lost soil
carbon warms the Earth, causing soils to release even more carbon.
Price:
Carbon prices across the land-based codes range between £10 and £40 tCO2e.
- WCC: the carbon price reflects site specific aspects of the woodland creation project, such as
planting and management costs and other benefits it may provide. The cost of pending issuance
units range between £10 and £20 /tCO2e.
– The Woodland Carbon Guarantee (selling credits to the government) provides a guaranteed price on delivery of verified Woodland Carbon Units every 5 or 10 years up to 2055/56. The average price per unit in 2021 was £19.22
– Vintage PIUs (PIUs between verification stages in order to be converted to WCUs) are selling at a premium of circa £30 per PIU
– It is expected that prices will increase as pressures to achieve net zero targets will increase demand in the coming years. A report from LSE and Grantham Research Institute suggested
that, to meet net-zero targets, shadow carbon prices would increase to circa £75/tCO2 in
2030 and to circa £160/tCO2 in 2050 - PC: yet to issue verified Peatland Carbon Units. The price of peatland PIUs is approximately £10 –
£12 tCO2e23, though peatland projects have recently reached comparable prices to woodland. - Soil: Interviews with those working in the agriculture soil market suggest that soil carbon credits
average at £30, with a range of £23 – £40 reported.
Current prices mean woodland creation (for objectives outside timber production) and peatland
restoration projects are unlikely to be viable on carbon prices alone. The stacking of ‘carbon credits’
funding with public subsidies or levering private investment in other areas of natural capital that
recognise broader ecosystem benefits could support the economic viability of project while
potentially increasing their resilience.
Voluntary carbon markets, including the two land-based codes above, are an area of devolved
power. Inward investment to the Peatland Code and Woodland Carbon Code from overseas
investors is not currently permitted.
Demand:
In order to analyse potential demand, AlliedOffsets (2022) examined the reports of FTSE 350
companies. Encouragingly, most companies had provided information on scope 1, 2, and 3
emissions, and many had charted a pathway towards reducing those emissions. However, there
were inconsistencies in how companies report the data, making it difficult to draw out clear
comparisons or to pull out a market-wide overview. For instance, most companies did not break
down their emissions by country, meaning it’s difficult to understand where the emissions should be
counted. Some companies reported carbon intensity, rather than the overall amounts. Some broke
down scope 2 emissions as location and market-based, while others did not.
Few companies make clear what emissions they offset, with most indicating that they offset
‘residual’ or ‘hard-to-abate’ emissions, if they report the information at all. Some make clear what
projects they offset with, but most only make vague statements about offsetting. Of the companies that make clear the number of credits they are offsetting, on average, they offset 36% of their scope
1 and 2 emissions (according to the latest data shown in the annual reports).
Furthermore, it’s not immediately clear what percentage of the economy FTSE 350 companies are
responsible for, making it difficult to extrapolate across the wider UK economy. AlliedOffsets (2022)
made the assumption that these companies are responsible for around 50% of the overall demand
for carbon credits in the UK, given their prominence in the UK economy; however, they encouraged
users to alter the assumptions and examine how the updated figures affect the overall supply and
demand for carbon credits.
Outlook for the UK market:
The outlook for the market appears to show growth in the number of projects created and credits
sought. Given the increased demand from corporates, and given that it’s unlikely the number of
projects in the UK will be able to meet UK companies’ demand; this is likely to continue to push
prices up for projects.
WCC and PC are still early on in their establishment, and there is recognition that the codes will shift
and change as they move forward. Earlier this year, for instance, Scottish Forestry made the listing
requirements more stringent, which likely means a slowdown of registered projects. Ensuring that
there is trust in the underlying carbon reductions taking place due to the projects is key, and while
there is a reputation that the codes offer quality credits, this is likely to be scrutinised further as
more projects begin to issue and sell units. There is also a seeming lack of understanding among
buyers of the difference between PIUs and WCUs, with only the latter being eligible for offsetting
current emissions. Instead, brokers assign future credits, but note that the credits are being used to
offset past emissions. (For instance, ‘Assigned by Forest Carbon Ltd. Woodland creation supported
by Zennor Petroleum Limited in recognition of its 2019 calendar year Scope 1 & 2 emissions. Credits
will be automatically retired as they are verified.’)
