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1、 As our premier thought leadership product,Citi GPS is designed to help readers navigate the most demanding challenges and greatest opportunities of the 21st century.We access the best elements of our global conversations with senior Citi professionals,academics,and corporate leaders to anticipate t

2、hemes and trends in todays fast-changing and interconnected world.This is not a research report and does not constitute advice on investments or a solicitations to buy or sell any financial instruments.For more information on Citi GPS,please visit our website at CARBON MARKETS A Critical Piece of th

3、e Net Zero Puzzle The voluntary carbon market(VCM),although nascent,has managed to provide financing for many sustainable projects.This report provides a guide for companies to help navigate the VCM.We discuss how the market works,describe what initiatives are being done to improve it,and identify s

4、ix steps that companies can use to help them use the VCM effectively.Citi GPS:Global Perspectives&SolutionsCiti GPS:Global Perspectives&Solutions July 2023 Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 Primary Authors Elizabeth Curmi is Head of Climate Finance&Energy Transition within Ci

5、tis Global Insights division working on developing thought-leadership content on sustainability and ESG.Prior to joining Citi,she worked as a postdoc researcher at the University of Cambridge focusing on the interconnections between water,energy,and food resources and their impacts on greenhouse gas

6、 emissions.Liz has published several academic papers and has also co-authored a number of the most-read Citi GPS reports including the United Nations Sustainable Development Goals,Energy Darwinism series,Hard-to-Abate Sector and Emissions,and Food and Climate Change.Liz has a PhD in environmental ec

7、onomics and has presented her work at many academic conferences,to the United Nations Economic Commission for Europe(UNECE),as well as to corporates and government officials.She is particularly interested in researching sustainable and economic solutions for companies,institutional investors,and gov

8、ernments to develop a low carbon and sustainable world through technology and innovation,economic instruments,government policies,and sustainable finance.+44-20-7986-6818| Jason Channell is Head of Sustainable Finance within Citis Global Insights division.Jason previously built and led Citis Sustain

9、able and Responsible Investment Research team from within Citi Research to a#1 ranking around the world in the Institutional Investor survey.Throughout his career Jasons research has covered many sectors,spanning the energy spectrum of utilities,oil&gas,and alternative energy,and has been highly ran

10、ked in many sectors.Jason started his career at Fidelity Investments,and prior to joining Citi in 2011 worked for Goldman Sachs,where he built and led the Alternative Energy&Cleantech coverage globally in Equity Research.Jason is the lead author of some of the most-read Citi GPS reports,covering all

11、 aspects of sustainability from the UN SDGs to Infrastructure.His most notable publications remain the Energy Darwinism series,which gained significant traction with institutional investors,corporates,governments,and supranationals around the world,culminating in its presentation to the United Natio

12、ns with Jason chairing the related session of UNECE at the Palais des Nations in Geneva.Jason features widely in the international media in print,online,and on TV.He holds a degree in Engineering Science and Management from the University of Durham.+44-20-7986-8661| Ying Qin is a thematic analyst wi

13、thin Citis Global Insights division working primarily on ESG and sustainability-related topics.Ying has contributed to many Citi GPS reports including the UN Sustainable Development Goals,the Energy Darwinism series,as well as the Women in the Economy Series.Prior to joining Citi in 2018,she worked

14、at Chatham House and has a PhD in sustainable development from the University of Cambridge which focused on natural resource use and governance in China.Her doctorate was funded by BP,and she has presented the research to a wide range of stakeholders including BP executives as well as Chinese govern

15、ment ministries.+44-20-7986-8325| Andrea Fleming is an associate within Citis Global Insights team focused on sustainability and responsible development-related content.Andrea has held various roles across the investment lifecycle through her experiences working on sovereign fixed income and ESG res

16、earch teams at a global asset manager and her years of experience in private and commercial credit.Andrea holds a Masters in Quantitative Economics from University of California,Los Angeles where her graduate thesis focused on the relationship between sovereign credit spreads and ESG country ratings

17、.Andrea is particularly interested in sustainable development in the public sector,identifying and bridging financing gaps,and the role of innovative policies in contributing to social goods.+44-20-7986-8326| 2023 Citigroup 2023 CitigroupCARBON CREDITS 10101234567Metric Ton of CO21 passenger on a re

18、turn flight from Paris to New York(or driving 6,000 km with a Citron Picasso)CO2 emissions per year from an average person in the UKCO2 emissions per year from heating an average UK householdCO2 EMISSIONS IN CONTEXTAvoidedDeforestationEnergyGenerationReforestationEnergyDemandEmissions$per tonne of C

19、O220051015Average Price10.77.012.19.95.3OVER-THE-COUNTER CARBON CREDIT PRICES(2022)Source:Citi GPS,BNEF Develop astrategyUse verified carbon creditsFind atrusted sellerUse rating agency,if neededDiversifyportfoliosAsk the rightquestionsHOW SHOULD BUYERS NAVIGATE THE VCM?50bnmetric tons of CO2ein GHG

20、 emissionsARE GENERATED ANNUALLY2 TYPES OF CARBON CREDITS NEEDEDCarbon Reduction and Avoidance(e.g.,REDD+and energy efficiency)Carbon Removal(e.g.,reafforestation,biochar,or technological carbon removal projects)TYPE 1TYPE 21 metric ton of carbon credits1 metric ton of CO2 equivalent(CO2e)=the reduc

21、tion,avoidance,or removal ofin greenhouse gas(GHG)emissionsVCM Market SizeTHE VOLUNTARY CARBON MARKET(VCM)$5bn-$50bn2030$2bn2022THE VCM IS EVOLVINGNew Marketplaces,e.g.,carbon credit access platforms and financial institutionsNew Technologies,e.g.,satellites and digital software to monitor impactRat

22、ing Agencies,to provide independent views on quality of carbon credits$1.7trngapWHY CARBON CREDITS?Source:UNFCCC Race to Zero Campaign with support and analysis from Vivid Economics,IPCC$1.7trn annual gap in climate finance for mitigation1.1C of global warming already recorded vs.1.5C targeted limit

23、 Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 4 Summary 4Introduction 7Carbon Credits 101 12Current Use of Carbon Credits.13Voluntary Carbon Market 18How Does the Voluntary Market Work?.18Parameters Used to Assess the Validity of Different Carbon Credits.20Different Types

24、 of Carbon Credits.21Co-Benefits.25Prices of Carbon Credits.26Current Demand for Voluntary Carbon Credits.28Future Demand for Credits.29New Players 31New Marketplaces.31Blockchain.34Uncertainty in the Voluntary Carbon Market from Article 6 of the Paris Agreement 35What Should Buyers Look for When Bu

25、ying a Carbon Credit?37Scrutiny from Regulators.39Conclusion 41 Contents July 2023 Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup 5 Summary We urgently need to scale up investment in climate mitigation and adaptation.There is currently a$1.7 trillion investment gap that needs to be c

26、losed to limit the negative impacts of climate change on both people and the planet.As the public sector does not have the fiscal capacity to reach this investment figure alone,70%of all climate finance needed must come from the private sector.For these reasons,we must deploy all available financial

27、 tools,while at the same time develop new,innovative financial tools that can be scaled up rapidly.Remember,we are in a race against time;we need to reduce emissions by 45%from 1990 levels by 2030 to have any chance of limiting temperature increase to a 1.5C rise.2030 is only seven years away and we

28、 are currently not close to these targets.The voluntary carbon market(VCM),although nascent,has managed to provide financing for many sustainable projects in developing and emerging countries.Traditionally,these countries have a hard time attracting private investment due to factors including the pe

29、rception of risk,lack of bankable projects,foreign exchange,and high debt levels.The VCM is currently valued at approximately$2 billion,but many project it will scale up significantly over the next decade as more companies invest in voluntary carbon credits to reduce their residual emissions.The VCM

30、 has come under scrutiny by the media,causing many buyers to question this market due to reputation worries.However,this market is needed.It is very difficult for companies,especially those in hard-to-abate sectors to reach net zero without investing in carbon credits.Collectively,these sectors(stee

31、l,cement,aviation,shipping,and road freight)account for 25%of todays global carbon emissions but have the potential to rise by 50%through 2050 given growth expectations.1 Hard-to-abate sectors typically have long-lived capital assets,such as industrial plants,which are expensive and difficult to cha

32、nge.They also require new fuels and technologies that are currently not available on a large commercial scale and are not yet economically feasible.Hard-to-abate sectors are not the only ones requiring carbon credits.In the limited time available,it is inherently difficult to reach net zero across m

33、any sectors,especially regarding scope 3 emissions.Companies still need to reduce their emissions and invest in low-carbon solutions both investors and the general public demand that this occurs and many companies are working hard to achieve this.It is also inherently difficult to raise the capital

34、needed in emerging and developing economies for them to move to a sustainable economy.We cannot deny the market currently has some problems.These include transparency in the pricing of credits,confusion among buyers as to how the market works,and confusion on ensuring that what they are investing in

35、 actually reduces,avoids,or removes carbon emissions In this report,we provide a guide for companies to help navigate the VCM.We discuss how the market works,describe what initiatives are being done to improve it,and identify six steps that companies can use to help them use it effectively.These inc

36、lude(1)developing a strategy for the use of carbon credits across their business,(2)finding a trusted seller,(3)asking the right questions,(4)ensuring the use of verified carbon credits,(5)diversifying portfolios,and(6)using rating agencies if needed.1 Citi GPS,Hard to Abate Sectors and Emissions:Th

37、e Toughest Nuts to Crack for a Net Zero Future,May 2021.Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 6 Introduction The Intergovernmental Panel on Climate Changes(IPCCs)final installment of their Sixth Assessment Report(AR6)provides a stark assessment on the current and f

38、uture impacts of climate both on people and the planet.The figures provided by the report are astounding;they show how no country is immune to climate change and how much of a detrimental impact it will have on peoples health,species,and food production around the world.The authors state that human-

39、induced greenhouse gas(GHG)emissions have already contributed to 1.1C of warming,which has caused substantial damage to our planet.This damage is expected to increase even further if we do not take measures to significantly reduce emissions now and in the future.The risks increase with every increme

40、nt of warming.It is estimated that 3.3 billion people are particularly vulnerable to the impacts of climate change,or around 40%of the current global population.Over the past few years,we have seen countries set up net-zero commitments through their National Determined Contributions(NDCs)under the P

