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What is Carbon Streaming?

J.S. Held’s Inaugural Global Risk Report Examines Potential Business Risks & Opportunities in 2024

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Introduction

As business leaders around the world look toward reaching net zero greenhouse gas (GHG) emissions by 2050, it is becoming clear that carbon offsets will play at least some role in every business decarbonization strategy. As a result, carbon offset prices are increasing as more and more companies look toward this GHG mitigation tool. This raises concerns around the economic viability of carbon offsetting. As more buyers enter the space, it will become increasingly crowded. If offset prices are pushed too high, it could undermine the ability of corporations to meet their net zero targets.

Companies cannot simply stockpile lower-price carbon offsets today for use in the future. That is because credits that exist today are labelled with a particular “vintage year,” which represents the year in which the emissions reduction or removal activity took place. Older vintage credits are less credible than newer vintage credits. This perception of lower quality is driven by quantification methodologies becoming more rigorous over time and weaker additionality claims associated with emission reductions that took place many years ago. Analysts suggest that carbon finance should be directed toward new emissions reduction projects, rather than rewarding past performance that has already been accounted for in past emissions inventories.

The solution to this stale vintage problem is carbon streaming. Instead of purchasing a large volume of offset credits in the spot market and saving those for the future, carbon streaming allows for a set number of offset credits to be delivered to the buyer on an annual basis. This ensures that the buyer is not left with trying to use old vintage offset credits which could attract criticism and undermine the company’s sustainability initiatives. Carbon streaming has the added benefit of locking in prices at today’s levels. If you think carbon offset prices are going to increase, the buyer can enter into a carbon streaming agreement, lock-in annual delivery at a set price, and eliminate spot-market exposure.

In many cases, the payment received by the offset seller is a lump sum. In some cases, credits are purchased on an ongoing basis similar to a forward contract. In these cases, the forward price for credits may have some escalator built in and may not precisely represent today’s prices. For example, a carbon streaming agreement might say I have the right to buy 10,000 offset credits on an annual basis starting today at $20 per credit and increasing at 10% per year. Next year, I would have the right to purchase 10,000 offset credits at $22 per credit, the year after that the price would be $24 per credit, and so on. This is a great deal for the purchaser if they expect that offset credits are going to appreciate in value at a rate that exceeds 10%. Everything in the world has a cost, and a carbon streaming agreement is no different, but reducing the longer-term price risk of your company’s carbon neutral program could be a small price to pay to lock-in certainty.

Major Players in Carbon Streaming

Having covered the basics of how a carbon streaming agreement works and what the motivations are for entering into such an agreement, we now look to cover some of the players that are active in this corner of the carbon market.

Carbon Streaming Corporation is a Canadian-based company that recently announced it would be seeking to list its shares on the U.S. NASDAQ stock exchange. The company says this will allow investors to gain exposure to a burgeoning new asset class. Last year, the company announced it had entered into an agreement to take offset credits from a forest carbon project in Indonesia developed by a company called InfiniteEARTH. The company also has projects in Brazil, Mexico, and the Democratic Republic of Congo. The company continues to eye opportunities worth over $135 million in both the Americas and Africa. After entering into a carbon streaming agreement, Carbon Streaming Corporation looks to turn around and sell these in the spot market. The strategy is driven by what they see as a strong market. As such, they are not looking to enter into multi-year agreements and are instead looking to give their investors spot market exposure.

Carbon Neutral Royalty (CNR) is another Canadian-based firm that is working in the carbon streaming space. The company recently announced an agreement with Worldview International Foundation that will commit it to take delivery of offset credits from over 100,000 hectares of tropical mangrove forest. CNR’s upfront payment to the project owner will allow for this restoration to be completed and for credits to begin to be generated. The credits will be split equally between CNR and the communities participating in the project. The price for credits generated from mangrove restoration can be worth well over $34 per tonne in the marketplace. Last month CNR, entered into a partnership with a procurement platform called Abatable that will act as an exclusive distribution partner for CNR’s credits.

