Leveraging demand from regulatory compliance may be key to building a robust market for biodiversity credits, some experts have said, pointing towards the potential for a softening divide between voluntary- and compliance-driven approaches.
It is broadly agreed that the voluntary biodiversity market should leapfrog lessons learned in the carbon market – which has been the target of harsh criticism towards buyers who purchase credits in order to continue business-as-usual polluting.
Biodiversity credits should not be an excuse to harm nature, stakeholders say, and instead these credits should only be used by buyers who wish to provide a positive contribution to nature outside their own value chains.
“I think some people may have the wrong understanding, and because we are talking about credits, they are immediately associating this with offsetting,” said Sinclair Vincent, who is leading efforts to develop the first nature credit under the world’s largest carbon credit standard, Verra, slated to be rolled out later this year.
“That’s just not the case,” she said.
In comparison to voluntary credits, biodiversity offsets mainly exist under regulatory schemes that require private actors to counter their negative impacts on nature during building and infrastructure projects – including a new framework recently introduced in the UK.
And while it is clear that voluntary buyers must be very careful about the types of claims they make when using biodiversity credits, it is less clear if maintaining a crisp distinction between government- and voluntary-led initiatives is truly helpful to the nascent market, particularly as it may struggle to build up sufficient demand through voluntary actions alone.
MOTIVATIONS
“There is definitely a mix of demand for biodiversity credits from companies that are required by law to mitigate their impacts on biodiversity, and from companies that want to show their commitment to positive environmental impact,” said Santiago Martinez Vivero, business development manager of global biodiversity at South Pole.
South Pole has made it easy for the general public to purchase biodiversity credits stemming from their projects – such as the Alicante River Canyon project, which protects tamarins, jaguars, and other species from agriculture expansion and illegal mining in Colombia.
“While the majority of demand may come from companies that are required by law to mitigate their impacts on biodiversity, there is also growing interest among companies that want to show their commitment to positive environmental impact,” Martinez added.
Colombia is one of several countries that mandates offsetting when economic activity disturbs nature, requiring project developers to show how they are compensating for their negative impacts on land by restoring or protecting an equivalent habitat elsewhere.
These types of regulations provide clear motivations for credit demand, where purchasing credits is often the only option after exhausting approaches to mitigating the activities’ impact on nature.
In the voluntary market, in contrast, there are no rules or laws driving demand.
Verra’s Vincent, who is also director of sustainable development innovation, said that she has been working with other experts to narrow down the various motivations that may instead drive demand in the voluntary space.
“It’s clear that [the forthcoming credits] are not offsets, but it’s less clear how companies can make a credible claim around their use,” she said.
Vincent pointed to Corporate Social Responsibility (CSR) as a likely driver for voluntary demand, noting that companies may want to demonstrate “nature positive” actions, though that specific labelling continues to be ill-defined.
She also noted the importance of transparency frameworks that are quickly ramping up globally, including the Taskforce for Nature-Related Financial Disclosure (TNFD) and Science Based Targets Network (SBTN).
As companies increasingly recognise and report on their dependencies on nature, they may want to make contributions that provide a positive benefit to these areas, both in terms of demonstrating positive actions, as well as to help de-risk their supply chains.
This means that companies may prefer to align any credit purchases and use to their own activities.
“This doesn’t necessarily mean it has to be tied to the company’s footprint in the way that it would if it was an offset, but I think companies are still going to want to invest in areas that impact their business,” Vincent said.
But Vincent also noted that CSR alone may be insufficient to provide the scale of finance and positive impact on the ground that is needed given the magnitude of the biodiversity crisis.
Instead other avenues of demand may be needed, and there is no doubt that compliance-based systems are a well-proven method in this regard.
LESSONS FROM CARBON
Compliance markets have been shown to be mega boosters for demand within the carbon credit world.
The Clean Development Mechanism remains by far the largest-ever carbon offset scheme, with the lion’s share of retirements arising from its link to the EU emissions trading system (ETS) through 2020.
Regulatory links to the voluntary carbon market have also taken place in Colombia and South Africa, linking offsets to regulated schemes, and boosting demand for eligible credits.
More recently, Singapore is expected to publish a ‘whitelist’ this year for which international carbon credits – from standards such as Verra and Gold Standard – will be eligible for companies to use to partially offset their liable emissions under the country’s carbon tax.
