CHAPTER 1: Markets & Mechanisms

This paper provides a first step in analyzing sources of finance for activities that avert, minimize and address L&D (hereunder referred to as ‘L&D activities’) in the context of: (i) the Voluntary Carbon Market (VCM) and mitigation programs with co-benefits; (ii) cooperative approaches under the Paris Agreement’s Article 6.2 and 6.4 carbon markets; (iii) the Nature Credit Market and its biodiversity credits; (iv) the Paris Agreement’s Article 6.8 with its non-market approaches; (v) and potential new markets and non-market mechanisms for responding to L&D.   

The paper distinguishes between sources of finance for (a) the new funding arrangements for responding to L&D and; (b) a new fund for addressing L&D.

The potential for using Paris Agreement’s article 6.2 and 6.4 credits (also called ITMOS) for enhanced finance of L&D is limited. This is because any activity under these cooperative approaches will need to reduce emissions. This includes the mitigation co-benefits resulting from adaptation activities. Possible mitigation co-benefits of L&D activities are not included. In other words, the L&D activity needs to be coupled with a mitigation activity and defined as an adaptation co-benefit for it to be financeable. As such, these credits could be generated for a limited number of activities that avert and minimize L&D. Thus, the payments for these credits that could be used as a funding source is limited. Further, the source of income from these credits will not be ‘additional’ as it could otherwise have financed adaptation. Further, they will not be applicable to finance activities that address L&D.

Share of Proceeds (SOP) is a levy on transactions of carbon reduction instruments going towards financing adaptation actions. It was introduced to de-couple some of the finance of mitigation projects and re-direct it towards adaptation in those States that were not benefiting from mitigation projects and programs. Potential new sources that can be earmarked for a L&D fund include the establishment of SOP under article 6.2 and 6.4 of the Paris Agreement as well as under the Voluntary Carbon Market (VCM). This has been done for adaptation, and the same procedures could be applicable for L&D.

SOPs under Paris Agreement’s article 6.4 is limited to the Adaptation Fund (AF). The AF does not have a specific mandate to finance L&D. However, it finances activities that ‘avert and minimize’ L&D if it has a clear adaptation component. For AF to provide resources for ‘addressing’ L&D, including non-economic measures, rehabilitation and reconstruction and so on, it will be necessary to clarify and expand its mandate to include L&D activities more comprehensively. However, this solution would not lead to ‘additional’ finance.

In addition, Parties should consider how to create ‘additional’ finance for L&D. However, the potential of increasing the rate of SOP beyond the current 5% and direct it to the L&D fund is limited. This is because the level of SOPs for adaptation is already set relatively high under the Paris Agreement (more than double than under the Clean Development Mechanism), and because it is likely to be challenging to ‘re-open’ these topics so late in the negotiations. Further, an additional SOP levy for a L&D fund could limit the viability of mitigation projects under article 6.4. Thus, if an additional SOP is to be introduced it should not lead to fewer mitigation projects being developed.

In deciding on a potential SOP for L&D the following is relevant: (i) the potential SOP for L&D should not reduce the finance for adaptation (i.e. it should be ‘additional’); (ii) the potential additional SOP for L&D should not hinder the realization of mitigation projects; and (iii) the potential SOP for L&D should not reduce the incentives to develop other market or non-market mechanism for enhanced finance for L&D activities.

The Voluntary Carbon Market (VCM) has evolved to finance sustainable development benefits related to the Sustainable Development Goals (SDGs) that are independent from mitigation activities. These stand-alone SDG benefits have the potential of financing activities that avert, minimize and address L&D as long as there is an SDG rationale to support them. There are pilot projects under Verra, one of the largest providers of these benefits, which could be utilized to channel new sources of finance for projects to avert, minimize and address L&D. The VCM is unlikely to be useful for direct funding for the L&D fund, however.

Another way to increase the potential of the VCM as a source of finance for L&D that does not encroach on adaptation finance, is to create specific L&D co-benefits that are more clearly connected with benefits from L&D activities. As such, the interest in paying higher premiums for these credits could increase, leading to potentially increased financial flows for L&D activities. Further research is needed to fully understand this potential, however, there seems to be an acknowledgment that SDGs and biodiversity co-benefits are increasingly popular and demand higher prices. These new finance flows are likely to be distributed through the existing system under the VCM, which means that finance will fund L&D projects under the VCM. As such, this option is a way to enhance the sources of funding for the funding arrangements for L&D, and not the L&D fund.

In enhancing sources under existing tools in the VCM it is worth noting the following limitations: (i) the VCM is heavily focused on mitigation, and co-benefits from these credits will be distributed to those countries that host the mitigation project or program, mainly a handful of developing countries, to the detriment of the least developed countries; (ii) it has limited potential for minimizing and averting L&D as there needs to be a link with a mitigation co-benefit; (iii) these sources will not be applicable to ‘address’ L&D, which is the main focus of the funding arrangements and the fund for L&D.

The Nature Credit Market (NCM) is a nascent market creating credits for positive biodiversity benefits. Private sector is encouraged to purchase these credits as their core activities are closely linked to natural resources. However, for L&D the NCM market is limited to financing of positive benefits reducing biodiversity loss: (i) it covers only the aspect of L&D averting, minimizing and addressing biodiversity/nature loss; and (ii) it addresses only the potential positive benefits of addressing biodiversity, such as restoration of biodiversity or soil quality or reduced loss of biodiversity, and does not aim to finance irreversible losses that have no potential positive activity connected with it.

Due to the inherent nature of the VCM and the Nature Market, which is structured in a way that creates credits from the ‘positive benefits’ created by the activity, this seems to be the potential of the VCM in addressing L&D.

In the carbon markets, private sector engagement in financing L&D is very limited. The main reason is that these projects, in particular for addressing L&D, as a general rule do not create a return on investment. Further, even when the benefits are quantifiable, private actors are reluctant to set a price on these benefits as they are difficult to price. To increase private sector finance of L&D, there are potential sources that can be developed independent of the VCM and the NCM.

There is limited (if not non-existent) discourse on the potential for existing and new markets and non-market mechanisms for financing activities that reduce, minimize and address L&D. There are several ways to enhance finance from private sector for L&D:

One option is to create a new market for adaptation, resilience and L&D, in the similar veins as the Nature Credit Market (NCM). The increased focus on the need for a more comprehensive response to climate change which includes supporting L&D efforts of developing countries that are particularly vulnerable could be used as a rationale for encouraging financial contributions from companies and other private sector actors. L&D credits could be established that reflect positive benefits from averting, minimizing and addressing L&D, potentially also including benefits of enhancing adaptative capacity, increasing resilience and reducing vulnerability. In establishing this market, it would be necessary to involve both public and private sector actors as well as other actors working with L&D projects to create voluntary guidelines for how to engage in this market. It could also be helpful to have a system of reporting in place which can enable these actors to clearly define their contributions (or ‘claims’) in their annual reports on climate risk.

The creation of credits from L&D activities would be de-coupled from mitigation activities, and differentiated from sustainable development activities and be funnelled to the most vulnerable countries with L&D projects, including the least developed countries (LDCs) and Small Island States (SIDS). The finance flowing from these credits, however, is likely to go to the funding arrangements for L&D and not be directed to the L&D fund.

Another option is to establish a private sector L&D finance mechanism as part of a L&D fund, or serving a L&D fund as a satellite mechanism with its own board. In establishing this mechanism, the fund could decide on a framework in which the conditions for private companies financing L&D could be stipulated. It could create a system of certification with information on the contributions that private companies or other entities providing finance could utilize in their company reporting on climate change risks. This mechanism would encourage finance directly to the L&D fund. It would reduce the risk of fragmentation of frameworks, and would have the benefit of having ‘global’ reach and visibility through the international climate negotiations. Further, it would not have restrictions from market mechanisms, and could be channelled to the most vulnerable countries in line with the framework’s conditions.

In the new market mechanism, the front runners could be government owned enterprises or enterprises that have a strong governance structure focused on improving their equitable footprint and comprehensively respond to climate change. National governments also play a role in encouraging, recommending or requiring companies to set goals and making contributions to L&D finance, for example through guidance documents, laws or regulations.

The board(s) could be tasked with developing a framework stipulating the criteria for how private sector finance could be undertaken and what type of information these actors could use to report on their contributions in their annual reports. It is likely that private sector actors would need a seat on the board with voting rights for this option to be viable. This could be an option for enhanced sources to be considered at COP28, including the necessary arrangements to be put in place for this to be possible. 

This part of the paper will assess the potential of the voluntary carbon market (VCM), the carbon market under Article 6 of the Paris Agreement, the Nature Credit Market (NCM), non-market approaches under article 6.8 of the Paris Agreement in providing new sources of finance for activities that avert, minimize and address L&D. It will also point towards the potential of creating a new market or new market mechanism for encouraging the private sector to finance L&D activities.

The Paris Agreement offers Parties the opportunity to cooperate with one another when implementing their Nationally Determined Contributions (NDCs). Article 6 contains three approaches to international cooperation; two of which allow the use of market-based climate change mitigation mechanisms (art. 6.2 and 6.4), and one for non-market-based mechanism (art. 6.8). These cooperation mechanisms should not only make it easier to achieve existing reduction targets, but also to raise ambition in Parties’ efforts for mitigation and adaptation and promote sustainable development and environmental integrity.

PA article 6.1

The Paris Agreement contains guidance for Parties when they intend to use cooperation mechanisms to achieve their NDCs:

The Adaptation Fund has projects and programmes which indirectly address loss and damage. As noted above there is no guidance from UNFCCC COP to the adaptation fund to finance loss and damage. Approximately 25% of the portfolio of the AF is composed of Disaster Risk Reduction (DRR) and Early Warning System (EWS) projects, emergency preparedness and resilience. There is no specific window to finance post disaster programmes. L&D is not directly financed by the AF but there are many projects which have loss and damage elements, mainly DRR and EWS projects. The AF classifies and finances its projects by sector. The sectors are Agriculture, Coastal Zone Management, Disaster Risk Reduction, Disaster risk early warning systems, Ecosystem based Adaptation, Food Security, Forests, Multisector Projects (synergistic projects in the sectors), Rural Development, Urban Development and Water Management.

Adaptation Fund Project Sectors - https://www.adaptation-fund.org/projects-programmes/project-sectors/

The AF does not have a L&D sector. Currently the AF is not providing resources for areas such non-economic measures: e.g., active remembrance, documenting and recording traditional and local knowledge, cultural preservation, societal protection, counselling, official apologies, enabling access/safe visits to abandoned sites, recognition and repair of loss (whether or not accompanied by financial payment), construction and creation: e.g., altering the nature of the area in question, such as building artificial islands and creating a metaverse for the State in question and emergency response and post disaster activities such as, rehabilitation and reconstruction.

Furthermore, Article 6 establishes Share of Proceeds (SOP), which is a levy on transactions that is earmarked for the Adaptation Fund.

