Maximising the climate impact of carbon credits in compliance schemes
Compliance schemes with carbon credits have the potential to deliver climate impact at a lower cost for participants, and with vast co-benefits like restoring nature or stimulating growth in new green industries like carbon capture and storage. However, there is also a significant risk that capital is channelled towards projects with questionable climate impact. This report includes actionable policy recommendations and case studies to help regulators embed carbon credit quality into the design of compliance markets.
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The market for carbon credits eligible within compliance schemes (e.g. cap-and-trade, carbon taxes) is already significant and is set to grow considerably - in a plausible scenario, the value of the global market for compliance credits could reach USD 15 billion by the early 2030s.
Regulators must ensure that the appropriate guardrails and incentives are in place to allocate this globally significant capital responsibly, in order to maximise the climate impact and economic outcomes derived from compliance carbon credits.
Existing policies are flawed because they are premised on the idea that performance risk - i.e. the risk that a credit doesn’t represent a tonne of CO2e avoided/removed - can be fully managed by controlling the methodologies which carbon credits within compliance schemes can follow.
Credit performance ultimately comes down to project-specific factors, hence compliance schemes must integrate a project-specific risk metric in order to manage underperformance.
Carbon ratings have been heavily adopted in the VCM on a voluntary basis as the common metric for credit performance risk - with the same adoption in compliance schemes, ratings can introduce the much-needed incentive for a “race to the top” in credit quality.