Carbon credits are an important way to unlock private finance for nature climate solutions. They’re increasingly controversial, but when developed in the right way, carbon credits can be a key piece of the puzzle for meeting global climate goals.

Regulating the carbon offset markets was one of the key agenda items at COP28. However, the conference closed without an agreement on ‘Article 6’, meaning that this nascent market remains without a consensus on how to implement and monitor integrity.

A high integrity voluntary carbon market rests on two equally important issues: supply-side integrity and demand-side integrity. Supply-side integrity looks at whether the activity associated with carbon credits genuinely delivers the climate, environmental, and social outcomes promised, without creating harm elsewhere. Demand-side integrity is about whether buyers of carbon credits use them in addition to meaningful actions to reduce their emissions, rather than as a replacement for climate action.

‘Greenwashing’ is a significant and valid concern, and strong demand-side integrity requirements can help. Currently, there is not nearly enough investment into carbon credit projects that could play a major role in climate mitigation, so agreeing on robust rules to drive high quality and high integrity carbon credits is a key – and time critical – element for unlocking climate finance at scale.

In an effort to address the issue, Mobilising Finance for Forests, a blended finance investment program funded by the UK government and implemented by FMO, the Dutch Development Bank, recently contracted Palladium and Systemiq to deliver a “Learning, Convening, and Influencing Platform” (LCIP).

The LCIP, a four-year project, is designed to increase the scale and impact of investments in forests, sustainable land use, and nature. By convening stakeholders who are already working with or looking to work in the forests and sustainable land use sector (including funders such as development finance institutions (DFIs), fund managers, and philanthropists) with project developers, the team hopes to share lessons learned and respond to information and data needs that can help unlock more investment across the public and private sectors.

“Supporting the development of high integrity carbon credit policies for investors is a key area of work for the LCIP team,” explains Martin Belcher, LCIP Team leader. “Many DFIs are seeking to invest into forest and forestry projects, including those that deliver significant carbon impacts, but are not currently investing at the pace needed because these types of projects are perceived to be high risk.”

Supporting High Integrity Credits

LCIP has been working with a Community of Practice of European DFIs to shape ambitious and implementable carbon integrity policies. The goal is ultimately to help them to better manage risk and provide the tools to identify high integrity projects. As a result, the team recently published a learning brief called ‘Implementing Approaches to Carbon Credit Integrity: How can Investors put their Policies into Practice?’.

The paper explores how investors can support the generation and use of high-quality carbon credits specifically in the forestry and sustainable land use sector in the tropical forest belt. Covering both the demand and supply-side approaches to carbon credit integrity, the paper discusses how investors can take an active role and engage collaboratively to develop this emerging asset class for the green economy.

The paper highlights risks, opportunities, and the need for new tools to keep carbon credit financing credible. It also addresses practical questions about how to apply integrity principles in forestry and sustainable land use financing.

Belcher adds that the paper draws from a series of open conversations with the community of practice of DFI participants. “We’ve helped them dive deep into the issues of supply and demand side integrity, how carbon credits can help them meet DFI internal climate and biodiversity strategic goals and discuss the role that DFIs can play in supporting the development of a high integrity voluntary carbon market.”

Although this paper does not represent official DFI policy, it has been a useful resource as the organisations work through their policy development processes. This is just one of many critical initiatives that will shape emerging market norms for the voluntary carbon market and place integrity at the heart of climate finance.

Read the paper, contact info@thepalladiumgroup.com for more information.