02/01/2024

A notable success and evolution of carbon pricing over 18 years, emphasize its integration into corporate budgets worldwide. Carbon markets have expanded beyond developed economies, attracting finance for developing and emerging economies. In 2023, carbon pricing regimes have emerged globally, aligning with the Paris Agreement. Europe’s Emissions Trading System (ETS) serves as a model, driving the shift away from coal and encouraging investment in green technologies. The Kyoto Protocol triggered global clean technology investment, leading to emissions reductions.

There is still a need for continued climate action within the private sector, particularly advancing the voluntary carbon market (VCM), as it plays a crucial role in fighting climate change. Companies now aim for real, permanent net reductions in greenhouse gas concentrations, leading to the development of carbon removals as a climate instrument.

Technologies like blue carbon and direct air capture are becoming a reality. Despite the journey ahead, well-designed carbon markets offer tools to transition away from fossil fuels, with environmental and financial incentives paving the way for achieving net-zero goals.

Over the years, the Paris Agreement spurred governmental actions promoting electric vehicles, taxing carbon emissions, and investing in renewable energy. Despite these efforts, climate scientists remain concerned about the risks of extreme heat, sea-level rise, and melting polar ice caps. According to the World Resources Institute the world is on track to exceed the carbon budget for a 1.5°C temperature rise by 2030.

Luckily, businesses are playing a crucial role in addressing climate change, with a significant increase in investments in carbon credit projects. However, a study by Trove Research indicates that the current rate of investment is insufficient, with an additional $90 billion needed to achieve the necessary volume of credits by 2030 to avoid exhausting the carbon budget.

The International Carbon Reduction and Offsetting Accreditation emphasizes the complexity of decarbonizing value chains and the need for comprehensive net-zero strategies for every business. The International Emissions Trading Association (IETA) supports businesses in navigating the VCM, where companies can buy and sell carbon offset credits globally. The VCM allows businesses to invest in decarbonization efforts beyond their own value chains. It operates outside compliance markets, focusing on voluntary emissions reduction and carbon offset projects.

The VCM has played a pivotal role in driving investments in renewable energy and nature-based solutions.

In recent decades, carbon project development has undergone significant changes, navigating through voluntary adoption, market dynamics, emerging schemes, methodologies, and evolving technologies. The landscape continually evolves to provide innovative solutions for a low-carbon economy. Carbon project development has embraced participative processes, fostering improvements at both the Clean Development Mechanism (CDM) level and in voluntary standards.

Global markets

In 2023, international markets saw significant developments, especially concerning carbon project crediting under Article 6.4 of the Paris Agreement. The Supervisory Body finalized methodological recommendations, addressing project ambition alignment with the Paris Agreement, additionality, permanence, leakage prevention, and the transition of CDM activities. Notably, removals were included in a UN crediting mechanism, but no actual crediting is expected before 2025.

Article 6.2, governing international trade of mitigation outcomes, witnessed agreements between countries for future transactions. Leading buyer nations, such as Singapore and Switzerland, engaged actively, with Ghana and Senegal notable on the supply side. ICE exchange marked its first trades in futures for the UN aviation offsetting scheme, CORSIA, covering the voluntary phase from 2024-2026.

Climate finance played a key role in diplomatic discussions, with high-level summits pushing for reform in funding channels from rich to developing countries. Suggestions included World Bank reform, debt relief, and new carbon pricing forms.

EU ETS

The key factor steering efforts to mitigate climate impact throughout the European Union and guiding the EU’s decarbonization strategy is the EU Emissions Trading System (ETS). Initially focusing on major emitters like industrial facilities since its creation in 2005, the ETS has extended its coverage to include aviation and recently to the shipping industry.

While the current state of carbon credit efforts falls short of the ambitious goals for 2030, optimism is driven by the progress made in the past and the anticipation of further developments in carbon markets, policy, and technology. Addressing the gap between current efforts and future targets remains a crucial challenge.

2030 Carbon Markets

In 2030, corporate carbon credit portfolios follow the Oxford Principles, combining credits for avoided emissions, short-lived storage, long-lived storage reductions, and long-lived storage removals. In 2013, carbon trading policies were underdeveloped, CDR technology was emerging, and VCM standards were lacking. Notably, recent strides include significant government investments in CDR, like the US allocating $500 billion, and the European Parliament establishing rules for carbon removal verification. Looking ahead to 2030, despite past progress, it is essential to address challenges and obstacles to ensure continued advancements in standards and government investments are crucial in combating climate change.

The evolution of the VCM

The VCM has historically played a crucial role in climate action, especially during periods when global political cooperation for a carbon market seemed limited. The VCM’s growth continued even after the Paris Agreement, with significant climate pledges from companies, resulting in a market worth $2.1 billion in 2021.

The VCM has undergone a revolution in recent years, marked by the Taskforce on Scaling Voluntary Carbon Markets, leading to the creation of the ICVCM and the VCMI.

The ICVCM has set out 10 Core Carbon Principles (CCPs) for high-quality credits, and the VCMI provides guidance to corporate buyers on making high-integrity claims. This revolution aligns the VCM with potential UN-backed markets, promoting convergence in quality and integrity. A highly liquid, commoditized voluntary market is envisioned to increase annual carbon removals by 1,500%, creating a single pool of fungible credits accessible to both voluntary and compliance markets.

The success of this vision relies on standardization, exemplified by the CCPs, which aim to simplify complex issues around standards, benchmarking, and quality. A well-developed, securitized VCM could serve as a runway for Article 6.4 implementation, offering a complementary role in a Paris-aligned world. Governments may choose high-quality voluntary credits over Article 6.4 units, and companies may prefer them for flexibility and co-benefits.

To ensure continued relevance, the VCM must embrace digital innovation, including AI, blockchain, remote sensing, and big data management, to reduce friction, improve transparency, and enhance interoperability. This innovation can help the VCM address challenges, maintain high-quality standards, and play a vital role in the evolving landscape of global carbon markets.