Over the past couple of years, the number of companies committing to net-zero has dramatically increased. Currently, over 5,200 businesses have committed to or set a Net Zero target as part of the UNFCCC’s “Race to Zero” campaign [1]. Furthermore, about 750 of the 2,000 largest publicly listed companies have committed to some form of net zero or climate neutrality target. However, the integrity and breadth of these commitments vary widely with regard to timelines, types of greenhouse gases (GHG) covered, and scopes included in their target.  

This discrepancy reflects the fact that the term “Net Zero” is still a poorly understood concept by many and it is even less well implemented in corporate strategies. A particular area of contention rests on the use of offsets, either in the form of carbon removals or reductions, and the role they should play in corporate climate commitments. In the paragraphs that follow, we aim to shed light on what a science-based Net Zero strategy that includes the purchase of offsets should take into consideration. 

The Net Zero landscape

Companies on the road to developing their Net Zero strategies will find themselves in no short supply of guidance to use. For now, the best practice when setting targets is to use the “Net Zero Standard” by the Science Based Targets initiative (SBTi). Another useful resource is Carbone 4’s “Net Zero Initiative”. In addition to providing guidance on SBT setting, SBTi also independently assesses and approves organizations’ targets. Carbone 4’s framework details different actions that can be taken both inside and outside a company’s value chain across the following three pillars: reducing the company’s own emissions, reducing other’s emissions, and removing CO2 from the atmosphere [2]. While their guidance is consistent with each other, Carbone 4 does not allow for a company to claim “Net Zero” status, but rather to communicate about its contribution to the targets of the national territory it is located in. 

On the role of offsetting in rigorous climate strategies, a useful resource companies can use is the Oxford Principles for Net-Zero Aligned Carbon Offsetting. These outline four principles that if adhered to can have a credible climate impact, as opposed to greenwashing [3]. These are: 

1. Prioritise reducing your own emissions first, ensure the environmental integrity of any offsets used, and disclose how offsets are used 

2. Shift offsetting towards carbon removal, where offsets directly remove carbon from the atmosphere 

3. Shift offsetting towards long-lived storage, which removes carbon from the atmosphere permanently or almost permanently 

4. Support for the development of a market for net-zero aligned offsets 

In addition to this, there are also various networks and alliances that work to ensure the integrity of the voluntary carbon market. 

On the supply-side, the Integrity Council for the Voluntary Carbon Market (IC-VCM) has recently published the “Core Carbon Principles” which aims to set a robust benchmark for companies to identify credible, high-integrity carbon credits, that create high environmental and social value. 

On the demand-side, the Voluntary Carbon Markets Integrity Initiative’s (VCMI) ambition is to set the standard for high integrity use of carbon credits in organisations’ climate strategies. Their Provisional Claims Code of Practice outlines clear guidance on how companies can make transparent and credible claims regarding offsetting and provides a framework for rating companies’ efforts on three levels: Gold, Silver, and Bronze. 

Both are designed to be used in tandem with SBTi’s Net Zero Standard. 

What is the meaning of Net Zero?

“Net Zero”, “carbon neutral”, and “climate neutral” are just a couple of examples of seemingly synonymous climate jargon, used by companies to characterise their climate efforts. While they are often used interchangeably, there are subtle differences between them, mainly relating to the coverage of different greenhouse gases, timelines and scale of emissions reductions required, the requirement for targets to be science-based, and most significantly, the role of offsetting and type of offsets allowed.

While Net Zero requires companies to drastically reduce emissions within their value chain in line with science, climate or carbon neutral can mean that emissions are balanced out by offsets. As a result, Net Zero is only achieved once long-term emission reduction goals are met and residual emissions neutralised, whereas climate neutrality can be claimed by any entity that has fully offset their emissions in a given year. However, the current lack of standardised definitions and oversight bodies means that companies will ultimately be able to do what they want – at the risk of being called out for greenwashing. 

A source of confusion is the definition of Net Zero itself. The IPCC defines a state of Net Zero emissions as: “when anthropogenic emissions of greenhouse gases to the atmosphere are balanced by anthropogenic removals over a specified period” [4]. Whilst this definition applies to the planet as a whole, some claim it does not hold at an individual company level. For this reason, Carbone 4 maintains that organisations can only contribute to global climate targets but cannot achieve a final state of Net Zero. 

Figure 1: Elements of the Net Zero Standard [5]

While there is currently no universally agreed upon definition of a Net Zero strategy, under the SBTi’s guidance, to determine their baseline emissions, companies must undertake a comprehensive GHG inventory that covers at least 95% of their scope 1 and 2 emissions and a complete scope 3 screening, usually using the GHG Protocol guidance. From this, they must set both near-term and long-term emission reduction targets. Long-term targets must be achieved by 2050 latest, whereas near-term targets must be achieved 5-10 years after having committed to net zero, typically around 2030. 

For targets relating to scopes 1 (direct emissions), 2 (indirect from heat and electricity), and 3 (indirect emissions) employing the absolute contraction method, the long-term target should represent an emissions reduction of 90% relative to the baseline year. The baseline year can be chosen by the companies themselves, provided that they have enough information on Scope 1, 2 and 3 emissions for that year, that it is representative of the company’s typical GHG profile and can be no earlier than 2015. For scope 3 targets employing the physical intensity contraction method, the reductions should represent 97% of the baseline.

After reaching their long-term emissions reduction targets, companies must neutralise their residual emissions, using removals only, to ensure that any GHG still emitted by company are counterbalanced. Residual emissions, which refer to the hard-to-abate GHG emissions remaining after the achievement of a long-term Net-Zero target, must not represent more than 10% of the company’s baseline emissions. 

How can carbon offsetting be incorporated?

The crucial point in all this is that carbon credits, whether removals or avoided emissions, cannot count towards the achievement of any emissions reduction target. Removal credits can only be used to neutralise residual emissions, but the rest of the way must be executed through a comprehensive emission abatement plan. 

Therefore, the IPCC’s definition, where net zero emissions is defined as a balancing act between total emissions and total removals, may not be appropriate to be applied at the corporate level. 

Instead, companies can purchase carbon removals or reductions credits to neutralise emissions on their way to achieving their Net Zero target. This is also referred to as beyond the value chain mitigation (BVCM). Doing so is also a requirement of the VCMI Claims Code of Practice. In this way, achieving climate neutrality can be seen as an interim measure on the path to achieving a long-term science-based Net Zero target. 

Whichever offsetting strategy entities choose must be clearly detailed in their climate plan, including whether there are any conditions on their use. For example, some companies chose to only purchase removals, whereas others purchase both removals and avoided emission credits. Other conditions can relate to the additionality, permanence, verifiability, or other environmental or social co-benefits certain offsets may offer [6].

How to recognise credible offsets

One issue is that the onus is on the company itself to do research and find out what carbon offsets could be considered credible, yet only a few have the resources and skills to do this. What follows is that a number of purchased credits do not comply with strict integrity requirements. The most fundamental ones include: 

• Environmental integrity: Ensuring the use of the credits does not lead to an increase in global emissions [7]. What this refers to is the fact that emissions reductions should not be overestimated, be based on a conservative baseline, and take into account possible leakage. 

• Additionality: Establishing that the GHG emissions reductions or removals resulting from the mitigation activity would not have occurred in the absence of this project. Often this relies on demonstrating the project’s reliance on carbon revenues or that it does not fall under a host country’s climate commitment [8]. 

• Permanence: Making sure that GHG reductions or removals are permanent and have a low risk of reversal, with any reversals being compensated. For agriculture, forestry and other land-use projects (AFOLU), which have a higher risk of reversal due to climatic conditions, wildfires, or deforestation, a percentage of credits are set aside in a buffer to compensate for any losses.  

• No double counting: Making certain that each credit only counts towards the achievement of one mitigation target or goal. In the context of Article 6 of the Paris Agreement, host countries are required to make corresponding adjustments if a mitigation outcome is being transferred internationally to meet a compliance target [9]. Whilst such adjustments will not be required for the voluntary carbon market unless purchasing credits authorised for Article 6, this will likely affect the voluntary carbon market in some way. 

• Avoiding social and environmental harms: Safeguards must be in place to ensure that the project does not contribute to any social or environmental harms, and respects laws and regulations. Certification standards such as the Climate, Community, and Biodiversity Standard (CCB) or programs to quantify sustainable development impacts such as the Gold Standard or the Sustainable Development Verified Impact Standard can offer additional safeguards that such harms are being avoided. It is however best practice to carry out due diligence of purchased credits regardless of the certification standard. 

Different types of reductions and removals

A family in Sudan with a collection of firewood for cooking for 4 days. Photo by HAMERKOP.

GHG reduction credits represent avoided emissions resulting from decreasing the emissions intensity of a certain process. Reductions are calculated according to how the with-project emissions scenario compares to the hypothetical without-project scenario. For example, renewable energy projects reduce emissions by displacing fossil fuel electricity production. Furthermore, cookstoves projects reduce emissions by reducing demand for firewood as a cooking fuel and hence avoiding deforestation, as well as reducing black carbon emissions, a powerful radiative forcing. Further information about HAMERKOP’s expertise in energy access and clean cooking can be found here. 

While investing in GHG reductions is an important tool in avoiding future emissions to pile up in the atmosphere, over time investment in permanent removals should also be scaled up substantially, to address past emissions. As explained above, to reach a state of Net Zero, residual emissions, which represent less than 10% of baseline emissions, can only be neutralised by removals. 

Carbon Dioxide Removals (CDR) include biological or technological methods of sucking carbon dioxide out of the atmosphere and permanently storing them. 

Currently, the most mature options at scale for carbon removals are Nature Based Solutions (NBS). These include tree planting and ecosystem restoration such as peatlands, mangroves, and seagrass meadows. At present, plants and soils in terrestrial ecosystems absorb the equivalent of around 20% of anthropogenic GHG emissions and are thus a key player in achieving Net Zero [10]. 

Figure 2: Estimated costs and 2050 potentials of CDR [13]

On the other hand, technological carbon removals are still unproven at scale but likely to play a measurable role [11]. Such engineered solutions to remove carbon from the atmosphere include carbon capture and storage (CCS), direct air capture (DAC), biochar, and enhanced weathering. Yet considerable investment is required to make these technologies have an impact on global mitigation. For instance, the largest DAC and storage plant running today only sequester about 4,000 tonnes CO2e per year, which approximately amounts to the yearly emissions of 870 cars [12]. 

A challenge for NBS removals is how to guarantee the permanence of removals given their vulnerability to a range of natural and human disturbances such as wildfires and deforestation.  

Currently, under the major carbon certification standards, all Agriculture, Forestry and Other Land Use (AFOLU) projects undergo a non-permanence risk assessment to qualify the risk that a given tonne of GHG removed will be reversed in the next 100 years. Geological forms of storage, which includes many of the engineered carbon removal solutions, are much less vulnerable to reversal and are likely to be guaranteed for 1,000+ years. For this reason, it is important to also invest in longer-term more permanent forms of storage. 

The major barrier to investing in technological carbon removals is their price, which also reflects the lack of maturity of their technology. In 2021, forestry and land use removals credits traded at around US$7.90 per tonne [14]. Today they sell for US$10-20. By contrast, the price per tonne of technological carbon removals can be US$200-600 [15]. 

The Frontier fund, set up by Shopify, Microsoft, Stripe, and others, aims to overcome this barrier by providing an advanced market commitment of $925 million for carbon removal technologies. Such actions send a powerful market signal and boost innovation and the development of such technologies by guaranteeing demand for them and bringing down their cost in the long run. 

Conclusion

This article has intended to highlight that using carbon removal or avoided emission / reductions offsets can have a positive climate impact, so long as it takes place within a credible and ambitious Net Zero plan or strategy. 

If companies choose to incorporate offsetting as part of their Net Zero strategy, it is important that they report on their purchases in a transparent way, set conditions for their use, and use best practice guidance to identify credible and high-integrity offsets. While investing in reductions is crucial in the long term, gradually scaling up investment in removals is instrumental to reaching the goals of the Paris Agreement. 

HAMERKOP’s experts have more than a decade of experience supporting project developers, designing climate change mitigation interventions, carrying out technical feasibility studies and getting projects through the certification process to issue carbon assets.  

