As interest around voluntary carbon markets increases, so too does demand from interested buyers for clear rules on how to use carbon credits in a legitimate way. While several initiatives have attempted to address this need, a broad framework has yet to emerge -- think of the equivalent of Article 6 but on the demand side.
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The Voluntary Carbon Markets Integrity Initiative (VCMI) has taken on the challenge and it's preparing a rulebook helping buyers of carbon credits to engage in the voluntary carbon markets in a well-founded, rightful way. Mark Kenber, interim co-executive director for external affairs at the VCMI shared his thoughts about the future of the VCM, the need for absolute transparency in the market and his desire to see buyers ask every detail of the carbon credits they buy.
Given the exceptional times we are living in, I must start this interview by asking your thoughts on the impact of the Ukraine-Russian conflict on the voluntary carbon market?
I think it's too early to understand the long-term impact of the Ukraine-Russia conflict. The conflict has had an impact on stock market prices and has given a further push to inflation. It has created a situation of general economic uncertainty and for many companies, commitments towards fighting climate change are -- understandably but unfortunately -- taking a second seat. The focus for many of them is now on keeping a handle on costs and shares amid rising inflation. So, I think the price drop is the result of this general economic uncertainty, but in the medium to long term prices will remain high, pivoting more investments towards energy efficiency and the decarbonization of companies' value chains. We are already seeing this happening.
How fast do you expect the VCM to rebound should the conflict come to an end soon?
We don't know when this war is going to end. But if it ends in a few weeks or months, the voluntary carbon market will rebound very quickly since demand remains higher than supply. We saw prices rising after COP26. This was supported by a raft of new corporate commitments and a bottleneck on the supply side. It takes time to have new carbon projects validated, as it should be since it's important not to cut corners. But this will contribute to generate a spike in prices. We are seeing that many players in the industry are struggling to find qualified employees. This contributes to slowing things down when it comes to certifying new supply, and results in higher prices. And as prices remain higher, one thing becomes increasingly important.
With increasing prices it's important to understand who benefits. Is it traders and brokers that increase their profit? Or is it host countries and their communities? We have to make sure that the extra profit goes to the local communities that host the projects. The VCMI is pushing through this idea. We are working on a guide that will offer a series of principles for buyers and users of carbon credits so that higher prices will result in more ambitious decarbonization efforts and also in higher shares of profits to local communities.
What would the guide entail?
VCMI is working on the demand side of the market to define set criteria that companies should follow when they buy credits, including the questions they should ask traders and brokers regarding profits. Our guidelines will be published this summer.
Would this imply the introduction of a threshold of profits that needs to be given back to the local community?
As VCMI, we can't introduce fixed profit percentages that need to go back to the local community, that has to be the job of the local governments under a jurisdictional approach. Local governments should say: if you invest in my country, this is what you need to give back to the local community. And of course, governments should act in coordination with each other so that they don't undercut each other.
But what we can do as VCMI is to recommend that buyers be aware of certain things and ask specific questions to traders and brokers about the destination of the profit. This becomes especially important now that we see credits sometimes being bundled in a way that makes it harder for buyers to understand what they are buying. You would do the same if you were investing, for example, in an ESG fund.
We want to bring absolute transparency into this market. It's absolutely essential that buyers and investors know what they are purchasing, from development to retirement, and the VCMI will collaborate with the Integrity Council For Voluntary Carbon Markets on this.
You mentioned the role that local governments can play in setting the rules of the game. Most private developers however are usually skeptical about seeing governments more involved because they fear political instability and, in some areas, corruption...
I think that involving governments in the market can only help to make it more legitimate. Yes, more complicated perhaps, but governments would be able to impact the market anyway so better to have them involved. One thing that you can do to ensure long term stability of policies is to involve institutions that are not politically driven. At the same time, guaranteeing government some kind of return in exchange for the work they would do would help to create policy stability.