A Review of the Carbon Markets

Roman Dubczak: Hello, everyone. I’m Roman Dubczak, Deputy Chair of CIBC Capital Markets. I’d like to welcome you to a webcast summarizing a recent carbon summit, as well as a snapshot on the state of the current carbon markets.

Today, the imperative for carbon reduction and removal couldn’t be greater. According to researchers, up to 9 billion tonnes of carbon dioxide annually need to be removed by mid-century from the atmosphere if the world is to meet the 1.5°C Paris Agreement target. Science will also tell us that the world will overshoot 1.5°C, unless investment and policy match ambition. Carbon markets provide a critical source of financing for emissions reduction and carbon removal activities needed to accelerate this urgent transition to a low carbon economy.

While carbon markets have expanded rapidly in recent years, they’ve also faced challenges that have hampered their full potential. It’s therefore essential that carbon markets continue to evolve the conversation on supply side quality, pragmatic approaches for corporate carbon credit use, and new financing channels, and foster deeper engagement with market participants to achieve scale.

Following the success of our inaugural Carbon Summit last year, CIBC hosted a second annual Carbon Summit this past October to continue to provide a platform for engagement and exchange on key carbon markets issues as it reaches an inflection point. This year, the summit brought back industry experts to share insights and practical examples of how to navigate the evolving carbon markets and their nexus with energy transition. Recognizing the growing role that carbon markets play Recognizing the role that carbon markets play in corporate decarbonization strategies and the need to scale up rapidly.

Here to give me further insights on the carbon markets and key takeaways from the summit are two leaders of our carbon market franchise at CIBC. Ryan Fan, Managing Director and Vice-Chair at Global Markets. And Tom Heintzman, Managing Director and Vice-Chair, Energy Transition and Sustainability. Thanks for joining me, guys. Ryan, perhaps will start with you today. Why don’t you just give us a bit of an overview of how the Carbon Summit went, just this past October and some takeaways from that?

Ryan Fan: My pleasure. Thanks Roman. Look, the Carbon Summit brought together industry experts to share insights and practical examples of how to advance decarbonization efforts and the right technology, policy support and financial structures. CIBC is naturally a facilitator and provider of capital. As such, we have a role to play in catalyzing climate action as a business imperative. The Carbon Summit attracted key decision makers in all areas of decarbonization. We had CEOs, CIOs and high level government officials in the room.

Overall, some 200 Canadian and international delegates attended, including carbon project developers, technologists, capital allocators, policymakers, market infrastructure providers, and many others. As is a hallmark of CIBC, we focused the discussion on the topics that will help our clients achieve their ambitions, which in this case is the acceleration of decarbonization activity.

The event included ten panel sessions that were moderated by leaders across the CIBC Capital Markets franchise. Some of the key discussion topics included, “How the evolution of carbon markets is driving decarbonization”, “The many forms of carbon dioxide removal technologies”, “Financing First-of-a-Kind, or better known as FOAK, carbon projects”, “How capital allocators make decisions to fund a variety of decarbonization initiatives”, “The emergence of government carbon management strategies in Canada and the US”, “Opportunities in carbon dioxide point source capture, utilization, transportation and sequestration,” and “Considerations for carbon credit buyers.”

The program also included two distinguished addresses. First, was a keynote delivered by Dr. Julio Friedmann, Chief Scientist of Carbon Direct. Dr. Friedmann discussed the urgency and opportunities in scaling carbon removal, and storage to meet our energy transition goals. A fireside chat was also hosted with The Hon. Jonathan Wilkinson, Minister of Energy and Natural Resources at the Government of Canada. Minister Wilkinson reflected on collaboration between public and private sector that has helped to catalyze investments that will capitalize on Canada’s competitive advantage in the climate tech and carbon management sectors.

Look, at this time last year, we were simply contemplating the provision of capital at scale to carbon project development. But now, a year later, we’re starting to see significant term demand that is helping us to unlock project level financing to bring these solutions at scale. The discussions at this year’s summit celebrated some of those early successes, and looked towards building on that success to scale investment and project development further.

