and how is it expected to evolve?
To generate a carbon credit, businesses, organisations, or individuals need to launch a project that has carbon removal at its core. However, the voluntary carbon market expects more: ‘only’ removing CO2 isn’t enough (as organisations such as the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) or the Science Based Targets initiative’s (SBTi) Foundations For Science-Based Net-Zero Target point out). These projects also ought to support local community development and livelihoods, as well as re-introduce biodiversity. The money generated from the sale of carbon credits must also largely benefit the local community. These projects often span 30 to 40 years and carry nature-based and political risks, but the benefits clearly outweigh those risks, and the higher the critical mass built in supporting these projects, the less risky they become.
Currently, the voluntary carbon market has a number of challenges and pain points: in particular, it needs to be more accessible, and price transparency has to improve, but there are already initiatives underway to resolve those pain points.
With demand rising and limited supply, we’re seeing a fast-increasing number of larger corporates investigating how they can start their own projects to ensure a long-term supply of carbon credits. By working directly with a project, or in fact initiating the project, companies have more control over the quality of the project and its outcomes.
Interestingly, the investment required to start (CAPEX) and maintain a project gives economists a floor price to the price of carbon. Using carbon credits generated from projects to offset residual emissions could act as a starting guide for valuing the social cost of carbon.
However, most businesses won’t be able to afford the investment, time or resources to start their own project, or maintain it over the usually long-time span of 30 to 40 years. These businesses will welcome projects that will generate excess credits, which they can buy. If the market price of those credits is much higher than the floor price, the provoking question of who gets that difference would naturally follow – one would hope the lion’s share goes to the local community.