JC NCS Team - Carbon Markets Roadmap

January 2022

1
Executive Summary of Findings
Although carbon is today a small part of nature finance, it has significant growth potential to fill the nature finance gap.
However, carbon markets are at a crossroads. However, this rise has come with valid and growing concerns about
quality and integrity on both the demand and supply side. Resolving key questions on regulations and standards,
quality, claims and affordability will be vital to scale a high-integrity market, and there remain a number of moving
pieces to track.

Key Themes for the Future of the Carbon Markets

1• Voluntary and regulated markets are growing and converging as countries seek to meet NDCs, trade carbon
internationally and regulate corporate action. This brings both sovereign risk for projects, and potential new sources
of jurisdictional credits and demand from regulated industries.
2• Supply-Side: There are a range of project types across avoidance and removals, each with differing levels of
integrity. There remains disagreement about where the “bar” should be, and a nuanced house view will be
necessary. Ratings agencies and the Integrity Council on VCMs are leading efforts to improve credit quality.
3• Demand-Side: Demand for credits is underpinned by a set of claims, but what constitutes a credible claim is
currently in flux. SBTI is an influential arbiter of credibility, and neutralisation claims supported by permanent carbon
removal are most robust. SBTI has also begun strongly encouraging offsetting beyond value chains, but sectors vary
dramatically in their science alignment and ability to pay; a new class of confident, credible buyers will be essential
to catalyse the market.
4• Alternative Mechanisms: “Insets” within food and agriculture supply chains could provide a parallel set of claims
(mitigation, rather than offsetting) to support nature finance; interest in biodiversity credits, which could help support
nature-positive claims, is also growing rapidly. 2
I. Introduction
and Context
Carbon markets are relevant to twin imperatives for economy-wide
decarbonisation and nature finance

Carbon Pricing Imperative Nature Finance Imperative

• Pricing carbon is a vital lever for accelerating • Nature protection and restoration is
the climate transition across economic an urgent climate imperative, but
sectors – and has been a key pillar of GIM’s there is a large nature finance gap
strategic advocacy and grant-making ($800bn+) with limited private
• However, carbon markets, particularly sector involvement
voluntary, have faced significant challenges • Carbon markets today represent a
with quality and have been largely ineffective small fraction of nature finance
at driving the transition - building high- (<$1bn), but could be catalytic to
integrity integrity will be essential for net zero shift incentives if they can scale with
integrity

Roadmap Focus
Carbon markets offer significant promise and real challenges – this roadmap is the JC NCS team’s effort to
better understand and address these challenges and build conviction to underwrite risk and position us for the
emergence of a high-integrity planetary restoration industry. Given overlap with the carbon pricing imperative, this
work is relevant for broader GIM investment, advocacy and grantmaking strategies
4
Just Climate’s planned NCS strategy aims to catalyse a new planetary
restoration industry as a core pillar of our future economy
Potential Outcomes

6.7 gigatons of annual CO2 abatement

potential by 20301

Backbone of resilient and more sustainable

food supply chains that are 100%
deforestation free
Source: Diponegoro University Source: AP

Millions of green jobs in rural areas and

economic opportunity for local and
indigenous communities

Reverse biodiversity loss by 2030 and

begin global net nature recovery

Source: NatureScot Source: City of Monterey Remain within or return to planetary

boundaries on freshwater, nutrients etc.

1. McKinsey Analysis (2021)

5
© JUST CLIMATE LLP 2022 – Private and Confidential – Not a Marketing Communication
 We cannot achieve 1.5C without tackling emissions from land
use; NCS also offers gigaton-scale drawdown potential
Natural climate solutions are crucial to achieving emission Protecting, improving and restoring ecosystems can
reduction and carbon removal on the pathway to 1.5C1 deliver gigaton-scale carbon abatement by 20302

Carbon dioxide emissions, 1.5°C pathway emissions

PROTECT intact ecosystems
Gt CO2 1.5°C pathway CO2 removal
50
~4Gt CO2e

Protect Protect Protect

~50% reduction
forests wetlands grasslands
40 39 of emissions by 2030
NCS via avoidance/reduction
(e.g. avoided deforestation)
30
IMPROVE working lands
~5Gt CO2e
20
Net Zero Manage Manage Manage
emissions timberlands croplands grazing lands
by 2050 better better better
10

0 RESTORE degraded ecosystems

~2Gt CO2e
-10
NCS via removals/sequestration 2050 Restore Restore
2021 2030 forests wetlands
(e.g. restoration)

1. McKinsey and World Economic Forum ‘Consultation: Nature and Net Zero”, January 2021.
2. Sources: Griscom et al., PNAS (2017) and Griscom et al., Philosophical Transactions of the Royal Society (2020) 6
While policy is key, valuing carbon storage offers an opportunity to align
incentives in favour of nature-positive land management with private capital

• Land management is an incentive alignment

problem, and land stewards are currently rewarded
for degrading nature via harmful subsidies.

• To fill the $824bn nature finance gap, policy

Harmful subsidies remains key – and a key step will be to reshape
need to be withdrawn… subsidies regimes with efforts like biodiversity net-
gain in the UK.

