Balancing the needs of stakeholders for a successful voluntary carbon market

The voluntary carbon market has a major role to play in keeping global warming below 1.5-2°C. It provides a unique set of incentives and instruments to drive mitigation that complements and goes beyond public action by governments. To be able to fulfill this role, the voluntary carbon market must work for the wide diversity of actors involved and needs to account for the new context for climate action created by the Paris Agreement.

So far, conversations on how to best shape and manage the market have centered on issues faced by carbon credit buyers: how to design a robust system of rules, checks, and accounting requirements that best guarantees the environmental integrity of the carbon credits bought? Far less attention has been paid to the reality of project implementation and to the hurdles faced by the stakeholders generating carbon credits. The disconnect between supply-side governments, project developers, and investors creates a complex situation and makes it difficult to develop high-quality voluntary carbon market projects. The ongoing negotiations on the Article 6 Rulebook, regulating the international transaction of mitigation outcomes in the context of the Paris Agreement, are creating further confusion and uncertainty for many voluntary carbon market stakeholders, and risk slowing down project implementation.

Making the voluntary carbon market successful at driving meaningful mitigation requires a governing approach that recognizes and balances the needs of stakeholders on both the supply and demand sides of the market. In turn, this requires an inclusive debate where different stakeholders’ voices are represented: a conversation that links years-long experience implementing voluntary carbon market projects on the ground with the technical discussion on transfers, accounting, and claiming.

Climate Focus, together with Transforma, SouthSouthNorth, and the Indonesia Research Institute for Decarbonization, supported by Verra, seeks to address this problem with the VCM Global Dialogue: an initiative that puts the supply side at the center of the conversation on how to shape the voluntary carbon market. In a range of stakeholder consultations — in Asia, the Pacific, Africa, Latin America, and the Caribbean — project developers, civil society, and government representatives are exploring what is needed to make the voluntary carbon market work on the ground.

A number of key recommendations have so far surfaced from these conversations, which should find their place in the ongoing global debate:

Cooperation between private actors and governments on the supply side of the market is essential to make the market work in the context of the Paris Agreement. The voluntary carbon market has historically operated independently from governments, resulting in limited governmental knowledge and involvement today. While many observers voice concerns that voluntary carbon market transactions may undermine the achievement of NDCs, others recognize the role the market can play in achieving and enhancing NDC ambition by bringing in private investments and infrastructure. To mitigate any risk and optimize the potential, governments need to actively engage with the market to ensure voluntary mitigation activities incentivize emission reductions and removals that support domestic climate action. Cooperation with governments allows project developers to keep track and engage strategically with the market while enabling carbon buyers to better understand how their purchases contribute to the host country’s NDC.

Insecurities faced by countries on how engagement with the voluntary carbon market will impact their domestic climate strategy can be addressed by harmonized and transparent reporting on emission reductions. The climate crisis demands urgent and wide-scale mitigation of global emissions, but the debate on how to account for voluntary carbon units risks slowing down mitigation action and hindering engagement. The complex discussion reveals diverging views on whether double claiming influences the market’s effectiveness in reducing emissions and if double claiming between governments and corporates exists in the first place. Somewhat overlooked by the demand side is that, while some demand-side stakeholders would like to see corresponding adjustments for voluntary carbon market transfers to back carbon neutrality claims, most host countries do not currently have the necessary recording, tracking, and accounting systems in place to do so. Additionally, a corresponding adjustment inevitably requires government involvement in voluntary carbon market transactions — which is a layer of bureaucracy the private sector generally likes to stay away from. Limited government involvement was one of the key attractive features of the voluntary carbon market in the first place.

Instead of applying a centralized accounting protocol from the get-go, increasing the transparency regarding the implementation activities, recording of mitigation outcomes and tracking transactions could be a key first step for suppliers and buyers to get insight into the emissions reduced in voluntary carbon markets. Such transparency could include harmonized reporting between different carbon standards and guidance on how to account for VCM transactions. An approach based on transparency and guidance will allow for tailor-made solutions that take into account different host country capacities and circumstances while contributing to the integrity of the system.

For voluntary carbon markets to drive sustainable development, a fair carbon price is key. Corporates engage with the voluntary carbon market to source cost-efficient mitigation opportunities, but they often also have an interest in financing benefits beyond carbon, such as sustainable development and broader community impacts. Voluntary carbon market projects are able to deliver these co-benefits, but the cost of developing, operating, and maintaining these more complex, high-quality projects are not matched by the prices so far being paid on the market. This needs to change, requiring willingness from corporates to make the necessary investments that keep these projects operational.

These considerations and recommendations being put forward by supply-side stakeholders are a fresh voice in the ongoing debate. The supply-side has specific needs and experiences informing their knowledge on what is needed to make the voluntary carbon market work in their countries, and their perspectives need to be further strengthened and systematically included in the global debate. The ongoing consultation process of the VCM Global Dialogue provides one avenue. Only through inclusive debate will we be able to design a system that channels private finance for low-carbon development, in a way that is meaningful for and supported by the countries where the activities are being implemented.