Will carbon markets go from a year of reckoning to one of redemption in 2024?

After a challenging year, experts tell Eco-Business that ongoing efforts to promote high-integrity carbon credits and recent bilateral agreements have spurred hope that markets will recover this year, despite lingering uncertainties.

Peru rainforest
The Peruvian Amazon near La Merced, Peru. At COP28, world leaders voiced support for carbon credits as an important mechanism to help countries achieve their net-zero emissions goals. Image: Hans Luiggi via Unsplash

After a year of intense scrutiny into the credibility of existing carbon credits and a continued lack of agreement over international carbon trading rules at the COP28 climate summit, carbon markets are striving to exit the doldrums.

The hard numbers are not out yet — Colin Moore, regional carbon advisor for Southeast Asia at the Wildlife Conservation Society says it will take several months before new and updated data can be accessed via published annual reports — but anecdotally, the uncertainty in the markets is still weighing on demand for carbon credits heading into 2024.

“We will have to wait for those reports to truly know [the extent of suppressed demand], but in terms of our projects and what we are hearing in the market, it has certainly had an impact [on carbon prices],” Moore told Eco-Business.

As an international non-governmental organisation, WCS supports the development of nature-based carbon projects.

2023: A year of reckoning for carbon markets 

January: The Guardian publishes an investigation which alleges 90 per cent of Verra-certified carbon credits are “worthless”.

March: ICVCM publishes a list of 10 Core Carbon Principles as a benchmark for high-integrity carbon credits

June: VCMI publishes their Claims Code of Practice to help identify whether corporate claims about carbon offsets are credible

October: South Pole pulls out of a forest-based carbon project in Zimbabwe, saying it was not confident the project met expectations

December: Negotiations at COP28 on Article 6.2 and 6.4 of the Paris Agreement did not reach a consensus, and were postponed to COP29

In 2023, carbon markets were defined from the get-go by a media report in January which alleged that the majority of carbon credits certified by standards setter Verra were “worthless”. This was followed by further revelations that one of the world’s largest nature-based projects led by climate consultancy South Pole had exaggerated how much carbon it offsets.

Fears of being called out for greenwashing led to withered corporate demand for carbon credits, with many “kicking the problem down the road rather than risk being criticised,” said Charles Bedford, founder and chief impact officer at Carbon Growth Partners, an international carbon investment management firm. “This was disastrous for climate, people and nature,” he told Eco-Business. 

Low carbon prices make it harder for carbon project developers to raise funds and prove financial viability. “There is a real risk of some projects either not getting started or struggling to stay afloat,” said Moore, who also represents WCS as a member of the Southeast Asia Climate and Nature-based Solutions Coalition (Scene), a network of leading non-profit organisations in the region. “It depends on where the projects are in their cycle and how well-financed they are.”

Although existing projects that have already sold credits and built cash reserves could be in a better position to weather the dip in prices, these are fewer than the number of projects that are new or in the early stages of development, he said.

On the bright side, others are seeing a return of investor and corporate confidence, suggesting that the market is poised for growth. “Investment has flooded into upstream carbon project development and institutional investors have been engaged,” said Bedford.

“2024 will see companies and countries moving aggressively back into carbon markets as the ambitious commitments they have made to each other, to the United Nations and through the Science-Based Targets Initiative (SBTi) collide with the reality of decarbonisation,” said Bedford, who is also adjunct associate professor of environment and sustainability at the Hong Kong University of Science and Technology.

In a recent commentary on carbon markets, professional services firm KPMG said that there are positive indicators for a major rebound in voluntary carbon markets this year, as key issues raised in 2023 are being addressed. Its analysts cited the consolidation of vulnerable methodologies, publication of integrity guidance and safeguards, and enhanced legislation surrounding reporting practices as crucial developments.

“All of this may result in a most needed sense of confidence and market consolidation,” said KPMG.

Despite fears that carbon credits will give firms an excuse to emit more carbon dioxide, an Ecosystem Marketplace study published in October last year suggested that companies which participate in voluntary carbon markets are 1.8 times more likely to be reducing their own emissions year-on-year.

Meaningful wins

The growing number of voices speaking up on carbon market integrity is another positive to look out for this year, said Moore. “One of the good things to come out of 2023 is this enhanced focus on high integrity, high quality carbon credits,” he said.

In response to the criticisms of carbon accounting methodologies last year, leading carbon governance organisations released new principles and guidelines for determining high-quality carbon credits. The Integrity Council for the Voluntary Carbon Market (ICVCM) announced its 10 Core Carbon Principles in March as a benchmark for high-integrity carbon credits, followed by the Claims Code of Practice published by the Voluntary Carbon Markets Initiative (VCMI) in June, which is meant to be used to assess corporate use of carbon offsets.

“ICVCM and VCMI came to the table with strong structural changes and leadership that clearly set project quality standards and clear claims guidance laying a path for a more positive future,” Bedford said. “There is now no excuse for inaction on the part of corporates or low-quality projects from developers.”

WCS’ Moore said: “This is the right time to put out guidance and these examples to try and steer the remaining demand towards high quality credits.”

More recently at COP28 in Dubai, ICVCM, VCMI and four other carbon market oversight bodies announced that they would collaborate on promoting voluntary carbon markets as a climate action tool, a move that KPMG said would “finally put an end to the ongoing integrity battle and confusion this had created.” Major standard setters including Verra and Gold Standard also joined forces to align their standards.

However, negotiators at COP28 also failed to reach consensus for international carbon trading rules under Article 6 of the Paris Agreement, particularly for Article 6.2, which covers bilateral agreements and Article 6.4, which concerns the market and mechanism for emissions trading.

“Fortunately, the international carbon market — trade between countries and trade between projects and companies — has not been dependent on these rules,” said Bedford, pointing to the multiple bilateral agreements that Singapore has made under Article 6.2 with countries including Papua New Guinea, Ghana, Vietnam, Bhutan and Paraguay. The country, which permits the use of carbon credits to offset up to 5 per cent of carbon tax obligations recently released its list of eligible international carbon credits, with eligibility differing for each host country depending upon their respective implementation agreements.

“The UN may never put in place the structure to set market rules but country governments, regulators, standard bodies, corporates and investors have bypassed it to reach consensus on how to proceed and are already doing so,” he said.

2024 will see companies and countries moving aggressively back into carbon markets as the ambitious commitments they have made to each other, and to the United Nations and through the Science-Based Targets Initiative collide with the reality of decarbonisation.

Charles Bedford, founder and chief impact officer, Carbon Growth Partners

KPMG, however, voiced concern that smaller countries may get the shorter end of the stick in such negotiations, given the absence of clear guidance and agreed rules. “For smaller nations, with limited experience or capacity on international carbon markets, securing finance under favourable termscould prove challenging.”

The absence of an agreement on Article 6.4 also spells “another year of uncertainty for voluntary carbon markets, but also an opportunity to continue shaping the rules” of international carbon trading, said KPMG.

Beyond trading, observers are paying close attention to the expected implementation of Verra’s new methodology for REDD+ projects. Launched in November, it uses a jurisdictional approach to determine baselines for deforestation instead of looking at project-level deforestation. Data sets based on this new methodology are expected to begin emerging in 2024, Moore said.

“The impact [the new methodology] will have on the market, both in terms of project viability and perception of those credits, is going to be an interesting dynamic to watch,” said Moore. It will also spark crucial conversations about the future of legacy credits, which are carbon projects that have used older methodologies and face the question of how they will continue to be priced and funded, he said.

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