We must build investors’ trust in carbon markets. This is how

NTB/Ole Berg-Rusten via Reuters

The US climate envoy, John Kerry, told Cop28 last year that carbon could become the largest marketplace ever seen. We agree – and see many drivers for growth. 

Investment of $5 trillion a year is needed to achieve the 1.5C target by 2050, according to the International Renewable Energy Agency. We need to use all levers available to mobilise that capital. Carbon finance is an essential part of that.  

To be clear, carbon credits are no substitute for decarbonisation. But they are the only solution for residual emissions that cannot be eliminated in the short to medium term. 

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About two thirds of Fortune 500 companies have net-zero targets with milestones coming up in 2030. MSCI Carbon Markets believes demand for carbon offsets could increase from 500 million tonnes of carbon dioxide equivalent in 2023 to 1,312 million tonnes by 2030 and 4,356 million tonnes by 2050, led by hard-to-abate sectors such as steel, cement and petrochemicals. 

With this kind of growth anticipated, companies are realising there will be a cost to inaction if prices rise in line with demand.

However, instilling confidence among investors in the integrity of carbon markets is essential if they are to be a valuable tool in scaling up climate financing. Effective supervision and regulation are critical. 

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Voluntary carbon markets – as opposed to compliance markets operating in some countries, where companies are mandated to offset emissions above a certain limit – have met with criticism. This is sometimes but not always with justification. 

Media and non-governmental organisations have shown that there are low-quality credits in the market and that improvements are needed. It is, frankly, a myth that credits are an easy way to achieve theoretical reductions in emissions and a substitute for the cost and complexity of real decarbonisation.

Instilling confidence among investors in the integrity of carbon markets is essential. Effective supervision and regulation are critical

Instead, the evidence, such as a report last year by Forest Trends’ Ecosystem Marketplace, suggests that investment in carbon credits goes hand-in-hand with companies’ efforts to reduce emissions from their own operations and value chains. 

Despite some negative headlines, there has been a recovery in voluntary markets after a difficult couple of years. “Retirements” of carbon credits (removing them from markets so they cannot be resold or reused) reached a new high in December, breaking the previous record by more than 40 percent, according to MSCI Carbon Markets. January was also a strong month for retirements.

Investment in carbon credit projects between 2012 and 2022 totalled $36 billion, says MSCI. Half of this came in the past three years and more than $3 billion of future investment has already been committed.  

Regulatory progress

Voluntary carbon markets are not supervised by a specific government, so participants need to work together to define and implement standards to create trust. 

The industry made real progress on this during Cop28. The Integrity Council for Voluntary Carbon Markets strengthened the supply side with its Core Carbon Principles procedure, and the Voluntary Carbon Markets Integrity Initiative announced an end-to-end integrity claims framework for buyers. 

In addition, Article 6 of the United Nations’ Paris Agreement, covering international co-operation and transfer of emissions reductions, has the potential to scale up carbon markets very quickly. 

While the planned UN-run exchange for carbon credits, covered under Article 6.4, has not yet arrived, credits can be transferred bilaterally under Article 6.2. This is where we see the potential to deliver much-needed infrastructure, especially in emerging markets. We are working with the government of Rwanda to develop a critical transmission line that offers host countries incentives such as emissions reduction and electricity supply. 

For buyers, it is likely that Article 6.2 credits could be used to pay cross-border carbon taxes in a growing number of countries. 

A critical role for Mena

The Mena region will be critical to scaling up technologies and fuels linked to the energy transition, such as hydrogen, given its substantial resources. That is why the development of a robust regulatory framework for environmental products, like that of Abu Dhabi Global Market, where Seagrass is based, is all the more important.

With improved standard-setting, we believe confidence in the voluntary market will be regained and volumes will grow, helping to deliver billions of dollars to emissions-reducing projects around the world.

Naveed Tariq is chief executive of Seagrass, a subsidiary of E.ON