Carbon Credits for Net Zero

At the 2022 World Bank Annual Meetings, Dirk Forrister, President of the International Emissions Trading Association (IETA), highlighted the importance of Article 6 of the Paris Agreement—one of the core outcomes of the COP26 Climate summit. It permits transferring credits from reducing greenhouse gas emissions between countries, providing a ray of hope for governments to scale carbon markets and achieve Net Zero. However, what obstacles do we still need to overcome for carbon credit to be genuinely effective in combatting our worsening climate situation?

PROCESS STANDARDIZATION

The latest number of voluntary carbon credit markets was only $1.6 billion. This is partly because the market is highly fragmented and bilateral. Buyers and sellers of carbon credits must invest immense effort and time in the current process, from conducting due diligence on every project to hiring climate scientists to help; this demonstrates an inefficient process. To remove these frictions, the World Bank panels highlighted the importance of creating a high-quality standard, such as the regulation of carbon credits or universally adopted contracts with a system or an assessment framework. Additionally, the IETA is currently working on standardized agreements to reduce the legal obstacles of carbon crediting deals. With these, companies can expect a future with fewer barriers to implementing carbon credit schemes, allowing the trading and investment in emission offset at a larger scale.

ACCEPTANCE OF INTERNATIONAL CREDITS

The IETA President also remarked that the critical challenge to achieving Net Zero was that an insufficient number of global carbon markets accepted international compliance credits. Therefore, he urged governments worldwide to open up more. The World Bank recommends the implementation of NDC, or Nationally Determined Contributions, which allows each nation to tailor its context of emission reduction, thus making acceptance of international credits more streamlined. This means that businesses will have more room to maneuver when it comes to purchasing carbon credit. They can buy carbon credit in other countries and receive recognition at their domicile nation, widening the scale and opening up more opportunities for carbon trading. A study commissioned by the World Bank indicates that trading in carbon credits could facilitate the removal of 50% of emissions at no additional costs. If Article 6 and the market can function effectively, it would promote better cooperation between countries to reach Net Zero. Thus, opening up an opportunity for green, resilient, and inclusive growth.

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