The Value of Carbon Credits

A Treasurer’s Viewpoint

Carbon credits can be used to rebalance an oversized carbon footprint. However, the market is not without its detractors, but Darryl Claret, COO and Treasurer, African Sun Holdings, is convinced they can offer a worthwhile contribution to sustainability – if used thoughtfully.

In parts of Southern Africa there are a number of invasive tree species, introduced by colonialists for their own benefit, which are creating serious problems with soil quality. Eucalyptus and pine, for example, grow rapidly, and can turn the land into desert by drawing up all the ground water. This can have a catastrophic effect on local farming and other economic activities.

But there is a solution being put into practice that removes these unwelcome additions and uses them to generate new and useful products, including wood pellets and chips, and construction materials. By removing the source of the issue, the land can be returned to its natural state, and depleted water tables restored. To ensure the restored water levels are maintained, the land is then released in phases for growing crops or sustainable supply chain products.

For the company orchestrating this work, African Sun Holdings (ASH), the creation of sustainable products from something that is otherwise destructive is a clear winner for all. “We work with partners to create a range of sustainable projects that are actually commercially attractive,” explains Claret. “In addition, one of the key practices at work here is carbon sequestration [capturing and storing potentially harmful atmospheric carbon dioxide] which we achieve through the creation of biochar. It is critical to us that there is a 100-year minimum carbon sequestration as we need to remove the carbon out of the atmosphere for at least a century to give our planet a chance to counter climate change.”

Biochar is produced in a manner similar to that of charcoal, but using a low-oxygen environment and ensuring the carbon is captured. Not only are ASH projects restoring agricultural land and helping to build up local economies and communities, they are also creating a carbon sink, locking away greenhouse gases (GHGs).

Credit where it’s due

ASH’s work gives it net-positive carbon status. This means it can produce carbon sequestration credits – essentially verifiable emission reductions validated by a number of registries. A single carbon credit represents one metric tonne of carbon dioxide reduced or removed from the atmosphere. These units can be traded by issuers – those that actively remove carbon dioxide from the atmosphere – with purchasing companies (typically those that are net producers of GHGs) that wish to use them to offset some or all of their own GHG production.

Obviously, a credit does not actually remove any additional carbon. By turning GHG emission reductions and removals into tradable carbon credits, it shifts emissions from one business to another, giving the buyer the opportunity to declare an effective fall in its total GHG production volume. This has certain values, as shall be explored later.

The idea of carbon credits has not always been looked upon favourably. Indeed, some studies suggest they are largely ineffective. “It’s been an extremely challenging time,” admits Claret. “Companies have bought carbon credits in the past to try to improve their sustainability reputation, and let’s just say some of the credits issued have been suboptimal.” The challenge, he notes, is largely one of lack of appropriate validation by certain issuers, and failure to check certification on the part of some buyers.

The bottom line is that some credits bought are without value. “As a producer, we have to ensure that our carbon credits are validated and verified by a third party, and for that it has to follow a recognised process of certification,” explains Claret. Many consider the industry gold standard to be Verra’s Verified Carbon Standard (VCS), but it has come under significant pressure recently with accusations of not having thoroughly vetted projects. For many, particularly industrial producers, Helsinki-based Puro.earth is becoming important.

Describing ASH’s role in the carbon-credit market, Claret says the company is purely a carbon-credit producer and seller, not a buyer. “We are fully focused on sustainability. As a nature-positive organisation, our entire mission is driven by moving our customers and partners towards net zero. We use the funds that we receive from selling carbon credits to focus on zero waste and making sure that we remain net positive in environmental and social impact.”

And this is a strong counter to negative views of carbon credits: they serve as legitimate tools, facilitating investment in emission-reduction projects, supporting sustainable development initiatives and global climate action.

ASH for example is starting 11 artisan projects in Southern Africa, specifically designed to be operated and managed by low-skilled, and predominantly unemployed female agricultural workers. These projects will, over a 20-year period, produce over 600,000 metric tonnes (MT) of sequestered carbon, while providing long-term jobs and security for more than 1,000 people.

Thousands of due diligence steps

Carbon sequestration projects require specific legal rights to be acknowledged in order to produce carbon credits. The work ASH is undertaking in Southern Africa has secured legal rights to the biomass it uses, ensuring that it is  fully entitled to the products it produces and the credits it generates.

A business such as ASH, no matter how well meaning, therefore cannot begin work without first ensuring that it has carried out the necessary due diligence, states Claret. This will likely require the advice of a specialist international law firm that is well versed in sustainability projects.

ASH partners with international law firm Crowell and Moring to ensure its projects are compliant with all local obligations from the outset, and these, he warns, often amount to thousands of administrative steps. “The legal and governance aspect of carbon credits and sustainable projects is absolutely huge. It is critical that projects are built with strong and transparent governance, and that partners and buyers are always able to have not just certainty of the quality of the credit or project but also have the right to check on these companies to ensure they are adhering to their commitments. I think this is the biggest challenge that many might not expect. But then the issues being tackled are also too big to ignore.”

It’s why Claret is keen to encourage other firms to see that it can be commercially viable to run sustainability projects. “We’re a bit different because we are just focused on sustainability. But many other companies, as part of their transition to net zero, could create their own carbon-offset projects, as well as purchasing carbon credits, to reduce their footprint.”

