Carbon markets are gaining recognition as a crucial tool for curbing greenhouse gas emissions and supporting the global economy in accelerating the net zero transition. While the required consensus to launch a global carbon trading market under Article 6 of the Paris Agreement was not yet met at the 28th United Nations Climate Change Conference (COP28), key international standard setters agree that voluntary carbon markets (VCM) have become a legitimate mechanism for companies to address emissions outside their own operations. This development reinforces the need for high-integrity VCM standards that will ensure that finance is being channelled to projects that would have real, additional and permanent climate benefits.

Creating quality and integrity

Amid the temporary drop in demand for carbon credits in 2022, which was reported to be primarily due to buyer hesitancy driven by controversies surrounding the credibility of certain carbon offsetting schemes, standards for both credit buyers and sellers have been released to reinstill confidence in VCMs.

On demand-side, the Voluntary Carbon Markets Integrity Initiative (VCMI) released its Claims Code of Practice in mid-2023. The Science Based Targets initiative (SBTi) also recently announced that it would release its first draft of basic rules, thresholds, and guardrails for the potential use of environmental attribute certificates for abatement purposes of Scope 3 emissions by July this year. New Guidelines for High Integrity Use of Carbon Credits were also released by the International Emissions Trading Association (IETA) this month.

On supply-side, the Integrity Council for the Voluntary Carbon Market (ICVCM) released the Core Carbon Principles (CCPs) and related Assessment Framework which sets out the criteria it will use to assess whether carbon-crediting programmes and methodologies of carbon credit projects meet the CCPs. The ICVCM is expected to announce the first CCP-eligible programmes this year.

Six of the largest independent crediting programmes, including Verra, Gold Standard and the Global Carbon Council, also announced a collaboration during COP28 to amplify cohesion of their registries and certification approaches. They are also applying for independent assessment against the CCPs to ensure transparency and credibility.

Policies for building trust

Governments and regulators could also play a role in strengthening the integrity of VCMs. For example, the International Organization of Securities Commissions recently ran a public consultation, which presents a set of Good Practices to promote the integrity and orderly functioning of VCMs. This includes regulatory oversight, taxonomy of carbon credit attributes, primary market issuance, secondary market trading, and disclosures of carbon credits usage.

Meanwhile, momentum has been building up in China as the China Certified Emission Reduction (CCER) market rebooted in January after its hiatus since 2017 due to small transaction volumes and inadequate carbon audit standards for projects. Under the new CCER, only certain project types may be qualified to generate CCER credits after third-party validation and government verification of authenticity and compliance, preventing double counting of emissions reductions, and transparently disclosing project details.

Following the Hong Kong Exchanges and Clearing’s (HKEX) launch of the city’s carbon marketplace – Core Climate – in 2022, Hong Kong has been utilizing its regional advantage and strong connections with international investors and trading schemes to connect the Greater Bay Area (GBA) to international carbon markets. To date, HKEX signed two memorandums of understanding with the Guangzhou-based China Emissions Exchange and China Emissions Exchange Shenzhen to explore the development of voluntary carbon emissions reduction programmes in the GBA, as well as opportunities in cross-border carbon market connectivity and climate finance.

Singapore has also been a major contributor for building confidence in carbon markets in 2023. This includes the Climate Action Data Trust, co-launched with the World Bank and IETA. The decentralized data platform provides a blockchain-powered log of projects across all major carbon credit registries to enhance transparency and reduce double counting. The Monetary Authority of Singapore was also instrumental in launching the Transition Credits Coalition, which is pushing for high-integrity CCP-aligned transition credits to scale the early retirement of coal-fired plants in Asia. The Singapore government signalled to be a potential off-taker for these credits.

Prioritizing nature

Voluntary carbon credit buyers are becoming more sophisticated and are now willing to pay premiums for high-quality credits. In particular, demand for avoided-deforestation offsets increased by 39 percent and demand for agriculture offsets tripled in 2023, according to BloombergNEF’s Long-Term Carbon Offsets Outlook 2024 report.

In February, the European Union reached a provisional deal on the world’s first Carbon Removal Certification Framework. This will pave the way for the bloc to certify high-quality carbon removals, including nature-based solutions generated in Europe, and incorporate them into a registry for market-based trading.

The SBTi also recently released two reports on its Beyond Value Chain Mitigation guidance which aims to encourage companies to scale up investments or mitigation actions outside of their value chains by means such as purchasing nature-based credits.

2024 outlook and beyond

As public confidence towards VCMs gradually restores, rules are expected to be released to bring more clarity on carbon credit integrity. Synergizing standards will be key to safeguarding against greenwashing risks, and ensuring an abundance of high-integrity credits in the market for countries and businesses to tap into as part of their efforts to achieve net zero ambitions. Hong Kong is well-positioned to become a leading carbon trading and green finance hub. To accelerate this growth, companies should expect more market structure developments and products to be launched for enhancing cross-border cooperation and policy coordination.

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