Voluntary Carbon Market: Nature-Based Offsets

Overview

The voluntary carbon market, or VCM, trades ‘carbon credits’, each if which represents one metric ton of CO2 equivalent avoided, or removed from the atmosphere. The main demand driver is companies racing to meet their ambitious net-zero targets, as many use such credits to neutralize their residual emissions.

Developers of projects that can reduce emissions, including nature-based solutions and renewable energy, also turn to the VCM. In this case, developers utilize the market to finance projects, generating emission-reduction certificates that can be traded as carbon credits.

Not all carbon offset projects in the VCM are created equal, however. The integrity of these offsets has recently come under scrutiny, as they vary greatly in their delivery of permanent carbon removal or avoidance.

Ensuring quality of credit supply

There is risk associated with purchasing carbon credits, ranging from reputational damage and allegations of greenwashing to the possibility of purchased reductions being reversed or voided. How a given project generates credits is thus critical. As awareness and scrutiny of the VCM grows, buyers are becoming more discerning about the projects from which they choose to buy carbon offsets.

The applied methodology of a carbon offset project is now the biggest indicator of its integrity. A methodology includes a set of guidelines to ensure a project is eligible to create offsets, including defining spatial boundaries, estimating baseline emissions, implementing risk-assessment procedures and quantifying emissions. Methodologies often refer to pre-existing modules and tools with detailed mathematical models to quantify these metrics.

Nature-based carbon projects constitute the majority of carbon offset supply in the VCM. The four main offset registries – Verra, Gold Standard, American Carbon Registry and Climate Action Reserve – have approved 41 forestry and agriculture methodologies specific to the voluntary carbon market. These have covered the creation of 552 million credits since 2015, equivalent to 73% of total nature-based supply.

Impact

Nature-based solutions are projects that restore and protect ecosystems while avoiding or removing carbon emissions through improved forest- and land-management activities. Avoided deforestation, reforestation, afforestation and agriculture projects are all examples. Well managed sustainable agriculture projects can also generate nature-based carbon avoidance offsets.

In addition to tallying benefits, advanced accounting methodologies should incorporate common risks associated with nature-based solutions. Three particular risk categories can be effectively measured, to ensure credits have a real and measurable impact.

1. Carbon leakage: When a project activity alters fundamentals such that carbon reductions are offset by an increase in emissions elsewhere. This is common in forest-management projects that limit the supply of timber, pushing up demand for alternatives like steel. Some 80% of nature-based methodologies account for leakage risks by measuring the effects of the project beyond its boundaries.

2. Permanence: Refers to the risk of reversing emissions reduced or avoided from a carbon offset project. In the case of nature-based projects, this could occur due to climate or human-caused disasters. Some methodologies often set aside credits for buffer pools, which can be used if the emission reductions from retired offsets are reversed – for example, in the case of wildfires and other disasters.

3. Additionality: A project is additional if its emission reductions would not have occurred without the project activity. In other words, the sale of carbon credits must be necessary to facilitate the development of an emissions reduction project. All nature-based methodologies approved by the four main registries require projects to demonstrate additionality.

Over the past decade, there has often been an oversupply of nature-based offsets because the quality of credits on the market was not well standardized. Buyers have thus been wary of purchasing offsets that did not confirm carbon removal or avoidance, or that could result in media backlash and allegations of greenwashing.

Incorporating leakage, permanence and additionality into offset methodologies improves the supply of high-quality offsets and unlocks demand for nature-based certificates. A high-integrity offset market also results in improved biodiversity conservation and sustainable job creation.

Opportunity

Methodologies are the building blocks of the voluntary carbon market. That means they must be updated regularly to reflect new standards, upgrade the tools and modules used and include emerging nature-based solutions to ensure reliable supply and healthy demand.

More-nascent conservation activities, such as enhanced rock weathering and biochar, are not widely represented in methodologies and registries today. Yet developers are unlikely to invest in projects that are not rewarded by the market, which could undermine these technologies’ ability to get off the ground.

To reward emerging solutions, as well as maintain the integrity of projects, registries must continue to address gaps in their accounting techniques and take into consideration the growing network of nature-based solutions.

Source

BloombergNEF