23 Nov

HELIOZ thoughts on the Voluntary Carbon Market

The Voluntary Carbon Market (VCM) has seen a busy year. Growing rapidly in size and potential while gaining public awareness has naturally led to enthusiasm but also rising questioning of a market, that is solely playing by its own rules.

Right or wrong? In a space without rules, there will never be a definitive right or wrong. It’s up to all of us participants in this market, to act based on our values and beliefs, convinced that they are the right approach to help prevent the worst effects of this climate emergency. These are our views on some of the biggest questions:

Are offsets the solution to companies' decarbonisation strategies?

Our short answer is: No. We view carbon offsets as a great complementary mechanism, to turn those last unavoidable CO2 emissions into positive impacts in the form of climate change mitigation, adaptation, as well as social outcomes. “Avoid – reduce – compensate”, with a strong focus on the first two, is the responsible approach to meaningful emission reduction until we have found a way to live our lives and run our businesses with environmental integrity. Carbon offsets, when done right, have a great power of not just CO2 avoidance, reduction or capture, but also of creating true social impact.

Are carbon offsets the solution to climate change?

Carbon offsets are one way to channel funds to reduce climate emissions. According to UNFCCC, the United Nations entity tasked with supporting the global response to the threat of climate change, yearly climate finance flows need to be increased by between 200% and 400% from now on to reach the amount necessary to transition to a net-zero-emission and resilient economy by 2050. Not meeting these financial targets will have dramatic consequences for each of us, because we will not be able to meet Paris Agreement goals. Innovative financial mechanisms, including voluntary carbon markets, on which carbon credits generated by carbon projects are traded, are therefore crucial to speed up climate action.

What is a good carbon credit?

For offsetting to be done right, it must only deal with residual company emissions, and it has to have a positive social impact. Why? Catastrophic events linked to climate change accelerated by carbon pollution, including floods, fires, droughts and excessive heat, have dire social costs in the form of losses of lives, livelihoods, deteriorating health, and economic and social set-back or isolation.  A high-integrity carbon credit must account for these costs too.

There are numerous characteristics of a high-quality carbon credit. These include transparency, additionality, permanence, sustainable development impact, or 3rd party validation and verification. Every climate project should be able to transparently show to all stakeholders the compliance with all of those principles, in impact reports, crediting registries, and other company communications. Carbon credits should never raise doubt about their integrity, neither by incomplete documentation nor a too low price point.

Does the Voluntary Carbon Market need an international governance framework?

Yes, it does. Initiatives like “The Integrity Council for the Voluntary Carbon Market” (ICVCM) prove that there is interest from all stakeholders, to ensure that carbon offsetting becomes a reliable mechanism for climate change mitigation. Old vintages, sold off at dumping prices or forest preservation credits, originating from already protected areas of woodland unfortunately act as the antidote to the impactful work of many climate projects. A form of independent market oversight would help to preserve integrity and sustainability of the voluntary carbon market.

What's next for the Voluntary Carbon Market?

The Voluntary Carbon Market remains still very small in the bigger realm of climate finance. However, in response to rapidly growing demand, markets have been gaining traction, as their global size quadrupled within one year, reaching US$2bn in 2021 according to Ecosystem Marketplace.

The right enabling conditions could further accelerate the growth of the market. In addition to the work of the ICVCM, the most exciting developments relate to the implementation of the Paris Agreement. First, individual jurisdictions are increasingly paying attention to Nationally Determined Contributions (NDCs), which according to the Agreement represent country-level efforts to reduce national emissions and adapt to the impacts of climate change. Tracking carbon market activities will help countries to systematically measure their contributions, and trade mitigation outcomes with other countries.

Second, the new guidance for Article 6 of the Paris Agreement provides more clarity on ways, in which countries can govern the generation, ownership and trade of carbon credits. These regulatory approaches might vary from country to country, but very likely, jurisdictions which seek to track, promote and perhaps incentivize, rather than to control and over-regulate projects will become more attractive destinations for climate finance. These countries will likely see the biggest impact of VCMs and become frontrunners on the market itself.