Unlocking carbon credits for water
New research has found that 1.6 billion voluntary carbon credits could potentially be generated per year for emission reductions created through investments in water. That is more than 10 times the amount of all voluntary carbon credits purchased today. These credits can be bought and sold as part of a liquid market, creating revenue that incentivizes the actions needed to ensure water is available for everyone.
The report, commissioned by WaterAid and conducted by the University of Colorado Boulder and Castalia Advisors, found that 4% of the world’s greenhouse gas emissions could be saved within the global water sector meaning local water projects that aim to reduce emissions can be brought into a global carbon credit economy.
In practice, this would mean generating carbon credits from projects that deliver carbon savings as well as water benefits such as improved drinking water access in developing countries, reduced methane emissions from latrines and centralized wastewater treatment plants or restored coastal environments.
We spoke to Professor Evan Thomas, Director of the Mortenson Center in Global Engineering & Resilience and lead author of the report about the opportunities and barriers to harnessing the potential of high-integrity carbon credits for a triple win: reduced emissions, improved water security, and improved access to safe water and sanitation for millions of people.
In the study, you estimate 1.6 billion tonnes of carbon could be reduced each year with investments in water and that this could potentially be financed by carbon credits. How much of the market potential is utilized currently?
Overall, our review yielded a total of 434 water-related projects that have issued a total of more than 45 million credits since 2010 and about 10 million credits per year today. This is within a broader market that is only about $2B/year today, and roughly 150 million credits issued per year.
“Water is a local problem - saving water in Colorado does nothing for insecurity in Rwanda.”
While there is today a growing, multi-billion dollar global market for carbon credits, water has not typically been fungible in the same way. Water is a local problem - saving water in Colorado does nothing for insecurity in Rwanda. This local feature of water has made it challenging to create effective financing and trading mechanisms and has limited the value, transactability, and liquidity of various forms of so-called water credits.
Who would be the main beneficiaries of the carbon crediting financing and who would be the ones buying in?
The global increase in water insecurity is one of the first perceivable effects of climate change. Today, two billion people live without access to safe drinking water, most notably in countries with the lowest per capita emissions, and four billion experience water stress at least one month a year. The linkages between climate change and water insecurity are clear, as are the implications for the global economy. The water sector produces 10 percent of global emissions, resulting largely from energy use for water treatment and transport, but also from wastewater decomposition, gas release from surface water bodies, decomposition of organic matter in reservoirs, and destruction of wetlands.
While water management is typically a local challenge, climate finance mechanisms, including the voluntary carbon market (VCM), offer the potential to provide new sources of recurring revenue to create a sustainable, performance-based funding stream to incentivize safe water and sanitation management services globally.
What do you see as the key barriers for expansion of the carbon credit market for water? What do you think would attract buyers of carbon credits for water projects, and also incentivize more projects to seek this source of finance?
We conducted approximately two dozen interviews with stakeholders across the VCM, including those representing project developers, investors, buyers, registries, intermediaries, carbon market associations, and industry standards bodies. A consensus emerged on the future of carbon credit generating water programs, including the large-scale opportunities created by broad co-benefits. However, the complexities of generating carbon credits under existing methodologies and the limited technologies available for monitoring, reporting, and verification remain barriers to scale. There is a tension between a mature market with stable prices and potential homogenization of credits against the advantages of bespoke credits that command higher prices because of their water benefits.
“The complexities of generating carbon credits under existing methodologies and the limited technologies available for monitoring, reporting, and verification remain barriers to scale.”
Further, the cost of carbon credit generation within the water sector can, in many cases, exceed the sale price of these credits, necessitating either significant additional investment or higher credit prices and highlighting the financial impediments to realizing the potential of these emission reductions.
How could other financers and sources of financing be used to leverage carbon credits in the future?
The VCM is designed to financially incentivize voluntary action supporting climate change solutions. However, the VCM represents a fraction of overall climate finance. In 2022, more than $60 billion dollars in climate finance was provided by multilateral development banks to low- and middle-income economies. Of this, 15 percent of global climate adaptation finance, more than $3.3 billion, was directed to the water and wastewater sector. Among high-income economies, the investment is even more significant, with 28 percent toward water and wastewater systems.
Finally, what are the key things that project developers should consider when examining if they can tap into the carbon credit market in a water program?
Even experts are often unaware that water contributes to 10 percent of global emissions today, or are unfamiliar with existing and potential opportunities to unlock carbon credit revenue for water programs. While this report is a start, increased promotion and awareness of the important relationship between climate change and water security and of the solutions offered by linking carbon credits to water programs may support market growth.
Further, many of the potential projects identified in this report would not be viable on carbon revenue alone, but may still benefit from carbon credit revenue as an enabling subsidy. Moreover, carbon revenue can help pool risk with the support of a global carbon credit market among otherwise independent, local water projects.
This report developed a global estimate of the potential carbon credits that could be generated from water projects. These estimates should be interpreted as broadly reflective of the general potential of various water-related projects to participate in the VCM. This analysis has not attempted to estimate the cost of the various interventions that would result in emission reductions and removals. Future work may include costing these potential programs, as well as localizing emission reduction estimates to specific projects or regions in order to increase the accuracy of these estimates and support investment.
Professor Evan Thomas, Director of the Mortenson Center , University of Colorado Boulder
Evan Thomas is the Director of the Mortenson Center in Global Engineering & Resilience, the Global Engineering Residential Academic Program, and the CU Boulder Climate Innovation Collaboratory, and holds the Mortenson Endowed Chair in Global Engineering at the University of Colorado at Boulder.