41、aris Agreement.Companies are also setting up emission reduction plans and net-zero commitments.As of July 2023,over 5,400 companies have either committed or set targets through the Science Based Targets initiative.However,even with these commitments,a substantial emissions gap still exists between e

42、xpected global GHG emissions in 2030,the implementation of countries NDCs,and the temperature increase of 1.5C.The IPCC claims that to keep within a 1.5C increase,we need to reduce greenhouse gas emissions by 45%from 2019 levels currently we are nowhere near reaching these levels.In fact,the World M

43、eteorological Organization stated that the annual mean global near-surface temperature for each year in the 5-year period 2023-27 is predicted to be between a 1.1C and 1.8C.2 To have any chance of limiting the impacts of climate change and staying within a 1.5C or even a 2C temperature increase,we n

44、eed to scale up investment in all regions,especially in the Global South.As we showed in our Citi GPS report Climate Finance:Mobilizing the Public and Private Sector to Ensure a Just Energy Transition,there is a$1.7 trillion annual investment gap in climate finance,and this is just for mitigation.We

45、 also need to invest in adaptation.No region is currently on track,with significant investment gaps in the Global South,especially in the Asia Pacific region.2 World Meteorological Organization,Global Annual Decadal Climate Update,May 2023.July 2023 Citi GPS:Citi GPS:Global Perspectives&Solutions 20

46、23 Citigroup 7 Figure 1.Investment Gap in Climate Finance in Africa,Asia Pacific,and North America Source:Citi GPS Market-based mechanisms such as cap-and-trade systems,baseline credit systems,and the voluntary carbon market(VCM),can help raise some of the finance needed to reduce emissions.This pap

47、er focuses on the VCM.If done well,this market can help scale some of the investment needed for climate finance,especially in the Global South.In addition,it can(1)help fund sustainable projects in places where raising capital for such projects is traditionally difficult;(2)provide an effective way

48、for companies and countries to reach their emission targets;(3)play a critical role in scaling down the cost for new climate technologies;and(4)have co-benefits such as improving health and air quality standards,safeguarding of biodiversity,and achieving the United Nations Sustainable Development Go

49、als(SDGs).The VCM can also help companies reach their net-zero commitments,especially for hard-to-abate sectors.In our Citi GPS report Hard-to-Abate Sectors and Emissions:The Toughest Nuts to Crack for a Net-Zero Future,we showed how difficult it is for industries like steel and cement and transport

50、 systems such as aviation,shipping,and road freight to reach net zero.These sectors are collectively responsible for 25%of global CO2 emissions;however,it is estimated their emissions could increase by 50%of total emissions by 2050.To reduce emissions,hard-to-abate sectors require new fuels such as

51、hydrogen and hydrogen derivative fuels,sustainable aviation fuels,carbon capture utilization,and storage technologies,which are not currently commercially available at scale.Demand-side solutions such as energy efficiency improvements can help reduce emissions,but they are not enough,as shown in Fig

52、ure 2.Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 8 Figure 2.Demand-Side Solutions Alone Wont Get Us to Net Zero Source:Citi GPS Food&Agriculture is another sector where it is notoriously difficult to reduce emissions.In our Citi GPS report Food and Climate Change:Creati

53、ng Sustainable Food Systems for a Net Zero Future,we call this sector the hardest sector to abate,as it is extremely complex,with thousands of key players,and there is not a silver bullet to reduce emissions across the sector.3 We also have to admit that other sectors will also have a hard time reac

54、hing net zero,especially in reducing their scope 3 emissions and in the limited time we have available.So,the VCM can play an important role in helping companies achieve their targets while also raising some of the finance needs for developing and emerging economies.However,to succeed,the VCM needs

55、to mature and develop into one that is more transparent,easier to navigate,and provides certainty to buyers that what they are purchasing is of high quality that reduces,avoids,or removes emissions.Over the last few years,the voluntary carbon market has come under intense scrutiny by environmental a

56、ctivists,the media,and academia.Many claim it is not effective at reducing emissions and that the market encourages companies to rely on carbon credits rather than reduce their own emissions.3 Citi GPS,Food and Climate Change:Creating Sustainable Food Systems for a Net-Zero Future,July 19,2022.July

57、2023 Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup 9 The Guardian has gone so far as to call them“phantom credits”and posed that they“have no benefit to the climate.”Although the journalists in that article were referring to certain types of REDD+credits4 generated from forestry pro

58、jects and the article was disputed by Verra(the largest issuer of carbon credits)and other key players such as the International Emissions Trading Association(IETA),it has still generated concerns for companies over the efficacy of carbon credits in general.Companies utilizing carbon credits want to

59、 ensure they are purchasing good-quality carbon credits that reduce,avoid,or remove emissions and help scale the investment needed in climate action.They will not participate in this market if they believe their reputation is at risk and if they believe the VCM is not operating transparently and eff

60、ectively.While the VCM has progressed over the years,there remain many who are critical of it,and therefore concerns about the quality of carbon credits need to be addressed.The good news is that these issues are being addressed by many in this industry.We wrote this report to help answer the questi

61、ons,“What should buyers look for when investing in these credits?”and“How can they ensure that what they purchase are effective at reducing,avoiding,or removing greenhouse gas emissions?”We divide our report into five sections:(1)an introduction to carbon credits,(2)a detailed discussion on the VCM,

62、(3)an analysis of the new players entering the VCM,(4)the uncertainty of Article 6 and the VCM,and(5)recommendations for buyers to help them navigate this sector.In our concluding chapter,we highlight six steps that buyers can make when buying carbon credits,as highlighted in Figure 3.These include(

63、1)developing an internal strategy of the use of this market,(2)finding a trusted seller,(3)asking the right questions,(4)ensuring the use of verified carbon credits,(5)diversifying portfolios,and(6)using rating agencies if needed.Figure 3.Recommendations for Navigating the VCM Source:Citi GPS 4 REDD

64、+credits are carbon credits that are used for avoided deforestation projects:to protect already existing forests from potential deforestation A strategy on the use of carbon credits helps outside entities track how a company will meet net zero goalsDevelop a StrategyThere are many intermediaries but

65、 choosing a good seller is key to quality offsetsFind a Trusted SellerAsking the right questions is crucial for understanding and choosing the right carbon credit to buyGet InformedLook for verified carbon creditsEnsureVerificationDiversify your portfolio into different types of carbon credits to he

66、dge riskDiversify Your Portfolio Rating agencies can provide information on quality and ranking against marketMonitorRatingsGet Informed on Your Carbon Credit:Asking the Right QuestionsHow is the price of these carbon credits calculated?What vintage year are these credits for?Is this project additio

67、nal and if this is the case how do you calculate this?How do you calculate emission reductions,avoided,or removal for this project;what methodology do you use and how is it different to other providers.If you are investing in nature-based credits,discuss the issue of permanence and if there are any

68、buffers in place to ensure buyer protection?Discuss leakage-if I invest in credits to protect the forest in this project would this encourage deforestation somewhere else?How is the project monitored over time to ensure that emissions are really reduced,avoided or removed?How do you ensure these cre

69、dits are not double counted or double claimed?Are there any other co-benefits that come with these credits and if so,how are these measured?Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 10 Carbon Credits 101 According to the Integrity Council for the Voluntary Carbon Marke

70、t,“a carbon credit is a tradable intangible instrument that is issued by a carbon-credit program,representing a GHG emission reduction to,or removal from,the atmosphere equivalent to one metric ton of carbon dioxide equivalent,calculated as the difference in emissions from a baseline scenario to a p

71、roject scenario.”In addition to reducing emissions,carbon credits can bring a whole host other co-benefits such as protection of ecosystems and benefits to communities.Projects must adhere to different criteria set out by a standard-setting body to pass verification by third-party agencies before an

72、y credits can be issued.Carbon credits are also referred to by many as carbon offset credits or as verified carbon credits,meaning that these credits have been verified by a third party.Carbon credits are measured in metric tons of CO2e.One credit represents the reduction,avoidance,or removal of one

73、 metric ton of CO2e.To put this into perspective,one metric ton of CO2e is equivalent to one return flight from Paris to New York or driving 6,000 kilometers with a Citron Picasso.Globally we generate approximately 50 billion metric tons of greenhouse gas emissions measured in CO2 equivalent(CO2e)ev

74、ery year.Figure 4.Equivalence of Metric Tons of CO2e Source:OECD,Citi GPS Most buyers of carbon credits are companies.Lets look at a simple example.Company A has managed to reduce its scope 1 and 2 emissions,but it is struggling to reduce its scope 3 emissions,which occur across its supply chain.It

75、has three options:(1)change its suppliers to ones that are more sustainable,(2)work with its suppliers to help them become more sustainable,and/or(3)go to a broker or other entity to purchase verified carbon credits.This means the company is supporting a climate action project and enables it to clai

76、m to have mitigated its footprint by funding a project elsewhere.012345678Metric Ton of CO21 passenger on a return flight from Paris to New York Driving 6,000km witha Citron PicassoCO2emissions per year from an average person in U.K.CO2emissions per year from heating an average U.K.householdJuly 202

77、3 Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup 11 Current Use of Carbon Credits Carbon credits started to take off after the Kyoto Protocol in 1997.The Kyoto Protocol was one of the most complex multilateral environmental agreements ever negotiated.The agreement placed the onus on

78、the wealthiest countries to commit to a reduction of their emissions.Developing countries,or non-Annex 1 countries,were not obliged to reduce their emissions at that time.The Protocol set up a number of flexible mechanisms to help Annex 1 countries5 reach their emissions targets,including the(1)Clea

79、n Development Mechanism(CDM),which allowed developed countries to fund projects in developing and emerging countries and claim these emission reductions against their commitments,and(2)the Joint Implementation(JI)program,which enabled Annex 1 countries to fund/run a project to reduce emissions in an

80、other Annex 1 country.In 2015,countries came together once again in Paris and adopted the Paris Agreement.This agreement superseded the Kyoto Protocol agreement as the principal regulatory instrument governing the global response to climate change.The Paris Agreement includes the goal of limiting th

81、e Earths average temperature increase to well below 2C above pre-industrial levels and pursuing efforts to limit it to 1.5C.As part of this agreement,all countries(including developing and emerging nations)committed to communicate at five-year intervals their National Determined Contributions(NDCs).

