Federico Vignati
Ejecutivo Principal de la Vicepresidencia del Sector Privado en CAF
Edited
The last 30 months have been particularly important for the structuring of what we can call the Voluntary Carbon Market Version 2.0 (VCM).
To think of the end of the VCM, as some advocated at the height of the criticisms associated with the integrity of its offer, was a difficult narrative to agree with, mainly because the underlying theme of a carbon credit, whether voluntary or regulated, is nothing more than financing projects with positive impacts on the climate.
To deny this financing mechanism is tantamount to denying the importance of making financial resources available for projects that are more than important in the poverty and climate agenda of developing countries, and naturally, this includes LAC.
But in this article, rather than reviewing the ups and downs of the GCF in recent months, we want to look at some of the consequences of these episodes and how the new consensus may affect LAC in its efforts to participate, with prominence, in the GCF.
Let us begin by dividing this period into at least three stages. The first one, we will call "implosion", which we understand as the period when the structure is detonated, although this may entail eminent risks for the essence of the mechanism.
Edited
The second stage we will call "consensus", it is the stage where the actors, faced with the eminence of losses and uncertainty, seek in dialogue, to rethink a feasible path for the sustained growth of the CVM.
The third stage is "resurgence", this would be the current stage, the importance of this stage is that it is under construction. In this context, it is essential not only to accompany its outcome, but, above all, to seek forms of participation that will allow LAC's position not to be weakened.
Period of implosion.
The implosion period was the one in which the CVM received criticism from within and outside its system, and a series of accusations associated with the lack of technical rigor in various stages of the credit origination and commercialization cycle were unleashed. This process drew the attention of international public opinion, highlighting the need to make concrete adjustments in the standards and procedures associated with the development of supply, as well as in the distribution of benefits.
From the demand perspective, the direct consequence was a 17% decrease in international demand for carbon credits in 2022 compared to 2021. It was in this period that major global companies announced the cancellation of carbon credit purchase contracts until further notice.
It was in this same period that the effectiveness and quality of the supply of credits resulting from avoided carbon emissions, such as REDD+ projects, was highly questioned, it was not the only segment criticized, but it was the one with the greatest retraction. It is worth noting that 70% of the total volume of carbon credits in circulation in LAC are from avoided emissions and conversion (REDD+).
In the second "consensus" stage, what we saw was a rush, led mainly by the brokers/traders segment, in coordination with the companies that generate standards and in turn certify climate projects, to appease the market and demonstrate that, despite the weaknesses of the system
weaknesses of the system, there was enough critical mass to give impetus to a new moment of the GCM, a version 2.0.
This moment of consensus building was characterized by the discussion around the concept of "integrity", a concept that is repeated over and over again in all the studies and recommendations resulting from this stage. Integrity in carbon credits in the VCM represents a kind of supra-quality mark, a transversal concept that is capable of giving credibility to all the actors that make up the carbon credit system. It is therefore a concept that is difficult to ground, but thanks to various efforts, it is gaining shape and tools through work such as that carried out by ILACC, the Voluntary Carbon Markets Integrity Initiative (VCMI) and the Integrity Council for Voluntary Carbon, among others.
Determining to what extent we are still in the second stage, or we are already starting a third stage, the "resurgence", is not fundamental for our analysis, however, it is important to recognize that we are moving towards a new moment, where, based on a series of new concepts and consensus, a good part of the VCM 2.0 can be structured.
Two significant evidences of the "resurgence" stage and particularly relevant for the advancement of the LAC GCM are the recommendations of the United Nations High Level Panel published in the report 'Integrity is Decisive', which justifies the use of carbon credits from the voluntary market for emissions offsets as a necessary and continuously improving financing tool.
The second piece of evidence, and this could raise concerns about its direct effect on the supply of carbon credits in LAC, is ISO 14068-1, published in November 2023. The ISO standard directs organizations seeking Carbon Neutral certification to initially use carbon credits of any category (i.e., avoiding, reducing or capturing carbon from the atmosphere).
However, it also indicates that once the baseline is established and the action plan is developed, organizations should only use credits from projects that capture carbon from the atmosphere, not considering the supply of credits resulting from renewable energy/energy efficiency (reduce), as well as the supply of credits that avoid emissions, such as forest conservation - REDD+.
The GCF 2.0, therefore, is projected towards a more sophisticated system, integrated by more actors and resulting from nearly two decades of lessons learned. LAC's competitive position in this new version of the GCF will depend, among other things, on the timely and adequate availability of climate finance, which will allow private companies operating in countries with ample capacity to compete and generate carbon credits (sequestration) to accelerate their origination and expand their supply in the international market.
The lack of enabling conditions and financing for private investments of this nature may inhibit the vision of LAC as a "solution region" for climate change, at least from the perspective of the supply of credits. From another perspective, proactive and concerted action between the private sector, development banks and the State could be fundamental for the region to adapt to these market adjustments and to make the most of its credit-generating potential for the benefit of the region and the planet.
