On November 14, 2024, RBC Capital Markets, in partnership with ClearBlue Markets, hosted its second annual Carbon Markets Conference. The event took place against a backdrop of the global election super cycle and growing government attention on the role of carbon markets in driving climate action. The objective of this year’s conference was to explore the many factors that are likely to impact both compliance and voluntary carbon markets next year and beyond. We have written about some of these themes before and are encouraged to see meaningful action starting to take place. Many speakers highlighted the evolving nature of these markets, emphasizing expectations for greater clarity, standardization and growth, in the year ahead.
Here are the top five takeaways from the conference:
Despite political uncertainty, the carbon markets will continue to grow
With the conference taking place just over a week after the US election and during COP29 in Baku, the opening speakers, Michael Berends, CEO, and Jennifer McIsaac, Chief Market Intelligence Officer, of ClearBlue Markets addressed the election-related elephant in the room. While many assume the incoming Trump Administration will spell trouble for the carbon markets, Michael and Jennifer explained that’s not likely to be the case. Drawing from history, they noted that despite challenges during Trump’s first presidency, key programs like the Western Climate Initiative (WCI) and the Regional Greenhouse Gas Initiative (RGGI) not only survived but continued to grow. They also highlighted positive signals such as Washington state’s recent vote to uphold its compliance carbon program with 62% support, and New York state’s ongoing progress towards launching its own compliance market as early as next year.
In fact, the new Administration could be a tailwind for US compliance markets as states may need to lean more heavily on these mechanisms to achieve climate targets in the absence of federal climate policy. Similarly, voluntary carbon markets (VCM) could see renewed interest. During Trump’s first term, private sector support for climate action surged, and some expect a similar response as corporations face mounting pressure to meet net zero goals.
In Canada, it’s also likely that there will be a change in the federal government next year. While the Conservative Party has campaigned on repealing the consumer carbon tax, it has remained silent on the Output-Based Pricing System (OBPS) for industrial emitters. Programs like Alberta’s compliance carbon market, which was established by Conservative provincial governments, are likely to remain in place and retain broad support across the political spectrum. However, newer programs like the emissions cap on the oil and gas sector and the Clean Fuel Regulations are likely to be at greater risk of repeal.
Carbon markets can help companies be more competitive
During a panel discussion on the compliance carbon markets, Kruger Inc. and Algoma Steel shared how their compliance obligations are helping them win against their competitors. The main reason for this is that companies in compliance carbon markets are incentivized to be more energy efficient which, in turn, can reduce costs thereby increasing profit margins or enabling lower prices. In addition, when companies reduce emissions they can earn additional revenue by selling excess carbon credits to other industrial emitters. John Naccarato, VP & Chief Legal Officer, Algoma Steel, shared an example of how carbon pricing helped drive the business case to electrify the company’s furnaces. This will reduce Algoma’s emissions by three million tons of carbon dioxide annually, the equivalent emissions of close to one million passenger cars.
We also heard from Maxime Cossette, SVP, Fiber Supply and Strategic Initiatives at Kruger Products, and Lee Hodgkinson, Head of Sustainability and Technical Services at Dream Unlimited. Dream and Kruger discussed their partnership on Zibi, Canada’s largest net-zero community located in the National Capital Region. Waste heat from Kruger’s nearby tissue plant is sent to Zibi’s District Energy System which supplies the community’s heating. The system allows Dream to provide its residents and tenants with an efficient zero-carbon source of heat while Kruger benefits from selling the heat and reducing its carbon compliance obligations. This case study highlights how carbon markets are driving meaningful carbon reduction projects while helping companies become more efficient and better positioned to win in the future.
The climate challenge is more urgent than ever, and carbon removals are a critical part of the solution
Over the past year, the Earth was 1.5 °C warmer than pre-industrial levels, breaching the first target of the Paris Climate Agreement and the level of warming that most scientists agree is tolerable. For Phil De Luna, Chief Carbon Scientist and Head of Engineering of Deep Sky, this demonstrates that emission reductions are simply not enough. To meet the challenge of climate change, the world needs to reduce emissions as quickly as possible while removing carbon dioxide from the atmosphere at scale. It is estimated that we will need between five and ten billion tons of carbon dioxide removals per year to reach net-zero emissions, and even more than that to return the climate to pre-industrial levels. At present, nature-based carbon removals such as afforestation and reforestation are removing a few million tons of carbon dioxide per year while technology-based removals are only removing tens of thousands.
