As the world becomes increasingly aware of the dangers of climate change, the need not only to reduce greenhouse gas (GHG) emissions but also accurately assess reductions in emissions is all the more urgent. One component that could play an important part in the transition to net zero is carbon markets.

(Compliance) carbon markets themselves may not lead to a direct reduction in emissions but can be an essential tool to support countries and companies in reducing their greenhouse gas emissions, by ensuring businesses and organizations’ access to carbon credits and facilitating the trading of emissions.  Traded certificates represent the removal, avoidance, reduction or sequestration of one metric tonne of CO2 or equivalent greenhouse gases from the atmosphere.

Voluntary carbon markets can enable companies to engage in emissions offsetting, as a compliment to reducing their own emissions and in particular where genuine emission reductions may not be technologically or financially viable.

In a recent roundtable discussion and client event hosted by UBS Investment Bank, experts from a range of stakeholders and interested market participants highlighted that voluntary carbon markets have undergone rapid developments over recent years alongside heightened regulatory and corporate support, indicating the space is maturing quickly. Scaling of carbon markets requires a multitude of improvements across data, analytics and tools, as well as market-wide governance and regulations. 

Carbon Markets

Origins of voluntary carbon markets

The concept of voluntary carbon markets was pioneered in the early 2000s by a small group of environmental organizations and private companies. These pioneers recognized that there was a need for a market-based solution to address carbon emissions, and thus created a platform for organizations to offset their emissions and support sustainable projects. 

Integrity and transparency

One of the main challenges in the voluntary carbon markets is the lack of standardization, integrity and transparency. Without clear standards for carbon credits, it can be difficult for companies to know whether they are truly reducing their emissions. To address this challenge, several initiatives have emerged that seek to establish clear standards and certifications for carbon credits. For example, the Verified Carbon Standard and the Gold Standard are two widely recognized certification programs that provide a rigorous and transparent framework for the development and verification of carbon credits.

Upcoming guidance and regulation are likely to support voluntary carbon markets, with national and supranational organisations steering guidance and regulation to promote market-wide standards. Organisations such as the Climate Change Committee, the Voluntary Carbon Markets Integrity Initiative, the Carbon Credit Quality Initiative and the Integrity Council for the Voluntary Carbon Market are working to bolster integrity in the space, making day-to-day practices more robust and resilient.

This effort is being actively bolstered by regulators across the world. The EU is considering allowing carbon removal in its Emissions Trading System, while in the US, the SEC is considering stringent carbon credit reporting requirements.

Meanwhile, the Article 6 rulebook of the Paris Agreement, completed in Glasgow in 2021, paves the way for effective international carbon markets to operate and prosper. Increasing their credibility will likely increase the efficacy of markets, and their participants, in achieving their climate goals.

The world will not move fast enough to reach net zero until net zero is priced
Annalise Downey

Innovation in abundance

Data and transparency issues act as a headwind for progress within the ESG space, as there is a continuous need for data analytics to help companies make informed decisions about their investments. The use of digital technologies within voluntary carbon markets marks progress in the level of transparency afforded by carbon credit rating companies. In a fireside chat, Annalise Downey, Senior Technical Climate Consultant at Sylvera, commented that “providing more data will help determine ratings scores for carbon credits. The use of artificial intelligence and machine learning can aid this process, for example, the use of multiscale Light Detection and Ranging techniques to assess how much CO2 is absorbed within a project”.

Nature-based offsets, which involve the protection or restoration of forests and other natural ecosystems, have previously lacked the transparency and reliable data essential to their utilization. But this area is also currently in transition.

As an example of innovation, UBS-backed consortium Carbonplace utilises a blockchain, or distributed ledger technology, to monitor how voluntary carbon credits are bought and sold. The platform allows individuals and organizations to offset their carbon footprint by purchasing carbon credits that are instantly retired on the blockchain. This ensures that carbon credits cannot be used again, leading to levels of trust and transparency not previously available.

Annalise Downey noted “the scale of net zero commitments is huge, and hitting those targets will be tricky without voluntary carbon markets”, but they must continue to evolve and develop in order to scale. By establishing clear standards and leveraging new technologies such as blockchain, we can ensure that the voluntary carbon market remains a credible and impactful solution for reducing greenhouse gas emissions.

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