Whether you are a company looking for guidance on how to integrate best quality carbon offsets, financially support long-term and impactful climate change mitigation intervention, or assess the quality of carbon offsets you intend to support, we can help – reach out to us. 

References:

[1] UNFCCC, "Race To Zero Campaign", Unfccc.Int https://unfccc.int/climate-action/race-to-zero-campaign#eq-3 [Accessed 26 August 2022].

[2] Maxime Aboukrat and others, Net Zero Initiative 2020-2021 Final Report (Carbone 4, 2021) https://www.carbone4.com/files/Net_Zero_Initiative_Final_Report_2021_2021.pdf

[3] Myles Allen and others, "The Oxford Principles For Net Zero Aligned Carbon Offsetting", University Of Oxford, 2020 https://www.smithschool.ox.ac.uk/sites/default/files/2022-01/Oxford-Offsetting-Principles-2020.pdf

[4] IPCC, "Annex I: Glossary", in Global Warming Of 1.5˚C. An IPCC Special Report on the Impacts of Global Warming of 1.5˚C Above Pre-Industrial Levels and Related Global Greenhouse Gas Emission Pathways, in the Context of Strengthening the Global Response to the Threat of Climate Change, Sustainable Development, and Efforts to Eradicate Poverty (Cambridge: Cambridge University Press, 2018).

[5] SBTi, "SBTi Corporate Net-Zero Standard", Science Based Targets Initiative, 2021 https://sciencebasedtargets.org/resources/files/Net-Zero-Standard.pdf

[6] Kaya Axelsson, Aoife Brophy and Elena Pierard Manzano, "Net Zero Business or Business for Net Zero? A Report on Corporate Climate Leadership Practices on Scope and Offsetting", Skoll Centre For Social Entrepreneurship & Oxford Net Zero, 2022 https://netzeroclimate.org/wp-content/uploads/2022/02/Net-zero-business-or-business-for-net-zero.pdf

[7] Lambert Schneider and Stephanie La Hoz Theuer, "Environmental Integrity of International Carbon Market Mechanisms Under the Paris Agreement", Climate Policy, 19.3 (2019) https://doi.org/10.1080/14693062.2018.1521332

[8] Lambert Schneider and others, "What Makes a High-Quality Carbon Credit?", WWF, EDF & Öko-Institut, 2020 https://files.worldwildlife.org/wwfcmsprod/files/Publication/file/54su0gjupo_What_Makes_a_High_quality_Carbon_Credit.pdf?_ga=2.218034974.983871514.1660815690-932968438.1660815690

[9] Trove Research, "VCM And Article 6 Interaction Discussion Paper On The Use Of Corresponding Adjustments For Voluntary Carbon Credit Transfers", 2021 https://globalcarbonoffsets.com/wp-content/uploads/2021/01/VCM-and-Article-6-interaction-6-Jan-2021-1.pdf

[10] Bronson W. Griscom and others, "Natural Climate Solutions", Proceedings of the National Academy of Sciences, 114.44 (2017) https://doi.org/10.1073/pnas.1710465114

[11] Robert Höglund, "The Carbon Removal Market Doesn't Exist", Illuminem.Com, 2022 https://illuminem.com/illuminemvoices/dd812162-ba25-4321-95dd-2b0208bc489b [Accessed 19 August 2022].

[12] Katie Lebling and others, "6 Things To Know About Direct Air Capture", World Resources Institute, 2022 https://www.wri.org/insights/direct-air-capture-resource-considerations-and-costs-carbon-removal [Accessed 23 August 2022].

[13] IPCC, "Chapter 4: Strengthening and Implementing the Global Response", in: Global Warming of 1.5°C. An IPCC Special Report on the Impacts of Global Warming of 1.5°C Above Pre-Industrial Levels and Related Global Greenhouse Gas Emission Pathways, in the Context of Strengthening the Global Response to the threat of Climate Change, Sustainable Development, and Efforts to Eradicate Poverty (Cambridge: Cambridge University Press, 2018) https://www.ipcc.ch/site/assets/uploads/sites/2/2022/06/SR15_Chapter_4_LR.pdf

[14] Stephen Donofrio and others, The Art of Integrity State of the Voluntary Carbon Markets 2022 Q3 (Ecosystem Marketplace, 2021).

[15] cdr.fyi, "Compilation of Known CDR Purchases", Cdr.Fyi, 2022 https://www.cdr.fyi/ [Accessed 19 August 2022].

The aim of REDD+ projects (short for Reducing Emissions from Deforestation and Forest Degradation) is to address one of the primary drivers of climate change by working to protect key areas of forest and wildlife from deforestation. Yet what sets REDD+ apart from similar climate mitigation projects is the focus on providing important co-benefits for surrounding populations including improved infrastructure, employment opportunities, and other community development projects. 

As we pass the 10-year mark of active, credit-issuing REDD+ projects, HAMERKOP has collected and analysed data from active projects certified to the Verified Carbon Standard (VCS), the largest “voluntary” carbon credit certification organisation, to assess project prevalence and effectiveness across 6 key metrics. 

All the projects reviewed had completed at least one monitoring cycle. The completion of the first monitoring cycle marks an important milestone in the certification process whereby the project is able to issue carbon credits for greenhouse gas emissions reduced or avoided. The data analysis performed omits projects that are in development but have not yet issued any carbon credits.  

1. Monitoring Period Length  

A monitoring period corresponds to the passage of time during which project developers record their project impacts before they undergo a verification audit. Successful completion of this leads to the issuance of carbon credits for the corresponding monitoring period. With most carbon certification standards, project developers are free to choose how often they want to materialise and monetise their project’s performance. 

REDD+ projects are complex to implement and monitor and this partly explains the reason project developers tend to have longer monitoring period than for other project types. The monitoring periods of VCS-issued REDD+ projects range from one to ten years long, with an average period of 3.25 years (39.4 months). 

The first monitoring period is often the longest, since a broad range project implementation and certification processes need to be set in place.  

The Ecomapua Amazon REDD+ Project [1] in Brazil, the first REDD+ project by activity history, began monitoring its performance in 2003. However, most REDD+ project start dates are concentrated within a nine-year period between 2008 and 2016 (inclusive). The first REDD+ project to issue credits, however, was the Kasigau Corridor Project [2] in Kenya, which, in addition to preventing deforestation, works towards sustainably resolving local human-wildlife conflicts that have been prevalent in the area in the past. 

2. Geographical Scope  

In the decade since the Kasigau project issued its first credits in 2011, the field has exploded to 55 projects that are currently issuing carbon credits. These projects are dispersed throughout the developing world.  

Among those already issuing credits, all except 5 projects are located in South America or Africa. In South America, they are concentrated in Brazil and Colombia, with a few additional projects in Peru. While Peru and Colombia have enabling environments, the case of Brazil is more contrasted and complex. African projects, by contrast, are spread more evenly throughout the continent.  

3. Project Size

The size of a project can impact the ability to deploy activities to counteract deforestation and forest degradation. The size of REDD+ projects that have issued credits range from just 18,000 ha (e.g., the Amazon Rio REDD+ IFM [3]) to over 1 million ha (e.g., the REDD+ Project Resguardo Indígena Unificado Selva de Matavén [4] in Colombia and the Cordillera Azul National Park REDD project [5] in Peru). 

Projects were categorised as small (under 100,000 ha), medium (100,000 ha to 500,000 ha), and large (500,000 ha and over). There are significantly more small and medium projects than large ones. It can be challenging in many countries to find areas that can be aggregated and managed under a single project entity and where the agents of deforestation and degradation can be addressed effectively. The figure to the left gives a more detailed breakdown of project sizes.  

Furthermore, the figure to the right shows the relationship between project area and their resulting emission reductions. Project performance here is based on the total emission reductions included in monitoring reports thus far, measured in tCO2e reduced/avoided per hectare and per year. The results suggest that mid-sized projects have the largest variety in performance. The emissions reduction performance of small and large projects, by contrast, vary less. Note, that the analysis does not take into account the number of monitoring periods conducted so far into account into the analysis, meaning these projects are likely to be at different stages of implementation and performance, which could explain the high variability.  

Overall, the highest project performance was found to be 77.06 tCO2e per hectare and per year for the Rimba Raya Biodiversity Reserve Project [6], over 5 monitoring periods covering 2009 to 2019. This is especially notable considering the second highest performance was over 30 tCO2e per hectare less annually [7]. The lowest project performance was 0.2 tCO2e per hectare and per year for the Biocorredor Martin Sagrado REDD+ project [8] in Peru over 2 monitoring periods covering 2010 to 2020. 

4. Certification Methodology  

The next metric examined was the choice of certification methodology to determine if there were differences in project performance based on different methodologies. Each methodology provides a slightly different framework used to develop and monitor projects [9]. This usually depends on the type of ecosystem as well as the drivers and patterns of deforestation. For example, methodology VM0007 is “applicable to forest lands, forested wetlands, forested peatlands, and tidal wetlands”[10] and cannot be used for projects where the deforestation is caused by illegal timber harvesting. 

The figure to the left shows that the VM0009 Methodology for Ecosystem Conversion performed consistently high, with a median of 5.1 tCO2e per hectare and per year, three times higher than a median of 1.74 tCO2e per hectare and per year from the VM0011 Methodology for Calculating GHG Benefits from Preventing Planned Degradation which had the lowest performance. These determinations were made through assessing the distribution of the available data. Both VM0011 and VM0009 showed little variation in the results with relatively few outliers. While other methodologies have similar ranges, they show greater variation and emission reductions cluster towards the lower end of the spectrum. There are more significant outliers in the VM0007 and VM0004 methodologies, but this mainly derived from Indonesian REDD+ projects, which had abnormally high annual averages of monitored emissions reduction per hectare. 

5. Type of Forest Damage 

We also attempted to analyse project performance based on the type of damage that was avoided (deforestation or degradation) and the various external drivers of deforestation.  

The figure shows that project performances are not significantly dependent on the type of destruction prevented when looking at the total distribution. However, it can be challenging to differentiate both, one (degradation) often leading to another (deforestation) and to analyse these parameters taking a more granular approach to differentiate the way in which projects operate and perform. 

Examining the primary drivers of deforestation, our analysis found that it was difficult to attribute project performance based on specific factors, due to the complexity and specificity of each situation, deforestation and degradation being due to a range of complex direct and indirect agents. 

6. Predicted vs. Actual Emission Reductions  

Another important aspect to take into consideration is how the project held up to predictions that were made upon the initial conception of the project. These predictions, formally called ex-ante emission reductions, provide an estimate of carbon credits the project proponents expect to generate from the project, and determine its financial viability. 

Examining the difference between the predictions and the actual measurements of emission reductions can reveal the difference between expectations, planning and the field reality. 

In the case of the 53 projects examined, the average difference between the predictions and measurements was found to be close to zero — just 1.02 tCO2e per hectare per year. 

However, this does not mean that predictions were accurate. On the contrary, we found a wide variation in differences for each project. They ranged from producing 39.48 tCO2e less than expected for the Katingan Peatland Restoration and Conservation Project [11] to 33.33  tCO2e more than expected for the Cikel Brazilian Amazon REDD APD Project Avoiding Planned Deforestation [12]; and ranging from – 80% to + 380%. 

Only 12 projects out of 55 (less than a quarter) managed to predict emissions reductions generated by their activities with an accuracy of plus or minus 10%. Moreover, 23 projects out of 55 (around half), predicted the potential of the project with an accuracy inferior to 50%, which shows how difficult it can be for a project developer and for potential upfront investors to estimate the financial potential of a project to cover its costs. 

CONCLUSION 

Through this analysis, we aimed to shed some light on results from REDD+ projects that are currently issuing carbon credits and provide a resource that collects and displays the data in one place. With new projects being approved and launched every year, we hope that additional reporting and data collection will further refine our findings and help inform project investments in the future. 

HAMERKOP’s experts have more than a decade of experience supporting project developers, designing climate change mitigation interventions, carrying out technical feasibility studies and getting projects through the certification process to issue carbon assets. 

Whether you are an international organization, a landowner, a project developer, or an NGO looking to benefit from carbon finance to financially support long-term and impactful climate change mitigation intervention, we can help, reach out to us. 

