Commentary
How Carbon Markets Can Serve as a Catalyst to a Low-carbon, Green Economy

Last week’s much anticipated Ecosystem Marketplace’s State of the Voluntary Carbon Market report made yet another significant contribution to making sense of the voluntary carbon market (VCM). The analysis found that, overall, the VCM contracted in 2023 for the second consecutive year, leading to a billion-dollar reduction in climate finance for the Global South. Of course, this provided opponents of the market with an opportunity to claim that the data signals the beginning of its decline.

Perhaps unsurprisingly, I have a very different view of what the data really said and the future of the market. This contraction should not be surprising, especially as it was led by project types that are undergoing natural evolutions (e.g., consolidation of REDD+ methodologies, broad reevaluation of renewable energy projects). In addition, initiatives like the  Voluntary Carbon Markets Integrity Initiative (VCMI) and the Integrity Council for the Voluntary Carbon Market (ICVCM), which are working to restore confidence in the market, have only recently started to generate results. In other words, this is therefore the perfect time for corporates to take a step back and wait to see what comes out of these important processes.

That does leave the market with a fundamental question to consider: What is the ultimate objective of the market if concerns about integrity are addressed and we are no longer mired in discussions about whether a tonne is a tonne? If we can count on integrity, what then? I propose that we view carbon as a means to an end rather than the end itself, which can then free our mind to think about a bigger purpose.

What would “better” look like?

Carbon markets, designed properly, can act as a catalyst for the urgently needed global transition to a low-carbon, green economy. While such an outcome may be broadly desired by the vast majority of market participants, this has never been made explicitly clear. As a result, the existing rules and requirements that govern the market do not necessarily lead to those types of transformational outcomes.

In an ideal world, carbon finance introduces new technologies and practices, lowers costs, and builds the capacity to scale up climate solutions that no longer depend on this innovative and nimble source of finance. This can be achieved through market forces, government regulation, and other innovative support mechanisms. In this scenario, the market can channel money to sustainable, future-focused businesses and support governments tackling climate change, and thereby enable the green transition the world desperately needs.

Reframing carbon markets for the future and redesigning carbon finance for sustainable transitions

If carbon finance is going to serve a bigger purpose, parts of it need to be redesigned. To use carbon as a proper transition tool, we must build on the requirements that govern the market. In my report, I recommend the development of methodologies designed with the green transition in mind, which means setting the stage for when carbon finance is no longer needed for the ongoing evolution of a particular sector of the economy. In addition, streamlined methodologies, which should allow for simpler approval processes, need to replace cumbersome project-by-project additionality tests (the idea that the project would not have been implemented without the extra finance provided through the sale of carbon credits).

In future installments of my report, I recommend embracing government participation given that carbon finance, if structured properly, can also help governments achieve ambitious NDCs. In addition, I suggest some changes which could make natural climate solutions more resilient. Taken together this could unlock the necessary legal, financial, institutional backing to ensure a transition.

Looking to the future

The climate crisis requires a long view. If we are to meet the ambitious targets of the Paris Agreement and create a foundation for long-term sustainability, it is essential that we reassess our climate solutions. The carbon market, fitting our dominant economic model, needs to be reoriented to serve a more enduring purpose. By doing so, the market can channel finance to key sectors of the global economy and support a low-carbon, green economy.

The carbon market is undergoing an important transition of its own, and we will likely soon have a market that is underpinned by quality and integrity. This will enable greater investment, and at the same time provide the market with a unique opportunity to further redesign it for maximum impact. Ideally, we can move on from today’s debates about integrity to tomorrow’s challenges of achieving green transition.

Antonioli’s new paper, published on June 4, includes an introductory overview to the concepts, with further chapters to be released on his website between June 11 and July 9. These future installments will elaborate on the specifics of how this new carbon markets concept builds on many of the innovations that are already operational in the market and would help achieve a green transition.

David Antonioli is a strategic advisor who specializes in harnessing the power of markets to solve critical environmental issues and support sustainable development. David has worked on climate change for the last 30 years and most recently served as CEO of Verra until stepping down last June. David’s experience includes working in the private sector as a project developer (EcoSecurities) and as a government official (USAID in Mexico).

His company, Transition Finance, supports clients in the design of financial instruments to support the green transition. The company’s website can be found at www.tranfin.com