The Paris Rulebook for Article 6 was adopted at COP26 in Glasgow, which included a program of further work. This was further elaborated at COP27 in Sharm el-Sheikh. There are outstanding issues, some to be agreed at COP28 in Dubai, but these are mainly of technical nature. Despite these issues, countries are eager to commence with implementation of article 6, and many have started bilateral cooperation under article 6.2. However, many countries lack the information and institutional capacities needed to participate in these markets, which has spurred initiatives under and outside of the UNFCCC to support readiness for participation.

World Bank (2023). State and Trends of Carbon Pricing 2023, p. 49. Available at https://openknowledge.worldbank.org/items/58f2a409-9bb7-4ee6-899d-be47835c838f

In the next sections, we will look at the potential for Article 6 as a source of finance for L&D activities.

Under article 6.2, Parties can cooperate directly with one another to bilaterally and voluntary trade with Internationally Transferred Mitigation Outcomes (ITMOS).

ITMOS are defined as emission reductions and removals, including mitigation co-benefits resulting from adaptation actions that are real, verified and additional; measured in metric tons CO2eq or in non-GHG metrics consistent with the NDC, generated from 2021 onwards.

This makes it possible for emission reduction and removal measures to be implemented in one country and the resulting emission reductions to be transferred to another and counted towards its NDC or authorized for use for other international mitigation purposes. This arrangement needs to promote sustainable development, ensure environmental integrity and transparency and be subject to robust accounting, to avoid double counting.

Paris Agreement, article 6.2. Double counting is avoided through a corresponding adjustment for both emissions and removals covered by their NDC (Decision 1/CP.21, para 36). This, in turn, would require that the host state has established legal clarity about the entitlement to the transferred emission reduction/mitigation outcome, to avoid that the same outcome could be transferred more than once.

In order to participate in article 6.2 cooperation, the Party needs to be Party to the Paris Agreement with an NDC, with arrangements in place for authorizing the use and tracking of ITMOS and with the most recent National Inventory Report. While international supervision of these cooperation activities is not foreseen, guidelines on using this cooperative approach have been developed.

Draft decision – /CMA.3. Matters relating to Article 6 of the PA - Guidance on cooperative approaches referred to in Article 6, para 2 of the Paris Agreement.

ITMOS are real, verified and additional emission reductions and removals, including ‘mitigation co-benefits resulting from adaptation actions and/or economic diversification plans’. For article 6.2 to include activities that avert, minimize or address L&D, therefore, it needs to overlap with part of the adaptation activity that also produces a mitigation co-benefit or is part of economic diversification (e.g. risk insurance facilities, climate risk pooling and other insurance solutions, activities that increase resilience for communities, cities, etc). The potential of producing any ‘additional’ sources of revenue is, however, not present as any finance for L&D nevertheless could have been construed as adaptation finance. A more in-depth analysis is provided below under article 6.4.  

Despite the detailed rules still being developed, Parties have already started implementing cooperative approaches under article 6.2 through bilateral agreements. The first project to generate ITMOS under article 6.2 was announced at COP27. It was an agreement between Switzerland and UNEP with Ghana and Vanuatu as host countries. In February 2023, Thailand and Switzerland authorized Asia’s first Article 6 program.

For a more comprehensive list of articles 6.2 bilateral agreements as of 1^st April 2023, please see World Bank. State and Trends of Carbon Pricing 2023, op. cit., p. 47.

A second option involves the use of the mechanism established in article 6.4 of the Paris Agreement to contribute to the mitigation of GHGs and support sustainable development. It is the successor of the Clean Development Mechanism (CDM) developed under the Kyoto Protocol and can be understood as the Paris Agreement’s version 2.0 of this mechanism. In contrast to direct bilateral cooperation, this mechanism is governed by a supervisory body (SP) designated by the Conference of the Parties of the Paris Agreement (CMA). It functions according to common rules, modalities and procedures, many which were adopted at COP26/CMA.3 in Glasgow.

Decision 3/CMA.3

The aim is to ensure that standardised procedures are followed in the design and implementation of emission reduction activities and when verifying and certifying the emission reductions (ERs) achieved.

An activity covered by the article 6.4 mechanism shall be designed to achieve mitigation of GHG emissions that is ‘additional’ to any that would otherwise occur.

Decision 1/CP.1, para 37 (d)

It also includes emission reductions, increase removals and mitigation co-benefits of adaptation actions and/or economic diversification plans. Further, the emission reductions shall achieve real, measurable, long-term benefits, minimize the risk of non-permanence over multiple NDC periods, address reversals in full, and avoid negative environmental and social impacts.

Decision 3/CMA.3, Annex III V A, para 31

Further, it does not currently cover mitigation co-benefits that are not reducing emissions (i.e., stand-alone SDG, adaptation or biodiversity benefits de-coupled from mitigation benefits).

The activities covered for adaptation are limited to ‘mitigation-co benefits of adaptation actions’. Thus, it is the part of the adaptation activity that produces the mitigation emission reduction that can benefit from support under article 6.4.

Please also note that mitigation activities can lead to adaptation co-benefits such as health benefits, poverty reduction, increased biodiversity and ecosystem services such as improved air quality, water quality, reduced toxic waste and reduced inequality. See Climate Sustainability Working Group (CSWG) G20 (2022). Study on the role of mitigation- adaptation co-benefits for creating a more resilient future for all, p. 11, available at: https://www.unicef.org/indonesia/media/17201/file/Study%20on%20The%20Role%20of%20Mitigation-Adaptation%20Co-Benefits%20For%20Creating%20A%20More%20Resilient%20Future%20For%20All.pdf

It is not clear how these benefits will be assessed. Mitigation co-benefits of adaptation actions can derive from technology-focused interventions (such as early warning systems) ecosystem-based adaptation strategies (such as green roofs and walls, green spaces, reducing impervious surfaces, mangroves, agroforestry, inland and coastal flood protection and wetland restoration), climate proof infrastructure (such as bioswales and hard infrastructure flood defences), resilient energy installations, building design measures (such as passive ventilation) and water and wastewater activities (such as rainwater harvesting).

Boyd, D., et al. (2022). Mitigation co-benefits of climate change adaptation. A case-study analysis of eight cities. Sustainable Cities and Society, Elsevier. Available at: https://www.sciencedirect.com/science/article/pii/S2210670721008295?ref=pdf_download&fr=RR-2&rr=7f8c71281c0cb517

Mitigation co-benefits of L&D actions is not specifically included. However, article 6.4 implicitly also covers mitigation co-benefits of L&D activities that overlap with mitigation co-benefit adaptation activities. For example, many activities that minimize and avert L&D could also be defined as adaptation activities. These include early warning systems, ecosystem-based solutions such as blue-green solutions, climate proofing of infrastructure and so on. It is worth noting, however, that measures to address L&D when adaptation measures meet hard or soft limits, will not be defined as adaptation measures.

Limits to adaptation (in that specific area) could for example be seen when rivers dry up completely, or when small island states drown. 

However, these L&D effects are highly unlikely to have mitigation co-benefits in the first place.

In short, article 6.4 activities could implicitly cover L&D activities that also produces mitigation co-benefits and that can be defined as ‘adaptation’ measures. However, this type of finance will not introduce any ‘additional’ finance for L&D. Further, the potential of using article 6.4 for measures to address L&D, such as non-economic loss or relocation due to slow onset events, is limited if not non-existent, as these activities in themselves do not produce mitigation co-benefits.

A supervisory body was established at COP26 in Glasgow, with the task to establish the requirements and processes necessary to operate the mechanism, including the development and approval of methodologies for article 6.4 activities.

Decision 3/CMA.3, Annex III B. Available at: https://unfccc.int/sites/default/files/resource/cma2021_10a01E.pdf#page=25

Further information on the sustainable development safeguards, including the L&D-adaptation nexus and how to assess the mitigation co-benefits from these activities, are likely to be included in the new tools that will be developed by the end of 2023.

Decision 3/CMA.3, para 5(c). Available at: https://unfccc.int/sites/default/files/resource/cma2021_10a01E.pdf#page=25

 

Finally, it is also worth noting that under the CDM most projects were distributed in China, India and Brazil, effectively crowding out the most vulnerable countries to climate change, such as SIDS and LDCs.

EDF (2018). The Future of the Clean Development Mechanism under a New Regime of Higher Climate Ambition, p. 10. Available at: https://www.edf.org/sites/default/files/documents/Potential_Supply_of_CDM_Credits.pdf

Although Parties are more aware of the need to enhance equitable spread of projects, the It is unlikely that the uneven geographical distribution will continue at the same level for article 6.4 as Parties are more aware of the social inequity. In addition, the introduction of Share of Proceeds (SOPs) attempts to de-couple benefits for adaptation from the actual area in which the mitigation took place.

After approval, validation, verification, certification, and issuance of A6.4ERs, the host Party shall make a corresponding adjustment consistent with guidance on cooperative approaches referred to in article 6, paragraph 2, of the Paris Agreement for the total number of issued A6.4ERs.

A unique aspect of the mechanism is its goal of also mobilising the private sector to participate in climate change mitigation. The Paris Agreement will thus offer also private actors the opportunity to use the mechanism established under article 6.4, as long as a Party authorizes them.

As with the cooperation approach provided for under Article 6.2, the ERs achieved using the ‘article 6.4 mechanism’ can be transferred from the host Party to the buyer Party and counted towards the latter’s NDC. The Paris Agreement also requires that the mechanism result in raised ambition and deliver an overall mitigation in global emissions, this means a net global outcome of an absolute reduction in global greenhouse gas emissions.

As a third option, article 6.8, provides for the use of non-market-based approaches (NMAs) for international cooperation that is not a mitigation outcome transaction. It was initially proposed by Bolivia as an alternative and opposed to the market-based approaches under article 6.2 and 6.4, included as a stand-alone article in the Paris Agreement to reach consensus.

A framework has been established and adopted to guide the implementation of the NMAs.

Paris Agreement, article 6.9, and Decision 4/CMA.3 para 2.

And a work program is elaborating on this. The initial focus areas under the framework include, but are not limited to (i) adaptation, resilience and sustainability; (ii) mitigation measures; and (iii) development of clean energy sources. It could potentially also include just transition of the workforce, circular economy and social inclusivity.

Decision 4/CMA.3, para 6 (b).

If properly designed, it has the potential to foster the acceleration of international cooperation on technology development and transfer, capacity-building and finance in both adaptation and mitigation, which are relevant contributions to NDC implementation and increased ambition.

Michaelowa, A. et al. (2021): Development of guidance for non-market approaches in the Paris Agreement Operationalizing Articles 6.8 and 6.9 of the Paris Agreement, German Environment Agency. Available at: https://www.researchgate.net/publication/355904524_Development_of_guidance_for_non-market_approaches_in_the_Paris_Agreement_operationalizing_Articles_68_and_69_of_the_Paris_Agreement

It does not specifically mention L&D. However, the framework can be construed to also include NMAs for L&D as long as it aligns with the framework’s principles. The principles are, however, centred around integrated, innovative and transformational actions that have significant potential to deliver higher mitigation and adaptation ambition, although Parties are opening up for a wider range of benefits.

