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Carbon markets hold immense potential to propel corporate climate action, but significant adaptations are necessary to unlock their full potential.
Businesses play a pivotal role in achieving global climate goals. However, to realize these objectives, they require incentives to unlock and deploy climate finance on a massive scale. This finance should support both near-term net-zero emissions and complete decarbonization in the long run.
Despite recent scrutiny on project effectiveness, carbon credits and the voluntary carbon market (VCM) remain a powerful tool. The VCM reached an estimated $1.2 billion in 2022 and is projected to mobilize up to $40 billion by 2030.
However, this represents a mere fraction of the potential. Business leaders have emphasized the need for structural and policy reforms in carbon markets and the broader net-zero framework. These reforms would encourage more companies to participate and increase investment from existing participants in critical areas like nature-based solutions.
It’s crucial to clarify that VCMs should not be a justification for the oil and gas industry to continue fossil fuel production. These companies must prioritize transitioning their business models to align with established principles for fossil fuel phaseout.
For other sectors, carbon credit investments offer a valuable complement to ongoing efforts to phase out fossil fuels, expand renewable energy capacity, and improve energy efficiency. Research indicates that carbon credits are indeed helping companies accelerate their decarbonization efforts and reduce emissions. Companies reported that VCMs allowed them to double down on climate action, achieving more than they could without them.
The benefits extend beyond emissions offsets. High-integrity VCMs channel vital capital to climate-vulnerable countries, supporting sustainable development while decarbonization technology is developed.
Therefore, governments, governing bodies, and companies must seize this opportunity for carbon market reform. This reform will unleash the full potential of carbon credits and nature-based solutions to drive global climate action and decarbonization.
A key step is greater recognition of carbon credit investments’ role in supercharging corporate climate action and raising overall business climate ambition.
Currently, leading standard-setters for greenhouse gas (GHG) emissions accounting and corporate sustainability targets do not recognize voluntary carbon market investments. This discourages companies from releasing more climate finance and needs to change to incentivize climate-positive investments.
Business leaders believe that simply including carbon credits in organizations like the Science Based Targets initiative (SBTi) would increase annual VCM spend by an average of 10%.
Beyond recognition, companies also require reassurance about the integrity, transparency, and validity of carbon credits to drive investment. Over a third of companies hesitate to purchase carbon credits due to concerns about a lack of transparency on credit quality.
Addressing these concerns will not only inspire greater investment in nature-based solutions but also trigger a positive ripple effect throughout corporate climate action.
Research suggests that companies participating in VCMs decarbonize their operations twice as fast as those not involved. Additionally, a recent survey found that over 60% of business leaders at VCM-involved companies believe high-quality carbon credits incentivize further investment in decarbonization. VCM participants are also nearly twice as likely to set an internal carbon price, encouraging reduced fossil fuel use.
Investing in carbon credits and VCMs demonstrably leads to more ambitious corporate climate goals being set and achieved by leading companies.
Carbon markets are thus a crucial mechanism for raising ambition among climate-conscious companies, supporting decarbonization within and beyond their supply chains.
However, time is of the essence. Carbon credits and VCMs represent a “use it or lose it” opportunity, especially with rising economic pressures. Without significant reforms in the corporate net-zero ecosystem, the world risks losing a critical source of climate finance when companies are most likely to cut spending due to inflation and potential recessions.
For instance, half of companies already purchasing credits stated that their carbon credit budget would be absorbed as savings if not used, forfeiting valuable climate finance that would be difficult to replace under current conditions.
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The business community has spoken. They are ready and willing to engage in high-integrity carbon markets to ensure companies, and the world, stay on track to meet shared sustainability goals.
The world urgently needs stronger, more robust carbon markets to leverage the private sector and mobilize the necessary climate finance. This untapped potential is an opportunity that humanity cannot afford to squander.