OPINION: Carbon markets poised for transformation through international standardisation
Quantum Commodity Intelligence - Angela Hepworth is commercial and carbon markets director at Drax Group.
The clash of pro-fossil fuel energy policy and grave warnings of stalled climate progress provide a dramatic and uncertain backdrop for the upcoming year. With just five years to a key climate benchmark in the energy transition, promises to "Drill, baby, drill" amid the projected exponential increase in energy demand from data centres powering artificial intelligence (AI) raise material questions about the feasibility of reducing greenhouse gas emissions to avoid the worst climate impacts.
The climate challenge demands an urgent scaling of high integrity carbon removals, and the development of rigorous, globally recognised standards is essential to underpin their development.
A history of poorly defined and competing standards led to the advent of the Integrity Council for the Voluntary Carbon Market in 2021, which convenes more than 100 stakeholders to define its programmes and methodology frameworks.
The council now applies labelling of high integrity credits through application of its Core Carbon Principles (CCP), which are founded on 10 science-based principles. It has received strong support and will help push the market toward higher integrity credits while also providing a clear signal to customers of how to identify quality credits in the market.
The advancements in the voluntary carbon market parallel work by policymakers toward standardisation at the national, regional and global level, including in the development of the Article 6 framework.
The emergence of a set of rules under a UN-backed standard will go a long way toward alleviating transparency concerns while ensuring greater trust in the carbon market. The European Council have already advanced a certification framework for carbon removals in the EU, while the British Standards Institute will provide a similar set of rules for the UK.
Standardisation also invites innovations starting with stronger monitoring, reporting and verification tools. Drones, satellites or airborne sensors, or even AI can be leveraged for measuring, reporting and verifying emissions.
Uniform metrics
Taken together, these efforts by the private and public sector, rooted in transparency and credibility, coupled with technological advancements, now allow much broader implementation and participation. Uniform metrics and stronger regulatory oversight allows for clarity in decision making and, as a result, new businesses and investors should face lower barriers to entry and accelerated adoption.
As the supply side matures, measures will be needed to drive demand. Several jurisdictions, including the UK and the EU, are looking at integrating carbon removals into their compliance markets, which could provide a huge boost to their uptake. It would also reflect the essential role of carbon removals in neutralising the hard to abate emissions of heavy emitters.
Further measures are needed to stimulate the voluntary side of the market, and setting clear standards for corporate carbon credits use - including removals - has a key role to play.
The Science Based Targets Initiative (SBTi), currently the pre-eminent framework for corporates setting net zero trajectories, is considering the role that carbon credits should play. The removals community is hopeful that this sends a clear signal to corporates that they should be building permanent carbon removals into their plans from an early stage. This could be a real game-changer in the market.
There is also a role for governments in encouraging corporate engagement in carbon markets, particularly the early purchase of removals. Both the US and UK administrations have published helpful guidance to corporates on engaging with carbon markets, and the EU's work on Green Claims, if done correctly, will help to codify how corporate claims should be made, including the use of carbon credits.
Together, these recent advancements will allow for the private and public sectors to build additional momentum in 2025. With progress on standards across both the supply and demand side of the market, we are closer than ever to enabling new and transformative action from capital markets to meet greenhouse gas emissions reduction goals.