Decision 4/CMA.3. Annex I, I, para 1 (ii). Available at: https://unfccc.int/sites/default/files/resource/cma2021_10a01E.pdf#page=25

Further, the NMA must facilitate the implementation of NDCs of host parties and contribute to achieving the long-term temperature goal of the Paris Agreement. 

Many L&D activities can be construed to be aligned with achieving higher adaptation ambition, and are often described in the NDCs. However, the aspects of L&D that do not overlap with either adaptation or mitigation are possibly falling outside of the current scope. That is not to say that activities that address L&D could potentially be included, even without adding clarifying text under article 6.8, as the activities currently listed are ‘initial’ focus areas, and ‘not limited to’ the listed activities. 

It is worth noting, however, that article 6.8 is not a source of finance in itself, but rather will depend on replenishments from global climate funds, private sector investment and through the use of government grants. Its established Trust Fund for Supplementary Activities for implementing the work programme to finance activities under article 6.8, and Parties have been invited to contribute to it.

Decision 4/CMA.3, para 13.

As such, article 6.8 does not represent a new source of finance for L&D, but rather an additional ‘avenue’ for the sources to fund article 6.8 activities, which can include activities that avert, minimize and address L&D. Whether this avenue will induce the private market and increase finance (i.e. ‘new and additional’) for adaptation and L&D will depend on the mechanisms developed under it.

Under follows an assessment of the Adaptation Benefits Mechanism, which is one of the key initiatives under article 6.8.

Other initiatives for enhancing finance for adaptation that can potentially be defined as article 6.8 activities include Local Climate Adaptive Living Facility (LoCAL), and the Adaptation Notes Mechanism. For the latter, please see more information here: https://www.climatefinancelab.org/ideas/climate-adaptation-notes/

In response to requests to develop innovative mechanisms for financing adaptation, the African Development Bank developed the Adaptation Benefits Mechanism (ABM) in the 2016–2019 period with support from the Climate Investment Funds (CIF). This was done in collaboration with African countries, such as Uganda and Côte d’Ivoire, and in consultation with various stakeholders.

African Development Bank (2023). Adaptation Benefit Mechanism (ABM): https://www.afdb.org/en/topics-and-sectors/initiatives-partnerships/adaptation-benefit-mechanism-abm

The ABM is designed to be aligned with the Paris Agreement’s article 6.8, as no international transfers are envisaged, and it aims to fulfil the requirements on non-market approaches.

African Development Bank (2023). Adaptation Benefit Mechanism (ABM): https://www.afdb.org/en/topics-and-sectors/initiatives-partnerships/adaptation-benefit-mechanism-abm

As such the ABM is meant for activities that contribute to the implementation of the NDCs, and are additional to the host-party’s adaptation actions.

The ABM is a results-based finance mechanism for mobilizing new public and private sector finance for enhanced climate change adaptation action in developing countries in Africa.

African Development Bank (2023). Adaptation Benefit Mechanism (ABM): https://www.afdb.org/en/topics-and-sectors/initiatives-partnerships/adaptation-benefit-mechanism-abm

It monetizes the benefits of adaptation action through creating Certified Adaptation Benefits (CABs) that represents verified and largely quantified packages of information on progress towards resilience and climate finance for various reporting purposes, such as under the Paris Agreement, that can be tailored to the needs of the purchaser. The host country also receives the information that can be used for own reporting purposes, such as on adaptation support received or progress towards the implementation of its adaptation needs and priorities. The price of the CABs is project specific. CABs are not tradeable on the international market. The CABs can be purchased by governments, development partners, philanthropies, consumers and corporate entities that aim to contribute to finance adaptation actions in a measurable, verified and reportable manner.

African Development Bank (n.d.). COP26. African Development Bank forges ahead with new Adaptation Benefits Mechanism, https://www.afdb.org/en/news-and-events/cop26-african-development-bank-forges-ahead-new-adaptation-benefits-mechanism-46784

The purchaser and the project developer enters into purchase agreements for the CABs. The purchase agreements for the CABs can then be used as collateral by the project developer to raise private sector debt, equity and in-kind contributions for adaptation projects that would otherwise not be financially viable.

African Development Bank (2023). African Development Bank driving innovation to scale up climate adaptation, https://www.afdb.org/en/news-and-events/african-development-bank-driving-innovation-scale-climate-adaptation-61646

Once the adaptation benefits are realised, the project developers will receive payouts from the contracted purchasers, which can then be used to repay the loan, and/or for maintenance and expansion of the activity. Private sector entities, local governments, local NGOs or non-profit organizations in developing countries are all potential candidates to develop activities under the ABM. Governments, private sector, impact investors, climate funds and philanthropies with ambitions to contribute to resilience in developing countries are the potential purchasers of the CABs.

The expectation is that CABs issued by a reputable international organization and based on sound methodological and technical approach, in consultations with stakeholders and with the approval of the host country government, will guarantee the credibility of the adaptation activities and increase their attractiveness to potential investors or lenders.

In the 2019–2025 period, the ABM will test the ground for 10–25 demonstration projects in Africa. The first ABM methodology was already approved. It was developed for a green potato cooling project for a community of smallholder farmers in Kenya suffering from increasing temperatures due to climate change, due to which traditional storage practices are no longer adequate. Several other methodologies have been submitted for approval, concerning sustainable agroforestry practices for enhanced cocoa resilience for smallholder cocoa farmers in Cote d’Ivoire, mobile flood barriers for a poor community in Lagos affected by more frequent and intensive rainfall and cyclone-resilient drinking water supply for Madagascar. These projects are seeking funding for implementation, expansion, or replication through the ABM. The African Development Bank has actively engaged in mobilizing funding for developing 16 more ABM demonstration projects in, among others, Benin, Burkina Faso, Egypt, Ethiopia, Mozambique, Sao Tome & Principe, Senegal, Rwanda, Uganda. These projects respond to climate hazards such as drought, flooding, land degradation, seasonal climate variability, sea level rise and extreme events through effective measures in the areas of climate information systems, clean potable water, solar water, mobile flood barriers for buildings, resilient settlements, plastic waste collection and recycling and preservation of natural reserves. The African Development Bank has a pipeline of about 30 other proposals for ABM demonstration projects and is open to assisting ABM demonstration projects by third parties.

The African Development Bank is currently working to raise at least USD 50 million for a new African Adaptation Benefit Fund (expected to be launched at COP28), which will then kick-start the ABM. The Biden administration has also committed to support the ABM in its 2023/2024 budget, subject to approval by the Senate.

African Development Bank (2023). African Development Bank driving innovation to scale up climate adaptation, https://www.afdb.org/en/news-and-events/african-development-bank-driving-innovation-scale-climate-adaptation-61646

Although it is too early to predict the potential of the ABM, the following pros and cons can be considered. One of its key potentials is its role as a ‘centralized system’ that verifies and ensures the quality and viability of adaptation projects, which could induce trust and provide verifiable information for investors to use in their reports when claiming to contribute towards adaptation action. However, if the framework is not seen as sufficiently rigorous and safe, it could lead to lack of trust in the ABM and potentially also negative press coverage and with the risk of reducing interest in financing adaptation actions, as we have recently seen was the case with certain carbon credits.

Another strength of the ABM is that it aims to provide the project developers easier access to stable finance flows (given the success of the project). Small-scale adaptation projects, private sector adaptation projects and projects targeting the most poor and vulnerable communities or fragile ecosystems often do not qualify for finance by the global climate funds, because they either deliver to the global good and do not generate any or enough revenues or because they target poor communities, which cannot invest or pay back the high loan rates of African commercial banks. The compatibility of ABM with other financial instruments such as bonds, guarantees and the UNCDF’s LOCAL expands the funding options. Furthermore, its focus on Africa, the continent with the most least developed and vulnerable countries, brings much needed attention and potential finance flows to those countries that are rarely benefiting from finance through the carbon markets. It is also hoped that the ABM will pave the way for scaling up and replicating the mechanism to other regions.

African Development Bank (2023). African Development Bank driving innovation to scale up climate adaptation, https://www.afdb.org/en/news-and-events/african-development-bank-driving-innovation-scale-climate-adaptation-61646

One of the hurdles with the ABM and other solutions to scale up adaptation efforts is the difficulty of measuring and monetizing adaptation efforts.

African Development Bank (2023). African Development Bank driving innovation to scale up climate adaptation, op. cit.

Another potential weakness of the ABM is that, if the money needs to flow through a new fund for adaptation, this will add another layer of overheads. This overhead will increase further, if the funding for the ABM fund comes from another climate fund. However, once the mechanism works more effectively, it could be financed directly from private or other source. If the ABM is envisioned to scale up, or be replicated in other regions, it would require either a new or existing body with a global or regional coverage to take over the tasks of the interim ABM bodies.

Michaelowa, Axel et al.: Development of guidance for non-market approaches in the Paris Agreement: operationalizing Articles 6.8 and 6.9 of the Paris Agreement, 2021, p. 80, available at: https://www.researchgate.net/publication/355904524_Development_of_guidance_for_non-market_approaches_in_the_Paris_Agreement_operationalizing_Articles_68_and_69_of_the_Paris_Agreement

Finally, it will be important to compare the ABM with alternative methods, such as private corporations direct support to project developers, or support through other established mechanisms such as the VCM.

It is currently possible to include some L&D project types through the ABM using its results-based methodological approach to measure progress towards averting and minimising L&D. For example, if X ha of a cocoa plantation are experiencing L&D due to decreased productivity resulting from climate change, an ABM methodology can be designed to measure the impact of measures taken, and the averted or minimized L&D, measured in hectares, finance and in number of men and women.

Finally, it could be worth noting the potential for replication for L&D – if the AMB achieves to entice private sector and others to increase their finance for adaptation action, and as such lead to ‘additional’ and perhaps also more predictable finance for adaptation actions. For such a mechanism to be established, it should first be compared with other potential solutions in which elements such as speed, scale, transparency, predictability, integrity, accessibility and involvement of indigenous peoples and local communities (IPLCs), amongst others, need to be taken into account.  

In either case, the discussion on the ABM and potential for financing of L&D under article 6.8 could be discussed further in a workstream under the UNFCC article 6.8 work program that also includes the Adaptation Committee and the WIM ExCom, and potentially also the Santiago Network.

In short, Share of Proceeds (SOPs) are earmarked levies from transactions of carbon reduction instruments, currently going towards financing adaptation activities through the Adaptation Fund.

It originated with the Clean Development Mechanism (CDM) under the Kyoto Protocol, which implemented SOPs to cover CDM’s administrative expenses and support adaptation in developing countries that were particularly vulnerable.

Kyoto Protocol, article 12 paragraph 8

The SOP for adaptation was 2% of the Certified Emission Reductions (CERs) issued for a CDM activity.

Decisions 17/CP.7, paragraph 15 and 10/CP.7.

The finance from these SOPs went to the Adaptation Fund.

Decisions 17/CP.7, paragraph 15 and 10/CP.7.

This was later expanded to require SOPs from the sale of ‘any units’ generated, such as under those under the Joint Implementation (JI) and the International Emissions Trading (IET).

