Developing projects for the global carbon credit market is a potentially rewarding but risky business. Developers need to find the ‘goldilocks zone’ where projects meet ever-exacting quality standards and the economics make sense. They also need ensure that host country rules and regulations enable them to sell the carbon credits over the long term. A number of governments have been changing their tune on these rules recently, creating uncertainty for both buyers and sellers.
Trove’s newly launched VCM Country Opportunity and Risk Index now allows developers, investors and carbon credit buyers to comprehensively assess these risks. This country-level Index builds on Trove’s detailed country profiles and carbon market datasets, and complements Trove’s project-level integrity rating system.
This country-level Index is based on a detailed analysis of the climate policies, regulations and political risk in 20 countries hosting a total of 3,400 voluntary carbon projects and representing over 80% of all carbon credit issuances. A further five countries will be added in September.
The risk assessment examines and quantifies seven aspects of business risk (corruption, rule of law, land tenure, climate policy uncertainty, business environment, governance and political stability), and four measures of carbon trading risk (domestic market and taxes, trading restrictions, corresponding adjustments, and national registry issues). Gauging the level of the opportunity involves examining the Nationally Determined Contributions of each country under the Paris climate process, and the scope for international finance to ‘bridge’ the gap to enable that country to meet its objectives. There is also the ‘co-benefits’ opportunity to create a positive impact for the society and environment concerned.
Measures of opportunity and risk are then combined to create an opportunity to risk ratio for carbon project development. This helps developers take a balanced assessment of how to trade off the upsides and risks when considering investments in new territories.
This new tool sheds new light on risks and opportunities in developing carbon projects.
There is a stark contrast between the countries that offer the most attractive opportunities for voluntary carbon investments and those that offer the lowest risks. To some degree this reflects the fact that least developed countries need the greatest help in mitigating carbon emissions and protecting natural landscapes but suffer from high political and regulatory risk.
This correlation is not perfect however – some countries provide better risk-adjusted opportunities than others. The Democratic Republic of Congo (DRC) comes top of the list of 20 jurisdictions for the scale of the opportunity, with Tanzania second, Cambodia third and Zambia fourth. The three African countries score well because of the scope for international climate finance to bridge the ‘ambition gap’ of current policies, and the scope for projects to contribute to sustainable development and adaptation ‘co-benefits. But whilst DRC has a lot of opportunity, it is highly risky. This contrasts with Tanzania and Zambia which rank amongst the middle risk countries.
Amongst the developed countries, Canada and the US do not score nearly so highly on the opportunity index, coming in 10th and 17th respectively, but they come first and second on the risk index. This reflects Trove’s assessment that voluntary projects in those places face relatively low business and carbon trading risks.
Overall, Canada and the US still top the table, due to their low estimated risks, but Canada is well ahead of its southern neighbour from the relatively large gap between its current policies and its NDC targets. Panama and Tanzania come in third and fourth respectively, the former with greater opportunities and higher risks, and the latter with somewhat more modest opportunities but also lower risk. At the bottom of the 20 in terms of the opportunity-risk ratio are Ecuador and Peru.
The rapid growth in the voluntary carbon market has caught many governments off-guard, and no government yet has a clear plan on if and how to regulate these activities. For example, in Africa, as highlighted in our recent blog (here), in the last six months Zimbabwe, Kenya and Zambia have introduced taxes or export limits on carbon credits, following Indonesia’s lead last year. Malawi and Tanzania are mulling similar restrictions. These rules will evolve as the market reacts to their introduction.
The Trove opportunity and risks indices will therefore shift around in the future, as we incorporate the latest policy positions of governments. Later this month, Trove will launch an interactive dashboard that will enable clients to adjust the index weightings to suit their particular opportunity/ risk appetites.
Combining country and project risk assessments
This new country-level indices sit alongside Trove’s project-level integrity assessment. Together these tools provide a complete perspective on the opportunities and risks of developing different types of carbon credit projects. This in turn allows a more accurate assessment of the value of carbon credit investments, and the price of the credits they produce.