How can we strengthen the carbon market?

Carbon credits could play a significant part in reaching net-zero by 2050. But the carbon market needs much greater integrity and credibility - as well as supply. How can we achieve this?

The global voluntary carbon market (VCM) is a critical tool for mobilizing finance for decarbonization efforts. As the market for carbon credits has grown, however, the value and effectiveness of the market has come under scrutiny.

To restore trust and increase confidence in the market, it is critical that carbon credits represent real, additional, verifiable emission reductions. The credibility and integrity of carbon credits rely heavily on the standards governing their creation and purchase. Strengthening market mechanisms, ensuring rigorous accounting standards, and increasing global cooperation are all essential to ensure that carbon markets contribute towards a low-carbon future.

How carbon credits can power green finance investment

Voluntary carbon credits have become an increasingly popular tool for climate action in recent years. They allow companies to offset their carbon emissions by funding projects that reduce or remove carbon from the atmosphere.

This can include energy efficiency projects, tree planting, and other carbon avoidance projects including sequestration of methane from landfills. They also have the potential to finance emerging climate technologies, such as carbon capture and storage (CCS) projects. Currently, however, the methodologies for certifying carbon schemes are so restrictive that engineered CCS projects are effectively shut out of the market.

Credibility challenges

VCM inflows reached a peak of $2 billion in 2021 and were estimated to grow to more than $50 billion by 2030 . However, concerns about a lack of regulation have persisted and a string of newspaper investigations in 2023 highlighted inflated impact claims by carbon credit developers and gaps in project design. These eroded trust in voluntary carbon markets and led to a significant reported slowdown in the market, with sharp declines in VCM prices and contracts .

Rebuilding trust in the voluntary carbon market

High-integrity carbon markets still have the potential to be a highly effective mechanism for decarbonization, and there are clear pathways to ensuring they are verifiable and trusted. However, the future blueprint for international carbon markets has yet to gain international consensus. Article Six of the Paris Agreement, which relates to the governance of carbon markets, remains mired in the United Nations decision-making process.

One of the most promising developments at the most recent UN Climate Conference in Dubai (COP28) — where the topic was one of intense discussion — was an agreement by major carbon registries, including Gold Standard and Verra, to align on carbon accounting principles under a new framework. While details of the framework remain thin, it represents a potentially important step towards greater harmonization across carbon markets. Independent carbon market regulators, including the Science Based Targets Initiative and the Voluntary Carbon Markets Integrity Initiative, also agreed to produce a cohesive carbon project quality standard, which could make the market significantly easier to navigate for buyers.

Greater government scrutiny could also be an important way of improving confidence and boosting the integrity of carbon markets. Currently, compliance carbon markets are regulated and aim to offset carbon through national schemes by requiring the purchase of credits from energy-intensive industries, while voluntary markets are unregulated. In recent years, there are signs that both markets are converging , which could lead to more robust and transparent standards and digital verification efforts for both markets.

One example is Singapore’s carbon tax , which allows companies to meet part of their tax liabilities through the purchase of certified third-party carbon credits. More countries — including the United States — are starting to explore alternative market models .

There are also a growing number of initiatives designed to improve transparency in carbon markets. Independent global regulators, such as Voluntary Carbon Markets Integrity Initiative (VCMI) are pushing for tougher scrutiny of the voluntary carbon markets, including a code of practice to ensure that companies buying credits can do so with confidence. Meanwhile the Climate Action Data Trust launched its Public Data Dashboard ,? meaning the public can now access and scrutinize carbon credit purchases with unprecedented ease.

Ensuring a robust supply of carbon credits

As the VCM grows, carbon credit projects will have to ramp up at an unprecedented rate. Nature-based solutions and efficiency gains are valuable, but not sufficient on their own. Green-lighting CCS projects which are currently shut out of the market by restrictive certification requirements would be a powerful tool for accelerating decarbonization. This would take advantage of the wave of forthcoming projects given investment impetus through mechanisms such as the US government's federal tax credit , adding a new steady supply of carbon credits to the global market.

Strengthening credit verification, using digital methods, better matching between buyers and suppliers through standardized project descriptions and a stronger market infrastructure will all help to scale up VCMs.

Revitalizing the carbon market so that it meaningfully contributes to emissions reduction goals is a key challenge for climate action. There are signals that 2024 could be the year where global co-ordination and standardization mean that they can start to realize their significant potential.

Article originally published on the IEF website - https://www.ief.org/news/how-can-we-strengthen-the-carbon-market