The Green Recovery is the cornerstone of the post-pandemic economic strategy. This plan requires incredible changes to build a sustainable future.
At its heart, lies a major challenge for our developed economies: change the way we use natural capital. Managing natures’ assets is crucial as biodiversity increases our resilience to environmental perturbations but also protects the natural services on which the economy depends.
However, in the past decades, the unsustainable extraction of provisions from nature (food, timber, fuel, etc.) at the expense of other crucial services (supporting, regulating and cultural) grew out of proportions. The land sector is the main driver of change. We know that 14 of the 18 categories of nature’s goods and services have declined since 1970 . The sector is also a major CO2 emitter, responsible for about 23% of anthropogenic emissions (and equivalents) between 2007 and 2016 .
The land sector is a pillar of our economies and changing the incentives, from extraction to conservation and restoration, is a difficult task. Even if investing in nature has proven benefits, adapted financing models to do so are lacking.
So, what is the link between carbon markets and nature-based carbon credits? In the past year, net-zero commitments from private businesses have rocketed and some are planning to offset their emissions.
Nature-based carbon credits could then be part of the answer. The funding and incentive potential is immense, but is there a catch?
In Europe, there are two different carbon markets, the ETS and the VCM. The EU emission trading scheme (ETS) includes heavy energy-intensive installations supervised by EU regulatory bodies. The voluntary carbon market (VCM) on the other hand regroups other categories of credits exchanged globally.
Nature-based carbon credits fall under the VCM regime. Why is that? Measuring CO2 impact from nature for a ton is complex as the CO2 uptake of an ecosystem depends on multiple factors and is not constant in time. For those reasons, the measurement and reporting quality for nature-based carbon credits are not considered by EU regulators to be comparable with ETS installations, and thus nature-based credits cannot be sold on that regulated market.
These nature-based carbon credits will thus be exchanged on the VCM. However, the voluntary carbon market has two limitations: it is unregulated, meaning not supported by trusted institutions, and it lacks transparency. Before these problems are addressed, it is unreasonable to expect buyers to trust this new form of carbon credits.
Removing carbon using nature (for example reforestation) means capturing CO2 but also ensuring its storage for a long period of time. This is critical to protect the carbon value of the credit and build trust on the market.
For businesses, buying nature-based carbon credits promotes a sustainable business model, which are attractive to customers. Hence, the credits must have the highest quality possible to avoid any risks of misleading consumers. But with the actual low-quality credits, the possible climate change impact and the lack of transparency on the VCM, greenwashing is real threat and one identified by the buyers.
This represents a significant challenge for the growth of the nature-based carbon credit model.
The rules of the game on the VCM are not clear. Depending on the seller, offsetting CO2 has a different meaning. It can represent avoided, reduced or sequestrated emissions. Thus, buyers on the VCM looking to offset their emissions are faced with multiple products accounting for different carbon value but using the same word for impact, an offset. There is another issue for buyers looking to remove their emissions through nature. Implementing nature-based carbon credits in Europe is almost impossible because of the double accounting rule (referring to counting twice for the same ton of carbon sequestrated). As a consequence, the credits are bought outside of the EU, where there is even less control over projects, which is only increasing further the risks of greenwashing.
The nature carbon credit model has many issues. The design and implementation are complex, time and resource consuming. Likewise, the concerns about the quality, transparency and long-term impact of nature-based carbon credits are too high. Making it difficult to consider this tool adequate to fund conservation and restoration efforts in Europe and Portugal.
There is potential for specific projects (under a tight forest management plan) but there are major limitations for scaling this financing model. It is a good measure of impact, but it shouldn’t be the selling argument.
The road ahead is complex. Partnering with business and land managers willing to try new approaches will be a determinant success factor to develop models for conservation and restoration efforts. It is the path on which MAZE has set its course.
This article was originally published in Maze-Impact
Graduate Master in Management, Nova SBEWebsite
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