Scaling Global Climate Solutions
Core-GEO and the Next Phase of the Voluntary Offset Market
by Russell Karas, Xpansiv Head of Carbon Market Development
A cultural shift has rippled across the global economy, sending every corporation, university, and government scrambling to address climate-change risks. It’s a movement that environmentalists have dreamed of, and an opportunity that Xpansiv market CBL has planned for.
The clearest path to immediate action involves voluntary emissions offset credits—a way for firms to help finance emissions-reduction projects while they determine how best to implement long-term, sustainable practices.
Historically traded directly in the over-the-counter market, there is frustration about how emissions offset credits are priced relative to other vintages, project types, and geographical locations. To remedy this, CBL developed the Standard Instrument Program (SIP) to define specifications for standardized contracts that enable market participants to transact baskets of high-quality offset credits with similar attributes—the quickest way to reliably scale without sacrificing quality and integrity.
The concept of standardized commodities has been used to build liquid commodity markets for decades. Once liquidity is pooled under these SIP contracts, there are myriad benefits to the marketplace:
- Increased price transparency
- More efficient execution
- Broader access to markets
- Increased participation
- Improved ability to manage long-term price risk
- Ability to anchor specific projects or niche credit pools to benchmark prices
The past 12 months have been transformative with the introduction of pioneering standardized contracts. In Q4 2020, CBL launched the Global Emissions Offset™ (GEO®), the first standardized voluntary emissions contract. For participants to transition from project-specific credits to a SIP contract, they needed confidence in the quality of the bundled credits. This was a significant change in behavior, as firms were used to spending months conducting due diligence on specific projects while simultaneously trying to decide what types of credits fit their unique approach.
The legitimacy and integrity of the underlying credits in the GEO comes from the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA)—designed by the International Civil Aviation Organization (ICAO)—to instruct airlines how to achieve carbon-neutral growth beyond 2020. Absent broader international guidance, many non-airlines have also been using the criteria outlined in CORSIA to screen offset credits.
Market participants quickly took to the GEO contract, which was listed on Xpansiv market CBL and allowed for delivery of CORSIA eligible credits from leading registries: Verra, Climate Action Reserve, and American Carbon Registry. Demand quickly emerged for an associated exchange-cleared GEO futures contract, which CME Group launched in Q1 2021. As liquidity developed and participants became confident in the SIP concept, the GEO not only priced deals directly, but was also used to mark similar transactions at a differential.
Following the fast adoption of the GEO contract, CBL launched an Agriculture Forestry and Other Land Use (AFOLU) SIP contract in Q2 2021, the Nature-Based Global Emissions Contract™ (N-GEO™). Like the GEO, this contract follows a leading market standard to ensure buyers are confident receiving any project type that meets contract specifications. The N-GEO allows for delivery of AFOLU credits issued through Verra’s Verified Carbon Standard (VCS), which accounts for more than 90% of large nature-based transactions. The contract only includes projects with co-benefits—such as improving biodiversity and aiding local communities—by requiring at least one of Verra’s Climate, Community, and Biodiversity (CCB) accreditations.
With the C-GEO contracts and N-GEO live and trading, firms can cover nature-based and tech-based credits through benchmarks contracts that account for approximately 230 million offsets. Not only could participants use CBL’s intuitive trading platform to buy and sell project-specific credits, but they could also trade SIP contracts directly, buying at scale with no counterparty risk, or use them to help price project-specific credits. Spread opportunities also emerged as the GEO excluded large forestry projects from the Verra registry, which are covered under the N-GEO.
CBL Monthly Carbon Volumes
While a substantial portion of the voluntary emissions markets was accounted for under the GEO and N-GEO, market participants were still actively transacting in non-GEO and non-N-GEO credits. Demand started to mount to have these other segments covered under a more transparent and efficient SIP contract.
