BMO Equity Research Hosts Voluntary Carbon Market Discussion at BNEF

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Rachel Walsh, CFA April 28, 2023 Research & Strategy

BMO hosted a round table discussion on the voluntary carbon market at the Bloomberg NEF Summit earlier this week. The session was oversubscribed, indicating a strong level of interest from both corporations and institutional investors. The need for a functional international carbon market remains clear; however, the path to getting there is somewhat opaque. At present, reputational risks appear to outweigh the rewards for potential corporate buyers and as a result, they may choose to sit on the sidelines for now. While we believe that thoughtful offsetting can still be done near term, it will require a certain level of expertise and trusted partnership with groups like BMO Radicle until standardization and official guidelines emerge in the voluntary space. As a result, these official guidelines could act as a catalyst for demand, along with ever approaching interim reduction targets. Below we highlight some key themes from the discussion.

Key Points

Why offset now? Corporate clients expressed concern that the rules around offsetting remain unclear, both in terms of volume and type, and are instead prioritizing internal reductions for the time being, an activity they are confident will be rewarded by capital providers (both debt and equity). However, corporates acknowledge that offsets will be entirely necessary to meet their long-term goals.

What would incentivize offsets near term? We believe that the risk/reward dynamics of offsetting need to come into balance to spur demand in this market. This could come in the form of standardization on quality and official guidelines for offsetting best practices. As a result, we believe that the combination of the IC-VCM and the VCMI could spur demand. That said, the details of both are not yet clear and may take time to become formalized (years). Corporate buyers can drive positive net impact today through the purchase of offsets and can leverage industry experts in the meantime to ensure they follow a sophisticated approach.

Are there other potential incentives? Ultimately, corporations need a clear indication from investors that the pursuit of offsetting (appropriately) will be rewarded. This could materialize through lower cost of capital for corporate leaders via lower cost debt and or premium trading multiples. While we believe this has been indicated for the pursuit of lower gross emissions it is not clear for the achievement of lower net emissions. Given the necessity of offsets to achieve global climate ambition, which we have published on extensively, we believe that this activity will eventually be benefited if carried out in a thoughtful and appropriate manner.

Reductions vs. Removals. It is clear that corporate buyers wish to prioritize removal credits and are somewhat apprehensive toward avoidance and reduction credits. While BMO recognizes that removals reflect higher-quality credits given their aspect of net negativity, the reality is that very few removals are available in the market today. In addition, removals projects will take several years for significant credit volumes to be generated (trees take time to grow and key technologies are yet to reach commercial scale). Emissions also need to be reduced and avoided to meet climate targets, and we believe credits that reflect this activity are completely necessary over the near-to-medium term. Again, clear indication from an official guideline on offsetting would help derisk the pursuit of these credit types, in our view.

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Research & Strategy April 28, 2023

Rachel Walsh, CFA Environmental Commodities Strategist, BMO Capital Markets

Rachel Walsh is the Environmental Commodities Strategist within BMO Capital Markets, focusing on market fundamentals for multiple environmental commodities to help …

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Research & Strategy April 28, 2023