500 Calyx Ratings: What have we learned?

Calyx Global has rated over 500 carbon projects. When reaching milestones, we like to pause for a moment to reflect and share what we have learned. Our ratings currently cover over half of all credit issuances in the past several years. Each week we also update our credit ratings distribution. So what have we learned?

#1 - Ugly Ducklings: Still overlooked by the market

Over a year ago we wrote about projects that lack charisma but have high greenhouse gas (GHG) integrity. This is still true today. Our highest GHG ratings come from the waste, manufacturing and industry sectors. They tend to command lower prices even though they have higher GHG integrity. We continue to write about projects that reduce methane emissions from landfills or abate N2O from nitric acid plants. Some of our highest ratings are from the destruction of ozone-depleting substances.

The Ugly Ducklings

Photos: a nitric acid plant [1, source: UN ], a landfill [2] and ODS canisters [3, source: Tradewater, LLC]

Why do these projects typically receive our highest ratings? They inherently have characteristics that make their pathway to higher GHG integrity easier: no non-permanence risk, relatively easy emissions to measure, a clearer counterfactual baseline and no or very low risk of leakage. Most of these projects address “point source” emissions or pollution, which regulatory agencies admit are easier to address than nonpoint-source emissions.

These issues are not the same for “charismatic” projects, such as nature-based or household-scale mitigation activities. Nature-based projects can be of higher quality as seen in the figure below. However, unlike the Ugly Ducklings, they have reversal risk. Carbon stock changes across a highly varied and dynamic landscape can be hard to measure (but gives nature its beauty). Nature protection projects also have challenging counterfactual baselines that are hard to set and easy to game. In addition, they come with leakage that can be significant but difficult to estimate. Household-scale projects, such as cookstoves, are an example of nonpoint-source emissions, which can be hard to oversee and measure accurately.

Therefore, it is unsurprising that the “short list” of project types likely to gain the ICVCM’s CCP Label – landfill gas, ODS, nitric acid and others – are the ugly ducklings. This is consistent with our distribution of ratings for GHG integrity, which looks better for “uncharismatic” projects in the industrial and waste sectors, compared to the more charismatic nature and household-scale projects.

This does not mean that nature-based projects cannot be high quality (see lesson #3 below). It also does not mean we should shy away from financing nature or projects that benefit households. Forests and other ecosystems are critical for human survival and adapting to climate change. And cookstove projects benefit, in particular, the health of women and children. But, the inherent characteristics of these project types mean they have more hurdles to overcome to meet quality criteria – not just those set by Calyx Global, but also those defined by the ICVCM and others. 

#2 - Location: Country and regional context matter

Not all projects are equal, even within the same category or project type. The location of the project can significantly impact the rating evaluation. Often, the country context is insufficiently covered in project documentation (excluding perhaps nature-based projects). Therefore, Calyx Global spends considerable time researching country-specific context for various project types and considers this information when applying ratings.

For example, regulation and government incentives can play a critical role in assessing additionality. If a government already provides sufficient financial incentives to create a business-as-usual scenario for a project type or introduces the legal framework that requires an activity, it is not additional. On the other hand, when incentives are removed, mitigation activities that were once considered business-as-usual could potentially transform into being additional. Certain countries or areas within a country face greater challenges implementing projects due to inadequate infrastructure, limited resources or high-risk conditions. This can be seen in situations such as conflict for land use or mining competing with possible revegetation activities, making certain activities in such areas highly additional.

#3 - Methodologies matter… but only to a point

The ICVCM will soon announce the initial categories (i.e. project type + methodologies) they deem sufficiently robust to receive the CCP label. This is a difficult task as few methodologies deliver consistently high-quality credits. If we go by the “80-20” rule, i.e., that a methodology is relatively good if it delivers an A-level rating 80% of the time, we have found fewer than five such cases. This means less than 10% of the 50 categories we have assessed to date are consistently high quality. Our analysis is consistent with the CCQI assessments of methodologies.

However, that does not mean projects using such methodologies have low GHG integrity. We have seen projects that make more conservative choices – despite the methodologies leaving flexibility for the project to be more aggressive in the volume of credits it could generate. We hope a higher rating rewards projects for their choices.

Our journey to 500 ratings has brought us these learnings and more. To hear more on what we’re seeing in the market, join us for a webinar on June 12, 2024: “Surprising learnings from rating over 500 carbon projects.”