82、NDCs are national climate action plans highlighting climate actions,climate-related targets,and policies and measures that governments aim to implement in response to climate change.Many companies have also set up net-zero commitments to align with the Paris Agreement.Since the Paris Agreement,a ple

83、thora of new,market-based mechanisms have been set up,and many of these allow the use of carbon credits.We describe some of them below:1.Countries can reach their emission targets through international markets such as the CDM program,which will be replaced by Article 6 The aim of the CDM was to help

84、 developed countries achieve their climate commitments while at the same time help developing and emerging countries in achieving sustainable development.Even though the CDM became the largest market for carbon credits ever created,it unfortunately encountered several problems.Many argue that most C

85、DM credits known as Certified Emission Reductions(CERs)were issued for projects which would probably have happened anyway,and in some cases the mechanism acted as an incentive for companies to increase their production of pollutants.The CDM market collapsed in September 2012,when the price for CERs

86、fell to less than$5 per metric ton of CO2 compared to levels of$20 per metric ton four years earlier.At these lower rates,many projects were not commercially viable.The CDM is still in operation today,but it will be replaced by the Sustainable Development Mechanism(SDM)under Article 6 of the Paris A

87、greement(refer to the box below).5 Annex 1 countries include the industrialized countries that were members of the OECD(Organisation for Economic Co-operation and Development)in 1992,plus countries with economies in transition(the EIT Parties),including the Russian Federation,the Baltic States,and s

88、everal Central and Eastern European States.Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 12 Article 6 Article 6 sets out the rules of how countries that have signed and ratified the Paris Agreement can engage in voluntary international cooperation to help countries reach t

89、heir National Determined Contributions(NDC).Unlike the Kyoto Protocol,all countries that are signatory to the Paris Agreement,including non-Annex 1 countries,are now obliged to reduce their emissions.Article 6 contains three separate mechanisms two of these are market-based(Article 6.2 and 6.4).Arti

90、cle 6.2 is more of a trading mechanism that would allow a country that has beaten its climate pledge to sell any over-achievement to another country that has fallen short of their goals,known as international transferred mitigation outcomes(ITMOs).Article 6.4 calls for a new international carbon mar

91、ket,supervised by a UN body,for the trading of emission reductions created anywhere by both the public or private sector.This new market is called the Sustainable Development Mechanism(SDM)and would replace the Clean Development Mechanism(CDM),which operated under the Kyoto Protocol.The SDM revolves

92、 more around projects,while Article 6.2 is more about trading between countries.We discuss this in more detail later in the report.2.In some cap-and trade systems,regulators allow companies to use carbon credits to counterbalance a percentage of their emissions to remain within their emission allowa

93、nce Emission Trading Systems(ETS),also known as cap-and-trade systems,are regulated by national or regional authorities.In these systems,the regulator sets up an upper limit on carbon emissions,known as carbon allowances.These allowances are distributed in part freely and in part by auctions.Many re

94、gulators lower the number of permits each year,thereby lowering the total emissions cap this ultimately makes permits more expensive and gives an incentive for companies to reduce their emissions by investing in clean technology.These carbon allowances must be surrendered by companies covered by the

95、 cap-and-trade system at a specific date.Companies can exchange or hold these carbon allowances for a future date.On top of the“physical”market is a market for financial futures,or derivatives,that allows other market participants to trade.In some cap-and-trade systems,regulators allow companies to

96、also use carbon credits to counterbalance a percent of their emissions to remain within their emission allowance.For example,the California cap-and-trade system allows a company to compensate for 4%of its total compliance.Use of these carbon credits are regulated for example,at least half of the one

97、s used in the California cap-and-trade system must directly benefit California,and the credits must comply with the California Air Resources Board(CARB)protocol.Most of the ETS systems that allow the use of these credits require companies to purchase those related to domestic projects rather than on

98、 the international market.Currently there are 36 ETS systems set up in the world,either on a national basis,a regional basis,or a state or local level,and more are in development.Not all sectors and greenhouse gases are included in the ETS systems,and they differ between different ETS systems.July 2

99、023 Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup 13 Figure 5.Examples of ETS Systems and Their Use of Verified Carbon Credits ETS System Status Coverage Use of Carbon Credits Canada:Quebec Operational Transport,Buildings,Industry,Power Yes,accepted:Carbon credits generated from the

100、 Quebec region for certain eligible projects are accepted.They are 100%guaranteed,meaning if carbon credits issued for a project are later deemed negligible by the regulator,then the project promoter is required to replace them.A company can use carbon credits to cover up to 8%of an entitys complian

101、ce obligation.China National ETS Operational Power Yes,accepted:Covered entities can use China Certified Emission Reductions(CCERs)generated from projects not covered by the national ETS for up to 5%of their emissions.EU ETS Operational Power,Industry,Domestic Aviation,Shipping(from 2024)No:Use of c

102、arbon credits are not allowed since 2021.Previously,operators were allowed to use the Clean Development Mechanism(CDM)or Joint Implementation(JI)credits.Japan:Tokyo Cap and Trade Operational Buildings and Industry Yes:There are only quantitative limits for outside Tokyo credits,and these are issued

103、only for the reduction amount that exceeds the compliance factor.Korea Operational Waste,Domestic Aviation,Buildings,Industry,Power Yes:Domestic and international credits(subject to qualitative criteria)are allowed for up to 5%of an entitys compliance.For international credits,certified emission red

104、uctions(CERs)generated from June 2016 from international CDM projects developed by domestic companies are allowed.Mexico Operational Industry,Power Yes:SEMARNAT will establish a domestic program for the generation of credits.Eligible projects will be domestic projects that have been validated and ve

105、rified under internationally or domestically recognized protocols.Participants can meet up to 10%of their compliance obligations through the use of carbon credits.New Zealand Operational Forestry,Waste,Domestic Aviation,Transport,Buildings,Industry,Power No:Carbon credits are not allowed.UK Operatio

106、nal Power and industry No:Carbon credits are not allowed at this time but are under review.U.S.:California Cap and Trade Program Operational Transport,Buildings,Industry,Power Yes:Carbon credits issued by CARB,which are related to domestic projects,are accepted.Entities can meet 4%of their complianc

107、e from the use of carbon credits;this increases to 6%in 2026.Also,no more than half of any entitys usage limit of these credits can come from projects that do not provide environmental benefits to the state.U.S.:Regional Greenhouse Gas Initiative(RGGI)Operational Power Yes:Currently 3.3%of any entit

108、ys liability may be covered with carbon credits from specific projects located in RGGI states.RGGI operates across 10 U.S.states.Source:Citi GPS 3.Certain countries allow companies to use carbon credits as a means of complying with carbon tax obligations Some countries,such as South Africa,Mexico,an

109、d Singapore,recognize the use of carbon credits as a means of complying with carbon tax obligations.Carbon tax systems are different than cap-and-trade systems;they are direct taxes imposed on carbon-intensive industries.In these countries,companies can avoid paying a carbon tax by compensating for

110、a proportion of their emissions through the purchase of carbon credits(see case study on Singapore in box below).Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 14 Case Study:Singapore Singapore introduced a carbon tax on high-carbon emitters.Currently,the tax is S$5 per met

111、ric ton of emissions,but it is expected to increase to S$25 in 2024-25 before eventually reaching S$50 to S$80 per metric ton by 2030.The carbon tax currently covers 80%of Singapores total greenhouse gas emissions from about 50 facilities in the manufacturing,power,waste,and water sector.6 The Singa

112、pore Government announced that from 2024,companies can use high-quality international carbon credits to reduce up to 5%of their reported emissions.The government signed a memorandum of understanding with Gold Standard and Verra,allowing Singapore businesses to use eligible carbon credits issued by t

113、hese standard bodies.This does not mean that all the credits issued by Verra and Gold Standard will be allowed to be used.In fact,the Singapore Government is expected to produce a whitelist of acceptable credits in 2023 that companies can use,which will include eligible host countries,carbon crediti

114、ng programs,and methodologies.7 In addition,Singapore is trying to establish itself as a carbon trading hub.It announced the establishment of Climate Impact X(CIX),which is a voluntary carbon marketplace backed by the Singapore Exchange.CIX also includes entities including DBS Group,Standard Charter

115、ed Bank,and sovereign wealth fund Temasek.The aim is to scale the voluntary carbon market by leveraging new technologies such as satellite monitoring,machine learning,and blockchain technology to improve the transparency of the market and to ensure the availability of good-quality credits.At present

116、,CIX offers credits from nature-based projects and all the credits are verified by global standards such as Verra and Gold Standard.In addition,CIX conducts checks to ensure that the credits available on the platform are good-quality credits.8 Singapore also has another platform that trades carbon c

117、redits called AirCarbon Exchange,which is supported by Enterprise Singapore.9 4.The international aviation industry developed a global market-based mechanism called the Carbon Offsetting and Reduction Scheme for International Aviation(CORSIA),to tackle climate change The aviation industry is current

118、ly responsible for 2.4%of global energy-related CO2 emissions(approximately 895 million metric tons of CO2).Domestic aviation emissions are already covered in the Paris Agreement in national pledges,but international flights,which represent 65%of the aviations CO2 emissions,are instead covered by th

119、e UNs International Civil Aviation Organization(ICAO).CORSIA was set up to help the international aviation sector reduce its emissions using carbon credits.It was adopted in 2016 by the ICAO with the aim to address any annual increase in total CO2 emissions from the international civil aviation abov

120、e 2020 levels and contribute to the industrys commitment to carbon neutral growth from 2020.It was the first time that a single industrial sector agreed to a global market-based mechanism to tackle climate change.The scheme started operating in January 2021,with the voluntary phase expected to last

121、until 2026.One hundred and fifteen countries have announced their intention to participate in CORSIA.The first formal phase is expected to run from 2027 to the end of 2035 and will be mandatory for all ICAO members,except those with less than 0.5%of international aviation and some of the worlds poor

122、est countries.6 NCCS Singapore Strategy Group Prime Ministers Office,“Singapore Will Raise Climate Ambition to Achieve Net Zero Emissions By or Around Mid Century,and Revises Carbon Tax Levels from 2024,”February 18,2022.7 Tang See Kit,“Singapore Will Take All Scrutiny of Carbon Markets and Projects

