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Carbon Market Convergence: What carbon markets' blurring lines means for incentivizing investment into climate action

January 25, 2024

To maximize our chances of limiting warming to 1.5°C and mitigate the catastrophic effects of climate change, we need to achieve global net zero by 2050. Achieving this depends on three key factors, all of which demand significant amounts of investment from both the public and private sector to drive them forward: 

  • Corporates decarbonizing their operations;
  • Preventing land use emissions from deforestation; and
  • Carbon removals expanded to 10 gigatonnes per year.

While all three factors to reach net zero have costs associated, no one actor is responsible for it entirely. As a result, increasing action and driving investment depends on a new system of incentives and penalties emerging. Fortunately, carbon markets–both compliance and voluntary–can help fill critical gaps in funding and incentivizing action.

Over the past year, there have been a number of clear signs, standards, and regulatory measures that are bringing compliance and voluntary markets closer together. Expanding the existing compliance markets to include voluntary carbon credits will drive investment and innovation, and helps lay the foundations for a real incentive system for corporate climate action to emerge. 

Convergence between the two markets

A notable shift is underway as the VCM and compliance markets have been increasingly converging, driven by two key trends; increased regulation in the VCM and the expansion of compliance markets. 

The VCM is witnessing increased regulatory scrutiny, particularly concerning corporate use of carbon credits. As a result, there has been increased regulation and interest from regulatory bodies like the International Organization of Securities Commission (IOSCO) and the Commodity Futures Trading Commission (CFTC). In addition, participants in the VCM are now emphasizing quality, exploring ways to invest in projects earlier in order to have a greater say in project development. This blurs the lines between the traditionally less-regulated VCM and the compliance-focused markets.

Simultaneously, compliance markets are expanding into new sectors not previously covered in the compliance markets, such as the inclusion of maritime transport in the EU ETS. Alignment with the goals of the Paris Agreement is prompting compliance markets to explore carbon removal credits, which currently only exist on the VCM. Compliance markets will need to expand to allow for durable removal credits — and this may mean opening their doors to VCM carbon projects.

Explore the Opportunities and the Implications in our Latest Whitepaper 

To delve deeper into the convergence between voluntary and compliance markets and understand the opportunities and implications for your business and your carbon strategy, download our latest whitepaper. We outline everything you need to know about the current trends and offer insights into what you should do to prepare for this transformative shift–and how we can help along the way.

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About the author

This article features expertise and contributions from many specialists in their respective fields employed across our organization.