Rising investment in carbon credits creates a boom period for brokers

When a potential buyer approached a group that restores Myanmar’s endangered mangroves to buy the credits used by the companies to offset their carbon emissions, they were told the tokens had run out.

Carbon credits could be purchased through a reseller but at a hefty markup – $30 each compared to $15 quoted by the Worldview International Foundation, the environmentalist. The price was almost three times what the reseller had agreed to pay WIF for the credits in the first place.

Carbon credits have exploded over the past 18 months as corporate buyers seek to improve their environmental credentials. Mark Carney, UN climate envoy, said at the recent COP26 summit that offset programs could bring “$150 billion to . . . emerging and developing economies of the world”.

But the market is opaque and unregulated, with dealers in the form of intermediary brokers accused of profiting from environmental causes.

“Offset projects are typically touted as having both emissions reductions and development benefits for poorer communities,” said Kamal Kapadia, co-founder of Terra.do, a climate educator. “But if we can’t find out who the money is really going to and how much is siphoned off along the way, claims of development and poverty alleviation look suspect.”

Each credit represents one tonne of carbon permanently avoided or removed from the atmosphere. The idea, which took hold in the early 2000s, is that the cash generated goes to climate projects, often in developing countries.

As the market can be difficult to navigate, buyers often go through intermediaries who help them identify and buy the credits. However, with brokers often reluctant to disclose pricing structures, it can be difficult to know how much money the buyer is actually going towards emissions reductions.

Laura Martin, a professor at the Williams College Center for Environmental Studies, said there was “surprisingly little data” on how the estimated at $1 billion that went into carbon offsets last year was spent.

While brokers “strive to make the process ‘frictionless’,” buyers were “unlikely to wonder where that money is going. . . [and] how it’s spent,” she said, adding, “Who benefits financially from carbon offsetting?

Aerial photo of a deforested area near Sinop, Mato Grosso State, Brazil
A deforested area near Sinop, State of Mato Grosso, Brazil © Florian Plaucheur/AFP/Getty Images

There is nothing illegal about what brokers do. They insist they are important for connecting buyers with sellers, who may not have any marketing experience. Others say they help get offset projects off the ground — which can be a long and expensive process — by offering funding and expertise.

Mike Korchinsky, founder of Wildlife Works, a developer of forestry projects, agreed that brokers were important, especially early on when demand was limited and prices low. “It was about trying to attract a dealer who could make your project attractive,” he said.

But some developers wonder if the brokers offer good value for money. An East Africa-based developer said some brokers charge big markups for “not much value”, describing middlemen as “absolutely extractive”.

Andrew Dreaneen, head of alternatives at asset manager Schroders, said the amounts of money paid out to developers were “completely unstandardised”. Information about where the money went was “hard to get. . . we need more transparency”.

Typically, developers either receive a percentage of the price at which the broker sells the credits, or a fixed amount per credit, regardless of the selling price.

EcoAct, a climate consultancy and intermediary, told a potential buyer that “typically 85-95%” of the money paid for the credits “goes to the project owner”, according to emails provided to the Financial. Times by Unearthed, a Greenpeace affiliate. publication, and Source Material, a nonprofit investigative group.

EcoAct offered the potential buyer carbon offsets from forestry projects in Peru, Brazil, Kenya and the UK for £15-25 each. But Michael Greene, who developed the Brazilian project, said he sold the credits to EcoAct the previous year for a fixed price of $2.75 each.

EcoAct said these figures were “misleading” and “the suggestion of large and unfair markups at the expense of project developers is false. Factors influencing price, market dynamics and the services provided must also be considered,” the company said.

Myclimate, the not-for-profit reseller in the WIF example, said it took a risk by accepting an upfront, fixed price for the credits in 2018. Its higher selling price, from 2020, covered marketing and administration expenses, and factored in the potential cost of having to find alternatives if something went wrong, he said.

The group pointed out that 80% of the revenue it receives from credit sales goes into a fund used to buy offsets and help develop projects.

South Pole, another broker, also has a fund to support new projects. Renat Heuberger, co-founder, said his group was better able to back projects than direct investors, who would demand higher returns. South Pole said it typically keeps 10-20% of the sale price on credit.

Market participants generally agree on the usefulness of brokers, or at least on a kind of exchange of carbon credits. But they say greater transparency is needed to help correct the power imbalance between developers and brokers.

A handful of resellers such as fresh effect opted to publish details of the discounts they are making on the deals, while some developers, emboldened by rising prices, began demanding better terms.

Jo Anderson, director of developer Carbon Tanzania, said it was imperative that communities were “fairly compensated for the work they do to protect our global ecosystems”. He added: “Transparency is extremely important for carbon finance to work effectively.”

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