By Ed Hewitt, Director of Natural Climate Solutions. First published by Carbon Pulse, 7th February 2023.
The latest debate arising from the Guardian’s recent article criticising ‘rainforest carbon offsets’ has brought the topic firmly to the forefront of public attention again. My position remains that carbon markets can be an incredibly important tool to finance nature-based solutions (NBS) at the scale required to be meaningful on a global scale . However, there are some serious questions which must be resolved as soon as possible if verified (not just voluntary) carbon markets are to deliver their full potential for nature.
Despite accounting for what seems like 99% of the conversations about financing nature, carbon markets still account for less than 1% of total global spend on NBS . However, carbon markets are heralded by many (myself included) as a much-needed way to bring significantly more private finance to the sector. Estimates range as to precisely how much , but assuming Mark Carney’s projection of $100 billion per year by 2030 is a reasonable figure, directing half of that to nature could provide 12.5% of the total NBS financing required by 2030  (i.e. not the panacea, but a very material contribution).
Unlocking this potential is hard though. The last 12 months have presented what many would observe to be a perfect storm of challenges for the market – notably a global economic downturn, continued debate over claims and quality (which has resulted in continued negative publicity in mainstream media) and uncertainty about the specific implications of Article 6 for nature-based projects. Demand in 2022 for retirements from nature-based credits in the voluntary carbon market dropped by 30% (53 mln in 2022 vs. 76.7m in 2021 according to AlliedOffsets’ data) and prices for the benchmark nature-based traded contract (the Xpansiv CBL N-GEO) fell by two thirds from over $14/tonne in December 2021 to below $5/tonne in December 2022.
We shouldn’t lose hope despite these concerning headlines. There are some specific technical reasons  accounting for the price falls in the N-GEO and, in contrast, there were a number of promising signs for the longer term in 2022. Despite the tough macro conditions, OTC sale prices for ‘high-quality’ NBS projects held up relatively well. Respira had first-hand experience of the Delta Blue Carbon project in our portfolio achieve a price of $27.80 for 250,000 tonnes in the auction conducted with CIX. This is at last a meaningful price for a meaningful volume. Market infrastructure and guidance further advanced; the first drafts were published of the Integrity Council on Voluntary Carbon Market’s (IC-VCM) Core Carbon Principles (CCPs) and the Voluntary Carbon Market Integrity’s (VCMI) corporate claims code of practice, and there was progress on Article 6 which could prove a huge market stimulant for nature-based projects. Further, a recent Abatable report showed that although nature-based credit retirements decreased in 2022, investment into ‘upstream’ (i.e. future supply of) nature-based carbon projects and developers reached record levels . These represent some encouraging signs, but what specifically remains to be resolved in order to truly unlock the potential?
I believe there should be 6 questions at the top of everyone’s mind for the VCM in 2023:
1) Will there be agreement about what nature-based carbon credit ‘quality’ looks like and will this build widespread trust?
As highlighted by the recent Guardian article and the following debate which has ensued, ‘trust’ in the climate (and social + biodiversity) integrity of nature-based credits is not as high as it needs to be. Some of this criticism is justified whilst some is based on a misunderstanding of the methodologies and on the ground realities of the projects. Either way, many people are confused, which is never good for scaling a market. The recent rise of carbon ratings agencies (such as Sylvera, Be Zero and Calyx) are useful attempts to make sense of ‘quality’ (although should be viewed as risk assessment tools rather than the ‘unquestionable truth’) and the IC-VCM’s attempt to develop CCPs is a needed attempt to address these concerns and ensure an underlying and consistent benchmark of ‘quality’. My hope is that the CCPs can be accepted by communities, developers, buyers and financiers alike in 2023. However – the principles do need to also be workable in practice – especially for nature-based projects – and that was one of the biggest areas of pushback with last year’s draft guidance which will need to be resolved in 2023.
This topic of trust is particularly an issue for forest conservation projects which were the specific subject of the Guardian article which called into question their ‘baseline’ integrity (the amount of deforestation which would have occurred in the absence of the project). Confusion also abounds with the mind boggling different uses of the term REDD(+) and whether it is carried out at project, jurisdictional, or national scale. This has all contributed to demand for forest conservation credits not increasing as expected (REDD retirements in 2022 saw the biggest drop off of any credit type). The accuracy of some of the more sensational negative headlines on baselines have been robustly challenged, but uncertainty still reigns. The hope is that new Verra methodologies which require projects to use national ‘nested’ baselines should ensure that new projects coming onto the market don’t suffer the same credibility issues. Similarly, due to the increased jurisdictional and national scale of the pending ART TREES credits, baselines should also be less of an issue with these credits too. It’s not inconceivable that a new crediting standard and mechanism may also emerge. But importantly – it’s crucial that these different crediting mechanisms, operating at different scales can exist side by side and reinforce, rather than undermine, one another. When these issues are resolved, then trust in the climate integrity of forest conservation credits can be regained. Let’s not forget that deforestation and degradation causes 10-15% of global GHG emissions and that rewarding communities, private landowners and governments for protecting forest under threat with results-based payments from corporates is one of the best tools available to halt deforestation.
2) Will corporate claims guidance be agreed and gain widespread acceptance?
It’s a crazy situation where corporates are currently ‘greenhushing’ for fear of making the wrong claim. Or simply withdrawing from and not entering the market because of a fear of reputational scandals. Claims drive the market in the short term, and we need clarity and consistency ASAP. In particular, specific guidance will be needed about whether ‘carbon/climate neutral’ can still be used. That’s the most widely used claim and drives near-term demand, but it’s also one of the most controversial and poorly defined (it’s currently the subject of a court case in Germany). If it’s continued to be allowed (or is replaced by a different term with clearly beneficial implications for the buyer), specific guidance will be needed about whether it can be met with avoided emissions credits (which are still by far the most common form of nature-based credit) and whether a Corresponding Adjustment will be required. If this is done well, we could see the emergence of a semi regulated market here where corporates are required to disclose the specific credits they are retiring and the associated claims they are making – further taking this out of the ‘voluntary’ only space.
