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Digital TransformationThe Voluntary Carbon Markets

The Voluntary Carbon Markets

If 2021 elevated optimism in voluntary carbon markets (VCMs), then 2022 brought some of those expectations down to earth. The markets’ explosive growth between 2019 and 2021 as well as the rapid acceleration of corporate net-zero commitments led companies to make big bets on its eventual size. But by 2022, participants were confronting new levels of complexity about the markets and the role of credits in their broader sustainability strategies.

Carbon markets are at an inflection point: Either the uncertainties will be resolved through cooperation by participants and regulators, leading to yet more growth, or markets will become bogged down by poor alignment and confusion. The latter course could cause many potential buyers to wait for greater clarity, thus slowing the growth of VCMs and limiting the potential of this important tool in the fight against the climate crisis. A look at the market dynamics of 2022 and the outlook for 2023 provides some insight to corporates navigating the VCMs and hoping to capitalize on the opportunities within them.

Several increasingly important trends will shape the carbon markets in 2023, each with the potential to strengthen markets, increase integrity, and help build scale.

We will see rigorous debates over the claims that credit buyers can make. VCMs lack a consensus on the claims that buyers of carbon credits can make. Claims of carbon neutrality are common, but it’s often unclear whether this refers to the offset of direct emissions or also includes indirect emissions along the value chain. Often, it’s not clear what type of credits are being considered. Avoidance or removal credits? Short- or long-term storage? And what’s the level of quality?

Given this, different companies could make identical claims for entirely different offsetting approaches, which don’t reward investments in strategies that rely on high integrity or credit quality. The market will have to work toward consensus on the standardization of voluntary claims. In 2023 and beyond, we expect to see lively debates over which claims are the appropriate ones for credit buyers to make and for the VCMI to have a central role in these debates.

Markets for nature-based solutions will start to quantify the value of ecosystems and biodiversity. A greater focus on ecosystems, as seen in the COP27 cover decision and the COP15 biodiversity summit, will encourage the growth of a market for biodiversity credits. 

Several promising pilot projects use a crediting approach to certify biodiversity impacts and divide up the impact into purchasable units. But measuring biodiversity is complex. And integrating more qualitative claims into carbon markets could create more confusion than clarity. Carbon markets are based on a single quantifiable metric—namely, carbon emissions—and yet they have taken decades to mature. A concentrated global effort will be needed to determine how to integrate the impacts of biodiversity into markets, to avoid creating more complexity.

In the short to medium term, we expect more regulatory involvement and oversight in VCMs. If done well, this could create the much-needed guardrails that will provide the trust required to scale. If done hastily, however, and without learning from the groundbreaking work done by voluntary actors already, it could also stifle the emerging infrastructure and constrict adoption.

In this fast-changing environment, it can be difficult for corporates to make the right decisions, but the urgency of the climate crisis does not allow us to wait for the perfect market. Executives need to act decisively, even in a volatile environment. Several actions can help navigate uncertainty and avoid inaction.

Act today, not tomorrow. 

Bold decarbonization action remains the top priority for companies on their net-zero journeys. As corporates set ambitious goals to align their decarbonization plans with a 1.5-degree future, many recognize that they will need to rely on carbon credits to meet their near-term emissions reduction goals. Taking an early stance will help companies develop their carbon credits position and give them an advantage over peers.

In this situation, we talked with Mr. Marcello Ferraina, CEO of Celebron Spa, one of the most visioner entrepreneurs about market opportunities. In his vision, credits are not a one-size-fits-all solution for climate action. Companies can consider their options to decarbonize their value chain, using carbon credits as a good resort. Moreover, it is possible to integrate other benefits such as biodiversity, poverty alleviation, or social inclusion in their choice of carbon credits can help companies meet their broader sustainability goals.

Some companies will also want to explore the commercial opportunity in credits beyond their own business needs. These companies will need to determine where to participate in the value chain and how to secure sufficient high-quality credits, whether from passive procurement or moving upstream to investing in project development. They will also need to identify the critical enablers, including building the required capabilities and developing a clear communication plan that reduces reputational risk.

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