The urgency to reduce emissions, protect critical ecosystems and deploy new technologies at scale to remove carbon from the atmosphere has never been greater. Without meaningful action, the impact of climate change, including extreme weather and rising seas, could reduce global GDP by around 14% and result in 1.2 billion climate refugees by 2050. Despite these potentially devastating consequences, annual flows of climate finance investment in 2021 were a mere 20% or so of the estimated $4.3 trillion required by 2030.
The voluntary carbon market (VCM) is one of the few transition finance options that could accelerate action, scale up new technologies and connect private capital to high-potential projects in the limited time available. Investment today is critical, not only to mitigate carbon emissions immediately but also to build market capacity ahead of 2030 ambitions. However, the VCM has failed to secure the financial investment necessary to scale up and innovate. Current government policies and market standards have failed to provide adequate strategic inducement to motivate boards and investors to deploy capital at scale. The VCM market, estimated at $1.3 billion in 2022, could grow to more than $50 billion by 2030, if companies begin investing more strategically today.
For the VCM to mature, grow and contribute meaningfully to the mitigation of climate change, governments must create regulatory mandates to compel corporate action while, in their absence, market standard setters must provide alternative recognition to incentivize corporations. These incentives can encourage companies to embrace carbon credits as an additional lever to complement dedicated mitigation efforts and further support their net-zero strategies. While early adopters and market builders invested heavily to create the necessary capabilities to navigate a complex landscape, the next wave of companies needs a simplified structure, tangible incentives to participate, clear guidance for credible market participation, and market infrastructure that provides transparency on credit quality as well as de-risking purchase. This will take time, but regulators and standard setters need to initiate both independent and coordinated action now.
Several stakeholders, including regulators, standard setters and corporations are already working together to address obstacles in the VCM and promote engagement. But the planet cannot afford for the private sector to await the perfect solution. While challenges are being resolved, companies can start using carbon markets to deliver climate action now and position themselves and society to achieve net-zero ambitions.
This report aims to provide guidance to companies who recognize the climate imperative and possess the will to participate in the VCM, but who remain on the sidelines due to market challenges and other complexities. For companies less inclined to act, the report seeks to make a case for the strategic value of the VCM and the urgency to act now.
Four tracks of action have been identified for the next wave of corporations to embrace the voluntary carbon market:
Define a net-zero role for credits: Define the complementary role of carbon credits while maintaining dedication to direct abatement in achieving science-based targets, consistent with the mitigation hierarchy and reflective of technological, financial and other constraints on decarbonization.
Create value and recognition: Identify tangible outcomes resulting from carbon market activity and communicate to key internal and external stakeholders to enhance forward-looking risk management, brand-building and employee engagement.
Tailor a portfolio: Prioritize high-quality, high-impact carbon credit portfolios where avoidance credits remain important initially and permanent carbon removal outcomes are ramped up over time.
Orchestrate the effort: Integrate the carbon credit strategy into the company’s wider net-zero approach and organizational structure; carbon credits should be closely connected to the broader decarbonization path and overall sustainability strategy.
Although this paper will briefly identify a few key challenges facing the VCM to provide context, it will not focus on detailed diagnoses of those issues but, rather, offer a flexible framework for action that can empower companies to act despite these market limitations.
The report is also a call to action for others. Corporations that have not yet built a comprehensive climate strategy must do so. Civil society, standard setters, regulators and other market actors must collectively acknowledge the market needs improvement, learn openly and drive efforts to facilitate high-integrity climate action, without distracting from or discouraging the central priority of decarbonizing value chains. When pursued as complementary to decarbonization, an environmentally robust approach to the VCM can deliver climate mitigation both within and beyond value chains to help accelerate the global transition to net zero.
By Dale Hardcastle, Henning Huenteler, Ann Siml, Nicholas Foreman, Pedro Gomez, and Nasim Pour
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