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Making carbon markets work – for everyone

In 2022, the Trafigura Foundation started a partnership with Plan Vivo. In this blog, published on Plan Vivo's website on 4 may 2022, Céline Yvon explores the potential of carbon markets as a mechanism for securing sustainable finance, diversifying development efforts, and fostering community resilience.  Céline discusses the issues that smallholders and local communities face on their journey to set up and manage carbon projects; highlighting how the Trafigura Foundation’s partnership with Plan Vivo will lower these barriers, with the aim of making carbon markets work – for everyone.

100 billion dollars. That’s the value the voluntary carbon market reached in 2021. At the Trafigura Foundation, we are passionate about translating this revenue potential into financial opportunities for those who need them most.

WHY CARBON MARKETS?
Credible and verified carbon offsetting systems channel finance and goodwill to projects that require support: protecting the rainforests, regenerating peatlands, developing a solar cookstoves value chain, etc. Until recently, such projects were the remit of traditional ‘development finance’, i.e., supported by short-term grants provided by NGOs, governments, international organisations, or environmental agencies.

While beneficial in many ways, this grant-making approach has also its limitations: it does not offer per se a long-term, sustainable solution to systemic social and environmental issues. Many projects supported through grant money always need… more grant money. This is particularly true if there are no robust income-generating mechanisms built into their DNA. Communities who benefit from these projects ultimately depend on the goodwill, priorities, and funds of donors. That’s why tapping into the potential of markets, when possible, is essential. Monetising the value of reduced, removed or avoided emissions - and allowing the trading of these offsets - can attract much needed private investment and diversify the funding basis of complex, multidimensional and long-term development efforts.

''PROJECTS SUPPORTED THROUGH GRANT MONEY ALWAYS NEED... MORE GRANT MONEY.''

CARBON CREDITS TRANSLATE INTO REGULAR PAYMENTS
Once a project is operational, companies can purchase carbon credits from that project. These purchases translate into regular payments - made to the project - for the emissions reduced. Because these payments are predictable and long-term, they increase the viability and impact of climate action projects. With private sector involvement also comes an appetite for innovation, which usually translates into effective transfer of technologies and know-how. Crucially, private sector involvement is accompanied by a business mindset geared towards leveraging market opportunities while instilling financial rigour and seeking return on investment. In other words: once linked to the carbon markets, projects that credibly remove or reduce GHG emissions not only attract sustainable financing, but also promote models, tools and technologies that strengthen their impact and foster scale.

“PROJECTS THAT REMOVE OR REDUCE GHG EMISSIONS ATTRACT SUSTAINABLE FINANCING AND PROMOTE TOOLS THAT FOSTER SCALE.”

A POTENTIAL YET TO BE FULLY UNLEASHED
This is not to say that everything is rosy in the carbon finance world. With a patchwork of voluntary carbon market standards and practices, and lack of a global oversight system, the sector is flawed and mired in confusion regarding the actual ‘climate value’ of some offsets. Moreover, questions arise regarding the true financial beneficiaries of carbon market revenue. Who really benefits? Commercial entities, states, or local communities and smallholders - the stewards of the land?

Developing carbon finance projects requires expertise and resources that many smallholders and local communities simply don’t have. Translating a project idea to a carbon project certified and validated by recognised agencies requires a qualifying exercise. This involves determining whether the project is viable; calculating the potential volume of carbon reduction or removals; and developing a project management plan for the site. The costs for project development are significant and vary depending on the project size, project location, and a project developer’s rates. Initial funding is a continuous issue within the project development phase. Furthermore, the certification process is often arduous, taking around 2-3 years, whilst monitoring emissions and reductions over a project’s lifecycle can be a challenge even for the most experienced professionals.

PRIORITISING COMMUNITY STAKEHOLDERS
Such technical and financial challenges explain why most carbon finance projects are initiated, designed, and managed by professional project developers. They are commercial entities which, when engaged in agriculture, forestry, and other land use sector projects, may or may not redistribute a portion of their profits to communities living on, or from those lands. When they do so, it’s often through mechanisms that lack meaningful engagement with local communities. While some degree of consultation (in the sense of information sharing) does often take place, this does not equate to true community participation. The latter requires a process that actively seeks out and facilitates the involvement of those affected by any decision-making. According to good practices, community stakeholders would need to be invited to formulate their needs and be able to influence priorities and policies as well as commenting on resource allocation and access to public goods and services.

ADDRESSING THE RIGHTS OF INDIGENOUS PEOPLES
Carbon projects intersect with complex land rights and issues such as contested land titles, overlapping tenure regimes, land grabbing, illegality, and marginal livelihoods across developing countries. In many parts of the world indigenous and forest communities struggle to assert their land and resources rights. They have raised concerns about land within traditional territories being set aside for carbon sequestration processes, and claims exist about communities being pushed off their lands to further the development of carbon sequestration projects [1]. Monetizing a state’s natural capital in accordance with principles such as the U.N. Declaration on the Rights of Indigenous Peoples (identifying and including all legal rights holders of carbon and shared natural heritage when designing climate action solutions; securing free, prior and informed consent when consulting people and communities; designing the appropriate mechanisms, structures, and processes that balance out private interests; ensuring cultural sensitivity) are challenges that must be addressed with a strong moral compass, patience and dexterity.

