The urgency to deploy new technologies at scale to reduce emissions, protect vital ecosystems, and remove carbon from the atmosphere has never been greater. Without meaningful action, the impacts of climate change, including extreme weather and rising seas, could reduce global GDP by about 14% and result in 1.2 billion climate refugees by 2050. Despite these potentially devastating consequences, the annual flow of climate finance investment in 2021 was just 20% or more of the estimated $4.3 trillion needed by 2030.
Voluntary carbon markets (VCMs) are one of the few transition finance options that can accelerate action, scale up new technologies and connect private capital to high-potential projects in the limited time available. Investing today is critical not only to reduce carbon emissions immediately but also to build market capacity ahead of 2030 ambitions. However, VCM has failed to secure the financial investment needed to scale up and innovate. Existing government policies and market norms have failed to provide adequate strategic incentives to motivate boards and investors to deploy capital on a large scale. The VCM market, estimated at $1.3 billion in 2022, could grow to more than $50 billion by 2030 if companies start investing more strategically today.
For VCMs to mature, evolve, and make meaningful contributions to climate change mitigation, governments will need to create regulatory mandates to compel corporate action, while in their absence, market standard setters will have to incentivize corporations to create alternatives. Recognition will have to be provided. These incentives can encourage companies to undertake dedicated mitigation efforts and adopt carbon credits as an additional lever to support their net-zero strategies. While early adopters and market makers invested heavily to build the capabilities needed to navigate a complex landscape, the next wave of companies will need a simplified structure, solid incentives to participate, clear guidance for reliable market participation, and the market. There is a need for infrastructure that provides transparency on credit quality. Also making the purchase risk free. This will take time, but regulators and standard setters need to start taking independent and coordinated action now.
Many stakeholders, including regulators, standard setters and corporations, are already working together to remove barriers and promote engagement in VCM. But the planet cannot wait for the private sector to find the right solution. While the challenges are being addressed, companies can now start using carbon markets to take climate action and prepare themselves and society to achieve net-zero ambitions.
This report aims to provide guidance to companies that recognize the climate imperative and wish to participate in VCM, but who remain on the sidelines due to market challenges and other complexities. For companies less interested in acting, the report seeks to make the case for the strategic value of VCM and the urgency to act now.
Four tracks of action have been identified for the next wave of corporations to adopt voluntary carbon markets:
- Define a net-zero role for credit: Define the complementary role of carbon credits while maintaining a dedication to direct reduction in achieving science-based targets, consistent with the mitigation hierarchy and reflecting technical, financial and other constraints on decarbonization.
- Create values and identity: Identify concrete outcomes arising from carbon market activity and communicate to key internal and external stakeholders to drive forward-looking risk management, brand-building and employee engagement.
- Prepare a Portfolio: Prioritize high-quality, high-impact carbon credit portfolios where avoidance credits remain significant initially and sustainable carbon removal results scale over time.
- Organize Effort: Integrate the carbon credit strategy into the company’s broader net-zero vision and organizational structure; Carbon credits should be closely linked to the broader decarbonization path and overall sustainability strategy.
Although this paper will briefly identify some of the key challenges facing VCM to provide context, it will not focus on a detailed diagnosis of those issues, but rather will offer a flexible framework for action that can help companies navigate these market limitations. Can empower you to work despite.
This report is a call to action for others as well. Corporations that have not yet created a comprehensive climate strategy must do so. Civil society, standard setters, regulators and other market actors must collectively acknowledge the needs of market reform, learn openly and engage in high-integrity climate action, without distracting or discouraging from the central priority of decarbonizing value chains. Efforts to facilitate this should be stepped up. When adopted to complement decarbonization, an environmentally sound approach to VCM can provide climate mitigation inside and outside the value chain to help accelerate the global transition to net zero.
Pedro Gómez is head of climate at the World Economic Forum and a member of the WEF’s Executive Committee. Naseem Pour is Head of Carbon Removal and Market Innovation at the World Economic Forum.