Pre-Issuance and Pre-Financing: Unlocking Opportunities in the Voluntary Carbon Market

As the world intensifies its fight against climate change, the Voluntary Carbon Market (VCM) is poised for significant growth, with BeZero Carbon projecting its annual value to reach $3 billion by 2024. Orbify’s recent webinar explored how pre-issuance and pre-financing strategies are driving this value increase, offering stakeholders new opportunities—and challenges—in advancing high-integrity climate solutions.

The webinar brought together industry leaders from carbon financing, rating agencies, and remote sensing to delve into the opportunities and challenges of early-stage investments in the VCM.

The VCM, pre-issuance, and pre-financing explained

In the VCM, companies, organizations, and individuals buy and sell carbon credits that represent removals or reductions of greenhouse gases (GHGs) in the atmosphere. Participation in the VCM is not mandatory, but with its reliance on high-integrity carbon credits, it provides finance to critical climate mitigation activities that would not otherwise be viable.

While pre-issuance buyers may purchase carbon credits before a certifying body officially issues them, pre-financing enables them to pay upfront funds to project developers in return for future carbon credits.

Growing interest in early-stage carbon projects

These early-stage investments allow stakeholders to shape project outcomes and lock in long-term benefits. Still, they also come with elevated risks compared to buying already-issued credits.

“Buyers are wary of buying existing credits, but pre-issuance credits pose a higher risk” due to long timelines, uncertainties, and complexities of project implementation, said Oliver Levers, Earth Observation Engineer at Orbify. Projects must adhere to stringent certification criteria, and unforeseen challenges such as political and regulatory instability or environmental disruptions can affect their outcomes.

Still, “for every dollar invested in carbon markets, four to five dollars are invested into the early stages of the VMC, such as project origination and development,” noted Ronan Carr, Leading Analytical Officer at BeZero Carbon.

Navigating risks and markets

So why do developers of carbon credit projects, investors, and buyers assume that these early-stage investments will yield the best financial and environmental results?

“Buyers are looking to secure long-term supply and lock in prices as well as to manage risks,” said Carr.

There is value in understanding risk early on.

“The view of getting into pre-issuance is to learn more, get closer insights, how the project is going to be run, to intermediate the market a bit, to take earlier stakes in projects to mitigate the price risks,” said Joseph Sarvary, Senior Manager at Engie Impact.

In addition, early-stage action also allows buyers and investors to hedge against the market.

“The evolving perception is that carbon removal certificates are going to become more expensive over time and that low-quality projects are going to be reputationally hazardous,” said Sarvary.

Frameworks and strategies for early-stage investments

BeZero’s risk framework evaluates five categories to assess the likelihood of a project's success:

• Technical risk, for which BeZero examines the project’s design, complexity and potential implementation barriers through feasibility studies;
• Financial risk, which includes funding, insurance and offtake agreements;
• Proponent risk, which looks at the developers’ track record and experience as well as stakeholder engagement strategy;
• Regulatory risk, which assesses specific legal requirements for example related to land rights as well as potential accreditation issues and other potential legal challenges across jurisdictions;
• And finally, operational risk, which investigates whether the project would face any risks to ongoing performance operationally once set up, for instance through supply chain challenges.

Sarvary stressed that when working on decarbonization and residual emission strategies for large corporates, Engie Impact has identified registration risks, legal risks - which he underscored includes corruption - and partner risks, as particularly detrimental.

“While you can’t control all these risks, you want to make sure your project developer you are going into this with strong partnership is high quality. ...You may be inclined to pay a premium to ensure that there is going to be higher biodiversity impact for instance or to hedge against changes in regulations,” Sarvary added.

Investors can further mitigate these risks by selecting competent and experienced project developers, scrutinizing project design features, ensuring financial controls are in place, implementing contractual controls that shift the responsibilities to project developers, and finally hedging against program-level risk via external insurance.

