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How the voluntary carbon market can help address climate change

Business leaders are making more ambitious goals to reduce the global greenhouse gas (GHG) emissions There is a new market which can assist in achieving these goals by supporting businesses’ efforts to cut their own carbon emissions. This is the rapid growth market for carbon credits that are voluntary.

Carbon credits (often called “offsets”) are a key component of carbon credits. They have an important function in the fight to combat climate change. They help companies support the reduction of carbon emissions beyond their own footprint, thereby accelerating the process of transitioning to low-carbon development. They also help finance projects for removal of carbon dioxide from the atmosphere–delivering negative emissions, which will be needed to neutralize residual emissions that will persist even under the most optimistic scenarios for decarbonization. While the market for carbon credits that are voluntary is currently gaining momentum however, it remains tiny. The report that was recently released by the Taskforce on Scaling Voluntary Carbon Markets is aimed at creating an outline for solutions that can help overcome any obstacles to its continued expansion.

The dual function of carbon credits to combat climate change

Carbon credits are an identification document that represents one metric tons of equivalent carbon dioxide which can be kept from being released into the atmosphere (emissions reduction or avoidance) or eliminated from the atmosphere as a result of a carbon reduction project. To earn carbon credits, the project has be able to prove that the emissions decreases, or the carbon dioxide eliminations are genuine, quantifiable permanent, indefinite, independently verified and unique (see the section on “Criteria in carbon-based credits”). If a project can meet these requirements–as defined by independent standards like Gold Standard and Verified Carbon Standard (VCS)–credits are granted. The effect of a carbon credit is only able to be claimed — that is, it can be counted towards an environmental commitment once the credit is removed (canceled through the registry) and then cannot be sold. A carbon credit is deemed as a “voluntary carbon credit” when it is purchased and then redeemed on a purely voluntary basis rather than in the context of conformity to legal requirements.

The profits made from selling carbon credits allow the creation of carbon reduction projects in many different types of projects. This includes renewable energy, avoiding emissions of fossil fuels and alternatives and natural climate solutions like reforestation, avoiding deforestation, or agroforestry energy efficiency and recovery of resources by eliminating methane emissions coming from landfills or wastewater facilities, to name a few.

Although the majority of these projects kinds, such as renewable energy, avoidance of deforestation and resource recovery, focus on reducing carbon emissions other types, such as the reforestation project, concentrate on removing CO2 from our atmosphere. This is a significant distinction that demonstrates the dual function carbon credits, which are voluntary, can play in combating climate change

In the short run in the short-term, carbon credits earned through voluntary projects focusing on emissions reduction or avoidance can aid in the process of transitioning towards a decarbonized world economy, such as by promoting investment in sustainable energy and energy efficiency in addition to natural capital. Reducing emissions is often the most cost-effective method to tackle the issue of the greenhouse gas emissions in the atmosphere.
In the long-term, carbon credits may serve as a key factor in increasing carbon dioxide removal (or negative emission) necessary to offset the residual emissions that cannot be reduced further. In a recent review we discovered that at minimum 5 gigatons (or negative emission) would be required annually to achieve net-zero emissions in 2050. They could be accomplished by combining natural climate solutions, such as the reforestation process (for instance the carbon sequestration in trees) and emerging technologies-based carbon capture utilization, and storage solutions like direct air capture using carbon storage (DACCS) and bioenergy that uses carbon storage and capture (BECCS). Carbon credits that are voluntary can help finance the development of these technologies.

The role of carbon credits in climate commitments of corporations

A legitimate corporate climate commitment starts by setting an emissions reduction goal that covers an organization’s indirect and direct greenhouse gas emissions. If an organization does not possess an emission baseline to determine a goal making one is a must-do first step.

Achieving a target’s ambitious to the most current research on climate science is generally regarded as the best way to go. That is, the goal should be compatible with the degree of decarbonization that is required to keep global warming less than two degree Celsius higher than preindustrial norms. It should also at a minimum, be in line with the 1.5-degree path that scientists believe will lower the chances of triggering the most hazardous and irreparable consequences from climate changes. This Science Based Targets initiative come up with methods to set the target. These methods have already been adopted by more than 1,000 businesses which includes many of the world’s top multinationals. To reach the necessary emissions reductions, businesses can use levers to improve efficiency in energy use, converting to renewable energy sources, and addressing the emissions of value chains.

In the next step, companies may decide to decide to commit to a goal that requires the use of carbon credits, either to offset emissions it hasn’t yet been able to completely eliminate or to offset the residual emissions that cannot be further reduced because of the prohibitive cost or technical limitations. These kinds of targets are available with different names (for instance the carbon-neutral, neutral climate net-zero carbon negative, climate positive) however, they all require a company to supplement reductions made within its carbon footprint through financing other reductions through the purchase and use of carbon credits on a voluntary basis (see the section on sidebars, “Types of carbon targets”). In the event that it offsets its remaining emissions this way companies can claim that it has reduced its impacts on the environment. Certain companies, like Microsoft have gone even further, setting goals to have a net positive impact upon the environment.

The momentum is strong, mostly driven by new commitments from corporations and points-of-sale products

After three years of booming growth and a strong market for carbon, the market for voluntary carbon 2 hit a record in 2019 with respect to issuances as well as retirements (exhibit). Issues included 138 million tons of carbon dioxide equivalent–nearly more than double that of the 2018 volume. Retirements were 70 million, which is a 33 percent rise over the year prior. This increase has been fueled by a combination of brand new corporate climate pledges, like carbon neutrality as well as net-zero. There are also what is known as “point at sale” offers of carbon credits, like Shell’s carbon neutral fuel and a bundled retail offer of gasoline and carbon credits. It also includes the passenger offset programs of airlines that permit passengers to offset the carbon footprint of their flights by using Shell’s site.

