NATURE AND NET ZERO M AY IN COLLABORATION WITH MCKINSEY & COMPANY - THE WORLD ECONOMIC FORUM
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In Collaboration with McKinsey & Company Nature and Net Zero M AY 2 0 2 1
Cover: Getty Images
Contents
Foreword 3
Executive summary 4
Introduction: converging crises and the need for a sustainable recovery 5
1 New commitments: corporate climate action is accelerating 7
investments in nature
2 Nature: the key to achieving net zero 10
3 The way forward: unlocking the potential of natural climate solutions 19
3.1 Key Action #1: Define net zero and corporate claims 21
3.2 Key Action #2: Highlight good practice for supply 22
3.3 Key Action #3: Send a demand signal 24
3.4 Key Action #4: Improve market architecture 26
3.5 Key Action #5: Create regulatory clarity 28
3.6 Build trust 31
4 Conclusion 33
Contributors 34
Endnotes 35
© 2021 World Economic Forum. All rights
reserved. No part of this publication may
be reproduced or transmitted in any form
or by any means, including photocopying
and recording, or by any information
storage and retrieval system.
Consultation: Nature and Net Zero 2
January 2021 Consultation: Nature and Net Zero
Foreword
Bill Winters
Chief Executive Officer,
Standard Chartered
As the world starts to look beyond the COVID-19 Natural climate solutions are crucial tools in this
pandemic, there is a compelling case to address transition process, provided they are underpinned
the climate crisis in the context of the global by internationally accepted principles and rules
recovery and reconstruction effort. Awareness is to ensure that they genuinely deliver emission
growing, across businesses and among citizens, reductions/sequestration, and to increase public
that tackling climate change is inextricably linked to acceptance of carbon offsetting as a vital element of
another urgent environmental crisis: the accelerating the climate transition. This cannot be at the expense
destruction of nature. Natural climate solutions (NCS) of accelerating decarbonization of business models.
– investment in conservation and land management We need to drive adoption of available solutions and
programmes that increase carbon storage and also invest in new technologies that create viable
reduce carbon emissions – offer an important way of options for hard-to-abate sectors.
addressing both crises simultaneously.
This report sheds light on the significant co-benefits
Greenhouse gas emissions from agriculture, forestry of NCS to nature and humanity. Carbon market
and other land use contribute to about a quarter of participants are increasingly recognizing these
global emissions, and it is estimated that NCS projects broader benefits. Not least of these is the flow of
can help deliver around one-third of net emission private capital they can generate to countries that
reductions needed by 2030. However, despite their offer the highest potential for NCS projects, typically
vast potential for reducing emissions, natural climate forest-rich countries in the Global South.
solutions attract very little public investment.
The report shows how NCS are being prevented
I welcome this report by the World Economic from fulfilling their potential at scale by conceptual
Forum and McKinsey exploring the opportunities and technical hurdles. The lack of consensus on
and challenges involved in NCS. It builds on how to treat corporate carbon reduction claims
the work of the Taskforce on Scaling Voluntary and on the role that NCS can play needs to be
Carbon Markets, which I am pleased to Chair addressed. Agreement is required on standards
and whose final report setting out a blueprint and certification under one commonly accepted
for infrastructure and mechanisms to achieve international standards body. Continuing public
rapidly rising investment in nature was published concerns about the validity of NCS credits should
on 25 January. Together, these documents be addressed through highlighting and sharing
provide clear and detailed guidance on the role best practice. I see this work, alongside that of the
business can play in curbing climate change, Taskforce on Scaling Voluntary Carbon Markets,
through making commitments to align with the as a call to action on the part of all stakeholders to
Paris Agreement; reporting annually on their tackle these hurdles.
emissions and those produced in their value chains
using accepted standards; and compensating I look forward to seeing stakeholders respond to this
a share of unabated emissions through the challenge by charting a course to realize a significant
purchase and retirement of carbon credits. increase in investment in nature. This year, as we
prepare for COP26, is the time for action.
Consultation: Nature and Net Zero 3
Executive summary
Natural climate solutions offer an opportunity
to address both climate and nature crises and
generate significant additional environmental,
social and economic benefits.
– The world faces converging environmental capital flows to countries that offer the highest
crises that are inextricably linked and potential for NCS projects, typically forest-rich
compounding: the accelerating destruction countries in the Global South.
of nature and climate change. Natural climate
solutions (NCS) offer an opportunity to address – However, NCS are being held back from fulfilling
both and generate significant additional their potential at scale by various conceptual
environmental, social and economic benefits. and technical hurdles, starting with a lack of
consensus on how to treat corporate carbon
– Private-sector commitment to action is gaining reduction claims and on the role that NCS can
momentum, with many companies setting the play. Agreement is needed on standards and
goal of reaching net-zero emissions and some certification under one commonly accepted
also making commitments on nature. As a result, international standards body. Continuing public
NCS are gaining attention and carbon markets concerns about the validity of NCS credits
are growing fast. Corporate strategies that aim should be addressed through highlighting and
to use NCS to help deliver a net-zero pathway sharing best practices.
are on the verge of becoming mainstream.
– To overcome years of oversupply of carbon
– NCS are fundamental to delivering a net-zero credits and low prices, a demand signal is
pathway alongside rapid decarbonization, by needed to build confidence and unlock the
enabling avoidance/reduction of emissions, and supply pipeline of potential NCS projects.
removal/sequestration of carbon dioxide from
the atmosphere. – Market architecture, infrastructure and financing
need to be developed to support the growth
– Reaching a 1.5° or 2°C pathway by 2030 will of NCS producing tradable credits, as set out
require about a 50% net-emission reduction in the recent report of the Taskforce on Scaling
of annual emissions to around 23 gigatons of Voluntary Carbon Markets (TSVCM).
carbon dioxide (Gt CO2) from 2019 levels.
