Citibank has published a new report on the voluntary carbon market (VCM), underlining its importance as a financial tool for closing the $1.7 trillion investment gap in climate mitigation and adaptation.
The report Voluntary Carbon Markets: A Critical Piece of the Net Zero Puzzle provides guidance for companies to navigate the VCM amid criticism due to certain issues related to the market.
These include transparency in the pricing of carbon credits, lack of clarity among buyers as to how the market works, and uncertainty about the actual impact, that is to what extent credits reduce, avoid, or remove carbon emissions.
A scale-up in investment is urgently needed if we are to mitigate the negative impacts of climate change on both people and the planet, and due to the limited fiscal capacity of the public sector, 70% of all climate finance must come from the private sector, according to the report.
This means that we must not only deploy all available financial tools, but also develop new, innovative tools that can be scaled up rapidly.
The VCM, which is currently valued at approximately $2 billion, is expected to scale up significantly over the next decade as more companies invest in voluntary carbon credits in a bid to reduce their residual emissions, Citibank said.
The report highlights the important role that carbon credits play in providing financing for sustainable projects in developing and emerging countries, which traditionally have a hard time attracting private investment due perception of risk, lack of bankable projects, foreign exchange, and high debt levels, among other factors.
Credits are also crucial for reducing emissions in hard-to-abate sectors (steel, cement, aviation, shipping, and road freight), which today account for 25% of carbon emissions globally but may rise by 50% through 2050 considering growth expectations.
Companies in other sectors are also struggling to reach their net zero targets in the limited time available, especially regarding scope 3 emissions, which include all indirect emissions that occur in their upstream and downstream activities.
To help buyers navigate the VCM and respond to the demand — by both investors and the public — to reduce emissions and invest in low-carbon solutions, Citibank has provided a report that discusses how the market works and describes what initiatives are being done to improve it.
On a practical note, the report identifies six steps that companies can take in order to use the market effectively, namely (1) developing a strategy for the use of carbon credits across their business, (2) finding a trusted seller, (3) asking the right questions, (4) ensuring the use of verified carbon credits, (5) diversifying portfolios, and (6) using rating agencies if needed.