A new era for the voluntary carbon market
This article was first published in Business Green
The voluntary carbon market can offer the scale, demand, market infrastructure and technologies to deliver for the climate, argues SustainCERT CEO Marion Verles
More than 30 years after the first offset project was initiated by a US electric power company in Guatemala, the voluntary carbon market finds itself at the dawn of a new era.
We see three converging factors that are expected to drive significant growth and institutionalisation of the market: namely the momentum on corporate net zero commitments, the publication of a blueprint to scale the market by a Taskforce of leading experts, and the emergence of new technologies that will disrupt the production and trading of offsets.
High complexity and uncertain rewards have impeded market growth – in 2019, carbon offsets issued totalled 137 million tonnes of CO2, less than 0.5 per cent of global emissions.
In its simplest form, a carbon offset represents a reduction of one tonne of CO2e in greenhouse emissions that would not have happened otherwise. In practice, this definition is highly complex to implement. Sophisticated methodologies were developed over the years to ensure that each offset is real, has not led to any unintended negative consequence, is not double counted, and is independently verified. The multiplication of standards and methodologies coupled with the controversies around specific activity types have turned offsetting into a highly specialised domain with many hidden risks for buyers and sellers.
Demand for offsets is driven by voluntary commitments to take on the responsibility for one’s greenhouse gas emissions by financing emissions reductions elsewhere. These voluntary commitments hinge on the expectation that civil society and consumers will recognise the purchase of offsets either by publicly supporting those who do so or by factoring it their purchase decisions. The lack of clear signals from these stakeholders has historically undermined the business case for voluntary offsetting, limiting it to a group of leading corporates.
The voluntary carbon market’s recipe for scale: demand side momentum, scalable and institutional market infrastructure, emerging technologies
Climate change awareness has experienced an unprecedented rise since the Paris Agreement in 2015. Thousands of companies have signed-up to science-based targets or net zero commitments, civil society and youth groups have led climate marches across the globe, and governments are slowly increasing their climate targets with a few already committed to achieving net zero emissions by mid-century.
With the rise in climate awareness, the business case for offsetting is strengthening. Recognition that offsetting is a credible lever to drive down emissions that cannot otherwise be avoided is growing among stakeholders. The recently published Corporate Climate Mitigation Blueprint by environmental non-profit WWF specifically refers to carbon credits and calls for investments in climate actions. We expect to see more of these recommendations in the future and the convergence towards a broad-base acceptance of offsetting as a credible tool in the climate mitigation toolbox.
Demand alone however is not sufficient to secure the long-term growth of the market. Structural challenges associated with price discovery, offset quality evaluation, upfront costs financing, and efficient trading are to be overcome for the market to fulfil its potential. The good news is that it’s exactly what the Taskforce on Scaling the Voluntary Carbon Market has set out to do. With its final report expected today, a blueprint to overcome these challenges and institutionalise the voluntary carbon market will be released. Whilst the implementation timeline remains uncertain, the recent growth in demand provides the necessary incentives for market players to coordinate the delivery of the blueprint. We expect to see the rapid emergence of a centralised governance structure, a commonly accepted taxonomy and standardised carbon contracts.
The last major hindrance to growth in our view lies in the complexity and costs associated with the production of high-quality offsets. The annual verification process underpinning the issuance of offsets relies on manual checks, email communications, PDF files and excel spreadsheets. The voluntary carbon market is one of the few sectors left untouched by the digital revolution of the last decade. This is going to change as market players step-up to provide digital verification solutions enabling real-time verification of data and near-real time issuance of carbon credits.
Digital transformation is on its way and will profoundly transform the voluntary carbon market
Downstream digital innovations have recently emerged to transform the way offsets are purchased and retired. Technology start-ups like Pachama or Wren claim to simplify the process of calculating and offsetting one’s footprint. Fortune Global 500 companies like SAP or BNP Paribas are investing in technology- based offsetting solutions to capture their share of a market expected to boom in the next decade. We expect to see an acceleration in these downstream innovations with the purchase of offsets becoming integrated into all purchase decisions.
The digitisation of the upstream segment has seen much less activity and we consider this to be an exciting area of growth for a company like SustainCERT. Upstream activities include all processes involved in producing an offset: data collection, greenhouse gas calculation and third-party verification. Emerging technologies such as IoT and satellite imageries will simplify the data collection process and significantly increase its accuracy. Algorithm and machine learning can replace excel spreadsheets in the greenhouse gas calculation process to produce consistent, comparable outputs in tonne of CO2e terms. Finally, the verification process itself is going to be radically different. Currently performed as a one-time action repeated before every annual issuance of offsets, it is set to become an ongoing process where data is verified as it feeds greenhouse gas calculation algorithms.
As a result of these profound digital transformations, carbon offsets will be verified and issued on a near-real-time basis going forward, costs and complexity will be handled by software solutions and accuracy will be significantly enhanced. This is a win-win-win for project developers, carbon offset buyers and the planet.