Demand and prices for high quality credits are on the rise – and that's good news for nature, argues Angela Churie Kallhauge
Protecting and restoring nature could provide at least 20% of the emission reductions needed to stabilize global climate – and it's among the most cost-effective ways to do it. But investment in nature-based solutions needs to almost triple to reach climate targets by 2030.
The private sector can make a crucial contribution to climate action by helping to close that investment gap. Purchasing high-integrity forest carbon credits is a smart way to achieve this goal, but carbon markets faced strong headwinds in 2023 – with credit prices falling in the wake of media stories highlighting controversies.
Fortunately, there are signs that the market is now starting to rebound. Here are five reasons why:
1. At the global climate conference in Dubai (COP28) Costa Rica and Ghana joined Guyana in offering "jurisdictional" credits on the voluntary market. By working across entire states or nations, jurisdictional programs offer greater scale of emissions reductions and support for dozens or even hundreds of local communities – a scale that is simply unmatched by other credit types.
New funding mechanisms and technical assistance programs mean that more forest governments will enter the jurisdictional market in 2024, with several Brazilian states in the process of preparing their credit offerings. Meanwhile Verra, the largest supplier of project-level forestry credits, has now adopted a jurisdictional approach to project level baselines, which will strengthen of the quality and integrity of future forest carbon credits.
2. The underlying fundamentals are strong. The Intergovernmental Panel on Climate Change notes that "reduced deforestation in tropical regions has the highest total mitigation potential" of all land, ocean, food and water interventions.
Meanwhile more than half of the world's 2,000 largest companies have set net-zero targets and need credible tools to deliver on these commitments. Forest carbon credits provide the obvious bridge between corporate demand for emissions reductions and nature's need for finance. These purchases could make a significant contribution to providing the $130 billion a year needed to end deforestation.
3. The market is maturing. At COP28, the six major registries announced they were aligning their certification standards to reduce market fragmentation – previously a key barrier for new companies seeking to enter the market. Long-awaited quality assurance labels will also enter the market this year, making it easier for companies to identify high quality credits and to demonstrate their responsible use of those credits.
On the supply side, the Integrity Council for the Voluntary Carbon Market will begin identifying credits that meet its Core Carbon Principles this Spring. On the demand side, the Voluntary Carbon Markets Integrity initiative have started verifying companies' claims about their use of offsets. Global management consultancy Bain & Company made the first VCMI Carbon Integrity Platinum Claim last month, with other organizations expected to follow suit soon. Combined, these two initiatives will go a long way to easing buyers' concerns that purchasing credits could lead to allegations of greenwash.
4. Buyers are showing a willingness to pay more for high quality forest credits. The price premium for A-rated credits has risen to around 200%, while survey data shows that experienced buyers are willing to pay more for jurisdictional credits.
5. Demand is returning – recent data shows that retirements reached record levels in December 2023 and January 2024. This trend is likely to continue, driven by convergence of compliance and voluntary markets and implementation of the aviation industry's offsetting plan, which commenced in January of this year.
The overall trend for this year is increasing quality, confidence and prices for carbon credits. By purchasing high quality credits – and investing in future supply through advance purchase agreements – companies can play an active role in the shift towards higher integrity, deliver on their climate and nature goals and support Indigenous communities who are protecting vital ecosystems.
Angela Churie Kallhauge is Executive Vice-President of Environmental Defense Fund.
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