The Doha Amendment J to article 12 paragraph 3 of the Kyoto Protocol. Available at: https://unfccc.int/files/kyoto_protocol/application/pdf/kp_doha_amendment_english.pdf

 

In 2018, it was decided that the Adaptation Fund would be financed by the SOP from the Paris Agreement’s article 6.4 mechanism once established, and at that time it would no longer receive SOPs from the trades taking place under the Kyoto Protocol.

Decision 13/CMA.1. Available at: https://unfccc.int/sites/default/files/resource/CMA2018_03a02E.pdf?download

In 2015, Parties agreed that a SOP under article 6.4 would be used for administrative expenses and to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation.

Paris Agreement article 6.6.

At COP26, Parties agreed that the SOP levied for adaptation shall go to the Adaptation Fund. And that the SOP comprises of three elements: first, a levy of 5% of A6.4ER at issuance; secondly, a monetary contribution related to the scale of the Article 6.4 activity or the number of A6.4ERs issued; and finally, a periodic contribution of the remaining funds received from administrative expenses.

Decision 3/CMA.3, Annex VII, para 67 (a)–(c). Available at: https://unfccc.int/sites/default/files/resource/cma2021_10a01E.pdf#page=25

In short, the finance from SOP for adaptation under article 6.4 shall go to the Adaptation Fund. This is a ‘shall’ obligation and does not leave room for constructive interpretation of other funds, such as the L&D fund. Financing of L&D by the SOP under article 6.4, therefore, is limited to the Adaptation Fund’s mandate.

As the L&D fund was not under discussion during the article 6 negotiations, it is understandable that this was not an issue. There are two options for introducing SOPs under Article 6.4 for the L&D fund. The first involves sharing the finance from the article 6.4 SOP between the Adaptation Fund and the L&D fund. This option is problematic due to the existing shortfall in finance for adaptation. Any finance for L&D should not be redirected from adaptation, but rather in addition to existing sources of finance. The second option is to introduce an additional levy directed to the L&D fund. This could take the form of a percentage levy, a monetary contribution and/or a periodic contribution, as is the case with the existing article 6.4 SOP. The percentage does not necessarily have to mirror that for adaptation, as there is a general fear of overburdening the market with additional costs which could lead to fewer projects being realised. Once a SOP level has been established, it could be assessed whether it could be increased to match the current level for the adaptation levy in due time.

Whether the negotiations have come too far to introduce an additional SOP earmarked for the L&D fund will also need to be assessed. As the negotiating room for article 6 historically has not discussed L&D, this is a new issue that could take some time to introduce and familiarize between the Parties. However, given the increased focus on this, and the role of the Transitional Committee in advising on potential solutions, the timing might be just right.

Finally, clear signals from the UNFCCC/PA negotiations on a potential SOPA under article 6.4 earmarked for the L&D fund could in turn influence the discussions on a SOPA for the Voluntary Carbon Market (VCM) that is currently being discussed for adaptation.

For further discussions on this, please see below.

Although the ITMOS under article 6.2 are bilateral cooperation and may not be ‘monetizable’ on the global market, it is nevertheless thought to be important to not create disadvantages to purchase A6.4 emission reductions compared to other cooperative approaches.

Ahonen, M. et al (2022). Governance of Fragmented Compliance and Voluntary Carbon Markets Under the Paris Agreement. Politics and Governance, Vol 10, issue 1. Available at: https://www.cogitatiopress.com/politicsandgovernance/article/view/4759

Parties engaged in article 6.2 cooperative approaches are therefore ‘strongly encouraged to commit to contribute resources for adaptation, in particular through the Adaptation Fund’ to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation.

Decision – /CMA.3, part VII, para 37.

In short, under article 6.2, Parties are not required, but ‘strongly encouraged’ to contribute resources for adaptation, with particular focus on the Adaptation Fund. The contributions do not have to go to the Adaptation Fund. As such, article 6.2 seems to open for interpretation that parties could choose to contribute resources to the L&D fund in addition, or instead. This interpretation is strengthened by the fact that certain L&D activities can be defined as ‘adaptation’ as well. However, as noted above, any finance for L&D should avoid being redirected from adaptation. As such, Parties could benefit from clear recommendations that additional contributions to the L&D fund is also strongly encouraged. Whether including a recommendation for L&D finance contributions is necessary, or whether the constructed ambiguity is sufficient for Parties to engage in additional finance for L&D remains to be seen. Going forward, however, the Transitional Committee could highlight this opportunity for increased finance, so that Parties are aware and encouraged to move forward with it.

In parallel with the discussions on SOP for adaptation under article 6 of the Paris Agreement, there have also been discussions on whether to adopt a SOP for adaptation under the Voluntary Carbon Market (VCM). The Climate Vulnerable Forum, which is an international partnership of countries highly vulnerable to climate change in the Global South, called for the adoption of SOPA as part of the Integrity Council for the Voluntary Markets’ Core Carbon Principles.

Huq, S. (2023). Voluntary Carbon Markets’ Credibility in Question Over Support for Adaptation – Adopting a Share of Proceeds for Adaptation as part of the Integrity Council for the Voluntary Carbon Markets. Core Carbon Principles. Available at: https://thecvf.org/our-voice/blog/voluntary-carbon-markets-credibility-in-question-over-support-for-adaptation/

The proposal for a SOP for adaptation is based on the need to ensure environmental and social integrity of the carbon credit market, to support the poorest and most vulnerable countries and communities and not just in the host countries.

Müller, B. (2022). Safeguarding Social Integrity in the Voluntary Carbon Market. Available at: http://blog.oxfordclimatepolicy.org/safeguarding-social-integrity-in-the-voluntary-carbon-market/

As part of its work to increase the integrity of the VCM, the Integrity Council of the VCM (IC-VCM) published Core Carbon Principles (CCPs) and Assessment Framework, which will be used to determine when carbon credits are of ‘high integrity’ and as such ‘CCP-Approved’.

IC-VCM (2023).  Core Carbon Principles, Assessment Framework and Assessment Procedure. Available at: https://icvcm.org/wp-content/uploads/2023/07/CCP-Book-R2-FINAL-26Jul23.pdf

It has also created supplemental tags, also known as ‘CCP attributes’, to showcase additional benefits or features related to the carbon credit issued. One such attribute is a Share of Proceeds for Adaptation (SOPA), which is when the ‘mitigation activity makes a voluntary contribution to the Adaptation Fund of the UNFCCC’.

The Integrity Council for the Voluntary Carbon Market (2023). Core Carbon Principles 2023, p. 45. Available at https://icvcm.org/wp-content/uploads/2023/07/CCP-Book-R2-FINAL-26Jul23.pdf

Other attributes could be developed at the discretion of the IC-VCM.

The Integrity Council for the Voluntary Carbon Market (2023). Core Carbon Principles 2023, p. 45. Available at https://icvcm.org/wp-content/uploads/2023/07/CCP-Book-R2-FINAL-26Jul23.pdf

As such, there is a potential for introducing a L&D attribute, in which the ‘mitigation activity make a voluntary contribution to the L&D fund under the UNFCCC/PA’.

There has not been a discourse on a potential SOP going to activities that avert, minimize and address L&D, for example to the L&D fund, for the poorest and most vulnerable countries and communities.

Discussions on the SOP for adaptation, however, will take place under the IC-VCM, which ‘will establish’ a work programme.

It is unclear whether this has been established at the time of writing.

The work programme will assess the potential of a mandatory SOPs for adaptation for all CCP-Approved credits; the readiness of buyers to make such contribution; the appropriate destination of any revenue; and impact on market participants, among others.

The Integrity Council for the Voluntary Carbon Market (2023). Core Carbon Principles 2023, p. 47. Available at https://icvcm.org/wp-content/uploads/2023/07/CCP-Book-R2-FINAL-26Jul23.pdf

An assessment of the potential of a L&D SOPs could be part of this programme.

The SOPs could for example be collected as a Share of Proceeds for Adaptation and L&D (SOPALD), and then shared between the two funds. The price for such SOP should be higher to reflect the dual nature.

Another option is to establish a stand-alone work programme under the IC-VCM for potential SOPs going to the L&D fund.

The potential guidance and/or decisions from the negotiations under the UNFCCC/Paris Agreement on a SOP for the L&D fund is likely to send strong signals and affect the discourse on this under the VCM, but also other markets such as ICAO. Although the UNFCCC/PA does not have governance over the VCM or ICAO, it could take note of existing initiatives and encourage further coordination (and potentially alignment) with the UNFCCC/PA.

It is also worth noting that the finance flows from SOPs are vulnerable to market volatility. For example, after May 2011, the Kyoto Protocol carbon market dropped, collapsing the price for CERs, which led to a deep decline in finance for the Adaptation Fund.

Adaptation Fund: Setting up an Emission Reduction Mechanism for Adaptation - Adaptation Fund (adaptation-fund.org). Available at https://www.adaptation-fund.org/setting-emission-reduction-mechanism-adaptation/

As of June 2022, cumulative receipts into the Adaptation Fund comprised of USD 212 million from the monetization of CERs, in which USD 188 million was generated between 2009–2012, before the market crashed.

Please see: https://unfccc.int/Adaptation-Fund and https://www.adaptation-fund.org/setting-emission-reduction-mechanism-adaptation/

Instead, voluntary contributions to the Adaptation Fund represent an increasing share, and was five times higher than the income from the monetization of CERs. Most of these donations come from grants from developed countries.

https://unfccc.int/Adaptation-Fund

Finally, the potential for establishing an SOP for L&D should not hinder the development of other advancement in the carbon market out outside of it for financing activities that avert, minimize and address L&D, such as stand-alone L&D units.

Reducing emissions from deforestation and forest degradation (REDD+) is a framework established under the UNFCCC and fully integrated in the Paris Agreement (Art. 5.2). It provides for effective and transparent mitigation actions in the forest sector in developing countries as well as for robust measuring, reporting and independent verification, as well as for channelling finance to developing countries implementing REDD+ activities. It is an international framework with credibility and legitimacy for ensuring and increasing environmental integrity and transparency of activities in the forest sector, unmatched by any other framework for any other sector.

Forest-based mitigation options, when sustainably implemented, can deliver large-scale GHG emission reductions and enhanced removals, as well as positive co-benefits for adaptation and resilience. As such, REDD+ activities could contribute to addressing L&D in the context of increasing ‘resilience of communities, livelihoods and ecosystems’.

Art. 8.4 (h) Paris Agreement.

REDD+ activities in developing countries can generate funding in the form of readiness support and results-based payments. While readiness funding supports the preparation and implementation of national REDD+ strategies and forest monitoring systems, results-based payments are generated by reported and verified results. So far, REDD+ has generated payments of several billion USD, trough bilateral agreements such as those by the Norwegian Climate and Forest Initiative (NICFI) or through multilateral channels, such as UN-REDD, Forest Carbon Partnership facility (FCPF), the GCF or through private sources.

Environmental Defense Fund Forest Trends (February 2018). Mapping Forest Finance - A Landscape of Available Sources of Finance for REDD+ and Climate Action in Forests. Available at: https://www.edf.org/sites/default/files/documents/EDF101-REDD%2BFinance.pdf; see also Lima REDD+ Information Hub, https://redd.unfccc.int/info-hub.html.

