Voluntary carbon markets are making progress – even if official ones aren’t

IT HAS been eight years since the Paris Agreement’s endorsement of carbon markets as a tool for efficient decarbonisation, which paved the way for the private sector to funnel global capital flows towards fixing the climate.

At COP28 last year, however, participants failed to adopt long-awaited rules and infrastructure for the carbon market.

The debates in Dubai were all about whether you believe markets are the solution or the problem.

Those who do not believe in market mechanisms, and who would rather count on government regulation, have called into question the quality of decarbonisation projects and the claims made by companies in the carbon-supply chain.

There have been news reports about individual projects, lawsuits about what companies can say, and increased regulatory scrutiny of the market. All this has, in turn, has raised concerns among corporations over their levels of participation in carbon markets.

Many companies have stepped back until they have further clarity about what carbon projects to buy and what to say about them.

Fortunately, the private sector has, in these past eight years, been able to put in place voluntary carbon market infrastructure that can accomplish climate objectives for countries, companies and individuals. Over the next nine to 12 months, we can expect a surge in corporate participation as confidence in the market’s integrity and efficacy grows.

Increased regulatory clarity and coordination among standards setters should help scale the volume and impact of carbon projects.

The voluntary carbon market went into rebuilding mode two years ago to fix issues related to a lack of clarity and consistency.

Over the course of the last year, in particular, major steps were taken that led to a set of announcements at COP28 (outside the official venues) that create safe harbours for corporations covering the types of carbon projects and credits they should invest in, and what they can say about their investments.

Three bodies came together for the first time in Dubai to announce an end-to-end integrity framework that was endorsed by nearly all market players, non-government organisations and governments.

The three bodies are:

• Integrity Council for the Voluntary Carbon Market, which is reviewing and approving all the methodologies for creating carbon credits;
• Voluntary Carbon Market Integrity initiative, which has set standards for corporate carbon neutrality claims; and
• Science Based Targets Initiative, which registers, monitors and enforces corporate climate pledges.

This is huge progress, and reinforced the private sector’s role in financing climate action globally.

Additionally, regulators and legislators are looking at the markets in their own countries to ensure they work in the maturing global framework of climate taxes, cap-and-trade systems, country climate goals, and carbon market platforms, standards and registries.

Singapore, for instance, has put in place a carbon tax and announced its cooperation in Dubai with more than 20 countries to create a supply of carbon credits that companies will be able to use to offset their carbon tax liabilities.

The United States, through the Inflation Reduction Act, is incentivising carbon projects around the country.

It has also, through the Securities and Exchange Commission and the Commodity Futures Trading Commission, announced its intent to require US-listed companies to disclose their carbon emissions and their decarbonisation plans.

Leading certification bodies such as Gold Standard and Verra, meanwhile, have announced they will standardise their approaches to ensure comparability and congruence between projects.

They have also upgraded the quality and science behind their most popular methodologies.

Since Paris, the United Nations Climate Change Conference has evolved from a decisional forum into one for collaboration and cooperation. Instead of meaningful language or binding treaties, we can now count on more of a stocktake of progress and announcements of major advances, big deals and breakthroughs.

Dubai’s outcomes, from the private sector, were a signal of growing momentum on several fronts: corporate clarity, country-to-country cooperation, and integrating compliance and voluntary carbon markets.

Demand is likely to continue prioritising the highest-quality credits, especially those that advance the Sustainable Development Goals, and projects will need to meet increasingly rigorous social and environmental safeguards.

Carbon markets need to work, and work quickly, to help achieve climate goals. These developments mean opportunities for both investors and project developers, and, if allowed to work, for the planet.

The writer is a professor at Hong Kong University of Science and Technology; he is also the founder and chief impact officer of Carbon Growth Partners, a fund manager and project developer in the carbon markets.