• However, mobilising private capital at scale by

… and nature-positive linking the climate and nature agendas is a
finance needs to expand catalytic opportunity. Carbon is the smallest
6-8X
source of private funding into nature-based
solutions, but one that has the most room to grow
rapidly, even as other environmental service
markets emerge over time.

Source: Nature Conservancy, Paulson Institute , State of Finance for Nature, Mongabay 7
Carbon markets are at a crossroads, and capturing value for nature
will require resolving key uncertainties and shortcomings
Selected Media Clippings from 2021-22
The value of the voluntary carbon market (VCM)
has quadrupled since 2020, reaching almost
US$2B in 2021
Optimistic
Signals and
Forecasts

The imperative for

higher standards
Loss of market confidence in and scale is clear –
REDD in 2022 as uncertainty bites but the transition
demand from 'wild west' to
standardised
market could be
Pessimistic smooth - or highly
Signals and disruptive
Uncertainties

Sources: Bloomberg, Guardian, Carbon Pulse, ClimateTrade, ImpactAlpha; Just Climate

Analysis 8
 Voluntary and Growing interactions
1 Regulated between compliance and

II. Key Markets voluntary markets

Questions for 2 Supply-Side

Integrity
House Views
across Different
Main Supply
Integrity

the Carbon State of the

Credit Types Initiatives

Markets Carbon
3 Demand-Side
Integrity
Credibility of
Claims
Credibility of
Demand
Main Demand-
Side Integrity
Initiatives

Markets
Future
Nascent efforts to create Insets for the
4 Mechanisms Food and Land
a global biodiversity
for Nature Use Sector
credit market
Finance
1. Voluntary and
Regulated
Markets
Regulated and voluntary markets emerged separately, and have both
faced integrity concerns in the past
Regulated / Compliance Markets
• Governments across the world have attempted to
price carbon as a way to incentivise emissions
reductions
• Common mechanism include cap-and-trade
schemes (e.g., EU ETS, California) or carbon taxes
(e.g., South Africa, Singapore) and have successfully
driven decarbonisation in certain sectors (e.g.,
utilities, heavy industry) and geographies.
• While some schemes do allow small percentage of
credits from outside regulated sectors to enter these
markets (e.g., California forestry, South Korean
cookstoves credits), these regulated market
standards have often faced the most serious
concerns around quality
Voluntary Markets
• Voluntary markets emerged as a tool for
companies to make voluntary purchases of
emissions reductions or carbon removal
credits generated by avoided deforestation,
clean cookstoves, renewable energy etc.
• These purchases allow companies to make
claims, such as carbon neutrality, with a view
to marketing, social licence to operate, talent
retention etc.
• Voluntary markets are governed by standards
bodies (e.g., Verra, Golds Standard), but the
market has also been riddled with low-quality
credits and inflated claims.
11
1 Carbon pricing now covers a quarter of global emissions, with
higher prices and more rigorous design

• Regulated markets
have proliferated over
the last two decades
• While carbon prices
are still largely too low
to drive deep
decarbonisation, more
jurisdictions are
recognising the
importance for fulfilling
NDCs

12
Source: World Bank
 2021 and early 2022 saw strong growth in the voluntary carbon
markets, combined with valid concerns on quality and integrity
Retirements (tCO2e), excluding tokenised credits
2023 Forecast
While the market is now worth ~$2bn, more
than double of the pre-2020 figure, demand
growth has slowed in the second half of 2022.
2021 2022 This has been linked to issuance bottlenecks
and macroeconomic conditions –in
conversations, we have heard that corporates
2020 are in “wait and see” mode amid uncertainty on
both supply and demand-side integrity
Analysts forecast growth in 2023, but this
prediction remains highly uncertain.

Corporate
However,greenwashing
there have been significant challenges in the Lack of how
Corporates buy low-quality
carbon credits and use them
to greenwash their impact
performance
Overcrediting
past in MRVthese
integrity
When project baselines
cherry pick reference
regions, or when activities
would have occurred
anyway – including in
compliance markets like
Common Issues
componentsReversal risks
are consistently Community issues
implemented
Baselines are not dynamic Instances where
Risk of fires, flooding,
(e.g. updated regularly), communities have not had
policy/regulation that can
minimal verification of sufficient informed consent
reverse all carbon impact
actual carbon stored vs. or where benefits are not
made
initial modelling shared equitably 13

California
Source: Trove Intelligence, AlliedOffsets
However, demand and pricing for the highest-integrity NCS credits has
remained robust

NCS credits have continued to

sell at a slight premium to other
credit types in the spot market,
and “over the counter”
transactions directly between
buyers and developers for the
highest-integrity NCS projects
fetch significantly higher prices.