Both bilateral as well as REDD+ funding schemes through multilateral entities, with the GCF in a central role, foresee financing possibilities for wider co-benefits than emissions reductions. For example, the GCF pilot programme for REDD+ results-based payments which has resulted in proceeds of USD 500 million during the period from 2018 to 2022, contained the possibilityy for host countries to receive a premium of 2.5% if they presented information on how the proceeds will be used in a manner that contributes to the long-term sustainability of REDD-plus activities, including non-carbon benefits.

GCF Board, Board in decision B.18/07, para 3.4.

As mentioned above several REDD+ activities within the forest sector have a high potential for co-benefits supporting L&D. Exploring this potential might open for funding possibilities through either REDD+ readiness funding or REDD+ results-based payments.

Besides these finance sources from bilateral and multilateral sources, the Paris Agreement opens new financial possibilities for REDD+ through Article 6.

See for a discussion of this issue: Nemitz, D., et al. The Paris Agreement and the Future Relevance of the Warsaw Framework for REDD+ (WFR). Forthcoming in 2024.

The forest sector is already included in the guidance on cooperative approaches referred to in Article 6, paragraph 2. Internationally transferred mitigation outcomes (ITMOs) are not specific or restricted to any emission sector. From the outset, “reducing emissions from deforestation” and “reducing emissions from forest degradation” are REDD+ activities that could potentially be included in bilateral arrangements under Article 6, paragraph 2. Furthermore, the inclusion of the word “removals” in the definition of ITMOs, as per decision 2/CMA.3,

Decision 2/CMA.3, annex, paragraph 1(b): ” Internationally transferred mitigation outcomes (ITMOs) from a cooperative approach are: (...) Emission reductions and removals, including mitigation co-benefits resulting from adaptation actions and/or economic diversification plans or the means to achieve them, when internationally transferred” among others.

suggests that such arrangements can potentially cover all REDD+ activities. The notion that REDD+ has been excluded from Article 6 or that its inclusion is contingent upon further negotiations is incorrect.

Perez, M. (2022). After COP27: The Future of REDD+ in the Paris Agreement Implementation. CCAP. Available at https://www.ccap.org/post/after-cop27-the-future-of-redd-in-the-paris-agreement-implementation

The inclusion of REDD+ activities in the mechanism established under article 6.4, however, is not as direct as for Art. 6.2. While removals are foreseen as eligible activities under the mechanism, at the moment it is still an open matter and subject to negotiation the way in which these removals are to be considered, as well as the potential acceptance of activities related to “emission avoidance” and “conservation enhancement”.

These are being considered under the mandates established by decision 3/CMA.3, paragraphs 6(c) and 7(h).

Some actors, notably linked to private certification schemes, have indicated the expectation that REDD+ activities, at project level, should be considered under these negotiations. In any case, the background and history of the development of methodologies for the forest sector under the Clean Development Mechanism, particularly with regards to environmental integrity and permanence issues, suggest long and protracted negotiations ahead. 

Regardless of these debates, the potential inclusion of forest-related activities as Article 6.4 activities, from the outset, raises issues of scale and accounting - which could be addressed, at least in part, through the use of the adopted framework for REDD+.

It is worth noting that some developing countries are already using REDD+ in the context of voluntary markets and ESG initiatives. The Coalition of Rainforest Nations (CRfN) is offering “REDD+ Results Units (RRUs)” through their REDD.plus platform, also referred to as “sovereign carbon credits” by members of the CRfN. The platform is neither endorsed by the UNFCCC, nor part of the WFR. Instead, it uses the REDD+ results as a tool to provide transparency and independent verification for corporations that want to offset their emissions voluntarily.

See https://www.redd.plus/. It is important to note that the redd.plus platform does not claim to issue ITMOs, only that the RRUs are “registered“ under the Paris Agreement, an indirect reference to article 5.2 and the REDD+ Info Hub.

This is an interesting development, worth following for future research, whether the use of one public international standard (for REDD+) will be able to occupy a significant portion of voluntary carbon markets, which so far have been dominated by a multitude of private carbon certification schemes.

Neither voluntary markets nor the Coalition can claim their units are ITMOs per se. As seen above, under Article 6 guidance, the fundamental requirement for an emission reduction to be recognized as an ITMO, regardless of its source, is the authorization of the host country Party to generate a corresponding adjustment to its NDC.

Whether voluntary markets will follow a path of integration or competition with Article 6 remains to be seen.

The Voluntary Carbon Market (VCM) provides an avenue for companies and other entities such as cities, endowments and universities to compensate or neutralize emissions not yet eliminated in their own operations and supply chains and outside of supply their chains by purchasing carbon credits, which are not intended to be surrendered in an actively regulated carbon market.

Regulated carbon markets include the EU Emissions Trading System (EU ETS).

The private sector is showing increasing interest in the VCM as the number of companies and other actors with carbon neutral or net-zero commitments in line with the Paris Agreement are rapidly growing.

According to the Science Based Targets Initiative (SBTi), companies covering over a third of global economy market capitalization were working with SBTi to set science-based mitigation reduction targets, in which the net-zero target is the ‘new compass’. See SBTi (2022). Science-Based Net-Zero – Scaling Urgent Corporate Climate Action Worldwide – the SBTi Progress Report 2021. Version 1.2. Available at: https://sciencebasedtargets.org/resources/files/SBTiProgressReport2021.pdf

The vast majority of companies pledging for net zero or neutrality plan to rely on some form of compensation for remaining emissions through offsetting, such as through the VCM.

Kreibich, N.; Hermwille, L. (2021). Caught in between. Credibility and feasibility of the voluntary market post 2020’ Climate Policy 2021, No. 7, pp. 939-957. Available at: https://www.tandfonline.com/doi/full/10.1080/14693062.2021.1948384

In 2022, the VCM channelled USD 1.3 billion in investments.

South Pole (2023). The Voluntary Carbon Market 2022-2023, p. 6. Available at: https://go.southpole.com/vcm-report-2023

Although the value of the VCM has fallen as a result of revelations of weaknesses since then, it is nevertheless estimated to reach between USD 10 billion and USD 50 billion by 2030.

GEF, Nature Finance, Carbone4 (2023). Harnessing Biodiversity Credits for People and Planet. Available at: https://www.naturefinance.net/wp-content/uploads/2023/06/HarnessingBiodiversityCreditsForPeopleAndPlanet.pdf And Taskforce on Scaling Voluntary Carbon Markets (2021). Available at: https://www.iif.com/Portals/1/Files/TSVCM_Report.pdf

The potential for the VCM is even greater if high-quality carbon removal credits are pursued, with estimated total market value of USD 1 trillion as early as 2037.

BloombergNEF (2023). Long-term carbon offsets outlook 2023. Available at: https://about.bnef.com/blog/five-need-to-knows-about-the-future-of-voluntary-carbon-offset-markets/

A survey of more than 500 medium and large businesses across the US and Europe found that nearly 90% consider carbon credits important to compensate for unabated emissions they are not currently able to reduce.

World Bank (2023). State and Trends of Carbon Pricing 2023, op. cit., p. 39.

The exact demand for credits under the VCM might be difficult to estimate at this point in time, however, as the quality and clarity on mitigation short-term targets (prior to 2030) fall below minimum criteria.

See for example Hale, T. et al (2022). Assessing the rapidly-emerging landscape of net zero targets. Climate Policy vol 22, p. 1. Available at: https://www.tandfonline.com/doi/full/10.1080/14693062.2021.2013155 For European companies in particular, please see Machnik, D.; Sun, P.; Tänzler, D. (2020). Climate neutrality targets of European companies and the role of carbon offsetting. Adelphi, p. 24. Available at: https://www.carbon-mechanisms.de/fileadmin/media/dokumente/Publikationen/Studie/GCMII_Klimaneutral_Offsetting.pdf

However, as the focus on alignment with the Paris Agreement’s goal is likely to increase, the governance and integrity of the VCMs strengthens and company reporting on climate risk becomes increasingly sophisticated, the VCMs’ growth is unlikely to stall in the near term. The forecast for the VCM is significant market growth driven by voluntary demand over the next decade.

World Bank (2023). State and Trends of Carbon Pricing 2023, op. cit., p. 39.

The surge of interest will drive finance towards projects that are additional to government action, opening for the VCMs to channel ‘significant funds’ towards climate projects and programmes and play an important role in accelerating climate action.

Streck, C. (2021). How voluntary carbon markets can drive climate ambition. Journal of Energy & Natural Resources Law. Available at: https://www.tandfonline.com/doi/full/10.1080/02646811.2021.1881275

Demand is also increasing for carbon credits with certified co-benefits to ecosystems and local economies, even if the price of these credits is higher.

World Bank (2023). State and Trends of Carbon Pricing 2023, op. cit., p. 40. Also see: Setting the Voluntary Market Standard (2021). Environmental Finance. Available at: https://www.environmental-finance.com/content/awards/voluntary-carbon-market-rankings-2021/corporate-statements/setting-the-voluntary-market-standard.html

These social and/or environmental benefits, also often referred to as ‘sustainable development benefits’, range from gender equity and economic development to affordable clean energy and restoration of wildlife.

For example, under Verra, the Blue Carbon Project Gulf of Morrosquillo ‘Mangrove Life’ will sequester almost one million tonnes of carbon dioxide over 30 years by conserving and sustainably managing mangrove ecosystems, while also introducing co-benefits to biodiversity and the local economy. 

With the adoption of the revised Sustainable Development Goals (SDGs) and their corresponding targets as well as the adoption of the Paris Agreement in 2015, corporate awareness and interest in supporting the SDGs and the climate goals have increased. Today, there is a clear trend that companies want to record their positive SDG and nature impacts from their investments in carbon credit projects. For example, Verra, the largest independent crediting mechanism/carbon offset program, reported an increase from 2021 to 2022 of 589% for requests for carbon credits with SDG benefits, and an 187% increase in requests for climate and biodiversity benefits.

Verra (December 2022). Update on Verra Project Reviews. Available at: https://verra.org/update-on-verra-project-reviews/

At the same time, the market participants have to be willing to price the additional benefit in. For example, the benefits resulting from gender equality and health from mitigation cookstove projects are quantifiable, but are difficult to prescribe a value, and corporate buyers are cautious to do that.

The following section will analyse how the VCM is currently used for financing L&D activities and assess its potential for innovative solutions enhancing finance for projects that minimize, avert and address L&D.

As noted above, there is increasing interest in ensuring that mitigation reduction credits include positive benefits for SDG and nature, so called co-benefits.

Carbon crediting programs have created third-party certification of the social and/or environmental integrity of the co-benefits from their mitigation projects. The certified co-benefits can be expressed as (i) verified claims; (ii) labels; or (iii) units/credits. A claim is a verifiable statement about a specific sustainable development benefit resulting from a project. The claim can be used by a company to express its contribution related to its mitigation and SDG goals and targets. Labels are markers that signal that the project’s SDG benefits are third-party certified. The label can be added to other units, for example verified carbon units, when listed on the registry. As such, the label will indicate that the carbon unit was created during the same time as the SDG label. Finally, units/credits are third-party verified stand-alone, standardized assets representing one or more of a project’s SDG/nature benefits. These units/credits are issued after verification in the registry and can be traded or retired on the VCM.