Emerging soil carbon companies are currently competing to sign up farmers, and they do not report
data to any registry. Some are currently selling certificates or other instruments, careful to not label
them as ‘offsets’. As there is no centralised code, each company takes a different approach in
creating a baseline and measuring carbon reductions, though most base their analysis on one of
existing soil carbon methodologies globally. Not wishing to crowd out the private sector, the Soil
Carbon Alliance is setting up guidelines for the companies to adhere to, instead of establishing a
centralised code like the WCC. While this is likely to spur innovation, it will also make it difficult to
create consensus around what a ton of soil carbon represents, with multiple entities setting up
multiple products at different price points. If one company is found to be issuing credits without
applying proper rigour to its measurement, it can make it difficult for other, more meticulous
companies, to sell the credits their farmers generate.
Across all project types, there is an ongoing debate about whether and how to enter the market.
While there is interest among landowners and farmers in farming in more sustainable ways, and a
need to supplement income, there is also a hesitation to part with any credits they generate. Some
are waiting for the industry to take firmer shape, while others are conscious that by selling their
credits today, they may need to purchase credits themselves in the future, if they will need to be
carbon neutral themselves.
Landowner guidance:
Strutt & Parker (2022) lay out some simple steps of advice for landowners looking to sell their
carbon credits:
How do I find someone to buy my carbon?
- In England, you can sell carbon units to the government through DEFRA’s Woodland Carbon
Guarantee (WCaG) auction. Projects must be registered under the WCC. Successful sellers
are offered agreements at a guaranteed index-linked price for 35 years. This gives the seller
the option to sell their units to the government at the guaranteed price – but they don’t have
to if they don’t want to. It therefore gives them greater certainty. Payments would be made
every five or ten years when verification has happened. Auctions take place every six months
approximately. - Register projects on the UK Land Carbon Registry (for WCC and PC) or any other verified
programs and be on a public register available to all potential buyers. - Use carbon brokers or find a private buyer.
Selling basis:
Landowners can get paid upfront for afforestation or peatland rejuvenation projects before the
carbon has been sequestered or emissions reduced.
Once registered under a code, the landowner can start selling PIUs for future planned offsetting (‘on
track to offset emissions’). Every 5/10 years, these units are verified and if validated, they can be
converted to WCUs or PCUs. These get sold for current offsetting purposes.
There are circa 12,000 large companies in the UK who are required to undertake greenhouse gas
monitoring. The UK Carbon Codes offer them an opportunity to buy carbon credits to compensate
current emissions or participate to achieve their long-term carbon neutrality plan.
What to consider before selling your carbon:
- Ensure that the verification scheme is of high quality – as there are a small number of
acknowledged international standards for verification, it is essential that buyers can rely on a trusted
and rigorous process. Good quality offsets must be associated with greenhouse gas reductions that
are additional, not overestimated, permanent, claimed by only one entity and not associated with
any environmental or social harms. - Understand the implications that lie within carbon trading – these include considering the consequences for farming economics, interactions with other environmental schemes, effect on thecapital value of land and property, tax issues, land tenure issues and the consequences of the landuse change to woodland.
- Be aware and keep track of your available carbon credits to sell to avoid double-counting – once a landowner has sold sequestered carbon, this appears on the buyer’s balance sheet. Landowners should understand how much carbon their land can sequester, how much they are producing on the land and any surplus that can be sold to third parties without detrimentally affecting their position from a financial, environmental and reputation point of view. It is inevitable that supermarkets and food processors will want their own supply chains to be low carbon and if a farmer has sold all of their carbon credits to another emitter for offsetting purposes, they will not be able to use the ‘sold sequestration’ against their own emissions. Be also mindful of double counting in a landlord / tenant scenario.
