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Concerns emerged in the voluntary carbon market about the impact of fresh supply of nature-based credits with expected issuances of High Forest Low Deforestation (HFLD) credits in focus, after prices of forestry projects slumped in the last few months.

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The Platts CNC, which reflects the most competitive nature-based carbon credits dropped over 22% from May 19-July 19 period.

While the exact timeline of issuances was unclear, market sources say the expected supply of credits might further lower prices in the nature-based segment.

HFLD regions are those with historically low deforestation rates and high forest cover. While maintenance of these regions is critical for our climate goals, there is a debate around whether credits generated from these areas meet the principle of additionality as these areas have not been historically under threat.

While proponents of HFLD credits say that maintenance of forest cover is a sufficient reason for the generation of credits, those against them say that generation of credits must be restricted to forestry projects that would not have existed had it not been for the financing of carbon.

"A lot of volume of HLFD REDD+ credits are expected to hit the market soon," said a large trader to S&P Global Commodity Insights. "With prices already so bad, one wonders what will happen when these credits hit the market."

HFLD credits are jurisdictional credits, which means they are spread over an entire local government area or jurisdiction as opposed to standalone forestry projects which are common in the voluntary carbon market. Jurisdictional projects require involvement of the area's governing authority which standalone projects don't necessarily need.

Even the standards have different stands on the certification of these credits. Architecture for REDD+ Transactions (ART) is the only standard that has an approved methodology for these credits.

It would be a perverse incentive if only jurisdictions that currently have high emissions were allowed to participate in carbon markets and issue REDD+ credits, a statement released by the standard in June 2022 said.

"The inclusion of HFLD jurisdictions is especially important because they host the world's few remaining large expanses of intact forests," the ART board statement elaborated.

In an HFLD primer released by the standard last year, ART had said that an effective and equitable global system for reducing tropical deforestation should incentivize all relevant jurisdictions and actors, including both historical emitters and historical protectors of carbon stocks. It indicates that considering only the historical trend of emissions as an eligibility criterion for REDD+ carbon finance is unfair as it negates the probability of future increase in deforestation rates in HFLD areas.

The Gold Standard, meanwhile, does not certify avoided deforestation credits at all – either regular REDD+ projects or HLFD projects.

"While we underscore the importance of preserving standing forests and continue to explore credible ways to incentivize the conservation of nature, Gold Standard's position has always been that the challenges around uncertainty for avoided deforestation projects make them unsuitable for carbon crediting and a risk to the integrity of the voluntary carbon market," said Sarah Leugers, Chief Strategy Officer, Gold Standard, in an email to S&P Global Commodity Insights.

Leugers further said, "HFLD projects rely on a projected increase in deforestation rate to make the case of their additionality. This poses an additional layer of uncertainty to that of other REDD+ projects; that is, the deforestation baseline is not only counterfactual, but it is also based on large assumptions rather than on historical, quantifiable trends."

Leugers added that the HFLD mechanism was not an eligible activity for carbon credit issuance under Gold Standard due to high levels of uncertainty around counterfactual baselines of avoided deforestation/degradation projects.

ART, however, says their baselines are based on historical, quantified and verified data to avoid the issues associated with counterfactual, projected baselines.

While issuance volumes are unclear, market participants anticipate millions of credits to be generated through the HFLD mechanism in the next year or two. According to the ART registry, 14 jurisdictions have begun the process to register for avoided deforestation credits.These jurisdictions include Papua New Guinea, Gabon, Costa Rica, Ghana and Guyana.

"If the jurisdiction's HFLD Score exceeds the threshold, the jurisdiction is considered as HFLD under ART and qualifies to use the optional HFLD crediting approach," said Mary Grady, executive director of the Secretariat for ART in an email to S&P Global. These jurisdictions include Papua New Guinea, Gabon, Costa Rica, Ghana and Guyana.

On expected issuances Grady said there have been no credits issued under the HFLD approach so far and they did not have a forecast for future issuances.

Many in the market were concerned about the expected issuances.

"I see this as a problem," said a developer of regular REDD+ projects to S&P Global. "There is a problem of additionality of these credits. However, there is a big push for these credits to make it to the market. The market would need to incorporate some adjustment."

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