Our Take: Looking Back At Climate Finance and Carbon Markets in 2023

As we reflect on the pivotal developments within the world of climate finance and carbon markets of 2023, we have called on our IMPACT framework to guide our assessment.

IMPACT serves as an acronym, encapsulating what we believe are the core attributes that define the pace and trajectory of climate finance and carbon markets in terms of:

Integrity, Momentum, Prices, Achievement, Collaboration, and Targets.

In the pursuit of a more sustainable future, these facets offer a comprehensive lens through which we analyze the intricate tapestry of capital, actions, and policies that have unfolded over the course of the year. Join us as we share our perspective on the details of climate finance, carbon markets, challenges, and collaborative endeavors that have left a mark on the global landscape of climate responsibility.

From increased scrutiny to fostering veracity in the market, and from volatile credit pricing to hard evidence of corporate decarbonization, our IMPACT review aims to provide a nuanced understanding of the strides taken and challenges faced in the realm of climate finance and carbon markets in 2023.

I = INTEGRITY

Carbon Markets: Negative Media Sentiment

It is safe to say that from a media standpoint, this was not a great year for the VCM. It was bombarded with consistent negative attention pretty much throughout the past twelve months. Numerous articles and reports have blown the lid on some problematic carbon projects with issues ranging from bad faith actors to human rights issues to extreme over-crediting. This has led to an increase on the attacks of carbon market mechanisms and a decrease in carbon credit prices, especially in nature-based projects. But, as the adage goes “there is no such thing as bad press” because from where we are standing, the negative publicity has helped to weed out those bad actors and emboldened the upstanding participants to come together to heal a wounded market and move forward with greater integrity (the undisputed “Word of 2023”).

M = MOMENTUM

Climate Finance: The Ball is Rolling (But Not Fast Enough)

This year provided insights into climate finance for 2021 and 2022, revealing that nearly $7 trillion–roughly 7% of global GDP–is annually invested globally in activities harmful to nature by both public and private sectors. Climate Policy Initiative estimates that global investment in climate-related projects reached an average of nearly $1.3 trillion per year in 2021/2022, nearly double the rate observed in 2019/2020 (Figure 1).

*Figure 1 – When $1 Trillion Seems Tiny in Comparison*

During 2022, investments in nature-based solutions (NBS) reached approximately $200 billion, with governments contributing 82% (about $165 billion) and private finance contributing just 18% ($35 billion). Despite this progress, a massive financing gap remains. CPI estimates $8.6 trillion will be necessary every year between now and 2030, ramping up to $10 trillion annually through 2050, to limit global warming to 1.5°C (Figure 2). To achieve climate and biodiversity targets by 2030, funding for NBS (nature-based solutions) must nearly triple to $542 billion annually, and by 2050, it needs to quadruple to $737 billion. Despite the natural lag in data, the International Energy Agency estimates that total climate finance might climb to $1.8 trillion in 2023.

*Figure 2 – Investing Trillions to Save a Quadrillion*

P = PRICES

Carbon Credits: Price Volatility

From $16/mtCO2e in January 2022 to around $4/mtCO2e at the end of 2023, prices of Platts CNC (Nature-Based Carbon Credits) have fallen dramatically (Figure 3). Platts CNC (S&P Global) incorporates credits from nature-based projects that carry standard Sustainable Development Goal (SDG) co-benefits and are certified by major standards including the Gold Standard, Climate Action Reserve, Verra, Architecture for REDD+ Transactions, and American Carbon Registry. By year’s end, convergence increased significantly between nature-based and avoidance credits, leaving only removal credits trading at a separate price premium. Futures contracts imply anticipations of price escalation, so the price premium for exchange-traded nature-based credit might once again rise in 2024.

*Figure 3 – Prices of Standardized Carbon Credit Contracts, 2021-2023, World Bank Group*

A = ACHIEVEMENT

Using the VCM: Positive Traction

Using the VCM is working! An Ecosystem Marketplace report showed strong positive market traction as it indicated that companies using the VCM demonstrate noteworthy sustainability practices and faster decarbonization results compared to their counterparts. These results include:

1.8x more likely to decarbonize every year
1.3x more likely to implement supplier engagement strategies, showcasing active collaboration with suppliers, employees, and customers to address climate impacts
3.4x more likely to possess an approved science-based climate target
1.2x more likely to have board oversight of their climate transition plans
3x more likely to include Scope 3 Emissions in their climate target

C = COLLABORATION

VCM: Market Guidance

Earth! Wind! Fire! Water! + Heart! GO PLANET!

In what feels like a call to summon the VCM version of Captain Planet, groups from all corners of the market are banding together to help companies act against climate change. The We Mean Business Coalition (WMB), Climate Disclosure Project (CDP), Science Based Targets initiative (SBTi), and Greenhouse Gas Protocol (GHG Protocol) are helping companies decarbonize their operations and supply chains. Meanwhile, Integrity Council for the Voluntary Carbon Markets (ICVCM) and the Voluntary Carbon Markets Integrity Initiative (VCMI) provide guidance on supply and demand respectively to help address remaining emissions with high-integrity carbon credits (Figure 4).

In addition to this, six of the leading independent crediting programs in the voluntary carbon market (VCM) joined forces to improve transparency and consistency. The American Carbon Registry (ACR), Architecture for REDD+ Transactions (ART), Climate Action Reserve (CAR), Global Carbon Council (GCC), Gold Standard (GS), and Verra’s Verified Carbon Standard (VCS) are collaborating to enhance integrity in the carbon market, aiming to create a significant improvement in dependability by 2024. All six are seeking assessment and approval under ICVCM’s Core Carbon Principles (CCPs).

*Figure 4 – Guiding Ambitious Corporate Climate Action*

T = TARGETS

Hits and Misses

The Article 6.4 Supervisory Body (SB) worked diligently throughout 2023 to draft text with the hopes of operationalizing the United Nation’s carbon market at COP28. While the SB was chipping away this year, a handful of nations around the world were drafting guidelines, establishing national registries, entering into bi-lateral agreements, and signing MOUs to prepare for collaboration on the Article 6.2 market. However, when COP28 wrapped, no agreement was made on text for either Article 6.2 or Article 6.4 so the possibility to formalize both of these carbon trading mechanisms is getting punted to COP29 in 2024. There are opinions abound, ranging from “terrible news” and “a failure” to “no deal is better than a bad deal.”

For net zero targets, around 2,000 new companies opted to act in accordance with Science Based Targets initiative (SBTi), by either pledging to reach net zero or by committing to science-based decarbonization targets.