Sources:

[1] Ecomapua Amazon REDD project VCS registry page: https://registry.verra.org/app/projectDetail/VCS/1094

[2] Kasigau Corridor REDD project VCS registry page: https://registry.verra.org/app/projectDetail/VCS/562

[3] Amazon Rio REDD+ project VCS registry page: https://registry.verra.org/app/projectDetail/VCS/1147

[4] REDD+ Project Resguardo Indigena Unificado Selva de Mataven project VCS page: https://registry.verra.org/app/projectDetail/VCS/1566

[5] Cordillera Azul National Park REDD project VCS registry page: https://registry.verra.org/app/projectDetail/VCS/985

[6] Rimba Raya Biodiversity Reserve Project VCS registry page: https://registry.verra.org/app/projectDetail/VCS/674

[7] Cikel Brazilian Amazon REDD project VCS registry page: https://registry.verra.org/app/projectDetail/VCS/832

[8] Biocorredor Martin Sagrado REDD+ project VCS registry page: https://registry.verra.org/app/projectDetail/VCS/958

[9] VCS methodologies: https://verra.org/methodologies/

[10] “VM0007 REDD+ Methodology Framework (REDD+MF), v1.6,” Verra, March 29, 2021, https://verra.org/methodology/vm0007-redd-methodology-framework-redd-mf-v1-6/#:~:text=This%20methodology%20provides%20a%20set,planned%20deforestation%20and%20forest%20degradation.

[11] Katingan Peatland Restoration and Conservation Project: https://registry.verra.org/app/projectDetail/VCS/1477

[12] Cikel Brazilian Amazon REDD APD Project Avoiding Planned Deforestation: https://registry.verra.org/app/projectDetail/VCS/832

Written by James Lloyd (Nature4Climate) in collaboration with the HAMERKOP Team.

Moving from tree planting to tree growing: How the Reforest Better Guide can increase the positive impact of forest restoration projects

From flooding and droughts to species extinction and land degradation, the impacts of climate change are already widespread, threatening nature and the livelihoods that depend on it. Scientific research has made it clear that we only have a very brief window of time remaining to prevent the worst effects of climate change.   

Nature can play a critical role in combating climate change and meeting the goals of the Paris Agreement. Nature-based solutions can deliver one-third of the climate mitigation needed to limit global warming to 1.5°C by 2030, and help communities adapt to the changing climate.  

Companies are increasingly waking up to the fact that they cannot achieve net zero emissions without protecting nature. At COP26 in Glasgow, 95 businesses pledged to halt and reverse the decline of nature by 2030, indicative of a growing interest in nature-based solutions from the business community.   

Tree growing is an effective method of financing nature-based solutions and removing carbon emissions from the atmosphere. When done correctly, tree growing can deliver positive social and environmental benefits, including restoring degraded ecosystems, protecting biodiversity, and supporting indigenous and local communities.  

What are the barriers to effective investment in tree growing?  

More and more businesses are turning to forest and tree projects to reduce their emissions and protect nature, either through purchasing carbon credits or investing in forest restoration projects. However, there are hundreds of projects and providers to choose from around the world and a lack of reliable guidance to help companies identify the good from the bad.   

As a result, forest projects have been historically mistrusted or considered a failure. This is partly because of a misguided focus on “tree planting” as a quick fix solution rather than “tree growing” as a long-term investment in our planet’s future.  

To deliver much-needed finance to tree growing projects that achieve real and lasting impacts for people and nature, we urgently need greater transparency and understanding of what makes a good restoration scheme. Companies looking to invest in tree growing projects would benefit hugely from clear and accessible information about what best practice looks like and how to identify it. 

The Reforest Better Guide simplifies high impact investment in nature  

The Reforest Better Guide offers an accessible and easy-to-use methodology to help companies understand the quality of tree growing schemes and identify high-impact projects to fund.   

Rooted in science, the interactive guide takes users through a set of questions to help them identify the most effective and ethical restoration projects to invest in. It measures the success of a project by rating it against 13 key metrics of good practice. These metrics include plant species selection, the inclusion and involvement of indigenous and local communities, and transparency on how baseline emissions are calculated. With this information, the guide uses a traffic light system to highlight the quality of a restoration project, considering its impact and its wider benefits to the environment and society.  

By providing a simple way to promote best practice in tree growing, the guide aims to shift the conversation from tree “planting” to tree “growing.” This reflects the importance of long-term investments in nature and restoration projects for climate and biodiversity benefits.

What are the benefits of using the Reforest Better Guide?  

With the Reforest Better Guide, companies are able to make more informed decisions before investing in tree growing schemes. Guiding investment in high-quality projects leads to more effective carbon emissions reductions, in turn helping companies and industries meet their climate targets.   

Beyond carbon mitigation, channelling investment into high-quality reforestation brings further social and environmental benefits. These include biodiversity conservation with a focus on promoting and protecting native plant species and providing a framework for sustainable land management, both of which promote the restoration of degraded ecosystems in a durable manner.  

High-impact projects will also offer social benefits including employment and income opportunities. They will ensure that Indigenous rights are protected, and that local communities have a say in decision-making.  

What best practice looks like: Tree growing in India  

In Eastern India, the Advasi tribes in the Araku Valley are among the most disadvantaged in the country. The region has suffered from severe deforestation under English colonial rule, resulting in soil erosion, land degradation and poverty. The Naandi Foundation works to tackle this poverty by growing trees and restoring nature to support local livelihoods.

Today, over six million trees have been planted and 6,000 ha of degraded lands restored. The forested land provides shelter and food for wildlife, as well as income opportunities for local communities, who can harvest crops including coffee beans and mangoes from the new trees. This has also increased food security for small and marginalised communities and improved agricultural productivity.

How can businesses use the Reforest Better Guide?   

Corporates looking to improve their sustainability credentials or offset their carbon emissions with meaningful impacts on local ecosystems can take advantage of the online Reforest Better Guide to identify and review high-quality projects.

Similarly, reforestation project managers, NGOs, and conservation organizations would do well to use the guide to assess existing projects and identify the potential for improvement of overall performance and scale. 

As the recent IPCC report made clear, we have a window of opportunity to make meaningful investments in nature – for the benefit of ecosystems, communities, and long-term planetary health. The Reforest Better Guide is one of the best tools that we have available to accelerate this investment and meet climate targets.   

The Reforest Better Guide comes from Hamerkop Climate Impacts, a climate change and climate finance boutique consultancy, in partnership with Nature4Climate and forest scientists.   

The Reforest Better Guide and online questionnaire can be found here: https://nature4climate.org/reforest-better-guide/  

This article was originally published here.

Organisations also involved in the development of the guide include:  

• Trillion Trees (Wildlife Conservation Society, BirdLife International and World Wildlife Fund)  

• OneTreePlanted  

• ReforestAction  

• TreeAid  

The United Nation’s Sustainable Development Goal (SDG) 7 aims to achieve access to affordable, reliable, sustainable, and modern energy for all. Although there has been significant investment in this sector, there are still about 4 billion people worldwide that do not have sufficient energy access, 80 million of which are forcibly displaced people (i.e., refugees, internally displaced people, stateless people, and asylum seekers)[1].

In many displacement settings, forcibly displaced people rely on firewood, charcoal, or other biomass burned on traditional, inefficient stoves for cooking. These traditional cookstoves emit large amounts of smoke when cooking, which in turn has a detrimental impact on health and indoor air quality. Women and children are often in charge of procuring fuel and carry heavy loads while traveling long distances; this puts them at risk of sexual and gender-based violence and takes away time for other productive activities including income-generating activities and education. The collection of firewood for cooking contributes to environmental degradation and incites conflict between displaced populations and host communities, especially in settings that have reached a crisis point in which there is no more firewood available in the local environment and no alternatives exist.

Therefore, energy access and specifically, access to modern energy cooking solutions in displacement settings are critical as they not only advance progress towards universal energy access, but also improved health and well-being, gender equality, climate action, peace and justice, and the elimination of poverty[2].

Woman in North Darfur, Sudan, with 4-day worth of firewood for cooking

Energy access has historically been excluded from humanitarian response and displacement settings due to limited availability of solutions, affordability, and lack of suitable business models. The aim of humanitarian aid is to provide instant relief to short-term crises, yet refugees and displaced populations can be housed in camps or other informal settings for generations without sufficient energy access.

Although dedicated initiatives are emerging, such as the UN-backed Global Platform for Action[3], a global initiative promoting actions that enable sustainable energy access in displacement settings, much remains to be tackled.

There have been increasing interventions involving the distribution of energy technologies for cooking, lighting, and other energy services, but few have focused on providing long-term solutions for modern energy cooking. This can be attributed to the fact that humanitarian funding is often politically motivated and short-term in nature, which means that funding and priorities can quickly change with donors and shifts in international relations. This often results in short-term solutions that do not meet the long-term energy needs in displacement settings. In addition, refugees face uncertainty surrounding their legal status and government policies that restrict their economic integration[4].

Energy Access and Carbon Finance

It is essential to implement new funding and delivery models for energy access in displacement settings, as donor funding is insufficient to tackle the challenge. More innovative financing is needed to scale up solutions and attract investment and participation from the private sector, who have traditionally viewed refugee camps and informal settlements as risky and unprofitable settings.

Promoted by the World Bank-administered Energy Sector Management Assistance Program (ESMAP), more knowledge is being generated and financing instruments are diversifying[5]. There is significant potential for private sector engagement in this context through carbon finance. Carbon finance is an innovative funding mechanism that places a financial value on carbon emissions. In displacement settings, emission reductions can be achieved through the use of fuel-efficient stoves or clean fuels. Each tonne of carbon dioxide (CO2) not emitted generates one carbon credit. Emission reductions take place when switching households and institutions (e.g., schools, hospitals, restaurants, bakeries) from a traditional technology (e.g., open fire or mud stoves with an assumed thermal efficiency of 10%) to either a more efficiency technology (e.g., improved firewood and charcoal stove) or to a different energy source (e.g., gas, solar thermal or electric, biogas, or biofuel).

Afaf Mohamed Ahmed Atroon switched from cooking with traditional stoves to cooking with gas, with the support of carbon finance in Sudan

These carbon credits can then be purchased by companies to offset or balance out their own emissions, or simply to contribute to financing development and climate actions based on results rather than activities. Carbon finance can increase the financial viability of projects or reduce investment risks by creating an additional revenue stream and enabling a transfer of technologies and technical know-how[6]. This mechanism allows for the (co-)financing of projects that bring about numerous social and environmental benefits in addition to a reduction in greenhouse gas (GHG) emissions. In this context GHG emissions reduction is often considered as a tool to channel development finance rather than the most important impact.

For cooking energy solution projects, carbon finance is usually used in the following ways:

• Pay for all the capital and operational costs of distributing improved technologies;

• Subsidise a portion of the cost of the improved technology to make it affordable to the target population; or

• Pay, finance or subsidy to various degrees the capital and operational expenditures required to expand the project: raise awareness through billboard, radio and TV adverts or local door to door sensitisation; expand marketing channels by paying for last mile distribution costs in areas with lower population density; provide consumer finance through micro-loans for stoves and other investment; and finance the expansion of production and storage facilities.

Not all interventions may benefit from carbon finance, but it is particularly impactful in displacement settings that arose from previous and not ongoing conflict. These displacement settings see decreasing amounts of both media attention and international aid, and could particularly benefit from carbon finance. In addition to generating additional emission reductions, projects would need to check a few additional boxes to benefit from carbon finance.

In terms of carbon certification standards, the Gold Standard is known for its work expanding the reach of carbon finance for energy access in various settings (e.g., for large, small and micro-scale interventions; or more recently for stoves including metering)[7]. The Verified Carbon Standard (VCS), the largest issuer of voluntary carbon offsets, also enables cookstove projects to benefit from carbon finance, although mostly those distributing improved firewood stoves[8]. The figure below shows the number of registered projects (in dark green) and the credits issued for these (in light green and in million tonnes of CO2), by each registry.

Cookstove Programme Volumes by Registry[9]

It would usually take 18 months for design certification or resgistration (point where a project is officially authorised to issue a carbon credit for each tonne of CO2 equivalent reduced, monitored and audited) and another 6 to 18 months to deliver a first batch of carbon credits.

Somes issues are specific to displacement settings and carbon finance, which include:

• The temporary nature of the settings. Most carbon finance sponsors cover at least some of the project costs of implementation and carbon certification and monitoring, based on their expected return. Knowing that a cooking technology is expected to last between 2 and 8 years, if households relocate, this would often mean it is no longer feasible to track their emission reductions and would result in a shortfall of carbon credits issued and revenue for the sponsor.

