Can voluntary carbon markets accelerate decarbonisation in Asia?

By Marko Lackovic & Jamie Bawalan

Asia has a powerful climate financing challenge. Taking the power sector for example, the region is projected to consume half the world’s electricity by 2025, and whilst growing renewable energy adoption offers encouraging signs of transition, the reality is that significant additional financing is required to deliver a net-zero power landscape.

Globally, just 16% of climate finance needs are currently being met, with an estimated US$3.8t additional funding from private and public sector entities required to achieve a net-zero pathway to 2025.

According to the International Energy Agency (IEA), annual clean energy investment globally will need to triple to more than US$4t by 2030 to put us on path to our net-zero 2050 targets.

Carbon markets are playing an increasingly important role in the decarbonisation efforts. The compliance market reached US$850b in value in 2021 - or 2.5x of its estimated value in 2020 -whilst the voluntary market is estimated to have quadrupled from 2020 to US$2b in 2021.

A clear view of voluntary carbon markets

Voluntary carbon markets (VCMs) offer a flexible, market-based complement that can help nations fund this vital energy transition and fulfil their critical power investment needs.

According to analysis in a joint report released by Boston Consulting Group (BCG) and the Rockefeller Foundation, What Gets Measured Gets Financed: Climate Finance Funding Flows and Opportunities, global voluntary carbon markets could be worth up to US$10-40b annually by 2030, or as much as 0.5-1.5 gigatonnes of CO2 equivalent (GtCO2e). The World Economic Forum estimates VCMs could deliver as much as 12% of total mitigation needs by 2030.

Growth in VCMs will be driven by a surge in net-zero commitments by corporates, as well as developments relating to Article 6—the rulebook on carbon markets—of the Paris Agreement. Greater government-to-government activity is expected as a result.

Carbon markets feature broadly two categories of credits. Avoidance credit helps limit the build-up of greenhouse gas (GHGs) in the atmosphere by limiting new emissions. Removal credits directly lower the concentration of carbon by removing historical emissions.

Avoidance credits dominate the market today, with 80% of credits focused on these more mature methodologies, which include renewable energy projects. However, concerns around the quality of avoidance credits, and pressure from external stakeholders, is likely to result in an acceleration towards removal credits by 2030.

With this increasing external pressure, the role of avoidance credits—especially in the energy sector—could be at risk. It’s important these flexible solutions continue to be pursued as part of a holistic and pragmatic solution to the decarbonisation of power systems in Asia. Whilst removal credits are vital, they inherently rely on avoiding emissions in the first place. This includes both preventing forest loss and ensuring a greater share of power consumed in developing markets is sourced from renewable energy and less from high-emission coal.

Avoidance credits can be effective, as demonstrated by numerous forestry projects across the world. Countries participating in the reducing emissions from deforestation and forest degradation (REDD+) framework, for example, saw lower deforestation rates (67%) than those non-REDD+ countries (80%) between 2015 and 2020.

There is no reason to assume that this same mechanism won’t deliver the same impact on power systems in Asia, through solutions such as supporting the decommissioning or conversion of coal power plants, upgrading grids to increase their ability to absorb more variable renewable energy, scaling more capital-intensive renewable energies (e.g., onshore and offshore wind), and other innovative use cases.

Supporting the energy transition with financing from the voluntary carbon markets will need action from both the supply and demand side, including power players and project developers, governments, and registries/standard bodies such as Verra and Gold Standard.

Project developers, both power and carbon-offset players, should seek to meet the strictest standards when pursuing projects. This is vital to retain trust in the market and ensure it continues to operate, thrive, and scale in line with the significant global need.

Governments have a significant role to play in scaling supply and building trust. There is currently a wide spectrum of support that authorities have provided in relation to supplying the VCM, from creating the legal frameworks for such projects to developing country-specific registries. Given the typical size, importance, and level of regulation of domestic energy sectors, more active orchestration and facilitation may be needed from governments to enable VCM solutions. An example could be providing technical or permitting support to energy-transition-related carbon projects. 

Strengthening current methodologies (and potentially developing new ones), and the communication around these, to ensure their robustness and to address integrity concerns from the demand side will be welcome. Developments are already underway for the market in general—the Integrity Council for the Voluntary Carbon Market (ICVCM) just released its new Core Carbon Principles. Energy sector-specific updates could be next.

Actions to enhance demand-side dynamics must also be encouraged, specifically from buyers and standards-setters, to ensure offsets stemming from power systems, which are largely avoidance credits, are not counted out. With the recent negative press surrounding the voluntary carbon markets driven by concerns regarding environmental integrity, it is understandable that buyers are looking to rely less on avoidance credits, specifically those relating to renewable energy.

However, the potential positive impact of such credits should not be discounted. Corporates and governments can link with fellow buyers and reputable intermediates to pool capabilities and assess projects thoroughly for their environmental integrity. The US’ recently announced Energy Transition Accelerator is a promising initiative to this end. Third-party claim standard-setters such as the Science-Based Targets initiative (SBTi) and carbon project rating agencies also have a valuable role to play, providing guardrails in which such offsets can thrive.

Ensuring flexible carbon opportunities continue

In presenting the recent IPCC Sixth Assessment Report, United Nations Secretary-General Antonio Guterres made it clear that “Our world needs climate action on all fronts: everything, everywhere, all at once.” Voluntary carbon markets offer an important complement to this multifaceted journey.

Carbon and offset players should actively look to pursue and develop these opportunities to maximise their impact, whilst governments work to enable power systems in leveraging these carbon market opportunities.

Buyers of carbon offsets should keep an open mind to these purchase decisions and embrace the flexible opportunities that VCMs can present to deepen net-zero commitments.

All things considered, voluntary carbon markets offer a credible, complementary path to finance decarbonisation of power systems in developing markets in Asia. With an acceleration in power demand expected in the coming years, it’s important that all potential solutions are explored to deliver a low-carbon power ecosystem for nations across the region.

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