How Credit Streaming Can Transform the Market for Methane Abatement

Abhinav Ganesh, Roberts Environmental Center at Claremont McKenna College

We invited students from Claremont McKenna College’s Roberts Environmental Center (REC) to provide their perspectives on key issues related to carbon markets. Here is a series of articles they have developed as part of a market research project in which Tradewater participated. These views are theirs and do not necessarily reflect Tradewater’s views — but in the interest of stimulating conversation we think they are valuable to share.

Upfront financing and market certainty are essential for developing the carbon offset market— credit streaming offers a potential financing model for project developers.

While the future of the global carbon offset market is difficult to predict, some sources project that the volume of credits traded is expected to cross 1 billion metric tons of CO2 equivalent (GtCO2e) by 2030, and surge to 5.2 GtCO2e by mid-century. These rapid demand increases are also projected to raise offset prices to an average of $224/ton over the next decade as the supply of credits catches up to spiking demand. While these projections ought to be treated with some skepticism, there is still a strong incentive for offset purchasers to find price stability in a market that is expected to undergo rapid fluctuation. As a result, many emitters with hard-to-abate emissions (most prominently in the technology sector), have resorted to individual offtake agreements with offset developers. These include a $10 million advance by Google to purchase direct air capture credits from Holocene, as well as a commitment by Frontier Climate, a consortium of technology and finance industry buyers, to purchase $1 billion in credits by 2030. These types of offtake deals provide significant benefits for both buyers and sellers: buyers gain long-term price stability and a secure supply of high-quality credits, while sellers receive the immediate flow of capital necessary to get their projects off the ground.  

What is noticeable, however, is that these offtake agreements are largely reserved for carbon removal projects, since the market leaders purchasing these offsets have sustainability goals that explicitly rely on carbon removal. While important, the removal market alone is nascent, and prices would remain at roughly $120/ton as late as 2050 for these credits. This indicates that a market very much still exists for providing high-quality offsets in other areas such as methane abatement and halocarbon destruction to buyers in industries with emissions that will be difficult to abate. Furthermore, this market could stand to benefit from the upfront capital and price stability that offtake agreements can provide. This is where credit streaming for high-quality, high-value projects such as methane abatement provides an enticing alternative. 

What is Credit Streaming?

The credit streaming model was developed in the precious metals industry as a mechanism for mining companies to quickly capitalize new projects. In these agreements, the purchaser provides the producer with upfront capital in exchange for the right to purchase a fixed quantity of the generated goods at a discounted price. Some of these deals also include royalty agreements that give the purchaser a percentage of the proceeds for all sales stemming from a project in exchange for upfront capital. This model has proven highly effective in the mining industry. For producers, being able to acquire upfront capital from streaming agreements instead of loans preserves the producer’s borrowing capacity, while guaranteed purchase prices minimize​s​ the potential shocks of price volatility. Furthermore, streaming agreements can act as a signal of confidence that may boost the developer’s share price and generate further interest in the project from outside buyers. Meanwhile, the streaming companies themselves have the advantage of being able to sell credits at a predictable rate by not being liable for cost overruns in project development. They are also able to diversify their holdings across a variety of different projects and industries, thus minimizing their exposure to volatility in any given market. The success of stream financing in the mining industry could be successfully replicated in carbon offsetting. 

Credit Streaming and Carbon Offsetting

In theory, the possibility that demand for carbon offsets could increase dramatically in the coming years would encourage buyers to purchase their credits earlier to escape future price volatility. However, buyers cannot simply hoard cheap credits produced today and “use” them towards their sustainability targets in the future. This is mainly because older credits are often seen as less valuable than newer credits due to the tightening of verification standards over time, as well as the difficulty of making claims of additionality when buying carbon credits produced long in the past. Here, the twin constraints hampering the offset market become visible: on the one hand, future prices of offsets are expected to increase rapidly, while on the other hand, buyers are disincentivized from over-purchasing in the short term. 

Credit streaming offers a solution to this problem that meets the needs of offset developers and buyers. It provides developers with the upfront capital and guaranteed buyers required to begin developing projects while also providing offset buyers with needed price stability and guaranteed supply. Since credit streamers purchase their credits at price points fixed well in advance, they are less subject to volatility than other buyers, which can offer a competitive advantage in volatile markets.  

Credit Streaming and Methane Abatement

Methane is a greenhouse gas that has a global warming potential 27 times that of carbon dioxide over a 100-year period — that means that even small amounts of methane abatement can go a long way towards preventing more global warming.  

​​One example of a methane abatement opportunity is the plugging of orphaned oil and gas wells. Orphaned wells are those where the company that drilled and operated them has either gone bankrupt or otherwise insolvent, leaving no corporation liable for plugging and any necessary remediation​. Tradewater, a B Corp and carbon offset developer founded in 2016, has become one of the first developers in the world to use carbon finance to plug high-emissions orphaned wells and eliminate uncontrolled health risks from them. Furthermore, plugging an oil well uses existing, proven technology to create immediate methane emission reduction impacts on a timescale far shorter than the years (or even decades) that other major offtake agreements require. The massive number of orphaned oil wells, the relative speed with which they can be closed with the right investment, and the high global warming potential of methane make these an important target for credit streaming. 

Takeaways

With upfront investments from streaming agreements, offset developers can make an immediate impact and bring high quality offset credits on the market quickly. The benefits could be enormous because greenhouse gas emissions abated today have a greater impact than those emitted a year from now. Furthermore, large volumes of quickly produced, affordable credits that maintain extremely high quality and integrity standards can bring stability to an offset market that has the potential to grow exponentially.  