One example of a carbon crediting program for co-benefits Verra’s Sustainable Development Verified Impact Standard (SD VISta) Program, which was established in 2019. The SD VISta Program assesses and certifies the sustainable development benefits of social and environmental projects. These benefits are third-party verified, and may take the form of an SD VISta claim, label or asset. [The claim is a verified statement of a project’s measured benefit advancing the UN Sustainable Development Goals (SDGs). The label can be used to mark carbon emission reduction credits, or other social or environmental credits, that were created during the same project to demonstrate that the credit is also SD VISta verified. The asset represents a quantified sustainable development benefit that has been created through an approved SD VISta methodology, and that can be traded.]

The SD VISta Program covers 14 sectoral scopes, including climate change adaptation, ocean and marine resources, livelihoods, infrastructure, housing, health, food, governance and education. The types of SDG benefits that can be created under SD VISta will depend upon project activities and outcomes. If generating and asset using SD Vista, benefits are quantified and credited under asset-specific methodologies. There are currently several methodologies under the SD VISta Program that are used to produce social and/or environmental benefits. Some of these programs are de-coupled from mitigation activities, and as such can be defined as being part of the nascent Nature Credit Market (NCM) or other voluntary credit markets (e.g., plastics).

This SD VISta program has the potential to apply to L&D projects that promote any of the above-mentioned sectoral scopes. For example, it could apply to adaptation activities that overlap with L&D activities such as national adaptation planning and preparing for climate related events (including sea level rise), enhan­cing climate data collection, establishing early warning systems, post-adaptation activities (building forward better), and planned migration and relocation as part of national adaptation actions. It could also apply to L&D activities that overlap with other sustainable development goals, including but not limited to enhancing livelihoods, good health and well-being, sustainable housing and infrastructure, zero hunger and responsible consumption and production, decent work and economic growth, quality education, governance and gender equality.

The SD VISta program is relatively new, and the extent and types of projects it can cover is broad. It may have some limitations for L&D activities that cannot be defined as sustainable development using the SDGs. L&D activities such as active remembrance, documenting and recording traditional and local knowledge, cultural preservation, societal protection, or counselling would need to be strategically aligned to SDG 11 or 16, and interventions assisting people suffering from degraded health due to climate impacts could be linked to SDG 3 while addressing reductions in agriculture production yield or fisheries might support SDG2. Creating artificial islands or metaverses could also fall under SD VISta’s umbrella if linked to SDGs 13 and/or 15. Finally, the SD VISta Program is developing two asset-generating methodologies covering certain L&D activities related to biodiversity restoration and coastal resilience.

Another standard by Verra is the Climate, Community & Biodiversity Standards (CCB), which can be used to create an independently verified marker, the CCB label. The CCB label can be used to verify that the project in question, for example an offset project for agriculture, forestry and other land uses (an AFOLU project), creates added benefits for the community and biodiversity, including through enhanced adaptation actions. This label is then added to a GHG credit listed on a registry to indicate that the verified emission reductions or removals represented by that credit were issued from a project which satisfies and is verified to the CCB Program rules.

Verra (2017). Climate, Community & Biodiversity Standards – version 3.1, p. 8. Available at: https://verra.org/wp-content/uploads/CCB-Standards-v3.1_ENG.pdf

This is often referred to as ‘earmarking’. Projects with these biodiversity benefits tend to be valued higher than those without these labels and can provide a ’significant source of biodiversity finance for developing countries’.

Bloomberg NEF (2023). Biodiversity Finance Factbook, p. 29. Available at:  https://assets.bbhub.io/professional/sites/24/REPORT_Biodiversity_Finance_Factbook_master_230321.pdf

It is worth noting, however, that these AFOLU projects are heavily concentrated in forest rich nations, with two-thirds of offsets coming from Indonesia, Peru, Cambodia, Brazil and the Democratic Republic of Congo.

Bloomberg NEF (2023). Biodiversity Finance Factbook, p. 29. Available at:  https://assets.bbhub.io/professional/sites/24/REPORT_Biodiversity_Finance_Factbook_master_230321.pdf

The use of this label for financing L&D activities is limited. Further, it does not provide additional finance for L&D that would not otherwise be financed under the label ‘biodiversity’ or ‘community’ benefits.

It is also worth noting that the carbon crediting program Gold Standard has established a standard for the global goals reflected in the Paris Agreement and the SDGs. The standard was created to ensure that projects that reduce carbon emissions featured the highest levels of environmental integrity and also contributed to sustainable development. It offers companies the chance to purchase certified SDG impacts, hereunder ‘claims’. The claims provide information on the financial contribution of specific SDGs. Gold Standard offers claims for renewable energy, water, gender equality, improved health outcomes and emission reductions.

Gold Standard (2023). Certified SDG Impacts for results based finance. Available at: https://www.goldstandard.org/impact-quantification/certified-sdg-impacts

For these specific claims there is limited overlap with measures to minimize, avert and address L&D.

In summary, therefore, the use of co-benefits for financing L&D activities under existing programs is limited, and does not finance actions to address L&D. Further, potential finance will not be defined as ‘additional’ to already existing finance for these co-benefits. To introduce new and additional finance for L&D activities, therefore, these programs would benefit from establishing new, stand-alone L&D credits representing benefits that include positive benefits from addressing L&D.

Carbon credits are tradable units issued by a carbon crediting program (also known as carbon offset programs, registries or standards), such as Verra’s Verified Carbon Standard (VCS), Gold Standard, ART TREES’ REDD+ Environmental Excellence Standard, Climate Action Reserve (CAR) and American Carbon Registry (ACR), that represents a verified reduction or removal of GHGs from the atmosphere.

One carbon credit represents one metric tonne of CO₂.

The crediting programs applies standards to ensure that the climate mitigation actions that generate carbon credits go beyond business-as-usual, often compared to a baseline scenario, and leads to credible and verified reductions of GHGs.

For a definition of carbon credits, please see VCM’s Code of Practice, p. 39. Available at https://vcmintegrity.org/wp-content/uploads/2023/06/VCMI-Claims-Code-of-Practice.pdf

Concurrently with the development of co-benefits, stand-alone assets, de-coupled from mitigation activities, that represent a verified nature or biodiversity benefit have been developed.

Interestingly, the market for these assets has yet to be named and is often confused with the VCM as the issuer is best known for its work within the carbon market. 

These assets are created independent of any mitigation activity, and are often referred to as nature credits. These programs can be used for activities that avert, minimize and address L&D, with a strong focus on activities relevant for biodiversity.

The development of markets for trade in nature and biodiversity credits is nascent and rapidly evolving at many different arenas, by public, private and non-profit actors. These markets mirror the voluntary carbon market, but are not for carbon reductions, but rather payments for positive contributions to biodiversity using biodiversity credits. Nature credits (often also referred to as nature market credits, nature certificates, biodiversity certificates, biodiversity credits or biocredits) can be defined as a ‘quantifiable unit representing a biodiversity conservation and/or enhancement claim, which cannot be used as an offset (i.e. to claim the compensation of residual impacts on biodiversity)’.

For the full definition, please see GEF (2023). Innovative Finance for Nature and People: Opportunities and Challenges for Biodiversity-Positive Carbon Credits and Nature Certificates, p. 5. Available at https://www.thegef.org/sites/default/files/documents/2023-03/GEF_IIED_Innovative_Finance_Nature_People_2023_03_1.pdf

 

The current surge in interest and initiatives for biodiversity credits is driven by in part by the realisation by companies on their dependence on nature and the increasing focus on reporting on nature exemplified by globally guiding documents such as the Taskforce on Nature-related Financial Disclosures (TNFD) framework and the Science-Based Targets for Nature (SBTN).

The TNFD Framework is available at: https://tnfd.global/ and the SBTN is available at: https://sciencebasedtargetsnetwork.org/take-action-now/take-action-as-a-company/what-you-can-do-now/

It is also driven by the realization of the importance to strengthen the international and national governance systems safeguarding biodiversity and the urgent need for increased finance, as exemplified by the Kunming-Montreal Global Biodiversity Framework.

GEF, Nature Finance, Carbone4 (2023). Harnessing Biodiversity Credits for People and Planet. Available at: https://www.naturefinance.net/wp-content/uploads/2023/06/HarnessingBiodiversityCreditsForPeopleAndPlanet.pdf

For the latter, the use of high integrity markets for biodiversity credits has been proposed as a key solution by an array of initiatives.

Key initiatives include the Taskforce on Nature Markets;

The Taskforce on Nature Markets is an initiative of NatureFinance (previously called Finance for Biodiversity, F4B), and includes a wide community of organizations. More information available at: https://www.naturemarkets.net/about

the Biodiversity Credit Alliance;

The Biodiversity Credit Alliance is governed by a secretariat, includes experts from a wide community of organizations. It has a Task Force inclusive of methodology developers and standard setters, and a community panel to engage nature-dependent Indigenous Peoples and Local Communities. More information can be found at: https://www.biodiversitycreditalliance.org/  

the initiatives under the World Economic Forum

See for example, WEF (2022). Biodiversity Credits: Unlocking Financial Markets for Nature-Positive Outcomes – briefing paper. Available at: https://www3.weforum.org/docs/WEF_Biodiversity_Credit_Market_2022.pdf and WEF (2022). Consultation Paper on High-Level Governance and Integrity Principles for Emerging Voluntary Biodiversity Credit Markets. Available at:  https://www3.weforum.org/docs/WEF_Biodiversity_Credits_Markets_Integrity_and_Governance_Principles_Consultation.pdf

and the World Business Council for Sustainable Development; the coalition on Forests and Climate Leaders’ Partnership (FCLP);

FCLP is a coalition of 26 countries and the EU launched at COP27 in Sharm el-Sheikh, and innovative instruments, including biodiversity carbon credits, are key action areas. For more information, please see: https://webarchive.nationalarchives.gov.uk/ukgwa/20230311221226/https://ukcop26.org/world-leaders-launch-forests-and-climate-leaders-partnership-to-accelerate-momentum-to-halt-and-reverse-forest-loss-and-land-degradation-by-2030/

the key recommendations on scaling up biodiversity credits at the One Forest Summit in Libreville;

The summit was co-hosted by Gabon and France. More information on the biodiversity credit recommendation can be found at: Coalition for a High Environmental and Social Quality Carbon Credit Market (2023) https://oneplanetsummit.fr/en/coalitions-82/coalition-high-environmental-and-social-quality-carbon-credit-market-255 

and France and United Kingdom’s collaboration to update the global roadmap on biodiversity credits.