123、 Seriously:Grace Fu,”Channel News Asia,February 7,2023.8 Climate Impact X,“Carbon Credits That Deliver Real Impact,”accessed June 28,2023.9 AirCarbon Exchange,“About AirCarbon,”accessed June 28,2023.July 2023 Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup 15 Figure 6.Timeline for COR

124、SIA Source:Citi GPS CORSIA allows several different carbon credits to be used from different registries including CDM,American Carbon Registry,China GHG Voluntary Emission Reduction Program,Climate Action Reserve,the Gold Standard,and Verra.Most of these schemes are currently being used in the volun

125、tary market.5.Companies to reduce their emissions on a voluntary basis using the voluntary carbon market This paper focuses on the voluntary carbon market as described in more detail below.Adoption by ICAO(2016)Baseline(2019)Pilot phase(2021-2023)First phase(2024-2026)Second phase(20272035)Voluntary

126、 ParticipationVoluntary ParticipationMandatoryParticipation(with exemptions)Monitoring,Reporting and Verification(MRV)Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 16 Voluntary Carbon Market The“voluntary carbon market”started to evolve after the Kyoto Protocol.It was led

127、by non-state actors who sought to develop a credible way to certify greenhouse gas emission reduction,avoidance,and removals outside the United Nations compliance mechanism.The VCM allows companies to buy carbon credits on a voluntary basis.The market is driven by private sector entities and is not

128、regulated by governments or financial institutions.How Does the Voluntary Market Work?The main players in the“legacy”VCM include the project manager,who develops the project in question,the standard-setting bodies who have approved accounting methodologies for quantifying the GHG benefits of a proje

129、ct,and third-party auditors who validate and verify the project and emission reductions.A project owner submits a Project Design Document(PDD)demonstrating how their project will use and how it will implement the methodology set by the standard body,the Standard body may then register the project an

130、d the PDD.Once the project is verified,the standard-setting body will issue carbon credits to the project.The project owner bears the cost and must demonstrate to the Standard that an independent verification has occurred.Figure 7.Key Players in the Legacy Voluntary Carbon Market Source:Citi GPS Jul

131、y 2023 Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup 17 There are four main companies that currently develop standards and certify projects Verra,Gold Standard,American Carbon Registry,and Climate Action Reserve.Verra manages the worlds largest VCM standard program called the Verifi

132、ed Carbon Standard Program(VCS).The VCS program is the largest issuer of carbon credits.Verified credits from these registries are also used in the quasi-compliance markets,such as CORSIA,and in Emission Trading Schemes(if allowed).Once the project developer receives the credits,he/she can sell them

133、 either directly to buyers,or through brokers or exchange platforms,such as CBL.Figure 8.An Example of the Steps That Need to Be Taken to Obtain Carbon Credits for Reforestation Projects Source:Citi GPS There is a time-lag between the initial investments into the project and receiving the cash flows

134、 from carbon credits.In some projects,this delay could be several years,and could be an issue for many projects,as upfront investment would need be sought for the project to go ahead.There are several structures that can be used to create cash flows.A new financial instrument called the Emission Red

135、uction-Linked Bond,also known as the Carbon Bond,managed to solve this timing issue and helped fund the manufacturing and distribution of water purifiers in Vietnam(see box below).Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 18 Emission Reduction-Linked Bond The World Ban

136、k(International Bank for Reconstruction and Development,IBRD)issued an Emission Reduction-Linked Bond that will help provide clean drinking water to two million children in Vietnam.Each year in Vietnam,an estimated 9,000 people die,and another 250,000 people are hospitalized,due to a lack of clean w

137、ater and sanitation.Millions are also exposed to dangerous indoor air pollutants from boiling water over an open flame to make it safe.The solutions available such as water purifiers are inexpensive;however,there are significant challenges to manufacturing these products and distributing them to the

138、 millions of people who need them.These purifiers avoid emissions,as each water filter replaces a metric ton of carbon that would have otherwise entered the atmosphere every five years.In recent years,carbon markets have been supporting projects like this one.For this project,a carbon credit would r

139、esult from the replacement of traditional biomass,such as wood used for cooking,with a more efficient system less wood is chopped down,and therefore less carbon dioxide is released into the atmosphere.However,for it to be successful,the project first needs to be financed,implemented,and operated(oft

140、en for a year or more)before it can be verified and carbon credits issued.To solve this timing issue in the water purifier project,a new emission reduction-linked bond was launched.This five-year$50 million Sustainable Development Bond is an outcome-based financial instrument.Investors support the u

141、p-front financing required to manufacture and distribute water purifiers,and rather than receive regular coupon payments they receive semi-annual coupon payments linked to the issuance of Verified Carbon Units(VCUs)by the Water Purifier Project on the Verra Registry.An amount equal to the cash flows

142、 that would have been paid as coupons on a regulated basis are“frontloaded”and through a hedge transaction with Citi used to support the financing of the project.Figure 9.Bond Flow Chart Source:Citi Debt Capital Markets Parameters Used to Assess the Validity of Different Carbon Credits Standard-sett

143、ing bodies have set up different accounting methodologies and standards to calculate emission reductions,avoidance,or removals from different projects.Each registry has developed its own methodology.There are several variables such as permanence,leakage,and additionality that are also taken into con

144、sideration when assessing the validity of a particular project.However,some of these parameters are difficult to prove or hard to monitor.We describe some of them below:July 2023 Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup 19 Examples of Parameters Used to Determine Quality of Car

145、bon Credits Additionality:For carbon credits to compensate for emissions they must be additional,i.e.,the emission reduction,avoidance,or removals would not have occurred in the absence of the incentive created by carbon credit revenues.10 Many protocols include various tests for additionality,inclu

146、ding whether the project is the first of its kind or a significant departure from common practice.Looking at a simple example a forest that will be protected and managed anyway,without the revenue of carbon credits,is not deemed to be additional.Additionality is based on the question:Would this proj

147、ect have happened without the VCM?Even though this question seems simple enough to answer,it is extremely complex,and if misinterpreted,can limit finance to projects that are needed.Permanence:Permanence refers to reductions in carbon that cannot be reversed.In other words,the carbon that was remove

148、d cannot re-enter the atmosphere.For carbon credits to compensate for a firms emissions,they must be permanent.It is no good investing in planting trees or in forest management if at a later time,these trees are either cut down for conversion to cropland or destroyed from natural fires.This has been

149、 an issue before;for example,the Financial Times reported that both Microsoft and BP invested in carbon credits related to forests in the U.S.that were destroyed due to forest fires and therefore all their credits were lost.11 To counter this,many standard bodies withhold a certain percentage of eac

150、h projects credits in a buffer pool,which acts as an insurance mechanism.They also contractually require minimum project lengths to ensure sequestration continues over time.In other words,trees might be a risky bet for permanent carbon storage,as they demand indefinite monitoring and protection.This

151、 does not mean that we should not invest in afforestation projects;these are essential for climate,biodiversity,and the livelihoods of many.Double Counting:When a carbon credit is retired,it should not be sold again or allocated to someone else.This seems simple enough,but in practice it is proving

152、to be difficult.To counter this,once a carbon credit has been used,it needs to be retired.Article 6(a new international mechanism outside of the VCM),which we discuss later in the report,is introducing corresponding adjustments to ensure that an emission reduction is not counted as mitigation by two

153、 different countries toward their Paris Agreement.Leakage:This is a situation where efforts to reduce,avoid,or remove carbon emissions in one place simply shift emissions to another location.For example,investing in REDD+credits in one location leads to deforestation in another location.Most standar

154、d bodies require all agriculture,forestry,and other land use(AFOLU)projects to account for leakage by monitoring leakage emissions in nearby areas.It is not only forest projects renewable projects,for example,can also push fossil fuel power generation somewhere else.In theory,leakage is very difficu

155、lt to monitor;however,satellite technologies can help immensely in tracking leakage.Unintended Consequences:One also must ensure that projects under this market do not have unintended consequences that could have negative impacts on local communities.Different Types of Carbon Credits While there are

156、 many different types of carbon credits that a buyer can purchase,they generally fall under two categories:(1)reduction or avoidance or(2)carbon removal credits.Carbon reduction or avoidance credits refer to projects that prevent carbon that would have been released into the atmosphere,such as certa

157、in REDD+projects or cleaner cook stoves.REDD+credits relate to projects that help avoid deforestation for example,if a forest is in danger of being deforested,then a government or an entity can apply for carbon credits to receive payment to maintain such forests intact,rather than develop them.10 IC

158、VCM,“The Core Carbon Principles,”accessed July 5,2023.11 Camilla Hodgson,“U.S.Forest Fires Threaten Carbon Offsets as Company-Linked Trees Burn,”Financial Times,August 3,2021.Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 20 It is worth pointing out that some REDD+projects

159、also include forest management practices that can remove carbon from the atmosphere,so it depends on the project itself whether it is considered avoidance or removal credits or both.Cleaner cooking stoves replace the use of traditional biomass used for cooking with more efficient cook stoves.Oxford

160、University separates the category of reduction and avoidance of carbon credits even further and classifies them as avoided emissions or emission reduction without storage(e.g.,renewable energy projects,cleaner cookstoves,methane abatement)and avoided emissions or reductions with short-lived and long

161、-lived carbon storage-refer to Figure 10.Figure 10.Types of Carbon Credit Type Description Examples Avoided emissions or emission reduction without storage.Projects that reduce or avoid carbon from entering the atmosphere Renewable energy,cleaner cookstoves,methane abatement Emissions reduction with

162、 short-lived storage Projects that reduce or avoid carbon from entering the atmosphere the carbon in these projects is stored on the order of decades REDD+,Changes to agriculture practices that retain already-stored carbon Emissions reduction with long-lived storage Projects that reduce or avoid car

163、bon from entering the atmosphere the carbon from these projects are stored in the order of centuries or millennia CCS on industrial sites,CCS on fossil fuel power plants Carbon removal with short-lived storage Projects that capture and store(remove)carbon from the atmosphere the carbon can be stored

164、 in the order of decades Afforestation&Reforestation,Soil carbon enhancement,Ecosystem restoration Carbon removal with long-lived storage Projects that capture and store(remove)carbon from the atmosphere the carbon can be stored in the order of centuries to millennia DACCS,BECCS,Mineralization,Enhan

165、ced weathering Source:Citi GPS Carbon removal projects refer to projects that remove carbon from the atmosphere,such as afforestation projects,biochar,or technological carbon removal projects such as Direct Air Capture(DACs or DACCs)or Bioenergy with Carbon Capture and Storage(BECCs).Blue carbon cre