Methane abatement through oil well plugging is one of the fastest ways for companies to make an impact— and stream financing could make this possible at scale while providing unparalleled benefits to offset buyers. 

Abhinav Ganesh

Abhinav is pursuing a BA in Philosophy, Politics, Economics at Claremont McKenna College, and is an analyst at the Roberts Environmental Center. He is primarily interested in renewable energy deployment and policy.

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Permanence

Emission reductions are considered permanent if they are not reversible. In some projects, such as forestry or soil preservation, carbon offset credits are issued based upon the volume of CO2 that will be sequestered over future decades—but human actions and natural processes such as forest fires, disease, and soil tillage can disrupt those projects. When that happens, the emission reductions claimed by the project are reversed.

The destruction of halocarbon does not carry this risk. All destruction activities in Tradewater’s projects are conducted pursuant to the Montreal Protocol , which requires “a destruction process” that “results in the permanent transformation, or decomposition of all or a significant portion of such substances.” Specifically, the destruction facilities Tradewater uses must meet or exceed the recommendations of the UN Technology & Economic Assessment Panel , which approves certain technologies to destroy halocarbons, including the requirement that the technology achieve a 99.99% or higher “destruction and removal efficiency.” Simply put, this means that Tradewater’s technologies ensure that over 99.99% of the chemicals are permanently destroyed. During the destruction process, a continuous emission monitoring system is used to ensure full destruction of the ODS collected.

Accuracy

Some carbon offset projects necessarily rely on estimations or assumptions when calculating the emission reductions from project activities. Forestry projects, where developers make assumptions about the carbon that will be sequestered over future decades if trees are conserved, are a perfect example. Such projects sometimes result in an overestimation of the environmental benefit of the project.

Tradewater’s halocarbon projects avoid the issue of overestimation by consistently conducting extremely precise testing and measurement of the amount of refrigerant destroyed in each project.

  • Every container of ODS that Tradewater destroys is weighed by a third-party using regularly calibrated scales. The ODS is then sampled by a third-party and analyzed by an accredited refrigerant laboratory to determine its species and purity. These two steps combine to ensure that credits are issued only for the precise volume and type of refrigerant destroyed.
  • The destruction facilities that Tradewater uses continuously monitor the incineration process during destruction events to ensure that over 99.99% of the ODS is destroyed. This monitoring is mandated by regulatory protocols and is part of the verification process to which projects are subjected.
  • Tradewater accounts for the project emissions created during the collection, transport, and destruction of ODS, and the number of offsets issued is reduced by a corresponding amount. The protocols that we use also build in other reductions to account for substitute chemicals that will be used to replace the destroyed refrigerants. Tradewater publishes this information in the documentation for all its ODS destruction projects. These documents outline how the material was obtained, the project emissions calculations, the test results, and the amount and type of ODS chemicals destroyed, among other information.

    • Additionality

    It is a basic requirement of all carbon offset projects that the underlying project activities are additional. “Additional” means that the projects would not happen in the absence of a carbon market. Tradewater’s halocarbon projects simply would not happen – and the gases would be left to escape into the atmosphere – without the sale of the resulting carbon offset credits. This is because there is no mandate to collect and destroy these gases. It is still permissible to buy, sell, and use halocarbons that were produced before the ban. There are other reasons halocarbon destruction projects are additional:

    • There are no incentives or financial mechanisms to encourage halocarbon destruction. According to the International Energy Agency and United Nations Environment Program, “there is rarely funding nor incentive” to recover and destroy ozone depleting substances in storage tanks and discarded equipment. And collecting, transporting, and destroying halocarbons is time-intensive and expensive. The burden to collect and destroy these gases therefore remains prohibitive outside of carbon offset markets—meaning that if organizations like Tradewater do not do this work, nobody else will.
    • Countries are not focused on the need to collect and destroy halocarbons. The Montreal Protocol has been celebrated as a success because of its production ban. This success, however, ignores the legacy gases produced before the ban and is a blind spot for government regulators. In the U.S., for example, the Environmental Protection Agency (EPA) developed a Vintaging Model in the 1990s to estimate the quantify of ozone depleting substances left in circulation. Based on the inputs and assumptions put into the model, the EPA predicted that no CFCs would be available for recovery beyond 2020 in the United States. But this prediction did not prove accurate. Tradewater has collected and destroyed more than 1.5 million pounds of CFCs globally in recent years and continues to identify thousands of pounds per week.
    • International carbon accounting standards do not require corporations to measure or track emissions tied to halocarbons, and refrigerants are specifically excluded from Science Based Targets initiative (SBTi) commitments. These commitments derive from emissions reporting under the GHG Protocol, which requires companies to report on emissions only from new generation refrigerants, such as hydrofluorocarbons (HFCs), but does not establish any obligation to report inventories or emissions of refrigerants still in use, such as CFCs and HCFCs. All these factors combine to make Tradewater’s carbon offset projects highly additional. As Giving Green, an initiative of IDinsight, concluded: “Tradewater would not exist without the offset market, so this element of additionality is clearly achieved.” The case for additionality is not so clear for some other project types, such as forestry and landfill gas carbon projects. For example, some forests are already being conserved for their beauty, or for use as parks, and generate carbon offset credits only because those conservation efforts do not yet have full formal protection in place to avoid deforestation in the future. Similarly, methane from landfills can be used to make electricity or captured as compressed natural gas, thereby creating additional revenue streams to support the activities, beyond the sale of carbon credits.