Business leaders are making more ambitious goals to reduce the global greenhouse gas (GHG) emissions There is a new market that could help in achieving these goals by supporting firms’ efforts to reduce their own carbon emissions. This is the rapid growth market for carbon credits, which are voluntary.
Carbon credits (often called “offsets”) are a key component of carbon credits. They have an important function in the fight for climate-related change. They help companies support the decarbonization of their carbon footprint, thus speeding up the transition towards 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 but it’s still tiny. The newly released report of the Taskforce on Scaling Voluntary Carbon Markets seeks to develop an outline of solutions that can help overcome any obstacles to its continued expansion.
The double role of carbon credits is to address climate change
Carbon credits are an official certificate that represents one metric tons in carbon dioxide equivalent which can be kept from being released into the atmosphere (emissions reduction or avoidance) or eliminated from the air as a result of a carbon reduction project. To create carbon credits, the project has be able to prove that the emissions cuts or carbon dioxide reductions are genuine, quantifiable permanent, indefinite, independently verified, and distinctive (see the sidebar “Criteria in carbon-based credits”). If a project can meet these requirements–as defined by standards that are independent, such as the Gold Standard and Verified Carbon Standard (VCS)–credits are granted. The carbon impact of a credit is only able to be claimed — that is, it can be counted towards an environmental commitment once the credit is taken off the market (canceled through the registry) and then cannot be sold. Carbon credits are deemed as a “voluntary carbon credit” when it is purchased and then redeemed on a voluntary basis , rather than in the context of conformity to legal requirements.
The earnings made from selling carbon credits allow the creation of carbon reduction projects in various projects. They include renewable energy, avoiding emissions from fossil fuels as well as natural climate solutions for example, reforestation or avoided deforestation, or agroforestry energy efficiency and recovery of resources by the reduction of methane emissions coming from landfills or wastewater facilities, among other things.
While the majority of these project kinds, such as renewable energy, avoidance of deforestation and resource recovery, focus on reducing carbon emissions others, like forest restoration, are focused on eliminating carbon dioxide out of the air. This is an important distinction that demonstrates the dual function carbon credits that are voluntary could play in tackling climate change
In the short run the short term, carbon credits that are voluntary from projects that focus on reducing or eliminating emissions could help speed up the transition towards a decarbonized world economy, such as by promoting investment in sustainable energy and energy efficiency as well as natural capital. Eliminating emissions is usually the most cost-effective way to tackle the issue of the greenhouse gas emissions in the atmosphere.
In the longer term, carbon credits can be a significant factor in accelerating carbon dioxide removal (or negative emission) necessary to offset the residual emissions that cannot be reduced further. In a recent study we found that at five gigatons (or negative emission) would be required each year to achieve net-zero emissions in 2050. They could be accomplished by combining natural climate solutions, such as Reforestation (for instance the sequestration of carbon in trees) and emerging technological carbon capture utilization, and storage solutions, such as direct air capture using carbon storage (DACCS) as well as 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 the company doesn’t possess an emission baseline to determine a goal making one is the first step.
Achieving a target’s ambitious level with the most recent science on climate is widely regarded as the best way to go. This means that the goal should match the amount of decarbonization needed to keep global warming less than two degree Celsius over preindustrial temperatures. At a minimum, it should most importantly, it should be aligned with the 1.5-degree path that, according to scientists, would decrease the likelihood of experiencing the most harmful and irreversible impacts caused by climate change. Science Based Targets initiative Science Based Targets Initiative has created methods for setting targets that have already been adopted by more than 1,000 businesses which includes many of the world’s top multinationals. To attain the required emission reductions, companies are able to take advantage of levers like improving efficiency in energy use, converting to renewable energy sources, and addressing the emissions of value chains.
In the next step, the company could agree to a goal which involves the use of carbon credits, whether to compensate for emissions it hasn’t yet been able to completely eliminate or to offset any the residual emissions that cannot be further reduced because of excessive costs or technological limitations. These kinds of targets are available with a variety of names (for instance the carbon-neutral, neutral climate net-zero carbon negative, carbon negative, or climate positive) however they all require a company to supplement reductions within its carbon footprint with other reductions through the purchase and use of carbon credits on a voluntary basis (see the section on sidebars, “Types of carbon targets”). In reducing its emissions companies can claim that it is reducing its environmental impact. Certain companies, like Microsoft have gone one step further, setting goals to have a net positive impact upon the environment.
The momentum is strong, mostly driven by new commitments from corporations and Point-of-sale services
After three years of booming growth in the carbon market, the voluntary 2 set a new record in 2019 as well as issuances as well as retirements (exhibit). Issues included 138 million tons of carbon dioxide equivalent–close to twice the volume of 2018–and retirements 70 million, which is a 33 percent rise over the year prior. The growth is driven by a mix of new corporate climate commitments, including carbon neutrality and net-zero, and what is known as “point point of sales” offering of voluntary carbon credit such as Shell’s carbon neutral fuel that is a retail offer of gasoline and carbon credits that are voluntary, as well as the passenger offset programs of airlines that permit passengers to offset the carbon footprint from their flights via Shell’s site.
