That is the second article in a six-part collection analyzing how carbon markets can catalyze the transition to a inexperienced economic system. The primary article describes how carbon markets will be reimagined to speed up extra sustainable financial fashions.
The principles and necessities at present governing carbon markets should not nicely suited to enabling the forms of sectoral transitions the world wants. That is particularly the case with reference to assessing additionality, one of many key tenets that underpins carbon markets — the notion that tasks funded by carbon credit wouldn’t have occurred in any other case.
Whereas the dominant strategy to assessing additionality works simply advantageous for the market’s present goal (i.e., producing emission reductions and removals that an organization will be assured about), it has confirmed insufficient to drive the broader crucial of sectoral transitions. For instance, none of the present approaches to additionality successfully think about what occurs when carbon finance is now not out there. As well as, they are typically characterised by cumbersome approval processes and a reliance on deep sector experience, which regularly sidelines stakeholders from the World South and impedes the scalability of climate-friendly applied sciences and practices.
Rethinking additionality
We will, nevertheless, change the assemble. Slightly than persevering with to ask whether or not a person challenge would have been constructed however for the existence of carbon finance, or whether or not a challenge makes extra sense economically when in comparison with the choice (i.e., making use of monetary additionality as the important thing criterion), we are able to change the main target towards a extra forward-looking and galvanizing goal. Specifically, we are able to concentrate on the adoption of latest applied sciences and practices throughout a whole sector, and body the problem as how to make sure these improvements get enough traction in order that they’ll ultimately function on their very own and new ventures now not want carbon finance.
A method to think about that is the everyday S-adoption curve, which posits that in some unspecified time in the future, improvements can take maintain and transfer into the mainstream market. Underlying the adoption curve is diffusion of improvements principle, which breaks down the inhabitants of potential shoppers of a specific product and units out that it may be notably difficult to maneuver from early to mature markets.
Within the context of carbon markets, these ideas may result in figuring out constructive tipping factors (PTPs), the place improvements grow to be economically sustainable on their very own, eliminating the necessity for additional carbon finance. By figuring out PTPs and leveraging insights from theories of how new applied sciences and practices are adopted, we are able to chart a proactive course that makes use of carbon finance as a device to drive sectoral transformation.
What’s extra, there are already helpful fashions to evaluate additionality, particularly standardized methodologies that think about whole sectors and embody constructive checklist approaches, which predetermine these improvements which can be deemed to be further. Optimistic checklist approaches are notably well-suited to PTPs, and new methodologies may very nicely set applicable thresholds that will allow the longer-term transition of sectors of the worldwide economic system.
Issues and challenges
Whereas the proposal for forward-looking additionality assessments holds promise, it’s crucial to acknowledge and deal with the restrictions and implications inherent in such a shift. Some of the vital is that not all tasks generate financial worth past the sale of carbon credit. Certainly, there are some challenge sorts the place the top of carbon finance may spell the top of the exercise altogether, thereby undermining efforts to realize the inexperienced transition. Such tasks might require different interventions, equivalent to authorities regulation sooner or later, which I’ll study in an upcoming article.
As well as, counting on standardized approaches primarily based on figuring out PTPs would face some challenges, together with the next:
- Upfront funding: The event of standardized methodologies tends to be significantly extra difficult and requires extra time and sources given the necessity to think about whole sectors of the economic system.
- Differentiation: One measurement is unlikely to suit all. Because of this growing these standardized methodologies would require making an allowance for the circumstances and particulars of every sector, together with any variations throughout borders or areas inside international locations.
- Common critiques: Monitoring progress in the direction of PTPs and transparency about this progress are essential for stakeholders to evaluate ongoing involvement and for the methodologies to proceed to make sure integrity.
- Potential limitations on crediting alternatives: Growing standardized methodologies for some sectors might not be possible because of inadequate knowledge. This limitation may limit crediting choices, though it may additionally direct restricted funds to sectors the place transitions are attainable.
- False positives: Whereas constructive checklist and efficiency benchmark approaches purpose to reinforce accuracy, they don’t fully get rid of the potential for false positives, the place actions that aren’t further get authorised.
Forging a future-ready path for carbon markets
The crucial to rethink additionality inside carbon markets has by no means been extra urgent. We now have a possibility to reimagine carbon finance as a real catalyst that can be utilized to introduce new applied sciences and practices, construct crucial capability and usually de-risk future investments in sectors of the economic system. Maybe most critically, we have to be sure that we design carbon markets for the time when carbon finance is now not wanted or applicable. Rethinking the market’s strategy to one in all its key tenets will undoubtedly current challenges in addition to complexities, however the potential for a forward-looking additionality mannequin that catalyzes sustainable sectoral transitions is simple.
David Antonioli is a net-zero transition guide and was the founding CEO of Verra till June 2023. This matter is addressed in additional element in his just lately launched report Financing the Transitions the World Wants; In the direction of a New Paradigm for Carbon Markets. A brand new chapter of the report will likely be launched each week by July 9.