Voluntary carbon markets can help companies decarbonize in the near term. Image: Unsplash/micheile henderson
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- Voluntary carbon markets (VCMs) can play a key role in accelerating climate action, while decarbonization through mitigation remains the ultimate goal.
- VCM investment can augment, instead of distract from, decarbonization and provide a direct catalyst for wider carbon mitigation initiatives worldwide.
- Stakeholders including regulators, market initiatives and corporations, must work together to overcome obstacles and promote VCM investment.
The voluntary carbon market (VCM) is widely seen as an essential lever to accelerate climate action, especially in the near term. The market directs capital flows from the private sector to create and protect natural carbon sinks, as well as to develop and implement technologies that will reduce and remove carbon dioxide.
While decarbonization through mitigation remains the ultimate goal of corporate climate action, it is clear that VCM investment is required to scale climate action globally and plays an important role in establishing a global price on carbon for business.
This provides a direct catalyst for wider mitigation initiatives while providing carbon finance to a diversified set of actions. Such investment should be viewed as augmenting, rather than distracting from, decarbonization.
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In 2022 the voluntary carbon market channelled more than $1.3 billion to projects that reduced or removed approximately 184 Mt of carbon emissions, compared to global net anthropogenic GHG emissions of 59Gt in 2019.
Especially in the Global South, these VCM-enabled capital flows are dearly needed. According to data aggregated by the United Nations Framework Convention on Climate Change (UNFCCC), the Global South will require trillions of US dollars in mitigation and adaptation finance to meet their nationally determined targets under the Paris Agreement.
This investment will also offer other benefits (known as co-benefits) such as supporting biodiversity conservation and protecting livelihoods of local communities. Public funds will not meet this need; tapping into private and corporate capital through the voluntary carbon market is a powerful and necessary lever to accelerate climate action today.
Scaling the voluntary carbon market
While it is more than two decades old, the voluntary carbon market is still in its early stages with high degrees of controversy and therefore uncertainty for corporate entrants. Companies that are currently active in the VCM have invested in building the capabilities required to manage the uncertainty and risks.
However, to move up the S-curve of adoption, the market needs to offer easier-to-understand rules of engagement, lower the entry barriers, and provide a more explicit business case for action.
Before making meaningful commitments beyond simply relabelling existing corporate social responsibility budgets, companies entering the market will need the VCM to evolve across three key dimensions.
1. Defined incentives for market participation
Corporate participation in the voluntary carbon is often considered discretionary or philanthropic – thus its’ “voluntary” nature. Yet without a clear linkage between VCM participation and net-zero targets, corporates struggle to establish the link between the rationale for action on a macro level and the tangible mitigation outcomes on a micro level.
2. Clear market engagement guidelines
There is a lack of sector-specific clarity on the role of carbon credits in the near-term transition to net zero. Companies will need better-defined, industry-specific and consistent guidance to help them allocate limited funds between in value chain abatement and outside value chain mitigation, buy high-quality carbon credits and communicate their actions confidently. This is particularly relevant for the next wave of voluntary carbon market participants, which, unlike many of the larger, well-funded early adopters, will not have the resources to develop bespoke VCM strategies.
3. Protection against reputational damage from factors outside their control
The risk of being criticized, even when acting with integrity and taking all reasonable measures to adopt industry best practices, has led many corporates to remain on the sidelines. Without changes in these three areas, climate action beyond corporate value chains will remain an optional and niche tool for years to come with dire consequences: the world will leave a critical tool for financing climate action on the table, and it will become much harder to achieve global net zero.
Making the most of VCMs in the green transition
While efforts to develop a well-defined market structure are under way, new entrants can learn from early adopters. Based on their experience and expertise, these companies integrate high-quality carbon credits into their wider net-zero and environmental, social and governance (ESG) strategies along four critical dimensions.
Net zero pathway: Determine the role of carbon credits to meet or exceed climate goals based on science-aligned targets that assess technological, financial, and other constraints on decarbonization. Carbon credits should be used in a complementary manner to the direct abatement of emissions, and not as a substitute.
Value creation and recognition: Understand the value and impact of carbon credits from the standpoint of communicating and disclosing details on credits transparently. While the market needs to provide more structured incentives for high-integrity VCM participation, leading players are developing ways to use carbon markets as a tool for value creation that goes beyond direct financial value, such as forward-looking risk management, brand building or employee engagement.
Portfolio: Prioritize high-quality, high-impact carbon credit portfolios, with a short-term focus on avoided emissions and move towards carbon removal in the long term. Additionally, integrate carbon credits into a broader portfolio of climate action within and beyond the corporate value chain.
Orchestration: Integrate the carbon credit strategy in the overall net-zero approach. Purchasing carbon credits should be closely connected with the broader decarbonization path, for example, through an internal carbon price that translates the costs for mitigation beyond the value chain into direct monetary incentives for internal and external stakeholders. The touchpoints within the organizational structure are manifold and need to be mapped carefully.
Scaling meaningful climate action
Wider corporate adoption of the VCM is critical to scale climate action and provide capital for much-needed activities outside of direct corporate value chains. Moving the VCM up its S-curve requires mobilizing early adopters and onboarding the next wave of entrants. But what motivated early adopters to act is not enough to catalyse adoption from the next wave.
A new narrative for participation is required, enabling the strategic use of carbon credits to achieve net-zero emissions and create wider sustainability impact while offering a pragmatic path for the next wave of market participants.
What’s the World Economic Forum doing about climate change?
Stakeholders, including regulators, market initiatives and corporations, are working together to overcome current obstacles in the VCM and promote investment. Notably, several key initiatives, such as SBTi, VCMI and ICVCM, plan to release new guidance in 2023 to address the market’s lack of clarity.
The World Economic Forum, in collaboration with Bain & Company, has assembled a group of leading companies that recognize the urgency to act. Together we aim to advance the dialogue on the use of high-integrity voluntary carbon markets as a tool for climate finance, and support others with our collective experience.
This will start with the publication of a playbook in the coming months that synthesizes how corporates can strategically use carbon credits on the road to net zero.
Ivy Langat, Consultant, and Nicholas Foreman, Manager at Bain & Company also contributed to this article.
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The views expressed in this article are those of the author alone and not the World Economic Forum.
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