Based on the year-to-date volume and an extrapolation that is in accordance with the historical patterns of seasonality We expect that the market will set a new record in 2019 as issuances and retirements both increasing by about one-third over the course of the year prior. After years of decreasing costs (from an average of $7 per ton back in 2008, to approximately $3 per ton by 2019) 3 as a result of the fact that demand is outpacing supply which is why we expect prices to increase in the near-to-mid time frame, mostly due to a strong increase in demand especially for high-cost projects like reforestation, and carbon removal projects in general (see the sidebar under “Issuances or retirees”). Although it is still relatively small, the carbon market is currently gaining acceleration and its effect (and the potential for future growth) is attracting more attention.

Nature-based climate solutions (NCS) is a class that includes project types like the reforestation process, avoidance of deforestation improved forest management, as well as Agroforestry, has grown more rapidly than any other project type and have significantly contributed to the growth of the voluntary carbon market trend. In the period 2016-19, the issuances in the NCS category increased by more than doubling each year, in average. And in the year 2019, NCS accounted for 53 percent of the total issued. In addition, retirements within this category have also increased (close to 50% annually, on average). We believe that this may be due to an increased awareness of the NCS’s potential (they could provide around one third of the emission reductions required to meet the Paris Agreement between now and 2030) and a rising attention to carbon dioxide removal (of the latter, NCS offers the highest cost effective, technologically tested method) and the consumers’ desire for benefits that go beyond mitigation of climate change, like biodiversity and the impact of local populations.

What’s next? What’s next? Challenges and opportunities

To accelerate the carbon market’s expansion and fully realize its potential, it is crucial to tackle a number of significant problems. This includes the need to improve the quality and impact of the market and to ensure that all stakeholders are aligned on the criteria that will allow for the utilization of carbon credits that are voluntary in the context of an overall climate strategy, develop a new market infrastructure and lessen the risk of regulatory uncertainty. We believe that developing new and innovative solutions to these issues can lead to more growth. The recently established Taskforce on Scaling Voluntary Carbon Markets will develop an outline for the solutions.

Enhancing impact and quality assurance

While reliable standards like Gold Standard as well as VCS confirm projects’ conformity to the specifications of their respective methods and methodologies, buyers generally have little information about the status of carbon reduction projects within their portfolio. The stakeholder community frequently raises questions regarding certain kinds of projects, like ones that involve the additionality of large-scale renewable energy projects biodiversity issues in forest afforestation, which includes planting monocultures or non-native species; leakage and inadequate local community involvement in the event of forest management that is not done; or the permanence in the case of solutions to natural climate in general (see sidebar “Additionality leakage, addition and the definition of permanence”).

While respected standards have implemented security measures to tackle these concerns but the insufficiency of transparency and the skepticism of stakeholders has led to buyers demanding an increase in effectiveness and quality assurance. This is why we anticipate innovation in measuring, reporting, and verification practices to increase in the next few years.

Affirming the credibility of carbon credits that are voluntary

There is there is no consensus among all stakeholders regarding the best way to use carbon credits for voluntary use in the context of an overall climate strategy. Thus, businesses may differ on the role that voluntary carbon credits could play in their progress towards net-zero. The most important points to consider are the degree that a company is able to count on carbon credits offered by voluntary organizations in lieu of reducing its own footprint, the kind of credits (for instance, emissions avoidance/reduction and the removal of carbon dioxide) to choose from and the way in which their use could change as time passes. There is a distinct distinction between the function of carbon credits offered by voluntary organizations currently and the role they can play once an organization has completely eliminated carbon emissions and only needs to reduce the residual emissions.

Building a new market infrastructure

Today, carbon credits for voluntary use are traded mostly through the internet, which results in the lack of transparency in market information (for instance, transactions quantities, prices) and a lack of information on the market that was a significant obstacle to market development during the previous time. The standardization of tradable products and contracts can improve liquidity and increase the scale of transactions, provided the quality of the credit traded and the integrity of the market participants are guaranteed.

Eliminating the uncertainty of regulation

The negotiations regarding The Paris Agreement’s Article 6, which introduces an international carbon market/mechanism currently in progress. In the end, the effects for the implications of Article 6 for the voluntary carbon market remain unclear. Do the voluntary purchase of carbon credits from private-sector actors aid countries meet their climate goals post 2020 (which are known as national-determined contributions) or should they be added to the goals? Are governments going to continue to permit projects to offer carbon credits on a voluntary basis? What is the problem with double-counting and how can it be prevented? Reduced uncertainty in the regulatory framework could lead more buyers to take longer-term commitments, as well as developers to invest in large-scale projects.

Carbon credits that are voluntary could play an important role in helping the world reach the 1.5-degree path. They can help accelerate the process of transitioning to a low-carbon future, by allowing companies to help decarbonize their own carbon footprint , and aid in neutralizing residual emissions by funding carbon dioxide removal projects. To fully realize this potential an enormous amount of effort in the real world is needed to tackle the current issues and expand the carbon market that is voluntary. This will bring substantial benefits, not only in fighting climate change, but also in protecting nature and the innumerable advantages it brings to all of humanity.