What is the Future of Nature-based Carbon Crediting?

Today’s announcement that the The Integrity Council for the Voluntary Carbon Market (ICVCM) approved Verra and Architecture for REDD+ Transactions (ART) as CCP-compliant programs is a good signal for the verified carbon market (VCM).? Following a decline in the VCM by about 25% in 2023 to $1.5 billion.? Volumes traded dropped as did average pricing, although projects with high quality ratings command up to 200% price premiums, as public criticism and concern about the quality and credibility of carbon credits, and the actors who develop these credits.? Carbon credits are increasingly a polarized, frequently misunderstood decarbonization lever.? There exists a powerful ideological split between people who believe that offsetting delays decarbonization, and proponents of carbon markets who believe that they accelerate decarbonization.?In such a noisy split, what is the potential future of the VCM longterm?? While it is hard to predict the future, this blog tries to help buyers, Governments and developers work on next steps. Here are a few key points:

·????? Carbon credits are designed to go extinct as a business model.? In an ideal world, society decarbonizes fully in the next century and carbon removals help to reduce atmospheric CO2 to safe levels after which there is no further demand for credits in the next 150 years.?

·????? The world needs to go carbon negative to return to safe levels of Carbon dioxide in the next century.? While net-zero or carbon neutral commitments are commendable, carbon-negative commitments need to become more universal.

Companies like 微软 have announced goals to go carbon-negative.? This is a huge pioneering leadership position.? For a company, being carbon-negative means removing more carbon than you have emitted since operations began.? A small number of companies have made carbon negative commitments like BCP (BioCarbon Partners) , Investindustrial Foundation and MAX Burgers .? Other than BCP, these other examples are from the US or EU: wealthy geographies responsible for the majority of historic cumulative emissions.? But if a company like BCP operating in a low-GDP, low emissions country like Zambia can make the effort to go carbon negative, then it should hopefully push more companies to make carbon negative commitments.? This will be easier for lower emissions sectors and take longer in emissions intense sectors, but it is still worthwhile consider a carbon-negative commitment over time.?

·????? There is no denying that carbon credits will form an integral part of decarbonization solutions going forward, but offsetting is only credible as a complementary strategy to direct emissions abatement.? A Sylvera study showed that the companies that offset do more for the climate than companies that don’t.? It’s not counter-intuitive in hindsight as companies who buy credits aim to take actions across their emissions holistically. Mandatory, public reporting rules could drive even further impact.? Currently, 81% of the largest companies do not yet have climate strategies or targets in place.? The companies that voluntarily spend on carbon credits use credits as part of a deeper commitment to cleaning up their footprint.?

·????? Opponents of offsetting understandably are also concerned that companies which buy carbon credits should be investing that money into reducing their internal emissions.? This is a valid concern.? The amount of money going into voluntary crediting is currently about 0.15% of compliance carbon markets.? For now, it is insignificant, but as the VCM converges with the compliance markets this will change. ?Combined with legislation that hopefully develops to cap emissions, and put a price on carbon, it is hoped that it will be more affordable for companies to decarbonize.

·????? Achieving the Paris Climate Agreement will require nature to contribute up to 37% of the near-term carbon removal and reductions needed by 2030 .?

·????? Loss and damage funding is likely to be politically blocked.? The US, for example, has vocally supported carbon markets as the pressure for loss and damage payments has mounted.? Governments are likely to prefer markets to deliver finance than taking funding away from defense, health or other budgets internally.? Let external markets do the work.

·????? Carbon credits cannot go away…just yet.? They need to in time, but for the foreseeable future they need to be used as a powerful lever to drive finance, implementation and decarbonization across the world.

·????? What will happen to communities when carbon finance dries up?? This is not too far away for some early REDD+ projects that approach the end of their crediting periods.? It’s expected that this finance will diversify and deepen rural economies to where they can thrive without carbon finance.? No where has this been tested yet, but there are examples like in Mexico of community economies strengthening and diversifying from community-based forest control .? The formula is not a secret: sophisticated community governance, a government enabling environment, and high prices for commodities produced.? But, any community that has a major influx of funding end will of course experience impacts.? Dubai or Mauritius are examples where leadership has made efforts to diversify away from a limited resource like oil or tourism.? It’s hard but not impossible.

·????? Approximately 36% of the world’s natural forests are community controlled or on indigenous lands while 80% of the world’s remaining biodiversity also occur on these lands.? Achieving behavior and perception change that make restoration of these resources more valuable in community development trajectories will require financial incentives that the VCM is already starting to provide.? Most of these communities are impatient for progress and are increasingly aware of carbon markets.? Interest globally has skyrocketed.? Demand from communities is likely to expand which is another reason why the VCM must continue to scale and innovate with transparency.? The VCM needs to continue refining both the supply and demand side to drive greater rigor and science into implementation, social impacts, and high integrity carbon monitoring.

·????? Sub-national and national governments, and even government departments overseeing lands, especially in emerging economies, are increasingly interested in exploring carbon finance as a financing tool.? Changing land use and reversing degradation will require external funding. I am skeptical that government to government grants to reduce emissions will materialize at the scale needed to close funding gaps.? The private markets are key to reducing funding gaps.

What can project developers do in this current whirlpool of opposing currents? Invest in the capacity to transform and measure social impact changes.? This will become the defining marker of a quality project in time.? This is the hardest part of a project in which to achieve impact and many developers ignore this or pay lip service to it.? Developers need to go beyond VCM standards and certify against the IFC Performance Standards or the World Bank equivalent, and B Corp certification.? Carbon accounting needs to be conservative and transparent.? Under the current evolution, many projects will not be viable due to reduced issuances, so developers are going to have to become more efficient and transparent in order to survive.? Scale will be the name of the game to balance against low issuances.

What can buyers do in this current whirlpool of opposing currents?? This is a time when exponential funding, energy and efforts are needed.? To meet the goals of the Paris Climate Agreement at the lowest cost requires emissions reductions and removals to be financed immediately.? Rating agencies are a helpful access to parsing projects.? These agencies are time limited too, until trust is restored in standards, developers and auditors.? Forming buyer coalitions like Frontier or LEAF can help reduce risk and share learning.

Scale is the name of the game: the world needs to become a sponge for carbon over the next few decades.? Every hectare where there is agreement and potential should be managed for carbon storage, even city backyards.? These markets are here, they are needed and they need more corporates to engage, alongside governments to regulate.