- Have a contingency plan in place to avoid breaking your contract – contracts between buyers and sellers of carbon are usually agreements over a long period of time i.e. 30 years. Be aware that if, for instance, a woodland suffers from a fire, the seller would have to still provide the same amount of carbon sequestration as per the terms of the contract. This could mean replanting woodland or supplying it from another source. The WCC has set up a centralised buffer account to which all sellers have to contribute 20% of each project’s carbon credits. This is used as insurance if ever trees in a verified scheme are damaged. Our understanding is that if a landowner sells land used to generate and sell carbon credits, the obligations in the contract transfer to the buyer.
- Avoid greenwashing by knowing your buyer – greenwashing can happen when buyers offset their carbon but have not first taken steps to offset their avoidable emissions of greenhouse gases and therefore are still major pollution contributors. To avoid getting involved with such buyers, transparency and knowing the buyer is key. If the buyer is greenwashing or intending to, this could damage the seller’s reputation.
Market Activity:
As mentioned previously in the forestry section, projects under the WCC are emerging but market
activity is low. However, outside the WCC and PC, there has been significant market activity within
the UK’s VCM over the last few years.
AlliedOffsets (2022) published and interesting article highlighting the size and activity within the
current market. The data shows:
The total number of credits retired by FTSE 350 and non-FTSE 350 companies, as well as the
estimated value of those retirements. It shows the data for all time (since 2009) until April 1, 2022; as
well as activity in 2021.
The total number of credits retired by projects with an associated project proponent / developer. This
data includes information from 2009 onwards. The first two companies are active primarily on Gold
Standard and Verra; the rest are active on WCC and PC.
The total number of companies in the FTSE 350 that plan to use offsets, as mentioned in their annual
reports (35%). We also show what percentage of companies actually mention the amount of credits
they have purchased (13%). Finally, we took a weighted average of the stated offset quantities, as
compared to their total emissions (36%), which equals ~7 MtCO₂e.
The current land use for carbon offsetting projects in the UK, and the expected near-term ha of the
land covered by carbon crediting projects (calculated using data from company land purchase
announcements, which specifically mention carbon offsetting as the purpose of the land purchase).
The number of carbon offset retired in the UK and globally, and the percentage of credits retired in
the UK vs. rest of the world.
The below charts showcase the breakdown of UK projects by type, as well as the types of projects
that UK firms offset with, and the types of credits UK project proponents have retired (skewed
towards energy efficiency projects run outside of the UK).
(a) UK Projects: The data on estimated number of credits generated by project types is
heavily skewed by two Verra projects, which anticipate to generate nearly 300,000
tons of carbon per year:
(b) Projects purchased by UK companies:
(c) UK Proponents:
A global insight:
USA: (Climate Trade , 2022)
Regulation:
With regard to forestry, carbon regulation is extremely similar to the UK.
Stats/market size:
The latest State of the VCM Briefing by non-profit Ecosystem Marketplace reveals that the market
has already topped the US$2BN mark in 2022. Growth has been driven by both higher prices and
stronger demand for carbon credits, with nearly 500 million credits traded in 2021, at an average
price of US$4 per ton – up 60% year on year.
But Ecosystem Marketplace (EM) also attributes this tremendous growth to international efforts to
standardize the voluntary carbon market, increasing transparency and quality. In particular, the
organisation cites the Public Consultation for Core Carbon Principles (CCPs) by the Integrity Council
for the Voluntary Carbon Market (ICVCM), which launched on July 27, 2022 to provide the
framework needed to identify high-quality carbon credits that create real, additional and verifiable
climate impact with high environmental and social integrity.
Demand:
Transaction volumes increased in almost all the carbon credit categories covered in the report, with
forest and land use projects showing the strongest growth from 57.8 million credits traded in 2020
to 227.7 million in 2021. Altogether, forestry credit transactions represented about US$1.3B –
almost 67% of the market total in 2021.
Renewable energy project demand more than doubled, from 93.8 million to 211.4 million credits.
Additionally, the pricing of these credits went from US$1.08 to US$2.26, bringing the value of
transactions to a total of US$479.1M.