166、dits,referring to carbon captured by ocean and coastal habitats,are also starting to emerge and are classified as carbon removal projects.Given that some of these technologies are rather new,there are only a limited number of projects available.Some of these new technologies,such as direct air captu

167、re,are not yet covered by the four main standard-setting bodies,leaving the door open for new players to take hold of this market.We discuss this in the next chapter.July 2023 Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup 21 Examples of Carbon Dioxide Removal Projects There are many

168、 well-established carbon removal technologies,but new ones are also emerging.These credits are divided into short-term storage,such as reforestation,and long-term storage,such as direct air capture.Some of these technologies are still in an early phase of development and are rather expensive;however

169、,they are essential if we want to have any chance of limiting temperature increase to a 1.5C or 2C.We describe some of them below.Afforestation/Reforestation Afforestation,reforestation,and the planting of trees for other land uses(for example,agroforestry)can reduce CO2 significantly.The IPCC estim

170、ate the mitigation potential for afforestation and reafforestation is approximately 0.5-10.1 gigaton CO2e equivalent(GT CO2e)per year.Their figures reflect the full range of low to high estimates from studies published after 2010 and refer to different potential scenarios.Large-scale increases in af

171、forestation and reforestation projects can have an impact on food prices,so it is important to balance the needs of land for food production and for afforestation.12 According to BNEF,over-the-counter(OTC)prices for afforestation projects currently average$12.10 per metric ton of CO2e.According to D

172、oelman et al.(2019),there is a risk of permanence and implementation with these projects as many are in regions with high investment risks and weak governance.13 To counter permanence issues due to disease,fire,and deforestation,several standard bodies have established buffer reserves this means tha

173、t credits from individual projects are set aside into a common buffer reserve,which functions as an insurance mechanism.Soil Carbon Sequestration Soil carbon sequestration involves removing carbon from the atmosphere and storing it in the soil.Land management practices have a huge effect on the amou

174、nt of carbon that is stored in the soil.Therefore,introducing better land management practices through no tillage,prevention of over-grazing,reduction in the use of fertilizers and pesticides,and the maintenance of ground cover can significantly improve soil carbon sequestration.Many food companies

175、rely on this method,which they term“regenerative agriculture,”to reduce emissions on the farm.There are,however,some issues that need to be taken into consideration when assessing the quality of these credits,such as additionality and permanence.In addition,calculating the amount of carbon and the l

176、ength that carbon is stored in the soil also can be challenging as it depends on different parameters such as climate and soil structure.Verra,together with other organizations such as South Pole and the Research Institute of Organic Agriculture,are developing a tool for soil sampling,processing,and

177、 analysis to determine soil organic carbon stock changes.The tool will be adopted in all the relevant methodologies produced by Verra that currently quantify soil organic stock changes such as the Methodology for Improved Land Management.14 Biochar Biochar is a solid carbon-rich material obtained fr

178、om the heating of biomass in a process called pyrolysis.It can be made from many different types of biomass,including wood,straw,organic wastes,animal manure,digestates,and sewage sludge.When it is applied to soil,most of the biochar remains in a stable form for many years(estimates range from hundr

179、eds to thousands of years).It has been classified by many as being a carbon removal technology,as it locks carbon in a solid substance,stopping the waste biomass from naturally decaying or being burned.However,a life cycle assessment needs to be done to account for fossil fuel energy used for gridin

180、g,transportation,and for pyrolysis.The use of biochar also has many benefits for the soil,including water and nutrient retention,and improved drainage.Verra has produced a methodology for biochar utilization in soil and non-soil applications and the calculation of emission reductions.12 P.R Shukla e

181、t al.(2019),Technical Summary,2019,In:Climate Change and Land:An IPCC Special Report on Climate Change,Desertification,Land Degradation,Sustainable Land Management,Food Security,and Greenhouse Gas Fluxes in Terrestrial Ecosystems,”2019.13 Jonathan C.Doleman et al.,“Afforestation for Climate Change M

182、itigation:Potential,Risks and Trade-Offs,”Global Change Biology,November 29,2019.14 VERRA,“New Tool to Determine Changes in Soil Organic Carbon,”November 2,2022.Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 22 Bioenergy with Carbon Capture and Storage(BECCS)BECCS is a carb

183、on removal technology that depends on two technologies;first,the biomass is transformed into heat,electricity,or liquid or gas fuels,and then the carbon emissions from this process are captured and stored in geological formations or used to produce other products.Because biomass absorbs CO2 from the

184、 atmosphere as it grows,many experts claim that BECCS can be considered a negative-emissions technology,if implemented well.Most of the IPCC scenarios include BECCs in their analysis of how to limit temperature increase to a 1.5C or 2C.The inclusion of CO2 capture facilities that produce liquid biof

185、uels could be a“low-hanging fruit.”This is because in several biofuel production pathways,CO2 is already separated as part of the process,and therefore concentrated CO2 streams are available,which reduces the cost of capture this is particularly true for bioethanol production.Direct Air Capture(DACC

186、s or DACs)Direct Air Capture is a technology that uses chemicals to absorb CO2 direct from the atmosphere.It does not need to be linked to a point source like carbon capture and storage(CCS)plants.The CO2 captured can either be stored in deep geological formations,reused to make products,or used in

187、processes.According to the International Energy Agency(IEA),as of September 2022,there were 18 direct air capture plants worldwide,operating in Europe,the U.S.,and Canada.All these plants are small scale,and the majority of them capture CO2 for utilization.However,the first large-scale DAC plant whi

188、ch has the capability of capturing up to 1 million metric ton of CO2/year is in development in the U.S.and should become operational in the mid-2020s.15 Plans for eleven more facilities are in advanced development,while many more are being promised.For example,Occidental has a goal to build 100 dire

189、ct air capture plants by 2035.16 Blue Carbon Blue carbon is defined as the carbon captured and sequestered by marine ecosystems such as mangrove forests,tidal marshes,and seagrasses.These ecosystems store huge amounts of carbon and are now being recognized by many as being important mechanisms to mi

190、tigate against climate change and also for adaptation,such as storm and flood protection.When protected and restored,these ecosystems sequester large amounts of carbon,and when they are destroyed,the carbon they have stored for centuries is unfortunately emitted.17 Blue carbon projects are currently

191、 only a small part of the voluntary market;however,these types of credits are attracting the curiosity of large corporations,such as Microsoft.18 The majority of blue carbon credits relate to the restoration of mangroves,but some new blue carbon credits are emerging such as the planting of seagrass

192、in the ocean.Most standard bodies have set out standards and methodologies for blue carbon credits,but they are not standardized across the market.Several initiatives are operating in this sector and provide great knowledge into the subject,including Blue Carbon Initiative,Mangrove Breakthrough,and

193、Blue Natural Capital Financing Facility.Blue carbon credits have the potential to grow significantly;they have plenty of co-benefits such as biodiversity and improved livelihoods for communities that rely on these ecosystems.Additionality and permanence of these blue carbon projects could be issues;

194、however,if done well,emission reductions from these projects together with co-benefits could be substantial.A number of organizations,including Conservation International and World Economic Forum,have published“High-Quality Blue Carbon Principles and Guidance”with the aim of providing guidance to de

195、velop high-quality blue carbon credits.Mineralization Carbon mineralization is a form of carbon sequestration and/or carbon capture whereby carbon dioxide gas is stored into a solid silicate material or geological formation.It can happen both above or below ground and both capture and store carbon.T

196、he major benefit to this type of sequestration is that once the CO2 is stored into solid form,it will be stored permanently and will not be released into the atmosphere.Though this chemical reaction is naturally occurring,when sped up for mineralization it can be referred to as“enhanced weathering.”

197、Many start-ups,companies,and projects have explored this technology hoping to scale it.According to The Economist,carbon mineralization across applications could capture and store 2-4 billion tons of CO2 per year by 2050.19 One such useful application of this technology would be in changing the carb

198、on-intensive concrete production process.July 2023 Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup 23 We need both types of credits reduction or avoidance and carbon removal credits.We need to fund new projects that reduce the use of fossil fuels and fund carbon removal from the atmos

199、phere both are important.We cannot limit the temperature increase to 1.5C or even 2C without investing in both mitigation,such as green energy,and in carbon dioxide removal projects,such as BECCs and DACCs.Co-Benefits Certain carbon credits go beyond emission reductions and have additional co-benefi

200、ts that result from such projects.For example,afforestation projects not only reduce emissions but also lead to an increase in biodiversity or prevent damage to biodiversity,while other projects could help improve air quality and therefore have a positive impact on the health of local communities.No

201、t all carbon credits offer the same level of co-benefits.Many standard-bodies label the co-benefits of certain projects,and these credits can fetch a premium.For example,Verras Sustainable Development Verified Impact Standard(SD VISta)is one available standard for certifying the real-world benefits

202、of social and environmental projects from gender equity and economic development to affordable clean energy and restoration of wildlife.However,measuring co-benefits is not easy.There is plenty of research currently being done to improve the measurement of these co-benefits.For example,Cardano Devel

203、opment and its partners have launched the Clean Impact Bond(CIB),which aims to monetize the gender and health benefits of clean cooking solutions alongside the environmental impacts from these projects(refer to the box below).15 IEA,“Direct Air Capture 2022,”September 2022.16 BNEF,“Occidental Sees M

204、ore Carbon Uses From Worlds Biggest Plants,”April 28,2023.17 Conservation.org,“The Blue Carbon Initiative:Mitigating Climate Change Through Coastal Ecosystem Management,”Accessed July 5,2023.18 BNEF,“Blue Carbon Offsets Pique Curiosity of Major Companies,”March 21,2023.19 The Economist:Intelligence

205、Unit(2023),Carbon Mineralisation:Permanently Store CO2 by Hastening Reaction with Minerals Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 24 Case Study:Gender Equality and Health Improvements of Clean Cooking Stoves by Cardano Development and IFC 2.4 billion people worldwid

206、e still lack access to clean cooking solutions.Annually,this costs more than$1.4 trillion,driven by adverse impacts on health and$0.8 trillion from lost productivity for women.20 Traditional cooking practices using open fires or stoves fueled with wood,charcoal,or kerosene are a major source of toxi

