Seizing the opportunities of voluntary carbon market: Lucrative alternative financing source for public projects of Bangladesh

Article 6 of the Paris Agreement delineates mechanisms for international cooperation to unlock financial support for developing countries to address climate change issues and challenges.

It offers countries market-based and non-market approaches to meet their climate targets i.e. Nationally Determined Contributions (NDCs) through – a. bilateral transfers (Article 6.2), b. centralized UN mechanism (Article 6.4), and c. non-market cooperation (Article 6.8). Among these three approaches, Article 6.2 enables a host country to sell units in the form of Internationally Transferred Mitigation Outcomes (ITMOs) or Carbon Credits (CC) to a buyer country in exchange for investments, support for capacity building, and access to technologies not available through domestic resources.

The buyer country purchases these units, from either Compliance Market (CM) or Voluntary Carbon Market (VCM), to address any gaps in meeting its own climate goals. 

Globally the significance and impact of market mechanism of Article 6.2 in financing environmental projects is getting visible and positive increasingly with time. The CM is more rigid as it requires bilateral agreements or MOUs between two countries (where participation is often mandated by national, regional, or international regulations – frequently through the implementation of cap-and-trade systems) that often takes years together just to be at the point of doing the MoUs.

More time is required to do the transactions. And a more functional alternative system is VCM as it offers more flexibility with easy access and exit available for both private and public entities. As of 2023 the CM worths US$ 850 billion covering 73 ETSs (Emission Trading Systems) and carbon tax mechanisms of 39 national jurisdictions and more than 30 Carbon Crediting Mechanisms (CCMs).

So far, 9 south and south Asian countries signed MOUs with Norway, Singapore, Switzerland and South Korea. Singapore alone made 23 MOUs. Unfortunately, Bangladesh has only one Joint Carbon Mechanism (JCM) signed with Japan which is yet to be operationalized.

On the other hand, the total value of VCM in just 2024 was approximately $535.1 million in terms of traded credits, with some forecasts suggesting it could exceed $10 billion in annual value by 2030 and potentially reach over $100 billion annually within the next decade. In 2024 Microsoft alone made an US$ 800 million Carbon Removal Deal with AtmosClear to permanently remove 6.75 million metric tons of CO2 over the next 15 years.

All Multinational Corporations (MNCs) and Transnational Corporations (TNCs) are pouring hundreds of millions of dollars using the VCM to meet their commitment of Net Zero Emissions. 

We can see that several countries of Africa, Latin America and even our neighbor are benefitting from VCM regularly.

They have already formed several mechanisms i.e. The Africa Carbon Markets Initiative (ACMI), The Brazilian Initiative for the Voluntary Carbon Market, The Development Bank of Latin America and the Caribbean, The Eastern Africa Alliance on Carbon Markets and Climate Finance, The Governors' Climate and Forests Task Force (GCF), The West African Alliance on Carbon Markets and Climate Finance, The Inter-American Institute for Cooperation on Agriculture (IICA) etc. to name a few. Carbon Credits are traded in Indonesian capital market.

Indonesia went to Sell US$ 1 billion worth Carbon Credits at COP30. Billions of dollars of are available in the VCM and with smart and effective move Bangladesh can avail financing from there but we are not fully equipped with to tap it.

Although Bangladesh made several trading of carbon credits through the earlier Clean Development Mechanism (CDM), an UN-run carbon offset program under the Kyoto Protocol, we are behind in way with regards to operate in VCM. For Bangladesh, one of the stark consequences of getting out of the LDC list is that grants and concessional loans will be unavailable in the coming years.

We are already confronting situations where we are being offered blended (concessional plus non-concessional) loans, and we cannot but accept it.  Soon we will have to opt for non-concessional and commercial loans to finance our development projects of the government. And one of the cushions can be the VCM as it can offer invaluable unconditional and grant financing. It is evident that we are missing huge opportunities to finance our efforts to address climate change by not being able to engage in or grab the resources from the VCM. 

To effectively unlock the potential of VCM for Bangladesh several key steps must be implemented i.e. – 

Firstly, the establishment of a dedicated National Carbon Market Authority with a strong mandate to oversee and regulate both voluntary and compliance carbon markets within Bangladesh is essential. 

Secondly, the development of comprehensive national guidelines and regulations specifically for VCM participation is crucial. These should cover all aspects, including project eligibility criteria, streamlined registration processes, rigorous MRV protocols, clear procedures for the issuance of carbon credits, and transparent benefit-sharing mechanisms that involve local communities. 

Thirdly, setting up a transparent and secure national carbon registry is vital for effectively tracking the issuance, ownership, and retirement of carbon credits generated from both voluntary and compliance market activities within Bangladesh. 

Fourthly, the implementation of targeted programs to significantly enhance the technical expertise and overall awareness of government agencies, private sector entities, local communities, and other relevant stakeholders regarding the intricacies of voluntary carbon markets and the processes involved in successful project development is necessary. 

Fifthly, actively facilitating public-private partnerships will be key to fostering collaboration between government agencies, private sector actors, non-governmental organizations, and international partners to develop and implement high-quality voluntary carbon market projects across various sectors. 

Sixthly, ensuring that all national policies and guidelines are closely aligned with established international best practices and recognized standards for voluntary carbon markets, such as those developed and promoted by the Integrity Council for Voluntary Carbon Markets (ICVCM) and the Voluntary Carbon Markets Integrity Initiative (VCMI), will enhance the credibility and acceptance of Bangladeshi carbon credits in the global market. 

Seventhly, a strategic approach should involve identifying key sectors within Bangladesh that possess significant potential for generating high-quality voluntary carbon credits. This could include renewable energy initiatives, forestry projects (particularly the conservation and restoration of the Sundarbans), the widespread adoption of improved cookstoves, and the development of advanced waste management solutions. Targeted policies should then be developed to specifically support project development within these promising areas. 

Finally, mirroring the approach being taken for the Article 6 compliance market, the government should consider developing both a positive list of eligible project activities that align with national priorities and a negative list of ineligible activities to ensure environmental integrity and prevent undesirable outcomes in the voluntary market. 

The good news is that the Economic Relations Division (ERD) of the Ministry of Finance is supporting the Ministry of Environment, Forest and Climate Change to establish policy and institutional requirements for Carbon Trading through a World Bank supported pilot Project.

The Department of Environment have been recognized as the Designated National Authority (DNA) of Bangladesh. Although we are yet to have our own 'National Register', we opted to use World Bank's Register for the time being. We must ensure several other policies become fully functional for both CM and VCM.

However, we've successfully negotiated and traded 1.6 million tonne CO₂ eq for IDCOL. But these initiatives are not enough at all, and we need to do more and do extensively. We just need to do faster.