My hope is that the two most influential external bodies in this space – SBTi and VCMI – will be aligned in their guidance here. Different bodies recommending different things is never helpful for markets and we all seek consistency and clarity.
If quality and claims are both fully agreed and accepted, I think that ‘greenwashing’ accusations can be put firmly to bed.
3) Will Article 6 of the Paris Agreement be friend or foe for nature-based credits?
Whilst it looks on first glance as though Article 6, which enables the trading of emissions reductions between countries under the Paris Agreement, will be a good thing for nature-based credits, the devil is of course in the detail. Specifically:
- Which specific nature-based credit types and methodologies will be eligible under 6.2 or 6.4? This will be key for establishing whether existing or new nature-based projects currently being designed will be able to benefit or whether new crediting mechanisms for nature-based projects will need to be developed. It currently looks like 6.2 will have more flexibility to use existing standards, whereas 6.4 looks like it will be a replacement for the CDM which may require new methodologies to be written.
- Will there still be demand for voluntary credits which do not fit within the Article 6.2 or 6.4 framework? It would be a huge shame to throw away all the impactful climate mitigation projects which don’t end up complying with Article 6, so hopefully a thriving voluntary market with clear quality and claims guidance can continue outside of the Article 6 framework. However, very clear guidance from VCMI (and others) will be needed into what specific claims can be made with these credits (specifically related to what you can and can’t claim with or without a Corresponding Adjustment (CA). The big issue right now with Article 6 is timing. It’s not clear exactly when any of these questions will be fully resolved, yet it makes no sense for the planet to hang around until they are sorted. Climate action can’t wait for perfection.
4) Will compliance programmes allow in more nature-based credits?
Currently, the vast majority of nature-based credits are not eligible for compliance markets. They are under voluntary standards and mainly transacted on the voluntary market. Yet it’s in compliance markets where the real scale lies and high price points can be found ($850 bln market size for compliance markets globally vs just over 1$bn for voluntary in 2021, according to Refinitiv). There are of course some exceptions – California, South Africa & Colombia are good examples where a limited number of domestic nature-based credits are allowed in and the airline scheme CORSIA has approved a limited selection of methodologies for international nature-based credits. However, these are currently small in scale and are all markets with low prices. Article 6 does give rise to the prospect of more international trading for compliance markets, but ultimately policy makers (especially for the largest market – the EU ETS) are going to be unlikely to allow in more nature-based credits until debates about quality are settled. Once they are, it opens up a whole new window for finance to flow – a good reason why we are seeing an evolution of the VCM terminology from ‘voluntary’ to ‘verified’ carbon market.
5) Will biodiversity credits gain traction? And if they do, what will be the implications for nature-based carbon credits?
It finally seems that biodiversity crediting is gaining traction on the back of the Montreal biodiversity COP. ‘Nature positive’ is gaining momentum as a term corporates can use and a few practical frameworks for measuring a standardised unit of biodiversity have now been proposed. Plan Vivo has developed the first crediting methodology. Similar initiatives are also underway at Verra and other standard bodies. My feeling is that these will be developed and adopted very quickly given the urgency and momentum, although it is worth acknowledging that we are still at a very early stage in their development vs carbon markets and the market infrastructure (including safeguards and MRV systems) is yet to be built. Although this a great development for nature-based projects, it could be a long-term risk to the premium price currently enjoyed by nature-based carbon credits with high biodiversity co-benefits (particularly those co-certified by CCB)
6) Will macro-economic growth return?
Of course, this is beyond the control of nature- and carbon-market actors, but it was a large contributor to the downturn in 2022. When growth returns, budgetary constraints for corporate buyers should ease and demand should return. The 2022 macro-economic conditions particularly hit nature-based carbon project retirements as voluntary nature-based credits still tend to trade at a significant premium (+50%) to other common credit types such as renewable energy and household devices. Indeed, 2022 saw a trend for corporates turning back to cheaper technology-based credit types (retirements of renewable energy credits increased from 90 mln in 2021 to 105 mln tonnes in 2022 according to Allied data).
Due to the severity of the climate emergency, we need to act at speed and scale. Nature-based solutions hold the key to one third of the climate mitigation needed between now and 2030 and come with a myriad of co-benefits for biodiversity and people when done right. We need new and increased ways in which to fund them. Carbon markets may not be perfect, but they are improving all the time, and can be a critical way of channelling private capital into nature-based solutions. We know the challenges, and by working collaboratively to solve them we can unlock this puzzle. Resolutions to these questions are within reach. Let’s make the next series of Guardian articles be about how the challenges were addressed successfully!
 (around $400 bln of investment is needed annually by 2030 according to UNEP, delivering over 10 bln tonnes per year of CO2e reductions and removals by 2030)
 Primary demand in voluntary carbon market in 2021 was around $1 bln of which around half was for nature based credits according to Trove Research. UNEP estimate $133 bln annually was spent on NBS in 2021
 Trove estimate $296 bln by 2035 in high demand tight supply scenario, BNEF show a scenario of $1 trillion by 2037
 UNEP state of finance for nature estimates $400 bln annually needed for NBS by 2030. $50 bln is 12.5% of that.
 The N-GEO is an illiquid contract with tiny volumes traded and no control over which project you end up with
 Abatable’s report shows over $10 bln of VCM deals were announced in 2022, with a further $16 bln estimated deals completed but undisclosed. It is estimated that just under half are for nature-based deals.