– Finally, it is vital to build coherent and agreed
– We estimate a practical potential of close to policy frameworks at either the national or
7Gt CO2 per year from NCS projects, sufficient international level for the growth of NCS in line
to deliver around one-third of that target and to with climate goals, covering such issues as
achieve carbon removal in the near term and at carbon standards, rules on accounting at the
lower cost than technological solutions. The bulk jurisdictional or project level, and connecting
of this total comprises four types of NCS: avoided voluntary and compliance markets.
deforestation and peatland impact, peatland
restoration, reforestation and cover crops. – This demands a concerted effort to build trust
and a broad consensus on the value of NCS to
– NCS are typically low-cost sources of carbon address the lack of confidence in the integrity of
abatement. In most cases, costs are between NCS credits, the markets, and the institutions
$10 and $40 per ton of CO2 with variations that govern them. On the one hand, there is a
between geographies and project types. need to increase public awareness, while on
the other, it is critical to create multistakeholder
– Beyond helping to address the changing climate, communities of trust to air and address
NCS can also deliver significant co-benefits to conceptual differences.
nature and humanity, and can generate private
Consultation: Nature and Net Zero 4
Below: Getty Images
Introduction: converging
crises and the need for
a sustainable recovery
NCS should be an integral component of
economic strategies to ensure a “green
recovery” from the ravages of COVID-19.
Consultation: Nature and Net Zero 5
As the world emerges from the health and record – nearly five times the five-year average;5 Brazil,
economic crises caused by COVID-19, we face Ukraine and Russia also suffered extensive fires.
converging environmental crises: the accelerating
destruction of nature and climate change. These The Paris Agreement is unequivocal: If we are to
crises are inextricably linked and compounding. significantly reduce the risks and impacts of climate
change, we must hold the increase in the global
Although the benefits are often hidden, nature average temperature to well below 2° Celsius above
sustains over half of the global economy – it pre-industrial levels and endeavour to limit the
ensures food security and supports water cycles; temperature increase to 1.5°C.6
it protects communities from floods, fires and
disease; and it helps mitigate climate change by This report outlines the potential for NCS to
absorbing carbon dioxide, and, in some cases, address the converging crises of climate change
providing resilience against the impacts of climate and nature loss, while also helping to deliver
change.1 But this stock of natural assets, the sustainable development in line with the United
planet’s balance sheet, is finite and dwindling. The Nations Sustainable Development Goals (SDGs) –
need for action is pressing: 32% of the world’s providing equitable livelihoods, advancing education
forests have been destroyed, 40% of invertebrate and equality, and improving natural resource
pollinators face extinction, and there has been a management. With close to 7Gt CO2 in annual
23% reduction in land surface productivity due to potential by 2030, assuming an illustrative price
land degradation.2 This drawdown on natural capital per ton of $20 would suggest potential capital
is unsustainable, accelerating climate change, flows greater than $100 billion, with opportunity
reducing resiliency and broadening challenges to across the world, especially in the Global South.7
the availability of fresh water, clean air, fertile soil Consequently, nature more broadly, and NCS
and abundant biodiversity. specifically, should be an integral component of
economic strategies to ensure a “green recovery”
Meanwhile, climate change is having a substantial from the ravages of COVID-19.
The following impact across the world – and is likely to increase
discussion paper in a non-linear fashion. Rising temperatures, This research should be seen within the broader
sets out an disrupted water supplies and flooding will displace context of the need to scale investment in climate
action agenda tens of millions of people. While today there are and nature, as described recently by the Taskforce
to accelerate the tens of millions of environmental migrants, by on Scaling Voluntary Carbon Markets (TSVCM) and
scale-up of high- 2050 approximately one billion people will live in the World Economic Forum’s New Nature Economy
quality NCS and countries that do not have the resilience to deal with report series. The following discussion paper sets
expected ecological changes.3 out an action agenda to accelerate the scale-up of
unlock markets
high-quality NCS and unlock markets through the
through the Drought and extreme weather events will threaten combined efforts of business leaders, policy-makers
combined efforts food production and supply chains. In 2020 alone, and civil society. This first consultation paper seeks
of business fires ravaged multiple countries. In Australia, one-fifth to create discussion with stakeholders on the role
leaders, policy- of the continent’s entire temperate broadleaf and of NCS to mitigate both climate and nature crises,
makers and mixed forest biome was destroyed;4 in California, as well as appropriate implementation strategies to
civil society. wildfires burned more land in 2020 than any year on build trust and confidence in the market.
BOX 1 About natural climate solutions
Natural climate solutions (NCS) are “conservation, NCS have environmental and financial attractions.
restoration and improved land management Many NCS have low costs compared to
actions that increase carbon storage and/or other climate mitigation options, as well as
avoid greenhouse gas emissions”.8 NCS therefore environmental, social and economic co-benefits
play a role in avoiding/reducing emissions by, for such as safeguarding biodiversity, securing water
instance, avoiding deforestation, and removing/ supplies and providing jobs for local communities.
sequestering emissions such as through restoring
peatlands as part of climate-mitigation pathways.
Ability to mitigate Environmental, Economically
climate change social and economic attractive
co-benefits
Consultation: Nature and Net Zero 6
Below: Getty Images
1 New commitments:
corporate climate
action is accelerating
investments in nature
Consultation: Nature and Net Zero 7
Private-sector commitment to climate action is level action in the aviation and oil and gas sectors
gaining momentum. Many companies are setting has accelerated commitments to net zero, with
net-zero goals to drive low-carbon strategies and American Airlines, Shell and bp among those with
address the business risks and opportunities they net-zero pledges.
face. Risks include those across their value chain –
disrupted supply chains and volatile prices of raw The actual demand for carbon credits based on a
materials, for example – resulting from extreme company’s commitments is intricately linked with
weather events and other climate effects (physical the claims a company is able to make. Today, those
risks), as well as regulatory and reputational risks making net-zero claims are expected to reduce their
that arise through shifts to greener economies emissions where possible, and neutralize by retiring
(transition risks).9 Their customers are meanwhile an equivalent amount of carbon credits or investing
demanding climate-friendly products and services, directly in carbon removals. The precise definition
presenting companies that are perceived to fail to and requirements of various claims are not yet clear
act with potential loss of business. Investors are (see Key Action #1). The ambition of these claims
demanding action as well: In his 2020 CEO letter, varies across companies. For example, Microsoft
Larry Fink, chief executive officer of BlackRock, has set a high bar by committing to remove all
wrote, “Every government, company, and historical emissions since its inception in 1975.