Roman Dubczak: Yeah. Thanks, Ryan. The summit was really well-received by our clients. We had very many clients attend as well. So, the turnout was, I think, stronger than it was probably even last year. And some very interesting insights. And it’s remarkable how much can happen in one year in a nascent industry, but continues to progress, as well. So, Tom, turning to you, there have been a lot of developments in the market in the last year, some of which are driving some new momentum. So, some aspects of carbon markets went sideways and others picked up momentum. Maybe touch on some of those and give us an update on how that’s all evolved.

Tom Heintzman: Sure Roman, as you mentioned, the overarching theme that I observed at this year’s summit was the degree to which the carbon markets have matured over the last year since our inaugural Carbon Summit in 2023. I observed this maturity in a number of different areas.

One example, and we can touch on a few others, is that the standards by which carbon credits are judged and the standards by which companies who make claims about their use of carbon credits are judged, have matured. On the supply side, so the generators of credits, historically, there’s been a proliferation of carbon programs, registries and methodologies.

That created some confusion in the market. And there were certainly poor quality credits that were being marketed, credits which did not reasonably lead to a reduction of carbon in the atmosphere. In response, the Integrity Council for Voluntary Carbon Market, that’s a mouthful, known as the ICVCM, was established at COP-26. The role of the ICVCM is to certify both the carbon credit program, think of that as some of the major registries being ACR, ART, Gold Standard, VCS, as well as the methodologies for different types of credits.

In other words, how these credits are produced. You can think of a methodology as the standards set by the certification program on which types of carbon capture projects such as landfill methane capture project or a reforestation project must meet in order to be valid. This year, ICVCM announced its first Core Carbon principles, which are the standards by which to judge programs and methodologies. The ICVCM has started reviewing the existing programs and methodologies to assess whether they meet the CCPs, the Core Carbon Principles, or not.

There are a lot of programs and methodologies, so the ICVCM has so far only made it through a small minority. But nevertheless, setting those standards this year was a big mark of progress. On the demand side of the carbon credit market, so governing all the buyers and what claims they can make, there was an equally significant milestone. Like programs and methodologies in the supply side of the market, there had been a proliferation of different claims that companies would make when they purchased carbon credits, some clear and transparent, and some less so.

In response, a similar effort, like the ICVCM on the supply side, began on the demand side, leading to the founding of the Voluntary Carbon Markets Integrity Initiative, or VCMI. The VCMI released its Claims Code of Practice in the summer of 2023, aimed at enabling companies to make claims about their use of high quality carbon credits. This past summer, summer of 2024, the VCMI announced the launch of a public consultation on the development of the proposed Scope 3 claim, which will offer a mechanism to enable companies to take greater action on Scope 3 GHG emissions, that they have been unable to reduce.

And this will also help to support and grow wider participation in high integrity, voluntary carbon markets. The long and short of all of that is, that over the last year, there’s been substantial progress in the way that both the quality of carbon credits on the supply side, and the clarity and transparency of claims by buyers on the demand side, are assessed.

Roman Dubczak: Thanks, Tom. And that’s the short version of how much has changed over the last year or so. Thanks, quite a bit there and, yeah, good job just summarizing all the comings and goings. So, Ryan, Tom mentioned the overarching theme of maturity that’s emerging in the carbon markets. How is that impacting buyer demand?

Ryan Fan: Yeah. Thanks, Roman. Tom did mention, you know, the development of frameworks such as VCMI’s Claims Code of Practice, which is helping to provide guidance to buyers on using credits responsibly. Large corporates are actively purchasing carbon credits, including advanced purchases of Carbon Dioxide Removal, or CDRs as they are commonly known, And there is increasing involvement from funds and the private sector in signing carbon removal offtake agreements. That’s new. There’s also government sponsored capital that is helping to crowd in additional private capital, as we well know. Many of the companies who presented at the summit announced big deals in the past year. These demand signals are driving further market momentum.