Another Canadian-based company operating in the carbon streaming space is Vida Carbon. Vida Carbon has recently entered into an agreement for credits from an African-based efficient charcoal cookstove project. Vida provides upfront capital to offset project developers in exchange for future revenue (take a royalty), a percentage of future offset production (take the streaming credits), or locking in the price of future production (an offtake agreement with a set volume). Vida plans to go public in 2022. ClearBlue Markets is the founder and major shareholder of Vida Carbon and ClearBlue’s directors and senior staff serve as advisors.

Canyon Carbon is an American-based firm, headquartered in Reno focused on carbon streaming for Western U.S. rangeland projects. The company plans to develop the first phase rangeland carbon credit royalties streaming opportunity in partnership with Warm Spring Consulting. The voluntary emissions reduction projects would use existing protocols for soil carbon sequestration, focusing on the U.S. Mountain West. In addition to providing project owners with an upfront payment, Canyon Carbon may also provide additional payments paid to developers or intermediaries once credits are sold. Canyon Carbon is a spin out of Nevada Canyon Gold Corp. The company has pivoted into carbon streaming given the opportunity to supply the Nevada mining industry with carbon offsets and provide ESG solutions to mining companies.

Canyon Carbon is not the only miner turned carbon streamer. Carbon Streaming Corporation was previously known as Mexivada Mining Corp. before it changed its name and business strategy in 2020. CNR’s non-executive chairman is also the president and CEO of Metalla Royalty, a precious metals firm focused on streaming and royalties. Star Royalties Ltd. is another example of a precious metal royalty and streaming investment company that has recently branched off into carbon offsets. Not all carbon streamers are converted miners, however; Trimac Renewable Royalties is one such firm that purely focused on renewables and carbon-based revenue.

Conclusion

Carbon streaming offers companies with bold climate reduction targets the opportunity to reduce the offset price risk associated with achieving their corporate climate goals. Most voluntary carbon market forecasters project that offset prices are set to surge. Earlier this year, Bloomberg New Energy Finance (BNEF) released a report titled the Long-Term Carbon Offset Outlook 2022. BNEF analysis shows that by 2030, the market could become significantly under supplied and prices could soar to $223/tCO2e. This represents a significant price increase from today’s benchmark price of about $8.00 per credit.

If you are looking to reduce the price risk associated with purchasing voluntary carbon offset credits, experts can help with offset credit sourcing and commercial carbon streaming agreements, as well as assisting companies that are just starting out to understand their carbon footprint and identifying carbon abatement options.

Acknowledgments

We would like to thank Steven Andersen for providing insights and expertise that greatly assisted this research.

Steven Andersen is a Senior Vice President in J.S. Held’s Environmental, Health, and Safety (EHS) practice. Steven has spent over 17 years in the EHS industry, with specific experience in air emissions management systems, information management systems, and data integration. He commonly fills the role of sponsor on large scale implementation projects, consults on Environmental, Social, and Governance (ESG) strategy and data management, and has performed the role of solution architect on many air emissions system implementations. As the founder and chief executive officer (CEO) of Frostbyte Consulting, Steven was responsible for strategy, partnerships, and business development. Under Steven’s leadership, Frostbyte grew into a company that delivers ESG and EHS advisory and information systems globally across all industry sectors.

Steven can be reached at [email protected] or +1 368 209 1012.

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This publication is for educational and general information purposes only. It may contain errors and is provided as is. It is not intended as specific advice, legal, or otherwise. Opinions and views are not necessarily those of J.S. Held or its affiliates and it should not be presumed that J.S. Held subscribes to any particular method, interpretation, or analysis merely because it appears in this publication. We disclaim any representation and/or warranty regarding the accuracy, timeliness, quality, or applicability of any of the contents. You should not act, or fail to act, in reliance on this publication and we disclaim all liability in respect to such actions or failure to act. We assume no responsibility for information contained in this publication and disclaim all liability and damages in respect to such information. This publication is not a substitute for competent legal advice. The content herein may be updated or otherwise modified without notice.

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