The Paris Agreement enables carbon to become an international tradable commodity, making a recognised contribution to global climate targets. This presents the VCM (Voluntary Carbon Market) with a significant opportunity to scale by mobilising finance for country decarbonisation, and supporting the development of new market mechanisms.
However, this opportunity comes with added complexities in assessing the effectiveness of any credits issued. Ratings will play a key role supporting the development of the market by assessing the integrity, carbon accounting and permanence of credits issued. The market will be reliant on effective disclosure at both a project and country level in order to scale. We see the interaction between carbon markets and countries’ Nationally Determined Contributions (NDCs) evolving in the coming years as Article 6 is fully agreed upon and operationalised.
1. The Paris Agreement recognised greenhouse gas emissions as a sovereign liability. Article 6 laid the foundation for decarbonising activities to become national assets.
2. The VCM has the opportunity to increase both private and country climate ambitions through effective interaction with the Paris Agreement, in our view.
3. The interaction between project level and country level accounting will make the carbon market increasingly challenging to navigate.
4. Ratings are a key tool to understand risk and need to be dynamic to capture the evolution of the market.
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