The important role carbon compensation plays in transitioning to a carbon-free society

A carbon credit is a certificate representing one metric ton of carbon dioxide equivalent that is either avoided from being emitted into the atmosphere (emissions avoidance/ reduction) or removed from the atmosphere. For a carbon-reduction project to generate carbon credits, it needs to demonstrate that the achieved emission reductions or carbon dioxide removals are real, measurable, permanent, additional, independently verified, and unique, write Tiago Alves and Silvia Andrade of Reflora Initiative, Portugal.

Voluntary carbon offsets enable those in unregulated sectors or countries to offset their emissions by buying these carbon credits. This situation applies to those agents that are not under a legal mechanism, allowing the possibility of broad participation. Thus, Voluntary carbon offsets have an important role in the achievement of the different global efforts to achieve net-zero emissions since it involves a variety of participants through the implementation of different kinds of projects. The proceeds from the sale of voluntary carbon credits enable the development of carbon-reduction projects across a wide array of project types. These include renewable energy, avoiding emissions from fossil-fuel- based alternatives, natural climate solutions, such as reforestation, avoided deforestation, energy efficiency, and resource recovery, such as avoiding methane emissions from landfills or wastewater facilities, among others.

Today it represents an incredibly dynamic market that can be part of the solution to the climate crisis because of their economic and environmental efficiency. According to Portuguese based company Reflora Initiative the success of carbon markets depends on guaranteeing the quality of carbon projects by measuring the co- benefits delivered and making sure that every carbon credit sold brings real impact. Especially for voluntary carbon markets, this system also enables companies to gain experience with carbon inventories, emissions reductions, and carbon markets. Consequently, this mechanism may facilitate future participation in a regulated system.

Even though it is important the role that voluntary carbon markets have in contributing to the global effort to achieve net-zero emissions, it is also crucial to establish under what regulations this mechanism should work. For instance, the Science-Based Targets argues that the companies’ net-zero targets will require long-term deep decarbonization targets of 90-95% across all scopes before 2050. They also argue that when a company reaches its net-zero target, only a very limited amount of residual emissions can be neutralized with high-quality carbon removals, this will be no more than 5-10%. Therefore, under the definition of net-zero emissions made by SBT, the voluntary carbon offsets should be applied to the amount of residual emissions for each company.

On the other hand, there are also some advances related to article 6 that is part of the Paris Agreement. After five years of negotiations, the world’s governments settled on the rules for the global carbon market. Negotiators agreed to avoid double-counting in order to prevent that more than one country could claim the same emissions reductions as counting toward their own climate commitments. It is considered that this is critical to make real progress on reducing emissions. Additionally, this mechanism is also a potential tool for the execution of net-zero pledges in companies.

In addition to the Voluntary carbon markets, there are also the Compliance Markets which are created and regulated by mandatory regional, national, and international carbon reduction regimes, such as the Kyoto Protocol and the European Union’s Emissions Trading Scheme. Each of the participants within a cap-and-trade system (usually countries, regions, or industries) is allocated a certain number of allowances based on an emissions reduction target. These allowances are then neither created nor removed, but merely traded among participants.

Given the regulatory framework that a cap-and-trade system has, its mechanism is influenced by policy diffusion. One of the main distinctions with the voluntary carbon market is that this market does not need this policy diffusion. Therefore, companies could execute their climate goals in a faster manner since they do not depend on this compliance framework. Moreover, it is considered that this specific framework by having a cap-and-trade system could limit the emissions that can be offset, which could affect the natural development of the carbon market.

Additionally, the compliance framework has different mechanisms depending on each country. For example, the systems in South Korea and Tokyo stand out as the only ones with specific sectoral caps. Some systems seem to rely heavily on emissions trading to achieve reductions. Other systems include looser references to contributing to overall GHG emissions reductions in the jurisdiction target. In contrast, Voluntary carbon credits have also an important role in democratizing carbon compensation since any company or individual on a voluntary basis could compensate for their emissions. Therefore, even though voluntary carbon markets have a lack of standardized requirements, there is more consistency in terms of the supply/demand forces in this market which could, in turn, help the transition to a decarbonized society.

The Taskforce on Scaling Voluntary Carbon Markets (TSVCM) estimates that demand for carbon credits could increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050. Overall, the market for carbon credits could be worth upward of $50 billion in 2030. Based on stated demand for carbon credits, demand projections from experts surveyed by the TSVCM, and the volume of negative emissions needed to reduce emissions in line with the 1.5-degree warming goal, McKinsey estimates that annual global demand for carbon credits could reach up to 1.5 to 2.0 gigatons of carbon dioxide (GtCO2) by 2030 and up to 7 to 13 GtCO2 by 2050. Therefore, it is considered that there is still a significant potential in the development of the carbon markets, especially leading by companies that need to offset their emissions.

In terms of Nature-Based Solutions or Nature Climate solutions, several actors argue that any credible pathway to net-zero must include ending deforestation and the degradation of natural ecosystems plus reducing emissions associated with agricultural production and food systems. Reflora Initiative is one of those companies focusing its carbon offsetting services on natural climate solutions and making sure that carbon projects are coupled with co-benefits, such as biodiversity conservation and enhancement, freshwater regulation, and social and economic support to rural and indigenous communities. For instance, a significant proportion of the voluntary market is based on projects in tropical developing nations. it is also considered that NCS also supports both adaptation to climate change and mitigation of emissions. For example, agroforestry systems can create more resilient farming economies, while restoration projects can reduce the impacts of intense rainfall events and floods.

To sum up, there is still a considerable potential for Carbon Credits Markets, specifically for Voluntary Carbon Credits. Companies’ Net-zero Targets will need these offsetting tools in order to achieve their decarbonisation goals. Additionally, it also gives the option to individuals to compensate for their emissions. On the other hand, the role of NCS projects is key to remove emissions in the atmosphere, while their co-benefits are generating impacts not only to the biodiversity but also to support rural and indigenous communities.

References

• Stockholm Environment Institute. “Making Sense of the Voluntary Carbon Market: A Comparison of Carbon Offset Standards”.
  https://www.sei.org/publications/making-sense-voluntary-carbon-market-comparison- carbon-offset-standards/
  
• Tom Dowall. “Science-Based Net-Zero Targets: ‘Less Net, more Zero’”. https://sciencebasedtargets.org/blog/science-based-net-zero-targets-less-net-more-zero
  
• McKinsey. How the voluntary carbon market can help address climate change https://www.mckinsey.com/business-functions/sustainability/our-insights/how-the- voluntary-carbon-market-can-help-address-climate-change/
  
• McKinsey. A blueprint for scaling voluntary carbon markets to meet the climate challenge https://www.mckinsey.com/business-functions/sustainability/our-insights/a-blueprint-for- scaling-voluntary-carbon-markets-to-meet-the-climate-challenge/
  
• World Economic Forum. Why natural climate solutions are about much more than carbon
  https://www.weforum.org/agenda/2021/10/natural-climate-solutions-more-than-carbon/

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