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ICE drives price discovery in nature based solutions carbon markets

Aerial shot of a misty forest.

US based environmental marketplace Intercontinental Exchange is to hold carbon credit auctions for GreenTrees, the largest reforestation project by issuance in the US.

ICE is to start auctioning carbon credits generated from the GreenTrees reforestation programme in Q4 2022. This builds on its launch of nature-based solutions futures (NBS futures).

Credit auctions will drive price discovery and clarity in the voluntary carbon markets.

Transparency on credit integrity and price will drive increasing scrutiny of the reforestation and nature-based solutions carbon credit market.

ICE (NYSE:ICE) plans to host two carbon credit auctions for GreenTrees in the fourth quarter of 2022. Each auction will offer 250,000 Emission Reduction Tons (ERTs) from GreenTrees’ reforestation projects.

The ERTs offered for sale by GreenTrees are issued by the American Carbon Registry (ACR) with each ERT representing the removal from the atmosphere of the equivalent of one metric ton of carbon dioxide. They are generated from its project to plant trees in 1 million acres of the Mississippi Alluvial Valley (MAV).

Carbon credits auction

Describing landowners as ‘the first responders to climate change’ Chandler Van Voorhis, manager, and co-founder of GreenTrees said: “Forestation is nature’s technology for removing carbon and represents the most viable, scalable, cost-effective means for answering climate change now and in the future.”

Connecting such landowners to a large network of buyers, the carbon credit auctions are intended to improve transparency and bring price discovery to the market. This is a key step in ensuring buyers have access to high quality carbon credits – and quality assurance is a fundamental requirement for a maturing market.

Gordon Bennett, Managing Director of Utility Markets at ICE. “As companies increasingly recognize their emissions footprint as liabilities, recognizing the 1 cost of pollution in their business models, companies will invest in emissions reductions and removals. As demand increases for these assets, price risk management will become increasingly important.”

ICE itself has a ten-year history in conducting carbon auctions, having conducted carbon allowance auctions on behalf of the UK Government since 2012. During the last two decades the environmental market says it has traded over 100 billion tons of carbon allowances, over 250 million renewable energy certificates, three billion carbon credits, and the equivalent of over 1.4 billion Renewable Identification Numbers.

In 2021, ICE traded the equivalent of an estimated $1 trillion in notional value of carbon allowances, equal to over half the world’s estimated total annual energy-related emissions footprint.

Reforestation carbon credits high quality credits?

There are challenges with the generation of credits from landscape, not least of which is the concept of paying landowners to do what they were doing anyway. Reforestation however, especially of degraded land, has many co-benefits alongside carbon sequestration, from managing water flows, cleaning the air, stabilising the temperature. Given that deforestation is said to be responsible for a third of global emissions, reforestation seems like a natural solution.

What matters is the price as that is what drives decision making about how to use the land.  Would the land be cleared, replanted, allowed to stand? These decisions are often made based on the price of crops, and reforestation credits change the economic dynamics of that decision making.

The integrity challenge that forestry related credits have is how to handle permanence – the view seems to be that a forest is a permanent carbon sink, but what happens if the forests burn down? Recent research from CarbonPlan for example, shows that wildfires have already depleted 95% of California’s carbon offset forest reserve.

Reforestation: Impact

On a global level, Nature4Climate has estimated that over 200 million hectares of deforested land currently provide little or no food production, and are eligible for cost-effective reforestation. That’s an area around three times the size of Texas. At the same time, the reforestation of those lands could sequester 3 gigatonnes of carbon dioxide equivalent per year (GtCO2e/year).

There is growing pressure for the restoration of forests as a means of not only sequestering carbon but also protecting and restoring ecosystem services. In 2021 the UK government published The Economics of Biodiversity: The Dasgupta Review which assessed the contribution of ecosystem services to the economy.

There is also a range of global calls for action in terms of reversing land degradation by 2030, which include The Bonn Challenge and the UN decade for ecosystems restoration

The global focus on the importance of restoration makes it clear that reforestation offers sequestration, nature and biodiversity benefits. But it’s not simply the quality of the credits that matters.

What companies must take into consideration is how they are going to use the credit’s they have bought. Patricia de Datta of Nature4Climate said: “Ensuring credible corporate claims is critical for building trust in the integrity of the voluntary carbon market and its ability to make a significant and meaningful contribution to climate action.” It’s important to have high quality credits but they should also be used to address emissions beyond the control of the business.

ICE’s carbon credits

News of the GreenTrees auctions follows ICE’s announcement earlier in 2022 that it has launched a Nature-Based Solutions carbon credit futures contract (NBS future), which expire in December 2022, December 2023, and December 2024.

The NBS future, which trades under the contract code NBT, physically delivers Verified Carbon Unit (VCU) credits certified under Verra’s Verified Carbon Standard (VCS) Agriculture, Forestry and Other Land Use (AFOLU) Projects with Climate, Community and Biodiversity (CCB) Certification. The vintages being sold are between January 1, 2016, to December 31, 2020.

Each NBS futures contract is equal to 1,000 carbon credits, where each credit is equal to the removal or reduction of one metric ton of greenhouse gas emissions achieved by projects that preserve and maintain natural ecosystems.

Participants supporting the contract include Chevron Products Company, a division of Chevron U.S.A. Inc., EDF Trading, Elbow River Marketing Ltd. a fully owned Parkland Fuel subsidiary, the Macquarie Group, Shell, Trafigura, Vertree Partners and Vitol.

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