Comment: Carbon market scrutiny must be a call to action to improve them, not abandon them

Gabon is betting that careful logging can safeguard the vast wealth of its forests
Aerial view of Gabonese rainforest. To end nature loss by 2030, $350 billion in finance is needed per year by the end of the decade.. REUTERS/Christophe Van Der Perre/File Photo

February 8 - Recent investigative reporting highlighted an important, and perhaps uncomfortable issue: not all carbon credits are created equal. Carbon credits bring varying degrees of risk, provide different levels of co-benefits, and some simply aren’t delivering the climate benefit they promise.

While it’s essential that these risks are addressed, it’s also essential that companies do not abandon carbon markets. We must end nature loss by 2030 to prevent the worst impacts of the climate crisis and to meet the ambition of the Paris Agreement. To achieve this requires $350 billion in finance per year by the end of the decade. If carbon market financial flows stop, our already perilous climate goals slip further out of reach.

Tackling emissions from nature loss is among the greatest challenges to addressing the climate crisis. Despite being responsible for 35% of gross global greenhouse gas emissions, just 3% of spending on climate goes to tackling nature loss. Finding a way to rapidly scale finance to nature-based solutions is therefore urgent and carbon markets are an important tool for companies to accelerate climate action and channel much-needed funding to address the climate impacts of nature loss.

But for carbon markets to function effectively and deliver maximum climate impact, companies must play a more active role in separating the wheat from the chaff. A laissez-faire approach to sourcing carbon credits will no longer suffice. Companies must treat carbon credits with the same care, due diligence, and screening that they implement for every other product and service they source in their operations. This means taking the time to understand their suppliers, the provenance of the product they are purchasing, and the risks associated with their procurement strategy.

The good news is that guidance, service providers, and communities of practice are increasingly available. It has never been easier for companies to perform due diligence on the carbon credits available. This includes:

• The advent of independent carbon-credit rating agencies like Sylvera, Calyx and BeZero, which perform detailed technical analyses of carbon credits on issues including permanence, additionality and co-benefits. Increasingly, these rating agencies are teaming up with carbon marketplaces, such as Salesforce’s Net Zero Marketplace, to bring more information to buyers, enabling more informed choices when they select carbon credits.

A Guajajara Indian. The TFCI Guide integrates viewpoints from leading indigenous organisations in the Amazon.. REUTERS/Ueslei Marcelino

• The Tropical Forest Credit Integrity (TFCI) Guide. This provides companies with best-in-class guidance for companies looking to source carbon credits specifically from avoided tropical deforestation. It brings consensus opinion from renowned global conservation organisations and, importantly, integrates viewpoints from leading indigenous organisations in the Amazon.

• Platforms like the Business Alliance to Scale Climate Solutions (BASCS) and the Natural Climate Solutions Alliance (NCS). Both have created communities of practice to help companies navigate the carbon-credit procurement process and identify high quality credits. BASCS recently released a primer for companies looking to begin their carbon market journey, and the NCS Alliance will soon launch a buyer's guide to help companies navigate the procurement of nature-related credits. By joining these platforms, companies can learn from industry leaders and integrate best practices in their own procurement strategies.

• Strengthened voluntary carbon market governance. This year the Integrity Council on Voluntary Carbon Markets will finalise its core carbon principles, and the Voluntary Carbon Markets Integrity Initiative will launch its final Claims Code of Practice. These initiatives will bring a global threshold for high-quality carbon credits and guide companies through the appropriate use of carbon market-related claims.

As companies seek out the highest-quality projects, they must also be prepared to pay a higher price. In 2022 companies paid an average of $4 per tonne of CO2 on the voluntary carbon market. As long as prices remain this low the carbon market will never move the needle on climate change, and the market will remain rife with credits of questionable quality. Now is the time for companies to send a signal that they are in a race to the top, and are prepared to pay more for credits that pass rigorous screening processes.

Mangrove tree planting in North Kalimantan province, Indonesia. High-quality carbon credit projects should command a higher price. REUTERS/Willy Kurniawan

High-integrity carbon credits enable business to go further and faster – but only when used in addition to cutting emissions across a company’s value chain. This point is absolutely critical, and remains an area of confusion. Companies cannot “count” any investments in nature-based solutions outside of their value chains towards science-based emission reduction targets. But investments in nature must be part of their overall climate transition plan. Why? Because no company is going to cut all its emissions today, this month or even this year.

Therefore, while a company works to cut its emissions as fast as possible through actions like switching to renewable energy, increasing energy efficiency and electrifying vehicle fleets, it will – for the time being – still be producing emissions that are released into the atmosphere. And that will continue for some years to come.

What should the company do about those emissions? Ignore them? Or address them by investing in nature-based solutions that contribute to global emission reduction goals?

Science tells us the latter is essential to limit global temperature rise to 1.5C and prevent catastrophic climate change. Carbon markets are at an inflection point, and companies have an important choice: cut ties and head for the exit, or commit to engaging deeper and drive carbon markets to meet their full potential.

Walking away would be the easier decision, allowing companies to escape the scrutiny of the media and campaigners, while freeing up funds for other corporate priorities. Their engagement in carbon markets is, after all, entirely voluntary. But such a move would threaten our increasingly tenuous global climate ambitions, stifling the most promising mechanism available to channel private sector finance to the intertwined crises of climate change and nature loss.

The alternative is for companies to recognise that the levers for change are already in their hands. Through their purchasing power and investments decisions companies wield great power to shape markets for the better. This will require a commitment to changing business-as-usual – by performing better screening of carbon credits, prioritising quality over price, and by demanding more from stakeholders across the carbon market ecosystem.

By doing so, they can help unlock billions in funding while ensuring their investments maximise climate impact. Most importantly, companies will help push up the quality of carbon credits to ensure they fulfil their critical role in our journey to net zero.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Sustainable Business Review, a part of Reuters Professional, is owned by Thomson Reuters and operates independently of Reuters News.

Luke Pritchard is deputy director, nature-based solutions, for the We Mean Business Coalition, a group of seven nonprofit organizations, BSR, CDP, Ceres, CLG Europe, Climate Group, The B Team and WBCSD, seeking to accelerate the inclusive transition to a global net-zero economy by working with the world's most influential businesses. Luke delivers the strategy to increase credible investments in nature as part of corporate climate plans.