Alternative asset manager Kimmeridge has published a white paper calling for a standardized rating system for carbon credits. The proposed system, similar to the bond market, would quantitatively assess the additionality and durability of carbon credits. This would provide greater transparency and allow buyers to make more informed decisions about the offsets they are purchasing. Additionally, it would incentivize developers and sellers to provide high-quality offsets by offering them a premium for their credits.
The paper argues that companies committed to decarbonization should use high-integrity offsets to drive internal change. It emphasizes the importance of reducing carbon emissions across all sectors to combat climate change. However, the current carbon credit market lacks transparency, simplicity, and volume, making it difficult to compare different technologies and projects.
The proposed rating system would address this issue by evaluating the environmental integrity of carbon credits based on their additionality and durability. These two factors are considered the primary drivers of value for carbon offsets. The system would assign ratings to different categories of carbon offsets, including direct air capture, point source carbon capture and storage, and nature-based solutions. This would allow for a standardized and consistent way to compare the integrity of offsets across categories, which is currently lacking in the market.
The paper suggests that the implementation of a standardized rating system would create a level playing field for carbon removal developers and buyers. It would incentivize the flow of capital into the most economical carbon removal projects and accelerate price discovery and carbon removal. The ultimate goal is to create a mature and unified carbon credit market that can effectively incentivize companies to remove carbon and contribute to the transition to clean energy.
Kimmeridge is an alternative asset manager focused on the energy sector. The firm’s expertise in the field, as well as its experience in founding a nature-based carbon offset developer and partner called Chestnut, informs its perspectives on the need for a standardized rating system for carbon credits.
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