The carbon market can appear complex, with multiple stakeholders each holding differing interests at the various stages of the credit lifecycle. This complexity can present challenges to new entrants in identifying their position, roles, and associated risks within the carbon market.
Our article aims to provide clarity on how carbon market participants can navigate the market by categorising participants, and their associated risks, into four primary groups: developers, offtakers, lenders, and intermediaries.
Developers
Developers are the organisations that work on the ground to implement carbon credit projects. Carbon credit developers initiate the process of credits entering circulation and ensure projects’ operational capability, compliance, and permanence.
Developers typically produce credits through greenhouse gas (GHG) abatement or removal projects via technologies such as biochar, direct air capture (DAC), or more traditional nature-based solutions, like afforestation.
Credit aggregators can also be considered developers. Aggregators are organisations that partner with smaller developers on the ground, to pool verified credits across similar methodologies, then ‘basket’ them for sale to offtakers. This is often essential when individual projects lack scale to reach end buyers directly.
Key risks faced:
Permanence risk – Projects in natural catastrophe-exposed regions are vulnerable to invalidation from forest fires, floods, or pest outbreaks.
Methodology disputes – As scientific baselines evolve, certain methodologies may be invalidated.
Delivery risk – Forward-sold credits may fail to materialise if projects underperform.
Political/regulatory interference – Host governments may alter land rights, subsidies, or Article 6 compliance (opens a new window), jeopardising project viability.
Offtakers
Offtakers is the term used to describe the end buyers of carbon credits. Offtakers are typically divided into compliance buyers (those subject to emissions caps, such as the EU ETS (opens a new window) or CORSIA (opens a new window)), and voluntary buyers (corporates seeking to meet internal climate commitments). While most carbon insurance products historically focused on the voluntary market, the latest swathe of products can now provide coverage for CORSIA and Article 6 compliance.
Buyers weigh up project type, permanence track record, and pricing when deciding whether to purchase. For example, DAC credits have a high permanence, but also a higher cost, and afforestation projects, which have associated social benefits, but a higher risk of invalidation.
Key risks faced:
Delivery risk – Ex-ante credits, paid for in advance, may never be delivered due to insolvency, political intervention, or underperformance.
Invalidation risks, including:
Adjustment – Audits revealing overstated abatement, resulting in adjustments and potential invalidation.
Permanence – Loss of stored carbon due to fire, flooding, or degradation. Great emphasis is placed on the project track record as an indicator of future performance.
Additionality – Do the credits represent a genuine reduction or avoidance of GHG emissions?
If reductions had occurred absent the project, then the carbon credit does not represent true additionality, and the credit may be invalidated.
Double counting – Credits erroneously claimed in more than one country or by multiple parties. This may occur where there has been poor record-keeping or changes to government regulations.
Lenders
Lenders, such as banks, investors, or private equity organisations, provide the capital that enables developers to bring projects to life – often years before credits are generated. Funding may come from equity investment (private equity, infrastructure funds) or debt financing (commercial banks). Lenders play a pivotal role: without financing, developers cannot scale, and without scale, offtakers are reluctant to enter long-dated offtake agreements.
Key risks faced:
Counterparty credit risk – Developers may default if projects underperform, and offtakers may default on long-dated agreements.
Regulatory shift – Tax incentives and ESG frameworks can change quickly, undermining investment strategies.
Liquidity risk
– Carbon credits are not yet a fungible commodity in a mature marketplace. In stressed markets, buyers can be hard to find, resulting in market lags.
Intermediaries
While intermediaries are not direct producers or buyers of credits, they play a crucial role in carbon market infrastructure. Intermediaries provide essential trust, transparency, and liquidity, examples include: exchanges, registries, rating agencies, and brokers. All intermediaries play a vital ancillary role for developers, offtakers, and lenders, and are exposed to varying risks that depends on their level of involvement.
The roles of intermediaries, include:
Exchanges, who provide price discovery, liquidity, and trade execution for spot and futures carbon products, such as BACX (opens a new window).
Registries, who issue credits, maintain ownership ledgers, and safeguard against double-counting.
Rating agencies, who assess project quality, offering independent due diligence.
Brokers, who facilitate carbon credit transactions and provide market transparency.
Key risks faced:
Errors & Omissions (E&O) and Professional Indemnity (PI) – Rating agencies or brokers making flawed assessments or recommendations risk liability claims if buyers suffer losses.
Cyber risk – Registries and exchanges hold sensitive data and transaction records. A breach or failure could undermine trust across the entire ecosystem.
Reputational risk – If a project endorsed by an intermediary is later discredited, their credibility and reputation may suffer.
Talk to us
While each stakeholder group interacts with carbon credits in different ways, all share exposure to risks that are novel, complex, and still evolving as carbon markets mature.
The fluid risk environment underscores the need for robust risk transfer solutions. Carbon insurance solutions, such as Carbon Lender Non-Payment Insurance (CLNPI), Carbon Delivery Insurance (CDI), and CORSIA Guarantee provide essential protection for market participants, as well as, more traditional forms of coverage like E&O/PI and cyber insurance.
For further discussion on where you are in the carbon market and your associated risks, reach out to a member of the Lockton Carbon Credit Team here (opens a new window).