The Global Roadmap to Harness Biodiversity Credits for the Benefit of People and the Planet (2023). Available at: https://nouveaupactefinancier.org/img/AGlobalRoadmapForScalingUpHighIntegrityBiocredits.pdf This outcome was part of the proposed Global Roadmap developed under the Summit for a New Financing Pact initiated by France. See Proposed roadmap to build on key milestones of the international agenda as a follow-up to the Summit on a New Global Financing Pact (2023), at https://nouveaupactefinancier.org/pdf/proposed-roadmap.pdf

Other initiatives for creating methodologies include the Organization of Biodiversity Certificates; Plan Vivo’s Nature Certificates; Global Biodiversity Standard; and Verra’s Nature Framework.

Common for all of these initiatives is that they aim to understand the potential role for these credits in catalysing finance for activities conserving or enhancing nature and biodiversity, to bring together stakeholders and to develop global methodolo­gies/​principles and instruments to ensure integrity and scalability in the market. 

Another key actor is the GEF, who has decided to establish a Global Biodiversity Framework Fund.

For more information on the Global Biodiversity Framework Fund, please see: https://www.thegef.org/newsroom/press-releases/gef-council-approves-plans-game-changing-global-biodiversity-fund  

GEF produced a report together with IIED on innovative finance for nature and people, which influenced the outcome on biodiversity credits from the One Forest Summit. The main take away was that ‘…with clear policy frameworks and signals, good governance, improved institutional capacities, and inclusive and transparent rules of engagement, biodiversity-positive carbon credits and nature certificates have the potential to markedly complement other financial mechanisms towards meeting the goals and targets of the Global Biodiversity Framework and the Paris Agreement.’

GEF, IIED (2023). Innovative Finance for Nature and People. Opportunities and Challenges for Biodiversity-Positive Carbon Credits and Nature Certificates, p. 8. Available at: https://www.thegef.org/sites/default/files/documents/2023-03/GEF_IIED_Innovative_Finance_Nature_People_2023_03_1.pdf

Further, it found that to ensure the success for the nature market it would be necessary to scale up investments, and move from pre-market phase and pilots towards a critical mass of trades. In doing so, countries were recommended to pilot and test biodiversity credits and nature certificates as part of their national strategies and plans, and utilize bilateral and multilateral support opportunities, including from multilateral development banks, GEF, GCF and others, as well as philanthropic support.

GEF, IIED (2023). Innovative Finance for Nature and People. Opportunities and Challenges for Biodiversity-Positive Carbon Credits and Nature Certificates, p. 10. Available at: https://www.thegef.org/sites/default/files/documents/2023-03/GEF_IIED_Innovative_Finance_Nature_People_2023_03_1.pdf

It also underlined the importance of good governance, with full engagement of actors including governments, IPLCs, private sector, philanthropies, and multilateral and bilateral financing partners.

GEF, IIED (2023). Innovative Finance for Nature and People. Opportunities and Challenges for Biodiversity-Positive Carbon Credits and Nature Certificates, p. 10. Available at: https://www.thegef.org/sites/default/files/documents/2023-03/GEF_IIED_Innovative_Finance_Nature_People_2023_03_1.pdf

This work was further developed into a ‘Global Roadmap’ to harness biodiversity credits for the benefit of people and planet by the GEF, Nature Finance and Carbone4, which was introduced at the Summit for a New Global Financing Pact.

Summit for a New Global Financing Pact. (2023). A Global Roadmap to Harness Biodiversity Credits for the Benefit of People and the Planet. Available at: https://nouveaupactefinancier.org/img/AGlobalRoadmapForScalingUpHighIntegrityBiocredits.pdf

The Global Roadmap is supported by an advisory panel, with the active involvement of the GEF. The advisory panel will deliver its findings and recommendations to a coalition of countries for COP28 and CBD COP16 with further opportunities towards UNFCCC COP30 (2025).

The financial potential for the nature market to create revenue streams for nature and biodiversity projects is difficult to properly ascertain. Its success will to a great extent depend upon the interest and involvement of the private sector in purchasing these credits. Strong signs of private sector engagement can be seen in relation to the UN Biodiversity COP15, where more than 1,000 businesses with revenues of USD 4.7 trillion, operating in more than 65 countries were calling for greater policy ambition and action on nature.

Business for Nature (2021). COP15 Opening: businesses call for greater policy ambition and action on nature. Available at: https://www.businessfornature.org/news/cop15-opening-business-call-to-action

There is little information on the potential value of the nature credit market, however, a Bloomberg estimate of the nature/biodiversity credit market which included biodiversity offsets was estimated to attract USD 6–9 billion in annual financing, and is expected to reach over USD 160 billion by 2030.

Bloomberg NEF (2023). Biodiversity Finance Factbook, p. 30. Available at: https://assets.bbhub.io/professional/sites/24/REPORT_Biodiversity_Finance_Factbook_master_230321.pdf

BIODIVERSITY OFFSETS EXPLAINED

The nature/biodiversity credit/certificate market must be distinguished from biodiversity offsets (also sometimes referred to as ‘credits’), which are ‘measurable conservation outcomes that result from actions designed to compensate for significant, residual biodiversity loss from development projects’.

For more information on biodiversity offsets, please see the OECD (2016). Biodiversity Offsets – Effective design and implementation. Available at: https://www.oecd.org/environment/resources/Policy-Highlights-Biodiversity-Offsets-web.pdf

In short, the biodiversity offsets compensate for biodiversity loss: if negative impacts on biodiversity cannot be avoided, they are compensated through restoration or protection of biodiversity in sites in the nearby area. The biodiversity ‘gains’ can be produced by independent operators, which are then bought by the developers that cause the biodiversity loss (if they cannot compensate for the loss themselves).

Karsenty, A. (2022). Emmanuel Macron’s ‘Biodiversity Credits’. What are we talking about? Available at: https://news.mongabay.com/2022/12/emmanuel-macrons-biodiversity-credits-what-are-we-talking-about/

The trading of these units is only allowed at local scale.

Karsenty, A. (2022). Emmanuel Macron’s ‘Biodiversity Credits’. What are we talking about? Available at: https://news.mongabay.com/2022/12/emmanuel-macrons-biodiversity-credits-what-are-we-talking-about/

The nature market is in the very first stages of trial and error, with pilot projects being called for. One of these pilot projects has been developed under Verra’s SD VISta Program, the evolving ‘Nature Framework’, which uses a pilot process to test key concepts with real-world projects.

Verra (2023). Call for Projects to Pilot SD VISta Nature Framework and Biodiversity Methodology. Available at: https://verra.org/call-for-projects-to-pilot-sd-vista-nature-framework-and-biodiversity-methodology/ 

This initiative will help Verra to refine design decisions alongside a public consultation of the framework and biodiversity methodology. The Nature Framework seeks to drive finance to critical nature conservation and restoration activities, with the view to help with meeting the goals and targets of the Kunming-Montreal Global Biodiversity Framework (GBF).

Verra (2022). Nature Credits. Financing Nature Conservation and Restoration. Available at: https://verra.org/wp-content/uploads/Verra_NatureCredits_Overview_2022.pdf

Project proponents using the Nature Framework will be able to verify the biodiversity outcomes of their projects and issue tradable ‘nature credits’ as standalone assets. The SD VISta nature credits are tradable on the voluntary nature market (also referred to as the voluntary biodiversity credit market). As explained above, Verra is a key global standards setter, and one of many stakeholders in the nature market.

The GBF aims to ‘halt and reverse the loss of biological diversity’, and to ‘minimize the impact of climate change on ocean acidification and biodiversity and increase its resilience through mitigation, adaptation and disaster risk reduction actions, including through nature-based solutions and/or ecosystem-based approaches, while minimizing negative and fostering positive impacts of climate action on biodiversity.’

The Kunming-Montreal Global Biodiversity Framework, Section F and Target 8. Available at: https://www.cbd.int/doc/decisions/cop-15/cop-15-dec-04-en.pdf

More specifically, the SD VISta nature credits would finance activities such as species conservation and restoration on land, soil and water health, or efforts to preserve and restore marine biodiversity.

Verra (2023). SD VISta Nature Framework Pilot Projects Terms of Reference. Available at: https://verra.org/wp-content/uploads/2023/07/SD-VISta-Nature-Framework-Call-for-Pilots-Terms-of-reference.pdf

L&D as defined under the Paris Agreement is not specifically mentioned under the GBF, nor is it mentioned by the SD VISta framework. However, the use of SD VISta nature credits for activities that avert, minimize or address biodiversity related L&D can be inferred from the current scope of the Nature Framework. For example, the nature credits could finance activities that aim to re-build biodiversity in existing areas or create habitats and biodiversity in new areas.

However, these assets do not seem to cover finance for irreversible losses of biodiversity. Instead, they could be used to finance positive biodiversity outcomes linked to L&D activities.

Lessons can be learnt from previous attempts to set up a market for biodiversity credits. A well known example is that of the public-private initiative Malua BioBank in Malaysia, launched in 2008. The goal of the initiative was to restore and protect rainforest in the buffer zone from palm oil plantations. Credits were created for 10 USD/certificate and represented 100 square meters of restored and protected rainforest. USD 10 million was committed between 2008–2014. Four Malaysian palm oil companies purchased certificates covering 21,500 square meters. However, the bank collapsed due to lack of regulation and safeguards, and as it was unable to create enough predictable demand to achieve financial viability.

Luc Hoffman Institute (2020). Diversifying Local Livelihoods While Sustaining Wildlife – exploring incentives for community-based conservation, p. 16. Available at: https://www.readkong.com/page/diversifying-local-livelihoods-while-sustaining-wildlife-4002700

As part of the nature market is the development of resilience credits. For example, under Verra’s SD VISta Program, resilience assets can be created under the Methodology for Coastal Resilience Benefits from Restoration and Protection of Tidal Wetlands. The sale of the assets created will be used to drive finance to coastal resilience projects, with the view to making them more viable and likely to be developed.

Please see Verra (2010). Methodology for Coastal Resilience Benefits from Restoration and Protection of Tidal Wetlands. Available at https://verra.org/methodologies/methodology-for-coastal-resilience-benefits-from-restoration-and-protection-of-tidal-wetlands/ Also see Verra’s Annual Report (2021), p. 6. Available at: https://verra.org/wp-content/uploads/2023/02/2021-Verra-Annual-Report.pdf

SD VISta assets generated using this methodology correspond to the number of people no longer at risk of coastal flooding as a result of the activities undertaken.

For the Methodology, see: https://verra.org/methodologies/methodology-for-coastal-resilience-benefits-from-restoration-and-protection-of-tidal-wetlands/

The proposed activities include restoration and protection of coastal wetlands, including tidal marshes and mangroves and can be expanded to other coastal habitats such as coral reefs and oyster reefs.

More specifically, the project activities will include creating and restoring the hydrological conditions, improving the salinity characteristics; introducing new management practices; reseeding or replanting native plant communities, removing invasive species, reduced grazing practices; and creating accommodation space for wetlands that will be submerged by sea-level rise, among others.

This coastal resilience asset will cover many L&D activities that are linked to restoring and protecting coastal wetlands and will be measured in increased resilience through avoided losses. Most of the activities are directly relevant for minimizing and averting L&D. And some activities are relevant for addressing L&D, such as restoration activities and activities creating new accommodation spaces for the coastal wetland’s flora and fauna. However, these units are limited to finance positive benefits from reducing L&D connected to coastal resilience.