Among the types of projects that received less demand in 2021, energy efficiency saw the biggest
drop, going from 30.9 million credits in 2020 to 10.9 in 2021. Meanwhile, sales of carbon credits
from household and community projects decreased from 8.3 million to 8 million. In both cases, an
increase in the price of credits softened the impact of this drop on value.
Pricing:
See above, the average price of a credit was $4 in 2021.
Projects that presented benefits beyond carbon mitigation, such as community support, biodiversity
conservation or contribution to the Sustainable Development Goals (SDGs), were sold at a premium
compared to others. For instance, the price of Gold Standard projects, which include co-benefits in
the certification process, increased by 35% from US$3.74 a ton to $5.05 a ton.
Opinions:
Despite the market already experiencing high activity, the overall opinions seem to be a continued
demand for transparency and quality assurance of credits. Climate leading organisations ask for
continued government participation to ensure the market remains correctly regulated and drives
genuine climate solutions.
New Zealand:
As previously mentioned in the forestry section, in New Zealand carbon credits can be generated,
calculated and sold on any forestry planted post 1989. Credits can be sold annually, or in
intermittent chunks, either back to the government or directly to businesses or individuals.
To calculate the amount a carbon sequestered by a forest they have two methods:
- Stoke change accounting:
The stock change method accounts for short-term changes in carbon storage. Using this method,
you earn units as your forest grows and need to pay units when it’s cleared. - Average accounting:
Averaging accounting accounts for the long-term carbon storage of your forest land. With averaging
accounting, you earn units until your forest reaches a certain age. You can then harvest your forest
without having to pay units, as long as you replant (Ministry for Primary Industries, 2022).
Conclusion:
With increasing publicity around voluntary carbon markets they are being scrutinised on what is and
isn’t accepted as a quality offset – with additionality being at the forefront of this. With too many
examples of poor-quality offsets through projects that aren’t properly verified, or failing to
sequester any additional carbon, companies are struggling to find a standard that they can trust and
be sure that purchasing won’t lead to a PR backlash or a failed offset. Therefore, high quality
verification standards like the WCC and PC are likely to rise and be seen as the premium credit
verifiers, enabling projects enlisted under them to sell their ‘premium’ carbon credits.
With increasing prices and a growing variety of carbon credits available, corporates must be cautious
when entering this market. Varying credits come with their varying risks which can often be
detrimental to a carbon investment. For organisations to use the voluntary carbon market
successfully, first, they must decide on their net zero strategies. Are they looking to offset annually,
biannually, in 3 or 5 year chunks or not at all? This enables them to reduce the risk of their climate
investment to ensure safer returns. Should you be looking to enter the voluntary carbon market in
any capacity, please do get in touch with us at CCB and we will navigate and guide you through this
process.
Glossary
Definitions:
ACR – American Carbon Registry
BECCS – Bioenergy with carbon capture and storage
CAR – Climate Action Reserve
CCC – Climate Change Committee
CCS – Carbon capture and storage
CDM – Clean Development Mechanism
CMA – Competition and Market Authority
DACCS – Direct air carbon capture storage
DEFRA – Department for Environment, Food & Rural Affairs
ECIU – Energy and Climate Intelligence Unit
ETC – Energy Transitions Commission
ETS – Emissions trading system
GHG – Greenhouse Gases
JI – Joint Implementation
Kha – Thousand Hectares
MRV – Measurement, reporting and verification
MtCO2e – Megaton of C02 equivalent (1 megaton + 1 million tonnes)
NDC – Naturally Determined Contribution
PC – Peatland Code
PIU – Pending Issuance Unit
QAS – Quality Assurance Scheme
tCO2e – Tonne of carbon dioxide equivalent
UNFCCC – United Nations Framework Convention on Climate Change
VCM – Voluntary carbon market
VCMI – Voluntary Carbon Markets Integrity Initiative
VCS – Verified Carbon Standard
WCaG – Woodland Carbon Guarantee
WCC – Woodland Carbon Code
WCU – Woodland Carbon Units
W/PCU – Woodland/Pending Carbon Unit
Bibliography
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