Inclusive Voluntary Carbon Markets Could Finance a Just Transition

As the climate crisis deepens, the world is under pressure to accelerate its green transition. But while technologies and practices like renewable energy and regenerative agriculture have become more affordable and ubiquitous in markets like the U.S. and Europe, they remain out of reach for many living in low- and middle-income countries. This challenge was underscored in a recent UN report warning that the majority of low-income countries risk missing out on the benefits of green technologies.

At the same time, new CGAP research suggests that voluntary carbon markets (VCMs) hold the potential to finance a green transition across the developing world. Companies are leveraging VCMs to realize a transition that is not only green, but also just – using revenue from the sale of carbon credits to make green technologies and practices more accessible, affordable, and attractive to those who have contributed the least to a changing climate.

Growing global demand for carbon could raise billions in green, inclusive investments

VCMs allow companies to offset their greenhouse gas emissions by purchasing carbon credits. These credits are generated by carbon offset projects, which use green technologies and practices to either avoid emissions that would otherwise occur (e.g., renewable energy) or remove carbon from the atmosphere (e.g., agroforestry).

Demand for carbon has skyrocketed in recent years, with the value of carbon credits traded on VCMs reaching $2 billion in 2021, and on track to reach between $10 billion and $40 billion by 2030. 

Importantly, a significant share of the projects that generate the carbon credits traded on these markets are located in low- and middle-income countries. The Task Force on Scaling Voluntary Carbon Markets (TSVCM) notes that increasing demand for carbon represents a once-in-a-generation opportunity to encourage flows of public and private capital to developing economies.

Companies are demonstrating how more inclusive carbon markets can allow low-income households and MSEs to share in the benefits of a green transition

The opportunity presented by VCMs is particularly important when considering the potential benefits that a green transition could offer the world’s poorest and most vulnerable. For example, off-grid solar energy has allowed tens of millions to gain access to electricity for the first time and helped to unlock new economic opportunities for rural households. Clean cooking technologies have been shown to improve health outcomes and free up women’s time use. Regenerative agriculture practices can improve yields and protect crops against climate shocks like droughts and floods.

But these impacts can only be realized when green technologies and practices are both accessible to and affordable for customers. This is why many green technology and practice providers are turning to VCMs to get their products and services into the hands of low-income and rural customers. CGAP has found that companies are using carbon revenues in three key ways: i) To expand access and availability at the last-mile, ii) to improve the affordability of their products and services, and iii) to incentivize uptake and use.

For solar home system distributors like d.light and EasySolar, selling carbon credits tied to the emissions their systems avoid has helped to make their businesses more sustainable, allowing them to improve access to solar energy for households excluded from electrical grids who would otherwise rely on polluting energy sources like kerosene lamps. Other companies have turned to carbon revenues to bring down the cost of their products and services. For example, Kenyan startup Koko Networks has raised more than USD 100 million from the sale of carbon, allowing the company to subsidize the cost of its bioethanol cookstoves by 85% and make its fuel 40% cheaper than charcoal.

Additionally, companies are using carbon revenues as an incentive for the adoption and use of new technologies and practices. Rabobank’s ACORN Initiative helps smallholder farmers to adopt agroforestry, with farmers receiving 80% of the revenues from the sale of the resulting carbon credits. In another example, electric cookstove manufacturer ATEC is piloting a cook-to-earn model in Bangladesh and Cambodia that uses mobile money to pay customers based on the time that they use their stoves.

Realizing the potential of VCMs will first require addressing barriers to inclusivity, scale

Despite the promise of early-stage innovations, the truth is that many carbon projects currently either fail to include or provide meaningful benefits to low-income households and MSEs. And even those that do, face significant barriers to scale.

Although demand for carbon credits has risen dramatically in recent years, prices for carbon credits remain relatively low and highly volatile. At the same time, the cost of project development remains high and dependent on resource-intensive approaches to validating and verifying emissions removal/avoidance before carbon credits can be sold. Smaller projects can also struggle to find buyers for their credits, while even larger projects face significant costs when selling credits through intermediaries that take a cut of the proceeds. These challenges are particularly acute when considering that the cost of capital remains prohibitively high, limiting even the most inclusive companies from investing in scale and passing along profits to the households and businesses participating in their projects.

But even taking these barriers into account, the fact is that few incentives exist for companies to prioritize inclusion. The leading carbon standards, which are responsible for certifying carbon credits, do not currently include any requirements or report data for whether and how carbon revenues are shared with local communities. As a result, buyers who would otherwise be willing to pay a premium for credits tied to social impacts beyond emissions mitigation are left in the dark.

CGAP is committed to contributing to the development of more inclusive carbon markets

CGAP believes that more inclusive carbon markets hold the potential to improve the lives and livelihoods of millions across the developing world. This is why we have launched a new effort aimed at breaking down the barriers that prevent low-income households and MSEs from participating in and benefiting from, voluntary carbon markets. CGAP is seeking to partner with key stakeholders in the climate and financial sectors to crowd in support for high-impact business models, drive innovation aimed at improving sustainability and impact, and create incentives that reward more inclusive approaches. We invite you to join us in making a just transition a reality for the world’s poor.