Could voluntary carbon credits be a $200 million industry for Pakistan?

Microsoft recently announced its commitment to eliminate its carbon emissions by 2030 and to remove all the carbon it has ever emitted historically by 2050. Apple has gone one step further to say it will eliminate not just its own emissions by 2030 but also emissions that arise from the consumption of its products. Microsoft and Apple are not alone in these ambitious efforts. With rising awareness on the threat of climate change, corporations are increasingly being held responsible for doing their part in transitioning towards a low-carbon future. Since most corporations have unavoidable emissions along their value chains, supplementary mechanisms are required to meet carbon reduction targets in the short term.

One increasingly used mechanism for reducing emissions is the purchase of carbon credits from the voluntary carbon market. Carbon credits allow companies to compensate for their own carbon footprint by financing projects that prevent or absorb the same amount of carbon emissions elsewhere. These projects — typically in developing countries which need such climate finance the most — can range from providing local communities with clean-burning cookstoves to setting up wind turbine generators that displace fossil fuels on the power grid. The benefits from carbon credits are two-fold: corporations are able to achieve their emission reduction goals in the near term by offsetting the unavoidable carbon emitted from their activities, while developing countries are able to attract much-needed finance to invest in climate-relevant activities, including renewable energy, waste management, and nature-based solutions.

“The voluntary carbon market has to date achieved over 600M tCO2e in emission reductions — more than 3 times Pakistan’s total CO2 emissions in 2016.”
Pakistan Environment Trust

In recent years, the voluntary carbon market has seen an influx of buyers as corporations set ambitious carbon reduction commitments. The voluntary carbon market has to date achieved over 600M tCO2e in emission reductions — more than 3 times Pakistan’s total CO2 emissions in 2016 (World Bank). The market generated approximately $300M in revenue in 2019 and while this may seem relatively small, its growth is expected to rapidly accelerate in the coming years as the number of companies making climate-neutral or net zero commitments has surged during the COVID-19 pandemic. So far, over 200 members of the World Business Council for Sustainable Development have made pledges to reach net zero by 2050 — this includes oil giants like Shell and FMCGs like PepsiCo. Similarly, Amazon co-founded the Climate Pledge to bring together a growing number of companies in committing to net zero by 2040 and hit the Paris Agreement target 10 years early. Interestingly, the third pillar of the pledge requires signatories to accelerate investment into ‘Credible Offsets’ — to “neutralize any remaining emissions with additional, quantifiable, real, permanent, and socially-beneficial offsets to achieve net zero annual carbon emissions by 2040.”

“This is a necessary market in the transition to net zero … [it] needs to be a $50–100Bn per annum market.”
Mark Carney

Mark Carney, the United Nations Special Envoy on Climate Action and Finance, predicts that the current voluntary carbon market may need to reach up to 330 times its current size to a $100Bn annual market value by 2030 to meet upcoming demand. Carney has spearheaded the Taskforce on Scaling Voluntary Carbon Markets to create the blueprint and enabling conditions for the market to scale up globally. The Taskforce contains members from the entire carbon industry value chain, including representatives from large corporate buyers such as Shell, Nestlé, and Etihad to carbon credit verification standards such as Gold Standard and Voluntary Carbon Standard. The Taskforce’s recommendations are promising for market participants as they focus extensively on the obstacles that host countries typically face in generating and selling credits — unpredictable demand, low prices, limited access to financing, and long lead times to verify credits. The recommended solutions range from developing a legitimate secondary carbon market to implementing transparent data structures on credit suppliers. As part of this effort, IHS Markit (another member of the Taskforce) also recently launched a comprehensive daily pricing service for greater transparency in the voluntary carbon market.

“Meeting the emission reduction ambition stated in Pakistan’s first NDC could create a carbon offset industry worth over $200M per year.”
Pakistan Environment Trust

For Pakistan, a rapidly growing voluntary carbon market presents a significant opportunity to mobilise much-needed finance for its climate adaptation and mitigation needs. According to its first Nationally Determined Contribution (NDC), Pakistan’s GHG emissions are expected to rise to 1.6Bn tCO2e by 2030 but much of this could be mitigated through voluntary carbon offsets. According to our research, meeting the emission reduction ambition stated in Pakistan’s first NDC could create a carbon offset industry worth over $200M per year. One-third of this could come from natural climate solutions, where ongoing initiatives such as the Ten Billion Tree Tsunami Programme provide a foundation for building a portfolio of nature-based offsetting projects across the country. Initiatives in sectors beyond forestry also have potential to generate carbon credits — commonly undertaken projects include installing micro-hydro plants for off-grid communities, distributing clean cookstoves in rural areas, and implementing sustainable agricultural practices.

Figure 1: Estimated market size for voluntary carbon markets in Pakistan

Unfortunately, Pakistan has made limited progress to date in participating in the voluntary carbon market. As of today, only ~10 projects are currently registered in the voluntary carbon market for Pakistan, which is striking when compared to neighbouring nations such as Bangladesh and Nepal that have over 80 projects between them, and market-leading China and India that have a combined 1,600+ registered projects. Even more concerning is the fact that virtually all of Pakistan’s current projects are ones that have been re-purposed from the original Clean Development Mechanism in the energy and waste management sectors. Despite the Government of Pakistan’s strong focus on forestry and the growing demand from offset buyers for nature-based solutions, no projects in this sector have been registered by Pakistan in the voluntary carbon market thus far.

Figure 2: Number of voluntary carbon offsets projects registered with Gold Standard and VCS as of January 2021

Scaling up its participation in the voluntary carbon market will be a major achievement for Pakistan. However, without a coordinated national framework for guiding policymakers, project developers, and buyers, Pakistan will continue to lag behind its peers in capturing the significant uplift in climate finance being mobilised for adaptation and mitigation projects through the voluntary carbon market.

Stay posted for our upcoming series of articles on the work the Pakistan Environment Trust (PET) is doing to build Pakistan’s first programme on voluntary carbon offsets.