Will the Voluntary Carbon Market ever be a reliable tool for corporate climate plans?

Fresh research has claimed that the availability of certain carbon credits could grow by six times the size of demand today, with prices also set to rise significantly as corporate buyers move on from a “wait and see” mindset. So, what exactly does this mean for the carbon credits market?

Will the Voluntary Carbon Market ever be a reliable tool for corporate climate plans?

Initiatives are underway to enhance the transparency and quality of available carbon credits for purchase.

Carbon markets remain one of the most contentious tools that corporates can lean on as part of their climate goals. On the one hand, environmental NGOs have warned that no corporate climate strategies can be classed as ‘high integrity’, due to an over-reliance on carbon offsets. Yet a survey of businesses from edie found that 86% of businesses believe that carbon credits can form a vital part of corporate ESG strategies, but only if they are used for unavoidable emissions.

The voluntary carbon markets (VCMs) are stuck in a state of flux. Efforts are ongoing to try and improve the transparency and quality of carbon credits available for purchase but currently, 60% of businesses believe that the carbon credits market is “currently too risky to invest in”.

While businesses are predominantly focused on decarbonisation when exploring VCMs, there is research that showcases how valuable these markets are to incentivise jurisdictions to actively conserve crucial ecosystems, reducing deforestation, providing livelihoods for communities and utilsing restoration to combat the twin emergencies of the climate crisis and ecological breakdown.

Growth and demand

A report from the Environmental Defense Fund based on new data from MSCI Carbon Markets has made some pretty punchy claims as to the projected growth of certain credits available through VCMs, but warned that demand may not scale with growth.

The research’s key warning is that many companies have committed to purchasing “high-integrity” emissions reduction credits, based on national or large-scale Reducing Emissions from Deforestation and Forest Degradation (REDD+) schemes based in certain regions. Demand for jurisdictional REDD+ has “plateaued” over the past two years due to concerns about market integrity. Indeed, the supply of VCM credits continued to outpace demand in 2023, according to the research.

Nonetheless, the research suggests that jurisdictional REDD+ carbon credit prices are set to increase significantly by 2028.  It found that up to 300 million metric tons of forest carbon credits from these REDD+ programmes could be in the market by 2030 – six times greater than the demand for such credits today.

As the types of credits comes from smaller project-based activities aimed at reducing emissions from deforestation and degradation, the belief is they can provide social and environmental benefits in developing countries, adding value aside from just decarbonisation.

Jurisdictional REDD+ (or JREDD+) is an emerging market, but three tropical forest countries, Guyana, Costa Rica and Ghana have already signed JREDD+ deals in the VCM.

Elsewhere, the state of Acre, in Brazil signed a term sheet for 10 million credits with the LEAF coalition. Corporate members of the LEAF coalition have collectively pledged to spend $1.5bn to support emissions reductions by ensuring tropical forests that act as carbon sinks are protected from deforestation while protecting the rights of Indigenous Peoples and members of local communities.

The research notes that REDD+ prices have fallen by over 70% in the last 12 months, but that “premium” high-integrity projects, trade at double the average price. EDF estimates JREDD+ credits at $6 – $12 depending on the vintage of the credit and individual jurisdictional considerations. These prices are set to grow to around $15 in 2028.

EDF also notes that a survey of almost 500 corporate buyers has found a willingness to spend a 20 – 40% premium on JREDD+ credits over REDD+ ones.  EDF does reiterate throughout the research that due to the infancy of the markets, the pricing forecasts can be “highly imprecise and one or two large policy changes could shift pricing dramatically.”

Report author Dylan McCall-Landry, Director of Sustainable Finance at EDF, said: “There is no way to avoid the worst impacts of climate change without drastically reducing tropical deforestation by 2030. Carbon finance via jurisdictional scale programs can provide vital resources to reverse current economic incentives, so that forests are worth more alive than dead, while also benefiting local governments, Indigenous Peoples and Local Communities, as well as biodiversity.

“This report aims to enhance market transparency, empowering forest nations to better navigate carbon markets and secure vital financing to conserve these crucial ecosystems.

Policies and frameworks

A patchwork of regulations, either voluntary from within the market itself, or via national governments and jurisdictions has emerged that could impact carbon credits.

The SEC issued Corporate Climate Disclosure rules in March 2024, which requires the US’s largest companies to disclose climate-related risks. Carbon credits, as a mitigation source, are included under the Disclosure rules.

