Well-designed carbon credit projects could offer “life changing” impacts in developing countries.
Experts have underlined the importance of emerging markets (EMs) in voluntary carbon markets (VCMs), calling for greater engagement with local communities to ensure that investments flow to where they are most needed.
Speaking at a virtual roundtable on VCMs co-hosted by the Glasgow Financial Alliance for Net Zero (GFANZ), COP 28 UAE and the Institute of International Finance, Annette Nazareth, Chair of the Integrity Council for the Voluntary Carbon Market (ICVCM), said that it is “critical to get things right” due the large number of projects in the Global South.
Nazareth said that consideration of Indigenous Peoples and local communities “unique challenges” is vital in improving the integrity and scale of VCM supply chains.
“The result will be increased trading and higher-priced credits, ultimately benefiting the Global South and private developers,” she said, adding that this will lead to positive outcomes and “pave the way” for a thriving market.
The ICVCM, the body responsible for the supply side of VCMs, released its full global benchmark for high-integrity carbon credits on 27 July, with the goal of maximising the ability of VCMs to support delivery of global climate targets.
“While some have questioned whether project developers can meet the standards, especially regarding transparency, we are confident that they will be able to meet them,” said Nazareth.
The value of the VCM reached almost US$2 billion in 2022, with it projected reach as much as US$1 trillion by 2037.
In 2019, the majority of the carbon credits purchased from VCMs were from projects in developing countries.
Emerging market impact
VCMs continue to be seen as an attractive means by corporates and investors of offsetting CO2 emissions despite having previously come under heavy scrutiny due to press investigations identifying lack of transparency, miscalculations, and inconsistencies in credit quality.
The ICVCM’s benchmark for high-integrity carbon credits includes requirements for programmes to assess and mitigate risks to Indigenous Peoples and local communities, including land acquisition and human rights. It also requires the assessment and mitigation of risks to biodiversity and sustainable management of natural resources, ensuring free, prior informed consent from these peoples and communities, as well transparency over how benefits from VCM projects are shared.
Dee Lawrence, Founder of the High Tide Foundation, underlined the benefits and “life changing impacts” that “well designed and executed” carbon credit projects can have on people’s quality of life in developing countries.
Agustin Silvani, Senior Vice President at environmental NGO Conservation International, previously told ESG Investor that VCMs play a significant near-term role in assisting the acceleration of EMs’ net zero transition. However, he noted that a lack of regulation, transparency and governance means that such markets opting to incorporate VCMs into their climate strategies are exposing themselves to a number of potential risks.
He also noted VCMs’ role in allowing developing nations to “benefit from the protection of nature as opposed to its destruction”.
An official side event at last month’s Summit for a New Global Financing Pact, emphasised the pressing need for integrity in the rapidly expanding VCM to facilitate cross-border financing for EMs and developing economies.
Also speaking at the virtual roundtable, Nili Gilbert, Chair of the GFANZ Advisory Board, said that VCMs can help “meet the challenge of moving trillions of dollars in finance to decarbonisation projects, not just in Europe and North America, but everywhere in the world”.
Ambitions in Africa
At COP27, the Africa Carbon Markets Initiative (ACMI) was introduced, which aims to support the growth of carbon credit production and create jobs in Africa.
ACMI aims to support the growth of carbon credits in Africa, targeting the production of 300 million carbon credits annually by 2030 and 1.5 billion credits annually by 2050, with the aim of unlocking US$6 billion in revenue by 2030 and over US$120 billion by 2050.
It also aims to create 30 million jobs in Africa by 2030 and over 110 million jobs by 2050, as well as the distribution of revenue “equitably and transparently” with local communities.
The supply side-focused ACMI works collaboratively with project developers to increase the credibility and availability of carbon credits in the market, engaging with market intermediaries – such as the ICVCM – to ensure that carbon credits produced in Africa meet the expected integrity levels of regulated markets in the Global North.
To address the challenge of high borrowing costs faced by governments and the private sector due to perceived risks of doing business in Africa, the initiative is using financial solutions such as blended finance to lower the cost of capital for private sector investors though incorporation of public finance.
It also works with governments to ensure political, economic, and regulatory stability, which are “important for markets to work at scale”, according to William Asiko, Vice President – Africa at the Rockefeller Foundation.
He added that the limited diversification opportunities in the financial markets regarding carbon credits have contributed to higher risk premiums in Africa.
Paul Watkinson, Advisor to the Minister of Climate Change and Environment of the United Arab Emirates, noted that the development of carbon markets in developing regions, such as Africa, is a “particular challenge” that requires capacity building and empowering project developers in the Global South.
Lowering the cost of capital and involving local communities in the process are crucial elements of this endeavour, especially with regards to achieving a just transition and benefit sharing, he added.
Earlier this year, the government of Zimbabwe established a national carbon credit framework, stipulating that the government will take 50% of the revenue generated from carbon credit projects, with foreign and local investors entitled to 30% and 20% respectively.
Mandy Rambharos, Vice President for Global Climate Cooperation at the Environmental Defense Fund, underlined the need for country-driven plans and programmes, noting that previous VCM-related initiatives were introduced with good intentions but lacked meaningful engagement with local communities.
She said that by engaging with local communities a greater understanding of regional specificities within EMs can be achieved.
“Unless you have legitimacy in the process of engagement, you won’t get local communities to buy in”, Rambharos added.
She noted that people within these communities want to feel engaged with in a “meaningful and thoughtful way”, rather than being viewed as a “tick box exercise”.