Shooting down excuses

The driver for uptake should be about moving to more sustainable supply chains, observes Claret. But by creating carbon-offset projects, companies can begin mitigating their own carbon footprint, and this, he says, is “really attractive” on several levels. “Not only does it create a stronger play for top talent because people want to work with you, it also places the business in a stronger position to secure better financing deals,” he explains. “The more sustainable your business is, the more banks today are interested in lending money to you.”

With anecdotal evidence that some bank relationship managers are already coaching clients in order to lend to them “because those banks have sustainability KPIs to meet”, Claret points out that while it is possible to be offered more favourable borrowing terms, it is also conceivable that some banks will start withdrawing facilities from clients that do not meet their sustainability criteria.

Furthermore, he believes that with regulation evolving rapidly country by country, companies – especially those operating across multiple borders – failing to engage now are “running the risk of being hit by legislation that they can’t adapt to quickly enough”.

One argument against responding now, “heard many times”, is that a company struggles to calculate its carbon footprint. But, states Claret, “if you begin taking steps, you can measure your carbon reduction, even if you can’t at present accurately measure your carbon footprint, so that’s not really an excuse”.

His advice for every business creating a carbon-offset project or carbon-sequestration project is to “connect with someone that knows what they’re doing or find a respected consultancy”. It will also be worthwhile exploring the carbon-credit markets, and finding out from a reliable source about market prices and trends

Properly certified carbon credits, using Puro.earth, for example, to generate a clear audit trail, tend to be relatively stable in price, at least according to normal market supply and demand behaviour. However, unaccredited offerings can prove to be worthless, so arguably their volatility is off the scale. But accredited registration programmes have an even more important market role: they ensure that every carbon credit that’s been generated is not replicated and sold multiple times.

The beauty of blockchain

Each credit is unique and thus should be sold only once. DLT that ensures uniqueness is something that could benefit carbon-credit inventory management.

As a confirmed technophile, Claret is keen to explore how automation, blockchain, and other tools such as AI and ML, could improve the carbon-credit space. However, he is astute in his approach and “will never throw a solution at a situation and then try to find the problem”.

Blockchain, he notes, has been hailed as the panacea for all process inefficiencies. “It’s proving not always to be the case, but I do think that for trade finance, and anywhere that an audit trail is needed, blockchain seems to be a natural fit. So as long as it can be used at scale to ensure sufficient market size, I think that could be good for carbon credits.”

Another concept in which Claret is interested, in the context of sustainable KPIs, is IoT. Connected devices, he suggests, could provide greater transparency over the measurement, recording and reporting of KPIs’ carbon footprint. This could provide vital assistance in the way the markets will demand and consume supporting data.

Driving uptake

Speaking on the need for progress within the carbon-credit markets, Claret urges governments around the world to “promote it and provide some sort of standardisation across the regions”. While this is beginning to happen, he says there are still different regulatory approaches to classifying certain elements used in the calculation of the viability of carbon-credit projects. This can be challenging for the inexperienced. “Currently, you either have to just jump in, and use the experience for follow-on projects, or find someone who has already done it locally, because it’s not as simple as it sounds,” he cautions.

However, at this point in their life cycle, Claret does acknowledge carbon credits as a relatively new instrument waiting to be developed. They could be used as investment funds, or be packaged and offered as green bonds, he suggests. “In fact, anything that would excite the financial community into being engaged and providing capital to do the right thing would really help. Then, as the market grows, we will see more liquidity and price stability across the board.”

The first step on the market side is to ensure easier access to platforms that can deliver a liquid supply of carbon credits. These solutions need to be able to filter the required validations for buyers, and provide them with sufficient background information. Any platform provider with a large customer base across FIs, governments and corporations, has a ready market to connect buyers and sellers.

The market for carbon credits is still very much at a nascent stage, but for Claret it has huge potential, not least from a treasury viewpoint. “This will change everything,” he states. “We [ASH] don’t have a very large carbon footprint, but we do want to show it, and manage it like any other risk, with proper KPIs. We want to show what our exposure is, what we’re doing to mitigate it, and what our carbon credit balance is.

“And, increasingly, this type of data will be collected and measured by many other corporate treasuries, so we will see more integration with ERPs, and the use of AI and automation tools to calculate carbon footprints so that companies can start looking at it like any other exposure.”

Capturing the ‘business zeitgeist’

While ASH is a carbon-credit producer, not a buyer, Claret’s message to those who are starting to explore the market is simple. “It is essential to make sure that the credits you are buying have legitimate third-party certification because that gives you some protection and greater confidence in the product.”

Notwithstanding the rogue element, it’s evident that Claret is keen to see treasury progress its involvement with the reporting and management of carbon footprint data. This has not always been the case. “I was very averse to sustainability. I found it very fluffy. Everybody was saying they were doing the right thing, but they weren’t, and governments were using it as an excuse to levy more taxes without any coherent strategy.”

But that’s all changed. “We’ve now reached a critical point where there are mechanisms in place to actually make a difference, yet AI, rather than sustainability seems to be capturing the business zeitgeist,” he states.

“How we respond now to climate change will be one of the defining moments in humanity, much like industrialisation and global commerce. And yes, I see the connection, but this isn’t going to go away, so I’m surprised carbon credits don’t get more attention.”

Maybe now is the time to explore the market.