Closer to home, the EU’s Green Claims Directive has just been approved. It restricts companies from making vague green claims about their products, and is especially relevant for those utilising carbon credits to offset. While these two frameworks are likely to reduce credit purchases in the short term, EDF notes that as consumer confidence in brand claims grows, it may boost private sector confidence in turning to credits for those unavoidable emissions, rather than for vague green claims.

The market still lacks the teeth to really instigate confidence.

The Voluntary Carbon Markets Integrity Initiative (VCMI) has been working on a rulebook of guidance for corporates wading into the VCM.

The VCMI reiterates that carbon credits must account for real and verified reductions or removals in emissions while also adhering to stringent environmental and social safeguards. The guidance also states that companies should use these credits in addition to, rather than instead of, active decarbonisation measures.

The VCMI also unveiled the first batch of corporates that would work with the initiative on a new “rulebook” to outline the usage of credits.

Bain & Company, BCG, Better Drinks, Natura and Sendle are among the first members of the Early Adopters Program (EAP). The programme, which runs through December, will help corporates make claims for the use of carbon credits to accelerate the uptake of the VCMI’s Claims Code of Practice.

Additionally, the Integrity Council for the Voluntary Carbon Market (ICVCM) looks set to outline its “Core Carbon Principle” approach to carbon credits, which will act as a label on carbon credits and could well create a significant premium on some credits that corporate may wish to utilise.

Then, of course, there is the upcoming consultation from the Science Based Targets initiative (SBTi).

The SBTi released a statement in April confirming that it would produce updated guidance on how companies can use ‘environmental attribute certificates’ including carbon credits to account for the delivery of their climate goals, specifically those relating to Scope 3 (indirect) emissions.

At present, companies wishing to align with the SBTi’s Net-Zero Standard can only use offsets to address 10% of their absolute emissions across all scopes. Many firms have aired concerns that they will not be able to deliver such significant emissions cuts. The consultation will explore whether companies should be allowed to increase carbon credit allowance beyond the 10% threshold. Many NGOs disagree with this, but six NGOs wrote to the SBTi this week saying they would support the decision.

These NGOs would support the SBTi in enabling businesses to use carbon credits to a greater extent to meet their science-based targets, provided that:

  • Only high-quality credits are used, as defined by the Integrity Council for the Voluntary Carbon Market
  • Companies prioritise the direct abatement of operational and value chain emissions
  • Credits used to ‘net’ Scope 3 emissions should result in climate benefits in the near-term
  • Companies should reduce the use of credits over time as technology and capacity improvements are made
  • Definitions of the appropriate use of offsets are drawn up “in close coordination” with the Voluntary Carbon Market Integrity Initiative (VCMI), taking note of its beta guidance on Scope 3 emissions accounting

Market recommendations

Based on the latest developments it seems that this “wait and see” approach isn’t going anywhere until guidance is formalised, labels are introduced and even then, corporates may be dissuaded by the premium they need to pay on high-integrity credits, given that many are still grappling with reduced resources.

In the meantime, the Climate Crisis Advisory Group (CCAG) has assessed the viability of the VCM to combat the climate crisis. The research, published this week, outlines seven recommendations to build trust and transparency, at which point it can become a “meaningful tool” for emissions reductions and removals.

CCAG argues that scientific principles must be used to identify what counts as a carbon credit, and for the VCM to highlight the current projects that have delivered real emissions reductions.

A call is also in place to ensure finance is redistributed so co-benefits are shared with local communities. It is currently very hard to gauge how much funding goes to the on-the-ground communities when investing in offsets.

CCAG also wants standardised monitoring, reporting and verification (MRV) practices to ensure each credit is comparable, real and verifiable.  An independent body overseeing practices at national, regional and global levels would also help regulate the market, shifting the focus from quantity to performance and quality of credits.

Chair of the Climate Crisis Advisory Group, Sir David King, commented: “There is no doubt that the voluntary carbon market faces immense challenges if it is to play a significant role moving forward. But I do believe that if it is based on robust scientific principles and is implemented transparently, the VCM has the potential to be a significant force for good.

“The science is clear: we need to be pulling every lever available to us to help tackle the climate crisis. This is one such lever and we should be doing everything possible to ensure that it is fit for purpose.”

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