INTERVIEW: Government dithering, interference pose new risks for carbon markets: South Pole CEO
30th June 2022 14:27 GMT

Slow government progress in developing new rules and standards for carbon markets under Article 6 of the Paris climate accord and interference in the functioning of existing carbon markets are growing risks for the industry, Renat Heuberger, chief executive of South Pole, a carbon brokerage and project developer, said in a recent interview.

Heuberger said the existing carbon market infrastructure has been built over the past 17 years, but governments are now looking at rethinking the entire architecture under Article 6, especially 6.4, which is essentially the renewed Clean Development Mechanism.

“Instead of thinking from the beginning and spending another 17 years to build it up, I strongly recommend using as much as we can from what we already have, because it has been proven functional and we have no time to completely reinvent,” he said.

Article 6 has given significant authority to host countries to manage their carbon abatement mechanisms.

Host countries can decide whether they want to use voluntary carbon markets to meet their Nationally Determined Contributions, or NDCs, use internationally transferred mitigation outcomes, or ITMOs, or set up domestic projects under Article 6.4, which proposes a centralized carbon credit mechanism that replaces the CDM.

Under 6.4, each country will have to follow guidelines laid down by an UN-backed supervisory body, but the host country will have to set up its own designated national authority, or DNA, and lay out rules and guidelines for domestic carbon projects.

“My fear is that every country starts a slightly different accounting mechanism, a slightly different way to do it,” Heuberger said.


Government interference


Article 6 also authorizes host countries to handle double counting of emissions reductions by making “corresponding adjustments” for carbon credits that are exported, so that only one country can claim the carbon reduction potential. However, this has also meant that countries can now decide that they do not want any domestic carbon credits to leave the country, such as Indonesia’s recent decision to do so.

“So far the voluntary carbon market was essentially not really affected by much policy change because, as the name indicates, it's a voluntary market, not a compliance market,” Heuberger said, adding that the voluntary market over the past years has grown completely without much policy interference.

Nevertheless, he said governments are now starting to create rules, and it may take five-10 years to get any legislation done or advance any policy.

“So, the risk is that the well-functioning voluntary markets could actually even be stopped or blocked by governments who would like to create clear rules, but face capacity and bureaucratic constraints that lead to ongoing discussions without approving anything,” he said.

This is a risk for both compliance and voluntary carbon markets as projects can run into a wall because they're bumping against half-developed legislation, which is in limbo, he said.

Heuberger said many countries are getting mixed messages about how to harness and regulate markets, without support to help them establish clear policies and recognize the need of compliance versus voluntary carbon markets.

Without this, he pointed out many countries are choosing to keep their carbon credit stocks domestically and limit cross-border trading. This has become “a big problem” that prevents the carbon market from scaling up, especially as countries do not have experience in cross-border trading of carbon credits or the nuances of the markets.

Heuberger said growing demand and liquidity in the carbon market should not be taken for granted and “a large number of companies have stepped up and committed to buy carbon credits to help finance the transition. However, if governments start to create ambiguity and unclear rules, the demand may go away again, and the private-sector funding cannot be unlocked”.


Speculative capitals ‘double-edged sword’


When asked about the role of speculative capital in the carbon market, Heuberger said such funds helped to boost prices, but also disrupted the project development side of the industry.

During the long period between the collapse of Kyoto Protocol in early 2000s and the launch of Paris Agreement in 2015, carbon credits were in large oversupply and some priced as low as $0.5/mtCO2e, Heuberger said.

Heuberger said speculative buying helped clear the oversupply and contributed to the post-COP26 price spike in 2021, when some cryptocurrency companies bought carbon credits in bulk. But speculative selling also brought down the carbon price in recent months after the Ukraine crisis, he said, adding that South Pole’s customer base was mostly long term.

“We are not day traders. We have mostly long-term contracts. We have ten-year contracts of the projects and five-year contracts with the buyers … These ups and downs don’t affect us that much,” he said.

On the project development side, Heuberger said what the market needs is serious, long-term players, instead of someone looking for quick wins.

For example, South Pole has five anchor buyers who have committed to procure carbon removal credits at an average price of $200/mtCO2e, aiming to scale up those technologies. The buyers are Swiss investment bank UBS, Japanese corporate group Mitsui, reinsurance company Swiss Re, American consulting firm BCG, and Liechtenstein-based banking group LGT.

“For those carbon capture projects, the only reason they exist is carbon markets,” Heuberger said.

Bunkerworld .,
30th June 2022 14:27 GMT