Reaching the goals of the Paris agreement will require a drastic reduction in greenhouse gas (GHG) emissions everywhere and across all human activities. The Intergovernmental Panel on Climate Change (IPCC)’s sixth assessment report, released at the end of March sets out a clear signal to drastically reduce emissions. The IPCC found that to keep within the limits of 1.5°C, emissions need to be reduced by at least 43% in the next seven years compared to 2019 levels, and by at least 60% by 2035.
To tackle climate change, the financial industry is contributing to the development of several mechanisms to support emissions reduction approaches of corporates and investors. This includes innovation across the capital markets and beyond, with voluntary carbon credits playing a role in contributing to collective carbon neutrality efforts – especially when combined with a broader toolkit of financial mechanisms.
In the context of developing such sustainable finance solutions, ensuring the materiality of carbon credits is becoming a priority. BNP Paribas experts Sébastien Soleille, Global Head of Energy Transition and Environment, BNP Paribas Group, and François Carré, Carbon portfolio manager, BNP Paribas Global Markets, share their perspectives on the voluntary carbon credit markets, challenges, and how to overcome them with transparency and digitalisation.
Sébastien, given the latest news we heard from the IPCC report, how can Voluntary Carbon Credits (VCC) contribute to global carbon neutrality goals?
The latest IPCC report has shown the urgency to rapidly tackle emission reductions to keep within a 1.5°C world. In terms of the global carbon budget, to the IPPC states that the best estimates of the remaining carbon budgets from the beginning of 2020 are 500 GtCO2 for a 50% likelihood of limiting global warming to 1.5°C. That is where voluntary carbon credits (VCCs) may be useful. There is strong market appetite for these certificates, which are sold based on the quantity of greenhouse gas emissions reduced, avoided, or removed from the air. Demand is set to rise, with the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) predicting that the number of certificates sold in the voluntary carbon market will increase by a factor of 15 by 2030.
Furthermore, the trade of voluntary carbon credits can also contribute to a shift of financial and technical resources from developed countries to developing countries. This is in line with the principles of equity and common responsibilities recognised by the Paris Agreement. Last year, during the latest COPs, COP27 on climate and COP15 in Montréal, the need to increase financial flows from North to South to tackle climate change and protect biodiversity was highlighted as a key challenge. Trading VCCs can contribute to these financial flows.
François, you have been an expert in carbon markets for over a decade. Can you share a brief explanation of how voluntary carbon credits work?
The voluntary carbon market allows organisations and individuals to purchase carbon credits, on a voluntary basis, thus allowing companies to go further with their emission reduction strategy than that stated by regulation.
VCC projects can either reduce the level of emissions entering the atmosphere, which is known as ‘reduced’ or ‘avoided’ emissions, or they can directly remove greenhouse gases (GHG) from the atmosphere, which is known as carbon removal.
There is another important distinction between technology and nature-based approaches. Projects based on technological processes can include the development of renewable energies instead of fossil fuel ones, or direct air capture technologies to remove carbon from the atmosphere. In contrast, nature-based approaches rely on protection, enhancement or creation of natural carbon sinks.
The VCC market is different from the mandatory carbon markets, or compliance markets, with the latter two having been created by national, regional or international policies or regulatory requirements to reduce emissions of specific activities and/or specific geographies. The main compliance markets today are emissions trading systems (ETS), such as the EU ETS in the European Union. These compliance markets are based on the ‘cap-and-trade’ principle, where regulated entities must secure annual carbon allowances corresponding to the quantity of their GHG emissions of that year.
Some have questioned the credibility of voluntary carbon markets, including potential risks and data accuracy issues. Sébastien, how do you perceive the current challenges the market is facing?
Voluntary carbon markets are still quite nascent and much remains to be done to increase their robustness and credibility. Strengthening rigour and credibility requires preventing three main challenges. These include: the risk of delaying emissions reduction actions by focusing on offsetting; the development of low-quality VCCs that may have adverse impacts on biodiversity or local populations; and finally, inaccurate claims related to carbon neutrality or carbon accounting.
Given the challenges you have mentioned Sébastien, how are global certification standards helping to address issues in scaling up the market?
All stakeholders have to keep on working together to scale up voluntary carbon markets in such a way that they can contribute efficiently to collective carbon neutrality, whilst avoiding adverse social and biodiversity impacts.
Globally existing certification standards can be improved. There is progress, as audits are continuously being strengthened to ensure that projects generating VCCs meet relevant quality standards, including on climate, social and biodiversity questions.
François, in your teams within Global Markets, how do you see the importance of industry collaboration – including on technology – in supporting robustness and transparency of the Voluntary Carbon Market as we look ahead?
Cross-sector industry collaboration is vital in this space, and one key area of development is the evolution of digital technologies around voluntary carbon credits, as these create positive outcomes on transparency, cost reduction, and increased reliability.
We have been actively working on digital initiatives to develop robustness and transparency in the market, including supporting the development of new platforms such as Carbonplace. Carbonplace will connect buyers and sellers of carbon credits through their banks to ensure transparency, traceability, and streamlined settlement of carbon credit transactions.
This is important as it highlights how industry leaders can work together to strengthen the potential impact of market mechanisms to contribute towards tangible climate action.
BNP Paribas is actively working with clients to ensure that the VCCs developed and used have a have a positive impact on the climate through ensuring high quality credits, and relevant reporting practices.
The Bank strives to ensure the global quality, robustness and integrity of carbon markets by working on several initiatives, such as the TSVCM and Carbonplace. To do this, it leverages its established market expertise, ensuring control mechanisms to prioritise market integrity.
The Bank selects its carbon projects and partners very carefully, and also engages with many other market participants who share the same concerns on the key challenges at play. The aim is to collectively increase the average quality of the Voluntary Carbon Credits that are generated and traded in the market.