Sliced: IMPACT Q3 Updates

As we roll into Autumn 2024, we're once again applying our IMPACT framework for a reflection of Q3 and a look ahead toward Q4. ?

The IMPACT acronym highlights key factors shaping the growth and momentum of climate finance, carbon markets, and impact investing, and has proven to be a helpful tool in guiding our evaluations and forecasts.

If you are curious, you can check out our Q1 and Q2 evaluations here and here, respectively.

IMPACT stands for:

Integrity, Momentum, Prices, Achievement, Collaboration, and Targets.

I = INTEGRITY

The push towards market integrity continues full steam ahead.

As we wrote about in August, Verra introduced their new ABACUS label for projects using its Afforestation, Reforestation, and Revegetation (ARR) methodology (VM0047) under the Verified Carbon Standard (VCS). The label aims to enhance trust, integrity, and financing for superior nature-based carbon removal efforts. While ABACUS focuses solely on ARR projects, which represent a small fraction of the carbon market, questions remain about its necessity and potential impact, especially regarding projects that do not meet the ABACUS criteria and whether the label will help or confuse the market.

The Integrity Council for the Voluntary Carbon Market (ICVCM) announced that renewable energy methodologies, accounting for about 32% of the voluntary carbon market, will not qualify for its high-integrity CCP label due to insufficient additionality standards. Instead, it approved methodologies for methane leak detection and landfill gas capture while rejecting some renewable energy and sulfur hexafluoride avoidance methodologies.

The Voluntary Carbon Markets Integrity Initiative (VCMI) has extended its public consultation on the updated Scope 3 emissions claim, hoping to obtain broader stakeholder input. VCMI is attempting to shape a robust framework for managing Scope 3 emissions, which are challenging for companies to account for and reduce. The updated claim aims for credible corporate climate actions by requiring science-aligned targets, transparent reporting, and high-quality carbon credits.

Speaking of integrity, Ken Newcombe, former CEO of C-Quest Capital (CQC), and two colleagues face fraud charges for allegedly manipulating data to wrongfully issue 6 million carbon credits valued at tens of millions of dollars. The Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Department of Justice (DOJ) accuse them of inflating project success between 2021 and 2023, while former COO Jason Steele pled guilty. Despite the accusations, CQC avoided charges due to cooperation. Newcombe denies the charges while facing up to 80 years in prison if convicted. This is a strong statement from multiple regulatory bodies showing that they’re getting tough on the integrity and accountability within the carbon markets.

Looking ahead to Q4 of 2024, we remain confident that current integrity initiatives will sustain their momentum and continue driving progress in carbon markets.

M = MOMENTUM

We’re feeling some momentum following Climate Week NYC.

Last week, our CEO, Sean Penrith, shared insights in the “Our Take” section, reflecting on a workshop he attended during the event. The workshop – Catalyzing Carbon Finance for High-Quality NCS Projects (hosted by the Doris Duke Foundation) – brought together industry leaders to explore financing strategies for a Brazilian Afforestation, Reforestation, and Revegetation (ARR) project. The project aims to engage 1,000 landowners and restore 10,000 hectares by 2028 but faces significant funding challenges. Experts, including representatives from Microsoft and UBS, focused on scalable solutions, with many highlighting the need for credit enhancements to ensure financial viability. You can read Sean’s full article here.

There has also been some positive momentum in biodiversity protection. The Brazilian state of Pará secured a massive $180 million deal with the LEAF Coalition to support its efforts to reduce deforestation and promote sustainable development. The agreement, which includes major buyers such as Amazon, Bayer, and the governments of Norway, the UK, and the US, will fund projects to preserve 10,000 hectares of critical forests by 2028. The deal involves the purchase of 12 million carbon credits under the Paris Agreement’s REDD+ framework, with a focus on benefiting local communities, including Indigenous Peoples. This agreement marks the first of its kind in Brazil and underscores the growing role of carbon finance in protecting global forests.

Regarding the clarity and introduction of regulations and the advancement of carbon markets, the CFTC issued final guidance to standardize voluntary carbon credit (VCC) derivative contracts with the hope of enhancing market transparency and integrity. This is the first US regulatory guidance for carbon credit derivatives aimed at supporting decarbonization.

As has been the theme throughout all of 2024, we expect continued momentum in Q4 with increased regulatory clarity, stricter disclosure requirements, and further development of carbon markets.

?P = PRICES

In the compliance markets, the prices for European Union Allowances (EUAs) from the EU Emission Trading System (ETS) have continued their decline, currently trading around €61 per allowance. This is down from close to €70 around the start of Q3. Let’s see what Q4 has in store for the EU as winter approaches and gas demand increases due to colder weather, which will likely impact EUA prices.

In the United States, Washington State’s Cap-and-Invest Program is up for a vote in November under Initiative 2117. Depending on the outcome, the program could be repealed this year, leading to understandable caution in the market.

From the voluntary side, we wrote a piece last month covering carbon credit prices across the VCM, which can be found here.

Credit marketplace Xpansiv now trades standardized contracts for programs and methodologies approved under the ICVCM’s Core Carbon Principles (CCP). Their contracts are helping to streamline the integration of high-integrity CCP credits into buyer portfolios, covering major carbon registries like ACR, CAR, and Verra. On their platform, there was some notable price activity in late August, highlighted by a record trade of 39,414 tonnes of 2023 vintage ACR CCP-approved landfill gas credits at $7.15 per tonne. Other transactions included various credits at lower prices, such as hydro and REDD credits at $2.00 per tonne and Indonesian peatland restoration credits at $3.25 per tonne.

