US farmers are eager to enter the voluntary carbon market, but concerns about the validity of what is being traded is causing them to hold off from participating, according to Amanda Cain, a managing director at Société Générale, a French bank that runs one of the largest futures trading and clearing businesses in the world.
Her comments highlight a major challenge for the voluntary carbon markets. These markets grew rapidly from 2019, but growth stalled in 2022 as doubts arose about market integrity. Not all carbon credits are the same quality, and some public interest groups have accused the industry of “greenwashing.” The uncertainty is causing potential buyers to stay on the sidelines.
Speaking at FIA Boca on 16 March, Cain said some US farmers have begun exploring ways to sell carbon credits. By changing the way they farm—such as by reducing tillage or adding cover crops—they can reduce their emissions and hold more carbon in their soil. The more carbon they retain, the more credits they can sell into carbon markets.
More recently, however, controversy over the quality of these offsets has put a halt to this activity, she said. The carbon markets depend on registries such as Verra that validate how much carbon has been reduced. But some media reports have found problems with the validation methodologies, raising doubt about whether the claimed reductions actually occurred.
Until these concerns are addressed, farmers are in a "no man's land", she warned. It can take years of investment to make the switch into alternative methods of farming. Some smaller farmers are pushing again, but the larger players are in a "wait and see" mode until the cloud of uncertainty clears up.
Cain heads a team of commodity futures specialists at Société Générale working with companies that use futures to hedge their risks. Futures on carbon have been traded on exchanges for many years, but most of the activity has been in the “compliance markets” such as the European Emissions Trading Scheme. Those markets use allowances granted by governmental entities as the basis for futures trading.
Voluntary carbon markets – in which buyers and sellers voluntarily trade certificates that represent tons of carbon reduced or avoided – are relatively new. Although they have the potential to become an important tool in efforts to reduce emissions, the lack of standards is now a key obstacle to growth.
Guy Wolf, global head of market analytics at Marex, echoed Cain's comments about the need for standards. Speaking on the same panel at FIA Boca, Wolf said that to be successful, the voluntary carbon markets need to do more than just generate trading activity. They need to show that they direct capital into economic activity that reduces emissions. The compliance carbon markets have been successful in achieving that, he said, but the voluntary markets not as much. Establishing a better regulatory framework and improved transparency will be key to scaling up the voluntary markets, he added.
Marex, one of the top brokers in the commodity futures markets, has a team dedicated to supporting both compliance and voluntary carbon markets. The company also is getting into the business of generating carbon offsets. It is leading a mangrove conservation project in Southeast Asia that will start generating offsets this year.
Carbon markets are not the only area in the futures industry where standards are needed. Robin Martin, head of market development at the London Metal Exchange, commented that standards are crucial for building trust in any futures market. At LME, for example, there is a "whole ecosystem" of companies that measures the chemical composition of metals and provides certainty about purity. And the LME has set "responsible sourcing" standards to ensure that metals traded through the exchange are not produced in ways that violate human rights.
Although the LME is not directly involved with carbon markets, Martin said it is exploring a role in the development of “green steel” and other metals that are produced with fewer emissions. The exchange is not setting the standards itself, but it is providing a platform for the sharing of data. Mining companies can use the LME platform to disclose how much energy and water they consume. This information is crucial for buyers to distinguish among metals suppliers and for the development of a "green premium" to emerge, he said.