As we pass the midway point of 2023, we find ourselves in the third crucial year of the battle against the climate crisis in undoubtedly the most decisive decade yet. Time seems to be racing by and the countdown is advancing at a dizzying speed.
Listen closely to the resounding plea of science, echoing through the corridors of multiple climate change gatherings: a formidable 50% slash in global greenhouse gas (GHG) emissions by 2030 is our beacon of hope against the looming abyss of a runaway global catastrophe.
Cruising Down a One-Way Street…in the Wrong Direction
How are we doing?
Spoiler alert: horrible (see image below).
Global CO2 emissions from energy combustion and industrial processes, 1900-2022Source: IEA, 2022
COP28 is only a few months away and with it comes the first Global Stocktake.
The Global Stocktake of the Paris Agreement (GST) is an assessment of how well the Paris Agreement is being implemented by member countries. The objective is to evaluate the overall global advancement toward fulfilling the Paris Agreement’s purpose and long-term objectives (reducing GHG emissions).
The GST findings will publicly inform what many in our field already know: we are way off track. Global GHG emissions continue to rise and are trending up, not down.
Despite the painful truths reached by looking in two directions—back at historical trends and forward at projected trends—we somehow maintain hope.
Solving the climate crisis requires a belt full of tools. Gordian Knot Strategies regularly utilizes a few of these handy tools on behalf of our clients. One of those (and probably the most contentious) is the utilization of carbon credits from the Voluntary Carbon Market (VCM).
If you’ve been paying attention to the VCM for the last few months, your brain probably hurts. There’s been a relentless influx of updates, changes, suggestions, criticisms, and proposed regulations.
If you haven’t been focusing on the VCM, you saved yourself a headache. But now is the time to dive in because the market is likely going to grow with a prediction of more carbon credit retirements in 2023 than in 2022.
Source: Trove Research
Most importantly, clarity for improvement is fast on the way (more on this below).
Thanks in part to all the recent movement, our firm often hears the question, “What the heck is happening in the Voluntary Carbon Market?”
An entirely fair question. Let’s discuss.
Voluntary Carbon Market 101
The VCM is complicated and uncomplicated, depending on the perspective. On one hand, it is a market just like any other: it involves buying, selling, and trading. On the other, its commodity—carbon dioxide—is not so simple. Below is a summarized explanation. (If you want to learn about the VCM in more detail, feel free to message us.)
In a nutshell, the VCM is a mechanism through which entities can voluntarily offset their GHG emissions by purchasing carbon credits. These credits represent a quantified reduction or removal of GHG emissions from the atmosphere through various qualified mitigation activities (projects).
Projects might include renewable energy, reforestation efforts, methane capture, or clean cookstoves (among many others). When a project successfully reduces or removes one metric tonne of carbon dioxide (CO2e), it generates a carbon credit that—once verified—can be sold on the VCM.
To participate in the VCM, a buyer selects from a range of carbon offset projects and purchases the volume of carbon credits needed, which varies wildly in price depending on the project. These credits can offset the equivalent carbon emissions that the buyer’s activities generate. If you want to reduce 10 metric tonnes of CO2e you buy 10 verified credits. By buying credits, a participant aims to demonstrate its commitment to environmental sustainability and contribute to funding projects intended to positively impact the climate.
Theoretically, the VCM can play a crucial role in encouraging the development of ecofriendly projects (especially in developing countries) and empowering businesses and individuals to take tangible action toward mitigating climate change.
VCM: The Problem Child
However, the VCM is rife with problems and currently faces several major issues that challenge its effectiveness and credibility. Key concerns include surface terms such as greenwashing, additionality, double counting, credit verification, certification, permanence, and leakage…a lot of industry jargon that we will not be discussing in this article.
We often hear that carbon credits are nothing more than a license for corporations to pay to pollute. We refute this.
Trove Research has shown empirically that companies that have been “material users of carbon credits have decarbonized twice as fast as those that do not use carbon credits.”
Furthermore, findings by BloombergNEF point out that even the most aggressive abatement strategies will have residual emissions. Specifically, if major companies adhere to the SBTi net-zero pathway to limit global warming to 1.5°C, there will still be 1.5 Gt (gigatons) of CO2e in residual emissions after reducing gross emissions in line with SBTi. If major companies instead follow an abatement strategy to maintain a 2°C pathway (which is far from ideal), that volume of residual emissions climbs to 7.9 Gt CO2e.
In short, the VCM has a pivotal role to play, so we must get it right.
