Business leaders are making more ambitious goals to reduce global greenhouse gas (GHG) emissions there is a market which can assist in achieving these goals by assisting businesses’ efforts to cut their own carbon emissions. This is the fast-growing market for carbon credits that are voluntary.
Carbon credits (often called “offsets”) play an important function in the fight for climate-related change. They help companies support the decarbonization of their carbon footprint, thereby accelerating the process of transitioning to low-carbon development. 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. While the market for carbon credits that are voluntary is currently gaining momentum however, it remains tiny. The report that was recently released by the Taskforce on Scaling Voluntary Carbon Markets is aimed at creating an outline of solutions to overcome any obstacles to its continued expansion.
The dual function of carbon credits is to address climate change
Carbon credits are an official certificate that represents one metric tons in carbon dioxide equivalent which can be blocked from entering the atmosphere (emissions reduction or avoidance) or eliminated from the atmosphere as a consequence of a carbon-reduction program. To create carbon credits, the project must be able to prove that the emissions cuts or carbon dioxide eliminations are genuine, quantifiable permanent, indefinite, independently verified and unique (see the section on “Criteria in carbon-based credits”). If the project is in compliance with the criteria set forth by standards that are independent, such as the Gold Standard and Verified Carbon Standard (VCS)–credits are able to be granted. The effect of a carbon credit is only able to be claimed — that is, it can be counted towards climate-related commitments–once the credit is taken off the market (canceled by the registry) and then cannot be sold. Carbon credits are deemed as a “voluntary carbon credit” when it is purchased and then redeemed on a voluntary basis , rather than as part of a procedure of complying to legal requirements.
The profits made from selling carbon credits allow the creation of carbon-reduction initiatives across many different types of projects. They include renewable energy; avoiding emission from fossil fuels and natural climate solutions like reforestation, avoiding deforestation, or agroforestry energy efficiency and recovery of resources for example, the reduction of methane emissions coming from landfills or wastewater facilities, among other things.
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Although the majority of these projects kinds, such as renewable energy, forest management, and resource recovery are focused on reducing carbon emissions, others, like forest restoration, are focused on eliminating CO2 from our atmosphere. This is an important distinction that demonstrates the dual function carbon credits, which are voluntary, can play in combating climate change
In the short run the short term, carbon credits that are voluntary from projects focusing on emissions reduction or avoidance could help speed up the transition to a carbon-free global economy, for instance by promoting investment in green energy sources, efficiency in energy use as well as natural capital. Eliminating emissions is usually the most cost-effective way to tackle the issue of the greenhouse gas emissions in the atmosphere.
In the medium – to longer term, carbon credits may be a significant factor in accelerating carbon dioxide removal (or negative emission) necessary to offset residual emissions that can’t be reduced further. In a recent review we found that at minimum 5 gigatons (or negative emission) would be required annually to achieve net-zero emissions in 2050. They could be accomplished by combining natural climate solutions, such as Reforestation (for instance the carbon sequestration in trees) as well as nascent technological carbon capture use and storage solutions like direct air capture using carbon storage (DACCS) as well as bioenergy that uses carbon storage and capture (BECCS). Carbon credits that are voluntary can help in the financing of the expansion of these technologies.
The role of carbon credits in climate commitments of corporations
A legitimate corporate climate commitment starts with setting an emission reduction target that covers the indirect and direct greenhouse gas emissions. If the company doesn’t set an environmental baseline to determine a goal setting one, it is the first step.
Achieving a target’s ambitious level with the most recent science on climate is widely regarded as the best method. This means that the goal should match the amount of decarbonization needed to keep global warming at least 2.25 degree Celsius over preindustrial temperatures. It should also most importantly, it should be aligned with the 1.5-degree path that, according to scientists, would decrease the likelihood of experiencing the most hazardous and irreparable consequences from climate changes. This Science Based Targets Initiative has created methods for setting targets that have already been adopted by more than 1,000 businesses which includes many of the world’s top multinationals. To attain the required emissions reductions, businesses can take advantage of levers like improving efficiency of energy, switching to renewable energy sources, and addressing the emissions of value chains.
In the next step, companies may decide to agree to a goal that requires the use of carbon credits, either to offset emissions it hasn’t yet been able to completely eliminate or to offset remaining emissions that are not further reduced because of excessive costs or technological limitations. These kinds of targets are available with different names (for instance the carbon-neutral, neutral climate net-zero carbon negative, carbon negative, or climate positive) 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 this way the company can claim it is reducing its impacts on the environment. Certain companies, like Microsoft have gone even further and set goals to have a net positive impact in the world’s climate.
The momentum is strong, mostly driven by new corporate commitments as well as Point-of-sale services
After three years of booming growth in the carbon market, the voluntary 2 hit a record in 2019 as well as issuances as well as retirements (exhibit). Issues included 138 million tons of carbon dioxide equivalent–close to more than double that of the 2018 volume. Retirements were 70 million, which is a 33 percent increase over the year prior. This increase has been fueled by a combination of brand new corporate climate commitments, including carbon neutrality as well as net-zero. There are also the so-called “point point of sales” offers of carbon credits such as Shell’s carbon-neutral gasoline that is a retail offer of gasoline and carbon credits that are voluntary, as well as airline passenger offset programs that permit passengers to offset the carbon footprint from their flights via Shell’s site.
