Why carbon markets must adapt to avoid forfeiting valuable climate finance
María Mendiluce
This article first appeared in Business Green.
Carbon markets can be a vital mechanism for raising corporate climate ambition – but they must be made more robust.
Businesses, as the linchpin of the global economy, are vital actors in ensuring the world meets its shared goals for climate action. Yet, to achieve these goals, they must be incentivised to unlock and deploy as much climate finance as possible to support both net zero emissions in the short-term, and full decarbonisation in the long-term.
Despite the scrutiny around the effectiveness of some projects over the last year, carbon credits and the voluntary carbon market (VCM) remain an effective tool for unlocking corporate climate finance, reaching an estimated $1.2bn in 2022 with projections of mobilising up to $40bn by 2030.
But this is just the tip of the iceberg. Business leaders made clear in a recent survey that structural and policy reforms to carbon markets and the broader net-zero architecture would encourage both more companies to invest, and more investment from those already using VCMs to fund critical priorities such as nature-based solutions.
To be clear, voluntary carbon markets must not be used as an excuse for the oil and gas industry to continue fossil fuel production. Instead, these companies must focus on transitioning their business models to align with industry-recognised principles on fossil fuel phaseout.
But for other sectors, investments in carbon credits can serve as a valuable complement to companies’ ongoing efforts to phase out fossil fuels, triple renewable capacity and double energy efficiency.
And research shows that carbon credits are actually helping companies accelerate their efforts to phase out fossil fuels and reduce emissions. Companies reported that VCMs allowed them to double down on climate action, achieving more than they would without carbon credits, and accelerating their decarbonisation strategies.
The benefits of carbon markets are not limited to emissions offsets. High-integrity VCMs also ensure vital capital is directed to climate-vulnerable countries to support sustainable development while decarbonisation technology is developed.
Governments, governance bodies and companies must therefore seize the moment for carbon market reform to unleash the full potential of carbon credits and nature-based solutions to deliver global climate action and decarbonisation.
To begin with, this means greater recognition of the role of carbon credit investments in supercharging corporate climate action, while also raising climate ambition for businesses as a whole.
At present, voluntary investments in carbon markets are not recognised by leading standard-setters for greenhouse gas (GHG) emissions accounting or for the achievement of corporate sustainability targets. This lack of recognition is discouraging companies from releasing more climate finance and must change if we are to incentivise more businesses to make climate- and nature-positive investments.
Greater recognition and inclusion of carbon credits by organisations like the Science Based Targets initiative (SBTi) alone would accelerate the annual VCM spend by an average of 10 per cent, according to business leaders.
But as well as recognition, companies also need reassurance about the integrity, transparency and validity of carbon credits to drive investment. More than a third of companies hold back from buying carbon credits over fears about a lack of transparency on credit quality.
Addressing these concerns will not only inspire greater investment into nature-based solutions but will also trigger a positive ripple effect throughout corporate climate action.
Research suggests that companies participating in VCMs decarbonise their business and operations twice as quickly as those not engaging with markets. Meanwhile, the latest survey found more than 60 per cent of business leaders at companies involved in VCMs believed that high-integrity, high-value carbon credits also incentivised investment in decarbonisation. And participants in the VCM are almost twice as likely to set an internal carbon price, encouraging businesses to reduce their fossil fuel use.
It is clear that investing in carbon credits and VCMs leads to the setting – and achievement – of more ambitious corporate climate goals by the world’s most forward-thinking businesses.
Carbon markets are therefore a vital mechanism for raising the level of ambition among companies looking to take action on climate, supporting decarbonisation both within and beyond their supply chains.
However, ultimately – and especially at a time of rising economic pressures – carbon credits and the VCMs are a “use it or lose it” opportunity for enhanced climate finance and greater progress towards decarbonisation.
Without greater reforms in the corporate net zero ecosystem to address the challenges faced by climate-conscious businesses, the world risks losing a critical source of climate finance precisely when companies are under pressure from high levels of inflation and looming recessions, and are subsequently looking to cut spending.
For instance, half of companies already purchasing credits said their carbon credit budget would be absorbed as savings if not purchased, forfeiting valuable climate finance that would not be easily won back under current conditions.
Businesses have made their position clear. They are ready and willing to engage in high-integrity carbon markets to ensure that companies, and the world, stay on track and meet our shared sustainability goals.
The world therefore urgently needs stronger, more robust carbon markets to leverage the private sector and mobilise the necessary climate finance. This untapped potential is an opportunity humanity cannot afford to miss.