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COP26: Nature-based solutions offset trading on the rise, as is concern

09 November 2021 Max Tingyao Lin

Voluntary carbon trading markets are booming due to rising demand globally for carbon offsets generated from nature-based solutions (NBS), but market participants and climate activists remain concerned about their overall social and decarbonization effects.

While over 600 companies have set voluntary targets of net-zero emissions by 2050 or earlier, many of them plan to achieve at least some emissions reductions with offset credits from agriculture, forestry, or land-use projects.

Such offsetting mechanisms are under scrutiny during some COP26 side events this week, as climate negotiators struggle to complete the final piece of Paris Agreement rulebook—the Article 6 rules—which could integrate voluntary carbon markets into government-administered trading schemes.

"Demand right now is overriding supply…I mean, it's all over the place," said VNV Advisory Services Co-Founder Sandeep Roy Choudhury, referring to carbon offsets from NBS. "I'm excited about the amount of money that is there, but I'm a little worried about how that money is going to be deployed in the future."

Business information provider Ecosystem Marketplace estimated the total transaction value of voluntary carbon credits from forestry and land-use projects reached $544 million in in the first eight months of 2021, compared with $269 million for the entirety of 2020.

The transaction value of agricultural projects amounted to $4.6 million in the eight-month-period, versus $2.8 million last year.

The potential for future growth is strong. Business giants like Facebook, Delta Airlines, Eni, and BP are purchasing offsets from afforestation and reforestation projects developed by third parties to compensate for emissions elsewhere in their value chains. Shell and TotalEnergies have established dedicated entities for direct investment in NBS-based carbon offset projects.

The Taskforce on Scaling Voluntary Carbon Markets, promoted by UN Special Envoy on Climate Action and Finance Mark Carney, estimates the voluntary market could be scaled up to $50 billion in 2030 to help cap global warming at 1.5 degrees Celsius.

McKinsey & Co. expects more than half of the carbon offsets will come from avoided nature loss, reforestation, and other types of nature-based sequestration projects by that time.

But Choudhury, whose company develops offset projects, warned that "too much scale" also comes with its own set of problems. "We will probably have to be careful about the integrity question about how we scale," he told the Sustainability Innovation Forum (SIF) 9 November.

Potential issues

In terms of reforestation projects, reports indicate that some projects have not been truly generating new emissions offsets, such as claims that some project developers simply cut down trees before planting new ones. Critics also questioned the overall mitigation effects of forest prevention projects as deforestation could be relocated elsewhere—for example, a planned hotel might be moved from an area covered by an offset project to another place not in the same forest.

Conor McMahon, global climate delivery manager at Nestle, said his company is taking a careful approach in planning forestry programs.

As part of its Euros 1.2 billion ($1.32 billion) investment project for regenerative agriculture, the Swiss food giant will plant 10 million trees per year for the next 10 years under various schemes. They will generate carbon credits by meeting Verra or Gold Standard requirements and help offset Scope 3 emissions.

But Nestle does not intend to acquire carbon offsets from other companies.

"We want to make sure the projects we are supporting, they are correct, not causing any externalities," McMahon said. "We don't want leakage…[like] you invest in one project in one location that results in negative impact somewhere."

In a separate event 8 November, representatives of non-profit organizations recognized that NBS can enhance biodiversity. But they said companies should not seek to generate carbon credits from their activities in this area for their net-zero goals.

"In the majority of cases, these corporations … are really planning to carry on 'business as usual' for a very long time," said Teresa Anderson, climate policy coordinator at ActionAid International.

She predicted that some companies will "pollute as much as they like" without investing in emissions reduction in their value chains, and find a way to offset the same amount of emissions to achieve net zero.

Moreover, the impact of climate change in the form of fires, droughts, and disease will cause the carbon stored in ecosystems to be released back into the atmosphere unless NBS programs are combined with other decarbonization efforts, according to scientists.

"Climate change itself threatens this kind of an offset," Institute for Agriculture and Trade Policy Director said, "so we really need to be careful because there's such a rush to create these carbon credits.

"We're actually lacking the evidence that any of this is going to work," she added.

Agnès Callamard, secretary-general at Amnesty International, said many forestry projects have harmed indigenous people and other local communities.

"There were failures to consult with people, failures to obtain their free will prior and informed consent for projects on their lands. Indigenous people are particularly vulnerable to those so-called offset project via illegal land seizures and forced displacement," Callamard said.

Further reforms

The UN believes NBS projects are vital in slowing global warming and has called for more financial support for them. Some entities, like the Nature Conservancy, believe offset projects can help facilitate climate finance.

An IHS Markit analysis found agriculture, forestry, and land-use projects are attractive to companies due to their low cost. The offsets from them are valued between $4 and $50 per mt of CO2e, while technology-based solutions cost somewhere between $17 and $180 per mt of CO2e.

"As critical tools to deliver global climate goals, they will likely play a relevant role in the voluntary carbon markets in the short-term due primarily to their lower cost. However, as offsets prices increase, given higher market demand, technology-based projects will become a more permanent and attractive solution in the long-term," according to the analysis.

"As companies keep developing their net zero strategies, they should rely on offsets for their residual emissions and continue advancing technology-based solutions to reduce emissions as their focus," the analysts added,

There have been some efforts taken in reforming voluntary carbon trading in recent months.

Carney's taskforce has established the Integrity Council for Voluntary Carbon Markets, while the UK government and the Children's Investment Fund Foundation launched the Voluntary Carbon Markets Integrity Initiative. Both are aiming to bring more transparency to the market and make carbon offset projects more credible.

Some market participants hope the Article 6 rules—if finalized—could help regulate voluntary markets with a global standard. Gonzalo Muñoz, a high-level climate champion appointed by the UN, suggested countries and the private sector will probably still need to establish detailed regulations.

This is because the Paris rule book is only meant to be a guide. "Many people might think a global market of carbon will be solving everything. [The reality] is much more complex than that," Muñoz told the SIF 9 November. "The voluntary markets will become regulated worldwide in many different ways."

Posted 09 November 2021 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

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