Regulatory links are always welcomed by carbon market actors, who recognise that the opportunity to boost demand and the corresponding price for the credits in the market.
COMPLIANCE FOR BIODIVERSITY
But linking nature credits to compliance systems, like all things in the biodiversity sphere, may include complexities not apparent for carbon.
Canada has allowed biodiversity offset credits as a flexible compliance instrument under rules posed by its Impact Assessment Act, Species at Risk Act, and several other legislative frameworks, for example.
But its newly released biodiversity offsetting policy stipulates like-for-like, where the offset must have comparable attributes to the land being displaced.
Counter-balancing the negative impacts of project development requires familiar principles such as “conservation gains over and above what is already taking place or planned in the future”.
But it also includes more localised requirements, such as if the impacted site provides habitat that promotes a certain species movement, the offset should provide the same function.
This means that in contrast to the carbon market world, credits may not be fungible globally for compliance-based systems – although it should be noted that carbon units used under the Colombia and South African schemes must arise from locally-sourced projects, and the issue of pure fungibility of carbon credits remains controversial.
There is also no telling that policymakers would not eventually allow for biodiversity credits from other jurisdictions if their domestic banks were insufficient to cover demand from regulated companies.
BOTH NEEDED
Some experts have been vocal in noting that the strict distinction from offsetting use could unfairly stifle potential demand.
“To me, whether you call it a credit or an offset, it’s still a performance-based approach where you’re selling outcomes. And someone is claiming those outcomes because they paid for them,” said Mariana Sarmiento, CEO of Colombian project developer Terrasos.
“We want to get people to have a motive to make permanent biodiversity contributions. So how do we do that in a way that is efficient, that is based on outcomes?” she added.
Terrasos generates biodiversity credits from seven Colombia-based projects both for the domestic compliance market as well as for global voluntary buyers.
Sarmiento said that without a requirement to offset, negative impacts on nature from development would continue, but there would be no opportunity to leverage finance towards nature gains.
“We’re so allergic to the term ‘offset’ that countries are going to start scratching that term,” said Sarmiento.
“But meanwhile big road projects, mining projects, energy infrastructure projects are all going to need biodiversity offsets because there’s going to be some unavoidable impacts there.”
Compliance-based offset systems usually specify that offsets should be used only after all measures to avoid, minimise, and restore on-site have been implemented to the fullest extent possible.
The Colombian system also requires projects to result in no net loss and ecological equivalence, establishing offset ratio requirements in a range of 1 to 4 or even higher.
Countries with biodiversity offsetting frameworks include Australia, Brazil, Canada, China, Colombia, France, Germany, India, Mexico, New Zealand, and South Africa, where habitat banks have often emerged to ensure a supply of credits.
DOORS OPEN
While many analysts have said that voluntary biodiversity credits should not be allowed to be used as offsets, others have said that frameworks could be developed to lessen related concerns.
Vincent noted that Verra’s nature credits are being designed specifically to leverage finance from voluntary buyers, with a clear distinction to offsetting use.
But she also noted that it might make sense to leave the door open for units to be eligible under government offsetting schemes.
“It’s a good question. I think it depends on how our framework and the core requirements and design principles shape up,” she said.
“But if we think about the way that other programmes can link into compliance mechanisms, we would absolutely encourage that, and hope that they can work together, or that what we create is useful for those programmes.”
Exactly how to make that work would still need to be sorted out.
“I think the devil will be in the details a bit on this because ours is not meant to be an offset … and we’re agreeing this on a global rather than local scope,” Vincent said.
“It could be that there’s some sort of additional components that you have to follow … or it could be that the region where the projects exist has to be constrained, and the offsetting mechanism could set those criteria on top of using our framework.”
Verra is aiming to consult on high-level principles around their forthcoming nature credits as early as Q2 before a draft protocol is issued later in the year, though the latter may initially be constrained in scope.
“Whether it’s focused on a particular ecosystem or a subset of activities we don’t yet know, there’s a lot of ways that we can slice and dice it and we know that we’ll have to add on to it over time,” Vincent said.
By Katherine Monahan – katherine@carbon-pulse.com
*** Click here to sign up to our weekly biodiversity newsletter ***
