Industry

GFMA, BCG Call for Rapid Scaling of Carbon Markets

VCMI launches action plan to ensure voluntary carbon markets contribute to global decarbonisation and Paris-alignment.

The Global Financial Markets Association (GFMA) and Boston Consulting Group (BCG) have issued a new report urging policymakers and regulators to ramp up efforts to scale deep and liquid carbon markets.

In order to meet the Paris Agreement goals, carbon price levels need to increase to an estimated US$50-150/tonne average by 2030 from the current global average of less than US$5/tonne, the report says.

“Carbon emissions are an externality of the real economy that is unaccounted for: in most jurisdictions and across most sectors carbon is priced at zero meaning there literally no accounting for climate impact in order to inform the trade-off between goods and services consumed versus their effect on global warming and what the broader community is willing to tolerate in terms of economic disruption caused by it,” says Matthew Chan, Head of Public Policy and Sustainable Finance at the Asia Securities Industry and Financial Markets Association (ASIFMA), who also contributed to the report.

“If we aren’t pricing carbon, there is no economic signal to curb this negative externality, no incentive to transition economic activity to a more sustainable footing with respect to climate; and yet, we know from our earlier research, in Asia alone US$66 trillion of capital is required to be reallocated to meet Paris Agreement objectives. With no price on carbon, or effective mechanisms for this to happen, this won’t happen.”

The report estimates that close to 80% of greenhouse gas emissions are not covered by regulated carbon pricing today, despite effective carbon pricing being one of the strongest tools to drive greenhouse gas (GHG) emissions reductions.

According to the report, rapid scaling of carbon markets – both in geographic and sectoral coverage – is needed to support greater carbon pricing effectiveness to accelerate global decarbonisation. It also calls for greater interoperability, including between compliance and voluntary markets, which the public sector needs to drive.

Given the relatively small amount of GHG emissions subject to regulated markets today, voluntary carbon markets can play a complementary role, for example, as a transitionary mechanism to compensate entities pursuing decarbonisation whilst compliance markets are established.

To strengthen trust in the voluntary carbon markets and enable them to grow, stringent and transparent baselining and measurement, reporting and verification (MRV) standards are needed to ensure verifiable “additional” emissions reductions, according to the report, which also notes that two of the largest emissions trading schemes for carbon are currently located in China and Korea.

Further, ahead of COP26 next week, the Voluntary Carbon Markets Integrity (VCMI) initiative has also published a roadmap setting out steps it will take to ensure voluntary carbon markets play a credible role in meeting Paris-aligned temperature targets and contribute to the UN’s Sustainable Development Goals (SDGs). The roadmap considers how to bring transparency to climate action claims based on carbon credits, how to prevent double counting and more.

“Voluntary carbon markets can play a credible and critical role in global climate action, if we can establish guardrails that ensure they are truly additional to real action on private sector decarbonisation,” said Rachel Kyte, VCMI Co-Chair.

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