Examples from late 2022 include

• Delta Blue Carbon (mangrove
restoration) at $28/t via
Respira
• Mombak (reforestation) at
$30+/t to Microsoft

Source: Trove Intelligence

14
1 In addition, voluntary markets and national and international
regulations converging in ways that could be productive or disruptive
Voluntary Credits Accepted in Some Compliance Markets
Some regulated markets, including the California cap-and-trade market, the South Korean ETS, and tax-and-offset schemes in Singapore,
Colombia, etc. allow regulated entities to purchase credits from third parties (incl. NCS credits) to fulfil compliance obligations. More
countries are beginning to consider similar mechanisms for a range of credit types; while the EU has historically resisted this, this may
change for durable carbon removals. Acceptance into compliance markets could create a new, and potentially more stable, source of
demand for credits.

Emerging Policies Regulating Voluntary Carbon Issuance and Purchases

Countries across the world are beginning to regulate (and in some cases, tax) the issuance of voluntary carbon credits, including from the
forestry sector. These can take the form of a combination of “jurisdictional” credits (e.g., LEAF credits by Guyana), export bans (e.g., Papua
New Guinea), central approval requirements to align with NDCs (e.g., Indonesia), and fees for corresponding adjustments (e.g., Ghana). As
Article 6 of the Paris Agreement (deep dive in appendix) is negotiated and implemented, countries are beginning to strike bilateral deals (e.g.,
Switzerland with multiple countries). Project developers and corporate buyers will need to proactively navigate this evolving regulatory
landscape.

Industry Compliance Schemes Backed by National Regulations

CORSIA, the airlines offset scheme, is set to come into effect next year and will represent the first major industry-wide effort, backed by
national law in most major countries, to mandate voluntary offset purchases above a threshold. The impact of CORSIA and other schemes
(e.g., for hard to abate sectors) remains to be seen.

JC Hypothesis: Productive interactions between voluntary markets and regulations will help accelerate adoption and secure demand,
and those jurisdictions should be priority investment areas. However, regulation and expropriation could also be a significant risk for
carbon projects in some areas. 15
2. Supply-Side
Integrity
2 Credits can either avoid or reduce existing emissions, or draw
down carbon from the atmosphere or point sources
Credit Type Credit Sub-Type Examples Roadmap Findings / Hypotheses
Serious concerns with first generation REDD+ and
Avoided Forest protection (aka REDD+), improved forest other (e.g., California) standards, but potential to
Deforestation management resolve issues through next-generation avoidance
credits (dynamic baselines, jurisdictional etc)
Avoidance/
Reduction Considered non-additional given falling cost of
Renewable Energy Solar and wind energy in LMICs
renewables- deprioritise

Clean cookstoves in low-income countries, landfill Mixed, with some significant additionality and
Others
methane capture monitoring concerns for cookstoves.

Removal with Short

Important co-benefits, but carbon benefit is
Duration Storage Soil carbon, improved forest management
uncertain and durability remains a challenge
(10-30 Years)
Removal with 30- Afforestation, reforestation and revegetation (ARR), Important near-term lever for both carbon
Removals 100 Year Storage mangrove restoration drawdown and biodiversity/communities

Tech (DAC+Geological Storage); Hybrid Tech-
Removal with 100-
Nature Solutions (bio-oil injection, biochar,
1000+ Year Storage
enhanced weathering, biomass burial or sinking)
Considered highly valuable for corporate
neutralisation claims; beginning to receive
significant policy support, cost-down will be key.

17
2 As the market evolves, we will need to build a nuanced house view
on integrity across credit types…
… and we will need to build a nuanced house view on
Integrity is more complex than avoidance vs removal… integrity that builds on accepted principles with specific DD
Integrity (Additionality, leakage and
methodological certainty) Additionality
Is a Tonne a Tonne?
Clear demonstration that the restoration activities wouldn’t have
DAC and
Geological occurred without the presence of the carbon project
Native Species Storage
Degraded Land Baselines
ILLUSTRATIVE ONLY Reforestation
Use of relevant and conservative dynamic baselines, crediting the
Dynamic Country-Scale difference between what would have happened in reality
Baseline Net Zero Aligned
Jurisdictional Avoidance (e.g., Leakage
REDD Ireland Peat)
The project will predict and monitor leakage risks, creating a plan to
Strong First-
Gen REDD+ OAE mitigate leakage in non-project areas (e.g. working with gov’t and
projects (e.g., communities)
Katingan) Eucalyptus
Ton-Year Harvest Plantations Permanence
Deferral Credits
Seaweed Accurately accounts for permanence and reversal risks, determining a
Sinking (?) realistic buffer pool and discount rates that realistically take into account
Clean Duration these risks
Cookstoves How long is that
Over-credited tonne expected
Indigo Ag Soil REDD+ (e.g.,
to stay avoided/
Verification
Carbon California forest
BECCS removed? (years)
Credits offsets) The verification system uses latest methods (e.g. remote sensing
validated by field measurements) to precisely determine carbon stored
1 10 100 1000
Source: Illustrative Just Climate analysis based on market scan
18
2 … and engage with tech-enabled monitoring, new standards,
industry initiatives and ratings agencies
Higher Standards and Tech-Enabled Measurement, Integrity Council on Ratings Agencies
Reporting and Verification (MRV) Voluntary Carbon Markets