The call is being shareholder must confront climate change”, in a call
heard: Net-zero to action from the world’s largest asset manager Alongside the potential use of NCS to satisfy
commitments by with almost $8 trillion under management.10 demand for carbon credits, leaders are also
companies have investing directly in nature. For example, Amazon
The call is being heard: Net-zero commitments by is investing $10 million to restore 1.6 million
more than doubled
companies have more than doubled in the past hectares (Mha) of forest in the United States,
in the past year and year and the scale of NCS and offset pledges within Nestlé is investing in ending deforestation and
the scale of NCS these commitments is rising accordingly.11 Based forest restoration in Ghana and Côte d’lvoire, and
and offset pledges on net-zero commitments today from more than Shell is planting 5 million trees in the Netherlands,
within these 700 of the world’s largest companies, there have among other climate commitments.13 Walmart has
commitments is already been commitments of around 0.2Gt CO2 pledged to be net zero in operations by 2040, and
rising accordingly. of carbon credits by 2030.12 For instance, industry- to manage or restore 50 million acres of land and
Consultation: Nature and Net Zero 8
1 million square miles of ocean. Within their net- the Biden administration adopts a net-zero target,
zero commitments, companies such as Unilever 50% of the top 10 emitters will have done so.
and PepsiCo have committed specifically to NCS,
recognizing the importance of engaging with farmers In sum, NCS are garnering more and more attention
and growers across the value chain who are critical as an integral component of climate change
to protecting and restoring landscapes and forests. ambition. While undersized overall, voluntary
carbon markets provide an important indication
Beyond the specific and largely voluntary actions of demand. In 2010, NCS accounted for 5%
of the private sector, governments are committing of carbon credits, and now account for around
as well: 65% of global CO2 emissions are produced 40% (Figure 1).15 Strategies designed to deliver
in countries with a net-zero target announced.14 a net-zero pathway with NCS at their core are
China, the world’s largest CO2 emitter, has becoming mainstream if not yet commonplace.
committed to net-zero emissions by 2060. And if
FIGURE 1 Demand for NCS credits has increased over the past 10 years
Chemical processes/industrial manufacturing Voluntary carbon credits retired by project type, Mt CO2e
Waste disposal
Energy efficiency/fuel switching
81
Renewable energy
Household devices 70
Transport
Agriculture1
Forestry and land use – ARR2
NCS
53
Forestry and land use – other
Forestry and land use – conservation (REDD+) 44
42
33 34
32
19
12
7
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20203
5 12 10 9 28 19 25 32 39 36 40
% proportion NCS of total credits retired
Notes: 1 We include all projects listed as “Agriculture” as NCS here for simplicity. However, in practice
a portion of these projects are not NCS, e.g. emissions reductions through anaerobic digesters.
2
Afforestation, reforestation and revegetation.
3
Data from January–November; does not include forecast to year end.
Source: McKinsey analysis of public registries data including ACR, CAR, GS, Plan Vivo, VCS
Consultation: Nature and Net Zero 9
Below: Getty Images
2 Nature: the key to
achieving net-zero
Consultation: Nature and Net Zero 10There is no clear path to deliver climate mitigation While exact estimates vary based on climate
without investing in nature. Limiting climate change mitigation pathway modelling, if we are to
to safe levels requires both: (1) avoidance/reduction reach a 1.5°C or 2°C pathway by 2030, we
of emissions; and (2) removal/sequestration require about a 50% net emission reduction
of carbon dioxide from the atmosphere. of 23Gt CO2 by that date from 2019 levels
(Figure 2).16 NCS could deliver up to one-third
of this net emission reduction (Figure 3).
FIGURE 2 A 1.5°C pathway requires 23Gt CO2 net emission reduction by 2030
compared to 2019 levels
Net carbon dioxide emissions, Gt CO2
A 1.5°C pathway requires
23Gt CO2 net emission
50 reduction by 2030
compared to 2019 levels
~41 23Gt CO2 NCS can contribute to this net
emissions reduction through:
Net emissions reduction
(1) avoidance/reduction
40 39 by 2030 vs. 2019 levels
e.g. avoided deforestation
(2) removal/sequestration
e.g. reforestation
NCS can contribute to this As there are multiple climate
30
net emissions reduction mitigation pathways, there
could be an even larger role
through avoidance/reduction
for NCS in delivering a 1.5°C
e.g. avoided deforestation pathway than that shown by
20 the pathway here
10
0
0
NCS can contribute to this net
-10
emissions reduction through
2010 2016 2019 2021 2030 2050
removal/sequestration
e.g. reforestation
Historical emissions 1.5°C pathway positive emissions 1.5°C pathway negative emissions
Source: McKinsey 1.5°C Scenario Analysis (Scenario A) IPCC Special Report on 1.5°C, Le Quéré et al., 2018
The research undertaken for this paper finds a total compared to existing literature that has produced
abatement potential of 10.2Gt CO2 per year by estimates above 10Gt CO2 per year.18 The scope
2030 from eight high-potential NCS. This total is of the research did not include the full range of
then filtered down to a “practical” potential of close regenerative agricultural practices; this will be
to 7Gt CO2. The practical potential is a portion of covered in future reports. This is due to two factors.
the total NCS abatement potential in recognition of First, the adoption of stringent feasibility filters and
the fact that it becomes progressively more difficult updated datasets. For example, the analysis uses
to secure carbon credits as the total potential of a biophysical filter to account for water stress and
each source is approached.17 It uses an economic an economic feasibility filter that removes high-cost
filter (agricultural rent) to identify and remove “low- land area (agricultural rent of over $45 per hectare
feasibility” lands (see “About the research”). Again, per year). Second, the focus on highest-potential
this is not to advise against or discredit the pursuit NCS, which means that solutions such as grassland
of the full potential, but rather to acknowledge conservation are excluded. While the bulk of NCS
that some portions will be more difficult to unlock potential comprises the four types already metioned,
than others. The bulk of this total comprises four a broad array of solutions will need to be adopted
types of NCS: avoided deforestation and peatland since each brings unique physical criteria (such as
impact, peatland restoration, reforestation and co-benefits), operational differentiation (such as
cover crops (Figure 3). Our estimate is conservative property rights) and geographical requirements.
