Carbon credit volumes are very small if compared with the level of emission reductions needed under countries' national climate targets, said Chandra Shekhar Sinha, adviser with the Climate Change Group of the World Bank, implying that more mitigation efforts are required rather than depending solely on carbon markets.
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Register NowWhen asked to comment about the recent moratoriums of carbon credit exports imposed by several countries, Sinha said it is a good signal that countries like Indonesia and Papua New Guinea are serious about implementing their nationally determined contributions, or NDCs, and relying on the carbon market to fulfill their commitments.
NDCs are official climate targets set by individual countries and submitted to the UN under the Paris Agreement framework.
"However, the volume of carbon credits is so small in comparison with what their NDC requirements are. Countries need to realize that Article 6 is only a small part of meeting their NDCs," he emphasized.
Article 6 is a set of rules under the Paris Agreement that enables countries without sufficient domestic carbon credit supplies to import credits from other countries to meet their NDCs. However, under Article 6, an individual government has the right to ban the exports of carbon credits generated on its territory to prioritize the fulfillment of its own NDC.
"We have 50 gigaton of emissions globally [per year]. The total volume of carbon credits till now is four gigatons -- total, in 20 years. Last year, the voluntary carbon market [contributed] 200 mt [of emission reductions] from total emissions of 50 gigatons. This is not even a blip in the overall," Sinha explained.
"Carbon markets are catalytic in helping investment flow, but there are many other things that need to be done. The carbon markets are neither the biggest risk, nor the only solution," he concluded.
COP27 takeaways on mitigation actions
"One of the key takeaways [from COP27, UN Climate Change Conference] was that there will be focused discussions around the global stock-take to review the progress of the first NDC period, in order to inform the second NDC period, which will start in 2030," Sinha said, adding that it is very important for countries to scale up their NDC ambitions.
"There's also a discussion around what the mitigation action plan will be. The process of defining the work program for the mitigation plan needs to be completed in the next two years," he added.
Sinha said the World Bank lends about $70 billion every year, and last year, it provided $32 billion in climate-related finance out of the total $70 billion. The World Bank contributed more than 50% of climate finance in the world from the public sector through climate-related lending to developing countries, he added
Funds to support local communities
Nowadays, there have been arguments that some decarbonization projects generate carbon credits, but unreasonably high amounts of profits go to the middlemen's pockets, instead of benefiting the local communities. Sinha said the World Bank has established funds that effectively avoid such problems.
He said such funds enable local communities to learn by doing, taking the role of project owners of decarbonization projects. "As you achieve the results, such as increasing your forest cover, the payments are made by the fund to the local community and to the project owners," he explained.
"We don't have the challenge of unreasonable profits going to the middlemen. We kind of avoid that problem, but that's not to say that problem is not real. It is a real problem, and there should be ways that the private sector addresses it in a transparent manner," he emphasized.
Platts assessed nature-based carbon credit at $4.6/mtCO2e Dec. 28, S&P Global Commodity Insights data showed.
A transparent database for carbon
CAD Trust, jointly launched by the World Bank, the International Emissions Trading Association (IETA), and the government of Singapore this December, is designed to consolidate carbon credit information across different registries and create a transparent platform that provides comparable data.
"The real hard work was to get the main registries, the countries, the UNFCCC to agree on what the standard data would be, and how you would translate the data from registries in a common format which goes into the CAD trust," he highlighted.
He said by the first quarter of next year, the main registries will be connected to the CAD Trust, while information within the registries will become available on the metadata platform.
CAD Trust will be hosted by Singapore. Its management council, known as CAD Trust Council, will determine the strategic direction of the platform's development and guide its future operations. Currently, besides Singapore, the council also includes national representatives of Bhutan, Chile, Japan, Senegal, and the UK.
"The CAD Council's desired mix was based on who are the active countries in Article 6 and the voluntary carbon markets," Sinha explained.
For countries like China and Australia, despite that they currently host large national carbon registries, the use of the international carbon market is limited, he said. "I think it would be logical to include the registry operators [in China and Australia] when they start engaging in the international market," he added.
An efficient ecosystem for carbon
CAD Trust is the anchor of the World Bank's broader initiative known as the Climate Warehouse, which enables digital, automatic emission monitoring, reporting and verification, and provides options to use blockchain-based registries, namely the on-chain registries, Sinha said.
Sinha explained, in the case of a solar power project, the digital ecosystem can equip the project developer with a smart meter that automatically measures the amount of solar power generated and directly issues carbon credits.
Compared with the traditional practices of sending verifiers to manually read the meters every six months or one year, the digital system offers a more efficient option with lower transaction costs and provides the project developers with carbon credits to sell them on a daily basis, he said.
Additionally, compared with building connections among carbon registries, the groundwork for this digital MRV system has to be completed on a project-type basis, which is harder and takes longer, he added.
Sinha said the Climate Warehouse also facilitates the delivery of digital carbon assets, namely as a token of a carbon credit that represents one ton of emission reductions, while the actual trading rules of such digital assets will be determined by government authorities for individual countries.
Sinha said such digital tokens are expected to lower the barriers to entry in carbon markets. Conventionally, the minimum purchase volume is usually one credit representing one ton of emission reductions. Nevertheless, the tokenization of carbon credits enables a buyer to purchase just a fraction of the token's represented volumes, such as 1 kg of emission reductions.
"As an individual, if you're trying to offset your carbon footprints for traveling from here [Singapore] to Bali, you'll probably need about 200 kg at most," he explained.
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