To make nature financing more equitable, we must understand how NCS credits are used

This blog was authored by Julia Ilhardt, former High Meadows Fellow, Global Climate Cooperation. 

sunset over a forest

At the end of last year, 196 nations agreed to the historic Global Biodiversity Framework, which includes the goal to protect 30% of land and sea area by 2030. Still, nature is woefully underfinanced, with investments in nature-based solutions needing to double to USD 384 billion per year by 2025, according to UNEP. 

Using crediting to incorporate natural climate solutions (NCS) into carbon markets is one way to generate significant finance for nature while cutting emissions, and it’s gaining public and private sector attention. However, both producing and using credits raises important equity considerations. A new paper from EDF focuses on the issues around use, including how credits may impact the communities surrounding polluting facilities. This blog lays out the framing, key issues, and potential solutions, with more detailed analysis available in the paper. 

To understand equity, ask the right questions 

Achieving environmental equity means ensuring that both the processes and outcomes associated with policy decisions are fair and just. Environmental benefits and burdens must be balanced. Everyone is entitled to a healthy ecosystem. 

Across academic and civil society literature, environmental equity is often framed along three dimensions: recognitional, procedural, and distributional equity. The graphic below defines these dimensions of equity and provides examples of questions that carbon market stakeholders should ask when designing and implementing crediting programs. 

large trees from below, looking up

In the context of NCS crediting, equity questions arise on both the demand and supply side. On supply, issues include the rights and priorities of communities generating credits, benefit sharing arrangements, and stakeholder consultation processes. On demand, these include the impacts of credit use on local co-pollutants, disparities in environmental burdens, and the distribution of benefits.  

Ultimately, carbon pricing and crediting is valuable only insofar as it can effectively drive climate-friendly outcomes in an equitable manner. 

In some cases, supply and demand considerations may come into tension, for instance when credit usage could exacerbate a community’s air pollution on the demand side but support local livelihoods on the supply side. 

Though equity should ultimately be considered holistically, this paper focuses specifically on demand, digging into the details and evidence around the use of NCS credits. EDF’s forthcoming NCS Crediting Handbook will include a chapter on supply side issues, including a section on safeguards for people and the environment. 

It is important to note that some environmental justice and civil rights groups fundamentally oppose carbon pricing as it favors economic efficiency over distributional equity and allows pollution to be paid for. Although these critiques cannot be corrected through modifications to policy design, they should be recognized and understood. 

Using NCS credits in compliance and voluntary markets 

Understanding the equity questions around NCS crediting, and taking actions to address them, is necessary to avoid negative outcomes for communities. 

In some countries and jurisdictions, emitters are regulated under pricing mechanisms like cap-and-trade or carbon taxation. Companies can often use carbon credits, including NCS credits, to meet a portion of these obligations. And in many cases, the equity considerations surrounding the use of NCS credits are the same as those for the use of emissions allowances. 

In these systems, companies may choose to pay for emissions allowances or credits when these are less expensive than direct emissions reductions. Since greenhouse gas emissions are strongly correlated with harmful co-pollutants, this could potentially maintain or exacerbate inequities in pollution exposure. Polluting facilities are disproportionately located in low-income communities and communities of color, meaning these groups could be particularly harmed. 

While well-designed emissions trading has been shown to reduce overall emissions in regulated areas, the evidence on local environmental impacts is mixed. Several studies using different methodologies have examined the California cap-and-trade program, finding either the exacerbation or reduction of pollution burden in predominantly minority or low-income communities. A detailed analysis of this literature is available in the full paper. Outside of the US, little research assesses the impacts of emissions trading on community air quality. 

The use of credits and allowances raises the risk of extending the lifespan of fossil fuel infrastructure, with associated public health effects. For NCS credits in particular, mitigation potential is limited by the overall availability of ecosystems, meaning this is not an indefinite solution for fossil fuels. 

As for the voluntary carbon market, NCS credits offer one option for companies to voluntarily contribute to emissions reductions. To the extent that carbon credits are used to mask unsustainable practices, this could be considered a form of ‘greenwashing.’ 

These issues can and must be addressed for effective, impactful use of NCS crediting. 

Promoting equitable outcomes 

NCS credits are an important tool for financing conservation, and several policy options help to promote the equitable use of these credits. For example, compliance markets often limit the percentage of an entities’ obligation that can be met with credits. Under Washington State’s cap-and-trade, an entity’s credit allowance may be further reduced if they “contribute substantively to cumulative air pollution burden in an overburdened community.” In voluntary markets, credits could be used only for contribution beyond a company’s value chain. 

Revenues from emissions trading can also be recycled, including through tax rebates for low-income households, income or corporate tax reductions, or funding for renewable energy and infrastructure projects. California Senate Bill 535 mandates that at least a quarter of the proceeds from the state’s cap-and-trade program go to projects benefiting disadvantaged communities, with at least 10 percent of funds for projects directly located in disadvantaged communities.

Ultimately, carbon pricing and crediting is valuable only insofar as it can effectively drive climate-friendly outcomes in an equitable manner. 

The NCS Crediting Handbook will explore other components of equity and integrity, including questions around the generation and transaction of credits. Visit our NCS Crediting Handbook and Briefing Series page for upcoming briefs, and to get the latest on our work in the NCS crediting space. This and other research are also part of EDF’s Economics Discussion Paper Series.


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