Consultation: Nature and Net Zero 11BOX 2 About the research
Overall, we find the “practical” abatement potential $45 per hectare per year to differentiate between
of NCS to be 6.7Gt CO2 per year by 2030. The high and medium, and medium and low feasibility,
practical potential is a portion of the total NCS corresponding to the 33rd and 66th percentiles of
abatement potential (10.2Gt CO2 per year by the ecoregion median values.
2030), recognizing that it becomes progressively
more difficult to secure carbon credits as the For each NCS, a different methodology was used
total potential of each source is approached. It based on the availability of data. In the case of
filters out low-feasibility lands, which are more reforestation, for example, we identified total
likely to be accessed by mechanisms other than biophysical potential and then adjusted down to
voluntary carbon markets, such as philanthropic correct for: (1) biomes (biological communities)
or governmental grants. For example, the practical where NCS could have a negative climatic
potential of reforestation is sized at 1.0Gt CO2 per effect, such as reforestation in non-forest biomes
year by 2030, which excludes and additional 1.1Gt and boreal forests due to absorbing heat and
CO2 per year that is low feasibility according to our accelerating warming (the albedo effect); (2)
filter. There are many economic, political and social water stress; (3) human footprint (we excluded
lenses that can be used to determine feasibility. cropland and urban areas, as well as areas where
In reality, these lenses would not draw a neat urban expansion is projected); and (4) land with
boundary between lands that are practical or not; high economic returns from other uses. For
however, this analysis classifies low-feasibility lands, avoided deforestation and peatland impact, for
assessing their “agricultural rent” as an economic example, we replicated analysis used in Busch
barrier and proxy for feasibility. Agricultural rent is et al., 2019,19 which estimates the geospatially
defined as the economic return from agricultural distributed potential for avoiding deforestation
land, which represents a key decision factor in to 2050 based on a forecast of the rate of
land-use choices relevant to NCS and is accounted gross deforestation, on agricultural revenue,
for in the majority of academic literature on NCS and on scenarios for carbon price incentives.
costs. We used statistical thresholds of $10 and See methodological report for further detail.
FIGURE 3 NCS could deliver up to one-third of net emission reductions required by 2030
Total NCS abatement Abatement potential per NCS
potential out of net emissions per year by 2030, Gt CO2 Forests Wetlands Croplands
reduction requirement by
2030, Gt CO2 6.7 3.6
Total before economic
feasibility filter applied
to reach “practical”
potential1 is 5.3Gt
7
0.2 1.0
23
1.0
0.5
0.3
0.1
Total Avoided Avoided Peatland Reforestation Cover Trees in Coastal
deforestation coastal restoration crops cropland restoration
and peatland impact
impact
Avoidance (~60%) Restoration (~40%)
Notes: 1 The “practical” potential is a portion of the total NCS abatement potential in recognition of the fact that it becomes progressively more difficult to secure
carbon credits as the total potential of each source is approached. It filters out low-feasibility lands, which are more likely to be accessed by mechanisms other
than voluntary carbon markets, such as philanthropic or governmental grants. The practical potential sized here is 6.7Gt CO2 per year by 2030, which excludes
3.5Gt CO2 that is low feasibility according to our filter. The total potential is therefore 10.2Gt CO2. There are many economic, political and social lenses that can
be used to determine feasibility. In reality, these lenses would not draw a neat boundary between lands that are “practical” or not for the voluntary carbon market;
however, this analysis classifies low-feasibility lands, assessing their agricultural rent as an economic barrier and proxy for feasibility.
Source: McKinsey Nature Analytics
Consultation: Nature and Net Zero 12These solutions are distributed unevenly around lower costs than other forms of carbon dioxide
the globe and at different costs (Figures 4a abatement, highlighting the benefits of NCS as it
and 4b). Costs are mainly driven by underlying is available to be deployed immediately without
land (opportunity) costs, so areas where there technological breakthroughs. The benefits to climate
are competing land uses tend to involve higher mitigation of early action are well understood.20
costs. Overall, however, NCS involve significantly
FIGURE 4a Low-cost NCS potential is spread across the globe, with the bulk
of volume in the Global South
1% Finland Russia 3%
1% Canada 1% Sweden
%
3% United States
Share of
2% China
NCS potential
2% Mexico India 2%
What is represented 1% Cuba 1% 1% Laos
Central 1% Philippines
on the map: Venezuela African Myanmar 1%
Vietnam
1% Nigeria Republic (Burma) 1% 1%
Lower-cost1 NCS Colombia 3% 2%
1%
Guyana
Suriname
Guinea 1% 1% Thailand
potential (high- and 1% 1%
Cameroon 2%
5%
Cambodia 3% 15% Indonesia
medium- feasibility NCS) Republic Malaysia 3%
of the Congo
Countries with a share of Papua New
NCS potential that is 1%
Peru 4%
15% Brazil Democratic 1% 1% Zambia Guinea
Bolivia 3% Republic Angola
or greater of the Congo 1% 1% Madagascar
Mozambique 1% Australia
What is not represented Argentina 1% While the bulk of
on the map: low-cost1 supply is in
Higher-cost NCS potential the Global South, this
(low-feasibility NCS) does not devalue action
100% of the global NCS in the Global North
potential analysed
Notes: 1 Low cost refers to the “practical” potential of NCS (see “About the research” box). “Practical” potential is a portion of the total NCS abatement potential in
recognition of the fact that it becomes progressively more difficult to secure carbon credits as the total potential of each source is approached. It uses an economic
filter (agricultural rent) to identify and remove “low-feasibility” lands. We refer to it primarily as “practical” instead of “low cost” to reflect that it is just one of a number
of barriers to mobilizing NCS (e.g. social, political, etc.). However, it is most appropriate in the context of a map to highlight that it is also a reflection of the low
costs that help to explain the bulk of volume in the Global South as represented here.