207、c air pollution,and using the traditional stove is time consuming.Globally,women do 75%of the unpaid household work such as cooking,collecting firewood,and fetching water.21 In order to reach these underserved customers with clean solutions,Cardano Development and its partners(IFC,Bix Capital,Osprey

208、 Foundation,and Sistema.bio)launched the Clean Impact Bond(CIB),which aims to create additional revenues through quantifying,certifying,and monetizing the gender and health benefits of clean cooking solutions alongside the environmental impact they generate through carbon credits.Monetizing the co-b

209、enefits is the first step in transforming them into tradable commodities that clean cooking companies could also use as collateral to get a working capital loan to finance their scale-up.IFC provided technical assistance to the transaction,advising,and managing the field survey for ex-ante estimatio

210、n of the health and gender co-benefits performed by Berkeley Air.The IFC-supported measurement of the gender and health co-benefits of the biogas digesters showed positive results using the Gold Standard gender and health methodology for measuring these impacts.In parallel,IFC has launched an outcom

211、e buyer market assessment with the objective of identifying potential outcome buyers for purchasing gender co-benefits with the views toward mobilizing more public and private capital for impactful enterprises targeting gender equality.Both the findings of the IFC field survey and the outcome buyer

212、assessment will be available in the next few months.Prices of Carbon Credits At the moment there is little transparency into how carbon credits are actually priced.There are several things that influence the price for example,the type of project,cost of the project,whether the project achieves any c

213、o-benefits,and the vintage year(refer to box below).20 ESMAP,“The State of Access to Modern Energy Cooking Services(English),”World Bank Group,September 15,2020.21 McKinsey Global Institute,“Power of Parity:How Advancing Womens Equality Can Add$12 Trillion in Global Growth,”September 2015.July 2023

214、Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup 25 Vintage Vintage refers to the year that the reduction,avoidance,or removal of carbon has occurred.Generally,old“vintage”credits are deemed to be cheaper and to be of less quality either because of the perceived lower standards used to

215、 calculate emission reductions or the public relations(PR)associated with old credits.From Figure 11,we can see that 33%of the carbon credits retired in 2022(when a carbon credit is used,it needs to be retired to ensure that it is not double counted)were created pre-2015.We will likely see more comp

216、anies use newer credits.For example,CORSIA has stated that it will only allow credits that are dated 2016 and above in the first phase and will only allow credits dated 2021 in 2021-2026.Figure 11.Vintage of Retired Carbon Credits Source:BNEF,Citi GPS Currently the majority of credits are sold over

217、the counter(OTC);however,exchanges such as the CBL or ICE are growing in prominence.OTC refers to buyers purchasing credits either directly from a project developer or from a broker.Figure 12 below shows the minimum,maximum,and average OTC prices according to the different types of projects.Afforest

218、ation carbon projects have the highest average OTC price at$12.10/metric ton,followed by REDD+projects at$10.70/metric ton.REDD+credits had the widest range of prices with the lowest estimated price at$4.80/metric ton and the highest at$19.80/metric ton.22 Project developers can also list their carb

219、on credits on exchanges at a specific price,and companies can specify the type of credit they want,the volume needed,and the bid price.23 This type of transaction allows for faster transactions,more transparent pricing,and more standardized products.The downside is that the buyer does not have any d

220、irect or indirect engagement with the project developer.In 2022,it became possible to list future contracts on these exchanges.22 BNEF,“Long-Term Carbon Offsets Outlook,Fasten Your Seatbelt,”January 23,2023.23 Ibid.02040608010012014016018020152016201720182019202020212022MTCO2ePre-2015201520162017201

221、82019202020212022 Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 26 What this means is that customers can invest in the“physical delivery”of credits from bundles of projects with similar characteristics at a future point in time.For example,ICE launched a nature-based solut

222、ions(NBS)carbon credit future.The NBS future delivers Verified Carbon Units of Credits certified under Verra with vintages from 2016 to 2021.24 Figure 13 shows the price of ICE-traded carbon credit future market contracts.It is difficult to really understand the pricing mechanisms of the carbon mark

223、et.Higher prices should indicate higher-quality carbon credits;however,in some cases this is not necessarily true.Figure 12.OTC Carbon Credit Prices in 2022 Figure 13.ICE-Traded Carbon Credit Future Contracts Source:BNEF,Citi GPS Source:BNEF,Citi GPS Current Demand for Voluntary Carbon Credits Curre

224、ntly,the VCM is rather small when compared to the compliance market.It is estimated at approximately$2 billion in 2022.As we show in Figure 14,corporations purchased and retired just 155 million metric tons of CO2 equivalent(MTCO2e)in 2022,down from 161 MT CO2e in 2021.To put this into perspective,w

225、e currently emit approximately 50 billion metric tons of greenhouse gas emissions measured in CO2e each year.25 Most of the credits retired in 2022 were from reduction or avoidance projects(e.g.,energy demand,transport,and avoided deforestation)rather than from carbon dioxide removal projects.The la

226、rgest types of credits retired in 2022 were projects related to energy generation;however,some of these credits are gaining a bad reputation as they are deemed not to be additional,meaning that the project would have gone ahead anyway without carbon credits.For example,when a coal-fired plant is due

227、 for decommission and will be replaced by renewables.This is not deemed to be additional as it would have happened anyway.In 2022 we also see a reduction in carbon credits generated from REDD+projects compared to 2021.REDD+projects should be funded as we need to make sure that our forests are protec

228、ted and managed;however,many critics state that carbon credits are not the ideal tool this issue is being debated by many in the market.24 ICE.25 Hannah Richie and Max Roser,“Greenhouse Gas Emissions,”Our World in Data,accessed July 5,2023.10.77.012.19.95.302468101214161820AvoidedDeforestationEnergy

229、GenerationReforestationEnergyDemandEmissions$per metric ton of CO2Average price 05101520Aug-22Sep-22Sep-22Sep-22Oct-22Oct-22Oct-22Oct-22Nov-22Nov-22Nov-22Dec-22Dec-22Dec-22Dec-22$/tonne2016-202017-212018-222019-232020-242021-25July 2023 Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup

230、27 If we look at regions,we see that most retired carbon credits originated from the Asia Pacific region,followed by Africa and Latin America.This geographic split has not changed much over the years.As can be expected,most of the buyers are located in Europe and North America.Figure 14.Retired Carb

231、on Credits by Sector Figure 15.Retired Carbon Credits by Geography Source:BNEF,Citi GPS Source:BNEF,Citi GPS Future Demand for Credits If done well,the VCM is expected to grow significantly.The Integrity Council for Voluntary Carbon Market(ICVCM)previously known as the Taskforce on Scaling Voluntary

232、 Carbon Markets have stated that in 2030,the VCM could be valued between$5 billion and$30 billion at the lowest end of the spectrum,and up to$50 billion at the highest end.These estimates assume a demand of 1-2 gigaton of CO2,and the differences in estimates depend on different price scenarios and u

233、nderlying drivers.26 BNEF estimates that the market in 2050 could reach as much as 5 gigaton of CO2e.Most of the current demand for carbon credits comes from corporates,as many set out ambitious net-zero targets from 2040 onwards with interim targets set for 2030.Currently,many companies buy credits

234、 for behavioral purposes,meaning they use them to gain competitive advantage with their customers or claim carbon neutrality.However,this is set to change over time,companies will look at using carbon credits to reduce their residual emissions once they have exhausted all other options available.BNE

235、F calls this fundamental demand.This change in behavior will increase the demand for carbon credits immensely,especially for hard-to-abate sectors such as cement,steel,aviation,shipping,road freight,and the agriculture sector,which are extremely difficult to fully decarbonize.26 Taskforce on Scaling

236、 Voluntary Carbon Markets,Final Report,January 2021.0204060801001201401601802016201720182019202020212022MTCO2eOtherLivestock&Manure MgmtChemicalsMetalsManufacturingBlue CarbonEnergy DemandTransportEmissionsReforestationWasteAvoided DeforestationAgricultureEnergy Generation020406080100120140160180201

237、6201720182019202020212022MTCO2eAfricaAsia PacificLatin AmericaEuropeNorth America Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 28 New initiatives can also help scale up this market.For example,at COP27 we saw the launch of the African Carbon Market Initiative.This initiat

238、ive aims to create a vibrant carbon market in Africa and unlock 300 million high quality credits by 2030,increasing even further to 1.5 billion credits by 2050.The U.S.also launched the Energy Transition Accelerator(ETA)in partnership with the Bezos Earth Fund and the Rockefeller Foundation.This sch

239、eme aims to utilize the voluntary carbon markets to finance the decommissioning of coal-fired plants and the deployment of clean energy in emerging markets and developing economies(EMDES)through the sale of carbon credits until 2030.More details on these two initiatives are expected during COP28,whi

240、ch takes place at the end of 2023.Given all this,the demand for carbon credits is expected to increase over the next two decades.However,the market needs to operate efficiently,effectively,and transparently to reach the estimates stated by both the Integrity Council for Voluntary Carbon Market and B

241、NEF.The good news is that there are several new players and initiatives happening in the VCM as well the development of new guidance for buyers we discuss these in the next few sections.July 2023 Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup 29 New Players The voluntary market is ev

242、olving very fast.New players are entering the market for example,there are new marketplaces and rating agencies.Some of these new players are specializing in a type of carbon credit,such as carbon dioxide removal projects,while others are specializing in a particular sector,such as agriculture.We di

243、scuss some of these new players below.New Marketplaces There are several new marketplaces available that can help buyers purchase voluntary carbon credits.Most create a carbon access platform that connects companies of all sizes with trusted carbon credits.There are other platforms offering just car

244、bon removal credits.Nori,Frontier,and Pure.earth are three new marketplaces.Pure.earth certifies suppliers of projects based on their own standards;they then issue credits and sell these credits directly to buyers.The projects are independently verified by a third party.Once used,the buyers then ret

245、ire these credits through their Pure.earth registry.Frontier operates a bit differently.It is a marketplace that acts on behalf of both the buyers and sellers.It has committed to buy an initial$1 billion of permanent carbon removal between 2022 and 2030.Its main aim is to accelerate the development

246、of carbon removal technologies.Buyers decide how much they would like to spend on carbon removals each year,and Frontier aggregates this demand and spend,vets suppliers,and facilitates carbon removal purchases.The supplier then invests in technologies to remove carbon and passes the carbon dioxide r

