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How the voluntary carbon market can help address climate change

Business leaders are making more ambitious goals to reduce the global greenhouse gas (GHG) emissions A market is emerging which can assist in achieving them by supporting firms’ efforts to reduce their own carbon emissions. This is the rapid growth market for carbon credits, which are voluntary.

Carbon credits (often called “offsets”) are a key component of carbon credits. They have an important double function in the fight to combat climate change. They help companies support the decarbonization of their carbon footprint, thus speeding up the process of transitioning to an environmentally friendly future. They also help finance projects for removal of carbon dioxide from the atmosphere–delivering negative emissions, which will be needed to neutralize residual emissions that will persist even under the most optimistic scenarios for decarbonization. Although the voluntary carbon credit marketplace is gaining significant growth, it remains quite tiny. The report that was recently released by the Taskforce on Scaling Voluntary Carbon Markets is aimed at creating an outline for solutions to overcome the obstacles that hinder its expansion. This article will provide an explanation of the process of carbon credits and how they could aid in the global effort to combat climate change.

The double role of carbon credits is to address climate change

Carbon credits are a document that represents one metric tons of equivalent carbon dioxide which can be kept from being released into the atmosphere (emissions reduction or avoidance) or eliminated from the atmosphere as a result of a carbon reduction project. In order for a carbon reduction project to earn carbon credits it has be able to prove that the emissions decreases, or the carbon dioxide eliminations are genuine, quantifiable and lasting, in addition to being independently verified, and distinctive (see the sidebar “Criteria in carbon-based credits”). If the project is in compliance with the criteria set forth by standards that are independent, like Gold Standard and Verified Carbon Standard (VCS)–credits are granted. The carbon impact of a credit is only able to be claimed — that is, it counts towards climate-related commitments–once the credit is removed (canceled through the registry) following which it cannot be sold. Carbon credits are deemed to be a “voluntary carbon credit” when it is purchased and then redeemed on a basis of voluntary rather than as part the process of ensuring compliance to legal requirements.

The earnings generated by the sales of carbon credits can be used to fund the development of carbon reduction projects in various projects. They include renewable energy, avoiding emissions resulting from fossil fuels and natural climate solutions like reforestation, avoiding deforestation, or agroforestry efficiency in energy use and resource recovery, for example, the reduction of methane emissions from landfills and wastewater facilities, among other things.

Although the majority of these projects varieties, including renewable energy, avoiding deforestation and resource recovery concentrate on reducing carbon emissions, other types like reforestation are focused on removing CO2 from our atmosphere. This is an important distinction and demonstrates the two-fold importance that carbon credits from voluntary sources can play in combating climate change

In the short-term in the short-term, carbon credits earned through voluntary projects focusing on emissions reduction or avoidance could help speed up the transition towards a decarbonized world economy, for instance by promoting investment in green energy sources, efficiency in energy use along with natural capital. Reducing emissions is often the most cost-effective way to tackle the issue of greenhouse gas concentrations in the atmosphere.

In the long-term, carbon credits can be a key factor in increasing the removal of carbon dioxide (or negative emission) required to neutralize the residual emissions1 that can’t be reduced further. In a recent review we found that at five gigatons of emissions would be required annually to achieve zero net emissions in 2050. They could be accomplished by a combination and a combination of climate-related solutions from nature, such as forest reforestation (for instance, storing carbon within trees) and emerging carbon capture and storage, and use solutions like direct air capture using carbon storage (DACCS) and bioenergy that uses carbon storage and capture (BECCS). Carbon credits from voluntary sources can be used to in the financing of the expansion of these technologies.

The role of carbon credits in climate commitments of corporations

A credible commitment to climate change by a company starts by setting an emissions reduction goal that covers the indirect and direct greenhouse gas emissions. If the company doesn’t possess an emission baseline to establish a target making one is the first step.

Achieving a target’s ambitious level with the most recent research on climate is widely regarded as the best way to go. This means that the goal should match the amount of decarbonization needed for limiting global warming to less than 2.25 degree Celsius higher than pre-industrial norms. At a minimum, it should most importantly, it should be aligned with the 1.5-degree path that scientists believe will lower the chances of triggering the most harmful and irreparable impacts from climate change. This Science Based Targets Initiative has come up with methods to set targets that are already being used by more than a thousand businesses, including a number of large multinationals. To reach the necessary emission reductions, businesses can use levers to improve efficiency in energy use, converting to renewable energy sources, and addressing the emissions of value chains.

In the next stage, a company could agree to a goal which involves the use of carbon credits, either to offset emissions it hasn’t been able yet to eliminate or to neutralize any residual emissions that are not able to be diminished due to prohibitive cost or technical limitations. These kinds of targets are available with a variety of names (for instance zero carbon, neutral to climate net-zero carbon negative or positive for climate) however they all include a company enhancing reductions within its carbon footprint through financing other reductions through the purchase and redemption of carbon credits on a voluntary basis (see the section on sidebars, “Types of carbon targets”). In reducing its emissions by this method the company can claim to be reducing its effect on the environment. Certain companies, like Microsoft have gone further and set goals to have a net positive impact in the world’s climate.

A strong momentum, driven primarily by new commitments from corporations and points-of-sale products

After three years of booming growth and a booming market for carbon, the voluntary carbon market hit a record in the year 2019, as well as issuances as well as retirements (exhibit). Issues included 138 million tons of carbon dioxide equivalent–a little more than double amount in 2018–and retirements were 70 million, which is a 33 percent rise over the year prior. The growth is driven by a combination of brand new corporate climate commitments, including those for carbon neutrality and net-zero, and the so-called “point point of sale” offering of carbon credits, like Shell’s carbon neutral fuel that is a retail product of gasoline, carbon credits. It also includes the passenger offset programs of airlines that allow passengers to offset their carbon emissions of their flights by using Shell’s site.

Based on year-to date volumes and an extrapolation that is in line with seasonal patterns in the past and trends, we anticipate the market to set yet another record in 2019 in which issuances and retires each increasing by around one-third over the course of the year prior. After years of falling costs (from an average of about $7 per ton back in 2008, to around 3 cents per ton by the end of 2019) because supply has outpaced demand, we anticipate average prices to rise in the near-to-mid time frame, mostly due to a strong increase in demand particularly for projects with higher costs such as reforestation, and carbon removal projects in general (see the sidebar under “Issuances as well as retirees”). Although still quite tiny, the voluntary carbon market is gaining significant growth and its impact (and the potential for future growth) is attracting more attention.

Nature-based climate solutions (NCS) is a class that includes project types like the reforestation process, avoiding deforestation improved forest management, as well as Agroforestry, have seen the most growth than any other project type and have significantly contributed to the growth of the voluntary carbon market trend. In the period 2016-19, issuances in this category have more than doubled every year, in average. And in the year 2019, NCS accounted for 53 percent of the total issued. In addition, retirements within this sector have also increased (close to 50% annually, on average). We believe that this could be due to an increased awareness of NCS’s potential (they can provide a third of the emission reductions required to meet the Paris Agreement between now and 2030) and a greater interest in carbon dioxide reduction (of the which NCS can be the most efficient and tested method) as well as customers’ preferences for benefits in addition to climate change mitigation for example, biodiversity and impacts on local communities.