If there is one thing that almost everybody agrees on when it comes to tackling climate change, it’s that there is no time to waste. Every hour matters.
Unfortunately, in relation to carbon markets — systems to trade carbon credits that have immense potential to propel the global decarbonization race — many global companies and investors have had something of a “watch and wait” approach.
The good news is that this is changing. As a member of a global climate and nature investment and advisory firm, I was recently in Japan, meeting with investors to talk about our portfolio of nature-based solutions, projects and opportunities. Through this and other interactions, I sense that the tide is turning.
Without standardized processes and a rules-based system for trading credits between countries, a patchwork of voluntary schemes has dominated carbon trading globally. But that is all set to change after key elements of the Paris Agreement’s Article 6 were approved at COP29, the United Nations climate change conference held in November in Baku, Azerbaijan.
Recent years have seen many companies either pause or slow down their involvement in carbon markets amid reports of irregularities and poor behavior in the context of some projects, and the negative publicity that has resulted. As an advocate for these markets’ potential to drive much-needed financing into climate change mitigation and nature restoration, this caution has been both understandable and frustrating.
Voluntary carbon markets have been far from perfect but, despite variability in the quality of different projects, we know that companies who participate in them are more likely to be decarbonizing and doing so at a higher rate.
What many of the “watch and wait” cohort have been holding out for is a strong signal that the necessary scaffolding is in place to ensure the carbon credits being generated and traded are of high quality and “high integrity.” The latter term is reserved for credits resulting from activities that feature stringent transparency and accounting standards, ensuring that claimed benefits are genuine and accurately measured and that the activities would not have been carried out without carbon markets’ financial support.
Article 6 will deliver a market-based mechanism that enables countries and companies to transfer emissions reductions or removals between each other to meet climate targets. It took nine years of painstaking negotiations to reach this breakthrough, and the impact it is already having should not be underestimated.
We are transitioning from a patchwork of voluntary schemes, standards and projects that companies adhere to to make public claims about offsetting emissions to an emerging new order that will increasingly be dominated by compliance (i.e., mandatory) markets. This means that governments and large emitters must meet targets set by domestic carbon pricing schemes and decarbonize their industrial sectors, in part using high-integrity credits.
Countries like Japan and Singapore are leading the way. In Japan’s case, the GX League — which already covers over half of Japan’s emissions and has an emissions trading system under its umbrella — will transition from a voluntary to a compliance framework starting from 2026. Japanese companies, therefore, have the chance to be at the forefront of the opportunities this shift creates.
Starting now, the chase is on for high-quality carbon credits.
Crucially, emissions reductions claimed for a project must be genuine. They also need to be permanent: There is little point planting a tree and claiming the carbon it stores only to cut it down some years later.
In addition, high-integrity credits should also be properly tallied. If a nation counts carbon credits toward achieving its Paris Agreement targets generated within its borders at the same time as those credits are sold offshore and “retired” — used — by a foreign company, then the emissions reduction benefit will have been double counted.
Agreement on Article 6, paired with the rapid development of national compliance schemes requiring companies to decarbonize in line with the Paris Agreement, is poised to supercharge demand for high-integrity carbon credits. This could grow by around 40% each year through to 2030, according to estimates.
We are already seeing this in aviation, where the Carbon Offsetting and Reduction Scheme for International Aviation, known as “CORSIA,” is being embraced on a significant scale by global airlines, to the point that shortages and higher prices for carbon credits are forecast.
To avoid supply crunches, many more high-integrity carbon projects must come online. Smart companies can help prevent potential roadblocks, acting now by underwriting carbon projects in exchange for guaranteed access to resulting credits.
All of this is, undoubtedly, a positive step. In a system that leans in favor of market-based responses to climate change, market forces will and should be a push factor that drives the financing of nature repair and carbon sequestration, therefore multiplying the number of projects able to supply high-integrity credits.
There will be winners and losers along the way, as well as plenty of opportunities to be strategically adept. Japan and its companies have the chance to lead in this space and we are already seeing burgeoning enthusiasm as the path ahead becomes clearer and increasingly well-marked.
