In the last decade, renewable-energy project developers have benefitted from signing long-term offtake agreements with corporate electricity buyers — known as Power Purchase Agreements (PPAs).[1] Something similar seems to be happening in the carbon credit market, especially where nature-based projects are concerned.
According to MSCI Carbon Market analysis, the number of multiyear offtake deals for nature-based credits publicly disclosed by corporations set a new record with 10 new deals signed in the first half of 2024. Specifically, there has been a focus on offtakes involving “removal” credits, with nine of the 10 new deals involving solely removal credits. These are projects that aim to take CO2 out of the atmosphere, typically by reforesting degraded land, and the length of these agreements can often be 10 years or more. The lengthy terms can mean a total commitment size of many millions of tonnes of CO2, and many millions of USD.
In an offtake agreement, carbon credits are delivered over a number of years, at a fixed or variable price that is paid upon delivery. Such structures have become more common for engineered carbon dioxide removal (CDR), a category that includes direct air capture and bioenergy with carbon capture and storage (or BECCS). This is different than a “spot” transaction where credits that have already issued are bought and delivered immediately.
Number of publicly reported nature-based offtake deals
The growth of this type of deal is a bright spot within a voluntary carbon market that is experiencing a period of mixed fortunes. On the positive side, the number of companies setting climate targets that, explicitly or implicitly, will require carbon credits has been hitting new highs. However, the volume of voluntary credits used by corporate buyers has been relatively flat for the last three years, with subdued average credit prices and limited fluctuation.
A growing trend
The 10 nature-based offtake deals disclosed in the first half of 2024 was double the number in the whole of 2023. These have included Tullow Oil plc’s agreement with the Ghana Forestry Commission in May to implement a REDD+ program to deliver more than 10Mt of carbon credits over 10 years by preventing the deforestation of tropical forests. The arrangement is designed to bolster Tullow’s 2030 “roadmap” for net-zero Scope 1 and 2 emissions.
Another major deal, announced in June, saw Microsoft Corp. agree to commit to buy 8Mt of nature-based removal credits between now and 2043 from BTG Pactual Timberland Investment Group (known as TIG). TIG’s program of projects totaled USD 1 billion, including the Microsoft deal. The project focuses on the conservation, restoration and planting of deforested and degraded properties in selected regions in Latin America, including the Cerrado biome in Brazil, one of the most biodiverse seasonally dry ecosystems in the world.
Other, somewhat smaller, deals have featured French utility ENGIE, for 5Mt of nature-based removal credits over the 2030-2039 period from Catona Climate, a carbon credit intermediary, and Microsoft’s commitment to buy 1.6Mt of removal credits over 30 years from a reforestation project in Panama.[2]
It’s not just single companies entering into these kinds of deals. Groups of firms are coming together to form buying clubs that aggregate expertise and financial commitments. Most recently, in May of this year, the Symbiosis coalition of Google LLC, Meta Platforms Inc., Microsoft and Salesforce Inc. committed to buy up to 20 Mts of nature restoration credits by 2030. The partner companies stated: “The goal of the coalition is to send a strong demand signal to accelerate the development of high-impact, science-based restoration projects that will advance progress on global climate goals.”[3]
Benefits for both parties
The reasons parties arrange long-term offtake contracts, whether for renewable electricity or for nature-based CO2 removal credits, boil down to “certainty.” For the project developer or operator of a portfolio of projects, such deals provide confidence that a customer is there for its credits for many years ahead, and that revenues are secure. This is important for developers looking to invest significant sums of capital upfront.
From a buyer’s perspective, a long-term deal to buy credits from a project gives the corporate buyer reassurance that it will have access to a high-quality stream of carbon credits for years into the future. And if the deal is at a fixed price, then the cost of the transaction is known for years ahead, which may also boost the company’s credibility as a sustainable organization.
The access to future supply, in size, of high-quality projects is particularly critical in supply-constrained project types, such as afforestation/reforestation/revegetation (ARR) and CDR. Offtakes also reduce the time and expense required for project due diligence; it can be done once, as opposed to every time in the case of annual spot purchases.
These transactions are often used for carbon projects in the early stages of development (i.e., pre-issuance and pre-validation) and are sometimes combined with up-front payments, referred to as pre-purchases or advanced market commitments.
What about the challenges?
Any long-term arrangement requires confidence on both sides that the financial health of their counterparty will be robust, and that it will be able to honor the contract for its full term. This introduces the notion of “delivery risk.”
Delivery risks vary significantly based on the specific developer context, project type and country, and can arise from a number of factors. These include failure of the project developer (e.g., insolvency or fraud), development risk (e.g., verification/methodology issues), political/regulatory risk (e.g., nationalization/expropriation and other forms of government intervention) and quantification risk (e.g., if actual emissions reductions are less than predicted).[4]
There are ways of trying to manage delivery risk via clauses in the contract that free the buyer from their obligation if the seller does not produce the credits on schedule and to the required quality. MSCI Carbon Markets’ comprehensive approach to delivery risk is explained in “MSCI Carbon Projects Ratings Methodology.”
Looking forward
The current trend toward companies engaging in offtakes for carbon credits may well continue as it gives a higher level of certainty for both buyers and project developers than the traditional spot market. Removal projects, both nature-based and engineered, may see a lot of this activity, given their attractiveness to net-zero strategies and their high up-front capital costs.
But such offtake arrangements do not suit all potential carbon-credit buyers, especially those with smaller budgets and nearer-term objectives. As a result, there is still likely to be a role for the spot market going forward, providing immediate access to a wide range of credits.