Market participants warn voluntary carbon market at risk of becoming “sideshow” to compliance counterpart.
The role of voluntary carbon markets (VCMs) must be re-evaluated, alongside mandatory standards to maximise their effectiveness, according to speakers at City & Financial Global’s International Carbon Markets Summit 2023.
Speaking at the event, Chris Podgorney, Product Manager at carbon removal standard and registry Isometric, pointed to key challenges that must be overcome to achieve an “efficient, high-integrity” VCM that can “fulfil its potential”.
These challenges include an insufficient level of market transparency and unanswered questions about the relationship between voluntary and compliance carbon markets.
Eron Bloomgarden, Founder and CEO at non-profit Emergent, noted the urgency of climate risks, with the world increasingly likely to miss the 1.5°C threshold for first time between 2023-27 according to research published in May.
“Offsetting should be widespread [and] every corporation should be doing it,” he said, adding that companies purchasing carbon offsets are decarbonising faster.
Bloomgarden stressed that there are “lots of great intentions” in the VCM sector, but noted the “complexity” it presents.
“I fear that the drumbeat on integrity, while important, has led to the implication there’s no integrity in the current market,” he added.
Evolving VCM focus
In 2022, VCMs mobilised US$1.2 billion of climate finance globally which accounted for less than 0.8% of emissions. The value of these markets has continued to grow this year, expanding to roughly US$2 billion.
This figure, however, is dwarfed by compliance carbon markets, which offer legally binding emissions reduction targets set by regional, national and international agreements, typically informed by the 2015 Paris Agreement. These markets already cover 20% of emissions worldwide and mobilised US$938 billion last year, highlighting their effectiveness in rallying global climate finance.
Notable examples of compliance carbon markets include the EU’s Emissions Trading System, the Chinese National Emission Trading System, and California’s Global Warming Solutions Act.
Bloomgarden said the VCM risked potentially becoming a “sideshow”, due to the relative size of the voluntary market compared with its compliance counterpart.
“The amount of talk that goes into VCMs is probably a lot more than the compliance market – there’s a misalignment there,” he said.
”We need to rethink how we’re using the VCM. My view is the highest and best use of VCMs is to mobilise collective action at scale for systemic change.”
Bloomgarden’s Emergent worked alongside the US, UK and Norwegian governments to launch the Lowering Emissions by Accelerating Forest Finance (LEAF) Coalition in 2021.
LEAF is a voluntary global coalition bringing together the private sector and governments to provide finance for tropical and subtropical forest conservation commensurate with the scale of the climate change challenge. So far, roughly 27 large corporates have committed to purchase emission reduction credits through the Coalition.
Bloomgarden said that LEAF Coalition is an example of the broader rethink that the VCM requires, combining public and private finance to galvanise change that will make a greater impact.
Last week, the Asia Securities Industry & Financial Markets Association (ASIFMA) and international law firm King & Wood Mallesons issued a paper offering recommendations to help the regions’ governments, regulators and market participants establish, regulate and scale up both compliance carbon markets and VCMs.
VCMs continue to be seen as an attractive means by corporates and investors of offsetting CO2 emissions, despite the heavy scrutiny they have faced due to press investigations identifying lack of transparency, miscalculations, and inconsistencies in credit quality.
The Integrity Council for the Voluntary Carbon Market (ICVCM) is the body responsible for the supply side of VCMs, while the Voluntary Carbon Markets Integrity initiative (VCMI) is introducing demand-side rules for entities using carbon credits.
Chris Leeds, Head of Carbon Markets Development at Standard Chartered and ICVCM board member, said that the Council had attempted to look at VCMs from a “regulator’s perspective”.
Despite the ICVCM’s standards being voluntary, he added the Council wanted its work to eventually be adopted, either domestically or internationally by regulators.
“One of the reasons VCMs were developed in the first place is regulatory failure,” Leeds said.
The Paris Agreement’s Article 6 enables voluntarily cooperation between countries to achieve nationally determined contributions emission reduction targets. Under Article 6, countries can transfer carbon credits earned from the reduction of greenhouse gas emissions to help one or more countries meet climate targets.
The agreement notably includes Article 6.4. This aims to facilitate the development and implementation of a framework for a multilateral carbon credit market with a centralised project authorisation system administered by UN Climate Change that will approve high-quality carbon credits from projects globally.
“Had the Article 6 framework been implemented when the Paris Agreement was signed, then there would have been little demand for a VCM, suggested ICVCM’s Leeds.
“I think that over time, what we’ll start to see is an adoption and hopefully an endorsement by national bodies,” he added.
Leeds also noted the need for industry support for voluntary standards.
“Ultimately, it’s largely around getting the industry to back it as well,” Leeds said. “If the industry doesn’t back these initiatives, it’s going to be difficult for regulators and governments to do so.
“The more that we get an endorsement, the better we’ll see that adoption of these standards,” he added.
Maria Eugenia Filmanovic, Co-Founder of carbon intelligence and procurement platform Abatable, said that “doors have been opened” for governments and corporates to complement their domestic efforts with voluntary cooperative approaches.
“This means that increasingly we’ll see some level of convergence happening at the global scale,” she added.
Speaking at the event, Baroness Penn, Treasury Lords Minister and Co-Chair of the Transition Plan Taskforce, confirmed that at COP28 UK negotiators will seek to drive forward agreement on the necessary details to help “fully operationalise” Article 6, established at COP26.