When it comes to the developers’ perspective, Carr advised creating high-integrity projects that undergo due diligence, add new positive outcomes, carry co-benefits beyond GHG emissions such as increased biodiversity and community benefits such as job creation, and can maintain such benefits for the long haul. Investors are particularly concerned with scalability and the ability to deliver credits at both the quantity and quality promised, he explained.

The role of remote sensing

In early-stage projects, where on-the-ground data may be limited, remote sensing technology has emerged as a critical tool. It provides detailed geospatial insights into land use, project eligibility, and risks such as deforestation or natural hazards.

Levers highlighted that Orbify's remote sensing-based tools support projects in rapid assessment of credit potential and real-time monitoring of progress. “In some cases, remote sensing is the only source of information for assessing new projects,” he said.

“The volume of historic data is increasing over time and aligning with methodology now,” he explained. Thanks to this trend, tools such as those provided by Orbify allow developers now to go beyond assessments of additionality and quality, but also to determine if projects remain on track of reaching their goals over time.

Nonetheless, he stressed that remote sensing tools should complement—not replace—traditional financial analyses.

“I would flag that especially with early project stages, we are still missing a big part of the story. Financial analysis cannot be done with remote sensing, and uncertainties will always be higher at the early stages... Context is everything,” he said.

The VMC’s current state

While recent economic challenges and scrutiny of low-quality credits have slowed growth in the VCM after its 2021 boom, the panelists expressed optimism about its future. Advances in improved project methodologies, and stricter compliance standards are driving higher confidence and market maturity.

Some of this scrutiny may have actually fueled the shift towards pre-financing and pre-issuance.

“I think because there has been a lot of criticism for credits not being additional and being low-quality, people want to be involved from the beginning of a project to ensure they are investing in high-quality credits,” said Levers.

“Buyers are looking to learn more about the credits and pay higher amounts for quality this is supported,” Sarvary agreed. “The highest-rated projects are selling at premiums 40 percent more than projects ranking just one below. We are seeing a greater level of transparency being demanded by the EU, in California, and elsewhere. Article 6 for international transparency and market signals for medium price evolution supports the theory that prices are going to go up. This is in my experience the justification for early action.”

Carr added that some credit also goes to new project implementation methods and more advanced technologies. “They are all doing something new and validate that their new approach is something that goes above and beyond what we had in the past.”

Takeaways and the road ahead

Looking forward, rising carbon prices are expected to further incentivize early investment in high-integrity projects. Between 2030 and 2035, as corporate net-zero commitments intensify, demand for quality credits is likely to surge.

“Every forecast you see shows skyrocketing pricing around 2030 to 2035 where more companies are shifting towards net-zero commitments and compensation or neutralization,” said Sarvary.

The VCM is undergoing a transformation, driven by innovation, enhanced methodologies, and a shift toward higher-quality credits. Early-stage investments, while riskier, offer a strategic opportunity for stakeholders to contribute to climate goals while positioning themselves for long-term success.

For developers, financiers, and buyers, success in early-stage carbon investments hinges on:

• Balancing opportunities and risks: Pre-issuance and pre-financing strategies provide buyers and investors with opportunities to hedge against rising carbon credit prices and reputational risks. However, they also require thorough risk assessments to address technical, financial, and regulatory uncertainties.
• Comprehensive risk assessments supported by advanced tools like remote sensing and frameworks. Orbify’s rapid assessment and monitoring tools as well as the frameworks provided by BeZero and Engie Impact offer a comprehensive approach to mitigate risks.
• Selecting experienced developers with proven track records and strong reputations.
• Advocating for predictable and transparent industry regulations: Investments in pre-issuance and pre-financing of carbon projects helps financiers and corporations to lobby in favor of predictable changes to the Science Based Targets initiative (SBTI), GHG protocols, the Voluntary Carbon Markets Integrity Initiative (VCMI), and EU rules for how credits can be used.

And if the forecasts are wrong?

“All forecasts agree that prices will trend up. If they don’t trend up, then we are in a lot of trouble for climate change and the issues will be a lot greater than just with carbon markets,” said Sarvary.