Carbon offsets plunge to near six-month low on issuances, Russia invasion

24 Feb 2022

Quantum Commodity Intelligence - Voluntary carbon offsets have plunged to near six-month lows as traders pointed to large credit issuance volumes in recent weeks and as demand evaporated following the Russian invasion of Ukraine.

Quantum assessed VCS CORSIA Solar/Wind/Waste to Energy 2016+ 20kt credits at $5.94/tCO2e on Wednesday, their lowest level since August 27, 2021.

Nature-based offset prices have also fallen heavily, even if they have been less affected than renewable energy credits.

The mood was bullish in January after a year of record price gains propelled by a flurry of net-zero commitments from companies, with financiers rushing to invest in the sector and exchanges announcing new contract initiatives seemingly every day.

But prices started falling in mid-January amid low seasonal demand and the rout has worsened significantly over the last two weeks.

Voluntary offset prices are largely reliant on the willingness to buy offsets from companies, which is driven by internal initiatives and is harder to gauge in real-time than other commodity markets.

Traders play a much larger role than a year ago, having entered the space in bulk in the second half of 2021. Even if higher trading activity is supposed to reduce price volatility, some large speculators are said to have panicked in recent days amid lower interest.

Large issuances

Carbon credit issuances have run at 5-6 million mt per week since the start of the year, versus 3 million mt for the same period in 2021, but this is largely unchanged from the fourth quarter of 2021 when prices rose substantially.

Even so, market sources said the volume of credits available for trade in the secondary market was significant.

Project developers can typically issue credits as soon as they have been verified by a third party auditor and need to pay a small fee to registry operators for doing so.

"There have been a lot of credit issuances recently and not as much demand as people expected," said one trader.

"With the Russia situation, everyone wants to wait before committing to new purchases."

"Given that the market has been supported by secondary market/speculative players it makes sense we see some pullback from time to time," said another.

War in Ukraine

Russia invaded Ukraine on Thursday, causing an international uproar and creating havoc in commodity markets.

In a webinar organised several weeks ago but held Thursday, a few hours after the Russian invasion, participants said the events had added a new dimension to voluntary carbon trading in recent days.

"The gepolitical events of the last 48 hours...I think are going to change the dynamic. We've already seen some downward price moves. At times of great uncertainty it's risk off," said Ana Haurie from carbon project financier Respira.

Iain Mackay of Cargill said the situation had triggered a flight to quality, with lower price credits suffering more than nature-based ones.

"We're probably going to see a bit of weakness in the cheaper quality credits...I think that it will continue. The speculative money that came in around the crypto wave...they will look to sell like we've seen in the last two weeks," said Mackay.