In the previous article we write about the Role and Impact of Voluntary Carbon Market and in this article I will write more about the Race to Net Zero, and how this related to the Voluntary Carbon Market.
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Race to net zero
The number of companies grow who want to join to the “race to net zero“
Companies purchase two types of credits to offset their greenhouse gas emissions in the voluntary carbon market:
- for projects that avoid or reduce emissions, such as building a wind farm,
- cheaper and more available;
Avoidance credits represent:
- the avoidance or reduction of a ton of CO2 that would have been emitted into the atmosphere.
Examples include nature-based solutions (NBS) like
- avoided deforestation, or
- technology-based solutions like renewable energy generation that displace fossil generation.
These credits play a key role in limiting the build-up of greenhouse gases (GHGs) in the atmosphere by limiting or offsetting new emissions.
Since 2015, they have accounted for more than 80% of the market and are expected to continue representing around 65% of the market by 2030.
- for projects that lower existing emissions through nature-based or technology-based solutions,
- more expensive and less available,
- more in demand.
Removal credits represent
- the drawdown of CO2 from the atmosphere, through nature-based solutions such as biochar production or
- ecosystem restoration, or
- technology-based solutions like BECCS and DAC.
Removals directly lower the concentration of carbon in the atmosphere by removing historical emissions. These credits have accounted for less than 20% of the market since 2015 but are expected to grow to 35% by 2030 driven by maturing technologies and methods, improving affordability, and net-zero requirements.
Growing and thriving markets
The voluntary carbon market grew at a record pace in 2021, reaching $2 billion, four times its value in 2020. Purchases are still accelerating in 2022, and the market is expected to reach between $10 billion and $40 billion by 2030.
200 sustainability executives were surveyed and 20 more interviewed to understand how economic challenges are affecting carbon-offset purchase strategies.
Findings indicate that
- demand for carbon credits is expected to grow despite economic challenges, and
- external organizations such as the ‘Science Based Targets’ initiative are increasingly influencing buyers’ decisions.
Buyers prioritize a
- reputable monitoring,
- reporting, and
- verification (MRV) framework when purchasing credits,
and more than half expect removal credits to dominate their portfolio by 2030.
However, companies have limited clarity on the impact of Article 6 and corresponding adjustments, which could impact sourcing credits internationally.
Participants believe that Article 6 has having an impact for example through giving some assurance on investment risks, still there is no clear consensus on what the pathway will look like.
Trading of Carbon credits
According to the 2021 McKinsey report
the trading of carbon credits help companies—and the world—meet ambitious goals for reducing greenhouse-gas emissions.
Companies are striving to reduce their greenhouse gas emissions to combat climate change, but many find it difficult to eliminate emissions quickly. Achieving net-zero emissions is particularly challenging, and carbon credits may be necessary to offset remaining emissions.
The Taskforce on Scaling Voluntary Carbon Markets predicts that demand for carbon credits could increase by a factor of 15 or more by 2030 and up to 100 by 2050, with the market potentially worth over $50 billion by 2030.
The voluntary market for carbon credits has multiple benefits beyond compliance, such as directing private financing to climate-action projects that would otherwise struggle to obtain funding.
These projects can also provide additional benefits like
- biodiversity protection,
- pollution prevention,
- public-health improvements, and
- job creation.
Carbon credits support the development of innovative climate technologies by lowering their cost.
Additionally, scaling up the voluntary market for carbon credits could increase capital flow to nature-based emissions-reduction projects in the Global South, where there is potential for cost-effective solutions.
To meet the demand for carbon credits and reduce greenhouse-gas emissions, a large, transparent, and environmentally robust voluntary carbon market is needed.
However, the current market is complex and fragmented, and some credits are questionable.
Limited pricing data makes it difficult for buyers and suppliers to manage risk. To learn more about the issues and how market participants can address them to scale up the voluntary carbon market please read the McKinsey report.
The Avoidance-Removal Debate
Avoidance credits currently make up 80% of the carbon credit supply, but removal credits are expected to reach 35% by 2030.
However, relying exclusively on removal credits is premature in the context of the shrinking carbon budget and the need to fund avoidance projects to stop deforestation.
A combination of verifiable avoidance and removal projects will be necessary, making the quality of both types of credits crucial as the market matures.
As the Shell and BCG report referring: decarbonization must start with reducing emissions: offsets are an additional tool, not a replacement. We must ensure that credits deliver their promises.
The key insight is increasing preferences for removal credits: also emphasised by several academic and corporate publications.
This view is in line with guidance
- from the Intergovernmental Panel on Climate Change (IPCC) 2022 AR6 Mitigation of Climate Change report and
- large investments in removal credits by companies like Microsoft and Google.
Pictures is from Shell and BCG published report (written in partnership with Shell) Jan 2023
MRV (monitoring, reporting and verification)
A reputable monitoring, reporting, and verification (MRV) framework is the most important criterion for purchasing.
91% of buyers rank MRV as one of their top criteria in credit purchase decisions. Buyers want to ensure that the credits they buy have a measurable benefit.
Threats and Weaknesses
The threats and weaknesses are similar as in other ratings:
- lack of clarity or understanding,
- lack of monitoring whether real actions happening through the ratings or are the ratings only a new tool, which has no sense at all.
- lack of communication how the credits will stop deforestation and other nature destroying actions,
- how reforestation and other nature improving actions will take place in order to know that ratings and measurements really have sense, decrease climate change, and increase sustainable development,
- lack of immersion and integrations into the companies’ policies by not knowing how exactly ratings will change future and create solutions, which really help on the nature,
- lack of collaborations, which would take place if companies would know whomever they need to contact with in order to be able to improve their measurement and performance on ratings,
- lack of understanding how different kind of actions are able to change performance rating, and
- lack of understanding how rating companies might rating and what else can rated companies do in order to improve their ratings…
(This paragraph is entirely what the author of this article and founder of the blog think regarding the threats and weaknesses.)
The Shell and BCG covers the growing debate around the need to shift from avoidance to removal credits, which has been driven by bodies like the IPCC (Intergovernmental Panel on Climate Change).
2021 report of IPCC argued that “avoidance alone won’t prevent a 1.5°C overshoot, as well as the SBTi’s net zero standards and the Oxford Principles, which both call for a “shift to carbon removals””.
The report by Shell and BCG shows
that the Quality evaluation criteria include
five primary areas – additionality, permanence, leakage, baseline, and quantification – as well as co-benefits such as biodiversity, soil quality, air quality, and improving community livelihoods.
“It’s important to remember there are still issues with removal projects and removals don’t have capacity – they’re only a few percent of the voluntary carbon market – to grow at the rate required to serve all the demand.” Carbon Portfolio Manager, consulting firm
Key trends and insights
According to the Shell and Bain report carbon markets grew at a record pace to 2022. Both compliance and voluntary markets now more than double the value of 2020.
Corresponding adjustments will impact voluntary carbon market growth, particularly in shaping demand for certain credits and the market’s convergence with compliance markets.
However, the exact nature of that impact is not yet clear and will depend on progress at future UNFCCC COPs. The avoidance versus removals debate is growing, but the answers are not binary.
Given the extent of climate action required, avoidance and removal levers are both needed at scale:
- stopping deforestation,
- increasing natural ecosystem restoration,
- practicing regenerative agriculture, and
- deploying technological removals.
While organisations must decide for themselves the appropriate balance of different credits within their portfolio, in line with their own decarbonisation strategy and broader climate objectives.
Focusing on the basics remains key leading with:
- deep direct decarbonisation,
- allocating investments based on broader climate and environmental objectives,
- rigorously tracking the quality of credits used
- 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.