Corporate Demand for Carbon Credits Could Support Climate Ambitions of Tropical Forest Countries

Growing corporate demand for carbon credits could aid tropical forest countries in achieving their national climate obligations, according to a new report from Trove Research supported by Environmental Defense Fund. The analysis found significant corporate demand for tropical forest credits, which could generate financing that could be leveraged to help exceed countries’ emissions goals under the Paris Agreement. By 2050, according to the analysis, corporate demand may become much greater than the capacity of tropical forest countries to deliver these forest credits, though more ambitious emissions targets could help increase the supply.

“This is the first time the potential impact of the voluntary sector on the world’s main tropical forest countries has been quantified, and we can see the demand for these forest carbon credits is massive,” said Guy Turner, study director and CEO of Trove Research. “Companies really want to invest in forest carbon credits, but after 2030, there may not be enough supply to meet their demand. Tropical countries could help meet that demand by boosting the ambition of their emissions targets under the Paris Agreement.”

The analysis examined the future demand for carbon credits from the corporate sector and the potential share of this demand for forest-related credits from tropical forest countries – both in the form of reduced deforestation (REDD+) and afforestation/restoration activities.  This potential demand was then compared with the capacity of these countries to deliver carbon credits.

The results show that up to 2030, demand for carbon credits from tropical forest countries could equal the capacity of these countries to supply the credits. But over the period to 2050 demand for carbon credits from tropical forest countries could exceed the available supply by 400%.

If voluntary demand for carbon credits materialises to the extent projected in this report, tropical forest countries could achieve emission reductions in excess of their current NDC commitments through finance available from the voluntary sector.

“The soaring global demand for carbon credits from companies unlocks incredible potential and necessary resources for tropical forest countries to achieve their climate commitments – and maybe even go above and beyond,” said Pedro Barata, Senior Climate Director at Environmental Defense Fund. “Companies in the voluntary carbon market can contribute their fair share to global climate action, and countries can reap the benefits with more ambitious, but attainable, emissions targets.”

To date, most of the debate around the use of corresponding adjustments* for voluntary carbon credit purposes has assumed that the voluntary market would not have a material impact on host country emissions. This research suggests the opposite is likely to be true when the long-term growth in demand for voluntary carbon credits is factored in.

If voluntary demand for carbon credits materialises to the extent projected in this report, it could facilitate the creation of correspondingly adjusted credits. Correspondingly-adjusted credits would likely be priced at a significant premium to carbon credits without an adjustment, as governments would prioritise the lowest-cost forms of mitigation first in achieving their NDCs, so that emissions reductions beyond their NDCs would be more costly. However, the appetite to pay for these higher priced credits has yet to be tested in the voluntary corporate sector.

*Corresponding Adjustments are an accounting mechanism designed to avoid double-counting of a carbon credits between the host country and the user of the carbon credit. If the user claims the credit against their emissions footprint, the country where the project takes place adjusts their emissions upwards so that the emission reduction is not counted twice.

About Trove Research

Trove Research is an independent research and data company focused on solving the climate change challenge through objective and rigorous analysis. We work across the range of climate policy areas, including carbon markets and the broader energy transition. We develop analytical tools and insights for use by companies, governments, NGOs and other research organisations to gain deeper understanding of complex sustainability decisions.