The Road to 2050: Developing voluntary carbon markets

January 12, 2022 - 5 minutes
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As an increasing number of companies commit to net-zero carbon emissions by 2050, many face the challenge of adjusting their business models to align to a 1.5-degree rise in the Earth's temperature.

While not a substitute for a reduction in absolute emissions, the use of carbon offsets provides a mechanism to smooth the transition to a decarbonized economy by linking sectors that face challenges in fully abating emissions with activities that avoid or reduce emissions. Whereas compliance carbon markets are focused on the transfer of credits for the purpose of meeting national emission reduction commitments, voluntary carbon markets provide an avenue for individual actors or companies to acquire offsets in support of their own emission reduction targets.

Given the scale of the emissions reductions committed to by the private sector, the potential size of the voluntary carbon market is significant. During our ESG conference The Road to 2050: Navigating the ESG Landscape, we explored the impacts of voluntary carbon markets in a global panel with leaders across the industry.

What are some key characteristics of the voluntary carbon market today?

  • The complexity of the current market is, in part, driven by the variety of projects that underpin carbon offsets, each offering varying degrees of emissions reduction potential, permeance, additionality, and associated social benefits. There is often limited insight on the environmental integrity of offset projects, particularly when quantifying the level to which a project avoids or reduces emissions.
  • Various registry platforms that validate and verify offset projects based on differing standards and protocols add further complications. Each registry seeks to provide minimum levels of assurance around credit quality, but the lack of homogeneity in standards often confuses those looking to access the market.
  • There are often few avenues available for buyers to access significant quantities of offsets with high quality features, such as removal-based projects with highly permanent storage. Similarly, there can also be a lack of transparency around price, with few public markers available to market participants to gauge differences in pricing dynamics by offset types.

Explore more from our The Road to 2050: Navigating the ESG Landscape series. Read 'What is a just transition?' and the impacts of equity in climate strategies.

How are voluntary carbon markets evolving and what must be considered as the market scales up?

Voluntary carbon markets have grown significantly as issuances and retirements increase to meet growing demand from corporates setting net-zero targets.

  • As of August 20211 , the value of offset credits traded in 2021 YTD totaled US$748 million, already exceeding full-year 2020 levels by 58%.
  • Despite this growth, high-quality credits have been in short supply, resulting in significant price increases over the last year across all credit types.

Buyers are expected to be increasingly selective when evaluating which carbon offsets to acquire.
  • While not currently feasible with today's market supply, buyers will increasingly focus their purchases on carbon removal offsets due to their greater environmental impact.
  • Future expansion of industrial-scale Carbon Capture, Utilization and Storage (CCUS) and Direct Air Capture (DAC) technologies will provide the prospect of greater future availability of removal offsets.
  • Similarly, buyers are expected to increasingly favour offsets that are verifiable and correctly accounted for, with a low risk of non-additionality, reversal, and negative unintended consequences.

Standardization of credit contract structures, improved depth of high-quality credits, and additional avenues to quickly price and trade offsets will be key to continued growth.
  • The private-sector-led Taskforce on Scaling Voluntary Carbon Markets (TFSVCM) has been working on concepts for further market standardization with the aim of improving offset integrity and establishing minimum standards in offset contracts.
  • Similarly, development of Global Emissions Offset (GEO) and Nature-Based Global Emissions Offset (N-GEO) futures contracts by the CME Group provides a simpler solution to trading high-quality offsets and offers a liquid and reliable market price signal.
  • The recent launch of the first-ever global carbon meta-registry by IHS Markit also offers the potential to avoid expensive and lengthy internal due diligence processes previously required to vet registry compliance.

First-Ever Global Carbon Meta-Registry

In October 2021, IHS Markit launched the first global Carbon Meta-Registry, a secure online platform that seamlessly connects disparate environmental markets and registry systems around the world. This registry enables the exchange of carbon market data and mitigates the risk of double-counting credits.

As part of TD's continued efforts to support the transition to a low-carbon future, we are proud to serve on the Carbon Meta-Registry advisory board among several of our global peers.

What role does technology play in the evolution of voluntary carbon markets?

Various technology solutions are playing an important role in the development of offset projects, ongoing measurement of actual emissions reductions, and verification of offset ownership. Examples include:

  • Ongoing development and future deployment of industrial-scale carbon removal technologies -- such as DAC and CCUS -- promises the potential for a step-change in the amount of carbon that can be removed from the atmosphere from any one project.
  • Emergence of drone technology and satellite imagery to verify emissions reductions from nature-based solutions have greatly expanded the capabilities of systematic monitoring systems. Combining air-based and ground-based monitoring systems not only increases accuracy of data collection but also increases speed in which emissions reductions can be quantified and compared against baseline values.
  • Incorporation of blockchain and distributed ledger technology is resulting in improved market transparency around offset ownership, enabling market participants to track the full lifecycle of an offset from generation to final retirement. Embedding such technologies in financial products promises to improve overall market confidence and eliminate such issues as "double counting" and "double retirement."

Accessible Decarbonization Solutions

As voluntary carbon markets continue to evolve and grow, we expect there will be even more opportunities for private and public companies to acquire offsets in support of their own emission reduction targets. With greater alignment of offsets contracts, as well as increased availability of industrial-scale carbon removal technologies, companies facing challenges with developing their own carbon reduction strategies will have the ability to leverage these additional market tools to meet their sustainability objectives.

Learn more about our environmental, social and governance strategies from our Sustainable Finance & Corporate Transitions team

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