Voluntary carbon credits are an option for companies to augment their emissions reduction agenda. When done right, they allow buying credits that avoid, reduce, or remove emissions that the industry is currently unable to cut or can't decrease efficiently. This market took off after the COP-21 global climate conference in 2021 in Paris endorsed them as a viable addition to the portfolio of climate solutions.
The annual voluntary carbon market (VCM) is estimated at $2 billion in volume and it is projected to reach $30-50 billion by 2030. Naturally, there is growing interest in the VCM in India and globally, which has led to both excitement and concern. The former is understandable given that VCM represents low-cost financing. The concern, however, is real and centred around integrity. The concerns are two-fold: greenwashing and equity. Do these credits deliver what they promise in terms of emissions reduction, and do the proceeds equitably reach the final step in the chain of action - usually farmers and communities?
An Ailing Market
These questions have resulted in damaging media reports over the last couple of years, delivering a body blow to the carbon market. It had grown rapidly to $415 million by 2021, only to crash to $354 million in 2023. The area needs to recover. The fact is also that this is not some limitless pot of money as the media usually suggests. If the global market was $2 bn for VCM in 2023, in the same period, the compliance market in Europe accounted for more than $900 bn.
While hard numbers are difficult to come by, a conservative estimate is that India accounts for at least 25% of the credits issued to date. This is not a small number. What, therefore, does the global climate community need to do to address the questions around integrity to reignite the market, and what should India do to become a preferred destination for VCM?
Firstly, we absolutely must address buyers' apprehensions. The last thing a company wants to do is buy carbon credits and then face reputational blowback because the design or monitoring of the programme did not deliver on the promised results. The Integrity Council of Voluntary Carbon Market (ICVCM) is an independent voluntary governing body for VCM, and they have set out a series of so-called 'Core Carbon' principles around impact and governance based on which carbon credits can be certified.
Promoting Transparency
This is an important step because right now, it is not clear whether the science adequately backs up the claims from some ostensibly climate-positive actions. Further, the opacity in the market creates justifiable and uneasy doubts about who is getting how much. Science should determine whether a proposed emissions reduction is viable, permanent in nature, and whether there is no double-counting (that is, the same reduction being counted twice by different entities). On transparency, it should be clear who bought a credit, for what, for how much, who they bought it from, who the intermediaries were, and how much finally reached the ground.
The second point is equity, and this is an acute and difficult one. A significant and growing share of credits is going into natural climate solutions like agriculture and forests. Local communities and farmers are often already disadvantaged. The VCM can be a significant additional income stream for them if they get a fair share of the value of the carbon credit. Now, between them and the buyers of these credits are what are called 'carbon developers'. They perform the essential role of identifying and sometimes even designing programmes, packaging them into credits that comply with current global standards; they then market these credits to buyers. There are costs involved, and making a competitive return on this is eminently reasonable.
Prioritising Local Communities
The current obstacle in VCM is that there is no way of knowing how much the last-mile producer of the credit - often a farmer or a landowner who takes an active decision not to till or to grow a specific crop, for example - gets. This creates suspicion - and there are various reports that indicate this - that those who are generating emissions on the ground get only a tiny fraction of the value of their credits as resold in far-off locations in Europe or the United States. Reasonable profit is justified, but disproportionate profit sparks accusations of exploitation. We should not be adding carbon middlemen to agriculture middlemen. If the carbon credit industry does not remedy itself, it is important and inevitable that the governments step in and regulate what is currently a totally unregulated space.
The third aspect of the remedies required is fixing the trouble on the buyers' side. Companies (or buyers) should be able to credibly declare that the credits they bought are in addition to substantive efforts by them to reduce emissions and that these credits benefit host communities. Another development that will likely be accelerated as the VCM grows is the accountability of companies on credits bought by them. So far, it has been relatively easy for companies to pass the buck to VCM standards-setters (the best known of which are VERRA and Gold Standard) if something goes wrong. That will change if companies find themselves more directly accountable.
What, therefore, should India do to channel as much of VCM to farmers and rural communities? The biggest opportunity is establishing the integrity of credits from India. This will require governments, carbon developers, buyers, and communities to work in concert, delivering promised emissions reductions, promoting transparency, and ensuring that communities get their due. The recently released framework of India's Agriculture Ministry is a fantastic start.
India can and should become the world's preferred supplier of voluntary carbon credits. It is good for the country and good for the world.
(Hisham Mundol is Chief Advisor, India, Environmental Defense Fund)
Disclaimer: These are the personal opinions of the author