247、emoval certificates back to the buyers.Carbon removal certificates are basically certificates showing that a company has invested in a carbon removal project that physically removes 1 metric ton of CO2.This model helps raise finance for carbon removal projects and helps increase the investment in th

248、ese projects.Buyers can also purchase carbon removal certificates directly from companies for example,Climeworks,a company that develops direct air capture,offers both individuals and businesses the opportunity to buy carbon removal certificates.Other companies with similar offerings include 1PointF

249、ive,which produces direct air capture technologies,and Carbfix,which captures CO2,dissolves this CO2 in water,and then injects it deep underground where it is turned into stone.This allows investment into scaling up these carbon removal projects.Financial Institutions In addition to being active in

250、the compliance market,financial institutions are increasing their capabilities of selling and buying voluntary carbon market credits and provide funding for various climate action projects.They play a key role in channeling investment into projects to enable the scaling up and acceleration of global

251、 decarbonization.Financial institutions act as a conduit between the institutional investor base looking at sustainable/impact investments and the underlying carbon projects;for example,via the recent World Bank issued emission reduction-linked bonds.They also provide finance for important climate a

252、ction projects.Financial institutions are also heavily regulated and have clients at the core of their operations.Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 30 Nine global banks are supporting a new platform called Carbonplace,which provides an overlay to registry accou

253、nts and encourages a mini-prime brokerage scheme.Launching in 2023 and will connect the markets,registries,and exchanges of the voluntary market directly to customers in different geographic markets.27 This will allow buyers to easily access good data on carbon credits.Rating Companies Rating compan

254、ies such as BeZero or Sylvera have also started to appear.These companies rate available voluntary carbon credits already on the market by first and foremost determining whether the calculated emissions reduced,avoided,or removed by such carbon credits are valid whether one carbon credit is actually

255、 1 metric ton of CO2e reduced,avoided,or removed.They then take into account a number of different parameters,such as additionality and permanence.Both companies rate projects against a rating scale from AAA(highest quality)to D(lowest).These rating agencies provide an independent view on the qualit

256、y of some of the carbon credits available on the market as they do not sell credits and are not tied to any developers.They currently do not cover all the carbon credits available on the market,but they can help buyers understand the quality of some of the available credits if needed.Sector-Specific

257、 Credit Case Study:Agriculture Currently,agriculture credits are rather a small part of the VCM.In 2022,it was estimated that 6.5 million metric ton of CO2e of carbon credits related to this sector were retired.However,this only measures credits sold on registry through established standard bodies s

258、uch as Verra and American Carbon Registry.There is a lot of activity happening off registry.The agriculture sector is unique,because while large projects are being registered on registry through the major standard bodies,the high price to get the project registered sets a barrier for many small deve

259、lopers and small farm holdings.These entities will instead issue their carbon credits off registry through companies such as Nori.Nori is a new marketplace that focuses on carbon removal,specifically regenerative agriculture projects.Other initiatives include the Agoro Carbon Alliance,which is a sch

260、eme backed by Yara International.They offer farmers forward payments to produce change and support them through the provision of local agronomic advice.Agoro Carbon then sells farm-based carbon credits to buyers.Many large multinational companies such as Cargill and Bayer also act as aggregators.The

261、se companies pool together large amounts of carbon credits from small-scale farmers or other suppliers and sell them off at a higher competitive rate,either directly to buyers or through brokers.28 This allows the multinationals to work directly with their suppliers and can support the food industry

262、 in reducing its emissions across the entire system(see our Citi GPS report Food and Climate Change:Creating Sustainable Food Systems for a Net Zero Future for more information on the global food system and emissions).27 Carbonplace,“About,”accessed July 5,2023.28 BNEF,“Agriculture Carbon Offsets Ou

263、tlook:Barren to Bountiful,”September 19.2022.July 2023 Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup 31 Any carbon credit that is sold through an aggregator must,however,only be counted towards the reported emissions of the buyer and not the aggregator or the farmer.The aggregator a

264、nd the farmer cannot use these credits towards their own goals.There is also a lot of new science and technology supporting these initiatives for example,Regrow Ag provides science,technology,and software to measure the impact that farms have on the environment and help model the changes that will m

265、ake a difference to the environment.They have partnered with many large multinationals,including Cargill and General Mills.Reducing emissions across the global food system is very difficult in fact,we believe it is the hardest sector to abate.Initiatives like the ones mentioned above can really make

266、 a difference in raising the capital needed to reduce emissions and in supporting small-scale farm holders.Figure 16.New Players are Taking Part in Agriculture Carbon Credits Source:BNEF,Citi GPS Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 32 Blockchain Blockchain has al

267、so started being used in the VCM.Blockchain is essentially a database that can store information electronically;it can digitize blocks of data,linked by secure nodes,provide better information,and can lead to a system being more transparent.Companies like Nori,mentioned above,use tokenized credits a

268、 token simply represents a claim on a carbon credit.Meanwhile,Carbonplace is using a blockchain to set up a distributed ledger to change how credits are bought and sold.There have been some problems with the use of blockchain in the VCM.For example,cryptocurrency companies used a technique called“fl

269、oor sweeping”where they purchase cheap carbon credits to raise the overall prices for the remaining supply.They would then tokenize these credits and sell them on blockchain registries.However,this resulted in developers flooding the market with cheap low-quality credits rather than raising the over

270、all price of them.In response,Verra banned cryptocurrencies from tokenizing carbon credits,and the top cryptocurrencies operating in this space saw their demand plummet.29 Blockchain technology can help link up different systems,improve transparency and liquidity,facilitate the tracking of credits,a

271、nd limit the issue of things like double counting.However,the technology has a limited impact on determining additionality,permanence,leakage,or enforceability of projects.Other technologies Satellite-based monitoring through high-resolution and multi-spectral imaging from space are also being used

272、to help monitor certain projects such as carbon sequestration in remote forests.These can help improve transparency to the VCM.Summary If done well,the initiatives described above,whether new marketplaces or new initiatives from the agriculture sector,could help scale up solutions to reduce emission

273、s and help raise needed capital for the climate transition.However,it will be easier for buyers if the methodologies used to calculate emission reductions are the same whether the provider is on registry or off registry.Consolidating these standards would avoid a situation where the market gets too

274、complex with different standards and methodologies being offered by different providers.29 BNEF,“Long-Term Carbon Offsets Outlook,Fasten Your Seatbelt,”January 23,2023.July 2023 Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup 33 Uncertainty in the Voluntary Carbon Market from Article

275、6 of the Paris Agreement The voluntary carbon market is changing,as described above.This market will evolve over the next few years with new guidelines being discussed,as we describe in the next section.There is also some uncertainty of how this market could be affected with the introduction of Arti

276、cle 6(a scheme outside of the VCM).As stated earlier,there are two market-based mechanisms in Article 6:Article 6.2,which is related to trading between countries,and Article 6.4,which is project-based.Both mechanisms include sections on corresponding adjustments in Article 6.2,this means that when a

277、 country transfers a mitigation outcome internationally,this would be accounted toward another partys mitigation pledge;this mitigation outcome must not be included by the party that has agreed to transfer it.This is to ensure that no double-counting occurs.Article 6.4 also includes provisions for t

278、he following:Corresponding adjustments to ensure that these credits are not double counted.Corresponding adjustments only need to be made where the unit is destined for another countrys NDC.Overall mitigation in global emissions(OMGE),which means a first transfer of a minimum of 2%of the issued cred

279、its would be cancelled and will not be able to be used for any purpose including an achievement of NDC or for any other international mitigation purpose.The use of old CDM credits is only allowed if they are registered on or after January 1,2013 and they can be used towards first or first updated ND

280、Cs.CDM credits,or CERs as they are known,can be transferred and be held in the new mechanism registered and will be identified as pre-2021 emission reductions.5%of issuance would be set aside for the adaptation fund.It is not quite clear how Article 6.2 and Article 6.4 would affect other carbon mark

281、ets for example,whether ETS systems would allow carbon credits from the SDM system or how it would impact the voluntary market.Article 6 does not provide any guidance on the voluntary market.The main issue is corresponding adjustments:Could carbon credits issued through the voluntary markets still b

282、e claimed against a countrys NDC or not?Would corresponding adjustments also be required under the VCM market or not?There are several arguments for and against this for example,advocates for corresponding adjustment in the VCM state that these should be included to avoid double counting of the same

283、 credit by both the country towards their NDC and the company towards its emission targets.Given the potential fungibility between VCM and Article 6 carbon credits,some argue that there might be a need to align the VCM rules with Article 6,and registries such as Verra and Gold Standard may,for examp

284、le,need to align their methodologies to the international market mechanism.This would simplify the process for buyers in the carbon market.Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 34 Others claim it is important that buyers of credits,who are mainly from companies bas

285、ed in developed markets,help a developing or emerging market achieve its NDC.30 Lets look at a simple example.Imagine a U.S.auto manufacturing firm invests in renewables to reduce its emissions at its factory in the U.S.These emission reductions should be counted towards the NDC of the U.S.However,i

286、f the auto manufacturer buys carbon credits,for example from Ghana,to compensate for its residual emissions,should Ghana make a corresponding adjustment?Is the U.S.going to count these credits towards its own NDC?Would there be a bilateral agreement between U.S.and Ghana,or if not,could it be that t

287、hese emission reductions through the purchase of carbon credits completely vanish from the Paris Agreements reporting?Until there is more clarity,several types of carbon credits could emerge:Article 6.2 ITMO credits,which would include bilateral agreements between countries with corresponding adjust

288、ment.Article 6.4 credits with corresponding adjustment,5%share of proceeds for adaptation,2%cancelled for OMGE.VCM credits issued by independent bodies,no authorization needed from government and no corresponding adjustment.VCM credits issued by independent bodies,with corresponding adjustments.For

289、the host country,the issue becomes whether the benefits outlined in Article 6 outweigh the benefits of the VCM.Corresponding adjustments(CA)ultimately come at a higher cost for the host country,as they are not able to include any of these credits against their NDC however,it could be the case that i

290、nvestors might view carbon credits with CA as being higher quality and therefore they could fetch a higher price.Because of this uncertainty,we have seen some governments impose moratoriums on the sale of carbon credits to overseas markets this is particularly relevant for REDD+projects,as the quest

