Skip to content

Possibility of merging carbon credit markets driven by voluntary compliance and market forces?

Global leaders consider merging voluntary and mandatory marketplaces, with Article 6 poised to offer a significant integrity enhancement to developing nations.

Potential Intersection of Volunteer and Regulatory Carbon Credit Trading Systems
Potential Intersection of Volunteer and Regulatory Carbon Credit Trading Systems

Possibility of merging carbon credit markets driven by voluntary compliance and market forces?

In a rapidly evolving landscape of carbon markets, the convergence of voluntary and compliance markets is set to have a significant impact on climate finance, particularly in the developing world. This convergence aims to increase demand for high-quality carbon credits, improve market integrity, and expand opportunities for climate finance flows to the global South.

The current carbon market is dominated by lower quality avoidance credits, often associated with scandals. However, with the emergence of Article 6 markets and the potential for more robustness, the quality and investability of carbon credits are expected to become "highly context and geography specific."

One of the key benefits of this convergence is the stronger demand and market integrity it fosters. As voluntary markets incorporate compliance-approved standards and frameworks, such as the ICVCM (Integrity Council for the Voluntary Carbon Market), and as compliance markets align with voluntary standards, there is a growing confidence in carbon credits. Companies and governments trust these credits for both regulatory compliance and voluntary offsetting, enhancing market liquidity and capital flows.

The convergence also enhances the role of the global South in carbon markets. Capacity-building initiatives, led by organizations such as VCMI, help emerging markets align their carbon project development with international standards, enabling them to attract more private climate finance. This is accomplished by linking carbon credits to their Nationally Determined Contributions (NDCs) and sustainable development goals.

Regulatory signals and government leadership are also crucial. Although not all countries have mandatory compliance markets, governments are signaling preferences for high-integrity voluntary credits and fostering government-led coalitions to grow carbon markets. This creates a bridge for private sector investment to flow into climate projects in the global South, even where formal compliance regimes are not immediately present.

The convergence is expected to lead to increased climate finance in the global South. Institutional investors are diversifying investments geographically, with growing interest in nature-based solutions and sustainable land use projects in the Global South that generate co-benefits such as biodiversity and community development. This geographic and project-type diversification improves risk management and investment returns aligned with climate impact.

Improved coordination via frameworks like REDD+ is another benefit. The Warsaw Framework on REDD+ ensures consistency between voluntary and compliance activities by requiring forest-related commitments in developing countries to follow safeguards and accounting rules consistent with international agreements. This helps maintain environmental integrity and encourages more robust engagement from the Global South in carbon markets.

Potential expansion of domestic compliance markets, such as the EU, with amended climate laws allowing carbon credit use from domestic permanent removals, could stimulate local carbon projects and provide additional investment avenues. This may inspire or complement emerging compliance markets in global South countries as well.

However, the Science Based Targets Initiative (SBTi) has recently expressed concerns about the effectiveness of carbon credits in meeting climate goals. Article 6 markets, if they avoid controversies, may attract not only corporates but also pension funds that have shied away from carbon credits due to integrity issues. The convergence of compliance and voluntary markets is being seen as a potential solution to resolve credibility and integrity issues in the voluntary markets.

Article 6 may take time to reach the similar level of integrity and acceptance as global north markets. UK master trust Nest remains wary of carbon credits and finds them uninteresting for the time being. Institutional investors are considering natural capital strategies, including carbon credits, as a first entry point into the rapidly growing carbon credit market. Pension funds tend to invest in carbon credits as a by-product of their wider forestry strategy.

In conclusion, the convergence of voluntary and compliance markets facilitates increased capital flows into carbon credit projects in the Global South, backed by more reliable, high-integrity market standards. This benefits both compliance and voluntary market participants, accelerates climate action, and supports developing countries’ climate and sustainable development goals.

Investors are increasingly interested in nature-based solutions and sustainable land use projects in the Global South, as these initiatives offer co-benefits such as biodiversity and community development. This trend is reinforced by the convergence of voluntary and compliance markets, which fosters stronger demand and market integrity for carbon credits.

The Science Based Targets Initiative (SBTi) has expressed concerns about the effectiveness of carbon credits in meeting climate goals, but the convergence of compliance and voluntary markets is seen as a potential solution to resolve credibility and integrity issues in the voluntary markets.

Read also:

    Latest