In a quest to reach the goals of the landmark 2015 Paris Agreement on Climate Change, world leaders are making plans to facilitate and grow a massive Voluntary Carbon Market (VCM).
The buzzy VCM concept has grabbed headlines over the past year, as it is often mentioned as a key part of limiting global warming to just 1.5 degrees above pre-industrial levels as outlined in the Paris Agreement.
As almost every nation signed the landmark global treaty and set off to work on individual contributions, the concept of buying and selling emission reductions (called offset credits) quickly spread to boardrooms across the world. There, companies feverishly pledged to help the cause by reducing emissions to “net-zero” as fast as possible.
Next stop VCM
Along the path to ending climate change, the VCM is found at the intersection of climate action financing and breakthrough technology research. To many, a robust VCM means big financial gains to pay for project development to create more offsets and to bankroll the key technological advancements that will really save the planet.
In other words, it’s a stopgap measure before environmental innovation transitions humanity into a net-zero carbon future – as heavy as that seems.
The carbon crediting strategy – in which emissions anywhere are offset by carbon reductions or removals created elsewhere – is by no means a new idea by those that believe carbon reduction is applied universally, no matter where it happens in the world.
It first surfaced in the US Clean Air Act of the late 1970s, and over the years, the concept was included as part of policy-driven emissions reduction programs – mostly quietly working in the background as a tool for industrial emitters to comply with governmental protocols.
Now, it’s been brought to the forefront in a big way.
In recent years, corporate leaders have faced increasing pressure from investors that mark sustainability as priority number one. As a result, hundreds of companies have pledged to become “net-zero” carbon emission by 2050 – many aligning goals with those in the Paris Agreement.
How does it work?
To illustrate how the concept works, let’s examine carbon offsetting on the most basic, personal level.
For most of us, carbon offsets credits are easy to come by on the internet. With a few clicks and a credit card, you can offset your carbon footprint straight from the producer’s tap and even pick your flavor too. Do you prefer a reforestation credit? Or one produced by renewable energy? You can make your purchase knowing that the payment is applied into any number of environmental projects all over the globe.
Now, imagine this concept on a much larger scale – think tech giant or oil major – where companies must purchase at least a million credits to offset emissions that can’t currently be reduced through operational measures.
And like a traveler’s decision to offset emissions from a post-Coronavirus vacation, this broad corporate action is meant to drive much-needed financing to not only carbon projects to create more credits but also to the expensive task of developing new carbon removal technologies imperative to stopping global warming.
Corporate Investments Facilitate Growth
To do this, some corporations invest money directly into the bank accounts of project developers.
For example, in the week prior to Earth Day 2021, Apple announced a $200 million carbon removal initiative. For its Restore Fund, Apple brought in financial partner Goldman Sachs and carbon offsets project developer Conservation International for forestry work in Africa. They aim to remove 1 million metric tons of carbon a year, Apple said.
Last year, Apple said it will reduce its emissions by 75 percent by 2030 while developing innovative carbon removal solutions for the remaining 25%. The fund relates to that 25%, which can’t be cut operationally.
So-called “breakthrough technology” like Carbon Capture and Sequester (CCUS) lags these efforts, so like Apple, some companies are leaning into nature-based solutions (NBS) such as protecting or planting trees to sequester carbon.
Several carbon experts have told OPIS that a company’s offsets portfolio should include 50% carbon reductions and 50% carbon removals to really reach net-zero emissions.
Along the line of experts, it must be said that there is a large group of adversaries to carbon offsetting. Many contend that the buying and selling of carbon offsets simply places a Band-Aid over the real issue of reducing industry emissions at the source. There has also been a large cause for concern regarding the quality and price of offsets credits. These are problems that proponents of offsetting want to address as well.
All in on VCM
And some are going all in – like the Taskforce on Scaling Voluntary Carbon Markets, a group of more than 200 company leaders from six continents with backgrounds across the carbon value chain. At the start of 2021, the taskforce developed a blueprint to “scale a transparent, verifiable and robust voluntary carbon market to help meet the goals of the Paris Agreement.”
They say that offsetting plays an important complimentary role to accelerate climate action, and to support the pathway to 1.5 degrees Celsius the VCM needs to grow by more than 15 times by 2030.
Through a maxed out liquid voluntary carbon market, billions of dollars of capital could flow from companies making net-zero commitments to finance measures to reduce and remove carbon.
This would greatly contribute to the transition to net-zero, the Taskforce says.
The Scaling is here
Since the start of 2021, when the OPIS Global Carbon Pricing Team launched the groundbreaking Global Carbon Offsets Report with the first full suite of VCM daily pricing, momentum has picked up beyond what was imagined in such a short time.
We’ve seen more liquidity of market participation in terms and traditional oil and gas traders positioning themselves as buyers in the VCM. To facilitate action, contracts like the CME GEO futures contract have been established and gained industry attention.
In the meantime, global banks have set up billions of dollar climate funds, and offset project developers are selling credits as fast as they are issued while starting groundwork on new endeavors.
While it’s unclear if the VCM will become the link between immediate climate action and the initiatives of tomorrow – it’s certainly a place to start.