Source: McKinsey Nature Analytics
Consultation: Nature and Net Zero 13FIGURE 4b The majority of NCS can be delivered at low cost
Wetlands: Forests: Croplands:
Peatland restoration (high feasibility) Avoided deforestation and Trees in cropland
peatland impact (high feasibility)
Peatland restoration (med feasibility) Cover crops
Avoided deforestation and
Avoided mangrove impact (high feasibility) peatland impact (med feasibility)
Avoided mangrove impact (med feasibility) Reforestation (high feasibility)
$/tCO2 Mangrove restoration (high feasibility) Reforestation (med feasibility)
Malaysia
Mangrove restoration (med feasibility)
100
Papua New Guinea
90
Indonesia
Guinea
Finland
80
US
Congo. Republic of
Spain
Sweden
Congo. Democratic Republic of the
Indonesia
Congo. Democratic Republic of the
New
70
Indonesia
China
Sweden
Australia
China
China
Russia
US Russia
US
Papua
60
Malaysia
Malaysia
Venezuela
Bolivia
Kazakhstan
Brazil
Indonesia
50
Mexico
Peru
Malaysia
Peru
Ukraine Canada
Belarus
Brazil
Colombia
Madagascar
EU
Brazil
40
Argentina
US
Brazil Bolivia
Peru
Colombia
Bolivia
Indonesia
Colombia
30
Russia
Indonesia
Venezuela
US
India
Bolivia
20
Russia
Congo
Peru
Not
India
10 costed1
0
-10 2.2 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 6.7
Abatement potential Gt CO2 per year
Notes: 1 2.2Gt total: avoided deforestation 0.95Gt; peatland restoration 0.21Gt; reforestation 0.36Gt;
avoided coastal impact and restoration 0.30Gt; cover crops 0.22Gt; trees in cropland 0.11Gt.
Source: McKinsey Nature Analytics
BOX 3 Detail of NCS credit cost curve
Country-level cost curves were built for each Results
NCS, focusing on high-potential countries (top 10 As Figure 4b shows, NCS are typically low-
countries by potential for each NCS). In total, we cost sources of carbon abatement. In most
created granular cost curves for approximately 70% cases, costs are between $10 and $40 per
of the practical NCS abatement potential, leaving ton of CO2 (tCO2) with variations between
2.2Gt CO2 not costed (represented on the left side geographies and project types. This is significantly
of Figure 4b). NCS project costs were determined lower than technology-based removal.
via expert interviews and literature reviews, and
Within NCS, avoided deforestation has the greatest
discounted using a 10% discount rate on 30-year abatement potential but also some of the highest
projects (in line with the academic literature) to costs, such as approximately $30 per tCO2 in
account for the different time horizons of expenses. Brazil and Indonesia. What drives high costs for
avoided deforestation is land efficiency. As a rule
Four types of cost are considered in our
of thumb, protecting 100ha in an area where there
assessment: land costs, initial project costs, is a 1% annual deforestation rate will yield credits
recurring project costs and carbon credit for avoiding the emissions from the deforestation of
monetization costs. 1ha per year. In practice, land costs can be funded
by other parties such as national governments
All NCS follow the same cost analysis except for
or NGOs. In these circumstances, avoided
cover crops, which differs in that we calculate net deforestation is lower cost than reforestation due
rather than gross costs for these. This is to reflect to lower maintenance costs. Our cost estimates
the direct economic benefits outside of carbon were calculated based on typical deforestation
markets that accrue to land operators using cover rates per country. While avoided deforestation may
crops, including reduced input costs such as incur higher costs in places, it is worth noting that
fertilizer, and in some cases increased revenue it also carries the potential to bring about more
from higher crop yields. substantial co-benefits than other pathways.
Consultation: Nature and Net Zero 14The co-benefits of natural climate solutions
To recap, the analysis suggests that NCS have more resilient rural development models in forest
the potential to limit the pace of climate change frontier regions and in the Global South. It could
significantly, delivering up to one-third of net also provide important innovation and learning
emission reductions required by 2030. opportunities for the transition to a nature-positive
food and land-use sector, a critical task for world
What makes But what makes investments in nature especially governments in the next decade.
investments in attractive if done well is the enormous and varied
nature especially array of “co-benefits” that can arise alongside Beyond the environmental co-benefits assessed in
attractive if directly addressing the biodiversity and climate Figure 5, NCS projects can create broader benefits
crises – benefits that accrue to nature and to for local livelihoods, health and education. As the
done well is the
communities. These include heightened resilience bulk of low-cost NCS potential is in the Global
enormous and
in the face of the negative effects of climate South, NCS projects can generate flows of private
varied array of change, and more sustainable development capital to these countries. This creates further co-
‘co-benefits’ that opportunities for local communities. Coastal benefits (even those not related to nature or climate
can arise alongside wetlands, for example, can absorb incoming such as reduced inequalities), many of which are
directly addressing wave energy, reduce flood damage and provide captured in the 17 UN Sustainable Development
the biodiversity protection from storms; improving soil health Goals (SDGs) that represent objectives on the path
and climate increases the resilience of cropland; and fire to a more sustainable future.
crises – benefits management can mitigate the risk of catastrophic
that accrue to wildfires, all of which can help protect and secure Resource-rich forest countries have drawn
nature and to the income and assets of rural communities.21 attention to this in the past. In the 2019 Krutu of
communities. Paramaribo Declaration, representatives of high
Analysis carried out by the Woodwell Climate forest cover and low deforestation (HFLD) countries
Research Center for this report shows that in the Global South called attention to the value of
the three largest NCS by potential have high preserving standing forests to achieve the SDGs
environmental co-benefits, including sequestering and underscored the need to scale up international
carbon, biodiversity, soil health and water climate financing to this end.23 Achieving the SDGs
quality (Figure 5; see methodological report for will require a multitude of financial instruments,
detailed results table). Therefore, scaling-up particularly to guide a sustainable COVID-19
NCS, and addressing the causes of the historic recovery in the coming years. While insufficient
underinvestment in nature solutions, will help by themselves, NCS credits can offer one vehicle
to close the biodiversity finance gap, recently for contributing to SDGs such as the creation of
estimated at between $722 billion and $967 billion decent work, the eradication of poverty and the
per year over the next 10 years.22 In addition, a preservation of life on land and under water.
