BofA Calls Out Liquidity Barriers as Bankers Await CO2 Deal

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(Bloomberg) — In the market for carbon credits, a game-changing global deal looks closer than ever, according to Bank of America Corp. 

“We may be on the verge of seeing a breakthrough,” said Abyd Karmali, managing director, environmental business advisory at Bank of America. 

Karmali is among senior bankers specialized in trading carbon who’ll be monitoring talks in Azerbaijan this month, where the COP29 climate summit will be held. There, negotiators will try to move closer to an agreement to let countries trade carbon reductions with other nations and corporations, under a framework known as Article 6.4. 

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“It’s a really important market,” Karmali said.

Article 6.4 would also provide an alternative to the so-called voluntary carbon market (VCM), which Karmali says Bank of America has been treating with a degree of caution due to its lack of liquidity. 

The VCM, through which companies including Volkswagen AG, Telstra Group Ltd. and TotalEnergies SE have purchased credits to offset their CO2 footprints, sank more than 20% in volume last year to just $1 billion, according to MSCI Inc. That followed a string of investigations alleging widespread greenwashing.

The upshot now is that “there’s just not enough liquidity,” Karmali said. “The segment has dropped considerably over the last two years, and it’s been pretty awful for those involved more directly.”

A final deal on Article 6.4, meanwhile, “could lead to supply standardization and improve global liquidity of global carbon markets,” said Layla Khanfar, research associate at BloombergNEF. These are “both valuable stepping stones towards a carbon credit market BNEF estimates could be valued at over $1 trillion by 2050.”

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What BloombergNEF Says:

“The creation of new standards for carbon credits has elevated efforts to implement a global carbon trading mechanism overseen by the United Nations. But the new guidance appears to be a less robust version of that which already exists. Even if rubber stamped at November’s international climate summit, there is still a long way to go in operationalizing a mechanism first mooted in Article 6.4 of the 2015 Paris Agreement.”

Click here for the full report by BNEF’s Layla Khanfar.

Carbon credits are supposed to represent 1 metric ton of emissions that have been avoided, reduced or removed from the atmosphere, which is achieved through investing in projects in areas such as reforestation. Often, project owners will seek to sell credits before they’ve been created, as a way of securing financing to pay for things like tree planting. 

As a model of financing within the VCM, Karmali says BofA is steering clear. That’s because there isn’t the necessary “certainty about supply-demand dynamics,” or even how to gauge the real market value of such credits, he said.

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Like other big Wall Street firms, Bank of America is keen to get a foothold in the wider market for energy transition products. Earlier this year, its global head of commodities trading, George Cultraro, said the bank was expanding its presence in gas and power markets as well as in the trading of environmental products in response to client demand. 

Bank of America is still willing to include carbon credits procured on the secondary market in its overall “portfolio of solutions” for clients, Karmali said. And the bank is exploring financing structures for carbon-credit project developers. 

There are currently high-level efforts in place to address the risks associated with trading carbon credits on the VCM. These include new US guidelines to restore confidence in the market, which Treasury Secretary Janet Yellen has said could become a “powerful ally” against climate change if done right. 

In September, the US Commodity Futures Trading Commission released guidance on carbon credit derivative contracts. And the CFTC recently charged Ken Newcombe, the former chief executive of a carbon-credit project developer, for allegedly making misleading claims, a move it said underscores its “commitment to vigorously fight fraud” in the VCM. Meanwhile, the Integrity Council for the Voluntary Carbon Market, an industry-led standards body, is in the process of determining which credits will be able to carry its quality label.

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Despite those efforts, companies are still retreating for fear of being embroiled in greenwashing scandals. 

Karmali, who spoke during the COP16 biodiversity summit in Colombia, said the financialization of many of the themes being discussed at the biennial summit remain challenging. That also applies to efforts to promote so-called biodiversity credits, which are similar to carbon credits. Instead of offsetting their carbon footprint, companies use biodiversity credits to compensate for things like construction that destroys natural habitats, or to make a voluntary contribution to nature conservation or restoration projects. 

“Innovative finance always attracts lots of attention while people try to figure it out,” Karmali said. “My personal view is it’s way too early to tell what the trajectory’s going to be with this. I don’t think of it as a secondary type market.” 

(Adds BNEF comment.)

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