As part of 2024 North American Carbon World (NACW), RBC Capital Markets’ Environmental Markets Solutions Group and ClearBlue Markets hosted clients for an exclusive discussion on carbon markets, with unprecedented interest and excitement, coupled with concerns around the need for regulation, standardization and credibility. Here are our top takeaways from NACW:
1. Interest in the carbon markets has never been higher
This was NACW’s largest conference ever with over 1,100 attendees, far outpacing last year’s record attendance of 700. Furthermore, the diversity of organizations participating has also grown with strong representation from federal, state/provincial and municipal governments, regulatory bodies, corporations, investors, project developers, non-profits, community and Indigenous groups. This highlighted the growing interest across all sectors, and underscored the opportunity these diverse stakeholders see in these markets.
There was broad support for compliance carbon markets, such as the EU Emissions Trading System (EU ETS) and Western Climate Initiative (also known as the California/Quebec Cap and Trade System). Compliance markets are the backbone of the carbon markets and they continue to grow globally, both in terms of geographies and sectors covered under these schemes. The latest jurisdiction to explore the compliance carbon markets is the State of New York, which is looking to launch its own scheme, NY Cap-and-Invest, and was a hot topic at the conference.
Despite its challenges, interest in the voluntary market has never been higher which is reflected in the recent record market activity between Dec 2023 and Feb 2024.
Governing bodies such as the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) acknowledged that carbon markets are going to play a larger role in financial markets and society as a whole. Both agencies are growing their regulatory oversight to ensure continued integrity in compliance markets and to bolster integrity initiatives in voluntary markets. Insurance companies are also starting to enter the market to provide risk management solutions to market participants. Finally, carbon credit ratings agencies had a strong showing at the conference and are gaining subscribers. These are all positive developments that should continue to support growth in both compliance and voluntary markets.
2. More actions are needed to incentivize action in the voluntary carbon market
As we’ve noted before, the carbon markets are the “net” in net-zero, and an important tool in the fight against climate change. Yet, one of the major concerns raised at the conference is that we are not doing enough to incentivize the private sector to utilize and invest in carbon projects. One example discussed was the Science-Based Targets Initiative (SBTi) recently launched Beyond Value Chain Mitigation (BVCM) protocol, which outlines SBTi’s guidance for how companies should utilize voluntary carbon credits. The general consensus was that BVCM was a missed opportunity to incentivize companies to take action today. While the BVCM encourages companies to make large investments in voluntary carbon credits and points to the benefits, there is a lack of tangible use cases for carbon credits, for example by allowing for a small percentage of a company’s SBTi emissions target to be met with the use of credits.
On the other hand, the Voluntary Carbon Markets Integrity Initiative (VCMI), which provides demand-side guidance on how to credibly utilize carbon credits, is piloting a new framework that would allow companies to utilize carbon credits to reach up to 50% of their Scope 3 targets if they meet other stringent criteria, such as setting and publicly disclosing science-aligned near-term emission reduction targets, and publicly committing to reaching net-zero emissions no later than 2050. If successful, this new framework could unlock $19 billion in additional finance for carbon reduction and removal projects and be a model for how the business case can work to credibly utilize carbon credits.
3. Carbon markets are meaningfully contributing to net-zero
The State of Washington’s Governor, Jay Inslee, delivered a powerful and heartfelt speech on the many ways in which carbon markets generate real and impactful climate solutions. Not only was his enthusiasm for climate action infectious, but he also reminded attendees why this work is so important and brought tangible examples of how the State of Washington’s newly established compliance carbon market uses the revenue it generates to make the lives of Washingtonians better. For example, the revenues are being used to buy air filters in public schools, an increasingly important investment as air quality deteriorates due to increasingly intense wildfires exacerbated by climate change. The revenues are also being used to buy electric school buses, which reduce carbon emissions and pollution, leading to better health outcomes.
Another important aspect of the carbon markets is that they are an effective tool to drive climate action and investment in cost effective climate solutions in developing countries. One of the speakers put it simply – there is no climate justice without carbon credits. The point being that no other mechanism provides capital to climate projects in developing countries as well as carbon markets do. The speaker reminded the audience of the commitment developed countries made in 2009 to provide $100 billion in finance for climate action for developing countries by 2020. This target was met two years late and highlights the difficulty in relying solely on governments to support these projects. Instead of criticizing private companies who are supporting developing country climate projects, we must encourage them while continuing to address gaps in transparency, standardization and data credibility to ensure these investments drive the most impact.
Conclusion
Our breakfast event was titled “2024 - The Great Carbon Markets Inflection Point” and following the conference, it’s clear that many market participants hold this view. While political and regulatory risks are widely apparent, there are encouraging initiatives and developments that will support the growth of both compliance and voluntary markets and further unlock this important source of capital for climate action.
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. Established in 2008, RBC’s Environmental Commodities desk was the first among Canadian banks to be involved in emissions trading. Our desk consists of experts with deep knowledge of the markets, as well as regulatory frameworks for voluntary and compliance markets.
Building on the longstanding leadership of our desk, in April 2023, RBC announced a strategic investment and partnership with ClearBlue Markets and the establishment of the RBC Capital Markets Environmental Markets Solutions Group to offer bespoke solutions to clients looking to operationalize their net-zero targets through carbon and renewable energy solutions.
