ANALYSIS: Next year will be 'moment of reckoning' for voluntary carbon market firms

Quantum Commodity Intelligence - Four of the biggest voluntary carbon market (VCM) service providers collectively are losing millions of dollars per month, according to an analysis by Quantum.

This, combined with anaemic growth for many, raises the prospect that either mergers and acquisitions (M&A) or a radical change in business plans are on the horizon.

Earlier this month, carbon ratings agency BeZero became the latest company offering services to the VCM to show figures in the red, with the ratings agency booking losses over the 12 months to March 2024 that were in excess of $1.5 million per month.

The company has $35 million on the cash balance sheet following a 2022 fundraise and is well capitalised, but observers in the market and those with financial experience say investors will be looking for better capital efficiency.

"We are blessed with a very strong cash position so we are in good shape. Rising revenues helps," Tommy Ricketts, the chief executive of BeZero, told Quantum by email.

Losses

Combined with exchange Climate Impact X (CIX), carbon standard Verra and marketplace ACX, big service providers are losing an estimated $5 million per month.

The figures are based on second hand reports from sources that have looked into these entities' finances and, where available, detailed financial reports. However, they often represent an average over 12 months and may not reflect the very latest data.

"Many of them have great products, but the revenues are horrible," said one source on the condition of anonymity.

Investors ploughed into the VCM in 2020-2022 during a run-up in price, amid hopes that the companies building a position in the market could benefit from a far larger wholesale carbon market in the future.

However, many of these investments have now gone sour as demand failed to rise significantly, instead following a gentle upward slope, while some big carbon credit buyers chose to pull out of the market amid controversy over some types of carbon offsets.

Many market watchers say this is just a question of timing and express confidence that a new, more positive phase of the market is forthcoming.

This may well be true: in Baku, UN negotiators pushed through a key carbon market policy that could boost confidence.

But, in the meantime, some company finances are suffering.

M&A

Quantum has heard that separate M&A discussions involving developers, marketplaces and even exchanges are underway, although we are not naming them in this article because they have not concluded.

"The key story here is really that most of the 'big' VCM providers are in really deep trouble... they are all running out of cash, not seeing any revenue growth, will have to either find massive amounts of revenue or diversify into new asset classes or find new solutions to sell," said an experienced market watcher.

"2025 will be a question of 'transform or die' for most," he added.

BeZero's Ricketts said: "There are a lot of companies who raised and are struggling to commercialise. Consolidation will pick up next year, no doubt. We count ourselves lucky to be one of the strong ones."

Sources said the larger firms cited in this article are probably just the tip of the iceberg.

Smaller companies with weaker balance sheets are likely to face a much more difficult time raising money following a steep rise in interest rates since 2022.

The current slowdown is perhaps best exemplified by US-based non profit Verra, by far the largest registry in the VCM, which experienced a sudden increase in revenues in 2019-2020, before choosing to hire more staff following complaints that its processes were too slow.

However, data released over the last few weeks shows that this, combined with a severe drop in issuances at REDD projects, led to a significant worsening of its cash position during 2023 and going into 2024, which eventually led to the decision to make 25% of the staff redundant last month.

A separate standard, on the condition of anonymity, says it has seen an influx in applications in recent months, with some developers choosing to migrate away from Verra.

Verra's new chief executive, Mandy Rambharos, told Quantum on the sidelines of COP29 one of her biggest priorities over the next year is fundraising.

Sought after

However, at the same time, many developers say Verra remains sought after by many companies looking to offset their emissions.

"It's no secret that the VCM has faced challenges over the past few years, reflecting both the natural fluctuations of an evolving market and heightened scrutiny.

Like any organisation operating in a dynamic market, Verra hasn't been immune to these challenges," the standard said in response to a request from Quantum.

"We remain optimistic about the future, because as the world gathers in Baku searching for pathways to combat climate change, there's no other tool that offers the immediacy and impact of the VCM," it added.

Singapore-based CIX, meanwhile, has significantly slowed the number of new contracts it releases to the market because of lower market liquidity and after it chose to downsize its staff last year.

And in October, a different exchange, ACX announced the closure of its Abu Dhabi entity barely 12 months after it had entered that market.

Discussions

"We are in discussions with several groups interested in purchasing our Abu Dhabi (AD) licensed entities. The regulated exchange in AD is not a good fit for carbon markets that trade mostly in the primary space," ACX said in a statement sent to Quantum.

"The broader ACX group is not for sale and we continue to build our distributed network of exchanges. The latest addition to our marketplaces is with BACX in Argentina where we are providing the infrastructure and connecting the nascent exchange to the broader carbon market."