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Exploring the importance and market demand for ART TREE in the Voluntary Carbon Market (VCM).
Since its inception in 2018, the ART carbon standard (a standard comparable to Verra and Gold Standard), has made a remarkable impact by issuing over 33 million carbon credits to Guyana in the period spanning from 2016 to 2020.
The issuance of carbon credits to Guyana holds tremendous significance, marking a historic milestone as it is the first instance in which a nation has been granted carbon credits specifically tailored for voluntary markets. This is just the beginning!
The Brazilian state of Tocantins is poised to become one of the next frontrunners in issuing those type of carbon credits, actively seeking to offer an ambitious volume of 200 million ART credits in the voluntary market.
Moreover, it is expected that the young independent carbon standard will be able to issue many more credits to regions such as Amapá countries such as Costa Rica, Uganda and many more in the future.
What is ART?
The Architecture for REDD+ Transactions (ART) is a voluntary global independent program that takes charge of creating and implementing standardized procedures for accrediting emission reductions and removals stemming from national and significant sub-national REDD+ initiatives. Consider ART as a carbon standard such as VCS (Verified Carbon Standard) and Gold Standard which, latter to the latter, similarly to the latter, ART has been fully endorsed by ICROA.
ART has established a program, called The REDD+ Environmental Excellence Standard, or TREES, which governs the measurement, monitoring, reporting, and verification of emission reductions and removals in the forest sector with the aim of ensuring accuracy and reliability in environmental assessments.
Under the ART framework, countries generate verified emission reduction and removal credits, which can be traded in voluntary markets, transferred under the Paris Agreement to meet NDCs, and used as a donor pay-for-performance mechanism.
How strong is the market demand for ART credits?
To address this inquiry, we engaged in discussions with more than 30 companies actively involved in the VCM sector. Their collective perspective reveals a shared agreement: while the current demand has been relatively subdued to limited spot volume and uncertainties stemming from the implication of article 6.4 of the Paris Agreement , there is nontheless many players in the sector expect an imminent surge in demand, thus promising prospects for substantial future growth in the market.
On top of that, a further significant indicator of a rising market demand can be found in the initiative known as The LEAF Coalition initiative. Introduced in April 2021 and spearheaded by Emergent, this public-private collaboration has already garnered an impressive $1.5 billion in results-based financing. These funds are dedicated to protecting the tropical forest of the nations that effectively achieve REDD+ outcomes validated by ART. Such a substantial commitment truly highlights the significance and potential market demand for ART credits.
Notably, the LEAF Coalition has attracted support from prominent entities including BlackRock, McKinsey, BCG, Buyer, Delta, Salesforce, and Inditex, among others. Their involvement adds further weight to the importance and credibility of this endeavor.
An additional clue of market development emerges from the remarkable agreement forged between the renowned American independent energy company Hess, and the state of Guyana, which on December 2, 2022, announced their partnership.
Under this agreement, Hess committed to acquiring 37.5 million ART carbon credits directly from the Government of Guyana. These credits, sourced from both current and future issuances, will be purchased for a minimum total of $750 million (in average $20 per credit), as part of an agreement spanning from 2022 to 2032, solidifying a long-term collaboration between the parties involved. This transaction serves as a resounding testament to the escalating recognition and value attributed to these units. It vividly exemplifies the burgeoning significance and potential impact that ART TREES units could hold in the market.
Last but certainly not least, the noteworthy inclusion of ART TREES in the criteria for CORSIA Eligible Emissions Units significantly amplifies their importance. This recognition opens the doors for the aviation industry to effectively incorporate these units into their compliance strategies, enabling them to meet their targets with ease. This endorsement highlights the broader relevance and impact of ART TREES, reinforcing their position as a potential valuable and influential big player in the VCM.
How does ART works?
The eligibility criteria for participation in the program requires the participant to be a national government or a subnational government with approval from the national government. In the second case, Subnational accounting boundaries should align with one or more administrative jurisdictions, which are no more than one level below the national level. In order to participate, these subnational areas should encompass a minimum forest area of 2.5 million hectares.
Once the Emission Reductions (ERs) have undergone independent verification to ensure compliance with the TREES standard and have been approved by the ART Board, the Secretariat will issue serialized ERs to the respective country or jurisdiction in their registry account. It is important to note that mitigation reversal precautions are in place, and the maximum allowed level of reversal risk is 25%.
Additionally, there are specific environmental, social, and governance (ESG) safeguards that must be followed, such as ensuring that REDD+ activities align with the Cancun Safeguards. Furthermore, a validation process takes place after the first year of each 5-year crediting period, and verification is required in years 1, 3, and 5 of each period. Verification is optional in years 2 and 4, but no credits will be issued without verification.
The validation and verification bodies (VVB) involved in the process are accredited by the International Accreditation Forum (IAF) organization. These bodies are required to submit their applications to ART and undergo a COI (Conflicts of Interest) assessment during each verification. The Secretariat provides training and oversight to ensure consistency across the verification bodies.
Conclusion
ART possesses the capacity to issue a substantial volume of credits, potentially numbering in the hundreds of millions. However, the market landscape is evolving, with a diminished demand for REDD+ credits.
As a result, the effect on credit prices remains uncertain, particularly given Hess’s acquisition of credits at considerably higher prices compared to the prevailing in the VERRA REDD+ market.
The unfolding of this dynamic presents an intriguing scenario, influencing the future shape and dynamics of the market.
