[6]

There is a premium for long term contracts and for projects which can be marketed as being of environmental significance.

We are in a period of energy transition and yet the world’s demand for energy continues to grow. We are seeing a change in the energy mix and how we handle the pollution including not only offset and changes in how we do things, but also the creation of carbon sequestration technologies.

The language is that of energy and mining finance with projects having lives like that of an oil field or mine. The legal documentation looks like a forward foreign exchange transaction with multiple settlements. ISDA documentation is used. Most contracts have a fixed volume of tonnes of CO₂ offset but an element of floating price set annually. Commercial long-term contracts vary on settlement terms.

If a project is on a national register, it cannot be on an international register – no double dipping allowed.

The value of the carbon credit is shared between

• The land owner
• Local indigenous people
• Operators (like staff) / Managers
• Investors – setting up a transaction requires a minimum investment of USD 200,000
• Consultants (mostly fees)
  1. Registrars
  2. Verifiers
  3. Lawyers
  4. Bankers
• Taxes to governments such as EVA
• Traders…

The Market

Given that most developed countries as well as energy exporting countries cannot generate enough domestic carbon credits, they are looking to effectively buy them in other countries. This practice has existed for more than 30 years with Northern European countries buying forests in Canada, Australia, New Zealand and elsewhere. The rules have changed and there is now pressure to conform.

In 2022, Projects RH is seeing the demand for voluntary natural carbon credits is being driven by the Europeans but most importantly has been copied by China and there is an expectation that the USA will follow.

Whilst there are five designation registry companies for carbon credits the two clear leaders are Veera[7] and Gold Standard[8]. Our preference will be to work with one of the two leaders. Both of these entities are not for profits located in Switzerland. The registry sets very highest standards in addition to those which have come out of international conventions. Each of the registries is authorised Validation and Verifiers, plus other technical experts to accredit projects.

What is being sold is units of one ton of CO₂ equivalent. In effect a party that burns fossil fuels emits CO₂ amongst other things and to be carbon neutral needs to acquire one ton of carbon credits. Carbon credits are created in several ways and many projects attract multiple sources:

• leaving forestry untouched 20 years
• rehabilitating land to its natural way
• changing the use of land for examples:
  1. – stopping the grazing of cattle and hence reducing the production of methane
  2. – replacing ageing plantations with natural vegetation
  3. – adding trees to pastures to improve the pasture (reduce fertilizer and soil erosion into the water system).
  4. – planting new long-life tree including
     1. avocados
     2. palm oil[9]
     3. almonds
     4. coco

• reducing the burning of fossil fuels by:
  1. implementing solar panels
  2. the collection of wind power
  3. the collection of river flow energy (small hydro)
  4. planting long life trees for soil conservation of farms
  5. building railways to replace trucks
  6. insulation to reduce energy usage

There are many other opportunities to improve the environment and gain recognition.

There is a constant stream of new projects gaining registration. A budget for registration would be USD 200,000+. It is therefore common to say that we are looking for a project with at least 5,000 tonnes per annum and of contract of 10 years. Most parties are looking for 20 year contracts but the market trays as little as one year. At Projects RH we expect a suitable project will need 25,000 t/pa for 10 years per project but we will need to be flexible.

Carbon credits are awarded at the end of the year where a project has delivered its commitment. Again, this is independently Validator and Verifier[10] and the results of the Validation and Verification sent to the registrar. (This work is undertaken by engineers and not accountants.)[11] The registrar then confirms that the credits have been earned and awarded. Payment is generally due to months after the anniversary.

Most projects incur costs not only in the establishment but in meeting the requirements for registration, and it not only includes paying fees to the registry and Validation and Verifications but also such expenses as land management and the prevention of poaching. Investors do invest in such projects. Much of our work will be involved in calculating the returns.

We must at all times work with the party who owns or controls the land and is officially recognised by government as the land controller/owner. In addition, we will need to work with indigenous people.

Why Now

National markets for carbon credits have existed across Europe for over a decade and in more recent years in other countries including Canada and Australia. These are national markets and as such the carbon credits have to be created locally. Most developed economies, and particularly energy exporting countries or countries that export processed goods (such as aluminum) need to demonstrate that they have the same business cost structure as countries which have a carbon credit scheme. In 2021 Europe announced that it would levy a tariff if a supplier could not demonstrate that the energy used in what they produced was covered by verifiable carbon credits.

COP26 held in Glasgow in late 2021 saw the international adoption of an official International Environmental Reporting Standard (IERS). The IERS was adopted by the International Accounting Standards Board (IASB) which effectively means all international companies need to report the area environmental performance. This action effectively put into place Chapter 6 of the Paris Accord (2015) (COP21).

The result of the above is that many international clients are looking for carbon credits not only for the energy they use but all the consequences of the product. For example, the purchaser of gas from Malaysia is asking for not only the gas or the gas company to supply carbon credits for using the gas.

This global scenario has other countries formally adopt the position of Europe or move towards it. These countries include Japan, Canada, Korea, China….

Projects RH’s interest in working in Viet Nam came from Viet Nam being one of the forerunner countries in the design of the Sustainable Development Goals (SDG) since the Rio+20 Conference in 2012 and has been a pioneer in the inclusion of the 2030 Agenda in its planning instruments, such as territorial development plans and CONPES 39181, which establishes the implementation strategies of the SDGs at the national level (United Nations Development Program, 2018).[12]

The drivers are:

• Reducing CO₂
• Protecting the environment
• Sustainability
• Maintaining bio-diversity
• Improving local communities
  1. Economics
  2. Skills
  3. Education
  4. The role and status of women

The Market Rules

All parties involved must find legally binding agreements. One of these agreements is a contract to sell the carbon credits in the form of the contract between the intermediary and the buyer and the intermediary and the seller is only ISDA swap agreement. Such agreements are common in the oil industry, commodity sales (gold, maize, cotton…) and in the interbank foreign currency markets. Again, this gives all parties concerned a sense of professionalism and legitimacy. It is a cost.

Projects not only need to be registered, with the register reviewing how the process has been completed. Veera and Gold Standard have a series of standards for different projects and purposes. In VNCC Veera main tool is VCS-AFOLU. It starts with a baseline study e.g.;

Completion includes the application of a well-documented methodology such as MDL AR-ACM0003 (A/R Large-scale Consolidated Methodology – Afforestation and reforestation of lands except wetlands).

Pricing of VNCC

Whilst VNCC are traded at the short end, one year, on The Chicago Board of Trade with a current price of USD 15/t, most purchasers / investors are looking for a deeper understanding of the source and involvement with the community. Many of the large global corporates now have specialised procurement departments which check the validity and ferocity of the carbon credit. They do not wish any more embarrassment about a sham – not only will they face issues with their accounts, their bankers and their host governments they run the risk of huge negative publicity. They would much rather spend more and gain a carbon credit which they are flat proud to include in their annual report or more importantly see their client include in their annual report.

Most projects with a 20 year life generate some early extra offsets and then tend to flat line in years 5-20.

Conclusion

We see Projects RH as a facilitator. It is a market with huge potential as Western countries look to carbon neutrality by 2050 and in most cases by 2030.

Our role will be to find projects and work with a seed funder to gain investors. Investment is needed to get registration and without registration the VNCC are worthless.

Our goal is to remain an innovator in the market and to work on a long-term basis with our clients. We share the view that both the demand and price of carbon credits will increase over time but now is the time to become active.

We see a great future in VNCC and to know we have done something for our world.

Until next time.