291、ion being asked is:Can REDD+credits be counted towards the host countries NDC if used in the VCM market?At the moment they can.30 Charlotte Streck,“Corresponding Adjustments for Voluntary Markets seriously?,”Ecosystem Marketplace,January 25,2021.July 2023 Citi GPS:Citi GPS:Global Perspectives&Soluti

292、ons 2023 Citigroup 35 What Should Buyers Look for When Buying a Carbon Credit?In the previous sections,we described the VCM,the new key players and initiatives being set out,and the uncertainty around how Article 6 could affect the VCM.The VCM is currently changing and evolving,but it is important t

293、hat we scale up the financing of projects in developing markets now,as we currently are in a race to reduce the negative impacts of climate change.Climate change unfortunately is already being felt in many countries and despite facing some headwinds,such as high inflation in many countries and low e

294、conomic growth,there is an urgent need to increase climate finance.The VCM can do this,and we are seeing many initiatives being undertaken to ensure his market grows and is able to help a company mitigate its footprint by funding a project elsewhere while at the same time raise financing for project

295、s needed for climate action.There are many organizations and institutions providing some guidance to buyers on what they should look for when it comes to carbon credits.For example,the Integrity Council for the Voluntary Carbon Market(ICVCM)have developed core carbon principles(CCPs)to set new thres

296、hold standards for high-quality carbon credits(see Figure 17).The aim is to develop a benchmark for high-quality carbon credits based on science and clear,measurable,verifiable data.They also published an Assessment Framework that provides details about the criteria needed for both carbon crediting

297、programs and for which the projects and credits that they certify will have to meet,for a particular carbon credit to carry the CCP label.For any carbon credit to get the CCP label,both the carbon crediting program that issued the credits and the mitigation activity(e.g.,whether it is a REDD+program

298、 or renewables)need to meet the criteria for high climate,environmental,and social integrity set out by the CCPs and Assessment Framework.According to the director of the Integrity Council,the CCP label is designed to address issues and concerns about the quality of carbon credits.The main aim is to

299、 give buyers the confidence that what they are funding makes a genuine positive impact.There are a lot of questions that still need to be answered it seems that the assessments will be forward-looking and existing credits in the market will not be assessed.It is also not clear how these standards wi

300、ll be applied and assessed given that there is a high variability between different projects,programs,and current methodologies that are being applied.Other questions being raised concern whether the proposed standards are just too high so there will be few credits that will meet these standards,the

301、refore discouraging entities to apply for CCP accreditation.31 31 Polly Thomson,“The Role of Core Carbon Principles and Carbon Credit Ratings,”Sylvera,September 9,2022.Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 36 Figure 17.Core Carbon Principles as Set Out by the Integ

302、rity Council for the Voluntary Carbon Market Source:Integrity Council for the Voluntary Carbon Market There are other initiatives focusing on market integrity of the voluntary market,both from a supply and demand perspective,including the International Carbon Reduction and Offset Alliance(ICROA)and

303、the VCM Integrity Initiative(VCMI).For example,the VCMI recently issued a Claims Code of Practice to help guide companies seeking to make credible,voluntary use of carbon credits.32 32 VCMI,“Claims Code of Practice:Building Integrity in Voluntary Credit Markets,”June 2023.The Core Carbon Principles

304、A.GovernanceEffective Governance:The carbon-crediting program shall have effective program governance to ensure transparency,accountability,continuous improvement,and the overall quality of carbon credits.Tracking:The carbon-crediting program shall operate or make use of a registry to uniquely ident

305、ify,record,and trackmitigation activities and carbon credits issued to ensure credits can be identified securely and unambiguously.Transition:The carbon-crediting program shall provide comprehensive and transparent information on all creditedmitigation activities.The information shall be publicly av

306、ailable in electronic format and shall be accessible to non-specialised audiences,to enable scrutiny of mitigation activities.Robust Independent Third-Party Validation and Verification:The carbon-creditingprogram shall have program-level requirements for robust independent third-party validation and

307、 verification of mitigation activities.B.Emissions ImpactAdditionality:The GHG emission reductions or removals from mitigation activity shall be additional,i.e.,they would nothave occurred in the absence of incentive created by carbon credit revenues.Permanence:The GHG emission reductions or removal

308、s from mitigation activity shall be permanent or,where there isa risk of reversal,there shall be measures in place to address those risks and compensate reversals.Robust Quantification of Emission Reductions and Removals:The GHG emission reductions or removals from themitigation activity shall not b

309、e double counted,i.e.,they shall be counted once towards achieving mitigation targets orgoals.Double counting covers double issuance,double claiming,and double use.C.Sustainable DevelopmentSustainable Development Benefits and Safeguards:The carbon-crediting program shall have clear guidance,tools,an

310、d compliance procedures to ensure mitigation activities conform with or go beyond widely established industry bestpractices on social and environmental safeguards while delivering positive sustainable development projects.Contribution Towards Net Zero Transition:The mitigation activity shall avoid l

311、ocking-in levels of GHG emissions,technologies,or carbon-intensive practices that are incompatible with the objective of achieving net zero GHGemissions by mid-century.July 2023 Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup 37 Scrutiny from Regulators Regulators are scrutinizing the

312、 VCM to ensure that it works well.For example,the European Union proposed a framework for the certification of high-quality Carbon Dioxide Removal that is more prescriptive than that of the ICVCM.They also proposed a new law on green claims to reduce any“greenwashing”from companies.The Commodity Fut

313、ures Trading Commission is considering whether the VCM needs to be regulated to promote market integrity.It is therefore in the interest of the VCM to provide a more transparent market;if not,the regulators will step in.What Should Buyers Look For?Given all this,what should buyers look for?How do th

314、ey ensure that they buy good quality credits in the current market?We discuss some of the salient points and questions that can be used to help ensure that the credits that are purchased are of high quality.Companies should establish a strategy on the use of carbon credits;this will allow outside en

315、tities to understand in detail how a company is planning to use these credits.Find a good seller of carbon credits.This is easier said than done as there are many intermediaries available;however,it is important that a good seller is chosen to ensure that good quality credits are purchased.Ensure th

316、at the credits are verified look for verified carbon units.When deciding what credits to buy,ask the right questions.For example:How is the price of these credits calculated?What vintage year are these credits for?The later the vintage year the better,as better methodologies were put in place over t

317、he last few years.Is this project additional,and if this is the case,how do you calculate this?How do you calculate reduction,avoided or removal emissions for this project,what methodology do you use,and how is this different from other standard bodies?If you are investing in nature-based credits,di

318、scuss the issue of permanence and whether there are any buffers in place to ensure you are protected.Also discuss leakage for example,if I invest in credits to protect the forest in this particular project,would this encourage deforestation somewhere else?How is the project monitored over time to en

319、sure that emissions are really reduced,avoided,or removed?How do you ensure that these credits are not double-counted or double-claimed?Are there any other co-benefits that come with these credits,and if so,how are these measured?Diversify your portfolio into different types of credits to ensure tha

320、t the risk is spread.Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 2023 Citigroup 38 Use rating companies(if needed)to see what their analysis says and how they rate these particular credits.They can provide additional information on the project and analyze different credits against a nu

321、mber of different parameters such as additionality and leakage.Figure 18.Recommendations for Navigating the VCM Source:Citi GPS The points mentioned above might seem obvious to many,but the VCM is getting more complicated,and there are hundreds of available credits that can be purchased,which could

322、lead to confusion and frustration for many.The VCM should also be readily available to all companies and other buyers,and not just the large multinationals that can afford resources to research this market in detail.Additional guidelines and labeling as mentioned above will improve the transparency

323、of this market,and new initiatives such as Carbonplace,will make buying carbon credits easier.A strategy on the use of carbon credits helps outside entities track how a company will meet net zero goalsDevelop a StrategyThere are many intermediaries but choosing a good seller is key to quality offset

324、sFind a Trusted SellerAsking the right questions is crucial for understanding and choosing the right carbon credit to buyGet InformedLook for verified carbon creditsEnsureVerificationDiversify your portfolio into different types of carbon credits to hedge riskDiversify Your Portfolio Rating agencies

325、 can provide information on quality and ranking against marketMonitorRatingsGet Informed on Your Carbon Credit:Asking the Right QuestionsHow is the price of these carbon credits calculated?What vintage year are these credits for?Is this project additional and if this is the case how do you calculate

326、 this?How do you calculate emission reductions,avoided,or removal for this project;what methodology do you use and how is it different to other providers.If you are investing in nature-based credits,discuss the issue of permanence and if there are any buffers in place to ensure buyer protection?Disc

327、uss leakage-if I invest in credits to protect the forest in this project would this encourage deforestation somewhere else?How is the project monitored over time to ensure that emissions are really reduced,avoided or removed?How do you ensure these credits are not double counted or double claimed?Ar

328、e there any other co-benefits that come with these credits and if so,how are these measured?July 2023 Citi GPS:Citi GPS:Global Perspectives&Solutions 2023 Citigroup 39 Conclusion We cannot hide away from the fact that we are behind there is a$1.7 trillion gap in climate finance,and we need all the t

329、ools available to reduce this gap.Developing and emerging countries already facing high debt levels,inflation,foreign exchange issues,and other societal pressures such as poverty will need the help to finance projects necessary to reach net-zero goals.The VCM is not only key for developing and emerg

330、ing markets;it is also essential for companies and other institutions to reach net zero.It moves capital from companies and other buyers to climate action projects.The VCM is changing rapidly.Controls,labeling,financial innovations,and new players are entering at an alarming rate.The current VCM nee

331、ds to become more transparent,more fungible,liquid,and provide good quality credits.There are many steps that can be taken to ensure this,and many are working tirelessly to achieve it.Standards,methodologies,and checks will be important to ensure that this market operates effectively.Yes,companies s

332、hould reduce their emissions first and foremost,but reducing all emissions,especially from hard-to-abate sectors such as steel,cement,road freight,agriculture,and others,is extremely difficult to achieve.The VCM is a critical piece of the net zero puzzle,a critical financial tool for climate finance

333、.An expansion of the VCM,inclusive of a wider set of credits,could be one of the means to bridge the$1.7 trillion climate finance gap.We can build the regulatory capacity,structuring skills,and monitoring schemes to get this right.We have to-we need all the financial tools available to meet this climate challenge.Citi GPS:Citi GPS:Global Perspectives&Solutions July 2023 Citi GPS:Global Perspective