The last few years have seen the voluntary carbon market expand with a growing momentum. Given this upward trend, there will be many corporates, individuals and financial institutions that are new to the market. Quickly immersed in a world of specific definitions, technical terms and industry jargon, it is little wonder that new stakeholders can feel confused. To help bring clarity, here are six, essential things to know about the voluntary carbon market.
Carbon credits represent 1 tonne of CO2e
A carbon credit represents the permanent removal of a tonne of CO2 from the atmosphere, or the reduction or prevention of one tonne of CO2 from being emitted. Carbon credits can also correspond to reductions or removals of other greenhouse gases (GHGs) such as methane or nitrous oxide. These other gases are always measured as equivalent to CO2 and represented by the sign CO2e. You may also hear carbon credits referred to as carbon offsets –more on that here.
High quality is key
When used well, carbon credits enable companies to achieve ambitious climate goals. However, for emission reductions or removals to be genuine, additional and measurable, credits must be of a high quality.
On the demand side, this means that credits should be used to complement credible decarbonisation strategies the company has already put in place. Only after actively reducing emissions throughout its supply chain, should a company use carbon credits to counterbalance hard to abate emissions. In short, credits should not be used as substitute for direct emissions reductions within a company’s operations. You can use the mitigation hierarchy as part of this.
In terms of supply, carbon credits should high quality and independently verified. One of the quality indicators is that they be classed as additional. This means that the reductions or removals would not have occurred without the incentive created by carbon credit revenues. Ideally, projects should also bring extensive co-benefits such as employment opportunities for local people and biodiversity protection.
The voluntary carbon market is different to the compliance market
The voluntary carbon market is an effective means to reduce net carbon emissions by driving finance to projects that deliver independently verified emissions reductions. However, as the name suggests, participation in this market is not mandatory – corporates and financial institutions purchase carbon credits to meet their own ESG targets.
On the other hand, participating in the compliance market is a legal requirement for certain actors. Compliance demand stems from a necessity to adhere to national, decarbonisation targets. Instead of credits, the compliance market uses carbon allowances which give companies permission to emit up to an agreed level. Over time, companies cut their emissions as the limit of the imposed ‘cap’ for the market gradually declines.
Nature-based solutions hold huge potential
Nature-based solutions involve working with nature to address global challenges. Providing benefits for both human well-being and biodiversity, these solutions hold great potential to tackle climate change. In fact, stakeholders have agreed that we cannot achieve the global climate goals of the Paris Agreement without harnessing the power of nature-based solutions. Specifically, nature-based solutions must provide at least 30% of the climate mitigation required by 2030 if we are to limit temperate increase to 1.5 degrees above pre-industrial times.
Forests provide one example of the power of nature-based solutions. Deforestation is currently responsible for nearly 15% of global CO2 emissions and must be curbed to limit temperature increases and nature loss. Therefore, forest conservation projects are both logical and cost-effective ways in which to reduce emissions. Other nature-based solutions include soil restoration projects or blue carbon initiatives.
Moreover, many nature-based projects are also working to include Indigenous Peoples and local communities in their climate change adaptation and mitigation strategies. Indeed, these populations manage 17% percent of the total carbon stored in the world’s forests. Therefore, as global forest cover declines, securing their rights to land and recognising these People’s roles as forest stewards is of utmost importance.
Given the multiple benefits of nature-based solutions, it makes sense that demand for nature-based solutions is growing. Indeed, the winning project developers of the 2022 Environmental Finance awards agreed that the highest demand is currently for nature-based credits with socially positive co-benefits.
Climate mitigation projects need finance; the voluntary carbon market can deliver it
Delivering effective nature-based solutions requires large-scale funding and there is currently a significant gap. However, through carbon finance the voluntary carbon market is channelling private capital to scale these important projects. Indeed, many countries’ nationally determined contributions (NDCs), articulate the need for more climate finance. This is especially true for countries throughout Africa, South America and parts of Asia. Many have contributed little to global emissions, but due to their geography, find themselves exposed to the worst impacts of climate change. The voluntary carbon market acts as a vehicle to channel more finance to these countries to help them to meet their nationally determined contributions.
The voluntary carbon market is growing
The final take-home message for anyone new to the voluntary carbon market is that it is expanding. Between 2020 and 2021, the market quadrupled in value from $520 million to nearly $2 billion. Given this upward trend, many stakeholders agree that the market has reached a major tipping point and will enter a period of sustained growth. As such, it is more important than ever that carbon credits be supplied and used with the highest level of integrity. It truly is a pivotal moment to join the voluntary carbon market.