scale-up of NCS could create opportunities for
Consultation: Nature and Net Zero 15BOX 4 Preserving and restoring forests can bring great benefits
Preserving and restoring forests is a top priority maximum biomass and in most cases slower
in terms of increasing carbon sequestration growth rates because they experience shorter
and providing the co-benefits of biodiversity growing seasons. Large areas of less dense
conservation and protection of soils and waters. forests and woodlands occur in drier regions,
but growth rates and maximum biomass of
Forests store carbon above ground in trunks
these areas are much reduced by low rainfall.
and branches. Leaf litter and tree roots
contribute organic matter to soils, stabilize soils Many regions of tropical forests contain much
against erosion, and improve the quality of higher levels of biodiversity than temperate or
downstream surface waters. Forests with fast- boreal forests. Conservation or reforestation of
growing trees can sequester carbon quickly, tropical forests therefore provides higher benefits
and large-statured, high-biomass forests can for both carbon sequestration and biodiversity
ultimately store large total amounts of carbon. conservation than conservation or reforestation of
equivalent areas of temperate or boreal forests.
Halting deforestation and land-use conversion
Conservation or reforestation of tropical forests
are key to combating climate change. Tropical
deforestation alone accounts for nearly 5Gt of in geographical hotspots that have exceptionally
global emissions every year, driven in large part high species diversity, or in places where most
by agricultural commodities – cattle, oil palm, of the original forest cover has been lost, will
soy, cocoa, rubber, coffee and wood fibre.24,25 have even higher biodiversity co-benefits.
All forests provide important co-benefits by
The largest areas of fast-growing and high- protecting soils, reducing erosion and absorbing
biomass forests occur in the Amazon basin of nutrients and other sources of water pollution.
South America, the Congo region of Central Africa, Conservation of tropical forests will also have
and the Indonesian New Guinean territories of high co-benefits for water protection, particularly
South-East Asia. Smaller areas of high-biomass in areas of very high rainfall and steep terrain.
forest occur in western North America, south-
eastern Australia, western Africa, and on the Because most of the carbon protected by
south-central coast of South America. While large tropical forest conservation or sequestered by
and important areas of temperate and boreal tropical reforestation is stored above ground, this
forests occur across North America, Europe and carbon can be tracked from satellite imagery that
Asia, these forests in general have lower potential quantifies the area, height and density of forests.
Consultation: Nature and Net Zero 16FIGURE 5 The environmental co-benefits of NCS1
Avoided deforestation Reforestation Avoided peatland impact Peatland restoration
Avoid/ High benefits of avoided carbon High benefits of sequestration. High benefits of avoided carbon Medium benefits from carbon
emissions and continued carbon Potential highest in humid tropical emissions and continued carbon sequestration due to variability.
sequester
sequestration, especially in humid and temperate regions with high sequestration in trees and soil, Potential will depend on how much
carbon tropical forests, high-biomass rates of tree growth and biomass. especially in tropical peat forests methane is emitted, which may
temperate forests and large Success will be more predictable in and in temperate and boreal offset potential gains. This is not
temperate forested regions. in temperate regions where availability peatland forests with high soil well known and will also depend
of native trees for replanting carbon that would be released on type and local setting.
is high and replanting after harvest upon forest loss and soil drainage.
is an established practice.
Biodiversity High and immediate benefits of High ultimate potential to protect High benefits across all biomes. High benefits because of the
maintaining intact and connected biodiversity rapidly in replanted Particularly high biodiversity disproportionately high value of
forests. Benefits very high in humid secondary forests, but benefits benefits in tropical peat forests. peatland habitats. These values
and semi-arid tropical forests with take decades to be realized as High biodiversity benefits in occur across biomes.
high biodiversity, and in regions forests mature. Benefits highest by connected peatland lowland
that have high numbers of endemic expanding or reconnecting forests. Lower biodiversity benefits
species and/or high proportions of remaining forests, in regions that in higher-latitude temperate and
forest loss. have high numbers of endemic boreal peatlands that have lower
species, and those that experience overall plant and animal biodiversity.
high proportions of forest loss.
Soil health High benefits of erosion prevention Medium benefits of reduced soil High benefits from avoidance of Medium benefits of returning soils
by physical buffering of high stream compaction, increased water losses of soil organic matter that to wetland conditions that have
flows and prevention of flash floods infiltration and accelerated cycling accompany soil drainage. Benefit high organic matter input and
and maintenance of soil infiltration of soil nutrients that occur with of avoidance of acid conditions that permanent or periodic low oxygen.
by vegetation and soil fauna under reforestation and associated return follow drainage of some peat While these conditions are not
forest. Benefits likely to increase in of inputs of leaf litter. Associated wetland soils. desired in agricultural soils, they
the future with a predicted greater benefit of reduced soil loss to facilitate carbon storage and the
number and magnitude of extreme erosion follows from reduced co-benefit of nutrient removal
precipitation events. compaction and greater infiltration. in peatlands.
Water High benefits of nutrient uptake High benefits of reductions in High benefits of avoidance of large High benefits especially in
quality and retention of nitrogen and erosion and soil loss caused by nutrient losses that accompany cropland regions and in locations
phosphorus by forest vegetation lower compaction, greater forest removal. In addition, avoidance that are downstream of fertilized
that prevents nutrient losses infiltration and more buffered of acid drainage water or highnutrient croplands or in locations that have
to watersheds. peaks of stream flows in releases that accompany contact with nutrient-enriched
replanted forests. drainage of some peat soils. surface or ground waters.
