Unlocking Climate Action: CAF Highlights the Role of High-Integrity Voluntary Carbon Markets in Latin America and the Caribbean

In the quest to tackle the urgent challenges posed by climate change, the role of the private sector has emerged as a linchpin, particularly in regions like Latin America and the Caribbean. A recent study titled "High-integrity Voluntary Carbon Markets in the Global South: Options for Policymakers in Latin America and the Caribbean" conducted by CAF-Banco de Desarrollo de América Latina y el Caribe, underscores the significance of high-integrity Voluntary Carbon Markets (VCMs) in mobilizing finance for climate action and achieving the ambitious goals set by the Paris Agreement.

Private Sector’s Crucial Role in Climate Finance

As the global community strives to limit global warming to 1.5°C, the need for substantial emissions cuts by 2030 and net-zero emissions by 2050 is imperative. The transition to a net-zero world demands approximately $125 trillion in investment, with the private sector expected to contribute a substantial 70% of this amount. High-integrity VCMs are identified as effective instruments to scale up private investment, generate credible emissions reductions, and foster sustainable economic growth.

Challenges and Opportunities in the Latin American and Caribbean Context

While the potential of VCMs is immense, challenges have emerged both on the supply side, such as concerns about the integrity of credits from the AFOLU sector, and on the demand side, with allegations of misleading carbon neutrality claims. The study identifies LAC as a region rich in natural resources, possessing massive carbon sinks, and presenting enormous potential for Nature-Based Solutions (NbS) and Technology-Based Solutions (TbS).

Latin America and the Caribbean currently represent the second-largest source of greenhouse gas emission reductions globally, contributing approximately 20% of all carbon credits in 2020 and 2021. Countries like Peru, Brazil, and Colombia have emerged as leaders, contributing over 80% of all Latin America and the Caribbean carbon credits retired to date in the Voluntary Carbon Markets.

Building Integrity for Trust and Growth

Ensuring integrity in VCMs is paramount for building trust and facilitating their growth. The study identifies six specific areas - capacities, credibility, regulation, information, cooperation, and stakeholders’ involvement - where systemic gaps exist in the development of VCMs in Latin America and the Caribbean. Entities operating on the demand side without integrity risk undermining the overall reputation of VCMs. Private companies, as primary users of carbon credits, play a pivotal role in ensuring high-integrity use, guided by international best practices such as the Claims Code of Practice developed by VCMI.

Recommendations for Governments

The study provides a set of recommendations for Latin America and the Caribbean governments to build high-integrity VCMs. It emphasizes the need for an inter-institutional and coordinated effort to define roles, expertise, and authority of national institutions, standardize regulations for carbon credits, and ensure coherence with the evolution of Article 6 of the Paris Agreement. Companies are urged to take responsibility for credit use, aligning with science-based targets and prioritizing internal emissions reductions.

Governments are encouraged to act on both the demand and supply sides. On the demand side, they can require VCM activities to report to domestic GHG inventories, align regulations with corporate sustainability disclosures, and clarify authorizations for VCM activities. On the supply side, governments can promote high-integrity carbon credits by aligning methodologies with NDCs, creating legal frameworks, and establishing supervisory institutions.