Project developers are at the core of the voluntary carbon market (VCM): they identify mitigation and business opportunities, bring partners together, and bear the financial risk of reducing emissions. The recent wave of corporate climate commitments has boosted demand for voluntary carbon credits to levels unprecedented in the history of the market. Whereas limited demand and low prices used to be one of the main barriers for project developers to implement their activities, more recently, regulatory uncertainties have started to constitute a bigger hurdle. The VCM Global Dialogue brought voices from project developers in the Asia Pacific, Africa, and Latin America, and the Caribbean to the surface, who are worried about how the uncertainty created by the ongoing negotiations on Article 6 of the Paris Agreement will impede their ability to develop projects.
The uncertainty centers around one main issue. As typical project host countries now have their own mitigation commitments under the Paris Agreement – as put forward in their Nationally Determined Contributions (NDCs) – many stakeholders are struggling to understand how voluntary carbon market projects will interact with domestic climate policies and national GHG accounting. Some governments are concerned that carbon credits created and exported through the VCM, without their involvement, may negatively affect their ability to meet their NDC targets. A number of voices have proposed to increasingly regulate the voluntary market, by getting governments involved in transactions and implementing corresponding adjustments, or by regulating the eligibility of project types in relation to host country NDCs. But more regulation is not what we need, write Sven Kolmetz, Paul Butarbutar, and Christiaan Vrolijk in their discussion paper on project developers for the VCM Global Dialogue.
The strength of the voluntary carbon market has always been that it is driven by the ambition of private actors in a way that is complementary to public and regulatory action. Because of this, the voluntary carbon market enjoys relative flexibility, allowing engaged businesses and individuals to contribute to emission reductions globally. The voluntary market has been successful at filling the gaps left by the compliance markets, by identifying mitigation opportunities, introducing new low-carbon technologies, and engaging private sector stakeholders. Limited red tape is the basis of this success.
To be able to leverage the much-needed contribution of the voluntary market in the context of the Paris Agreement, the voluntary market should continue to operate separately from compliance markets, write Kolmetz, Butarbutar and Vrolijk. While project developers recognize the inevitable increase in the overlap between different types of carbon markets – including domestic compliance markets such as emission trading systems and international collaboration under Article 6 – they stress the importance of not burdening the voluntary market with the complexities and uncertainties of compliance markets. Instead, voluntary and compliance carbon markets should remain separate and synergistic. In practical terms, they write, this would mean for example that the additionality of voluntary carbon market projects should not be determined in relation to the host country NDC. NDCs often set clear mitigation targets, but are rarely backed by specific sectoral contributions, planned policy interventions, or implementation plans with accompanying timetables and financing streams. As such, project additionality should reflect the reality on the ground, assessed on a case-by-case basis by applying the methodologies that have been developed over the past twenty years. This allows project developers to continue to incentivize the uptake of low-carbon technologies beyond those prioritized in governmental action, and in a way that is tailored to local circumstances.
Whereas the voluntary carbon market itself would not benefit from more bureaucracy, project developers stress the importance of an agreement on the Paris Agreement Article 6 Rulebook at COP26 to reduce the regulatory uncertainty they currently face. The agreement needs to enable governments to lift their precautionary approach of discouraging voluntary carbon market projects in an effort to safeguard their ability to achieve their NDC. This will allow the VCM to continue to be a catalyst of climate action beyond public action by governments, supporting global efforts to meet the objectives of the Paris Agreement.