You know, good examples are Microsoft, as a significant purchaser of carbon credits, representing a large portion of the all time volume of contracted, durable CDR. The Canada Growth Fund, which was in its infancy last year, is catalyzing private sector through its involvement in various financing structures, and they’re quite flexible in how they approach it, which is helpful. And then there’s numerous offtakes that have been signed by companies like Alaska Airlines, Shopify and Stripe, and they’re demonstrating the willingness of companies to enter into long-term contracts for carbon management solutions.

Additionally, both the US and Canadian governments have established carbon removal purchasing programs, with Canada having announced their procurement program a day before our Carbon Summit. While the CDR market has, to-date, kind of, relied on, you know, a concentration of 40 or 50 corporate buyers. This does serve to illustrate that further education is needed to attract a wider range of purchasers to scale this market.

Now, as part of the carbon markets evolution, essential risk management and allocation tools, largely borrowed from traditional financial markets that we well know, are also emerging, that can help buyers to mitigate carbon credit purchasing risks. Products such as carbon ratings and carbon insurance.

Roman Dubczak: – Yeah, so, I’m taking away that there is, quite a bit of buyer activity forming under the guise of the new higher quality regime, if you will. So, it’s going to be a quite an interesting year going forward, I think, and it’ll be interesting to see how the pipeline continues to build going forward.

So, Ryan, on the theme of demand, one of the goals of the Carbon Summit that we just held, was to help promote awareness and understanding of the market ecosystem. Preceding the summit, your team hosted a carbon markets education seminar, which is a pretty cool idea and, you know, allowed people to sit around in a room and workshop and talk about how did that go, and, you know, did it surface any ideas for us?

Ryan Fan: The Carbon Markets Education Seminar was hosted by CIBC in collaboration with the Voluntary Carbon Markets Integrity Initiative. The intent of it was a workshop,

Roman Dubczak: – Yeah.

Ryan Fan: – to bring like minded corporates together, to actually talk through how to engage carbon markets as they think about using carbon credits to offset any emissions that they can’t currently abate. So, the purpose was to support this cohort of corporate buyers who are interested in navigating the carbon markets. Participation spanned companies across a variety of industries.

In addition to a discussion on the various types of carbon credits and drivers of quality and price, we covered emerging themes in the voluntary carbon markets in the coming year. VCMI also walked us through how to properly make claims on the climate positive activity of buying and retiring carbon credits against a residual emissions profile. Helpful. This is clear that these discussions need to be broadened across a larger swath of companies, and at various levels within these companies. As a reminder, companies who have made net-zero commitments have an interim target to meet in 2030. In order to meet those targets, there’s lots of work to be done, including companies needing to ensure that they are properly accounting for all their emissions. They need to start acting on plans to decarbonize. And then finally, think about how they’re going to offset emissions that they can’t abate in the near-term. Overall, the message is that it’s imperative that companies get in motion today.

Roman Dubczak: All right. Tom, Ryan highlighted some observations around demand side activities. Are there areas around the market that are evolving in tandem, meaning the supply of credits? And if so, like what are just some highlight takeaways?

Tom Heintzman: And a little more succinct than my ICVCM..?

Roman Dubczak: – Maybe? Maybe it’s longer. I don’t know.

Tom Heintzman: Sure, I mentioned the maturation and standards before, and Ryan talked about the growth in the buyers and offtake. But this year, there’s also been an incredible maturation in carbon capture technology, Canadian companies in the space, the development of projects in the space and the financing of carbon projects.

There are many examples of the advancements of projects, technologies and companies that were showcased at the summit, including Wolf Midstream, which spoke at the summit and built some of the early carbon transportation infrastructure in the country, is expanding its carbon transportation infrastructure UNDO, a very successful UK enhanced rock weathering company, which also spoke at the summit, significantly grew both its offtake and its production over the course of the last year, becoming one of the largest globally.

