The voluntary carbon market is at an impasse. Not the one you think.

Corporate buyers want credits representing real, permanent emissions reductions or removals. They want third-party verification, robust monitoring, clear additionality. Bullet-proof accounting. 

The impasse is not that carbon project developers are unable to do these things. The challenge is delivering all of this when the average spot price for a carbon credit is less than seven dollars a ton. At today’s prices, it’s just a tough business model.

Consequently, demand could significantly outstrip high-integrity supply between now and 2050. This isn’t good timing. Climate resilience requires more investment, immediately, in technological breakthroughs in carbon removal, safeguarding carbon sinks, and ramping up carbon sequestration. But credit providers point to systemic barriers including accessing capital, high costs of project development relative to credit prices, and the risk they take on in a volatile market where credits can take up to a decade to bring to market.

If you build it

To ensure predictable long-term supply, buyers have sometimes used offtake agreements, a contract to buy a given volume of credits from a developer over a fixed period at an agreed commercial structure.

But today, carbon buyers are experimenting with a new set of strategies that aim to fundamentally reshape market supply.

One such effort is the “advanced market commitment.” It’s an idea borrowed from vaccine development. Essentially, a buyer guarantees a market for a product that doesn’t yet exist. The US government used an AMC in 2020 to guarantee future purchase of 900 million doses of the COVID-19 vaccine, to encourage pharmaceutical companies to develop one. AMCs are a bit like an offtake agreement – on steroids.

Carbon buyers are experimenting with a new set of strategies that aim to fundamentally reshape market supply.

“AMCs aggregate demand, and signal to suppliers: ‘If you build it, we will buy it,’” says Julia Strong, Executive Director of the Symbiosis Coalition, an AMC focused on reforestation and agroforestry, backed by Google, McKinsey, Meta, Microsoft, and Salesforce.

The first carbon AMC was the LEAF Coalition, launched in 2021. LEAF pays governments in tropical forest zones for verified emissions reductions from stopping deforestation. It’s a “buyers’ club” of both governments (Norway, the UK, and – for now – the US) and business, including Amazon, Bayer, BCG, Capgemini, H&M Group and Walmart Foundation.

LEAF employs a clever structure built on its public-private nature: Donor governments guarantee purchase of a large volume of emissions reductions from forest governments at an agreed price, typically $10/ton. Companies in the coalition have the option to buy the resulting credits. If a company offers more than the floor price, the extra proceeds go to the forest government. Otherwise, donor governments pay for emissions reductions. Either way, there’s a buyer.

LEAF’s goal is to send a major demand signal from a critical mass of buyers to overcome barriers to scaling supply. It’s signing big deals: $60 million in its first pair of agreements with Ghana and Costa Rica, $30 million with Ecuador, $180 million with the State of Pará. Meanwhile, Frontier is using an AMC to scale emerging technologies and projects that permanently remove carbon from the air (as opposed to reducing emissions, LEAF’s focus). Its members include Stripe, Alphabet, Shopify, Meta, and McKinsey.

“AMCs can send a strong and immediate signal that there is a market for a product, and do so without picking winning technologies at the start,” Nan Ransohoff, Head of Climate at Stripe, explains.

For buyers, there’s strength in numbers. “Smaller buyers can learn from larger buyers with more experience and participate in projects they otherwise may not have,” says Strong. “Larger buyers recognize that their actions alone cannot expand the supply of and unlock lower cost financing for high-integrity projects.” AMCs also coordinate procurement, due diligence, and contracting with suppliers, lightening the load for buyers.

Show me the money

LEAF and Symbiosis are purchase guarantees for a point in the future. The American Forest Foundation is tinkering with the formula to fix a third barrier to credit supply: early finance.

“It’s extremely difficult to get third-party financing for these projects,” says John Ringer, Senior Director of Environmental Markets and Project Finance at AFF. Ringer says that new, stricter methodologies are welcome but inevitably increase project costs. “When you layer that reality onto the high cost of capital, the market can’t bear both the cost of capital and the cost to develop high-integrity dynamic baseline projects. So, we’re working on prepayment structures with corporate buyers.”

AMCs can send a strong and immediate signal that there is a market for a product, and do so without picking winning technologies at the start

Prepurchase contracts are effectively buyer financing, with interim payments linked to project development milestones. Buyers get a substantial discount when they prepay, Ringer adds. Frontier also allocates a portion of its spending toward prepurchases.

Market movement?

AMCs and prepurchase agreements are ongoing experiments. Their long-term impact on the carbon market remains to be seen. But it’s clear they’re concentrating demand. LEAF has a billion dollars in pledged demand. Frontier has similarly deep pockets; it’s already contracted more than $450 million, representing more than a million tons of carbon to be removed from the atmosphere. Symbiosis just closed its first RFP for 20 million tons.

Will we see buyers’ clubs for other markets where there’s uncertain demand, limited supply, and a solution set that’s still being worked out? One could imagine an AMC for verified biodiversity outcomes, for example, or for products made with waste fuels leftover from wildfire mitigation treatments. Send a big enough demand signal, and maybe entrepreneurs will follow.

One could imagine an AMC for verified biodiversity outcomes, for example, or for products made with waste fuels leftover from wildfire mitigation treatments.

“We sent an anonymous survey to our latest cohort of prepurchase companies, and 71 percent of founders said Frontier’s launch played a role in their decision to start a carbon removal company,” said Ransohoff.

Ringer agrees. “Projects are happening that wouldn’t have happened otherwise, and faster.”

Phil Brady, Executive Vice President at Emergent, said LEAF’s recent deal with Pará guaranteed $15/ton, reflecting upward pressure on prices. “If we can find market demand at that price, we’ll sign at that price,” Brady says. He expects to see further movement as more deals are done.

“LEAF is not intended to be the market. It’s intended to catalyze the larger market.”