NEW STANDARDS FOR THE TRADING OF CO2 CERTIFICATES IN THE VOLUNTARY COMPENSATION MARKET

The importance of climate targets and CO2 offsetting measures for companies is steadily increasing. Voluntary CO2 offsetting enables companies to achieve their climate targets.

The voluntary market for Co2 certificates is facing great positive changes, which serves for transparency and safety of the environment.

At the climate conference in Glasgow, the Paris Climate Agreement’s framework for international emissions trading was adopted. This set of rules establishes clear requirements for trading allowances in the voluntary offset market and eliminates double counting. In the future, host countries will rely on high-quality and transparent projects to achieve their own net-zero targets. This could turn the “compensation market” into a “neutralization market.”

Currently, there are many companies, service providers and products that are advertised as climate neutral. However, few companies have achieved climate neutrality by completely reducing their own emissions. Most companies achieve their climate neutrality by offsetting “unavoidable emissions.” This involves generating certificates in climate protection projects outside one’s own company and then trading, selling and decommissioning them to finance the project. Under this trading scheme, companies can have these emissions savings credited to them.

This voluntary additional benefit plays only a limited role in the assessment of companies by investors and ESG ratings, as it does not reduce the climate change-related risks of companies. For end customers and consumers, however, “climate neutrality” is already more than just a quality feature.

The voluntary offset market has steadily grown in importance since 2015. The market is expected to reach $1 billion in 2021, which is already 60 percent higher than the previous year’s level. According to scenarios from the Taskforce on Scaling Voluntary Carbon Markets, the voluntary market could retire 15 times more CO2 by 2030 compared to 2020.

The regulatory framework of the unregulated market, the Kyoto Protocol, expired in 2020. Since then, all certificates in the voluntary market have been subject to the rules and regulations of the Paris Climate Agreement. The agreement now commits all 192 states to climate protection at home. Developing countries must first improve their own carbon footprint before they can sell benefits from climate protection projects.

The development and implementation of new standards for voluntary trading poses some challenges for the market. The rules for trade were defined in Article 6 of the Paris Agreement:

Article 6.2 regulates the trading of emission reductions. It provides that a country that has reduced its emissions beyond its reduction target can transfer the excess emission reductions to another country that has not yet met its reduction targets. This creates a mechanism of international emissions trading.

Article 6.4 allows the use of market-based approaches, such as CO2 allowances, to offset emissions. Companies can purchase emission reductions outside their own country and have these reductions credited to their own emissions balance.

The implementation of these articles requires clear and transparent rules to prevent double counting and misuse of allowances. This is where the regulations of the Paris Climate Agreement come in, setting strict standards for trading CO2 certificates in the voluntary offset market.

The main changes include:

Traceability and transparency: Each certificate must be traceable to ensure that the associated emission reductions have actually been achieved. Robust monitoring and reporting systems will be implemented to ensure the origin and tracking of allowances.

Avoiding double counting: Ensuring that emission reductions are not double counted. A certificate can only be used once to offset emissions. This avoids companies offsetting their own emissions while simultaneously offsetting the same emissions from another company.

Quality standards for projects: The projects from which the certificates originate must meet certain quality criteria. Clear criteria for selecting and reviewing projects will be established to ensure that they actually contribute to sustainable emissions reductions.

Governance and regulation: an independent body or organization is created to oversee and regulate the voluntary offset market. This body ensures that the rules are followed and that the market operates fairly and transparently.

These new standards for trading CO2 allowances in the voluntary offset market are an important step towards making the market more effective and trustworthy. Businesses, investors and consumers can be confident that the certificates they buy actually contribute to sustainable emissions reductions and combat climate change.

It is expected that these standards will help to build confidence in the voluntary offset market and further support the growth of the market. Companies committed to carbon neutrality can still access the voluntary offset market to offset their emissions and reduce their environmental footprint

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