• The ICVCM is a new multi-

• A number of tech-enabled MRV approaches incl. satellite
stakeholder effort to define
data, LiDAR, dynamic baselines etc. are complementing
a new bar for “high quality”
manual methods to improving project quality
credits
• A range of open-source and proprietary data are being • As with the financial markets, independent
• The body has issued draft
used for better project design and high-quality and rapid ratings are playing an increasingly important
Core Carbon Principles
response role in marking out high-quality projects.,
plans to release final CCPs
• Standards bodies like Verra and Gold Standard are leveraging latest advances in MRV
in early 2023 – unclear how
incorporating such approaches into their methodologies • The highest-rated ( e.g., AAA) projects are
strong uptake will be if expected to meet/exceed most other
• Organisations such as CarbonPlan have offered
standards are “too high” quality standards – and could be a helpful
independent assessments of project methodologies to
raise standards shorthand for companies looking for an
external market of quality

JC Hypothesis: Tech-enabled MRV will become standard, and ratings agencies will likely be an important player in determining “high
quality” credits for corporate buyers. ICVCM remains the main multi-stakeholder body on quality, but its uptake remains unclear given the
range of competing interests involves. Multiple markers of quality will likely be layered on top of each other.

Source: ICCVC,
3. Demand-Side
Integrity
 3 Corporate claims underpin the voluntary market, and the integrity
of various claims is coming under increasing scrutiny
Claims (non-exhaustive)
SBTI neutralisation claim for
unavoidable emissions as part of
SBTI-aligned
SBTI beyond-value-chain
mitigation as part of an SBTI-
aligned high ambition pathway –
“compensation”
VCMI Claim (Gold, Silver or
Bronze) alongside a science-
based target
Nature-positive claim (no major
claim-level standards, but ART-
TREES is making the case)
Compliance claim fulfilled by
voluntary credits (e.g., CORSIA)
Voluntary self-defined claim
with varying purposes (e.g.,
carbon neutral product, to pre-
empt regulation,
Guidance
Residual emissions must be neutralised at
the net-zero end date (e.g., 2040 or 2050)
SBTI strongly recommends that companies
take immediate action above and beyond
their science-based targets… through
beyond value chain mitigation
Gold, Silver and Bronze all require 20-100%
of Scope 1-3 emission to be offset
Not defined, but will include zero
deforestation and nature
protection/restoration within and outside
supply chain
Mandated by compliance scheme (e.g.,
must offset any emission over 85% of 2019
baseline in CORSIA)
Self-defined within constraints of advertising
laws or ISO
Credit Type Emerging Answers on Longevity
High-Durability • Likely to offer a highly credible long-term option for neutralising
Removal unavoidable emissions, but demand at scale will likely only pick up
2030+
Avoidance or • Likely to be encouraged over long-term as companies are seen to be
Removal on a credible path to net-zero
• BVCM may help differentiate SBTI-aligned companies with an
important role for storytelling in certain regions with co-benefits
Avoidance or • If VCMI gains traction, then the tiers are likely to provide durable
Removal demand – however, the stringent nature of the standards means it may
be unaffordable for many companies/industries (e.g., Oil and Gas)
Avoidance, • Credible nature-positive claims are likely to hold value for customers,
Removal or particularly those with supply chains that interface significantly with
Biodiversity Credit natural and managed ecosystems
• However, claim standards for nature positive are nascent and may
take years to emerge
Avoidance or • Likely to remain in place in medium term (CORSIA to 2035) given they
Removal are backstopped by compliance requirements, but loose standards
may not generate significant demand for high quality credits
Avoidance or • Public pressure on offsetting means these uses are likely to face
Removal increasing scrutiny over time for non SBTI-aligned buyers
• This effect is likely to be stronger for lower-integrity credits
21
 3 Stylised “high-ambition” pathways represent the ideal, but even
market integrity leaders have followed a more gradual path
A Stylised High-Ambition Nature-and-Climate Pathway from Emergent… … compared to Microsoft’s pathway to achieving “carbon-negativity” by 2030

involves deep annual reductions in emissions, with full offsetting of value While Microsoft is a leading science-aligned, high-ambition corporate, it
chain emissions (beyond-value-chain mitigation) with reduction credits, and previously bought credits for a fraction of its emissions, which rose till 2020.
full neutralisation of residual emissions with removal credits all through Microsoft only plans to fully offset its footprint with a range of short and long-
the pathway, alongside specified claims durability removals credits by the year 2030.

22
Source: Emergent Forest Finance Accelerator, Microsoft
3 SBTI, the leading body on the claims-side, now strongly encourages
avoidance and removal credit purchases now in addition to future
neutralisation of residual emissions
Extract from latest SBTI position on BVCM (Sep 2022) – detailed guidance
expected in early 2023

The principle at the heart of the SBTi’s Net-Zero Standard is the mitigation hierarchy.
This hierarchy says that companies must prioritize value chain emission reductions
ahead of actions or investments to mitigate emissions outside their value chains to
achieve net-zero. However, the Standard also explicitly states that “companies
should go further and invest in mitigation outside their value chains now to
contribute towards reaching societal net-zero” – also known as beyond-value-
chain mitigation (BVCM)

It is important to understand that BVCM includes but is not limited to carbon

removals. While permanent removals are necessary to neutralize residual
emissions at the net-zero end date (e.g. 2040, 2050), investments in reducing and
avoiding emissions are critical right now. In fact, the Standard recommends that
businesses focus on securing and enhancing carbon sinks (terrestrial, coastal and
marine, etc.) to avoid the emissions that arise from their degradation. Examples
include purchasing high quality, jurisdictional REDD+ carbon credits.

