The UK | How high-integrity voluntary carbon markets support climate objectives

Achieving global net zero emissions will involve substantial climate investment: the Sharm el-Sheikh Implementation Plan agreed at COP27 concluded that a global transformation to a low-carbon economy is expected to require at least USD $4-6 trillion a year. In order to unlock the capital urgently required for climate action, we need infrastructure and financial instruments that enable innovation and support the new green economy.

As a world leading financial centre for sustainable finance, the UK is in a good position to use its financial infrastructure, international reach, regulatory support and sector expertise to help to scale sustainable finance solutions to global challenges. This includes voluntary carbon markets (VCMs). Ahead of COP28 we look at how carbon markets are emerging as an essential tool in the policy toolkit to finance the transition.

The vital role of voluntary carbon markets

Carbon credits have emerged as a powerful and cost-effective mechanism which can enable immediate climate action. While they are not a stand-alone solution for emissions abatement, together with other decarbonisation efforts, carbon credits can deliver market-led carbon pricing.

As a brief refresher, carbon credits differ from regulated emissions trading systems (ETS). Purchasing carbon credits provides companies with a way to achieve their climate goals by voluntarily compensating for the emissions which cannot be avoided.  

Carbon credits have several potential benefits. Firstly, they have the potential to drive significant private funding to climate positive investments, often in the Global South. This allows investors to support climate-action projects that otherwise would not be able to get off the ground and which may have a positive co-benefits for local communities and economies, including biodiversity protection and job creation.

Additionally, the market for carbon credits can help channel investment into innovative new technologies and ultimately lower the cost of delivering of projects such as carbon capture and storage.

Globally, the voluntary carbon market (VCM) has vast potential. With the need for climate action becoming increasingly urgent, the VCM could reach USD $50bn in value by 2030, while demand for carbon credits could increase by a factor of 15 or more in the same timeframe. 

Obstacles to VCM growth

However, at present carbon markets face a number of intersecting challenges that hinder their growth, including questions around the integrity and scalability of offsetting. Historically, there have been issues with low-integrity credits which have not lived up to their claims. Meanwhile greenwashing accusations have dissuaded many companies from purchasing carbon credits. 

When it comes to monitoring and standards, the VCM ecosystem is nascent but growing. 2023 saw the launch of some initiatives and developments intended to strengthen the integrity of the markets. These include the Integrity Council for the Voluntary Carbon Market’s Core Carbon Principles and associated Assessment Framework, which is designed to set new global standards for the supply of high-integrity carbon credits; and the Voluntary Carbon Markets Integrity Initiative’s Claims Code of Practice, which provides companies with a rulebook on credible use of high-quality carbon credits. At the same time, other standards such as the Science Based Targets initiative (SBTi) are evolving to better reflect the role which carbon credits can play in corporate climate action strategies.

Globally, uncertainties surrounding how carbon credits can be used to support Article 6 of the Paris Agreement are holding back confidence in the market. At the country level, we are seeing several jurisdictions attempt to break through the gridlock with innovative policy solutions. The UK government has been instrumental in helping to establish the IC-VCM and the VCMI. Separately, the UAE launched the world’s first regulated carbon credit exchange and clearing house, and Singapore has established a novel carbon tax regime which incorporates carbon credits. Ultimately, a high-integrity global VCM will require international policy harmonisation and learning from best practice. 

How COP28 can help to scale high-integrity VCMs

At COP26, new market mechanisms were agreed to help countries meet their Nationally Determined Contributions (NDCs) under the Paris Agreement:

• Article 6 provides two market-based approaches for countries to meet their NDCs.
• Article 6.2 facilitates trade of carbon emissions units amongst countries through bilateral and multilateral agreements.
• Article 6.4 facilitates trade of carbon emissions units via a trading mechanism, established under the auspices of the Article 6.4 Supervisory Body.

While incremental progress on the details of these mechanisms was made at COP27, there are still questions which need to be answered to make these mechanisms operational. 

COP28 has a vital role to play in bolstering the credibility of high-integrity voluntary carbon markets. Some of the technical issues we expect to be discussed at COP28 include approaches to the architecture of registries; the technical expert review process to ensure consistency of transactions; and issues around authorisations, including whether they can be revoked. These are complicated but essential topics with the potential to bring more clarity for buyers and sellers around how VCMs can both support the objectives of Article 6 and allow countries to meet their NDCs.

It is encouraging, therefore, that the COP28 Presidency has recognised the discussions around VCMs as a top priority for this year’s climate summit. Alongside these important high-level discussions, we expect COP28 to enable private market participants, together with the IC-VCM and the VCMI, to showcase their efforts to support a high-integrity marketplace.

The UK leading a global VCM

The City of London Corporation is collaborating with EY to host a panel at COP28 focused on growing trust in voluntary carbon markets. The event is global and fosters global dialogue bringing together private sector and civil society voices, representing different parts of the VCM ecosystem, to explore how to help ensure public trust in VCM as a growing driver of mitigation and finance.

As one of the world’s leading international financial centres for green finance, the UK is well-positioned to leverage its best-in-class financial infrastructure, governance and expertise to support these efforts. In fact, the UK is home to a carbon markets startup sector already worth over £1.4bn. That’s why the City of London Corporation’s Vision for Economic Growth lists VCMs as a key area where London’s ecosystem can support and scale innovative approaches to sustainable finance.

We invite all actors in the space to join the dialogue on voluntary carbon markets at COP28 to move the space forward. By working collectively, we can unlock high-integrity transactions and ensure the market’s momentum continues to grow.

Read more about the role of voluntary carbon markets on City A.M.