1‭ 0 innovations‬

‭revolutionising‬
‭carbon markets‬
‭10 innovations revolutionising carbon markets‬
I‭ n the last few years we have seen a number of innovations and developments that are changing‬
‭carbon markets dramatically. The data, information and tools available to market participants are‬
‭significantly different compared to a decade ago.‬

‭ here remains a lot of work to be done to grow these markets to make a meaningful net zero‬
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‭contribution. But these innovations are laying the foundations to get us there. Below we look at the 10‬
‭that we think are having the biggest impact on raising this potential.‬

‭1. Ratings - carbon markets are learning the language of risk‬

‭ atings are now commonplace in the voluntary carbon market. We have seen them used in every part‬
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‭of the value chain, plugging in at any stage in a project lifecycle to help people make better decisions.‬
‭Examples include the‬‭first public ex ante rating‬‭being‬‭published earlier this year and the first‬
‭ratings-linked contract being launched.‬

‭ espite the volatility in the market this year, we have seen a continued correlation between the BeZero‬
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‭Carbon Rating and pricing. Our analysis finds that, on average, each ratings notch (on our eight-point‬
‭scale) leads to an additional 25% price premium for credits in the market. With ratings helping to shift‬
‭the incentive structure in the VCM to better reward quality, projects with the greatest climate impact‬
‭have the most to gain.‬

‭ igure 1.‬‭BeZero Carbon Rating versus average credit‬‭price on CBL exchange for the period April 2022‬
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‭through December 2023. The number of transactions for credits with each BeZero Carbon Rating in‬
‭the period analysed is indicated by the size of the data point. The plotted linear regression line was‬
‭calculated on the full transaction-level dataset.‬

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‭2. Satellite imagery - everywhere and all the time‬
‭ atellite data and downstream analytics are increasingly targeting applications in the carbon market.‬
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‭Space agencies such as ESA,‬‭ISRO,‬‭JAXA, and NASA‬‭provide‬‭open data, including‬‭LiDAR‬‭and radar‬
‭aimed at measuring carbon. Through initiatives such as‬‭NICFI‬‭, some commercial satellite data are also‬
‭open for climate research. Combined with cloud computing and the march of machine learning,‬
‭innovation is booming.‬

‭ umerous companies and open science initiatives are now competing to provide affordable satellite‬
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‭monitoring to project developers and independent third parties, targeting forestry and agriculture and‬
‭renewable energy, through to direct measurement of GHG flows at local to jurisdictional scales. This‬
‭competition will drive higher quality and lower costs for project monitoring (see‬‭number 3‬‭).‬

‭ nique in this mix is Planet Labs, whose fleet of commercial satellites maps the entire world every day.‬
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‭BeZero’s‬‭partnership‬‭with Planet will see their high-resolution‬‭data - alongside other data from space‬
‭agencies, government institutes, and researchers in the field- used to inform independent carbon‬
‭ratings for hundreds of projects globally. This constant eye on project performance makes ratings a‬
‭real-time risk metric for the carbon markets.‬

‭ eanwhile, some aspects of carbon accounting defy direct observation, no matter the tech. Project‬
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‭baselines - the unobservable elephant in the room - have come under scrutiny this year, for instance.‬
‭Solutions exist however, among them integrating the latest satellite data with dynamic baseline‬
‭methodologies and independent, jurisdictional risk maps - an approach that is working its way into‬
‭standards, while already‬‭routinely applied by BeZero‬‭,‬‭among other agencies. On all fronts, the data‬
‭and science are supporting an increasingly rigorous and transparent market.‬

‭ igure 2.‬‭Forest structural attributes and carbon‬‭mapped for an Improved Forest Management project‬
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‭in Mexico, using data from Planet in partnership with BeZero.‬

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‭ . Monitoring, reporting & verification (MRV) - bigger, better and‬
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‭more often‬
‭ ll carbon projects are live, but historically the availability of data on their performance has not‬
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‭reflected that. Monitoring was expensive and reporting cadences were in the decades in places.‬
‭However, this is changing for many project types. New technologies are opening access to datasets‬
‭that are more expansive, timely, accurate, and verifiable than the data that was previously available.‬

‭ ot only are innovations in Earth observation data having big impacts in the forestry space, but the‬
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‭technology behind other project types is also changing rapidly. Cookstove projects are coming to‬
‭market with‬‭data on the usage‬‭of individual cookstoves‬‭made available through the use of sensors. In‬
‭agriculture, the use of low-cost probes could make tracking soil carbon more cost-effective and‬
‭accurate. There is even talk of digital health sensors on cows to monitor digestive emissions or feed‬
‭into pasture management.‬

‭ he availability of these types of data has been influencing how accreditors think about‬
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‭methodological improvements, with Verra’s new jurisdictional REDD methodology incorporating the‬
‭improved MRV capabilities in the market.‬

‭4. Regulators & initiatives - from theory to practice‬

‭ n enormous amount of work has been done across the market to improve standards and practices.‬
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‭This has culminated in new principles and initiatives on both the demand and supply sides that are‬
‭now set to be operationalised.‬