We urge all businesses to act immediately.

Key Question : Will SBTI continue to be the main arbiter of credibility, and how will guidance evolve in 2023??
23
Source: SBTI Blog; Sylvera
3 A new effort, VCMI has attempted to set a high bar
for corporate claims, but affordability is uncertain
VCMI analysis suggests that different Industries have vastly
The VCMI was set up by the UK government for COP26 to raise the bar for
different abilities to fully offset emissions
credible corporate claims

Rough % of Profits Required Consum Tech F&B O&G Cement

to offset Scopes 1 & 2 er Goods

Avoidance ($10/t) <1% <1% <1% 23% 65%

JC Hypothesis: VCMI may be suitable for a small number of high-ambition Removal ($30/t) <1% <1% <1% 58% 190%
companies, but sets a very high bar that may limit uptake to certain high- Rough % of Profits Required
ability-to-pay industries. Guidance is still provisional – Google, Unilever and to offset Scopes 1-3
Hitachi have committed to trialling this in the pilot phase, so we should follow Avoidance ($10/t) 10% <1% 5% 157% 80%
and engage but not expect rapid uptake.
Removal ($30/t) 30% <1% 40% 470% 240%
24
3 Scaling the carbon markets will require a new class of confident, high-
integrity buyers to make large-scale purchases across the credit spectrum
X Voluntary credit purchases in most
recent available year (>2019) in MtCO2

Natural Carbon Avoidance Natural Carbon Removal, Natural Carbon Removal, Engineered/Geological
and Removal within Natural Storage (e.g., ARR, peat Engineered/Geological Storage Carbon Removal and Storage
Landscapes (e.g., REDD, IFM) restoration) (e.g., biochar, algae C removal) (e.g., DAC, ERW)

“Natural” “Engineered”

6 27 6
2 1.5 1 1.3 0.1 0.1 0.1

Traditional Offset Potential new class of Carbon Market Integrity Pioneers Permanent Carbon
Buyers “confident” buyers in addition to 5-10Mt/year Removal Pioneers
100Mt+/yr the Pioneers – with large <100Kt/year
footprints and credible net-zero
targets (1Gt/year)

Amid uncertainty over

quality and credible claims,
ILLUSTRATIVE many corporates are taking a
0 0 0.3 “wait and see” approach

Source: Company reports, AlliedOffsets

25
A. Alternative
Mechanisms for
Nature Finance
4 Biodiversity credits are nascent but could offer a way to finance landscape
stewardship as part of corporate nature-positive commitments
Key Uncertainties
Organisations to Track
Compliance schemes, including legacy mitigation banking and
the UK’s new biodiversity net gain framework, typically involve
offsetting biodiversity loss with restoration.
Equivalence and
However, some, including the new UNDP/IEED effort on
Offsetting
biocredits, argue against equivalence or offsetting in voluntary
markets. They favour using biodiversity credits to “represent a
positive investment in biodiversity, and not a way to offset
damage to biodiversity done elsewhere”

Biodiversity lacks a common metric (e.g., tCO2e), so efforts are

Measurement and
underway to create indices or baskets of metrics for verifiable
Verification
outcomes. There is no agreement yet on this.
Voluntary carbon market demand has taken two decades to
materialise at scale – are buyers likely to move early and at scale
Demand on biodiversity credits, particularly if not used for offsetting
purposes? There have been no at-scale transactions to date,
although UN PRI expects the market to grow to $43bn by 2050/
JC Hypothesis: While highly uncertain,
biodiversity credits could provide an
alternative source of demand,
particularly for avoided deforestation and
stewardship of natural landscapes. We
should engage with leading efforts and
attempt to catalyse both demand and
supply.
27
4 Insets could also become a source of value, following new guidance
from SBTI for companies with food and land use footprints
What are insets and why are they relevant?
An inset is a carbon removal that occurs within a
company’s supply chain. Unlike an offset, where
activity outside the value chain is used to
compensate or neutralise emissions, an inset is
considered closer to a real reduction in emissions.
Insets are most relevant for the food, land use
and agriculture sector (FLAG), where activities like
soil carbon sequestration, agroforestry and
reforestation can occur within a company’s supply
chain.
Insetting could be carried out by carbon project
developers (e.g., Pur Projet), but would represent a
new market mechanism for nature finance that does
not involve trading carbon credits, while still being
able to support net-zero and nature positive
claims for certain industries.
Source: SBTI
Guidance on Insets from the SBTI for the Food, Land and Agriculture sector
• Don’t cross the streams’: Companies are required to set FLAG targets when land-
intensive activities contribute 20% or more to their overall emissions. FLAG targets must
be separate and additional to their traditional science-based target that covers all other
non-FLAG emissions (i.e. from energy and industrial processes). Because these targets
must be separate, FLAG mitigation cannot be used to meet non-FLAG targets
• Reductions AND removals: FLAG pathways require companies to deliver both
emissions reductions AND removals. These removals are not ‘offsets’ because these
companies must also enhance carbon sinks as well as make emission reductions. The
removal activities included in the FLAG model are only inclusive of on-farm/in-forest
supply chain actions that sit within company value chains. FLAG carbon removals
cannot be used to deliver non-FLAG science-based targets.
• Carbon Avoidance or Removal outside corporate FLAG: We estimate that more than
half of the 15 GT annual mitigation from this sector will occur within agriculture and
forestry company supply chains. This still leaves significant FLAG mitigation activities
occurring outside of corporate supply chains by those engaged in subsistence
production, community or government land management and NGO projects. For
example, REDD+ projects (not associated with commodity production), cookstove
projects and others are not considered within FLAG as they do not fall within company
supply chains.
28
III. Just
Climate
Takeaways
We are acutely aware of the uncertainties, and plan to track a
number of key moving pieces across each of our priority themes
1 Voluntary and Regulated Markets

