Carbon markets can mobilize significant private sector climate finance and raise ambition by lowering climate change mitigation costs. If designed and implemented in a way that ensures high integrity, carbon markets are expected to play an important role on the achievement of the global temperature goals of the Paris Agreement to the United Nations Framework Convention on Climate Change (UNFCCC).
Under the landmark 2015 Paris Agreement, 197 countries committed to avoiding the catastrophic impacts of climate change by limiting global warming to well below 2 ̊C, preferably to 1.5 ̊C, compared to pre-industrial levels. However, we are currently on track for more than 2.5 ̊C of warming above pre- industrial levels this century – far above the “safe upper limit” of 1.5 ̊C warming defined by the United Nations Intergovernmental Panel on Climate Change (IPCC).
While action to mitigate climate change and halt nature loss is essential, global finance flows are further entrenching unsustainable economic pathways. The IPCC reports that an additional investment of $2.4 trillion is needed each year in the energy system alone until 2035 to limit warming to 1.5°C.
Many companies are stepping up to support global climate action. Despite the disruptions from the COVID pandemic, in 2020, the number of corporate “net zero” climate commitments more than doubled. Businesses are under increasing pressure from consumers, investors, and governments to show that they can contribute constructively to solutions to the climate problem.
As companies and other non-state actors set climate targets, there is growing interest in voluntary carbon markets (VCMs). Provided the carbon credits purchased are of high integrity, VCMs provide an opportunity to channel private sector finance into mitigating climate change, protecting nature and supporting sustainable livelihoods at a time when finance is urgently needed.
What is a voluntary carbon market?
The voluntary carbon marketplace encompasses all transactions of carbon offsets that are not purchased with the intention to surrender into an active regulated carbon market. It does include offsets that are purchased with the intent to re-sell or retire to meet carbon neutral or other environmental claims.54
VCMs provide an opportunity to direct private finance, at speed and scale, to mitigate climate change. They can channel significant private sector finance over the next three decades into investment-ready carbon saving activities, which can also have positive ‘co-benefits’ such as energy access, biodiversity conservation, and sustainable economic development. The market size was US $320 million in 2019 but could be worth between US $5 – 30 billion per year by 2030,11 with perhaps two thirds of this channeled into nature-based solutions (NBS).
Voluntary carbon markets will make a significant, measurable, and positive contribution to the transition of the global economy to a 1.5°C future while promoting inclusive, sustainable development in line with the United Nation’s Sustainable Development Goals (SDGs).
The Role of Carbon Credits in Corporate Climate Commitments
Credible climate commitments demand clear pathways to a result of carbon neutral or ‘net zero’ and a clear and legitimate role for the use of carbon credits as part of corporate climate action plans which align their businesses with the said objective, currently being analyzed in many companies to increase the bet and be carbon positive, including this to its value chain.
The imperative for overall and absolute emissions reductions globally, to keep 1.5 ̊C within reach, necessarily means the end to ‘traditional’ offsetting – where carbon credits are purchased instead of reducing avoidable emissions within the value chain of a Company.
The use of carbon credits should be additional to abatement and should be carefully managed to avoid replacing other forms of public and private action
Today, hundreds of companies are making a variety of statements associated with their carbon credits transactions, their current greenhouse gas (GHG) emissions performance, and future mitigation commitments.
This proliferation of carbon credit-related claims comes with an assortment of different usages – offsetting, compensating, neutralizing, insetting, and financing additional mitigation contribution – as well as concepts, including carbon-neutral, climate neutral, net-zero, carbon negative, and climate positive. The lack of transparency has resulted in limited public confidence in corporate claims.
It is essential that companies are not using carbon credits to make claims that would mislead their stakeholders – including investors and customers – into thinking that the organization is taking more ambitious mitigation action than they are in reality. In addition, the array of claims should be clearly structured according to their potential climate impact and accuracy in framing the use of carbon credits, including what is required from a company to merit each claim.
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