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Environmental Audit Committee’s Call for Evidence on the financial sector and the UK’s net zero transition

July 12, 2022
Environmental Audit Committee’s Call for Evidence on the UK’s net zero transition
Sylvera have submitted evidence to the Environmental Audit Committee on the essential role of voluntary carbon markets in the UK net zero transition.

Executive Summary

1. The potential effectiveness of the financial sector in encouraging the decarbonisation of the economy in time to limit global temperature rises to 1.5°C is currently limited by its faltering approach to carbon markets.

2. London was until recently the global centre for carbon trading, yet today other trading centres are in the ascendancy. By regaining the initiative, and taking a more ambitious, innovative and science-based approach to offsetting, the UK could simultaneously:

  • Boost the potential of the financial sector to hit net zero;
  • Seize a larger slice of the rapidly growing global carbon trading pie;
  • Lead the global debate on high quality offsets, building on important UK-sponsored initiatives such as the VCMI and IC-VCM; and
  • Preserve and promote its position as an intelligence and advocacy hub for the carbon sector, with a strong presence of climate and energy think tanks and research institutions with a global focus and large data and market information services firms.

3. Carbon markets are an essential tool in the net zero toolkit as they are where a large proportion of the world’s most cost-effective abatement is to be found. However in many circles they are currently treated with undue scepticism. While this scepticism has its roots in the well-documented shortcomings of the carbon markets of the late 2000s and early 2010s, it fails to recognise the much higher integrity of the carbon markets today.

4. Rapid technological advances in recent years mean that many of these problems are now solved. For example, it is now possible to independently verify the effectiveness, including permanence risks, of forest projects, with a very high degree of certainty. This was simply not possible five years ago.

5. The financial sector in general, and GFANZ in particular, should therefore rapidly reassess its positions to seize this opportunity to leverage climate finance and channel it to where it can have the greatest climate impact. The Government also has an important role to play.

The imperative for carbon markets

  1. There is clear scientific consensus on the steps necessary to mitigate the climate crisis. The latest IPCC reports unambiguously state the need for rapid and deep global decarbonisation starting this decade. To have a chance of limiting warming to 1.5°C, IPCC scenarios suggest that global emissions need to peak no later than 2025 and reach net zero by 2050. 
  2. Although less than the costs of failing to act on climate change, there is a significant up-front cost to this decarbonisation. Furthermore, there are limits to what is technologically feasible at present. These factors limit the potential for within-value chain decarbonisation alone to reduce global emissions to the extent needed this decade. For example, nature-based solutions will play an essential role in global emissions reductions and removals, but for the world to meet its net zero targets, the future global investment in nature-based solutions needs to increase four-fold by 2050, to an annual investment of more than $536 billion
  3. For these reasons, we emphasise that following the emissions mitigation hierarchy is essential: avoid, reduce, offset, remove. However, we highlight in this response that an essential step is currently being overlooked: offsetting. 
  4. Offsetting, delivered through effective global carbon markets, can deliver faster global emissions mitigation at a lower cost. More than two thirds of countries include a role for carbon markets in their plans to meet their nationally determined contributions (NDCs), and this role for carbon markets could halve the cost of implementing NDCs up to 2030. Furthermore, carbon markets play a vital role in channelling climate finance and funding green growth in the Global South, which hosts the most potential for carbon credit issuance: global carbon markets could mobilise up to $1 trillion per year by 2050. 

Quality concerns: carbon markets, then and now

  1. Historically, the impact of both compliance and voluntary carbon markets (VCMs) has been restricted by a number of challenges, such as poor accounting, practical limitations of monitoring, reporting, and verification (MRV), perverse incentives, corruption, and lack of transparency. In particular the Clean Development Mechanism (CDM), established under the Kyoto Protocol, has been criticised for poor methodologies and safeguards, including allowing non-additional projects, not accounting for leakage, and not protecting the rights of indigenous people and local communities. These concerns about the underlying environmental integrity of the market, and hence the quality of the credits produced, led to a steep decline in demand after 2012. 
  2. This scrutiny has resulted in improved procedures. Voluntary standards developed by leading registries such as Verra and The Gold Standard are applying increasingly stringent conditions for the validation and verification of crediting projects. Industry bodies such as the Integrity Council for VCMs (IC-VCM) and VCM Integrity Initiative (VCMI) are outlining comprehensive standards for carbon credit quality and their credible use in net zero-aligned strategies. Developments in technology are revolutionising MRV and promoting both transparency and scaling of carbon markets. Meanwhile market infrastructure is also growing to support appropriate due diligence and future regulation of VCMs, including Sylvera’s provision of carbon credit ratings. 

