How Companies Can Use Voluntary Carbon Markets to Help Protect Tropical Forests
In 2021, 145 country leaders committed to halt and reverse forest loss by 2030. At the time, soaring demand for forest carbon credits from companies seeking to demonstrate climate action promised a new source of finance for tropical forest protection. However, in 2022, the demand for credits leveled off, reflecting uncertainty on the rules regarding the claims companies could make based on their purchases and concerns about the quality of carbon credits, especially those originating from forests.
There are two general types of carbon markets that companies may participate in, voluntary and compliance markets. The voluntary carbon market consists of companies or other entities purchasing credits to fulfill voluntary mitigation commitments whereas in compliance carbon markets, companies purchase carbon credits to meet obligations under a domestic law or an international agreement. The requirements vary among countries and agreements, including the types of credits eligible to meet obligations and limits on the share of total emissions reductions that a company can fulfill with credit purchases.
However, no such regulations exist for the voluntary carbon market, as there is no independent framework that dictates rules to govern the quality of credits or the claims companies can make based on their purchase.
There are numerous global initiatives and processes underway that are seeking to help participants navigate the voluntary carbon market, including a new guide produced by WRI and seven other leading environmental and Indigenous Peoples organizations. The Tropical Forest Credit Integrity Guide can help companies develop and populate a tropical forest carbon credit portfolio that contributes to global climate, biodiversity and development goals.
Actions to protect tropical forests cannot wait. Companies can play an important role in signaling demand for tropical forest carbon credits in ways that will accelerate the needed transitions toward climate-friendly forest management, complementing decarbonization efforts within their own operations and value chains.
Why is Forest Finance Urgent and Important?
The science is clear that halting the loss of tropical forests is critical to achieving global climate goals. Tropical forests also contribute additional benefits for the climate, nature and people. In addition to sequestering and storing carbon, tropical forests provide additional global cooling services, maintain rainfall patterns and shield crops and people from heat stress through non-carbon biophysical processes.
Tropical forests contain over 60% of mammal species and more than 70% of bird species, even though they only cover about 18% of Earth’s total land area, making them a crucial habitat for the world’s terrestrial biodiversity. Tropical forests are also home to Indigenous communities who both rely on these forests for their livelihood and serve as their most effective as stewards.
Despite the many benefits of tropical forests, the high rate of forest loss has continued to climb upwards over the last two decades. In 2021, 3.5 million of the 11.1 million hectares cleared or burned were tropical primary rainforests. Those forests store massive amounts of carbon that cannot be recovered in the relevant timeframe to achieve global climate goals.
The challenge is finance. Recent analysis estimates domestic and international public finance for agriculture and forestry production, outweighs climate public finance for forest restoration and conservation by a ratio of 10 to one. Even more worrying is that current public domestic and international mitigation finance for forests is less than 1% of the total needed to achieve international forest goals. Public sector money will not be sufficient to close this gap, but the private sector can play a critical role with companies providing finance to incentivize tropical forest protection as part of their climate mitigation strategies.
What’s Constraining Carbon Markets as a Source of Forest Finance?
The voluntary carbon market provides an opportunity to increase finance for tropical forests and the people who protect them. In 2022, the voluntary carbon market channeled more than $1.3 billion globally (about $4 per person in the U.S.) for all types of credits, helping mitigate about 173 megatons of carbon emissions, which is greater than the 2021 emissions from the Philippines, the world’s 33rd largest emitter. While many analysts have projected that the voluntary carbon market could reach at least 10 times that amount in the coming decade, increased uncertainty on both the demand and supply side has constrained financial flows leading to an inflection point.
On the demand side, companies that would otherwise be in the market have grown wary that credit purchases and associated claims could lead to greenwashing allegations. Various initiatives are underway to define what appropriate corporate claims and investments should look like, but in the meantime the uncertainty about “what counts” as legitimate climate action and which purchases will be rewarded with reputational benefits may be keeping hundreds of millions if not billions of dollars on the sidelines.
On the supply side, recent media attention to the risks associated with forest carbon credits generated by small projects, as well as debates over how conservation of large areas of still-intact forests should be credited, have renewed concerns about the quality of forest carbon credits. There is emerging consensus that forest carbon credits generated at the scale of entire countries or large subnational jurisdictions are superior to project-scale crediting. Such programs operate at the scale needed to create incentives for improved governance, needed policy reforms and broad implementation. However, recent offers by some countries to sell “sovereign credits,” which are issued based on self-reported emission reductions and not certified to comply with a rigorous standard, has caused further confusion.
Continued growth of the voluntary carbon market will depend on the ability of key stakeholders to agree on rules that will ensure integrity on both the demand side and supply side and enable finance to flow. There is a narrow path for success: Setting the bar too high would stifle the supply of and the demand for credits, while setting the bar too low would lead to low-quality climate outcomes and undermine the legitimacy of the market overall.