• The lack of infrastructure and higher costs. Many refugee and displacement settlements are isolated or difficult to reach and often occur in settings with little infrastructure (e.g., roads, fuel storage facilities), making the distribution of goods and the fuel supply chain challenging to establish. These limitations would result in higher project implementation costs. Other factors driving costs up may include the lack of implementation partners in the target area(s) or the need for military escorts to move around.

• Providing upfront capital. Carbon finance is by nature a result-based financing tool, which means that financial sponsors are usually reluctant to pay for the activies to be implemented, which they may consider too risky. However, without such upfront capital deployment, such projects could not take place.

Carbon finance also offers a range of opportunities, which includes:

• Lean costs structure. The costs associated with implementing such projects are often seen in light of the funding that can be generated from the sale of carbon credits. As such, projects tend to focus on activities that are highly efficient in meeting the main project goal (e.g., delivery emission reductions). This in effect tends to reduce the costs of such projects, compared to a project that would be funded through a traditional aid donor.

• Continuous improvement. Once the project is up and running, carbon finance requires a range of parameters to be monitored through quantitative tests and qualitative surveys. While traditional development projects include monitoring to some degree, parameters to be followed closely for carbon-funded projects enable them to improve over time (e.g., reduce usage of baseline cooking device, implement activities to enable users’ money saving, scale up fuel retailing channels, etc.). The multiple surveys conducted throughout the project lifespan also enable collection of precious information about the beneficiary socio-economic dynamics and allow a better understanding of their concerns and preferences.

• Contribution to SDG 17 – Partnership for the Goals. While the private sector is often reluctant to collaborate with the public sector, carbon finance can be seen as a simpler instrument for both cooperation and contribution to SDG 17. The public and aid sector are well aware their funding is insufficent to tackle all the development issues and private sector funding can be leveraged through carbon finance.

Case Study: Solar Cooking in Chad

Darfuri Woman using the Cookit distributed by ADES in the camp of Iridimi, Eastern Chad

The solar cooking in Chad project is funded by FairClimateFund and implemented by local NGO ADES, with the technical support of HAMERKOP. It focuses on the distribution of a simple, patent-free stove called the CookIt. These solar cookers were initially distributed in 2005, at the time Darfur refugees fled Sudan and crossed the border into Chad. The project began on funding from international donors that gradually dried up. Without the sale of carbon credits, the project would have been discontinued and households would have gone back to cooking on traditional open fires with firewood. In 2012, the project was continued in the Iridimi refugee camp, through the funding provided based on the expectation that emission reductions from the CookIt could be claimed and sold onto the voluntary carbon market. The beneficiaries transferred the ownership of their emission reductions to the project in exchange for highly subsidised CookIts, training on how to use these cookers, and the creation of employment for local production of stoves.

The carbon credits are being sold to cover the cost of project management and carbon certification. In partnership with FairClimateFund, HAMERKOP was brought on as a partner in 2019 to take over project expansion and ensure its long-term sustainability through carbon finance. The project has since entered its fourth monitoring period, is expanding to a second refugee camp, and is certified under the Gold Standard for the Global Goals using the GS micro-scale Simplified Methodology for Efficient Cookstoves.

Case Study: Assessment of Cooking Practices in Displacement Settings in Cambodia

The UK aid-funded Modern Energy Cooking Services (MECS) programme supports the transition of low-income economies from biomass to the use of modern energy cooking services. While research has been previously conducted on energy access across low-income countries, there is a limited amount of data on energy access in displacements settings. Relatively little is known about the cooking practices used, the roles involved, and mechanisms used to cope with shortages in fuel, cooking appliances, and other aspects of livelihood that are affected during a displacement event (e.g., land-related conflict, urban development, extreme natural events such as flooding).

Cambodian woman preparing her family meal, captured during the MECS’s surveys conducted by HAMERKOP

Through developing a research tool and for a month in Cambodia, HAMERKOP carried out data collection to support MECS at gaining a better understanding of how displaced people and institutions (e.g., hospitals, schools, restaurants, bakeries, etc.) utilise energy for cooking. To gain insight into cooking practices in displacement settings in Cambodia, data was collected through conducting 300 surveys and focus group discussions amongst households and institutions in rural and urban areas of Cambodia where internally displaced peoples were known to have resettled.

While this assignment was not intended to lead to the development of a carbon project, some of the initial findings point in that direction. Displaced people face numerous burdens. One is the loss of their historical source of income and assets; another is the challenge to produce their own food due to the lack of land and the lack of access to savings and consumer finance to afford energy efficient and cleaner cooking technologies. In this context, carbon finance could provide for the support mentioned earlier in this article and enable modern cooking technologies to be accessible to these vulnerable populations.

HAMERKOP’s experts have more than 10 years of experience supporting projects in benefitting from carbon finance in displacement settings, conducting baseline assessments, designing interventions, selecting the most appropriate technologies, to certifying projects to the Gold Standard and providing strategic advice for their implementation.

Whether you are an international organisation or an NGO looking to benefit from carbon finance or an organisation looking for interventions to financially support over the long term, we can help, so reach out to us.

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[1] Source: Bisaga, I. & To, L.S. 2021. Funding and Delivery Models for Modern Energy Cooking Services in Displacement Settings: A Review. Link: Energies

[2] Source: Ibid

[3] Global Platform of Action website: https://www.humanitarianenergy.org/  

[4] Source: Patel, L. & Gross, K. 2019. Cooking in Displacement Settings: Engaging the Private Sector in Non-wood-based Fuel Supply. Link: chathamhouse.org

[5] Source: Modern energy cooking: review of the funding landscape. Link: https://mecs.org.uk/wp-content/uploads/2022/02/Modern-Energy-Cooking-Review-of-the-Funding-Landscape.pdf

[6] Source: UNHCR. 2014. Carbon Financing. Link: https://www.unhcr.org/55005b069.pdf   

[7] Source: Gold Standard’s Impact Quantification Methodologies. Link: https://globalgoals.goldstandard.org/400-sdg-impact-quantification/

[8] Source: VMR0006 Methodology for Installation of High Efficiency Firewood Cookstoves. Link: https://verra.org/methodology/vmr0006-methodology-for-installation-of-high-efficiency-firewood-cookstoves/

[9] Source: World Bank /Ci-Dev: https://ci-dev.org/sites/cidev/files/2020-11/CI-DEV_FRACTION%20OF%20NONRENEWABLE%20BIOMASS_R2.pdf and Modern energy cooking: review of the funding landscape. Link: https://mecs.org.uk/wp-content/uploads/2022/02/Modern-Energy-Cooking-Review-of-the-Funding-Landscape.pdf

In May 2021, the IUCN’s Centre for Mediterranean Cooperation released their “Manual for the Creation of Blue Carbon Projects in Europe and the Mediterranean”. This document provides guidance for developing projects which utilise carbon finance to enhance, protect and develop seagrass and coastal wetland ecosystems for climate change mitigation and adaptation, specifically in Europe and the Mediterranean region.

HAMERKOP’s Director Olivier Levallois was the primary contributor to the manual’s chapters 2, 3 and 4, which detail the policies and new mechanisms for carbon management; carbon project eligibility; and the certification process. This blog post will introduce you to blue carbon and provide an overview of some of the topics covered in these chapters.

Coastal blue carbon is defined as the organic carbon stored in ecosystems from the coastal or near-coastal zone and includes mangroves, seagrasses and salt marshes. Certified blue carbon offsetting projects have traditionally been associated with tropical environments and, more specifically, mangrove forests. However, with the entry into force of the Paris Agreement, there is significant potential for certification under voluntary carbon standards to support the development of blue carbon projects in Europe and the Mediterranean.

In recent years, there has been growing interest in Nature Based Solutions (NbS), notably tree planting; afforestation; reforestation and land management. Whilst this term also includes blue carbon, discussions around NbS are often dominated by forestry projects. Even though they are not as well known or as well developed in the carbon markets as forestry projects, seagrass, salt marshes and mangroves all have significantly higher carbon storage potential per hectare than both boreal and tropical forests, as 95% of their carbon is stored in the soil[1]. Therefore, the funding of their protection, restoration and creation raises an opportunity for organisations who are willing to balance out their emissions.

Source: https://sustainabletravel.org/what-is-blue-carbon/

Blue Carbon Ecosystems

Coastal blue carbon ecosystems in Europe and the Mediterranean basin are primarily comprised of seagrass meadows and salt marshes. Seagrass meadows are found across the Mediterranean and North Atlantic and have been identified as important sinks which bury organic carbon. The species Posidonia oceanica is the most abundant and widespread in the Mediterranean and has the carbon storage potential of a substantial 1,500 tonnes of CO2e per hectare[2].

The loss of seagrass in Europe and the Mediterranean can be attributed to both direct and indirect anthropogenic impacts. These include poor water quality and mechanical erosion (trawling and anchoring); burial of the seagrass caused by the construction of new coastal defences and infrastructure; and storms and marine heatwaves which significantly impact the stability of these ecosystems.

Source: Med-O-Med, Posidonia oceanica, the lung and base of the Med-O-Med region.

Salt marshes are found primarily on the fringes of estuaries, bays and low-energy inter-tidal zones. Atlantic European salt marshes are characterised by natural grasslands along sheltered stretches of the Atlantic European coast from mid-Portugal to the North Sea. Salt marshes are also prominent along the sheltered shores around the south coast of Portugal and the Mediterranean basin.

Data on the extent and carbon stock of salt marshes is patchy at best, however it is estimated the soils of European salt marshes having the long-term sequestration potential of 151 g C m-2 yr-1. This is six times the carbon sequestration potential of peatlands (26.6 g C m-2 yr-1) which are considered the largest natural terrestrial carbon store worldwide[3]. Salt marshes are particularly threatened by sea-level rise as a result of “coastal squeeze”, causing an average estimated reduction of 13% in these habitats over the past 50 years. Changes in the supply of coastal sediment and modification of water hydrodynamics such as flow and strength can also cause a significant decline in the quality and quantity of salt marshes.

Source: The Guardian, how artificial salt marshes can help the fight against rising seas

In addition to their carbon sequestration potential, both seagrass and salt marshes support climate adaptation by improving habitat and the food chain for commercial fisheries; shoreline stabilisation; storm protection and flood attenuation. Many blue carbon plant species also significantly raise the seafloor, again supporting natural coastline protection against sea level rise. These additional adaptation benefits are becoming increasingly important as the climate continues to change and, in the UK, alone, salt marshes provide £1 billion worth of coastal flood defences[4].

Alongside mangroves, seagrass and salt marshes, there is additional potential for blue carbon projects that involve kelp, phytoplankton and biogenic reefs. Kelp especially has been argued by scientists to have been “overlooked” in the blue carbon scene, notably in Australia where in the Great Southern Reef kelp is calculated to hold ~3% of total global blue carbon. However, a key challenge of including kelp in blue carbon is that it may be indirectly accounted for already, as it can be buried within tidal marshes, mangrove forests and seagrass beds[5]. This raises the risk of double counting. Whilst not currently included, this is a pioneering area of research and it is likely as blue carbon develops further additional ecosystems may also be included.

Political and Financial Incentives for Blue Carbon Projects

As part of the Paris Agreement, countries are required to submit revised National Determined Contributions (NDCs) every five years. These NDCs include information regarding the scope and coverage of a country’s mitigation and adaptation efforts, of which nature-based solutions, including blue carbon, play a central role. Specifically in Europe, the European Commission adopted the Biodiversity Strategy under the European Green Deal in May 2020. This ambitious multilateral framework sets a series of biodiversity goals, including enhanced restoration and conservation measures in protected areas and improving weakened and deteriorated ecosystems. Restoring, protecting and improving blue carbon ecosystems (i.e., salt marshes and seagrass) across Europe is a key tool in achieving these goals.

In addition to the biodiversity strategy, at the heart of the European Green Deal is also this target of reaching climate-neutrality by 2050 which requires transitioning to a net-zero economy[6]. Whilst this will be achieved primarily through countries and companies reducing their own emissions, certain emissions are unavoidable and thus require to be offset. The sale of carbon credits generated through European and Mediterranean blue carbon projects would allow for the upscaling of restoration, conservation and development of these ecosystems, whilst allowing private companies to support the attainment of their net zero targets.