Technology and high integrity carbon markets

  1. Technological innovation is providing solutions to many of the challenges limiting the integrity and scaling of carbon markets. The technology deployed by Sylvera provides an illustrative case study. Nature-based solutions, particularly REDD+ (reducing emissions from deforestation and forest degradation), have been dismissed, and even excluded from systems such as the CDM, due to concerns about their implementation and monitoring. Sylvera’s novel technological approaches allow rigorous monitoring of forest projects’ emissions, quantification of uncertainty, baseline analysis, risk mapping etc. 
  2. Within the domain of forest crediting projects, historically sampling and allometric approaches introduced bias, uncertainty of 40% or more, and the opportunity to game methodologies and approaches. Sylvera has overcome these challenges by deploying machine learning (ML) models to interpret optical, radar, lidar, and hyperspectral satellite imagery, calibrated by multi-scale lidar (MSL) data collected by our field teams. This allows us to assess the actual carbon benefits to date of forest projects with a high degree of confidence, as well as rate other important considerations of credit quality such as additionality, permanence, leakage and co-benefits. 
  3. As these instruments become better known and more widely used in the market, they will address much of the opacity and lack of confidence that has so far marred the reputation of VCMs and limited their impact.
  4. Future technology promises to have similar transformative effects on other types of carbon credits. One example is remote sensing of soil carbon. Soil plays a significant role in global carbon cycles and has the potential to either emit or sequester large amounts of carbon in response to human activity and climate change. However, monitoring these impacts is currently only possible using in-situ sampling followed by laboratory analysis. Sylvera is contributing global efforts to allow comprehensive, timely, and scalable monitoring of soil carbon through remote sensing-based approaches. This work is being supported by a research grant from UK Research and Innovation. 

Carbon markets and net zero finance

  1. All economic activity flows through financial institutions, and so net zero finance cannot be achieved without decarbonisation of the whole economy. Although all sectors need a sophisticated understanding of the potential role of carbon credits and offsetting in their net zero strategies, this is especially true for financial institutions, as they are likely to be held accountable for the emissions and offsetting of their customers through scope 3 emissions accounting. 
  2. The financial sector has made huge strides in its response to climate change. This was driven in large part by the pioneering work of Mark Carney and the Bank of England in championing the concept of climate-related financial risk through the Task Force on Climate-related Financial Disclosures (TCFD), established in 2016. In 2021 the Science-Based Targets Initiative (SBTi) published its draft guidelines for the financial sector, bringing further clarity, structure and guidance to the sector’s transition to net zero. However one exception to these positive developments has been a narrow view of carbon markets, which overlooks the importance of offsetting, in particular relating to reduced and avoided emissions. The cost of this oversight is that the financial sector, and the world, is unnecessarily forgoing a critical tool in the toolkit to achieve low-cost, high-integrity mitigation - increasing the cost and reducing the likelihood of meeting the goals of the Paris Agreement.
  3. It is important therefore that financial institutions pursue a nuanced understanding of how offsets can credibly be used in different contexts. Organisations such as GFANZ can promote balanced and evidence-informed discourses on these topics, while independent, transparent data such as Sylvera’s carbon credit ratings allows financial institutions to act in the market with confidence. 

About Sylvera

  1. Sylvera is a UK company founded in March 2020 to provide independent data on nature-based carbon. With over 120 staff and growing fast, Sylvera combines Earth observation (EO) data and advanced machine learning methods to quantify the above ground biomass and carbon stored across forested landscapes. These estimates are uniquely accurate because they are underpinned by proprietary, state-of-the-art lidar-based calibration data collected from forests around the world, from both the ground and air. 
  2. The initial commercial application of this technology is a ratings product for carbon credits sold on the VCMs. Coverage is rapidly expanding across the whole VCM, with 50% of nature based credits and 85% of REDD+ credits (as measured by issuance volume) currently rated. Other project types, including ARR (afforestation, reforestation, and revegetation), IFM (improved forest management) and renewables, will be available in the coming months. 
  3. Alongside customers using this data to select high-quality carbon credits, Sylvera has built partnerships with exchange platforms CBL and CIX. As Sylvera does not sell credits, the data is totally independent and free from conflicts of interest. 
  4. Sylvera’s work has been supported by research grants from InnovateUK’s Small Business Research and Innovation (SBRI) programme. As part of this programme Sylvera has conducted field work in the UK, Peru and Gabon to develop and validate the lidar methodology. The company has a range of technical partners including Dr. Antonio Ferraz of UCLA and the NASA-Jet Propulsion Lab, Prof. Mathias Disney at University College London, and the University of Leicester through the Space Research and Innovation Network for Technology (SPRINT). In 2021 Sylvera was named one of the winners of the WEF Uplink Carbon Markets Challenge, and in 2022 Sylvera was listed as number eight on the Sifted’s list of Europe’s top 100 future unicorns (companies with a valuation of $1bn or more).
  5. More recently, Sylvera has partnered with the World Bank and various national governments to conduct national forest inventories and quantify forest emissions and sequestrations in forested tropical nations. 
  6. As a mission-driven organisation, we believe passionately in the potential contributions of high integrity and well regulated carbon markets to the global net zero transition. Our ongoing analysis of carbon markets and the policy landscape reveals the importance of clear and consistent policy support to instil confidence and facilitate the scaling of these markets. 
  7. Furthermore, we see massive potential benefits to the UK in becoming a world leader in this space. Following the UK’s presidency of COP26, at which great progress was made on Article 6 of the Paris Agreement (covering international carbon trading), and the UK’s support of VCMI and IC-VCM, there is already significant momentum for the UK to regain its position at the forefront of global carbon trading.

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About the author
VP Policy

Ben Rattenbury is a carbon markets, green finance and climate policy expert with more than a decade of experience in the sector. A former Fulbright Scholar at Columbia University, he has also worked with and for the UK financial sector, UK Government, World Bank, and UN Climate Change Secretariat. As VP Policy at Sylvera he leads the team working on Voluntary Carbon Markets intelligence and intersections with wider climate and markets policy.