The “explosive growth” in the voluntary carbon markets (VCMs) between 2019 and 2021 has given way to increased scrutiny, uncertainty over greenwashing and oversupply of carbon credits, says Ong Shu Yi, ESG analyst at OCBC O39 Bank.
As VCMs continue to grow, there is urgent need for a consistent framework among nations and authorities, adds Ong in a June 23 note.
VCMs have been caught up in controversies involving cheap and low-quality carbon credits that do not avoid or remove greenhouse gas emissions, says Ong. “Verra, a global leading carbon standard, was criticised for phantom rainforest offsets. These allegations have caused concern over whether carbon offsets are more beneficial or detrimental to global decarbonisation.”
With increased scepticism amongst market participants regarding the legitimacy of carbon offsets, the price of REDD+1 credits plunged to as low as US$1.70 ($2.29)/tonne in February as buyers retreated.
The carbon offset market is also oversupplied with energy generation and avoided deforestation offsets, says Ong, many of which are of “low-quality”, which has also contributed to low prices.
See also: Are carbon credits credible?
That said, the market value of VCMs was valued at some US$2 billion in 2021 and is estimated to grow by at least five times to US$10 billion to US$40 billion by 2030, according to a report by BCG and Shell.
“While it is concerning that some credits do not deliver the benefits they claim, VCMs are still an important funding mechanism for the conservation of carbon sinks and valuable ecosystem services through REDD+ projects,” says Ong. “Nature-based solutions are becoming a priority in the low-carbon transition, with growing awareness of increasing nature risks because of global dependencies on natural capital.”
Urgent VCM framework is required under Article 6 of Paris Agreement, says Ong. “At the 27th United Nations Climate Change Conference (COP27) last year, texts on Article 6.2 (guidance on international trade of carbon credits) and Article 6.4 (set-up of a centralised carbon market overseen by the UN) saw some progress. But countries pushed back to 2023 a decision for project types that can produce credits, as well as definitions on what constitutes a high-quality carbon credit.”
See also: A US$12 bil climate fund is readying a rare bond issuance
To enable stakeholders to confidently engage in VCMs without risking greenwashing accusations, these are urgent but complex issues to tackle, notes Ong. “Stakeholders remain hopeful that there will be some progress in Article 6 negotiations at COP28 in Dubai this year.”
From 2024, carbon tax-liable facilities in Singapore will be able to use high-quality international carbon credits to offset up to 5% of their taxable emissions.
To facilitate this, the National Environmental Agency (NEA) has signed agreements with organisations including Verra and Gold Standard to allow credits issued by them to help Singapore’s carbon tax-liable facilities meet part of their carbon tax obligations.
Singapore has also signed agreements with Peru and Papua New Guinea to facilitate collaboration on carbon credit projects, to collectively advance global climate action towards the Paris Agreement goals.
Despite uncertainties and criticism, corporates can consider VCMs as part of a more holistic decarbonisation strategy, says Ong. “The urgency of the climate crisis and 2030/2050 climate commitments do not give us the luxury of time to wait for the development of a perfect market. Corporates can navigate through the uncertainty by prioritising high-quality carbon credits to mitigate reputational risk and offset residual emissions in hard-to-abate sectors.”
