How Futures Play A Role In African Forestry Initiatives

AT-A-GLANCE

• An active futures market provides improved price transparency for the voluntary carbon offset market

• Offset certificates delivered through CME Group global emissions offsets contracts included some generated by the Kasigau Corridor Project in Kenya

The Rukinga Wildlife Sanctuary in Kenya is home to over 50 species of large mammals and includes the main migration corridor between the Tsavo East and Tsavo West National parks. The sanctuary was developed on the site of a former cattle ranch, which was gradually reforested by environmental project developer Wildlife Works.

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The project has proved a significant success. Reforestation efforts have captured carbon and prevented habitat loss, while new jobs have been created for local residents, thereby reducing the poaching and illicit logging that had led to declines in biodiversity.

Carbon Credits

The valuable development work undertaken at Rukinga was financed by the sale of carbon credits. One of the world’s leading carbon registries, Verra, assessed the project’s positive impact on the environment under the terms of its Verified Carbon Standard (VCS) and subsequently issued carbon credits to the developer.

Once issued, carbon credits are transferrable and tradeable, allowing an environmental project developer to sell some or all of the certificates to firms or organizations that have pledged to offset their carbon emissions.

Energy companies, airlines and producers of consumer goods are among the most active buyers of carbon credits from projects like Rukinga. Entities with a strong environmental mandate, such as some cities and universities, are also present in the voluntary carbon market.

The growth in interest in offsetting carbon emissions, which is generally viewed as a complement to efforts to mitigate carbon production, was a hot topic at the recent COP talks in Glasgow. The greater global focus on the sector has led to a boom in the market for carbon credits, which are either bought and sold bilaterally or traded on spot platforms such as CBL.

The Futures Market Emerges

As the market for offsets grows, the next natural phase of market development was the emergence of a futures market for voluntary carbon. In 2021, CME Group launched two futures markets – global emissions offsets (GEO) and nature-based global emissions offsets (N-GEO) – to support the development of the voluntary carbon sector. In 2022, CME Group added its third product, the core global emissions offsets (C-GEO), which complement the existing contracts.

An active futures market allows project developers and offset buyers to hedge against the risk of price fluctuations for certificates, as well as to sell and procure certificates ahead of time for delivery in the next few years. Even if project developers don’t actively participate, an active futures market provides improved price transparency. Buyers and sellers know the current market prices of comparable projects and can price certificates accordingly.

This is a significant development in a market where price transparency has been a challenge in the past, including accusations that project developers were left short-changed by intermediaries.

In December 2021, CME Group reported a record delivery of 5,916,000 offsets through its physical delivery mechanism as market participants looked to offset their 2021 emissions profile. The certificates delivered in December included ones generated by the Kasigau Corridor project, the second phase of development of the Rukinga Wildlife Sanctuary.

From rural Kenya to the electronic marketplaces of Chicago might seem a far distance, but the role of exchanges and marketplaces is crucial in bringing buyers of carbon credits together with developers of exciting projects like Rukanga.

Exchanges’ ability to facilitate financing and risk management means that more projects can be developed, ultimately benefiting us all.

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