Companies around the globe are increasingly committing to achieving net-zero carbon emissions, sometimes through a regulatory nudge and sometimes voluntarily. Carbon credits will be a key element of the net-zero toolbox, allowing companies to offset emissions they cannot yet cut. The carbon credit market is expected to grow significantly in the coming years, with the voluntary carbon market potentially growing from the current $1 billion per year to $50–100 billion by 2030.1
There are opportunities and risks associated with carbon credits. If carbon credit projects are properly run, credits will lower overall global emissions. When carbon credits are generated in developing countries, they may also contribute to other sustainable development goals. Carbon credits can generate these positive outcomes only when the integrity of the credits is ensured. The regulation of carbon credit markets is limited and fragmented, so there are justifiable concerns that some credits may amount to little more than greenwashing.
To address some of these concerns, the international community took significant steps at the Glasgow Climate Change Conference in 2021 to bolster the integrity of credits. Countries adopted the so-called Paris rulebook, which provides new rules on both procedures and benchmarks for credits (e.g. on government approvals; methods for measuring emission reductions; and monitoring, reporting, and verification). The rules aim to ensure that carbon credit projects genuinely lead to a measurable reduction in global emissions, and they add transparency to the process.
Early signs suggest that the new rules will improve the integrity of carbon credits and, over time, may reduce fragmentation. When successfully implemented, the rules will help carbon credits to deliver on their potential to reduce global emissions, encourage companies to invest in these instruments as part of their net-zero pathway, and provide important investment opportunities for investors to finance credit-generating projects.
Given the nature and scale of the challenge and the lack of clarity on some aspects of the Paris rulebook, the rules are complex and difficult to navigate in practice. This article introduces carbon credit markets, the Paris rulebook, and the rulebook’s impact on the supply of, and demand for, carbon credits.
*Reprinted with permission of The Oxford Institute for Energy Studies.