Enter Deep Sky, a carbon removal project developer that is building the world’s first carbon removal innovation and commercialization center, Deep Sky Labs, located in Innisfail, Alberta. The premise for Deep Sky Labs is simple: carbon dioxide removal technologies like direct air capture (DAC) are nascent and the various approaches to DAC and other forms of carbon removals should be tested and analyzed in order to fully scale. Deep Sky will then take the best of those technologies and use them in large-scale commercial facilities that will remove millions of tons of carbon dioxide from the atmosphere. This novel, tech-agnostic approach is what led RBC and Microsoft to become Deep Sky’s Founding Buyers, committing to buying 10,000 tons of carbon removals from Deep Sky Labs with the option to purchase 1 million more from their future commercial facilities.
Key challenges remain in the voluntary carbon markets, but hope is on the horizon
While 2024 is set to be another record year for demand in the VCM, the market has not seen rapid growth since 2021 and is not on pace to reach the lofty projections market analysts have long held. The key issue stems from a lack of trust precipitated by a lack of supply- and demand-side standards, regulation, and guidance. This, however, is set to change as meaningful progress is being made to address current issues and restore confidence in the market. On the supply side, the Integrity Council for Voluntary Carbon Markets (ICVCM) has started providing guidance on which project types meet its Core Carbon Principles – a baseline for carbon credit quality. Carbon credit registries, like Verra, have also been revising their methodologies to make them more comprehensive and stringent, noted David Antonioli, Former CEO of Verra. Donna Lee, Founder of Calyx Global, one of the main carbon credit ratings agencies, shared that this is already having a positive impact, indicated by clear improvements in the quality of recent issuances.
On the demand side, there is frustration at the flip-flopping of standards setting organizations like the Science-Based Targets Initiative, which has sowed confusion in the market. Bill Morris, Former President of Accenture Canada and Board Member of Boreal Carbon Corporation, believes the market should rally around the Voluntary Carbon Markets Integrity Initiative (VCMI), the demand-side focused cousin to the ICVCM. VCMI already has guidance available for how to credibly use carbon offsets within net-zero strategies with more forthcoming. Bill also mentioned positive developments at the supranational level as being equally important, with agreements on Article 6 (the Paris’ Agreement's framework for a global carbon market) happening at COP29 and the first stages of CORSIA (the aviation sector’s carbon offsetting scheme) coming into effect. While challenges in the VCM still remain, the outlook is starting to turn positive and 2025 will be a milestone year as many of these new standards are brought to market.
Following years of debate, climate action needs progress, not perfection
The need for progress, not perfection, was a central theme at the conference. This year, that message has grown louder as the world experiences more frequent and severe extreme weather, and as progress continues to stall. Increasing politicization of climate action has also resulted in sustainability leaders being criticized for not doing enough, not doing it perfectly or for taking a risk in doing something at all, while the vast majority that choose to do nothing are implicitly rewarded. This has been especially relevant in the VCM with standards developing too slowly while organizations search for perfect solutions, and with companies utilizing carbon credits facing criticism despite their purchases being completely voluntary. In fact, a growing body of research shows that companies buying carbon credits are on average decarbonizing twice as fast as peer companies that don’t.
David Antonioli suggested that one way to combat this is to focus on the outcomes the market is trying to achieve, which could help reframe the entire narrative and lead to more constructive approaches. Another way forward is to find like-minded partners, as Kruger and Dream did to help make Zibi Canada’s largest net-zero community. Lastly, organizations should prioritize science over ideology, and the science tells us the time to act is now.
Conclusion
To help navigate the rapidly evolving carbon markets, RBC Capital Markets offers extensive expertise and full capabilities in emissions trading across both compliance and voluntary carbon markets. The Environmental Markets Solutions Group partners with RBC Capital Markets’ Environmental Commodities desk, established in 2008, to offer bespoke solutions to clients looking to operationalize their net-zero targets through carbon and renewable energy solutions.
In April 2023, RBC announced a strategic investment and partnership with ClearBlue Markets, an award winning carbon markets advisory firm. ClearBlue Markets provides carbon markets services to hundreds of clients worldwide, helping them optimize their strategies for compliance requirements and voluntary net zero ambitions through its deep advisory expertise and AI enabled technology.
