Why public and private sector collaboration is essential in our journey to net zero

Paraphrasing Charles Darwin from 1859: It is not the strongest or the most intelligent of the species that survives. It is the one that is the most adaptable to change. In response to the growing challenge of climate change, global corporations have announced pledges to become net zero within the next ten to thirty years. Commendable pledges now need to give way to the hard work around implementation. One practical tool in the corporate solutions kit – growing in adoption and significance – are voluntary carbon credits. Trading volumes in the voluntary carbon market have expanded rapidly – growing from $300mm in 2020 to over $1bn in 2021, with some market participants predicting the market will grow to around $50bn by 2030.

There is a healthy debate around the reliance on carbon offsets to meet net zero targets. New opportunities present new challenges. Significant inefficiencies exist in the market today that impede scalability. The current landscape is varied in both cost and impact. A corporate client recently purchased a voluntary carbon credit for $5,000 to fund research on ocean biomass, while another paid $10 for the preservation of existing forests. Each offset one ton of carbon from the company’s carbon account. The fragmentation is driven in part by a diverse set of motivations – impact investing, consumer marketing, employee retention, response to shareholder pressure, or a prelude to regulation.

Goldman Sachs has a long history supporting the development of new asset classes, and our experience teaches us that market structure addressing homogeneity, liquidity and transparency are critical ingredients for success. The quality standards for voluntary carbon credits must become less voluntary. Some corporates have taken independent steps to define best practices for carbon investing, but the market needs greater transparency and coherence to higher principles from suppliers, market makers and shareholders. There are currently multiple registries, methodologies, trading venues and contracts – all of which adhere to different standards.

There is an urgent and immediate need for corporations, market participants, policy makers and scientists to come together to better harmonize and raise standards. Improvements will drive transparency, liquidity and greater uniformity in how shareholders evaluate the purchase of voluntary carbon credits when evaluating the sufficiency of a corporate’s net zero strategy. Some corporates will not achieve their stated net zero goals without offsetting some portion of carbon emission. This is a complementary tool, to be used in conjunction with (rather than instead of) tangible actions to reduce emissions. To bookend with Darwin: “In the long history of humankind (and animal kind, too) those who learned to collaborate and improvise most effectively have prevailed.”