Voluntary carbon markets and credits could see a boost due to increasing demand for lower-carbon commodities amid a move towards "insetting" as companies focus on reducing emissions in their own supply and value chains.
The VCM has typically been used by companies seeking to offset emissions by buying carbon credits that represent certified removals or reductions of greenhouse gases in the atmosphere, but this could be changing.
Companies are now exploring new uses for carbon credits that include ways to get paid for supplying low-carbon commodities that are typically more expensive to produce.
"Interest in diversifying carbon management beyond offsetting is generating a whole new market opportunity for commodity producers,” said Alfredo Nicastro, head of carbon markets at financial services company StoneX.
“In some cases it is just developing mitigation projects and selling carbon credits and, in some cases, decarbonising your commodity and getting a premium paid for your low carbon intensity product," he said.
StoneX specialises in commercial hedging, global payments, securities, physical commodities, foreign exchange and clearing and execution and carbon is one of the asset classes the Nasdaq-listed firm offers to its 55,000 institutional and corporate clients.
More clients are looking for instruments to monetise climate action, StoneX said, particularly firms that produce commodities that are starting to see demand from buyers for "decarbonised commodities".
For example, a study by Morgan Stanley in late October highlighted the growing demand for green steel products in the auto and construction sectors. The survey of 120 procurement professionals showed that 95% of the companies surveyed currently use or plan to purchase low-carbon steel by 2030.
“Customers appear willing to pay a 'green premium', which is likely to incentivise a faster shift to green steel,” the report said.
Morgan Stanley expects producers with a rapidly growing low-carbon steel offering to enhance their position and harness the benefits of rising green premiums as the market imbalance between supply and demand of green steel intensifies.
Nicastro said StoneX is "actively engaged" in discussions with market players that the firm is hoping will be reflected in new products and contracts soon that will improve risk management and monetise climate action.
Internal insetting
More companies are participating in projects that can be used to reduce their own carbon footprints in a practice known as "insetting", as firms invest in cleaner supply chains.
“We're starting to see a significant movement towards insetting as more and more companies look internally at how to mitigate their emissions and their supply chain Scope 3 emissions," Nicastro said.
The recent implementation of the EU’s Carbon Border Adjustment Mechanism is one of the main drivers of action as companies get ready to start reporting carbon emissions by January 31 2024 to avoid fines and penalties.
The CBAM, which will tax imports of goods linked to significant carbon emissions in their country of origin is expected to have a major impact on carbon-intensive industries such as steel, aluminium, cement, fertilisers and electricity production.
More companies are now using internal carbon prices to calculate the impact on their businesses and bottom line, although prices vary by sector.
"Typically, when you look at large corporations today, their internal cost of carbon is much higher than current carbon prices. Companies that are working on that proactively are generally being conservative and have a higher internal cost of carbon," Nicastro said.
"I've heard of companies that have an internal price of carbon of US$50, but I've also heard of companies that have a US$300 per tonne, it depends on what sector you're in, if you're in a hard to abate sector, you're going to have more costs and be on the higher end," he said.
Although voluntary carbon credits continue to face criticism over their credibility and the practice of buying credits to offset emissions remains controversial, some regard the VCM as essential for channeling funding to green projects.
The VCM has grown considerably – in 2022 their overall value surpassed US$2bn, a fourfold increase from 2020, according to the Atlantic Council. Boston Consulting Group has estimated that the market could be worth US$10bn to US$40bn by 2030.