However, in January, a few groups claimed that their investigations concluded that most carbon credits are effectively worthless. Industry proponents pushed back, stating: “Well, yes, that is kind of true. Some are junk but hey, some are still good!”
Source: The Guardian
The fallout was pivotal.
Yes, there are massive problems with the VCM and subsequent carbon credits. But this highlighting of their actual value created discussion amongst some smart, concerned groups. The beauty is that if done reasonably, such discussion can lead to step-change improvements. The golden word that kept coming up as a solution was…integrity.
A-D-I-D-A-I
All-Day-I-Dream-About…Integrity
Integrity / noun: the quality of being honest and having strong moral principles
Integrity is what our parents and educators impart on us over and over as we grow up, to hopefully craft us into decent human beings. Regarding the VCM…
Integrity / noun: adherence to moral and ethical principles; sound in construction; the condition of being unified.
That’s the ticket! And that is precisely what the VCM needs to be effective and help the world decarbonize: unity and sound construction.
Thankfully, there are a whole host of groups working to improve integrity. But for the sake of brevity, the rest of this article will focus on two major players that have emerged to help bring some much-needed integrity to the VCM. They are the VCMI and the ICVCM.
Yeah, I know…confusing.
Voluntary Carbon Markets Integrity Initiative (VCMI)
Are you looking to purchase carbon credits from the VCM to achieve your GHG emission targets but are unsure which credit is the right one? Do you want to make sure that you aren’t spending precious company capital on some of those junk credits? VCMI has you covered.
Source: VCMI Twitter
In June, VCMI released its long-awaited Claims Code of Practice to help guide buyers on the appropriate actions necessary to decarbonize. The organization stated the following:
The primary purposes of the VCMI Claims Code are twofold:
- To provide clear requirements, recommendations, and supporting guidance to companies and other non-state actors on when they can credibly make voluntary use of carbon credits as part of their near-term emissions reduction objectives and long-term net-zero commitments; and
- To guide the associated claims that they can make regarding the use of those carbon credits.
Finally, buyers have some direction.
Integrity Council for the Voluntary Carbon Market (ICVCM)
(Disclosure: Sean Penrith, the CEO of Gordian Knot Strategies, is a senior advisor to the ICVCM.)
The yin to VCMI’s yang is the ICVCM because buyers need something to buy. The goal of ICVCM is to create integrity on the supply side of the deal to ensure that the product it is offering is legitimate.
In March, ICVCM released its Core Carbon Principles (CCPs), which are ten principles that were arduously crafted to create a high standard for carbon credits. In addition to the CCPs, ICVCM developed a Program-Level Assessment Framework which outlines thorough criteria and decision tools for each principle. The idea is to provide a CCP stamp of approval to carbon credits that meet the high-quality threshold.
ICVCM hopes to have the first batch of CCP-approved credits in the market later this year.
Source: ICVCM
The good news for the market is that the two groups have decided to work together to solve the integrity problem and improve confidence for both carbon credits sellers and buyers.
The newly formed collaboration will continue to release updated standards and guidance while integrating best practices from a crew of other key market actors such as the Greenhouse Gas Protocol, the Science Based Targets initiative, CDP, and the We Mean Business Coalition’s 4As of Climate Leadership.
Now What?
Despite the rough waters that the VCM has been navigating since the turn of 2023, we believe that smoother sailing is ahead.
From a market standpoint, the total market value is predicted to continue its growth in 2023. With each passing quarter, more companies pledge to science-based net-zero commitments, indicating interest in carbon credit purchases. And although credit prices have continued a downslide, more recent months have seen an uptick in prices and industry experts are optimistic for a gradual increase.
From the environment’s perspective, the clarity and guidelines that have come into play in the last few months are promising. The focus on high-quality carbon credits is sharpening and greenwashing is increasingly in the crosshairs. With greater scrutiny around net-zero and decarbonization claims, no company wants to get caught with its pants down due to the purchase of empty credits.
If the amount of carbon projects that offer first-rate carbon credits and tangible co-benefits grows and credit purchasing entities follow the recommended 1-2 combo of decarbonizing business operations followed by credible offset purchases for hard-to-abate emissions, the VCM and carbon credits have a real shot to do what they are intended to do: remove or avoid GHG gases from entering our atmosphere and help the world reach its decarbonization goals.
The ride isn’t over yet as COP28 in November will surely bring more updates to the VCM. But we remain optimistic that the VCM can continue to improve and finally develop into the powerful climate crisis prevention tool we imagine it can be.
