First published in 18th March 2023 with the title “Voluntary Carbon Market” on the previous Greenfrastructures site.
Climate Finance
According to the World Economic Forum (WEF) and Bain & Company’s Briefing Paper from Jan 2023, Climate Finance is an inflection point & the corporate net-zero imperative is accelerating decarbonization and investing in nature.
The science is clear
The world must reduce greenhouse gas emissions by 43% by 2030 to limit global warming to 1.5°C above pre-industrial levels.
Collaboration
Climate finance and voluntary carbon markets work together to mobilize financial resources for climate projects.
Voluntary carbon markets provide a way for individuals and organizations to invest in emission reduction projects through the purchase of carbon offsets.
The revenue generated from these markets helps
- finance climate projects,
- attracting additional investment and
- bridging the gap between public climate funds and private finance.
Both climate finance and voluntary carbon markets utilize market-based mechanisms and rely on robust measurement and verification systems to
- ensure the credibility and
- effectiveness of emission reductions.
This collaboration helps to
- accelerate climate action and
- mobilize resources from various sources for a sustainable future.
Voluntary Carbon Markets
Voluntary carbon markets are markets which play a crucial role in helping to minimize carbon emissions by providing a mechanism for
- individuals,
- organizations, and
- companies to voluntarily offset their carbon footprint.
The mechanism
Essentially these markets are platforms which allow
- companies and
- individuals
to voluntarily buy and sell
- carbon credits or offsets
to help reduce their carbon footprint.
Carbon credits
Carbon credits and offsets represent the reduction or removal of one metric ton of carbon dioxide equivalent (CO2e) from the atmosphere.
Credits/offsets are generated by projects that
- reduce or
- remove
carbon emissions from the atmosphere, for instance
- renewable energy projects,
- energy efficiency measures, or
- reforestation initiatives.
These projects are typically verified & certified by third-party organizations to ensure that they meet specific standards and criteria.
Market value & size
According to a report co-authored by the Boston Consulting Group (BCG), Shell predicts significant growth in the voluntary carbon offset market.
The market,
- valued at approximately $2 billion in 2021, and
- projected to reach a value of $10-40 billion by 2030.
In terms of carbon dioxide equivalent, the market expected to transact between 0.5-1.5 billion tonnes, a significant increase from the current 500 million tonnes.
Shell’s findings indicate a substantial expansion in the demand for voluntary carbon offsets over the next decade. This growth reflects the increasing recognition among individuals and organizations of the importance of offsetting their carbon emissions.
By participating in the voluntary carbon offset market, they can take responsibility for their emissions & contribute to global climate mitigation efforts.
Projections indicate a significant scaling up of the voluntary carbon offset market, reflecting the growing importance of carbon neutrality and the collective effort required to combat climate change effectively.
Solutions
Voluntary carbon markets and carbon offsetting is one among the several other solutions (additional emission reductions, funding sustainable development projects which cities already doing and aiming for, transparency and accountability, awareness and behavior change, and market signal for carbon pricing for policy makers).
Carbon offsetting
Enables individuals and organizations to offset their carbon emissions by
- investing in projects that reduce or remove greenhouse gas (GHG) emissions elsewhere.
Projects
These projects include
- renewable energy initiatives,
- reforestation and afforestation projects,
- energy efficiency programs, and
- methane capture projects, among others.
By purchasing carbon credits from these projects, individuals and organizations can effectively balance their own emissions by supporting emission reduction activities elsewhere.
The voluntary carbon market is crucial for reducing deforestation.
Credible participation
However, it requires
- urgent interventions,
- market reforms, and
- corporate commitments to ensure credible participation.
Waiting until 2030 to take action is not an option, as the global price of inaction is high.
Market participants need to find ways to address challenges.
Opportunities
The voluntary carbon market provides considerable opportunities:
Companies need their own strategies for achieving net-zero that fit their objectives for climate, nature & sustainability.
Offsetting: best practices and guidance
Best practices and principles are emerging e.g.: The Oxford Principles for Net Zero Aligned Carbon Offsetting provides guidance for carbon credit procurement after committing to decarbonization.
A viable pathway involves
- collective action,
- a portfolio approach to sourcing carbon credits, and
- clear communication of a company’s action.
Short term goals
In the short term, corporates should focus on
- high-quality credits from nature conservation and
- restoration that maximize co-benefits.
Mid to long term goals
In the mid to long term, they should shift to financing carbon dioxide removals with long-term storage, for example
- Direct Air Carbon Capture and Storage,
- Bioenergy with Carbon Capture and Storage,
- Biomass with Carbon Removal and Storage,
enhanced weathering including engineered and nature-based solutions, which should constitute the majority of carbon portfolios after 2040.
Developing the carbon credit portfolio
Building and evolving the carbon credit portfolio over time
Global Demands
Reduction/Removal of emissions
When a company or individual purchases a carbon credit or offset, they are paying for the reduction or removal of carbon emissions that they are unable to eliminate through their own actions.
This allows them to become
- “carbon-neutral” or
- to reduce their net carbon emissions to zero.
Regulated vs. Voluntary Carbon Market
The voluntary carbon market operates alongside with the regulated carbon market, which is governed by mandatory emissions trading schemes:
- the European Union Emissions Trading System (EU ETS) or
- the Regional Greenhouse Gas Initiative (RGGI) in the United States.
The regulated carbon market is mandatory and legally binding.
Meanwhile the voluntary carbon market is based on voluntary participation and operates on a smaller scale.
Trends
Increasing global awareness
However, for people sustainability, less carbon emission and reforestation will be more and more important. Especially for those who suffered from the consequences of the smoke of forest fires or needed to leave their homes.
Forest fires can be in connection with climate change because if the climate cause higher average temperature permanently (which is happening now) that can cause
- more fires,
- more dryness which can cause faster expansion and acceleration of forest fires.
Obviously that is not the case all the time, but the possibility is still there.
Corporate responsility
That is why more and more people will be interested regarding companies who will
- invest into sustainability,
- support sustainable development and initiatives and
- corporations who help the environment, take responsibility in any way
they can to increase reforestation, decrease emission and help the globe make it a greener & a better place.
Analyses
SWOT
Risks and threats
Voluntary carbon markets have been criticized for
- the lack of standardization and
- transparency in the verification and
- tracking of carbon credits and offsets,
which has led to concerns about the credibility and effectiveness of these markets.
Opportunities and strengths
However, they have also been seen as a way to
- encourage sustainable practices and
- support the transition to a low-carbon economy.
According to the BCG published report (written in partnership with Shell) said in January 2023 that the
The idea of ‘Low Carbon economy’ and the “Voluntary Carbon Market Is Thriving“.
“Despite the sluggish economy and ongoing budget pressures, the demand for voluntary carbon-emissions credits is growing rapidly. The focus of credit trading is shifting from reducing emissions to removing them altogether. “.
Global analysis
These found that the influence of external organizations on buyers’ decisions is growing;
- a reputable monitoring,
- reporting, and
- verification framework has become a priority when making purchase decisions; and
companies continue to monitor developments on Article 6 of the Paris Agreement (Nov. 2015) to adapt their strategy as needed.
In the next article we will write more about the Race to net zero and how Carbon credits, Market share and Trading works, writing about guidance, debates and some analysis regarding future trends.
Sources:
- Paris Agreement Article 6.
- World Economic Forum (WEF) and Bain & Company’s Briefing Paper from Jan 2023
- BCG published report (written in partnership with Shell) said in January 2023 that the “Voluntary Carbon Market Is Thriving“.
- McKinsey report from January 2021: A blueprint for scaling voluntary carbon markets to meet the climate challenge.