Tom’s take #4: How to best source carbon credits - do I develop my own carbon project?

Working in climate finance is a fascinating challenge. On a daily basis, I get to discuss the best options of how clients can make a difference to reduce emissions and do their part to reverse the trend of man-made global warming with our clients. The interest to invest in climate finance is genuine. As detailed in edition #2 of “Tom’s Take”, more and more clients are seeing the benefits of carbon offsetting as a meaningful way to internalise externalities and bring them on corporate balance sheets. And companies are becoming increasingly ambitious, often resulting in ‘net zero’ targets and the definition of a related decarbonisation pathway. Where in the past, we mainly focused on the sale of off-the-shelf carbon credits via spot transactions, we now see a wide array of conversations of how clients can support one, or a portfolio of carbon projects, often for an extended period of time.

As South Pole regularly wins prestigious project developer awards in both voluntary and compliance markets, the company is a great partner to explore options for investing in climate finance. The following image provides an overview of these options, which I will briefly discuss. These options can be viewed as a journey, where companies become more engaged as they progress from one-off transactions to deeper-level commitment to drawing down emissions via carbon projects.

1. Off-the-shelf credits: these are carbon credits from existing carbon projects that are already issuing credits. Companies can select their preferred project based on geographic location, project type (e.g., wind, solar, cookstoves, etc.), co-benefits associated with the project (e.g., health improvements, biodiversity protection) and price. This is a one-off transaction.
2. Exclusive offtake: similar to the previous point, except that the buyer purchases the entirety of carbon credits issued by a project in a given year. It provides the opportunity for a higher level of association with the project, and allows the buyer to claim that he financed the co-benefits associated with that period.
3. Turnkey projects: these are projects that South Pole develops for key clients, such as L’Oréal or Signify in accordance with the client’s specifications.The projects can be fully aligned with the client’s vision, brand values and mission. They can also be integrated into their value chain, such as “Insetting” projects.
4. Bespoke sourcing: South Pole can act as your trusted advisor to compile a portfolio of existing projects, soon-to-be-issuing projects, or projects to be developed, in direct response to a client’s very specific briefing. This option is usually for larger clients with significant carbon procurement requirements over the medium to long term.
5. Carbon fund: this is the most sophisticated and long term level of securing access to carbon assets. Here, South Pole develops specific funds for clients, or pools clients’ funding into larger pots of money to finance existing or new projects that are based on a certain project type or purpose. Examples include South Pole’s “landscape resilience fund” or the “Power4Impact fund”. The yields of these funds can be agreed on with the client. They include:
6. Impact-only funds, representing a non-commercial, often evergreen, fund that leverages venture philanthropy to generate positive, quantifiable environmental and social impact for the investor.
7. Credit-generating funds: evergreen fund that generates returns for investors in the form of environmental commodities, such as carbon credits.
8. Commercial carbon funds: A fund that generates financial returns for the investor from the prepayments and sale of carbon credits of the projects it invests in.

To learn more about how South Pole can support you to understand carbon procurement and carbon project development options, get in touch at [email protected]