Scaling voluntary carbon markets to help meet climate goals

Voluntary carbon markets help companies supplement their emissions-reduction efforts and finance climate action. The Taskforce for Scaling Voluntary Carbon Markets offers a draft blueprint for them.

Limiting global warming to 1.5 degrees Celsius requires that global annual greenhouse-gas emissions be cut by 50 percent of current levels by 2030 and reduced to “net zero” by 2050. To achieve these goals, deep, broad-ranging, and rapid action to lower emissions must begin immediately across all sectors of the economy. As more companies commit to reaching net-zero emissions, they will be expected to show how they plan to meet these targets with an appropriate mix of direct emissions reductions and emissions offsets using carbon credits.

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Carbon credits, purchased voluntarily, enable organizations to compensate for or neutralize emissions that have not yet been eliminated, by financing projects that reduce or avoid emissions from other sources, or that remove greenhouse gases from the atmosphere. A large, effective voluntary carbon market would help increase the flow of capital to these projects, and thereby play a critical role in reaching net-zero and net-negative emissions goals. Recognizing the need for such a market, the Institute for International Finance (IIF) established a private-sector Taskforce on Scaling Voluntary Carbon Markets (see sidebar, “About the taskforce”). The ambition of the taskforce is to create a blueprint for building a voluntary carbon market of unprecedented scale and for ensuring it is transparent, verifiable, and robust.

Six topics for action to scale up voluntary carbon markets

With knowledge and advisory support from McKinsey, the taskforce has identified six topics requiring action, spanning the entire carbon-credit value chain. In setting out these topics, the taskforce built on numerous scaling efforts that are already under way. The resulting blueprint does not seek to replace ongoing initiatives, but rather to articulate an integrated set of priorities, including some that existing efforts have yet to address. The six topics for action are as follows:

1. Core carbon principles (CCPs) and attribute taxonomy. These quality thresholds will ensure credits adhere to the highest level of environmental and market integrity. The CCPs should be hosted and curated by an independent third-party organization, which should also define a taxonomy of additional attributes (for example, project type) to classify credits.

2. Core carbon reference contracts. Liquid reference contracts (spot or futures) with a daily price signal will enable price-risk management and the growth of supplier financing. Information from such reference contracts would also be used as an input for pricing over-the-counter trades.

3. Infrastructure: trade, post-trade, financing, and data. Resilient and scalable infrastructure enables the listing and trading of reference contracts. Clearinghouses and meta-registries support post-trade activities (on-exchange and over the counter) and provide counterparty default protection. Supply-chain financing will provide funding for developers. Advanced data infrastructure will increase data availability and strengthen the market’s overall integrity.

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4. Consensus on offset legitimacy. Establishing further guidance on the appropriate use of carbon credits will ensure that offsetting does not disincentivize efforts to mitigate emissions in the first place and will clarify the use of offsetting in corporate claims.

5. Market integrity assurance. The integrity of voluntary carbon markets should be improved in three areas: participant eligibility, participant oversight, and market functioning.

6. Demand signals. Clear demand signals would provide the impetus needed to drive the development of liquid markets and scaled-up supply.

As voluntary carbon markets begin to scale up further, decision makers across industries should consider their own plans for participating in these markets in the near future.

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