The following carbon market update was written by South Pole's Commercial Director - APAC John Davis for Market Advisory Group's April Carbon Monthly report.
A year plagued by the coronavirus pandemic might not seem like a good year for business, but when it comes to the voluntary carbon market, encouraging signs of demand from a diverse range of sectors are persisting.
2019 saw climate disruption play out across the world in many arenas. The streets were filled with protestors inspired by Greta Thunberg and the 'Fridays for Future' school strikes, the European Union launched the 'European Green Deal', and climate distress ravaged the world, with Australia's 'Black Summer' a case in point. 2020 was to be the year of action on climate change, which we saw reflected by a surge in demand within the voluntary carbon markets. How is this momentum lasting in times of economic crisis?
At the start of this year, we witnessed a surge in demand for carbon credits at South Pole. Companies fell under more pressure than ever to address climate change from governments, investors, boards, financial regulators, employees and—very importantly—consumers. Corporate climate action finally went mainstream, driving an influx of new buyers into the voluntary carbon market.
As CORSIA regulations solidified, corporate stakeholders such as airlines, oil and gas companies and others moved to secure high quality credits. Australia but also Asia saw increased demand driven by CORSIA, shipping and supply chain pressures. In tandem, we observed an awakening in North American sustainability awareness, with clients such as JetBlue and Delta committing to carbon neutrality. Demand outgrew supply and we saw pricing across most voluntary units increase 10-15%.
Such was the scene when the coronavirus hit and began crippling economies—and airlines. Here, our gut reaction at South Pole was to draw parallels with the financial crisis of 2008: in that year, voluntary carbon reduction and offsetting were all but discarded by the vast majority of companies. Previous sustainability commitments were cast aside, as businesses scrambled to protect the bottom line and governments financed a carbon-intensive recovery.
What we witnessed in March 2020 was markedly different from the immediate fallout of the GFC, highlighting new patterns that we expect to continue. We see a different categorisation of players in the market, with many new entrants as long-term drivers point towards an increasingly robust development of voluntary carbon markets.
Those clients with clear strategies and pledges both in Australia and beyond now largely fall into two distinct categories:
Interestingly, we have also seen a third strategy appear: relative newcomers to the carbon market are using this unique moment to understand the fundamental drivers of the voluntary carbon markets, along with global demand and supply trends. These clients are both major financials and industrials in nature that are beginning to recognise a clear shift in the world, where a sustainability strategy is critical and includes access to high-quality, long-term carbon offtake agreements.
With significant demand pushed down the curve, market prices are attractive in the short term. Business will bounce back, fuel prices will rise, airlines will fly again, and Australia's extractives industry will shift up a gear. At the same time, the fundamental drivers of climate action are here to stay and some sectors may even find climate conditions tied to emergency loans.
From our perspective at South Pole, the continued interest we see for carbon offsets and climate neutrality in Australia and globally indicates that 2020 is still firmly the year of climate action. Moreover, we believe that the next three to six months will be a good time to enter a market that enables companies to lower emissions and—even more critically—finance initiatives that not only remove carbon, but combine social and environmental benefits in local communities.