It appears to still be too early to see how CCP-labeled credits will impact credit prices. This delay might be impacted by a hesitation in corporate action (more on this later).

Interestingly, the International Air Transport Association (IATA) will host a procurement event for airlines to buy Eligible Emissions Units (EEUs) for CORSIA’s first phase. Co-organized with Guyana, Mercuria, and Xpansiv, the event will be held in Q4 on the Aviation Carbon Exchange and is open to all airlines. The available EEUs are mainly from Guyana's avoided deforestation projects.

We predict that in Q4, credit prices in the VCM will gradually rise above current levels, though only modestly.

A = ACHIEVEMENT

As we stated in our last IMPACT update, United Nations (UN) meetings were scheduled to continue, to push Articles 6.2 and 6.4 closer to the finish line for COP29 later this year.

Thankfully, some achievements have been made. Just this week, the UN panel overseeing Article 6.4 of the Paris Agreement adopted the "Sustainable Development Tool" (SDT), which introduces the first mandatory safeguards for carbon projects in developing countries. The tool aims to ensure projects benefit local communities and avoid harm, with ongoing updates every 18 months. Further discussions on Article 6.4 methodologies and removals are anticipated.

Regarding Article 6.2, more countries have entered bilateral agreements during Q3, including Sweden, Rwanda, and Zambia. Additionally, countries such as Suriname and Zimbabwe have begun the process of establishing Article 6.2 guidelines and frameworks to allow projects to generate Article 6.2-compatible carbon credits – internationally transferrable mitigation outcomes (ITMOs) – for international trading. In September, Switzerland announced plans to buy ITMOs from a biogas project in Ghana, developed by HomeBiogas, to meet its emissions reduction targets. Supported by the KliK Foundation, the project will install anaerobic digesters to convert waste into clean energy, reducing methane emissions. ?

Following talks with the European Union, the United States climate advisor John Podesta is optimistic about reaching a carbon trading agreement under Article 6 of the Paris Agreement at COP29. While differences remain, both sides state they are committed to resolving them. The US prefers a decentralized approach, while the EU supports a centralized system.

Currently, Article 6.2 appears to be close to agreement, but challenges remain for Article 6.4. We are optimistic more progress will be made at COP29, with both texts possibly finalized when the conference wraps.

C = COLLABORATION

With Q3 now behind us, several significant elections have taken place in 2024, showing mixed implications for global climate cooperation. However, the most impactful election is still ahead –the U.S. election in November, which could greatly influence the future of international climate action.

As the U.S. election in November approaches, the climate policies of Kamala Harris and Donald Trump stand in stark contrast, each with significant implications for climate change and international collaboration. Although she’s been pretty silent about her specific plans, Harris is expected to continue and push forward with current policies, potentially even expanding them.

Conversely, Trump has signaled a return to deregulation, with an emphasis on reviving fossil fuel industries and reducing government intervention in energy markets. His potential election could hinder the momentum of global climate initiatives, weaken international agreements, and strain cooperation, as the U.S. would likely pull back from proactive leadership in climate diplomacy. The outcome will, therefore, be pivotal for shaping both domestic climate policy and the broader global effort to combat climate change.

Beyond national elections, this quarter saw various market stakeholders announce the collaboration. A standout announcement came from VCMI and the Africa Carbon Markets Initiative (ACMI). The groups are looking to boost carbon trading across Africa, announced at New York Climate Week. The partnership aims to help African governments develop carbon market frameworks, enhance local capacity, and attract climate finance. It will focus on harmonizing policies, building expertise, and raising awareness to leverage Africa's natural resources for climate resilience, food security, and green job creation.

T = TARGETS

Last quarter, we wrote about the shakeup around the Science Based Targets initiative’s (SBTi) announcement that companies might be able to use carbon credits to offset Scope 3 emissions. Since then, not much tangible progress has been made on this front, which means the target for corporates remains elusive.

In July, the organization revealed it will continue to consider allowing carbon credits in its Corporate Net-Zero Standard (CNZS), but further analysis is needed. A decision has been pushed to late Q4 or possibly 2025. SBTi released four technical papers exploring the role of environmental attribute certificates (EACs), such as carbon credits, in addressing Scope 3 emissions but concluded that current evidence is insufficient to draw robust conclusions. The delay has upset some carbon market participants and corporate leaders, who fear the lack of clarity hinders investments and emissions reduction progress and could even lead companies to abandon their climate commitments.

Like many in this space, we are eager to see SBTi's final decision (hopefully this quarter) and its potential impact on corporate emission reduction targets.

And that concludes our Q4 IMPACT assessment. We'll return at the end of the year with our final report for 2024.

Gordian Knot Strategies has been engaged once again to help the U.S. Endowment for Forestry and Communities screen for investment opportunities, develop program criteria, evaluate proposals, and conduct due diligence for its?Impact Investing Program. A second call for the submission of impact investing opportunities is planned for the winter of 2024/2025.

If you would like to be on the distribution list for the announcement of the next round of funding and informational webinars, please leave your details?here, and we will keep you updated.

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