At the mid-point of 2024: a reflection on the strong year-to-date progress made in the VCM
Carbonaires
Carbonaires is a values-driven carbon asset manager investing in high-integrity carbon credit projects.
The Rise and Rise of CDR
Could COP28 in Nov 2023 have been a VCM inflection point? The first six months of 2024 have been notable for a surge in activity, both in terms of project development and policy discussions across the globe, particularly for Carbon Dioxide Removal (CDR). At the global level, nearly all IPCC climate modelling pathways now acknowledge that CDR must play a significant role in meeting 2050 net zero goals. Governments are setting specific national CDR targets and looking for ways to stimulate CDR to drive sufficient investment at scale. Overall, the policy signals and general trajectory of the CDR market are extremely bullish in our opinion.
6-Month VCM Global Policy Update
The first 6 months of the year have seen a surge in international policy both on CDR and in general green policy aimed at the VCM specifically or either indirectly or directly benefitting the VCM.?
The United Kingdom
The UK is aiming to become a leader in European CDR by investing in various programmes. The UK government has pledged ￡100m to support various CDR methodologies including CO2 transportation and storage infrastructure. Biochar and enhanced weathering are among solutions included in the ‘GGR-D’ (Greenhouse Gas Removal Demonstrator) programme.
The UK is also exploring a contract for difference (CfD) approach that is currently going through a public consultation to integrate CDR into the UK ETS (Emissions Trading Scheme). The consultation, which opened on 23 May 2024 and closes on 15 August 2024, will determine the extent to which carbon removals are integrated in the UK’s ETS and therefore used as a decarbonisation lever.
The European Union
The EU is setting standards for and regulating the use of carbon credits, as shown in the publication of the Carbon Removal Certification Framework (CRCF). The CRCF aims to promote high-quality carbon removal activities in the EU - the first and most ambitious attempt by an international institution to set standards on high quality CDR. The framework was adopted in April 2024 and marks a significant milestone in the EU's climate strategy, through which the bloc will certify CDR credits within its own framework.
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The EU has also clamped down on greenwashing through the creation of the Green Claims Directive. Approved in March 2024, the legislation bans unsubstantiated carbon neutral claims and regulates all corporate environmental statements, including those in relation to carbon credits. The EU Parliament has proposed that all offsetting claims connected to “residual” emissions be certified under the EU’s CRCF to assure a minimum level of quality. The definition of “residual” emissions is still being debated and its determination will dictate the way in which carbon credits can be utilised and communicated.
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The United States of America
The US is incentivising CDR deployment and market creation through substantial subsidies and direct government procurement. The Inflation Reduction Act (IRA) has allocated $3.5bn in funding for CDR projects, $1.2bn of which has already been awarded. As a result, many CDR market participants are actively targeting the US, making it a hub for investment.
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The federal government has also publicly endorsed the VCM through the publication of its Voluntary Carbon Markets Joint Policy Statement and Principles. The White House explained the purpose of the policy: “put simply, stakeholders must be certain that one credit truly represents one ton of carbon dioxide (or its equivalent) reduced or removed from the atmosphere, beyond what would have otherwise occurred.” Treasury Secretary Janet Yellen added, “voluntary carbon markets can help unlock the power of private markets to reduce emissions, but that can only happen if we address significant existing challenges. The principles released today are an important step toward building high-integrity voluntary carbon markets.” This vote of confidence has bolstered VCMs in the US and beyond, signalling to buyers and sellers the meaningful role high quality CDR must play in lowering emissions. ?
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Latin America
Latin America is emerging as a key player in the VCM with various governments pushing to unlock value from the potential of the carbon markets. Brazil is currently developing a national ETS and carbon standard for nature-based solutions. Chile’s environment ministry has codified three carbon credit standards into law and is currently seeking to approve carbon credit suppliers at a national level. Paraguay and Chile are also making progress in operationalising bilateral agreements outlined in Article 6 with Singapore and Switzerland respectively.
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India
The Indian government is developing a national ETS, known as the Carbon Credit Trading Scheme (CCTS), to enable offsets to be used as a pathway to compliance with the EU’s CBAM (Carbon Border Adjustment Mechanism). India aims to be among the top three global carbon markets by 2030 and is following the structure of the EU’s ETS compliance scheme. It is estimated that India’s compliance market will be up and running by 2026 (possibly earlier) with an official timeline for its VCM currently under discussion.
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China
The Chinese national ETS claims to be the largest carbon market in the world, incorporating five billion tons of CO2 from more than 2,200 fossil-fuel power plants. Recently, China relaunched its national “Chinese Certified Emissions Reduction” (CCER) scheme which will become the national voluntary standard for certifying domestic carbon credits. Companies that are part of the mandatory ETS program can use CCER credits to offset a portion (currently 5%) of their emissions obligations. The CCER program underwent a six-year reform period before its official relaunch in January 2024 which included new regulations, crediting methodologies and a national registry for CCER credits.
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6-Month Additional VCM Boosting Activity
The Science Based Targets initiative (SBTi) announced a revision to its Corporate Net Zero standard, whereby companies can use carbon credits in the future to abate their scope 3 emissions. The organisation recognised that “when properly supported by policies, standards and procedures based on scientific evidence, the use of environmental attribute certificates for abatement purposes on Scope 3 emissions could function as an additional tool to tackle climate change.”
6-Month(ish) Notable VCM Endorsements
Mark Carney, UN Special Envoy on Climate Action and Finance & Former Governor of the Bank of England:
"High-integrity VCMs can promote a smoother, more efficient transition." "The prize is huge if we get this right. Carbon markets can provide hundreds of billions of dollars in annual cross-border capital flows to emerging markets, promote the end of high-emitting assets and help prevent new coal generation in Asia." Michael Bloomberg, Businessman, politician, philanthropist and author: "Carbon credits, which are bought and sold in what’s called the voluntary carbon market, offer companies and investors many ways to reduce greenhouse-gas emissions." "There is enormous potential demand for carbon credits." "Fixing the carbon-credit market won’t solve the climate crisis on its own, but it will go a long way toward enlisting the market in the fight."
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Ajay Banga, President of The World Bank:
"High-integrity voluntary carbon markets could help transfer resources of wealthier nations to support development.”
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To close this newsletter, we can’t help squeezing in an extra quote from the end of 2023 by US Special Climate Envoy John Kerry because it’s so impactful and because it helped frame so well the first 6 months of 2024 and hopefully a bull market to come:
“I have become a firm believer in the power of carbon markets to drive increased climate ambition and action, and the VCM is a vital tool to keep 1.5C in reach. Let's not waste any more time or let the perfect be the enemy of the good”