Cover crops Trees in croplands Avoided coastal impact Coastal restoration
Avoid/ Medium benefits to store soil Medium potential to increase High carbon storage benefits both
carbon. Potential is limited by short carbon stored in trees within above and below ground for
sequester
duration of cover crops in most existing croplands. Potential is mangroves and below ground in
carbon planting systems, potential generally less than one-third of the coastal marshes. Maintenance of
conflicts with crop production, and potential of avoided deforestation mangroves and marshes promote
benefits that are easily reversed if or reforestation. resilience in the face of sea level rise.
cover cropping is discontinued.
Biodiversity Low benefits, especially compared Medium benefits from addition of High benefits from improved Medium benefits as restoring
to reforestation, because land structural complexity to croplands. habitats for fisheries and mangroves and marshes produces
remains cropland with relatively Benefits will occur across all aquatic life. high benefits in the long term, but
low biodiversity. Some benefits for biomes but will be greater in tropical these benefits take many years
pollinators for some cover crops, regions with high biodiversity and to occur.
but timing during the growing in regions that have low proportions
season may restrict benefits. of remaining forest area. Uncertainties for successful
mangrove and marsh restoration
Soil health Medium benefits of increased Low benefits for soil health, but High benefits as a result of are higher than for avoided
organic matter inputs, increased with some potential for reduced continued sediment capture and mangrove loss because of limited
water infiltration, increased water- erosion. Benefits will increase with maintenance of wetland and peat experiences in restoration across
holding capacity and benefits to the number and coverage of trees soils by mangroves and marshes. the range of mangrove species
nutrient supply provided by decay of and will vary by location. and in conditions where
cover crop-derived soil organic matter. mangroves and marshes occur.
Water Medium potential to reduce nutrient Low benefits for water quality. High benefits of nutrient and
losses by maintaining plant cover Benefits will be higher if trees are sediment retention by mangroves
quality
for a longer time during the year. The planted within heavily fertilized and marshes.
deep rooting of many cover crops croplands and if they are
helps prevent nutrient losses. The concentrated along streams or
short duration of cover crops limits watercourses where they could
total nutrient capture potential. intercept nutrient run-off.
High Medium Low
Notes: 1 The types of NCS represented here are those included in the detailed sizing and cost analysis; research carried out for this report also analyses the co-
benefits of additional NCS such as biochar, fire management, grazing management and natural forest management. See the methodological report for more details.
Source: Woodwell Climate Research Center
Consultation: Nature and Net Zero 17The concept of co-benefits is not new. The sequestration can benefit citizens globally, improved
Climate, Community and Biodiversity (CCB) water quality and availability provide local benefits.
Standards identifies projects that produce these
wider benefits, and social credits are traded and Addressing this lack of clarity must be a high priority
command premiums over other credits. But, for in the future. Improvements could lead to benefits
now, volumes remain small and prices low. This in terms of the price and value of NCS, especially
reflects one of the major challenges facing NCS: the if they are to attract the levels of investment
variability in nature benefits of NCS creates a lack of required to take full advantage of their benefits.
transparency, which in turn stymies demand. NCS currently face something of a chicken-or-egg
problem: Demand is constrained by uncertainty in
Put simply, it is difficult to accurately determine the supply – lack of clarity on co-benefits, concerns
co-benefits of any project. First, the specific nature about environmental integrity, and the absence of
of each biome varies, as do the indirect effects and visible supply – and supply is limited by the absence
their local value. Second, not all nature benefits of predictable demand (which in turn would attract
have global reach. For example, while carbon the requisite financing).
Consultation: Nature and Net Zero 18Below: Unsplash
3 The way forward:
unlocking the potential of
natural climate solutions
Consultation: Nature and Net Zero 19While there is tremendous potential for NCS also between the resource-rich host countries of
as part of a net-zero economy, a number of NCS projects and potential buyers of such credits.
technical and conceptual hurdles, as well
as various institutional failures and poor Carbon markets present one opportunity to
experiences of past schemes, have created a increase financing for natural climate solutions
lack of confidence among many stakeholders and help NCS reach the scale required to meet
in terms of how effective NCS can be. This has net-zero targets. Other financing vehicles have
prevented NCS markets from achieving scale. gained increasing attention in recent months,
including debt-for-nature swaps, green bonds and
In the past, carbon markets in general and forestry loan programmes, blended finance instruments to
credits in particular have suffered from low price de-risk investments and nature-linked insurance
levels, an oversupply of credits as a result of inflated mechanisms to increase resilience. While not the
baselines, insufficient demand and liquidity in the focus of this report, it is recommended that further
market. The technical hurdles remaining today can work should be undertaken to see how these other
be overcome with improved monitoring technology kinds of vehicles, together with carbon markets,
and market architecture. Perhaps most importantly, can provide a portfolio of NCS financing solutions.
the conceptual differences that hamper today’s
market development require stronger collaboration, Rather, and building on recent developments, this
multistakeholder dialogues and dedicated efforts report lays out some key actions to overcome
to build effective institutions and – fundamentally existing bottlenecks in NCS carbon markets and
– trust among both public and private actors, but create certainty for buyers, suppliers and regulators.
FIGURE 6 Five key actions needed to unlock natural climate solutions
Consultation: Nature and Net Zero 203.1 Key Action #1: Define net zero and
corporate claims
Net zero was defined by the Intergovernmental The use of NCS credits (or any offsetting credits)
Panel on Climate Change (IPCC) at the global level. by companies without a net-zero target is heavily
However, there is no universal consensus on how disputed today. However, there is emerging
to translate global reduction targets into company- consensus that NCS are required to permanently
specific claims. Several initiatives are working transform agricultural and land-use sectors into
towards sector-specific abatement pathways to regenerative models, to balance out unavoidable
quantify reduction milestones, as well as the level residual emissions. This is an interim solution for
of residual emissions to be expected in 2050 in a companies on a net-zero transition journey, and can
net-zero world. play a role in compensating for historic emissions.