Source: Manual for the creation of blue carbon projects in Europe and the Mediterranean

Whilst to date there are no certified blue carbon project in Europe, there are a number of organisations who have begun undertaking conservation and regeneration in support of carbon sequestration. One such organisation is Carbon Kapture, who has the intention of creating a new market in seaweed-based (i.e. kelp) carbon services. Kelp grows 30 times faster than trees and is considered highly efficient in removing CO2 from the atmosphere, it can also be sold to farmers as animal feed, reducing methane emissions from livestock[7].

Another organisation working to conserve blue carbon ecosystems is Project Manaia who are on a mission to preserve seagrass, investigate invasive species and clear out marine debris. Based in Austria, their work on seagrass has primarily focussed on documenting the current extent of the meadows as well as any changes in the dimensions over time. This allows them to focus on replanting the seagrass in areas which need it.

Carbon Certification

Prior to the implementation of the Paris Agreement, certified carbon projects in Europe were enabled through the Kyoto Protocol’s Joint Implementation (JI). Of the European Union countries in the Mediterranean region (Spain, France, Italy and Greece), only 20 projects have been registered under JI - seventeen in France and three in Spain, with none of them being in relation to ocean ecosystems. To learn more about this, one of our previous post deals with carbon offsetting and the functioning of carbon certification processes.

Whilst blue carbon projects have become increasingly popular alongside other NbS, its use in a European context remains underdeveloped. All blue carbon projects currently registered in both the compliance and voluntary carbon markets are mangrove projects in tropical countries.

There are currently six carbon accounting and monitoring approved methodologies under the Clean Development Mechanism (CDM), the Gold Standard (GS) and the Voluntary Carbon Standard (VCS) that can be applied to blue carbon projects. While it is recommended for projects to use an existing methodology, it is possible to amend or develop a new methodology if required. Of these six, only two VCS methodologies would be suitable to projects based in Europe – VM0024 Methodology for Coastal Wetland Creation and VM00033 for Tidal Wetland and Seagrass Restoration. The CDM only allows for projects in developing countries; and the GS methodology is currently only applicable to mangroves.

There are a number of potential methodologies under development and the GS is looking to expand their methodologies to include other blue carbon ecosystems including seagrass and algae. French certification standard Label bas-Carbone has also begun research into establishing the first methodology specifically for certifying conservation and preservation measures for seagrass beds, with the intention of their first project being undertaken in the Calanques National Park in France[8].

If you already have a blue carbon project in mind, there are five stages to work through to understand whether your project could be eligible for carbon finance:

1. Confirm your project’s additionality and evaluation the ownership conditions of the carbon offsets

2. Identify the relevant carbon accounting methodology and certification standard

3. Quantify the carbon offsets that could be generated

4. Assess the financial viability and timeline of your project

5. Evaluate the potential barriers and non-financial motivations

Each of these steps are discussed in depth and directly in relation to blue carbon in the IUCN manual. In addition, HAMERKOP has also produced a Carbon Finance Handbook which provides a comprehensive, step-by-step guide to find out whether a project can be eligible to carbon finance.

If you are interested in learning more or discussing your options, our team of experts is here to help and have extensive experience in NbS and blue carbon projects. We can help you assess the potential of your project to benefit from carbon finance, help you structure your project or support you to better understand the opportunities related to this field.

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[1] Source: The blue carbon initiative, Coastal Blue Carbon methods for assessing carbon stocks and emission factors in mangroves, tidal salt marshes and seagrass meadows.

[2] Source: https://www.se.com/fr/fr/about-us/newsroom/news/press-releases/label-bas-carbone--ecoact-interxion-france-schneider-electric-france-et-le-parc-national-des-calanques-lancent-le-projet-de-m%C3%A9thodologie-pour-la-pr%C3%A9servation-des-herbiers-marins-prom%C3%A9th%C3%A9e--med-6050b9e9b120ca0dec63cc2b

[3] Source: https://www.iucn.org/resources/issues-briefs/peatlands-and-climate-change

[4] Source: https://www.theguardian.com/environment/2020/sep/09/how-artificial-salt-marshes-can-help-in-the-fight-against-rising-seas-aoe

[5] Source: Substantial blue carbon in overlooked Australian Kelp forests (Filbee-Dexter, K., Wernberg, T., 2020)

[6] Souce: https://ec.europa.eu/clima/policies/strategies/2050_en

[7] Source: https://www.carbonkapture.org/blog/r87trpd128isrubc0vromx9oebnfwz

[8] Source: https://www.se.com/fr/fr/about-us/newsroom/news/press-releases/label-bas-carbone--ecoact-interxion-france-schneider-electric-france-et-le-parc-national-des-calanques-lancent-le-projet-de-m%C3%A9thodologie-pour-la-pr%C3%A9servation-des-herbiers-marins-prom%C3%A9th%C3%A9e--med-6050b9e9b120ca0dec63cc2b

The concepts around nature-based solutions (NbS) can seem intricate and sometimes even daunting for non-experts. This is no reason to turn our back on them, considering they will provide a fair proportion of the cost-effective mitigation required by 2030 to limit global warming to below 2°C. Economic development has driven the significant destruction of nature and biodiversity loss worldwide. The subsequent excessive greenhouse gas emissions that occur with this economic development contributes to significant changes in the climate and contributes to more extreme weather, further compounding this destruction[1]. To break out of this vicious circle, scientists and policymakers are seriously encouraging land restoration at a large scale[2].

NbS, also called natural climate solutions, are increasingly considered a credible mitigation tool and when used for offsetting may also be profitable. As climate change awareness grows, an increasing number of companies are making carbon neutral pledges and are willing to support NbS, whether by sponsoring tree planting, sustainable agriculture practices or avoiding deforestation efforts.

In this article, we review the technical foundations of NbS, present an overview of the global situation and map out the actors currently at play in the sector.

Scientific basis and techniques

As defined by the International Union for Conservation of Nature (IUCN), NbS are “actions to protect, sustainably manage and restore natural or modified ecosystems, which address societal challenges […] effectively and adaptively, while simultaneously providing human well-being and biodiversity benefits”[3]. IUCN has also developed a list of 8 principles intending to set up a common framework for NbS[4]. Under this umbrella term, NbS gather a broad range of actions and activities resulting in improving nature conservation, contributing to sustainable land management, restoring natural ecosystem resilience, and helping mitigate climate change.

Whilst restoration and conservation techniques have been known and used for decades, the concept has gained more traction over the past five years. In practice, NbS are applicable to different types of ecosystems as exemplified below.

Forests and tree related NbS

About 30% of the world's land area are covered by forests[5]. They play a crucial role in acting as a carbon sink, however man-made deforestation contributes to 20% of greenhouse gas emissions. NbS related to forests include:

• Reforestation, the act of replanting an area with trees after it was cleared by human activities or a natural disaster such as a storm or wildfire, and afforestation, a similar process applied to lands previously unforested such as grazing lands.

• Enhancing forests state of conservation through improving logging practices, encouraging sustainable forest management and avoiding rainforest degradation.

Beyond forests, under certain conditions, tree planting schemes might be considered as a NbS, wherever it takes place (e.g. in cities), given its potential positive effects such as moderating the impact of high temperatures, abating pollution, enhancing biodiversity, reducing the risks of landslides and floods, filtering water and removing carbon from the atmosphere.

Farmlands

According to the FAO, farmlands cover around 40% of the world's land area. Most of this is permanent pastures and arable land. NbS related to agriculture include:

• Sustainable farming, production practices and innovative planning of agricultural landscapes that increase multi-functionality and ecosystem services. Organic farming is a form of sustainable farming of which principles are defined by standards.

• Conservation agriculture is a sustainable and resource saving agriculture production system where farming and soil management techniques are implemented to avoid soil disturbance, preserve land, biodiversity, and the natural resources[6]. A well-known example is the reduction of ploughing.

• Agroforestry, a land-use system where the spatial arrangement enables trees and shrubs to grow among or around crops or pastures. This allows for both ecological and economic interactions and benefits.

Wetlands

Wetlands are areas where water permanently or seasonally covers the soil. Inland and coastal wetlands are highly efficient carbon sinks and support a specific biological diversity. Tidal marshes, swamps or peatlands are all forms of wetlands. NbS related to wetlands include:

• Wetlands restoration, protection, and management which can provide a multitude of services of great social, economic and environmental value[7].

Coastal ecosystems

Coastal ecosystems provide habitat for an important variety of marine species as well as resources for humans. NbS related to coasts include:

• Replanting and protecting mangrove belts, which mitigate the impact of waves and wind on coastal settlements, control coastal erosion and sequester CO2. Mangrove belts also provide nurseries for marine life which may results in increases in local populations’ livelihood.

• Reef belts restoring, which enhances the resilience to sea level rise and coastal flooding and provide valuable environmental and economic services.

• Conserving seagrass meadows, a group of flowering plants adapted to live in salt water, and one of the most threatened natural ecosystems which contains a significant amount of carbon stored underneath.

The diagram below[8] shows where some NbS can be implemented. 

The implementation and monitoring of the impacts of NbS can be complex[9] as the approaches and techniques used must be specific to the type of soil, location, climate, ecosystems, biodiversity and human needs.

Beyond the urgency around the loss of natural habitat, of biodiversity and climate change, the emerging of new approaches and financing tools is fuelling interest for NbS. Investing in NbS can be considered an “umbrella approach” in terms of impacts. It often contributes simultaneously to the storage of carbon, preservation and protection of biodiversity and often generate social and economic benefits for local communities. Conserving 30% of the land and water on Earth could create up to 650,000 jobs in nature conservation and NbS can address many of the Sustainable Development Goals simultaneously[10].

Facing the challenges posed by climate change, NbS is expected to help mitigation and adaptation efforts globally. As a result, 66% of Paris Agreement signatories mentioned NbS in the first iteration of their Nationally Determined Contribution as illustrated in the map below[11] (countries in green).

State of play and financial instruments

The financing of NbS is based on the recognition of the services natural ecosystems provide, particularly in terms of risk reduction; biodiversity and resources protection; carbon capture and storage. In this context, the different financial instruments and vehicles presented below can be mobilised.

Payments for ecosystem services (PES) is a well-established market-based concept considered to be an efficient policy tool for coordinating socioeconomic development and environmental protection and has the ability of encouraging the development of NbS. The payments provide incentives for people managing and using natural resources, typically forest owners or farmers, to manage their resources sustainably and implement good practices, generating monitored and valuable benefits.

Carbon finance is a PES system based on the monetisation of greenhouse gas emissions reduction or avoidance. Many carbon finance projects are registered to third-party certification schemes that issue carbon credits for each tonne of CO2e avoided or reduced, such as the Gold Standard or the Verified Carbon Standard. Funding NbS with the sale of carbon credits is well suited for various reasons, as it does not require a sophisticated knowledge of financial markets; it provides the sponsor with a product or a service that has a tangible value; and it is an indicator of performance by itself. However, other instruments can be used to finance activities to be implemented, such as:

Grants

Grants have been the most popular financial instrument for NbS activities until now. Public subsidies, charity funds or even individuals’ donations often take the form of grants. Funding is generally channelled through intermediaries such as public funds or NGOs to local organisations implementing projects.

Example: Conservation International is one of the largest NGOs dedicated to the protection and restoration of natural ecosystems, protecting nature to halt climate change, protecting oceans and promoting sustainable lands and water. Most of the financial support is received and used in the form of grants for project implementation.

Debts and equity

NbS may have reliable business models which generate revenues and help to set projects and ventures on an independent and financially sustainable path. While lending funds results in the issuance of debt, equity is capital from investors in return for share ownership. As the measurement of risk and return on investment is not always obvious in the NbS field, this type of financing is still in its infancy and tend to be directed towards companies rather than projects.

Example: The Dutch Fund for Climate and Development is endowed with €160 million and invest in agroforestry, sustainable land use and climate resilience food production. Part of this funding is provided as development grant to develop viable business cases and the rest in the form of debts or equity to finance the businesses originated and set up.

Even though climate finance was in excess of 500 billion USD per year in 2017 for the first time, only 1% of this amount was directed to NbS[12]. Despite their significant potential, NbS remain complex for investors and present numerous challenges for policymakers to provide frameworks for. Whilst this is currently only a small proportion of all climate finance, there are a number of project holders, developers and key investors already active in this industry, which are highlighted below.

