Carbon credits need more supply, integrity to meet global net-zero goal- IEF
Carbon credits could significantly contribute to achieving net zero by 2050, but only if participants address issues over limited supply and integrity, said Joseph McMonigle, secretary general of the International Energy Forum (IEF).
In a keynote address at the S&P Global Carbon Markets Conference in Barcelona, McMonigle said trade in voluntary carbon credits could grow 100-fold by 2050 if teething problems are addressed, according to a statement by IEF.
“There is a huge opportunity for voluntary carbon markets, which can only be realized with concerted international efforts. Overall, the market is characterized by low liquidity, scarce financing, inadequate risk-management services, and limited data availability,” he said.
“Building trust in the market is vital to achieving these goals so we must work harder to improve transparency, standardization and stability.”
According to the statement, “A carbon credit is a permit which allows a country or organisation to produce a certain amount of carbon emissions and which can be traded if the full allowance is not used.
“They come from four categories: avoided nature loss including deforestation; nature-based sequestration, such as reforestation; avoidance or reduction of emissions such as methane from landfills; and technology-based removal of carbon dioxide from the atmosphere like carbon capture, utilisation and storage.”
According to the World Bank, global carbon credit revenue grew 60 percent to $84 billion in 2021.
The statement also said the task force on scaling voluntary carbon markets estimates that demand for carbon credits could increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050.
McKinsey, a management consultant issued a report in 2021 that estimates demand in 2030 in the range of 8 to 12 gigatons of carbon dioxide (CO2) per year of carbon credits.
“It is critical that purchasing a carbon credit can be trusted to bring a real reduction in CO2 emissions,” McMonigle told the conference.
“The market today lacks transparency and there is a lack of data on how money is spent. The world will need a voluntary carbon market that is large, transparent, verifiable, and environmentally robust.”
In 2016, the European Commission found that 85 percent of projects it examined were unlikely to achieve their stated reduction claims. Similar conclusions were found in a 2019 ProPublica investigation and a 2021 study on forest preservation in California.
The second issue is the supply of credits, McMonigle said. “The development of projects would have to ramp up at an unprecedented rate,” he said, adding that most of the potential supply of avoided nature loss and nature-based sequestration is concentrated in a small number of countries.
Project and financing risks could reduce the supply of carbon credits to as little as 1 gigaton of CO2 per year by 2030, according to the McKinsey report.
“Policymakers need the carbon markets to work better because they are increasingly relying on them to deliver a portion of their promised reductions in greenhouse gas emissions in their nationally determined contributions (NDCs) under the Paris agreement,” McMonigle told the conference.
“And companies are seeking higher volumes of carbon credits because their regulators and shareholders are demanding rapid and measurable progress towards net zero goals beyond what they can deliver internally.”
IEF secretary general also said that Article 6 of the Paris Agreement is central to the development of an effective international market for trading carbon credits.
“It serves as the crucial link between the trade in carbon credits and countries’ commitments to reduce greenhouse gas emissions, so it is vital that we see these talks come to a successful conclusion,” he said.
Talks at COP27 in Egypt were meant to deliver a breakthrough in implementing Article 6, but differences between the parties remain, and negotiations have been extended into 2023, the statement by IEF said.
“Differences relate to the deadline for transferring emissions reduction projects listed under the Clean Development Mechanism to the new registry, the procedure for moving credits between countries, and the conditions for mandatory cancellations of credits, McMonigle said.