Based on year-to date volumes and an extrapolation that is in accordance with the historical patterns of seasonality We expect that the market will set a new record in 2019 as issuances and retirements each increasing by around 1/3 compared to the previous year. After years of falling costs (from an average of about $7 per ton back in 2008, to about $3 per ton in 2019) 3 as a result of the fact that demand is outpacing supply and we anticipate average prices to rise in the near-to-mid time frame, mostly because of the strong growth in demand particularly for projects with higher costs like reforestation, and carbon dioxide removal projects generally (see the sidebar under “Issuances or retirees”). Although it is still relatively tiny, the voluntary carbon market is currently gaining acceleration and its effect (and its potential) is receiving more and more attention.
The Natural Climate Solutions (NCS) which is a term used to describe a range of that includes project types like the reforestation process, avoidance of deforestation better forest management, and Agroforestry, have seen the most growth than any other project type and have significantly contributed to the market’s voluntary carbon direction. In the period 2016-19, the issuances in this category have more than doubled each year on average, and in the year 2019, NCS accounted for 53 percent of all issues. Additionally, retirements in this category have also increased (close to 50% annually, on average). We believe that this could be due to an increased awareness of the NCS’s potential (they can provide about one-third of the reductions in emissions required to meet the Paris Agreement between now and 2030) and a rising interest in carbon dioxide reduction (of of which NCS can be the most efficient and tested method) and the consumers’ desire for benefits in addition to climate change mitigation like biodiversity and the impact upon local community.
What’s next? What’s next? Challenges and opportunities
To speed up the voluntary carbon market’s growth and maximize its potential, it is crucial to tackle a number of significant issues. This includes the need to increase the impact and quality assurance of the market in order to bring stakeholders together with the requirements for a credible utilization of carbon credits that are voluntary in the context of an overall climate strategy, to create a new market infrastructure and lessen the uncertainty of regulation. We believe that developing creative solutions to these challenges will allow for more growth. The newly formed Taskforce on Scaling Voluntary Carbon Markets is aiming to develop an outline for the solutions.
Enhancing impact and quality assurance
Although reputable standards like Gold Standard or VCS confirm projects’ conformity to the standards of their respective methods buyers usually have limited information about the status of carbon reduction projects within their portfolio. The stakeholder community frequently raises questions about specific types of projects, like the ones that deal with the additionality of large-scale renewable energy initiatives; biodiversity within the context of afforestation projects that plant monocultures and non-native species, leakage and lack of community involvement when it comes to avoidance of deforestation, or the durability for natural climate strategies in general (see sidebar “Additionality leakage, additionality and permanent definition”).
While respected standards have implemented measures to deal with these concerns but the insufficiency of transparency and the skepticism of stakeholders has caused buyers to call for more vigor in the area of the impact of quality assurance and. This is why we anticipate innovation in measurement, reporting and verification practices to increase over the next several years.
Inspiring stakeholders to agree on the carbon credits that are voluntary
There is no consensus among the stakeholders about how to utilize carbon credits that are voluntary as part of a comprehensive climate strategy. So, different companies could differ on the role that carbon credits from voluntary sources could play in their progress towards net-zero. The most important points to consider are the degree that a company is able to depend on carbon credits that are voluntary in lieu of reducing its own footprint; the types of credits (for instance, emissions reduction or avoidance and the removal of carbon dioxide) to choose from and how their function could change as time passes. There is a distinct distinction between the purpose of carbon credits offered by voluntary organizations in the present and what role they’ll play in the future when the company has completely eliminated carbon emissions and only needs to offset its remaining emissions.
New market infrastructure being built
Today, carbon credits for voluntary use are traded mostly through the internet, which results in a lack of transparency regarding market information (for instance, transactions volume, price levels) as well as a dearth of data on reference which was a major obstacle to market development earlier. The standardization of tradable products and contracts can aid in increasing liquidity and the size of transactions, as long as the quality of the credit exchanged and the integrity of the market participants are guaranteed.
Eliminating the uncertainty of regulation
The negotiations regarding Article 6 of the Paris Agreement Article 6, which introduces an international carbon market/mechanism currently in progress. The effects from Article 6 for the voluntary carbon market are not yet clear. Do the voluntary purchase of carbon credits from private-sector actors aid countries to meet their climate goals post 2020 (which are known as contributions that are deemed to be national) or should they be added to the goals? Do governments allow projects to offer carbon credits on a voluntary basis? What is the problem with double-counting and how can that be prevented? Reduced uncertainty in the regulatory framework could lead more buyers to take long-term commitments and developers to invest in large-scale projects.
Carbon credits that are voluntary could play an important role in helping the world reach the 1.5-degree path. They can help accelerate the process of transitioning to a low-carbon future through enabling businesses to contribute to decarbonization that goes beyond their own carbon footprint , and aid in neutralizing residual emissions by funding carbon dioxide removal projects. To fully realize this potential an enormous amount of effort in the real world is needed to tackle the current issues and expand the market for carbon emissions that is voluntary. This will bring substantial benefits, not only in the fight against climate change, but also in conserving nature and the many advantages it brings to the human race.