‭ n the supply side, having published its Core Carbon Principles (CCPs), the ICVCM is set to announce‬
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‭which methodology types will qualify, as well as assessing applications from accreditors. This should‬
‭mean that we see the first CCP labels in the market this year, raising the bar in a number of areas for‬
‭what a carbon credit looks like.‬

‭ n the demand side, the VCMI has published its guidance on what a credible claim looks like. Having‬
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‭been stuck for an alternative to the misleading precision of ‘carbon neutral’ labels, this framework will‬
‭give the market more confidence in using carbon credits as part of a broader climate-based claim.‬

‭ t COP28 we saw both of these initiatives come together with SBTi and the GHG Protocol to‬
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‭collaborate on delivering clear, cohesive standards for corporate climate action.‬

‭ hese progressions come at a time when a number of governments are looking at the market, be it in‬
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‭terms of oversight or utilisation. Many are looking at the extent to which these initiatives provide a‬
‭blueprint for potential regulations. More consistency is always helpful for market participants.‬

‭ owever this consistency should not be achieved by treating credits like a commodity. Any regulation‬
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‭based on the idea that all credits are the same is destined to fail. With any luck, regulators and the‬
‭initiatives will continue to push the market towards better information, data, and transparency.‬

‭ e have also seen governments looking to include international credits in their national climate‬
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‭strategies, such as Singapore, which is making them eligible against their carbon tax. Similar‬
‭consultations are underway in Japan through the GX League, and in South Korea.‬

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‭5. Technological removals - rise of the machines‬
‭ othing splits opinions amongst the carbon crowd like technological removals - climate saviour for‬
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‭some versus a dangerous distraction for others. While we sit firmly in the ‘everything, all at once’ camp‬
‭on the macro of tackling climate change, this has largely been a theoretical debate given the lack of‬
‭delivered tech removals.‬

‭ owever, in the last couple of years huge strides have been made towards tech removals becoming a‬
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‭prominent sector of the carbon market. Total issuance for the sector was 10x larger in 2023 than it was‬
‭in 2020 according to data from CDR.fyi. While the bulk of this is made up of Biochar credits, we have‬
‭also seen credit issuance in Enhanced Weathering, Mineralisation, and Bio-oil.‬

‭ irect Air Capture remains nascent, but there have been notable milestones around the world. For‬
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‭example in Iceland, Climeworks is progressing construction of Mammoth, their second plant. In the‬
‭US, ground has been broken on the Stratos plant after Carbon Engineering’s purchase by Oxy and tie‬
‭up with 1Point5, while Heirloom is commencing operations on their first plant in the US. In Africa,‬
‭Octavia is developing the continent’s first pilot DAC facility utilising Kenya’s geothermal power.‬

‭ hile the numbers remain small, the pipeline of technological removals projects continues to grow.‬
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‭This has been aided by new accrediting players in this space, such as Puro and Isometric, bringing new‬
‭methodologies to market. Ongoing support from both the public and private sector is required if the‬
‭sector is to make its way down the cost curve. This year’s large number of elections will be important‬
‭to see how support for this space evolves.‬

‭ s part of the sector’s integration into the market, this year saw BeZero launch the‬‭first ever Biochar‬
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‭rating‬‭to the market. We expect to see the first ratings‬‭for a number of other technological removals‬
‭projects this year.‬

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‭Figure 3.‬‭Credits delivered by technological removals‬‭between 2020 and 2023. Source: CDR.fyi‬

‭6. Unique identifiers - the yellow pages of the market‬

‭ ow do you know the carbon credit you have purchased is the one you were sold? How do you know‬
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‭the credit being retired is unique and matches the records of what has been issued? Each carbon‬
‭registry has its own identification system for credits issued through their respective systems. But‬
‭these do not all follow the same formula and so cannot be compared across systems. This makes‬
‭transacting across the market challenging, with different processes required to validate the veracity‬
‭of credits from different registries.‬

‭ nter unique identifiers. Having a unique identifier for all credits in the market that follows the same‬
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‭formula and is fungible across systems enables participants to avoid the cost of gathering this‬
‭information themselves. It also enables them to speak the same language as their counterparts in the‬
‭market, reducing the cost of transacting.‬

I‭ dentification systems play a crucial role in other markets by acting like a directory for the market,‬
‭providing an independent third party label for a given instrument. The introduction of‬‭unique‬
‭identifiers to carbon credits‬‭is a vital step to increasing‬‭the functionality of the market.‬

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‭7. Insurance - giving the risk to people who want it‬
‭ ho bears the biggest risks in the carbon market? Historically it has been the buyers and the‬
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‭investors, we would argue. The buyers have taken on most of the reputational risk, as this year has‬
‭shown, while investors have taken on most of the project delivery risk. While the former still needs‬
‭some work (see the section on‬‭diversification‬‭), the‬‭latter is changing.‬

‭ e have seen a number of big insurance companies enter the carbon markets as well as the birth of a‬
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‭number of carbon-specific start ups. Companies like Kita and Oka are now insuring against delivery‬
‭risk; the risk that forward-purchased carbon credits fail to be issued or delivered.‬