At the same time, demand in the offset market continued to accelerate. According to Ecosystem Marketplace, the voluntary emissions market crossed $1 billion in value for the first time in 2021, which was more than double the prior year’s value. More than 110 million offset credits were transacted through CBL during this time. Despite this tremendous growth, many market participants were still working to define what criteria their own organization should follow to purchase offset credits.
After a year of meetings and working groups between its 250+ members, the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) created a governance board comprised of leading Non-Governmental Organizations (NGOs) and private-sector participants from around the globe in October of 2021. The newly formed Integrity Council for Voluntary Carbon Markets (IC-VCM) recently listed its initial recommendation for Core Carbon Principles (CCP), with the goal of ensuring “carbon credits that deliver additional, high-quality emissions reductions with real environmental and social impact [that] will allow the market to scale with integrity.”
The culmination of the acceptance of the SIP construct through the GEO and N-GEO, the continued rise in global demand for offset credits, and initial CCP guidance has led to the creation of the latest benchmark in CBL’s SIP product suite: the Core-Global Emissions Offset contract (C-GEO).
C-GEO was designed to align with the Core Carbon Principles and provide the market with a SIP contract that covers high-quality, non-nature based or “tech” based credits from the Verra registry. While the GEO was estimated to have a deliverable supply of 34 million, the C-GEO contract has an underlying market three times that size.
CBL is also introducing another innovation with the C-GEO contract to provide long-term certainty by rolling the six-year vintage period in the middle of each year. This means that the oldest vintage in the contract will be excluded in June of each year, when a new vintage is added. For example, the initial listing is for 2016–2021 vintages, and in June of 2022 the eligible vintage years will roll to 2017–2022. The ability to add newer vintages means the contract will evolve as registry standards and buyer demand changes over time.
To accommodate this rolling vintage mechanism, a companion contract, dubbed C-GEO 1, will be launched simultaneously with the C-GEO. It will accommodate older credits, including those that roll off the C-GEO as the vintage range advances. The C-GEO 1 will provide benchmark liquidity, price discovery and other benefits for these vintages. The pool of credits deliverable into the C-GEO 1 instrument is estimated at 57 million, bringing to the total for the two contracts to more than 160 million credits.
C-GEO on its own is a testament to the evolution of the voluntary market, but an even more important aspect of this launch is that it provides a clear roadmap to the creation of an asset class for standardized voluntary emissions credits.
With the C-GEO, C-GEO 1, and N-GEO contracts live and trading, firms can cover nature and technology-based credits through benchmarks contracts that account for approximately 230 million offsets. And the GEO will continue to serve as a premium product that is well vetted in the voluntary space and can be used for compliance under CORSIA.
After working with market participants, registries, and groups like the TSVCM, CBL now has a path to offer more specific contracts to the market that are anchored in benchmark C-GEO and N-GEO contracts. Like every other major commodity market, this will help participants trade more niche markets or put on a more specific hedge, while utilizing the liquidity of a benchmark contract.
The road to standardizing the voluntary emissions market has been bumpy and circuitous, yet we stand on the verge of a transition to a more transparent and open global emissions market. Despite this progress, legislation, technological innovations, and buyer preferences will evolve in the coming years. Xpansiv and its markets and data products will continue to be flexible to adapt to these changes, and we will continue to employ market-based mechanisms like offset credits to help mitigate climate-change risk.
Although this pivotal next step in scaling voluntary markets will be faced with plenty of challenges, one thing is for certain—we’re finally on the right path.
The largest voluntary carbon exchange, CBL provides an open electronic venue for accessing these standardized markets. Transacting through the CBL platform allows firms to mitigate counterparty risk, as CBL holds credits and payment before any trade is executed. CBL’s API connectivity into the major offset registries—Verra, CAR, ACR, GS—enables the easy execution of bundled standardized contracts and project-specific contracts on the same platform. And CBL’s EMA portfolio-management tool offers a single, intuitive screen to schedule across multiple registries, making it simple to navigate the complex matrix of shifting rules and positions as the world’s carbon markets continue to grow and mature.