Based on year-to date volumes and an extrapolation that is in keeping with historical patterns in seasonality and trends, we anticipate that the market will set a new record in 2019 as issuances and retirements each increasing by around one-third over the course of the previous year. After years of falling costs (from an average of $7 per ton back in 2008, to approximately $3 per ton by 2019) 3 as a result of demand outpacing supply and we anticipate average prices to rise in the near and medium long term, because of the strong growth in demand particularly for projects with higher costs like reforestation or carbon dioxide removal projects generally (see the sidebar under “Issuances or retirees”). Although still quite small, the carbon market is gaining significant acceleration and its effect (and the potential for future growth) is attracting more attention.
Nature-based climate solutions (NCS) which is a term used to describe a range of 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 significantly contributed to the growth of the voluntary carbon market direction. In the period 2016-19, the issuances in this category have more than doubled each year on average, and in the year 2019, NCS accounted for 53 percent of the total issues. Additionally, retirements in this category have also increased (close to 50% annually, on average). We believe that this could 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 interest in carbon dioxide reduction (of of which NCS offers the highest cost effective, technologically established method) as well as consumers’ desire for benefits in addition to climate change mitigation including biodiversity and impacts upon local community.
What’s next? Challenges and opportunities
To accelerate the carbon market’s expansion and fully realize its potential, it is essential to address a variety of major issues. This includes the need to improve the impact and quality assurance of the market and to ensure that all stakeholders are aligned on the criteria that will allow for the use of carbon credits offered by voluntary organizations in the context of an overall climate strategy, to create a new market infrastructure and lessen the uncertainty of regulation. We believe that developing new and innovative solutions to these issues can lead to additional growth. The newly formed Taskforce on Scaling Voluntary Carbon Markets will develop an outline for the solutions.
Quality assurance and strengthening impact
Although reputable standards like Gold Standard or VCS confirm projects’ conformity to the specifications of their respective methods and methodologies, buyers generally have little transparency regarding the progress of carbon-reduction projects that are part of their portfolio. There are also times when stakeholders raise concerns about specific types of projects, like ones that involve additions to large-scale renewable energy projects biodiversity within the context of afforestation projects that plant monocultures and non-native species, leakage and lack of local community involvement when it comes to avoidance of deforestation, or the durability in the case of solutions to natural climate more generally (see the sidebar “Additionality leakage, additionality and permanent definition”).
While respected standards have implemented security measures to tackle these concerns however, the lack of transparency and a persistent skepticism from stakeholders has caused buyers to call for an increase in the impact of quality assurance and. In the end, we anticipate innovation in measurement, reporting and verification practices to increase over the next several years.
Inspiring stakeholders to agree on the utilization of carbon credits for voluntary use
There is no consensus among the stakeholders about the best way to use carbon credits that are voluntary as part of a comprehensive 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 to which a business can depend on carbon credits that are voluntary in lieu of reducing its own footprint, the kind of credits (for instance, emissions avoidance/reduction or emissions avoidance/reduction versus carbon dioxide elimination) to utilize and how their function will change over time. There is a distinct distinction between the purpose of carbon credits that are voluntary in the present and what role they’ll play in the future when the company has completely eliminated carbon emissions and is only required to reduce its remaining emissions.
New market infrastructure being built
The present day, carbon credits that are voluntary are mostly traded through the internet, which results in the lack of transparency in market information (for instance, transactions volume, price levels) and a lack of data on reference that was a significant limitation to market development earlier. Tradeable, standardized products and contracts can improve liquidity and increase the scale of transactions, as long as the quality of the credits exchanged and the integrity of the market participants are guaranteed.
Eliminating the uncertainty of regulation
The talks on Article 6 of the Paris Agreement Article 6, which introduces the first international carbon market or mechanism is in progress. In the end, the effects from Article 6 for the voluntary carbon market are not yet clear. Do the voluntary purchase of carbon credits made by private sector players help 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 sell carbon credits for free? 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 long-term commitments and developers to invest in large-scale projects.
Carbon credits that are voluntary could play an important role in helping to ensure that the world achieves the 1.5-degree path. They could both speed up the process of transitioning to a low-carbon future, by allowing companies to contribute to decarbonization that goes beyond their own carbon footprint , and assist in neutralizing residual emissions through financing projects to remove carbon dioxide. To make this a reality 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 important benefits not just in fighting climate change but also for conserving nature and the many benefits it can bring to all of humanity.
