If you’ve been following Klima DAO so far, you’ve probably researched carbon offsets and where you can get them. You’ll have noticed that there are many different project types, as outlined here, as well as different prices on a per tonne basis. With this post we’re going to dive a bit deeper into the current pricing landscape and explain what carbon offsets are classically used for.
What are carbon offsets used for?
Individuals and businesses purchase carbon offsets in order to counteract the negative environmental impacts of their own activities, actions and tasks. Importantly, carbon offsets provide critical financing for sustainability projects, including forest conservation and renewable energy generation. Since we’re all sharing the same atmosphere, one tonne of carbon reduced or removed from e.g. Australia has the same climate impact as one tonne removed from Alaska. In this way, regardless of where you are and where the projects are located that you support, you can help create positive environmental outcomes.
Who issues offsets and how is the market regulated?
There are two principle carbon markets: compliance and voluntary. The compliance markets are governed by public policy in individual countries, though there are examples where multiple countries come together to create a homogeneous market, as is the case in the European Emissions Trading System (ETS).
The voluntary carbon market (VCM), in contrast, is international and governed by standards institutions which set certification criteria, as well as organizations which regularly publish best-practice and monitor the market. The International Carbon Reduction & Offset Alliance (ICROA), is a non-governmental organization which has played a key role in the VCM over the past two decades. Additionally, organizations which develop standards and certification schemes such as Verra and Gold Standard are critical for onboarding the supply of carbon offsets into the VCM. As of this article’s publishing, Verra alone has facilitated the issuance of 728 million carbon offsets.
The Pricing Landscape
There are 30+ retailers of carbon offsets in the market today. We reviewed a few of the leaders in this space in the chart above and compared forestry project pricing in Latin America (as a reference point to set the comparison on more equal ground). As can be seen, offset pricing varies quite a bit. In fact, even the same project which may be supported by two separate retailers could have a different price, as the retailers themselves may charge different margins for the same tonnes.
Generally, the main stakeholders that impact pricing are as follows:
1) Landowners and those that control the project location (e.g. land/forest owners)
2) Project implementers and technical teams (e.g. tree planting crews)
3) Verification and validation bodies (VVBs) — the entities checking projects for adherence to specific certification schemes
4) Brokers/Financiers/Retailers (e.g. Carbonfund & Offsetra)
Moving forward, Klima will liaison with existing brokers and retailers and who are familiar with the DeFi landscape. This will help individual users and organizations move offset liquidity on-chain to make it available for other DAOs, DeFi platforms, and those wishing to add to the Klima supply.
The carbon market is extremely bullish. Over the past year there has been an explosion of interest from major corporations and businesses that are looking to internalize the price of their emissions while supporting carbon mitigation and removals projects. Concurrently, there have been a number of compliance markets in countries like Colombia which have drawn liquidity away from the VCM and thus driven up pricing. If you’d like to dive deeper into carbon market dynamics and the role Klima has to play, be sure to check out our previous blog Introducing KLIMA, a liquidity engine for the carbon markets.
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