INTERVIEW: Voluntary carbon emissions reductions see bleak future with NDCs kicking in, says CFRN

With millions of United Nations Framework Convention on Climate Change (UNFCCC) carbon credits expected to be generated soon by countries under the Coalition for Rainforest Nations (CFRN), Kevin Conrad, Executive Director of the intergovernmental organization, spoke to S&P Global Commodity Insights on the significance of UNFCC-certified credits, the role of the voluntary carbon market and the various standards, as well as the need to urgently focus on real emissions reduction instead of speculative trading.

Q. Millions of credits are expected to be generated by Gabon and other rainforest nations soon. Are those High Forest Low Deforestation (HFLD) credits?

A: Gabon is not issuing HFLD credits under the UNFCCC. Gabon is only asking for emissions reduction credits and any additional removals credits they've earned through the re-growth of forests.

Q. However, a lot of the nations under CFRN have also applied for credits under the Architecture for REDD+ (ART) standard. They could qualify for HFLD there.

A: ART TREES does allow an adjustment for HFLD countries. The UNFCCC does not. If you ask me, that's probably not the right approach by the UNFCCC. If we lose our forests, we lose the battle against climate change. If there is no incentive to keep our forests standing, then those forests are likely to be lost.

However, one of the fatal flaws of ART TREES is that they allow sub-national or small areas to be counted till 2030. The UNFCCC requires accounting for all national forests. If we allow every country to play the HFLD game, there is only one outcome that is certain, we fail to meet the 1.5 degree target.

Q. What about standards like Gold Standard and Verra?

A: There is only one standard, that has been agreed by every country in the world. That standard is the Paris Agreement under the UNFCCC. But there is this proliferation of voluntary standards that arose while everyone was waiting for the Paris Agreement to come into effect.

If you look at this Verra and GS, they are three main problems with them. First, they credit avoidance. The Paris Agreement does not. That means you can theorize and get credits for things that haven't occurred by simply claiming that you have avoided them. Secondly, there is no requirement or transparency on the financing or benefit sharing. This is now required under the Paris Agreement. Lastly, in most cases, these credits have been taken without authorization of the host country's government. In effect, they are stolen from developing countries with most of the money kept offshore. The Paris Agreement has tried to correct this by mandating a country must authorize a credit before it is exported.

Q. If a country buys UNFCCC credits, is it considered part of the voluntary or compliance market?

A. I would argue that voluntary credits are a dying breed. At present, many governments are not regulating their industry and they are hoping they will voluntarily regulate themselves.

As Nationally Determined Contributions (NDCs) start to bite and emissions reductions have to come down, the voluntary nature of emissions reductions is going to disappear and the regulatory or compliance requirements are going to kick in.

During this interim space, some countries are still testing and working out their NDCs and are allowing voluntary action. Other countries have issued moratoriums on voluntary standards. While this voluntary action is temporarily in existence, we suggest companies should be buying credits from the Paris Agreement to avoid holding "stranded carbon assets" and also such that get educated and comfortable with all of the process under the Paris Agreement.

Q. How will UNFCCC credits be priced?

A. If you look at compliance credits around the world, they are between $60-$80 dollars. Voluntary credits are about a tenth of that. As more and more countries introduce compliance regimes to meet their NDCs, compliance prices will be pushed upwards. But, voluntary credits will continue to languish as there is no requirement to buy them. They are also inconsistent given around 80% of them are based on avoidance which is not permitted under the Paris Agreement. Candidly, the future doesn't look very bright over the medium and long term for voluntary carbon standards.

Q. Countries have not yet started actively purchasing credits for their NDCs. What then will happen to these millions of credits from rainforest nations expected to enter the market?

A. Keep in mind that most people are in their first NDC. But NDCs will tighten, and demand will increase. Switzerland is already in the market for ITMOs. They are looking for 9-10 million credits. We've already heard from Singapore. They are aggressively looking for ITMOs. Japan has also highlighted they are looking for ITMOs.

Q. Prices in the VCM have really been dropping. How do you see UNFCCC credits being priced in this market?

A. Buyers are beginning to understand that these voluntary standards are not compatible with the Paris Agreement. So, demand has dropped. Most voluntary buyers are speculators in the market and just resell for a profit. There are very few actual retirements.

We have to quickly and exponentially expand and our net zero requirements with real reductions, which voluntary markets have not been able to do so far. Governments and corporations need to focus on real emissions reduction and not merely speculation. We have to move away from the voluntary standards. Our expectation is that as retirements increase and real demand grows, prices for ITMOs will rise.