Ratings play a significant role in the voluntary carbon market (VCM) space. ISFI spoke to Ronan Carr, the chief research officer at BeZero Carbon, about the role of ratings in the carbon market, its recent issuance of the world’s first pre-issuance rating for a carbon project as well as the mispricing of carbon credits.
“Carbon credits can be very complex. It’s a very diverse, heterogeneous market and outcomes can really vary from project to project. What ratings provide is an opinion on how effective each different project is, allowing for all those differences and complexities,” Ronan shared.
“As carbon markets begin to mature, we are moving away from the binary perspective on carbon projects where either a credit was created or it wasn’t,” Ronan explained. “We are now seeing that the quality of carbon credits is probabilistic and varies significantly across projects.”
Taking the view that quality is probabilistic, the value of credit ratings is to give an opinion on where a given project falls on the quality scale. According to Ronan, the ratings provide a way to manage risk and build portfolios that can drive credible claims.
Carbon credits are an outlier compared to most other asset classes as there is a relatively low correlation between the value or price of the carbon credits and their quality or carbon efficacy.
“In most other asset classes, whether commodity or other financial asset classes, higher quality usually commands a price premium. So that has been an inefficiency and to some extent a failure of the carbon market.”
In contrast to quality being rewarded, the carbon market has typically seen volume being rewarded. For the market to scale, achieve true impact and be successful from a commercial perspective, it is going to need to reward quality, Ronan explained.
With the intense focus on integrity, Ronan also believes that ratings play a role in generating investment in carbon projects. “Ratings are one way to try to manage that supply-side quality question.”
For newer markets or newer project types, accessing ratings is a way to seek an external independent opinion and provide a perspective on quality and carbon efficacy that has currency across the global market.
Understanding where a project benchmarks in the quality spectrum within that region and globally will be key for players entering the market, Ronan shared.
While generally credit ratings for carbon projects provide an independent perspective on the quality of the carbon credit post-certification, BeZero Carbon is expanding its offerings to include ratings pre-certification and pre-issuance.
According to Ronan, it is estimated that up to three to five times as much activity takes place for carbon credit projects pre-issuance compared with post-issuance. This includes corporates taking out long-term offtakes, the signing of long-term pre-purchase agreements as well as investors investing in these projects.
The ex-ante ratings are designed to serve these stakeholders as a complementary rating tool to use at the earlier stage of the project lifecycle from the design and concept stage of a project up to the issuance of the credit.
This is an excerpt from an interview with Ronan Carr, the chief research officer at BeZero Carbon. Listen to the full discussion on IFN OnAir.