Sovereign Risk Which jurisdictions will Compliance Markets How much demand for Policy Support for CDR Will incentives (e.g,
support vs stifle supply under Article 6 etc? VCM credits will come from compliance IRA) new standards (e.g., EU CDR, UK CO2RE)
market sleeves and/or domestic markets? drive supply (in particular for permanent CDR)?

2 Supply-Side Integrity

Avoidance Will next-generation Ratings Agencies Will Permanent CDR How quickly will
ratings agencies emerge as ICVCM Will ICVCM become
avoidance gain acceptance as a step- long-durability CDR scale and
key arbiters of quality? the de-facto bar for quality?
change in quality? come down the cost curve?

3 Demand-Side Integrity

SBTI How strong will guidance Extractive Sector Demand Can we Uptake of VCMI Carbon-neutral product claims Will
be on beyond-value-chain thread needle between credibility and Gold/Silver/ product-level claims prove to be a
mitigation? ability to pay? Bronze meaningful source of future demand?

4 Future Mechanisms for Nature Finance

Insets Do insets create new demand or BD Credits / Stewardship Payments How

compete with offset demand? quickly could biocredits gain ground?

Prioritisation – based on High to Low Materiality to Roadmap- based on how could materially near-term changes in these areas could impact our core hypotheses
The NCS team has developed investment hypotheses for navigating
carbon markets uncertainty

Invest in Highest Only a fraction of current projects meet the future “high quality” bar, but we can
Integrity Projects look around the corner to back only those that are highly likely to meet this bar

Revenue from non-carbon (physical) commodities and alternative mechanisms

Diversify Revenues
(e.g., biodiversity credits) can help de-risk nature investments across landscapes

Secure Credible Long-term offtake from credible science-aligned buyers (e.g, Microsoft) may be
Offtake critical to ensure a base level of project viability

Support Durable Long duration removals (incl. tech and nature/tech solutions) fulfil "neutralisation"
Carbon Removal and "climate action" claims (while avoidance only fulfils the latter)

Track and Engage with ... such as emerging SBTI, VCMI, ICVCM guidance, biocredits, jurisdictional credits,
Key Moving Pieces role of ratings agencies, sovereign risk and insetting
31
We have also begun drafting a quality and risk assessment template
to assess carbon projects ILLUSTRATIVE Version 0.1 – to be refined
Category Parameters Below Threshold Minimum Requirement Best-In-Class Assessment

Avoidance or removal certified under major

Credit Type, and Some standards insufficient on High-integrity removal , jurisdictional credits ,
methodology (or in case of frontier CDR, clear
Methodology their own (e.g., California, ACR) ratings agencies [threshold TBD]
scientific validation)

Designed in consultation with communities, Active community participation in project

Project Design and No or limited community
>[30%] to communities and government design with [50%+] to communities and
Community Benefits consultation and benefits
government

Quality
Inflated baseline based on Baselines meet latest methodologies (e.g., Baselines highly conservative, over and above
Baseline and Additionality independent assessment. Poor dynamic REDD). Highly additional in carbon methodology requirements. Highly additional in
additionality terms. carbon and financial terms.

Durability <30 years [ton-year TBD] 30-100 years 100+ years

Other Revenue Streams ------- NA – Qualitative- ------

All-manual MRV, no insurance or Some tech-enabled + manual MRV, plan for State-of-the-art MRV for design and reversal
MRV and Reversal Risk
plan for reversal mitigation insurance and risk mitigation monitoring; contracted insurance

Active credit ban or unresolved
Country Risk for Carbon regulatory issues; actively
Risk
sanctioned (e.g., PNG)
Clear legal framework / active support for
Clarified political stance on carbon credits and
carbon credits domestically / in international
acceptable political risk (e.g., Brazil)
markets (e.g., Colombia)

Contracted offtake to ensure base level of

Merchant Risk TBD Identified offtake partners in active discussions business viability with creditworthy and
“confident” counterparty 32
APPENDIX
1 National and international policy on carbon credits remains fluid as
Article 6 of the Paris agreement is implemented
Article 6 Markets and Corresponding Adjustments

