Voluntary Carbon Market V2.0: new growth cycle for Latin America and the Caribbean?

April 04, 2024

The last 30 months have been particularly important for the structuring of what we can call the Voluntary Carbon Market Version 2.0 (MVC).

Thinking about the end of the MVC as some defended at the height of criticism associated with the integrity of its offer, was a difficult narrative to agree with, mainly because the underlying issue of a carbon credit, whether voluntary or regulated, is nothing more than financing projects with positive impacts on the climate.

Denying this financing mechanism is equivalent to denying the importance of making financial resources available for projects that are more than important in the anti-poverty and climate agenda of developing countries and naturally, this includes LAC.

But in this article, rather than reviewing the ups and downs that the MVC has had in recent months, we want to see some of the consequences of these episodes and how the new consensus may affect ALC in its efforts to participate, prominently, in the MVC.

Let's start by dividing this period into at least three stages. The first, we will call "implosion" which we understand as the period where the structure is detonated, although this may bring eminent risks to the essence of the mechanism.

The second 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 MVC.

The third stage is "resurgence", this would be the current one, the importance of this stage is that it is under construction. In this context, it is essential not only to monitor its outcome, but, above all, to seek forms of participation that allow ALC's position to not be weakened.

The period of implosion was one where the MVC received criticism from inside and outside its system, a series of accusations associated with the lack of technical rigor in various stages of the credit origination and commercialization cycle were unbuttoned. This process caught the attention of international public opinion, revealing the need to make concrete adjustments in the standards and procedures associated with the development of the offer, as well as in the distribution of benefits.

From a demand perspective, the direct consequence was (– 17%) of a decline in international demand for carbon credits in 2022, if we compare it with 2021. It was in this period that large global companies announced the cancellation of carbon purchase contracts. carbon credits until further notice.

It was in this same period that the effectiveness and quality of the offer of credits that result from avoided carbon emissions, such as REDD+ projects, was highly questioned; it was not the only segment criticized, but it was the one that had the greatest retraction. Here it is worth highlighting that, of the total volume of carbon credits in circulation in LAC, 70% are from avoided emissions and conversion (REDD+).

In the second stage "consensus", what was seen was a rush, led mainly by the broker/trader 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, there was sufficient critical mass to give impetus to a new moment of the MVC, a version 2.0.

This moment of search for consensus 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 that result from this stage. Integrity in carbon credits in the MVC represents a kind of supra-quality brand, a transversal concept that is capable of giving credibility to all the actors that make up the carbon credit system, it is therefore a difficult concept to land. , but thanks to various efforts, it has been 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 are already beginning 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 to a series of new concepts and consensuses, a good part of MVC 2.0 can be structured.

Two significant pieces of evidence of the "resurgence" stage, and particularly relevant to the advancement of the LAC MVC, are the recommendations of the United Nations High Level Panel published in the report 'Integrity is Decisive', where the use of credits is justified. of carbon from the voluntary market for offsetting emissions, as a necessary and continually improving financing tool.

The second evidence, and this could generate concern due to its direct effect on the supply of carbon credits in LAC, is ISO 14068-1, published in November 2023. The ISO standard guides organizations seeking their Carbon Neutral certification. , to be used initially, carbon credits of any category, that is, they avoid, reduce or capture carbon from the atmosphere).

However, it also indicates that once the baseline has been established and the action plan has been prepared, organizations should only use credits from projects that capture carbon from the atmosphere, not considering the offer of credits that result from renewable energy/energy efficiency. (reduce), as well as the offer of credits that avoid emissions, such as those for forest conservation - REDD+.

MVC 2.0 is therefore projected towards a more sophisticated system, made up of more actors and resulting from nearly two decades of lessons learned. LAC's competitive position in this new version of the MVC will depend, among other things, on the timely and adequate availability of climate financing, which allows private companies operating in countries with ample capacity to compete and generate carbon credits (capture) to be able to accelerate its origination and expand its offer 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 credit supply. From another perspective, proactive and concerted action between the private sector, development banks and the State could be essential for the region to adapt to these market adjustments and value its credit-generating potential, for the benefit of the region and the planet.

Federico Vignati
Federico Vignati

Ejecutivo Principal de la Vicepresidencia del Sector Privado en CAF