‭ he insurance sector is well positioned to take on specific risks, such as political risk, fraud,‬
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‭negligence, or natural catastrophes. They have decades of experience, sophisticated underwriting‬
‭models, loss datasets and existing reinsurance structures to draw on. In turn, more efficient pricing‬
‭and allocation of risk can help attract more risk averse capital.‬

‭ igure 4.‬‭Data from our‬‭Issuance Risk Monitor‬‭shows‬‭that issuance can vary significantly versus what‬
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‭is forecast at the start of the project’s life. Insurance products can enable buyers and investors to‬
‭manage their exposure to this delivery risk.‬

‭8. Diversification - buyers are tooling up‬

‭ his year has shown that if the‬‭demand side‬‭of the‬‭carbon market is to scale, two problems will need to‬
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‭be addressed: validating the use of credits (see the‬‭initiatives‬‭section) and managing their risks.‬
‭Ratings enable market participants to measure and monitor the risk, and insurance enables them to‬
‭pass some of it on. But credits will always come with risks and buyers need a way to understand and‬
‭manage them.‬

‭ ortfolio theory can help. Historically, buyers spent lots of time doing in-depth due diligence on a‬
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‭small number of projects, leaving them overly exposed to those credits used to make a claim. However‬
‭we have seen a growing number of companies providing portfolio solutions to clients. This enables‬
‭buyers to outsource their due diligence process and access a higher number of projects than they‬
‭may have available if purchasing for themselves.‬

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‭ ost importantly, this enables buyers to diversify the claims they make using carbon credits. With‬
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‭every credit exposed to risk in some form, using credits from a single project leaves the integrity of‬
‭claims overly exposed to those risks. Given that these risks vary from project to project, some can be‬
‭mitigated by spreading purchases across a number of projects (a topic we explored‬‭here‬‭).‬

‭9. Funding -‬‭unexcitingly‬‭innovative‬

‭ apital raised in the carbon market is estimated to have hit $6-7 billion last year‬‭1‬‭. This is the level‬‭it has‬
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‭been at for the last few years, with financial investors making up around two thirds, versus a third from‬
‭corporate investors.‬

‭ nderlying this headline number, we have started to see a diversification of funding sources. While‬
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‭their performance has been mixed, there have been a number of examples where public markets have‬
‭been used to raise capital for projects now.‬

I‭ n terms of capital structure, we have seen some innovative debt solutions, such as the World Bank’s‬
‭emission-reduction linked bond, where the coupon payments are linked to VCU issuance. We expect‬
‭to see more global banks exploring how debt products and markets can play a bigger role in funding.‬
‭The World Bank’s support for carbon markets at COP28 opened the door to more funding for projects.‬

I‭ nstitutional investors globally (think pension funds and other major asset managers) are short carbon.‬
‭In other words, most are invested assets that yield income flows linked to emissions. Therefore,‬
‭investing in decarbonising assets that yield a return should be extremely attractive as a way to‬
‭mitigate their emissions liability (see this‬‭paper‬‭by McKinsey and GIC‬‭for example).‬

‭ owever, they also need stable and predictable returns, something the carbon market has so far failed‬
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‭to deliver. The price volatility seen in the last few years and the lack of options available to mitigate this‬
‭are challenging. Furthermore, most projects are in parts of the world where returns have historically‬
‭been volatile given political and institutional uncertainties.‬

‭ ublic-private cooperation has the potential to unlock significant funding opportunities.‬

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‭Announcements such as the intention of the World Bank’s Multilateral Investment Guarantee Agency‬
‭(MIGA) to enter the market could help reduce the risk faced by private investors.‬

‭10. Article 6 of the Paris Agreement - fit for use‬

‭ rom a carbon markets perspective, last year’s COP was disappointing. There was‬‭no agreement‬
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‭reached‬‭on how to move forward with some key parts‬‭of the Paris Agreement. But taking a step back,‬
‭the Paris Agreement provides a national framework through which to tackle emissions and Article 6‬
‭enables market mechanisms to play a role in this. This will continue to be a key driver of carbon‬
‭markets in the years to come.‬

‭ overnments have the potential to be a significant source of demand in this market. While the‬
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‭mechanism agreed through Article 6.4 remains a way off being agreed upon and operationalised,‬
‭Article 6.2 can be used today as a way for governments to fund projects and purchase credits‬
‭internationally through bilateral agreements. This can be done directly by the government, or‬
‭indirectly through corporates incentivised or mandated to purchase credits against a carbon liability.‬

‭ he current lack of structure and process underlying the Article 6.2 mechanism makes external‬
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‭interrogation of these transactions even more important, and by extension the information, data and‬
‭tools that enable this.‬

‭1‬
‭Extrapolating the H1 data in Trove’s ‘Investment trends and outcomes in the global carbon credit market’‬
‭report‬
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‭Disclaimer‬
‭ he BeZero Carbon Rating of voluntary carbon credits represents BeZero Carbon’s current opinion on the likelihood that carbon credits‬
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