Notwithstanding these ethical, financial, and technical challenges, carbon markets have huge potential. To unlock it, project design and implementation need care and diligence to ensure that local people fairly benefit, poverty is reduced, and biodiversity is promoted. This is where Plan Vivo comes in.

LOOKING BEYOND CARBON – PARTNERING WITH PLAN VIVO TO ENHANCE COMMUNITIES’ AGENCY AND RESILIENCE
At the Trafigura Foundation, we chose to partner with Plan Vivo as they put marginalised and vulnerable communities and smallholders at the centre of project design, implementation, and operation. The Plan Vivo Standard not only focuses on tackling climate change, but also creating opportunities that allow people and nature to thrive in harmony.

Climate Change is multidimensional and touches on a broad range of Sustainable Development Goals (SDGs). It also affects smallholder communities in a disproportionate manner, dependent as they are on natural resources and their immediate environment. Climate finance projects, when devised in an inclusive manner, have the potential to bring strong positive effects locally - beyond the avoidance or reduction of GHG. Agriculture, Forestry and Other Land Use projects (AFOLU) for example may produce ‘co-benefits’ such as improved food security and better health for local communities, thanks to smart agricultural practices and clean energy sources (SDGs 2, 3, 7). They may also positively impact the local biodiversity (SDGs 14 and 15).

We view carbon finance as a vehicle to promote empowerment, i.e., strengthen the governance of vulnerable communities and boost their enterprise capabilities. Setting up and implementing a carbon finance project is an excellent community capacity building opportunity. It instils greater management and financial planning and puts communities on the highly competitive global map of supportive networks. With their inclusion in the carbon markets, communities become well positioned to undertake and be understood as low-risk investment opportunities for other development and poverty-reduction efforts.

In sum, well-managed carbon finance projects can result in enhanced community resilience to climate-related shocks and to the socio-economic development challenges felt within these vulnerable locations. This differs from a more mechanistic approach which focuses on GHG emissions only, favouring economic efficiency and de-emphasising community engagement.

“CARBON FINANCE PROMOTES COMMUNITY EMPOWERMENT AND RESILIENCE TO CLIMATE RISKS.”

There are other factors that drive and characterise the Trafigura Foundation - Plan Vivo partnership. Firstly, it advocates for a greater share of carbon finance to legitimately reach smallholders and communities. Plan Vivo’s unique model ensures that at least 60% of the carbon revenue goes back to communities on the ground – budgetary provisions are verified, and communities decide how to allocate the reinvested funds in a robust and inclusive manner. This differs from the pledges of some project developers, who promise to reinvest a certain level of profit into communities after operating costs.

Secondly, we want to strengthen carbon finance systems in the global South by providing the appropriate expertise and networks for carbon markets to thrive. Currently, most validation and verification bodies (VVBs) operate from the global North. Our partnership will help build capacities for local VVBs, auditors, and quality assured institutions to boost market confidence, bring project costs down, and reduce carbon footprint.

Thirdly, the partnership is ambitious about scale. The green transition pathway will require a fundamental shift with regards to how our societies function, with significant social and economic costs attached. Scaling up carbon markets can help support financial flows to developing countries. We want to accelerate the number of projects that can produce credible, verifiable, and additional carbon credits. Developing tools, methodologies and frameworks that are adequate and accessible to communities is a prerequisite – as are catalytic finance, support resources and services. Right now - and despite the accelerating interest in voluntary carbon offsets - robust community-based initiatives can’t transition into full-fledged carbon finance projects. This is due to the lack of the upfront finance needed for investment, or because the authors can’t access (or are not eligible for) appropriate financial instruments (e.g. grants, debt, equity). In fact, the demand for offsets with high co-benefits seems to currently outweigh the offer. Our partnership with Plan Vivo will pilot-test an “acceleration” mechanism -bringing an array of business support resources and services including coaching, capital and connections to communities developing their own carbon projects.

“WE ARE TESTING AN ACCELERATION MECHANISM - BRINGING AN ARRAY OF BUSINESS RESOURCES AND SERVICES TO COMMUNITIES DEVELOPING THEIR OWN CARBON PROJECTS.”

Designing equitable and effective carbon markets requires the participation of all relevant parties.

Through our partnership with Plan Vivo, we wish to amplify community voices, hone local competencies, and play our part in strengthening an effective and equitable carbon market.

For the sake of the climate, communities, and biodiversity.

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Find out more about Plan Vivo's partnership with the Trafigura Foundation here.

NOTES 

[1] See for example the “credible evidence” of violence and evictions against indigenous people gathered in the northern DRC by UNDP investigators (Armed ecoguards funded by WWF 'beat up Congo tribespeople' | Conservation and indigenous people | The Guardian, 2020), the allegations made against the Carbon project backed by the World Bank in the Kenya’s Cherangany Hills backed/, or the court case initiated in summer 2021 by a Peruvian indigenous community against the State over the establishment of a National Park in the Amazon.

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