Encouraging a Market for Climate Solutions: Re-envisioning the voluntary carbon market

Hundreds of billions of dollars of capital are needed annually over the next decade to address the climate crisis, so how do we reach that scale? A scaled-up voluntary carbon market may not be a silver bullet, but it's an important arrow in the quiver, argues Nat Keohane, President of the Center for Climate and Energy Solutions (C2ES).  // Banner image: Shutterstock/3rdtimeluckystudio
Encouraging a Market for Climate Solutions: Re-envisioning the voluntary carbon market
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Addressing the climate crisis requires rapidly scaling up climate finance. According to analyses by the International Energy Agency and others, hundreds of billions of dollars of capital are needed annually over the next decade, in emerging markets and developing economies, across sectors including power generation, fuels, industrial processes, land use, and carbon removal. Tropical forests represent a particularly crucial use case: public finance for forests have averaged only about $1 billion per year in recent years – a small fraction of the tens of billions of dollars annually that are needed to achieve significant reductions in tropical deforestation.

 As a matter of urgency, the world’s advanced economies need to meet their existing commitment to mobilise $100 billion in climate finance for developing countries, as well as set and achieve a new climate finance target from 2025. Even so, given the amount of investment required, we must also tap every available source of private capital.

The voluntary carbon market – in which private actors buy and sell carbon credits representing verified removals or reductions of greenhouse gases (GHGs), typically as part of voluntary corporate climate commitments – offers significant potential to help fill the gap. It is growing rapidly, having quadrupled in volume from 2020 to 2021 to $2 billion. Estimates from the Taskforce for Scaling the Voluntary Carbon Market, along with current price trends, suggest that the market could well grow to between $10 billion and $20 billion annually within the next decade.

How can we reach that scale? Here are three steps we need to take:

First, ensure quality. Concern about the environmental and social integrity of carbon credits is a first-order obstacle to growing the voluntary carbon market, as a recent high-profile series of articles in The Guardian has highlighted. While some of the criticisms are exaggerated, it seems clear that the quality of carbon credits is inconsistent, at the least. More to the point, there is no easy, transparent way for potential buyers of carbon credits to differentiate between good and bad credits.

 Building confidence in the integrity of carbon credits among companies, NGOs, and other observers will help the voluntary carbon market to grow

To help address this issue, the Integrity Council for the Voluntary Carbon Market (of which I am a member) is establishing a threshold quality standard to identify high-integrity carbon credits. In the coming months, the Integrity Council will publish a set of Core Carbon Principles, along with a framework for assessing carbon crediting programmes and methodologies. Both will incorporate extensive input from stakeholders and public comment. Building confidence in the integrity of carbon credits among companies, NGOs, and other observers in this way will help the voluntary carbon market to grow, channelling finance into real, additional emissions reductions that support sustainable green growth in developing countries.

Second, build coalitions. Public-private coalitions can also help to scale up voluntary carbon market transactions, while also targeting climate solutions that most urgently need financing. A prime example is the LEAF Coalition, created in 2021 to mobilise public and private finance into protecting tropical forests. LEAF, a partnership between the governments of Norway, the United Kingdom, the United States, and private companies (originally nine, now  22), has secured commitments of over $1.5 billion that will pay for high-quality carbon credits representing verified reductions in emissions from tropical deforestation across entire national or subnational jurisdictions. Likewise, the United States, along with the Bezos Earth Fund and the Rockefeller Foundation, have announced at COP27 a new initiative, the Energy Transition Accelerator, to mobilise capital into large-scale emissions reductions from the power sectors in developing countries.

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Third, shift the mindset. To truly realise the potential of the voluntary carbon market, we need to change our mindset about the role of voluntary carbon credits. Instead of approaching them as a means to minimise the cost of compliance, we should see them as an opportunity to maximise the flow of finance into climate solutions.

The roots of the voluntary carbon market lie in the Kyoto Protocol’s Clean Development Mechanism and the cap-and-trade systems in the European Union and California. In those programmes, as initially envisioned, regulated entities faced a mandatory cap on emissions, but could use carbon credits to “offset” excess emissions. In this way, offsets could effectively reduce the cost of compliance – but at the risk of allowing entities to keep emitting carbon they would otherwise have had to cut. In response, civil society organisations appropriately subjected offsets to strict scrutiny and significant limits on use.

Treating voluntary carbon credits as a threat rather than an opportunity (...) runs the risk of stifling a potentially potent source of climate finance

The problem is that the same mindset has been carried over to the very different context of voluntary commitments. Of course companies with voluntary targets must prioritize cutting their own emissions first. And the voluntary carbon market should never be seen as an alternative to the ambitious, economy-wide targets (and finance flows) that countries must commit to and implement under the Paris Agreement on climate change.

But treating voluntary carbon credits as a threat rather than an opportunity – focusing on restricting their use, rather than encouraging investment in high-quality credits as a complementary means of fighting climate change – runs the risk of stifling a potentially potent source of climate finance.

After all, the fundamental challenge the world faces on climate is not that companies are voluntarily buying too many carbon credits. It is that far too little money is flowing into the technologies and practices that are desperately needed to tackle the climate crisis: zero-carbon electricity generation, cleaner cookstoves, low-carbon industrial processes, sustainable agriculture, tropical forest protection, and more.

A scaled-up voluntary carbon market is not a silver bullet – but it is an important arrow in the quiver. Realizing its promise will require ensuring environmental and social integrity, building new coalitions—and most of all, re-envisioning the purpose of the market itself. The world cannot afford to miss this opportunity to mobilise billions of dollars into climate solutions.

By putting a price on pollution, taxes and tradable permit systems incentivise emissions abatement at the lowest possible cost. To learn more, check out also the OECD work's on tax and the environment
And read the report Pricing Greenhouse Gas Emissions: Turning Climate Targets into Climate Action

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Go to the profile of Guillermo Sigala
12 months ago

I completely agree that scaling up climate finance is critical to addressing the climate crisis. The voluntary carbon market represents a promising opportunity to mobilize private capital towards achieving this goal. However, as you have rightly pointed out, concerns about the quality of carbon credits remain a significant obstacle to growth in this market. Establishing a threshold quality standard, as the Integrity Council for the Voluntary Carbon Market is doing, is an important step towards building confidence in the integrity of carbon credits and attracting more buyers.

Building coalitions between public and private actors is another key strategy for scaling up voluntary carbon market transactions. The LEAF Coalition and the Energy Transition Accelerator are excellent examples of how such partnerships can mobilize capital towards high-impact climate solutions in developing countries.

Overall, I believe that public and private actors must work together to mobilize the hundreds of billions of dollars in climate finance that are needed annually over the next decade. By ensuring quality, building coalitions, and tapping into every available source of capital, we can make significant progress towards achieving a sustainable and equitable future for all.