• Article 6 of the Paris Agreement is expected to govern

international emissions trading between countries, and a
related process will set rules around how voluntary credits
will be integrated
• “Market-Friendly” Scenario: If corporate net-zero claims
are treated separately from NDCs, then voluntary credits
that do not undergo corresponding adjustments could still
be appropriate. For instance, if Microsoft buys from a
project in Indonesia: Indonesia’s emissions would be
reduced and Microsoft would be able to make a claim
regarding compensation or neutralisation of emissions.
• Alternative Scenario: If corresponding adjustments are
required for all credits, this would significantly restrict
supply and introduce new bottlenecks for issuance –
although perceived quality may increase.

JC Hypothesis. Early signs from countries like Ghana and Singapore show transparent regulations being implemented after
periods of uncertainty. We will need to closely follow policy developments, leveraging supportive regulations where they
exist and fully understanding and mitigating risks where policy remains in flux.

Source: VCM Primer, Reed Smith, Carbon Pulse, JC Analysis 34

1 CORSIA could provide a new source of demand from airlines, but
likely at low prices
CORSIA Summary and Key Takeaways

• CORSIA is an international offsetting scheme by the UN’s

ICAO, underpinned by national law inc. 120 countries
(notably excluding Brazil, China and India), intended to cut
aviation sector net emissions
• During Covid, the baseline year was the subject of
controversy, and has recently been set at 85% of 2019
levels. Only emissions over that threshold need to be offset.
• CORSIA has approved a number of eligible emissions units –
including Verra and Gold Standard, but also including ACR
and China’s VCM. Corsia-eligible credits have traded at $4-
6 in 2022, with a very wide range of quality.
• Given the compliance-like nature of this scheme,
there is little incentive for airlines to pay high prices
voluntarily, though they may prefer higher-integrity
avoidance credits to avoid PR challenges
• Overall, this is likely to generate around 150Mt of annual
demand in the year 2030, and a total of <2Gt by the time
the scheme ends in 2035.
35
Source: Carbon Brief, Transport and Environment
1 High-forest countries are seeking new ways to attract
investment for nature, but one effort REDD.plus, creates a
new non-additional class of credit with significant challenges
What are Redd.plus sovereign carbon credits? What are the issues? Trove Research View

Not to be confused with jurisdictional credits, the CfRN There is no intrinsic problem with developing markets
defines RRUs as sovereign carbon ‘credits’ issued by investigating new ways to raise funds for their natural
Issues Identified by Trove
countries themselves. It claims that this sovereignty habitats, high forest cover countries included. What we
makes them superior to jurisdictional and project-based cover here are our concerns with REDD.plus itself in Methodological
General red flags:
REDD+ credits for having higher integrity, and being claiming to be selling carbon ‘credits’. risks:
more transparent and more effective at protecting • The UNFCCC
tropical forests. While jurisdictional REDD+ is still seen as ‘high-quality’, secretariat does not
• Baseline
recognise their definition
the market does not seem to trust REDD.plus. After inflation
of a ‘UNFCCC REDD+
A new platform, redd.plus, a collaboration between S&P being available for a year, only 20,000 RRUs have been • Poor
mechanism’
quantification
Global’s IHS Markit, CBL commodity exchange, and the sold. This compares to 57 million retirements of verified • Did not receive CORSIA
Coalition for Rainforest Nations, which represents over REDD+ credits in the same period. The ‘flooding’ of the eligibility – twice
• Insufficient
• Low levels of interest in
50 developing countries. market has not materialised, and we think that further validation and
the market
RRU issuances are unlikely to change that. verification
• Uncertainty on free,
• Lack of
In 2021 the Coalition for Rainforest Nations (CfRN) prior and informed
permanence
launched REDD.plus, a new platform for country-level Ultimately, purchasing credits from REDD.plus is like consent
safeguards
• Lack of transparency on
carbon credits from forests. Papua New Guinea was the engaging in a miniature result-based payment scheme.
distribution of funds
first country to join and now offers over 9 million ‘REDD+ Its ‘credits’ are not rigorous enough to offset or
Result Units’ (RRUs) at USD 16/tonne. Gabon, Ghana, compensate for emissions, whether ‘sovereign’ or not.
and Honduras have registered their interest. Gabon We cannot recommend that they are considered
alone plans to issue 90 million RRUs before the end of equivalent, let alone ‘superior’, to high-quality project-
this year. based REDD+ or jurisdictional REDD+ credits when
available.