Project holders and developers

To undertake NbS requires land and resources. Therefore, one or several organisations are required to implement and finance these. NbS activities involve a broad variety of stakeholders which interact with one another: landowners, local communities, non-governmental organisations and private companies. In developing countries, authorities may also get involved, since issues around land tenure and ownership can result in conflicts[13] when implementing NbS and sharing the benefits of activities.

Landowners

Be they individuals (private landowners), private companies or public institutions (states, municipalities), landowners have a close relationship with nature. NbS often implies that they change their current land management practices. Certain practices such as agroforestry or natural forest regeneration could lead to significant additional costs with little benefits over the first years. Payments for ecosystem services could then be leveraged to rewards landowners and trigger additional investment.

Examples:

• In France, individual forest landowners[14] gathered in an association have benefited from voluntary carbon offsetting funding (through the national Label Bas Carbone standard) to rebuild forests destroyed by a storm.

• In Cambodia, Wildlife Alliance has enabled the Southern Cardamom forest conservation and agricultural project to directly supports the livelihoods of 21 villages and benefits to the municipalities owning the forest lands[15].

• The brewery company Brewdog[16], has purchased 2,000 acres of land in Scotland and has pledged to plant over one million trees over the next few years to offset their scope 3 carbon emissions with the Woodland Carbon Code accreditation.

Local communities

Whether activities involve avoiding deforestation, conserving coastal ecosystem or changing agricultural practices, NbS have an impact on the communities living both inside and outside project boundaries. Usually gathered, mobilised, and educated by local associations, villagers and forest dwellers may be impacted by activities, on land they may have customary rights on. Local communities often take part in activities with different levels of engagement. Not only do they participate in the work (e.g. tree planting), but they must be the first to benefit from the social and economic benefits of activities implemented, to ensure a high level of acceptability.

Example: in Kenya, the Mikoko Pamoja project[17], world's first blue carbon project, is a mangrove conservation and restoration project led by a local community benefiting from nursery habitat for fish, improved biodiversity, beekeeping and ecotourism. The project is certified to the Plan Vivo carbon standard and coordinated by the Association for Coastal Ecosystem Services.

Source: Hamerkop supports a REDD project in Sudan involving local communities (photo: Hamerkop & Etifor).

Global non-governmental organisations

Non-for-profit and NGOs have been operating globally in reforestation, land restoration and conservation for many years, long before the concept of NbS emerged. They have been doing so because agriculture and natural ecosystems hold the key to poverty alleviation, reducing the impacts of disasters (e.g. storms, droughts) and preserving biodiversity. Most of them collect donations from individuals or companies in Europe and North America and fund projects in developing countries, usually without resorting to market-based mechanisms but in collaboration with local NGOs, communities or institutions.

Example: Eden Reforestation Projects, a US-based NGO planted more than 480 million trees in many developing countries. They are supported by philanthropic donations, including from organisations willing to balance out their own emissions. Their main motivation is the provision of fair wage employment to impoverished villagers as agents of global forest restoration.

Private companies

Private companies have often been on the opposing side to NbS, having practices leading to deforestation, land degradation, use of chemical fertilisers for agriculture or destruction of ecosystem for building resorts and housing. The emergence of NbS and the growth of public awareness around climate change have brought private companies a reason and tools to tackle environmental degradation and is leading to the development of new opportunities. New needs are emerging, and a growing number of companies are now offering financial and technical services related to NbS or offering to support NbS financially.

Examples:

• CHOOOSE, a Norwegian company help individuals and organisations address their carbon footprint by removing barriers to support climate change mitigation projects, including reforestation and deforestation avoidance, around the globe through a range of API and IT tools.

• Wildlife Works, a forest conservation project developer conceives, structures, implements and facilitates financing for a range of projects located in hotspots of deforestation in Africa, Asia and South America.

• Nori, a carbon removals marketplace, supports farmers in North America to changes their practices to enhance the carbon stored in farmland, through the creation of carbon assets that can be purchased by companies and individuals willing to support climate action.

Funders and investors

Addressing the climate emergency requires collective action and mobilization of significant funding. Both the public and the private sectors have a role to play.

Public funds

As NbS is a relatively new concept, the use of public funds is often required to initiate their implementation, reduce risks and leverage additional funding from the private sector. While advanced economies have pledged a yearly $100 million in climate finance for developing nations, France has recently announced that 30% of its contribution would be going to NbS. The funding is usually directed to large multilateral specialised funds, technical facilities, distributed as bilateral development aid or used as guarantees for the private sector.

Example: the Green Climate Fund is the largest financing mechanism of the Paris Agreement. It is offering grants, loans, equity, guarantees and result-based payments and fund both the private and the public sector. It has been actively financing NbS, notably forests and land use as well as ecosystems and ecosystem services.

Private funds

In their yearly Emissions Gap Report, UN Environment has kept highlighting the gap between the 2°C temperature target and the pledges made by governments. It is believed that this gap could be financed by the private sector voluntarily. The increasing consumers awareness is pushing some companies to finance this gap. Most of them do it by planting trees or funding more complex ecosystem restoration through carbon finance.

Examples:

• Mirova Natural Capital is pioneering the asset management NbS space with US$400 million currently invested on ecosystem conservation and sustainable agroforestry. Mirova aims to reach a billion euros by 2022. Financial returns are generated through the production and sale of commodities (e.g. certified cocoa, FSC wood, etc.) and carbon emission reductions.

• Total launched Total Nature Based Solutions in 2019, a new unit endowed with a budget of $US100 million, to fund and develop projects dedicated to natural carbon sinks (planting activities, sustainable forest management, agroforestry, agriculture and the conservation of remarkable species), which intends to generate biodiversity benefits.

Challenges to address

While the interest and knowledge of the global community around NbS to address climate change is growing, activities and funding sources remain highly fragmented. Moreover, NbS present a challenging investment profile for many, with high risks and uncertain returns. Insufficient collaboration between scientists, corporates and policymakers also hampers the expansion of NbS.

Carbon finance presents a fantastic financing tool for NbS, even though there remains uncertainty around carbon sequestration in natural ecosystems, and the impact of climate change on the carbon stock changes, that requires improving our scientific understanding of NbS impacts. The Oxford Offsetting Principles[18] notably considers NbS as a credible way for companies to offset their emissions.

Finally, progress remains to be done in the definition of operational schemes that could guide applications of NbS effectively on the ground. Several initiatives are working in this direction. For instance, Nature4Climate, an alliance of nature conservation associations, multilateral and business organisations founded in 2017 to promote action and investment in NbS. International and national agreements and frameworks are being shaped and propositions of standards are being released, this is notably the case of the IUCN Global Standard for Nature-based Solutions[19].

Conclusion

Even though NbS rely on engineering techniques and land management principles that have been known for a long time, the concept as it is known in the context of climate change is relatively recent and its scientific definition and financing mechanisms are still being clarified and improved. To uptake this challenge, a wide range of stakeholders, from both the public and the private sector, are committing to work together in order to leverage the benefits of NbS to address the climate change.

HAMERKOP works with private landowners to determine the potential for them to implement NbS funded by carbon finance. Experts at HAMERKOP have been working on NbS for more than 15 years and can help you assess the potential of your NbS activities to benefit from carbon finance, help you structure NbS or support companies to make sense of this new landscape.

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[1] Source: Malhi Y, Franklin J, Seddon N, Solan M, Turner MG, Field CB, Knowlton N.2020 Climate change and ecosystems: threats, opportunities and solutions. Phil. Trans. R. Soc.B375: April 2019

[2] Source: The UN Environment Programme and the nine tracks of the Climate Action Summit. Link: https://www.unenvironment.org/unga/our-position/unep-and-nine-tracks-climate-action-summit

[3] Source: Cohen-Shacham E., Walters, G., Janzen, C. and Maginnis, S. (eds.) (2016). Nature-based Solutions to address global societal challenges. Gland, Switzerland: IUCN. xiii + 97pp.

[4] Source: Cohen-Shacham E et al., Core principles for successfully implementing and upscaling nature-based Solutions, Environmental Science & Policy Volume 98, August 2019, Pages 20-29

[5] Under the UN Food and Agriculture Organisation (FAO) definition

[6] as defined by the United Kingdom’s Conservation Agriculture Association

[7] Source: Thorslund J. et al., Wetlands as large-scale nature-based solutions: Status and challenges for research, engineering and management, Ecological Engineering, Volume 108, Part B, November 2017, Pages 489-497

[8] Source: Graphic: Natasha de Sena, Wageningen University & Research

[9] Source: Core principles for successfully implementing and upscaling Nature-based Solutions (Cohen-Shachamab et al., 2019)

[10] Source: Valuing nature conservation, a methodology to evaluate where safeguarding natural capital could have the biggest impact on climate, economies and health. Link: https://www.mckinsey.com/business-functions/sustainability/our-insights/valuing-nature-conservation

[11] Source: Nature-based Solutions Policy Platform, University of Oxford. Link: https://www.nbspolicyplatform.org/adaptation-planning/adaptation-action-types/nature-based-actions/

[12] Source: CPI, 2019. Global Landscape of Climate Finance 2019 [Barbara Buchner, Alex Clark, Angela Falconer, Rob Macquarie, Chavi Meattle, Rowena Tolentino, Cooper Wetherbee]. Climate Policy Initiative, London.

[13] Source: Secure indigenous peoples and community land rights as a nature-based solution to climate change: https://wedocs.unep.org/bitstream/handle/20.500.11822/28942/SecureIP.pdf?sequence=1&isAllowed=y

[14] Source: Le carbone au CNPF, un savoir-faire au service des forestiers et des entreprises responsables. Link: https://www.foretpriveefrancaise.com/data/fe245_7_15.pdf

[15] Source: The Southern Cardamom REDD+ project. Link: https://registry.verra.org/app/projectDetail/VCS/1748

[16] Source: Brewdowg. Link: https://www.brewdog.com/uk/tomorrow

[17] Source: Mikoko Pamoja project. Link: https://www.planvivo.org/mikoko-pamoja

[18] Source: Principles for credible carbon offsetting. Link: https://www.ox.ac.uk/news/2020-09-29-oxford-launches-new-principles-credible-carbon-offsetting

[19] Source: IUCN Global Standard for Nature-based Solutions: first edition. Link: https://portals.iucn.org/library/node/49070

Our environment is changing, and this will have far-reaching consequences. Wherever we live, work or travel, we should all want to participate in the effort to combat global warming. At HAMERKOP, we believe that carbon offsetting and carbon finance (a subset of climate finance) are powerful tools which companies and individuals should understand and leverage to mitigate climate change.

Carbon (used for GHG emissions) offsetting allows for the balancing out of emissions in one place through a project happening elsewhere in the world. The idea of offsetting greenhouse gas (GHG) emissions emerged in the late 1980s and is based on the scientific evidence that emitting, absorbing or reducing emissions has the same effect, wherever it occurs in the world. In other words, since climate change is a global phenomenon, the effectiveness of actions to avoid GHGs entering the atmosphere does not depend on these actions’ locations.

Carbon offsetting offers organisations or individuals the opportunity to finance GHG emission reductions to an amount corresponding to their own emissions. When labelled or certified, these emission reductions can be called emission reduction units; certified emission reductions; voluntary carbon units; verified emission reductions; and many other names, depending on the organisation that issues them.

In this article, we review the origins of carbon finance; the difference between compliance and voluntary carbon markets; how organisations can balance out their own emissions; how carbon credits are created; and a range of other key concepts necessary to understand the contributions these make to current efforts in reducing global GHG emission levels.

The birth of carbon credits or carbon offsets

Carbon financing through projects originated from the Kyoto Protocol (1997), where a market-based mechanism (also called cap-and-trade) and two project-based mechanisms were developed: the Clean Development Mechanism (CDM) for developing countries and the Joint Implementation (JI), for industrialised countries. These project-based mechanisms work to subsidise activities reducing GHG emissions, providing an additional or complementary source of income for some projects and the only source of income for others. These so-called flexibility mechanisms were operationalized by the Marrakech Accords (2001). The CDM is due to expire at the end of 2020.

