Latin America: the new cluster for climate solutions?

Since the signing of the Paris Agreement in 2015 and the passing of Article 6 at Glasgow COP26 in 2021 linked to the regulation of carbon markets, nearly 200 countries and more than one thousand corporations have backed the global effort to slow the increase of global temperatures to 2 degrees celsius, aiming ideally to nor surpass 1.5 degrees.

 Bearing in mind the amount of compensation needed to reach the goal of the Paris Agreement, the TSVCM estimates an annual demand for private sector carbon credits in the voluntary market to reach between 1.5 and 2.0 gigatonnes (GtCO2), generating a market of 50 billion dollars until 2030. 

 Over the last two decades, Latin America and the Caribbean (LAC) as a region has proven to be an essential market player as the carbon credit provider of natural climate solutions (NCS). It's noteworthy that the prices for compensation of NCS credits have increased 30% compared to 2019, while the prices for renewable energy have decreased 16%. In 2020, the region had nearly 40% of the market share, leading the voluntary carbon credits market. 

 This scenario opens a window of opportunity that is very advantageous for the region; the first reason is relatively obvious: there aren't enough carbon credits in Europe and Asia to cover their domestic demand. For this reason, the likely provider to step in and lead the market, due to the quality of their assets and additionality, is LAC. 

Still now, for this possibility to solidify into a successful reality, it is necessary to bear in mind: (a)  From the buyer'srs perspective, the carbon credits represent an additional transaction cost, and the compensation of carbon credits is not the ultimate end in and of itself; (b) The true objective is that the compensation of carbon credits gives a sense of economic pressure on the companies to take on more necessary and permanent investments to decarbonize the economy; (c) LAC's supply of carbon credits has weaknesses that are difficult to manage primarily due to the impermanence of the natural assets and the uncertainty in the macroeconomic context. With improved transparency requirements, buyers will be more rigorous in verifying compensation results, which will generate an important challenge for natural solutions; that is precisely the niche market where LAC has the highest competitive advantage.  (d) A new generation of industrial/tech solutions for the climate is developing alternatives to the supply of natural solutions. Despite not having the level of social and environmental inclusion compared to nature-based solutions, these technologies will compete directly with the climate project of LAC. 

 For all these reasons, the development of the regional carbon market must result from a concerted process and joint learning among the interested countries, avoiding the fragmentation of supply and the weakening of the regional position as a key provider of carbon credits.

 However, it is not a trade-off between national markets and the regional market. It is a two-way path, where the reinforcement of national processes should simultaneously promote the harmonization and complementing of standards and regulations at the regional level. In short, it is about building a shared and strategic regional vision for the carbon market.

 With this perspective, we work in the Latin American and Caribbean Carbon Market Initiative (ILACC). This regional project, designed in collaboration with the national development banks of the CAF member countries, aims to promote the competitiveness of the supply of carbon credits generated in the region, expanding the impacts of jobs creation, income, green businesses, and poverty alleviation.

 ILACC is based on a three pillars approach that targets core aspects of the carbon credits market development: 

•  The first consists of expanding and diversifying the supply of climate projects, generating gains in scale and know-how;  
•  The second pillar consists of access to international markets, reinforcing the traceability of the projects and transparency in their compensation results. This pillar includes the application of technologies such as blockchain and the tokenization of natural assets, among others. 
•  The third pillar consists of the need to strengthen the benefit-sharing mechanism between project developers and local communities.  

 Experience shows us that the "promise" of compensation offered by a carbon credit, generated by the conservation and restoration of a forest ultimately depends on a complex web of political, legal, economic, social, and environmental convergences that must be articulated for this purpose.

 Without a convergent vision among the actors, there is no effective delivery of the compensation service; without delivery, there is no credibility; and without credibility, LAC will not have a significant role in the carbon market. 

 On the other hand, through a shared strategic vision and having the correct tools of economic policy and climate financing, LAC will be able to position itself as an important source of natural climate solutions, fulfilling its vocation, and through this, develop the capacities that it requires to be competitive in the new global economic (r)evolution of green businesses.