Another example is Capsol, from Finland. Another speaker at the conference, which signed an offtake agreement with Microsoft, very large agreement, and received environmental permitting for its Stockholm Exergi facility. Carbon Upcycling, another panelist, captures carbon in cement, and it’s nearing the completion of its first commercial scale facility. And at the earlier stage of the spectrum, CarbonRun, a Canadian developer, raised an equity around this year and has started producing carbon credits.

So, right across the spectrum, you’re seeing evolution from very large producers, like UNDO, and all the way down to much smaller producers On the financing side of the equation, over the last year, we’ve also seen big progress. At the summit we heard from the Canada Growth Fund, which has made a significant number of bespoke investments over the year, ranging from venture capital at one end of the spectrum, to carbon contracts for difference, to project financing.

Examples of other recent equity raises in the space include Arca, a young company out of British Columbia that processes mine waste to capture carbon dioxide through mineralization, and ION Clean Energy, for which CIBC led the financing. And of course, over the last year, the rules on investment tax credits were released in Canada, which are to some degree analogous to the 45Q and the other 45 series tax credits in the United States.

Ranging from carbon capture and transportation, to carbon utilization and transformation, these projects and technologies have advanced beyond the early stages of development, and are now being implemented and scaled up in real world application. However, all that good news aside, or maybe not aside, but with an asterix, a note of caution. While there’s been much progress in financing carbon capture, transportation and storage over the last year, with elections looming in both the United States and Canada, there’s also regulatory uncertainty, which has a chilling effect on the development of carbon capture projects.

Roman Dubczak: So, Ryan and Tom, one last question for you both, recognizing that the carbon markets play an essential role in driving climate action, how can CIBC further help our clients navigate this evolving ecosystem? And Ryan, over to you first.

Ryan Fan: Sure. Coming from a trading floor background, I naturally look at carbon markets through that lens. And as such, we’re looking to develop financing solutions for both the supply and demand sides in this equation, using traditional trading floor tools. On the supply side, we look to help project developers structure top co-equity and project level equity, and debt. And then on the demand side, we look to help investors and companies finance their balance sheet investments in the space.

Tom Heintzman: Building on Ryan’s points, I think there’s a few opportunities to take a number of our well-established financing pads and apply them to climate tech and carbon capture and storage, or CCS. We already have a strong investment banking practice that raises capital for growth-stage climate tech companies. Our Innovation Bank is a leader in North America and lending to startups, and there’s an opportunity to expand the lending to climate tech. Same with trade finance, equipment finance, project finance. But, broadening your question, there’s also an important role for Canada to play in growing the carbon markets.

Canada has the necessary natural resources, the storage space underground for carbon dioxide, often referred to as ‘the pore space’, the rock formations and mine tailings that companies like UNDO and Arca require. The rivers and oceans that companies like CarbonRun and Planetary require.

The biomass that bioenergy projects, like those at CO280 work with. Canada also has the expertise in geology, in drilling, in pipelines for transportation, and Canada’s capital markets already have extensive experience in financing mining, oil and gas, and power, which have a lot in common with the carbon capture and sequestration projects. In summary, in my view, this represents a significant opportunity for Canada as we have the geology, the reservoirs, rock tailing, mines and agricultural land, and the talent to become a significant net exporter of carbon removals.

Roman Dubczak: Great insights. And, you know, this is just a synopsis of what’s going on. There’s just so much happening, and I’m pretty excited about how this is all going to evolve over the course of the next year, and years, despite it being a tough topic that we all need to address, you know, immediately.

Thanks, Ryan. Thanks, Tom. As I referenced in the beginning, the carbon markets play an important role in companies decarbonization strategies. At CIBC, we’re committed to helping our clients meet their net-zero ambitions, managing exposures and opportunities in decarbonization. Whether it be financing, project development or the monetization of carbon assets.

Many of the market developments we are highlighting today play a big role in shaping and advancing how we achieve this ambition. I want to thank you, our clients, for spending some time with us today. We hope you enjoyed today’s session and we look forward to speaking with you again soon. Thank you.