How Can Companies Purchase High-Quality Tropical Forest Carbon Credits?
Even with the voluntary carbon market at an inflection point, there are four steps that companies can take now to be part of the solution to end tropical deforestation through the purchase of carbon credits: aligning portfolios with global needs, driving demand for jurisdictional-scale crediting, conducting due diligence and keeping up with the latest developments. These steps are detailed in the new Tropical Forest Credit Integrity Guide, which was produced by Conservation International, Coordinator of Indigenous Organization of the Amazon Basin, Environmental Defense Fund, Instituto de Pesquisa Ambiental Amazonia, The Nature Conservancy, Wildlife Conservation Society, World Resources Institute and the World Wildlife Fund.
Here's more information on each of the four steps:
Step 1: Plan a Tropical Forest Credit Portfolio to Align with Global Needs
Corporate credit portfolios should align with the latest science by prioritizing emissions reduction credits (resulting from slowing deforestation) and only increasing the share of removals credits (resulting from forest restoration) with the global achievement of halting deforestation and ecosystem loss. In their portfolios, companies should also include credits from areas that have high forest cover but low rates of deforestation, known as HFLD areas, as these credits provide near-term incentives to maintain remaining intact forests and can reward Indigenous peoples and local communities for their success in forest conservation.
Step 2: Build a Portfolio that Drives Demand for High-Quality Jurisdictional-Scale Crediting
Corporate buyers should give preference to — and make advance purchase commitments for — credits that are issued by programs that operate at the scale of national or large subnational government jurisdictions. To date, nearly all tropical forest carbon credits have been issued at the project scale (i.e., site-specific activities that generate carbon credits based on an independently established baseline) and have often proven vulnerable to critiques from academic researchers and environmental groups about their environmental and social integrity.
Jurisdictional-scale programs are better positioned than individual projects to meet key environmental criteria for all types of credits, such as mitigating risks of leakage (when an activity that causes emissions — such as deforestation — is displaced to another location outside of the accounting boundary, thereby causing new emissions elsewhere), non-additionality (when the emission reduction or removal would have occurred in the absence of the intervention), and non-permanence (when a previously credited emission reduction or removal is re-emitted).
Additionally, crediting results at the jurisdictional scale incentivizes governments to undertake actions that only they can perform, including increased law enforcement where deforestation is illegal, recognition of resources rights where land tenure is unclear or providing needed incentives for private landowners.
Step 3: Conduct Due Diligence to Ensure High-Quality Credits
To ensure high-quality credits, companies must go beyond exclusive reliance on standards as well as be able to differentiate among different standards and between credits independently verified to comply with standards and other types of products offered for sale. For example, companies should pay attention to how the design and implementation of activities that produce carbon credits impact and engage with Indigenous peoples, local communities, women and other marginalized communities. To date, many principles surrounding equity and transparency have been poorly represented in practice and companies can incentivize improved performance through their purchasing decisions.
Further, project-scale forest carbon credits should be “nested” within larger, jurisdictional-scale programs where they are in place or under development. A project is nested if its crediting baseline and interventions are aligned with accounting and strategy at the larger scale. Such alignment reduces the risk of over-crediting at the project scale while exploiting synergies between government policies and local activities.
It is also important that all credits purchased by companies as part of their climate mitigation strategies, not just tropical forest carbon credits, undergo independent, third-party validation and verification. Without independent validation and verification by credible auditors with relevant expertise, it cannot be determined whether or not credits meet the requirements associated with high integrity.
Step 4: Follow up with Complementary Actions and Stay Attuned to New Developments
The purchase of forest carbon credits is only one of several types of action that companies can take to conserve and restore the world’s tropical forests. For example, companies should also consider investing in the development of sustainable supply chains located within jurisdictional programs and increased support for the full and effective participation of local communities in all aspects of program development and implementation. Further, as the “rules” governing the voluntary carbon market are still evolving, companies should stay updated on how demand-side and supply-side integrity can best be achieved.
Despite Uncertainty, Companies Can Support Tropical Forests Now
Reducing deforestation and forest degradation is not only critical to limiting global warming to less than 1.5 degrees C but is consistently listed by the Intergovernmental Panel on Climate Change as a high-priority, low-cost mitigation option. Renewed political commitments to halt and reverse forest loss by 2030 are encouraging but must be complemented by collective action and a significant increase in private sector finance.
The voluntary carbon market is now at an inflection point with the opportunity to channel billions of dollars to tropical forest protection and can contribute to achieving global climate goals as well as provide many other development and biodiversity co-benefits. Uncertainty is holding back urgently needed forest finance, but the world’s forests and forest peoples can’t wait.