Until the end of 2020, the CDM had two key objectives: to reduce the costs of emission reductions for industrialised countries (Annex I countries of the Protocol) by enabling them to outsource their emission reductions to projects in countries where it is cheaper to do so, and enable developing countries (non-Annex I countries) to benefit from funding for cleaner and often more expensive technologies. Alternatively, the main objective of the JI was to offer a financial mechanism for industrialised countries to tackle emission reductions domestically, notably in sectors where emissions are more challenging to address (i.e. those not covered by a cap-and-trade carbon market).

Both project mechanisms of carbon finance (CDM and JI) have been structured in such a way to provide result-based incentives. It is only when projects have demonstrated a GHG emission reduction that they obtain carbon credits (interchangeably called carbon offsets) that can be sold.

In 2015, the Paris Agreement was signed. Article 6 of this international treaty includes provisions for the next generation of carbon market instruments, for which rules remain to be fully developed, even though the treaty enters into force in January 2021.

Source: UNEP

Compliance versus voluntary carbon market

Until the end of 2020, carbon credits issued for projects registered under the CDM are eligible to be used by heavily polluting industrial sites to fulfil a portion of their national emission reduction commitments as part of the Kyoto Protocol. These carbon credits are eligible to be used and exchanged under a so-called compliance carbon market, a market structured for regulatory purposes. The most notable example of this kind of market is the European Union Emissions Trading Scheme or EU-ETS (e.g. comprising 11,000 heavy energy-using installations). Under these markets the type of carbon credits that can be used are usually very restricted. As per the map below, many countries around the globe have implemented various national or subnational carbon taxes or carbon markets.

Source: State and Trends of the Carbon Pricing 2019 - World Bank

In parallel, and from 2006 onwards, a voluntary carbon market has developed. This voluntary market generally involves entities that buy carbon credits to support projects. These entities are generally in the service, consumer goods and retail industry but can also be individuals, NGOs or international organisations.

Unlike the compliance state-organised markets, the voluntary carbon market is not regulated by a central authority. Thus, there are no constraining rules regarding the type of carbon credits that are eligible. As a result, in addition to using carbon credits from the CDM, organisations which are active in the voluntary carbon markets have been increasingly using carbon credits issued by independent certification standards that started emerging around 2006 (well before, for some of them). The most heavily used at present are the Gold Standard for the Global Goals (from the Gold Standard Foundation) and the Verified Carbon Standard or VCS (from Verra). Today, most organisations who voluntarily offset their carbon emissions do it with carbon credits from these independent certification standards or so-called voluntary carbon standards.

How do organisations offset their emissions voluntarily?

Currently, offsetting generally consists of an organisation purchasing an amount of carbon credits that corresponds to the quantity of GHG they wish to offset and whose type enter either in scope 1, scope 2 and/or scope 3:

• Scope 1 emissions are the direct GHG emissions emitted from sources owned or controlled by the organisation (e.g. the on-site production of electricity, heat or steam; physical and chemical processes; transportation of goods and people).

• Scope 2 emissions are the indirect GHG emissions emitted from purchased electricity or steam consumed by the organisation (e.g. electricity from the national network).

• Scope 3 emissions are the indirect GHG emissions emitted by the value chain of the reporting organisation (e.g. business travel, employee commutes, production of purchased materials, investments, leased assets and franchises, and waste disposal).

Source: GHG Protocol

The money these organisations pay to purchase carbon credits contributes directly or indirectly to the funding of a specific carbon emissions reduction project. Project developers receiving these payments then implement a range of activities, from the installation of renewable energy infrastructure like wind turbines or biogas recovery from landfills to planting trees that remove and store carbon from the atmosphere.

For 2019, the transactional value of this market was estimated to be 320 million US$, representing 104 million carbon offsets transacted[1].

Which emission reductions can be certified and monetised as carbon credits?

The issuance of carbon credits is dependent on the unique processes, rules and procedures developed by each carbon certification standards. Currently, all commonly used carbon certification standards have based their core rules on those of the CDM. As a result, projects have to fulfil the following basic requirements of offering emission reductions which are real, measurable, additional, permanent, verifiable and unique. What these conditions entail is briefly defined below:

• Be real: the emission reductions must have actually happened. There must be an emission reduction underlying each carbon offsets which corresponds to the outcome of the implemented project.

• Be additional: the revenue from the sale of carbon credits is a determining factor in the implementation of the project. The survival of the project depends, to some extent, on the project developer’s ability to sell these carbon credits. In other words, this implies that the project could not have emerged had it not been financially supported by an offset scheme. This concept is known as 'additionality'.

• Be measurable and verifiable: emission reductions can be calculated with scientific rigour and be monitored and audited. To do this, there must be calculation and monitoring methodologies that are appropriate to the context and technology concerned.

• Be permanent: the emissions which have been reduced or avoided must last over time and must not be released back into the atmosphere by the project in question at a later date.

• Be unique: each carbon credit must correspond to a single tonne CO2e. This also means that procedures to avoid double-counting must be put in place.

Additionality is a key concept of carbon finance mechanisms. Whilst some conditions are specific to each standard, the determination of a project's additionality generally focuses on these key questions:

• Is the project financially viable and likely to attract financing without selling carbon credits? The answer must be no for a project to be additional.

• Does the proposed project carry risks that make it difficult to be financed or implemented? The answer must be yes for a project to be additional.

• Does the proposed project reduce/avoid GHG emissions beyond regulatory requirements? Is the proposed project already a common practice where it takes place? The answer must be yes to both of these for a project to be additional.

• Does the project face significant organisational, cultural or social barriers that cannot be overcome without selling carbon credits? The answer must be yes for a project to be additional.

What are these carbon certification standards?

More than 15 voluntary carbon certification standards have emerged since the mid-2000s. Some of those which are still operating and recognised widely by the market are the Gold Standard for the Global Goals (GS4GG); the Verified Carbon Standard, Plan Vivo, the American Carbon Registry, the Climate Action Reserve, the Woodland Carbon Code and the Label Bas Carbone.

As part of the carbon certification process, a project must be eligible for both: (i) a set of conditions that are specific to the project specificities; and (ii) the rules and principles of the chosen certification standard. Each standard has its own requirements and eligibility criteria. Each standard notably has eligibility requirements based on the project geographical location, scale, or technology.

Each standard has a slightly different focus. Certain standards are limited to particular project types (e.g. forestry for the Woodland Carbon Code) while some others exclude certain projects (e.g. Plan Vivo excludes non community-based projects) or exclude technologies based on their features to focus on projects maximising social benefits (e.g. large scale hydropower plants are ineligible for the GS4GG).

Beyond emission reductions, voluntary carbon standards usually demand from the candidate project to achieve a range of co-benefits in the host country. These co-benefits usually imply contributions to development objectives in areas that matter: social (gender imbalances, discriminations against women and/or ethnic minorities); economic (poverty, access to jobs, and other economic opportunities); health (reduction in exposure to toxic air, chemicals); environmental (protection of old growth forests, of biodiversity, reduction in pollution levels, increase in access to clean energy); or humanitarian (improvement of refugees’ livelihood standards). These co-benefits are often in line with at least one or more of the UN Sustainable Development Goals.

Finally, the choice of certification standard is not only a choice from a project perspective, but it also guides the market on which the carbon credits will be sold and determines the prices at which they will be sold.

Carbon finance as an efficient financing mechanism

Providing financial support to projects through carbon credits, or carbon offsetting, is considered a critical part of efforts to tackle the climate crisis. Carbon finance provides concrete solutions, which are both economic and environmentally efficient, whilst also providing the opportunity to generate development co-benefits.

Therefore, carbon finance:

• Is open to all actors and entities.

• Enables the diffusion of climate change know-how and experience among corporate and institutional actors.

• Offers an international source of revenues for projects, without the complexities of capital markets.

• Allows equity to be decoupled from efficiency, and thus enable burden-sharing, whereby rich countries facilitate mitigation efforts in less developed countries.

In addition to the above, carbon finance is a result-based mechanism. This means that instead of paying for activities that may trigger results (generally positive outcomes), as it is the case for development aid, through the voluntary carbon market, organisations willing to balance out their own emissions are only paying for evidence-based results: emissions that have already been reduced or avoided. This means organisations which offset their emissions with carbon credits only direct financing towards projects that work and deliver positive outcomes, and projects find themselves incentivised to perform. Efficiency then becomes a key feature of carbon offset projects.

Certified vs uncertified projects

Today, almost all projects selling carbon credits are certified through a recognised carbon certification standard which issue labelled and recognised carbon credits. This was not so much the case 10 years ago. Actors in this environment built on past failures and made a substantial effort to build credibility and legitimacy in their activities.

While carbon offsetting is often criticised, many of these criticisms are ill-formulated, outdated or relates to how corporates use or communicate about it rather than to the suitability of the financing mechanism. Unlike bureaucratic certification organisations such as the CDM which has unfortunately struggled to keep up in this fast-paced environment, the voluntary carbon standards, initially set-up to address some of the gaps of the CDM, have been driving forces of innovation. They have strengthened their rules to ensure the environmental and social integrity of their certified projects. For instance, the risk of double-counting is now almost non-existent. This is also the case when it comes to ensuring the reality of emissions reduction (i.e. the risk of carbon credits being sold by a project that has not reduced emissions). In the near future, we expect monitoring procedures to require increasingly more accuracy, international registries holding carbon credits to be more transparent and social and environmental safeguards to be reinforced.

Carbon offsetting does however entail some risks. Whether you support a certified or a non-certified project, any project can go wrong. This can be even more true that it often exists an important asymmetry of information between the entity running the project and the entity financing it. On the other hand, when carbon offsetting is used to balance out the lack of action from a company not reducing its own emissions, this can lead to reputational issues for the financing organisation.

Carbon reduction, avoidance, sequestration and removals

Credit: Photo by Bas Emmen on Unsplash

When referring to emission reductions monetised as carbon credits, the term reduction is not always necessarily accurate, as it refers to a range of situations or actions:

• Avoidance: most carbon projects reduce emissions in comparison to a theoretical situation that would have occurred in the absence of the project. For instance, if a country intends on installing a coal-fired power plant to expand national electricity production as it is the cheapest or most convenient way to do so, carbon credits can make the installation of an alternative hydropower plant as financially attractive by enabling the avoidance of those emissions that would have occurred otherwise. In this case, a carbon credit represents a tonne of CO2e avoided and not reduced.

• Removals can be classified under two types:

1. Natural removal: most projects labelled as nature-based solutions remove carbon from the atmosphere. For instance, as a tree grows, carbon is being biologically sequestered in its stems and roots. In this case, a carbon credit represents a tonne of CO2e sequestered, removed or reduced.

2. Engineered removal: while such projects have not yet developed into certified carbon projects, this is a growing practice. Technology is being developed which has the capability to capture carbon directly from the atmosphere (also called direct air capture) or from flue gas (carbon capture and storage) and store it in geological formations. While the efficiency of such technologies is still being questioned and these are at the moment under-deployed, they could be considered as reductions. In this case, a carbon credit would represent a tonne of CO2e removed or reduced.

A company that offsets its emissions with carbon credits avoids making things worse by being accountable but does not prevent emissions to keep stacking up into the atmosphere in absolute levels. Offsetting only makes sense when integrated within ambitious emission reduction plans.

Conclusion

In this article, we hope to have offered you a glimpse of what carbon offsetting is, how it works, which emission reduction can be monetised as carbon credits, how carbon certification standards work and why it is considered as an efficient financing mechanism.

HAMERKOP’s experts have more than 12 years of experience helping companies, NGOs, and governments navigate the complexity of voluntary certification processes, from selecting the appropriate standard, to the successful sale of their first offset units and further, through the monitoring of their projects, thus ensuring their long-term economic, social and environmental viability.

If you are looking to engage with the voluntary carbon market, whether you are a company considering offsetting your emissions and looking to understand what project or certification standard to support and how to procure and negotiate carbon credits; or an organisation that have an upcoming project that reduces emissions potentially eligible to sell carbon credits, we can help, so reach out to us. We do not sell carbon credits and so we can advise independently as well as connect you with the right counterparts.