Source: Redd.Plus, Trove Research

36
3 We see a potential mismatch between current and future credible
demand
Volume of Note: Directional and illustrative given
Credibility =
Current CO2e Offset data quality challenges
alignment to
Sectors Emissions Retirements Ability to Pay4
net zero
(Scopes 1-3)1 Among Top
pathway3
50 2
Energy incl. O&G >10Gt 29% ~6C Low Future of hard-to abate sector
demand remains an open question
Industrials ~10Gt 7% ~4C Low given large current purchases,
affordability challenges, and
Materials / Mining ~ 4Gt 7% ~4C Low
increasing scrutiny
Automotive ~5 Gt 3-7% 2C+ Medium
Airlines ~1.5Gt 20% 2C+ Medium Potential source of credible, high-
volume demand for avoidance and
Shipping & Transport ~1 Gt 3-7% 2C+ Low removal – particularly for science-
aligned leaders within sectors, and
Food & Beverage / Consumer ~6 Gt 4% 2C+ Medium consumer-facing ones
Real Estate ~3 Gt N/A ~2C Medium
Fashion 2 Gt 3% ~2C High Smaller volume buyers with
potential to lead on full beyond-
Financial / Professional Services <1Gt 12% ~2C High value-chain mitigation and catalyse
a market for high-price permanent
Technology / Software <1Gt 4% ~1.5C High removals
1. Our World in Data, McKinsey, team analysis
2. Triangulated through market research and data from AlliedOffsets tracking purchases of Top 50 purchasers over last 15 years
3. Estimated using MSCI Implied Temperature Rise Scores of comparable sectors
4. Estimated as share of revenues/profits required to offset Scope 1-3 at $30/t; VCMI Analysis 37
3 While still nascent, high-durability carbon removal are likely to be supported
by long-term “neutralisation” demand from corporates and governments

Corporate Demand for CDR Government Support for CDR

Frontier is a $925M advance market
commitment by leading corporates to purchase
high-durability engineered and hybrid nature-
tech carbon removals
Criticism of short-term removals and avoidance
credits has led many corporates to invest into
high-price, low-volume carbon removals instead
– making claims around catalysing a new market
rather than fully offsetting today.
SBTi requires “neutralisation” of residual
emissions, understood to involve permanent
CDR
The EU has begun defining a new carbon removal
certification scheme, and Sweden has launched a
$192m reverse auction for BECCS procurement. The EU
looks set to eventually integrate permanent removals into
its ETS, which has much higher prices than the VCM.
The IRA includes significant incentives for DAC, and
funding for natural carbon drawdown; various branches
of government are considering further support for other
CDR methods and a National Carbon Removal Authority
has been proposed.
The UK is designing a new programme via CO2RE to
invest in greenhouse gas removals as part of its net-zero
commitment

JC Hypothesis: High-durability removals are likely to have long-term, and growing, demand, and are the most certain of all credit
types in terms of integrity. Key questions to be resolved include the durability threshold (will reforestation or soil carbon qualify?);
cost-down and scale up potential (given current prices $200-1000/t+ at low volumes) and monitoring and verification 38
4 Inevitable Policy Response (UN PRI) expects that biodiversity credit
markets will take off between 2030-2050 to be worth ~$40bn annually

39
Illustrative
Scenarios
There are three broadly plausible scenarios to 2025 and beyond –
the implications of a step-change growth scenario are least clear
Price and Volume Implications
What we need to believe

Step-Change in Corporate action, after a temporary slowdown in late 2022 / early 2023, continues
Supply and to accelerate, mediated by SBTI and VCMI encouraging and/or requiring the use of

Price
Demand high-integrity avoidance and removals credits. ICVCM and ratings agencies play a
Integrity key part in bringing trust to the market.

Volume

Scrutiny results in permanent CDR being viewed as the only truly credible credits Price Volume
Durable CDR for high ambition buyers.
Dominates The rest of the market remains as a wild west, gradually losing credibility on both High-cost durable credits dominate, Volumes
supply and demand side decline due to cost and supply constraints

Efforts to standardize the market fail to gain ground – some corporates leave the Price Volume
Wild West market, but others enter and attempt to raise the bar. Claims become marginally
Continues more rigorous, and supply integrity gradually improves. Permanent CDR fails to Modest increases or decreases in prices and
scale beyond a very small set of buyers and suppliers. volumes

41
 While there are a range of future scenarios if markets scale as
hoped, the proportion of highly credible demand is an open question
Total GHG Emissions (Scope 1-3) Highly Credible Science-Aligned Demand Total Demand

Current Market – “Wild West” Step-Change in Supply and Demand Integrity

Future SBTI
Footprint ILLUSTRATIVE 2030 Scenarios –
2021
2025 Scenarios Trove Research
Current SBTI
Companies’
Footprint Trove
SBTI High
BCVM (2030)
3900
Current VCMI Trove
VCM Medium Low
2250 Demand VCMI
(2030) 1300
High 625 1200
Ambition
200 430
100-200 200-300 200-300
20-30

SBTI 2021 2X SBTI 10% to 30% to

Key Trove 30% 10% of 30% of
Scope 1-2, companies + VCMI VCMI Silver/
Assump Research offsetting of footprint of footprint of
adding 50% 4.6% annual Gold Bronze
tions SBTI Scope “net-zero” “net-zero”
decline (100% (20% 1-3 companies companies
offset) offset)

DISCUSSION: In a world where claims become more robust, back-of-the-envelope calculations suggest that demand could increase to 1-7X
based on SBTI adoption and the emergence of claims standards like VCMI. How much of that demand will be considered highly credible and
42
science-aligned remains an open question.