In the carbon markets and beyond, private sector engagement in financing L&D is very limited. The main reason is that there is a need for coupling with mitigation activities, or that the co-benefits created are too narrow in scope. New markets are developing for financing biodiversity. Further, historically, earmarked finance from the carbon market has gone to adaptation. Another reason is that the L&D projects, in particular for addressing L&D, as a general rule do not create a return on investment. Further, even when the benefits are quantifiable, private actors are reluctant to set a price on these benefits as they are difficult to price.

To increase private sector finance of L&D, there are several potential sources that can be developed independent of the VCM and the NCM.

One option is to strengthen the L&D aspects of existing methodologies, for example through specifying that the SDG claims, labels or units could also cover activities that avert, minimize or address L&D as part of SDG 14 ‘Climate Action’. A drawback of this option is that activities financing L&D need to somehow be connected to existing methodologies, and as such needs to be linked to a mitigation activity or will need to be dependent on the L&D project having either an SDG benefit or a biodiversity/nature benefit. Further, it will not create any new and additional sources of finance for L&D activities, but could lead to strengthening the value given to these existing credits. A benefit of this option is that the adjustments to include L&D could be added in the updated versions of the methodologies, which takes place frequently.

Another option is to create a new methodology under existing frameworks that could enhance funding for L&D and be additional to existing crediting programs under the VCM.

A first step could be to create a ‘L&D framework development group’, which can work towards creating a methodology with quantifiable L&D benefits.

For example, the Nature Framework was created by the Nature Framework Development Group (NFDG), which included Verra, the International Union for Conservation of Nature (IUCN) and four other biodiversity-focused foundations and alliances.

This group could consist of members from the WIM ExCom and the Santiago Network under the UNFCCC, as well as other UN bodies working on L&D projects, Verra, and key L&D focused foundations and alliances. These benefits from averting, minimizing and addressing L&D could be measured through an array of different ways.

For example, it could be quantified by number of deaths avoided due to climate related disasters; number of people reached after a climate related disaster; number of people permanently re-located from places negatively affected by sea level rise; number of people included in projects for just transition to alternative livelihoods; number of people covered by early warning systems; increased areas (measured in hectares) with climate data collection; number of people covered by climate related insurance; number of indigenous peoples and local communities directly benefiting from the L&D activities; number of national adaptation and resilience plans which incorporates L&D aspects; etc.

Due to the VCM’s focus on positive ‘benefits’, it is not clear whether this methodology could also include financing actual and irreversible losses, for example, loss of land, loss of lives, loss of biodiversity, including loss of cultural expression and other non-economic losses such as loss of health, loss of livelihoods (i.e. when fish stock migrate). And if so, whether this should be connected to projects that aim to transform and minimize these losses in the long run.

The benefit of this option is that it innovates on market developments that are already under way (the stand-alone SDG and biodiversity/nature benefits) to also include stand-alone benefits from L&D activities. Another benefit is that it utilizes existing systems and structures under VCM’s crediting programs, including its market position and good governance procedures. A benefit from the purchaser’s side is that it can undertake its purchases of carbon units and L&D/resilience units from the same provider, and as such reduces time and efforts to familiarize itself with a new standard or provider.

A drawback with this option is that it could confuse the participants in the VCM, as this is a market that has historically been used for mitigation activities. However, as the market is already moving in this direction, it might not be an issue. A final consideration is what extra benefits a new methodology gives the actors when finance for L&D projects could as easily be transferred directly to the new fund established for L&D (see the solution on a new mechanism below).

Another option, is the development of stand-alone credits for activities that avert, minimize and address L&D, created under a new market specifically designed for responding to L&D. In developing the framework for creating these credits, lessons can be drawn from the VCM and the NCM. These credits could be used by corporations, private individuals, municipalities, universities and other entities to comprehensively respond to climate change, including responding to L&D.

Under this new market a new standard could be created, with customized safeguards, requirements and methodologies for L&D benefits to create units which finance L&D projects. These third-party verified L&D units could be stand-alone or could be created together with other climate resilience and adaptation units.

For example, if these adaptation, resilience and L&D benefits are bundled together, it could be called the Climate Risk Reduction Unit (CRRU).

The standard could include third-party verifiers to ensure the integrity of the credits. The claims connected with the credits can be used by the private sector to report, for example in their annual reports, on how they comprehensively respond to climate change, including by addressing L&D. Further, the credits could potentially include compensating for irreversible L&D, particularly if coupled with activities that aim to ensure positive benefits and long-term solutions that responds to L&D.

The creation of credits from L&D activities would be de-coupled from mitigation activities and differentiated from sustainable development and biodiversity activities. This is particularly relevant for activities to address L&D impact on humans, built environment and infrastructure, non-economic losses and climate-induced displacement, which are currently not covered by the VCM or the NCM. It also ensures that the financing of these credits will be decoupled from mitigation activities and be funnelled to the most vulnerable countries with L&D projects, including the least developed countries (LDCs) and Small Island States (SIDS).

A new standard differs from a new methodology under an existing program in that it is independent of any other methodologies and as such can be created without any restraints from that existing methodology. Although the standard is likely to operate independently of the VCM and the NCM, it can draw on the good practice and established systems by actors within the VCM and NCM. The standard could be created by an independent standard-setting body consisting of market actors, private sector participants and government representatives, including representatives from the governing body of the L&D fund.

It is worth considering that the finance flowing from these credits is likely to go to the funding arrangements for L&D and not be directed to the L&D fund. Another point to consider is whether the market-approach is valuable: would it be feasible to develop a secondary market for L&D credits, and when the market decides where the projects to be financed are located, could this lead to exclusion of certain vulnerable countries that perhaps do not have the necessary institutional structures in place to safeguard the projects or programs, or will the market lead to a race to the bottom, in which the projects and programs that are cheapest to finance will be the preferred option as this gives more credits. However, this latter point might not be an issue if these projects are undertaken in the least developed countries. As such, the market could be utilized to address issues of equity.

Another option is to develop a non-market mechanism for financing L&D. This private sector mechanism for financing L&D could be set up as part of the L&D fund, or as a satellite mechanism serving the fund. Either way, it could be tied to the global processes of financing L&D under the Paris Agreement. If the mechanism is part of the L&D fund, it will be essential to ensure that the constituted body of the L&D fund can accommodate for private sector engagement, preferably with one or more seats in the board to take part in the decision making relevant for these actors. If it is a satellite mechanism, it will be important to ensure that the board is sufficiently represented by Parties to the UNFCCC/PA to ensure its integrity as a global climate finance mechanism.

In establishing this mechanism, the fund could decide on a framework in which the conditions for private companies financing L&D could be stipulated. It could create a system of certification with information on the contributions that private companies or other entities providing finance could utilize in their company reporting on climate change risks.

This mechanism would encourage finance directly to the L&D fund in return for ‘certificates’ with information of the L&D activities financed by the contributions. To have one central mechanism with its own framework would reduce the risk of fragmentation of frameworks, and would have the benefit of having ‘global’ reach and visibility through the international climate negotiations. Further, the potential restrictions from market mechanisms in allocating the sources would not apply, as finance could be distributed in accordance with the framework’s conditions.

In the new market mechanism, the front runners could be government owned enterprises or enterprises that have a strong governance structure focused on improving their equitable footprint and comprehensively respond to climate change. National governments also play a role in encouraging, recommending or requiring companies to set goals and making contributions to L&D finance, for example through guidance documents, laws or regulations. For the Nordic countries, encouragement of using this mechanism could take place through the Nordic Code of Best Practice for the Voluntary Use of Carbon Credits, or a new best practice code relevant for L&D could be developed.

The potential contributions from the private sector could be encouraged based on principles of solidarity and equity, with clear guidelines on expected levels of contributions for the polluting industries and sectors. Its guidelines should be included in existing reporting frameworks, such as the Task Force for Climate Related Financial Disclosures (TCFD) and international, regional and national reporting frameworks to increase transparency and comparability of information on financial L&D contributions.

The finance potential of this solution is unclear. If the potential is the same or less than the nascent nature credit and offset markets, it could contribute with USD 6–9 billion per year, moving upwards to USD 160 billion by 2030. However, if financial contribution to the mechanism becomes the ‘new standard’ of good practice for companies in comprehensively responding to climate change, the finance deriving from this source could potentially unlock new finance at scale to support L&D activities.

In short, the above analysis has shown that the SDG and nature market has potential to finance certain activities that avert, minimize and address L&D if aligned with the SDGs or with biodiversity benefits. However, revenues created by these projects will go to the existing arrangements financing activities to avert, minimize and address L&D, and are unlikely to go to the L&D fund, at least based on how this market is currently structured. There is a need, however, to increase the focus on the potential of this market for financing L&D activities, and to include L&D needs as potential projects in the ongoing pilot projects. Parties to the UNFCCC and the PA could encourage the ongoing work under the VCM and the nature credit market and highlight the importance of developing L&D projects and enhancing funding for projects that avert, minimize and address L&D. 

The SOPs for article 6.2 and 6.4 of the Paris Agreement would be politically and economically difficult to increase and earmark for the L&D fund. The SOP is already higher than what it was for the CDM, and Parties are worried about the consequences for the viability of the mitigation projects. In a worst-case scenario, potential mitigation projects would no longer be viable due to an increased SOP for L&D. It is therefore not recommended to include an additional fee on the existing SOP under article 6.2 and 6.4 unless this will not affect the viability of the mitigation projects.

The same arguments could be used for the call to include a mandatory SOP on adaptation and L&D for the VCM. However, for the VCM there are currently less stringent requirements, and it could be argued that a mandatory SOP should be introduced which then could be shared between the AF and the L&D fund. This would indeed increase the new and innovative finance for L&D. Parties could in a decision under the COP/CMA encourage the VCM to follow the guidance under the PA for article 6.4, which requires SOPs for adaptation, but could point out the need for revenues also for the L&D fund.

The AF is currently financing certain L&D activities that overlaps with adaptation. However, in order to ensure that L&D activities are financed by the AF, guidance from COP/CMA is required on the issue of L&D. This would, however, not be ‘new and additional’ finance, and the AF would need increased resources to tackle its widened mandate. Parties could agree to clarify the role of the AF to fund L&D in a mandate under the COP/CMA.

Finally, the encouragement of private sector finance for L&D is important to highlight. Parties could ensure that the L&D fund has the necessary board seats available for private sector representatives for them to feel comfortable with funnelling finance to the L&D fund. A new private sector mechanism to finance L&D could be established as part of the L&D fund, or as a satellite mechanism serving the L&D fund. This mechanism could be created with the view that NPS, in particular the private sector and philanthropic entities, would receive sufficient information on the effectiveness of their contributions to be able to use it for their company reporting. This could be done by the creation of a framework with criteria for contributions and corresponding ‘claims’ or certificates to clarify the level and depth of contributions given. As such, Parties could ensure that the L&D fund is structured in such a way that makes it possible to create a private sector L&D finance mechanism.