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ESG

Voluntary carbon offsets – the next big investment

Mark Carney has put his weight behind a new taskforce to speed up the development of voluntary carbon markets. The aim is to build infrastructure that will create liquid and investable carbon offset markets.

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Mark Carney, UN special envoy for climate action

Voluntary carbon markets are about to get a boost.

Mark Carney, UN special envoy for climate action, finance advisor to UK prime minister Boris Johnson for COP26 and soon-to-be vice chair and head of ESG and impact fund investing at Brookfield Asset Management, launched the Taskforce on Scaling Voluntary Carbon Markets in early September, aiming to speed up liquidity and scalability.

There is an awakening happening
Stephen Donofrio, Ecosystems Marketplace
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It is sponsored by the Institute of International Finance (IIF), with Bill Winters, Standard Chartered chief executive, as chair. DBS, BlackRock, Goldman Sachs, UBS, Itaú Unibanco and BNP Paribas form part of its 40-plus membership.

The voluntary carbon market has been growing steadily, but it is still small. Latest data from Ecosystems Marketplace shows the volume of offsets increased by 52.6% from 2016 to 2018, and rose in value by 48.5%.

That value, however, was just shy of $300 million in 2018. Data for 2019, set to be released later this year, should show an uptick again, but the new taskforce estimates that the voluntary carbon market will need to grow by up to 160 times to meet the Paris Agreement.

'Surge in demand'

Commenting on the taskforce, Carney stresses that “many companies will need to offset some emissions as part of the transition, creating a surge in demand for offsets.” He adds that the financial sector can use its expertise in building market infrastructure to create a carbon offset market which connects demand with supply.

Ingo Puhl, co-founder of sustainability consultancy South Pole, and its representative on the taskforce, says the financial sector and private sector have “realized the horse to bet on is the voluntary carbon markets.

“The realization has been that the UN process regarding Article 6 of the Paris Agreement on developing a global carbon market is too slow. It just won’t deliver the scale in the time required. If we have to wait on unanimous decision-making among countries, it will be too late.”

What is preventing investment in projects is the lack of access to capital
David Antonioli, Verra
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The taskforce is comprised wholly of private sector representatives. Puhl adds that the net zero pledges of the private sector, civil society and sub-national entities like cities have earned them “a place in shaping how carbon markets will be delivered”.

Tim Adams, president and chief executive of the IIF, says a key aim of the taskforce will be to identify standards and create a taxonomy that will help build confidence on both sides.

Voluntary carbon markets have come a long way since the early 2000s era of the “carbon cowboys” and have shaken off their negative reputation as being a ‘get out of jail free card’.

Stephen Donofrio, director of Ecosystems Marketplace, says it would be difficult for a company to get away with buying offsets to mask an increase in emissions nowadays, given transparency levels on corporate sustainability reporting that enable stakeholder accountability.

Donofrio says: “Our research shows that companies that included offsetting in their carbon management strategy typically spent about 10 times more on emissions reductions activities than the typical company that didn’t offset.”

David Antonioli, chief executive of Verra, a non-profit organization that manages the Verified Carbon Standard (VCS), the world’s largest voluntary GHG offset programme, says despite great strides in the market, some buyers may still have unfounded fears about projects.

“The safeguards we have in place address concerns about fraud and community participation, but we are always looking for way to improve these in a way that would increase confidence in the market,” he says.

Good intentions

Puhl at South Pole says everyone in the taskforce is there with good intentions. “Any concerns raised that the model for growth might create risk will be addressed,” he says. “It’s a very diverse taskforce.”

We are hoping to create the infrastructure that allows the market to scale up
Tim Adams, IIF
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Adams says members will work together to create a market infrastructure. “How do we create the ability to share data? How do we create a benchmark? What would settlement and post-settlement look like? Essentially we are hoping to create the infrastructure that allows the voluntary carbon offset market to scale up.”

If such an infrastructure is created, then a futures market may develop for the voluntary market as well as a carbon price.

Donofrio says the finance sector recognizes the investment opportunity that offset projects could provide. “There is an awakening happening that there are projects beyond renewable energy that can turn a profit and benefit the planet,” he says. “It is increasingly being seen as a legitimate commodity market and there needs to be liquidity in commodity markets.”

In particular, upfront financing is needed for reforestation and afforestation projects.

Antonioli says: “Often what is preventing investment in reforestation and restoration projects is the lack of access to capital to develop and manage projects through their early stages, until they produce carbon credits.

“If we don’t have steady streams of longer-term financing, not only will we not have these kinds of projects, but there could also be an incentive to plant fast-growing trees. That is not always best for the environment.”

Puhl adds, however, that whatever emerges from the taskforce will be in answer to what creates demand.

“If potential buyers say what is important is to be able to buy credits and have the finance market be the intermediary then that’s what will be developed. If, however, they say what will move them to action faster is working with the projects on the ground, then that will be our route.”

Whatever the route the taskforce puts forward, the outcome will be much needed support for long-term projects and relief for environmental NGOs, many of which are scrambling for funds but unable to identify revenue streams that would allow them to tap private finance to put trees in the ground. A large and reliable voluntary carbon offsets marketplace would provide such a revenue stream.

Discussions on scaling up carbon offsets are not new, and much work has already been done, but as one member of the taskforce says: “If anyone can get it to the finish line it will be Carney.”

The taskforce will produce an interim report in November and a final report of “actionable solutions” in January.

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