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The Case for Scalable Voluntary Carbon Markets

Power of Ideas
The Case for Scalable Voluntary Carbon Markets

Increasing number of public- and private-sector organizations recognize the threat of climate change and are working to transition to a low-carbon economy. Collectively, commitments to reach net-zero carbon emissions currently cover over 80 percent of global emissions and more than 90 percent of GDP.

While these are impressive figures, there remain significant challenges to speed up emissions reductions, especially in hard-to-abate sectors. Left untackled, these issues will continue to deplete our precious remaining global carbon budget. To address the problem, we should remove structural barriers to embrace high-quality voluntary carbon offsets as part of credible, net-zero decarbonization strategies.

Demystifying Voluntary Carbon Offsets

There are two types of voluntary carbon offsets. Nature-based solutions include “green” carbon offsets such as reforestation, “blue” carbon offsets in coastal and marine ecosystem restoration, and soil carbon sequestration through regenerative agricultural practices. Engineered solutions are technologies that capture and permanently store CO2 from industrial processes and directly from the air.

Globally, annual greenhouse gas (GHG) emissions have increased by more than 50 percent from 1990 levels to approximately 50 gigatons of CO2 equivalent in 2020, according to the Intergovernmental Panel on Climate Change. Given the magnitude of this increase, the demand for carbon offsets currently drastically exceeds the supply of credits that are verified and certified. Only 344 million metric tons of voluntary carbon offsets were issued and certified by the top four carbon registries in 2021, which represents less than 1 percent of total global emissions. This number will need to grow at an exponential pace for governments and companies, especially in emissions intensive sectors such as energy, power, industrials, and transportation, to reach their 2030 emissions reduction targets, and more importantly, for the world to reach net-zero emissions by 2050.

We should remove structural barriers to embrace high-quality voluntary carbon offsets as part of credible, net-zero decarbonization strategies.

An Important, yet Underutilized, Arrow in Our Quiver: Voluntary Carbon Markets

Different from the regulated compliance emissions markets, the voluntary carbon markets, while still in their infancy, have drawn unfortunate criticism. While carbon offsets are not a substitute for science-based decarbonization solutions, they have a meaningful and important role to play, especially given that carbon emissions will need to be negative from 2050 to 2100 to reverse the damage sustained from years of unregulated heavy GHG emissions. If successfully implemented, voluntary carbon markets, along with other compliance carbon trading schemes, as well as government mandated incentives and penalties as we have seen in the recent Inflation Reduction Act in the US, can help remove and reduce “last mile” unavoidable emissions and help attract more capital to early-stage companies and green projects that have traditionally been challenging to fund.

In 2020, the Taskforce on Scaling Voluntary Carbon Markets was established to help scale an effective voluntary carbon market. It was succeeded by the Integrity Council for the Voluntary Carbon Market (ICVCM), which earlier this year released its draft Core Carbon Principles (CCPs). The CCPs offer guidance for how to identify high-quality carbon credits that are tied to verifiable climate impact. In addition, the Voluntary Carbon Markets Integrity Initiative (VCMI) released the first iteration of its Claims Code of Practice (CoP). The CoP provides much needed guidance on how businesses can use carbon offsets, and what they can claim about their use as part of achieving their net-zero goals.

ICVCM’s and VCMI’s proposals mark a first step in the global effort to scale the voluntary carbon markets. However faster and clearer standards are needed for both supply and demand side to develop further.

A Two-Pronged Approach: Pursuing Sector-Specific and Science-Based Decarbonization Strategies

The top priority is to develop and implement the most appropriate technologies to decarbonize each economic sector. However, these efforts need to be complemented and amplified by simultaneous emissions reduction and removal activities that can be met by high-quality carbon offsets today. Proven solutions should be used more broadly while other nature-based and engineered solutions evolve.

As one of the largest global financial institutions that is committed to sustainable finance, we are committed to helping build a more transparent, liquid, and scalable voluntary carbon market. This includes our work and support for proper framework and disclosure, governance, and ratings; verification and certification; transparent data access; and robust spot and forward trading capabilities. Established infrastructure financing mechanisms collateralized by long-term offtake contracts should be utilized in this new carbon market to provide upfront capital to accelerate the development of these projects that will restore our environment, improve biodiversity, and remove carbon emissions.

Once the appropriate market framework and structure are established to properly develop this asset class, voluntary carbon credits can become one of the practical solutions to help fight climate change as sector-specific decarbonization technologies mature and scale up.