In recent years, the vintage of a carbon credit – the year in which the corresponding abatement activity occurred – has become one of the defining attributes of perceived quality (and price) in the verified carbon market. But is newer really better?
Carbon Growth Partners CEO Rich Gilmore explores…
Ordinarily, in an article such as this, one articulates a series of points and counterpoints, ideally supported by data, and then expresses an opinion or conclusion at the end. But with attention spans ever-shortening, I’m going to lead with the spoiler: for Paris-era carbon credits, vintage is not a helpful quality attribute. It may actually be contra-indicative of climate impact, and buyers in the market should be careful not to confuse “quality” with “utility”.
Let’s dig into this by asking and answering some key questions.
Firstly, what do we mean by Paris-era carbon credits?
Paris-era carbon credits are simply those that help to meet the goals of the Paris Agreement. That means credits generated after the Paris Agreement was adopted by 196 Parties at COP21 on 12 December 2015. For practical purposes and to align with other policy instruments like the United Nations CORSIA initiative, we take Paris-era credits to mean abatement outcomes delivered on or after January 1, 2016.
Why does this date matter?
Because by definition, we can only meet the goals of the Paris Agreement by investing in outcomes that were achieved after the agreement was made. (Note: that doesn’t mean pre-Paris credits have no utility, they just have different use cases, which we will explore later).
How big is the price premium?
In some cases, very big. Refer to the two charts below, using February 2024 benchmarkets provided by Quantum Commodity Intelligence. The charts show pricing by vintage for a basket of Verra REDD+ projects, and for a specific high-quality REDD+ project, the Keo Seima wildife sanctuary in Cambodia, managed by the NGO Wildlife Conservation Society. You can see that for intra-Paris-era credits, the premium is significant and is some cases, extreme. Also notable is that the price premia within the Paris-era window is greater than that between the Paris-era and pre-Paris windows. For example at Keo Seima, the price spread between 2017 and 2018 is more than 100%, while the spread between 2016 and pre-2016 is just 8%. For reasons we will explore, this makes zero sense.
Is there a basis for this premium?
There is no objective scientific, technological or governance reason to explain a price premium for carbon credits within the Paris-era window.
If there is no basis for the premium why does it exist?
As is often the case in the absence of objective rationale, there are two culprits: human psychology, and group think. As CarbonPool‘s Nandini Wilcke recently wrote on LinkedIn: “The continued insistence that vintage matters is in my view a sign that people are grasping anywhere they can for perceived quality differentiators, regardless of whether what they land on actually has anything to do with quality”.
To demonstrate, let’s break down three of the most commonly-cited explanations for the “newer is better” phenomenon.
i). The exchange-traded ‘vintage roll’: In July 2023, Xpansiv and CME Group changed the contract spec of the nature-based N-GEO from a fixed 2016 start date to a rolling six-year start date, in which the oldest eligible vintage will ‘roll off’ the contract and into the exchange’s ‘trailing’ contract. At face value this would give older credits less utility, but that ignores the scale issue: at the expiry of the December 2023 contract, there were just 1,762 contracts (1.762 million tonnes) exchanged. That’s around 1% of the credits eligible to be included in the basket. To be a contributing factor, the futures contract spec would need to be a very small tail wagging a very big dog.
ii). Registry standards are improving: That’s true but in the VCM that change is almost always incremental and only occasionally transformational. Let’s look at the category most afflicted by vintage preference: forest carbon and in particular REDD+. As the timeline below shows, the VM0007 REDD+ methodology has been incrementally updated since its inception, but none of those changes:
- Change the fundamental nature of the methodology and its application
- Are aligned with any of the vintage price premium windows
It is not until the introduction of VM0048 in 2024-25 that we will see the kind of transformational change that would explain a price premium.
iii) MRV is getting better: That’s also true, but it doesn’t help explain a price premium. Baselines are set ex-ante (and reviewed infrequently) and performance is measured ex-post. Through ratings agencies likeSylvera we can now see vintage-by-vintage performance. As such, price premiums could be – and are – paid for better project performance overall (and even perhaps on a specific vintage/performance basis) but this does not explain a newer vintage premium per se.
Overall, along the way a few people decided that newer is better and absent a more coherent explanation, the rest of the market just followed along.
If newer is not better, how should we think about this instead?
We need to keep in mind what Simon Puleston Jones and others describe as “the time value of carbon“. That is to say, the longer a carbon emissions avoidance outcome has been delivered, the more impact it has had, and that this impact compounds over time. Consider two carbon credit vintages side-by-side, one from 2020 and one from 2018. Compared to the 2020 credit, the 2018 credit has delivered:
i) Two more years of compounding climate impact, in which emissions were avoided or removed.
ii) Two more years of proven track record from the project, its host community and host country
iii) Two more years of food security, water security, habitat and biodiversity.
iv) Two more years of avoided permanence risk.
As such, if anything an older Paris-era credit could be more valuable than a newer one. It should certainly not be worth less.
It is also worth nothing that vintage preference only afflicts the internationally verified carbon market. In the Australian ACCU market for example, vintage is not even mentioned in market bids and offers.
What does all that mean for prices?
At Carbon Growth Partners we are firmly of the view that the vintage spread has over-corrected and that over time, project-level quality, and the rigour of the issuing standard will become much more important than vintage. That’s especially true with the implementation of The Integrity Council for the Voluntary Carbon Market (ICVCM)’sCore Carbon Principles and the REDD+ transition to VM0048.
And with a higher integrity bar across the board, utility will become as valuable as quality in the market. As alistair mullenfrequently points out, only “Post-Paris” credits (those issued from 2021 onwards) will be usable in Article 6 markets and compliance initiatives like CORSIA Phase 1. That DOES NOT mean those credits are higher quality, but it DOES mean there are specific additional use cases that can enhance their value.
Then what should participants do?
That’s a lot to digest, so let’s break the potential pathways for companies into the three use cases for vintage windows:
- Pre-Paris (pre-2016) credits: Use these to offset historical emissions (i.e. emissions from 2015 and earlier), corporate emissions for which no contemporaneous ‘net zero’ claims are being made, and for ‘retail’ / ‘personal’ emissions, again where no claim is being made
- Paris-era (2016-) credits: Use these for contemporaneous emissions reductions and claims, from a portfolio of vintages, projects, project types and countries. See the approach taken byBain & Companyas an example. These can also be used for allowable compliance purposes, such as the Colombian carbon tax and CORSIA pilot phase.
- Post-Paris (2021-) credits: Use these for contemporaneous emissions reductions and claims, from a portfolio of vintages, projects, project types and countries. These can also be used for more compliance purposes than Paris-era credits, such as the Singapore Carbon tax, CORSIA Phase 1 and Article 6 (subject to corresponding adjustments etc).
In summary
Carbon markets are complex enough without the need to add extra quality attributes where none exist. If you are a buyer, just buy and retire Paris-era credits from reputable, ICROA-approved standards and put post-2015 vintage newness out of your mind as a driver of quality. Your stress levels and the climate will thank you for it.