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[1] Voluntary Carbon and the Post-Pandemic Recovery (Ecosystem Marketplace, 2020). Link: https://www.ecosystemmarketplace.com/articles/demand-for-voluntary-carbon-offsets-holds-strong-as-corporates-stick-with-climate-commitments/

Climate finance has become an increasingly discussed topic and is set to become one of the largest sources of funding in the coming decades. A broad range of entities will be offering climate finance from private companies to public institutions and financial organisations, it is only a matter of time. Given the challenges that lie ahead, Individuals and the private sector will benefit from it. However, this is still a niche topic: the #climatefinance hashtag only has 5,000 followers on a professional network like #LinkedIn. So, what is climate finance? What is its purpose? How does it work? Where is it coming from? Where does it go to?

Climate finance is generally presented as an expert topic with fancy concepts, but it is in fact very simple. Let’s begin with a simple definition. Climate finance is the use of financing instruments specifically aimed at reaching climate change mitigation and adaptation goals. In other words, climate finance consists in any financial efforts to support the reduction and avoidance of further greenhouse gas emissions getting into the atmosphere but also helping people and countries to prepare and adapt to different climate. This concept has been around mostly since 1997 with the adoption of the Kyoto Protocol.

Where is climate finance coming from?

While there is no historian to tell us when the term climate finance was first coined, it is generally accepted that the use of the term ‘climate finance’ began during the Earth Summit of 1992 which ended with the creation of the United Nations Framework Convention on Climate Change (UNFCCC) and later led to the drafting and adoption of the Kyoto Protocol in 1997. The word finance is only mentioned once in the UNFCCC and once in the Kyoto Protocol[1] and the then financial mechanisms that could be considered early forms of climate financing were not call so at the time. It is only with the Marrakesh Accords of 2001 that the word finance, mostly used in relation to adaptation, was finally mentioned[2].

Surprisingly, it is only as late as 2014 that the UNFCCC adopted an official definition for climate finance: “climate finance aims at reducing emissions, and enhancing sinks of greenhouse gases and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts”. In 2015, 4 mentions of climate finance fought their way through into the Paris Agreement[3].

Where does climate finance fit?

For the general public, climate finance can be considered as a fairly vague or broad concept. In order to further investigate what climate finance refers to, it is useful to first describe where it fits in the broader financing landscape. In order to do so I have sought to draw its family tree below. If it was a living thing, the climate Finance family’s genealogy could look like this.

As a caveat, this diagram does not represent all the extended family but the most notable members. It probably also does not fully capture the linkages between all its members. As you can see there is no space for green finance, since this can be perceived very generic, undefined, overused and tainted that it does not make too much sense to use it anywhere. All economic activities have an environmental impact, since there always is an ecological footprint behind the transformation of materials for the purpose of producing a good or a service.

Over the past 2 years, the European Union’s Technical Expert Group (TEG) on Sustainable Finance has gone through a complex and long process of defining what sustainable finance is, in order to facilitate the channelling of funding to it. The outcome was a sustainable finance taxonomy.

In short, financing climate mitigation in the EU context would correspond to fund activities that:

• Are low carbon (even though this is usually poorly defined)

• Contribute to a transition to a net-zero emissions economy but are not currently close to a net-zero carbon emissions level

• Enable low-carbon performance by others or enable substantial emissions reductions through avoided emissions

The TEG has defined activities contributing to climate change adaptation as activities that:

• Include or provide adaptation solutions that contribute substantially to preventing or reducing the risk of adverse impact or substantially reduce the adverse impact of the current and expected future climate on other people, nature or assets

The TEG even came up with a technical annex[4] listing all the activities contributing to mitigation or adaptation as well as a list of activities by sector.

Mitigation and adaption do not belong to a specific set of activities or sectors. It applies to all sectors and reaching the objectives of the Paris Agreement will require a substantial shift of our economy and of our lifestyles, and this partly explains the need for visionary politicians and leaders who are committed to implementing these objectives.

Why do we need climate finance?

In 2017, the OECD estimated that, globally, a shiny EUR 6.3 trillion a year would be required to meet the Paris Agreement goals by 2030[5]. To give an idea, this is slightly less than the monetary value of all of Germany’s global economic activities in 2019 and more than France’s or the UK’s for the same year.

It is obvious that the already overstretched public resources will not be sufficient to address this challenge. Whether you consider capitalism as an obstacle to achieve the Paris Agreement’s objectives or not, institutional and private capital will be necessary to get there.

Money has always been the sinews of war. The war the world finally seems ready to start fighting, is the one against a changing climate, in other words, against the unpredictable consequences of elevated concentrations of greenhouse gas in the atmosphere. It also a war that is meant to enable humanity to adapt to a new environment. An environment that may change to an extent that is still difficult to imagine.

Except maybe for conservationists, in our human-centred conception of the world, climate change has never been so much about the environment than about the human impacts these changes may trigger in that environment.

Even a 2°C hotter climate would trigger changes such as more intense extreme weather events (droughts, flooding, storms, heatwaves), a number of diseases migrating into temperate zones, global agricultural yields decreasing, lands becoming unfit to grow anything, water scarcity, generalized loss of biodiversity, ocean acidification and coral bleaching. All these having consequences on their own, on each other and combined, to an extent that would comparatively exceed those caused by the COVID-19 global pandemic.

The figure below shows that our current development pathway leads us to 3°C to 4°C of global average temperature increase. This could translate into +10°C in certain places and -10°C in others.

Until mainstream finance is not forced to integrate the safeguarding of our environment as a compulsory criterion in its decision to allocate funds, we cannot realistically hope to keep temperature increases below a reasonable level.

Whether it is to avoid dramatic climate change or to build resilience and cope with the effects of climate change, financing mechanisms will be increasingly in need. It is currently being distributed under very small and modest channels.

What does climate finance look like?

If you are still wondering what all this is about, wait no more. According to the Climate Policy Initiative, as summarised in the figure below climate funds are being expended through regular-rate (commercial) and lower-rate loans (concessional). Climate funds are also distributed as capital for companies to operate and project to enable them to start off and obtain further assistance if required. Finally climate finance also takes the form of grants to help fund technical and financial assistance for projects with no other access to financing.

One of the interesting resources in the area of climate solutions is the Drawdown Review[6]. While it only covers mitigation and some aspects of its methodology could be questioned, it is a very credible piece of work that contains a lot of insightful content.

According to the review, the following actions would have the greatest potential for reducing emissions:

• Energy: cleaner electricity generation (e.g. wind power, solar, geothermal, biomass, waste-to-energy, etc.), energy efficiency (e.g. in lighting, building heating, insulation)

• Agriculture: reducing food waste, meat and dairy consumption by developing plant-based food, protecting and restoring ecosystems (e.g. rewetting peatland, protecting primary forests and grassland, securing indigenous people land tenure rights, etc.), reducing the use of nitrogen fertilizers and improving rice production techniques

• Industry: phasing out some refrigerant gases (e.g. in storing), recovering gas from waste (liquid and solid), recycling, and producing lower-carbon cement and bioplastics

• Transportation: developing alternative to individual cars (e.g. public transit, carpooling, bicycle infrastructure, etc.), developing electric vehicles, energy efficient trucks and aviation

• Building: adopting energy efficient cooking stoves, heat pumps, biogas for cooking, solar water heater and insulating buildings

The other part of the mitigation equation is the sequestration of carbon in natural ecosystems: through forestry, improved agriculture practice and restoration of ecosystems.

Two other channels used to disseminate climate finance are:

• The carbon offset markets: where projects are provided payments for each tonne of CO2 equivalent they reduced or avoid. These payments could not really fall into the regular type of financial instruments and represented nearly 300 million USD in 2018 according to the State of the Voluntary Carbon Markets 2019.

• The international climate funds: such as the Green Climate Funds, the most significant financing mechanism of the Paris Agreement, which has committed more than 6 billion USD since its inception a few years ago. The funding was provided mostly in loans and grants.

Since it is now clear mitigation efforts have not been enough, financing climate change adaptation has become an increasingly pressing issue. However, not only has climate change adaptation financing received less attention, it is also a lot more complex to quantify and monitor. Financing efforts in the field of adaptation has mostly taken the form of water and wastewater management, climate-smart agriculture (e.g. productivity increase, drought resilient crop, mixed crop-livestock systems, etc.) and disaster risk reduction. These efforts have been mostly funded by government and international or regional development agencies (e.g. development banks, UN agencies, climate funds, etc.).

How big is climate finance?

The think tank Climate Policy Initiative has been mapping climate finance flows since 2013 and found that in 2017-2018, around 579 billion USD were spent annually on average[7]. The yearly variation is presented in the figure below. Fund sources accounted in this data are very likely not exhaustive but include a very broad range of references.

As you may have guessed, when compared to the OECD estimation of what would be required to attain the Paris Agreement climate objectives, we are more than 90% short on funding. We would need another 5,7 trillion USD each year on top of what we are currently spending. The world is incurring delays every year on the level of investment required to put us on track to achieve these objectives.

Who spends climate finance? Who benefits from it?

According to the same Climate Policy Initiative report and as can be seen in the graph below, climate finance is coming from a broad range of sources.

Since we know countries themselves don’t have pockets that are deep enough to bear the burden of the heavy investment required, public finance should ideally only be used to leverage private finance if we want to reach the target amounts. However, private finance only accounted for 56% of all sources of climate finance in 2017-2018, which is far behind where it needs to be.

Climate Policy Initiative reported that domestic, bilateral, and multilateral development finance institutions (DFIs) accounted for most of public finance. DFIs, operate mostly in developing countries and are also providing development finance which is sometimes redirected or rebranded as climate finance. It also means that industrialized countries who also need public support benefit less from it and in a different form.

The remaining funds coming from public organisations is provided by regional and municipal governments and helps subsidise or invest into lower-carbon infrastructure.

Private finance has a more diversified range of sources. Private companies account for the majority of private investors, and commercial financial institutions play an increasingly important role. Aside from these, private individuals are also contributing to climate financing. They provide10% of the total amount spent. Lagging behind these actors are actually the most important financial actors: those with vast amounts of money, who manage households’ savings and retirement pensions. These actors do not seem to believe that the risks involved in building tomorrow’s world are worth taking. Thus, institutional investors and smaller funds managers account for a surprisingly small fraction (2%) of climate finance.

When it comes to the sectors towards which private finance is being channelled, renewable energy comes first (85%) notably for electricity production, followed by low-carbon transportation systems (14%). However, collecting data for some of these sectors can be difficult. This is highlighted in the graph below which also shows, an illustration of the narrative bias related to the role of renewable energy. It is indeed commonly believed that renewable energy will play a key role in combating climate change by enabling the clean generation of electricity even though it only accounts for 7.5% of energy consumed worldwide[8].

The figure below offers a rather tortuous view of where funding tagged as climate finance comes from and where it goes. It does however provide a complete picture of the current situation.

Conclusion

While still a fairly niche practice, climate finance is increasingly used by the public and the private sector. A growing number of projects can take advantage of the opportunities this shift will create. We believe it is now the right time for projects, programmes and organisations to identify potential sources of funding or activities that could enable them to implement mitigation and adaptation activities. It is also the right time for financial organisations to build up their climate finance offering to the general public.

The Drawdown project estimates that overall, net operational savings exceed net implementation costs four to five times over when most mitigation measures are implemented. This means that with the right financing instruments, our societies could unleash a broad range of opportunities to fight and adapt to climate change.

HAMERKOP’s experts have more than 12 years of experience helping companies, NGOs, and governments navigate the complexity of climate finance, from identifying candidate initiatives, assessing projects, liaising with the right source of funding and drafting winning project proposals. If you are looking to engage with climate finance, whether to benefit from it or provide funding, we can help, so reach out to us.

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[1] The Kyoto Protocol: https://unfccc.int/sites/default/files/resource/docs/cop3/l07a01.pdf

[2] The Marrakesh Accords: https://unfccc.int/cop7/documents/accords_draft.pdf

[3] The Paris Agreement: https://unfccc.int/files/essential_background/convention/application/pdf/english_paris_agreement.pdf

[4] Technical annex: https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/200309-sustainable-finance-teg-final-report-taxonomy-annexes_en.pdf

[5] OECD. 2017, Investing in Climate, Investing in Growth, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264273528-en

[6] The Drawdown Review 2020: https://www.drawdown.org/drawdown-framework/drawdown-review-2020

[7] The Global Landscape of Climate Finance 2019. https://climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2019/

[8] Long-term energy transitions, Portugal, 1856 to 2008. https://ourworldindata.org/grapher/long-term-energy-transitions