In parallel, different climate mitigation pathways One possible approach involves a company using
model different roles for negative emissions in a net- carbon credits to compensate for its entire footprint
zero pathway, depending on factors such as cost today, as an interim measure while on a transition
and technology.26 What is certain is that a share pathway towards net zero. Truly unavoidable
of residual, unavoidable emissions will need to be emissions after full decarbonization could be
sequestered both in the run-up to 2050 and into the compensated for only with removal credits, and
second half of the 21st century. As stated above, companies taking this path could claim net zero.
the analysis underpinning this report suggests that
NCS have the potential to deliver close to 7Gt CO2 Opting for a full compensation strategy to reach
of emission reductions and removals per year by climate neutrality in this way offers the opportunity
2030 if significant action is taken. to remove carbon from the atmosphere earlier, but
critics fear it might divert funds from critical (and
Today, companies can claim carbon neutrality, often underfunded) emission reduction measures.
climate neutrality and climate-positive and It is critical that corporates apply a mitigation
carbon-negative performance, as well as zero- hierarchy, investing in emission reductions and
emission products based on different labels and efficiency measures ahead of and in addition to
standards. To truly scale demand, corporates need investing in compensation measures. Several
clarity on the type of claims they can expect to initiatives have laid this out in detail, including
make based on a combination of reduction and ICROA Code of Best Practice and the Natural
compensation measures. This requires alignment Climate Solutions Principles.27,28 From a market
of net-zero certification for companies under perspective, the added benefit of full compensation
one commonly accepted international standards would be to substantially drive up demand – and
To truly body, underpinned by scientifically reviewed given the time lag in delivering quality supply, the
scale demand, sectoral trajectories. While the development of earlier this signal is provided, the more chance
corporates need such methodologies will take time, it is clear there will be to achieve the full potential of NCS and
that this decade presents a narrowing window provide a critical source of funding for forests and
clarity on the
of opportunity to reduce emissions and remain other ecosystems.
type of claims
within safe carbon budgets. The lack of clarity on
they can expect corporate claims is currently curtailing demand, There is an urgent need to quantify and clarify the role
to make based running the risk of hindering the development of of NCS for sector-specific net-zero strategies. Such
on a combination NCS projects today when these credits will be research needs to be scientifically grounded and
of reduction and urgently needed in the future. universally accepted, and requires a concerted effort
compensation to build consensus on the integrity and validity of both
measures. the pathway itself and the institutions presenting it.
Consultation: Nature and Net Zero 213.2 Key Action #2: Highlight good practice for supply
In recent years, concerns about the validity of course for others to follow. This could be done
NCS credits have been raised repeatedly in the by elevating large-scale lighthouse approaches
public discourse and expert outlets. Most notably, to ensure the amplification and acceleration
there are questions with regard to the additionality of promising practices, and adoption at scale.
of NCS projects, meaning whether the emission Coordinated communications and visible success
reduction would have occurred without a carbon- stories will provide clarity, assurance and
crediting programme, such as through conservation confidence that NCS projects uphold rigorous and
measures or alternative competitive sources of robust principles. For example, the International
revenue. Another prevailing concern is whether a Carbon Reduction and Offset Alliance (ICROA)
project developer can guarantee the permanence of promotes best practice across voluntary carbon
carbon storage in the event of future deforestation, markets, supporting and collaborating with
wildfires, floods or other disasters. Critics often cite participants who follow best practice guidelines.
leakage, where harmful activities such as illegal
logging simply relocate to an area outside the There is also a need to highlight good practice and
purview of the project. In addition, projects can progress among local and regional administrations
fail to account for or support the needs of local in implementing sustainable land-use policies in
communities and stakeholders. line with climate targets. Any such lighthouses
should follow robust definitions, ensure additionality
With more than 20 years of international and permanence, follow stringent monitoring and
collaboration to generate and trade NCS credits, verification methodologies, avoid leakage, double
great strides have been made in addressing these counting and integrate environmental and social
issues. Buffer pools account for the risk of reversal safeguards. Increasingly, credits from the voluntary
in cases such as illegal deforestation and wildfire. market are being accepted in compliance schemes,
Monitoring and verification technology is assisted project developments are being administered on
by leaps in machine learning and earth observation public lands, and projects are being integrated into
capabilities that were unimaginable even 10 years jurisdictional programmes. A key objective for the
ago. Baseline methodologies have become more broader community is to empower jurisdictions
stringent and we now have accounting systems to to begin to integrate at scale and unlock the full
integrate reduction from standalone projects into climate, environmental and social benefits of NCS.
national reference levels to avoid flooding This will require partnership with forest country
the market. governments, local leaders and on-the-ground
implementation agencies. Critically, any such efforts
In order to expand quality supply, participants to highlight existing best practices must be in step
in these ecosystems will need to highlight with HFLD developing countries, and concurrently
good practices that have successfully used ensure they recognize and address the needs of
methodological and technological advances to local stakeholders (see “Case study: the Katingan
mitigate environmental and social risks, setting a Mentaya Project”).
BOX 5 Technical hurdles for credit originators
Beyond the critical challenge of elevating good high-quality NCS credits grows and prices
practice to address persistent integrity and increase, the return profile would become more
credibility issues, there are a number of technical commercially attractive and improve prospects
hurdles facing the scale-up of NCS supply: for up-front project financing.
– Financing: carbon credits are pay-for- – Land rights: NCS projects are often
performance, meaning that suppliers have implemented in remote locations with unclear
to operate projects for years before being tenant rights or a lack of enforceability.
able to verify any emission reductions
achieved and collect revenue. As a result, – Verification cost: the process of verifying
and exacerbating the situation, there is NCS credits can still be slow, expensive and
a lack of up-front project finance. contested. This is particularly true in the case of
soil carbon, which has not yet benefited to the
– Pricing: low prices in carbon markets in same extent from improved earth observation
recent years have made it difficult to develop capabilities.
viable business models. Currently, many
project developers have resorted to stacking – Biophysical capacity: land use for NCS is
revenue streams such as ecotourism and constrained by critical activities such as food
sustainable agricultural and timber production production, human infrastructure and fuel
to supplement their income. As demand for production. In addition, increasing carbon
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