From co-benefits to core-benefits:
how to ensure carbon finance is equitably and transparently distributed

Indigenous peoples (IPs) and local communities (LCs) are critical stakeholders for nature and climate stewardship including carbon finance. Over 50% of the world’s land is inhabited by IPs and LCs, with at least one-third of the world’s remaining intact forests on their lands. 24% of the carbon stored above ground in the world’s tropical forests is in the collectively and sustainable managed lands of IPs and LCs. They are critical to the success of nature-based projects that are often developed on these lands and are encouraged to continue managing their lands sustainably by the global north. Therefore, they should be remunerated fairly for their efforts to do so.

Equally, carbon finance is already a powerful tool for many IPs and LCs in providing a crucial income stream to supplement unpredictable crop sale income from falling yields, variable product/input prices and extreme weather events, as well as to provide a payment mechanism for forest conservation. The voluntary carbon market can be a vital source of funding for IPs and LCs on the frontlines of climate change. However, due to a combination of institutional, financial, and technical challenges, IPs and LCs cannot easily gain fair and equitable access to carbon finance at scale. If we hope to scale the market and better support Indigenous peoples and local community stewards, new systems are needed with appropriate controls and processes in place to secure fair and equitable compensation for IPs and LCs.

This paper supports regulators, standard setters, investors, buyers, developers, and community organisations in understanding the implementation and novel opportunities for ensuring financial transparency in community compensation within nature-based carbon removal projects. By highlighting the innovative work of Terraspect alongside emerging guidance from the Integrity Council for the Voluntary Carbon Market (ICVCM) and better rights-based practices, it demonstrates how transparent compensation distribution from the voluntary carbon market can become a reliable source of long-term financial security for IPs and LCs. This approach offers a transformative pathway for financing and supporting those on the frontlines of climate stewardship.

Indigenous peoples (IPs) and local communities (LCs)¹ _{1
Secretariat of the Convention on Biological Diversity, 2012.} are on the frontlines of nature stewardship and the climate crisis. IPs and LCs are being buffeted by headwinds of the climate crisis such as declining crop yields, land degradation, reducing incomes and retrenchment in global development aid.

Over 50% of the world’s land is inhabited by IPs and LCs,² _{2
Rights and Resources Initiative, 2015.} with at least one-third of the world’s remaining intact forests on their lands.³ _{3
Frontiers in Ecology and the Environment, 2020.} 24% of the carbon stored above ground in the world’s tropical forests is in the collectively managed lands of IPs and LCs.⁴ _{4
World Resources Institute, 2017.} Recent research suggests when environmental projects ensure combined social and climate benefit, there is minimal climate trade-off, and a net positive biodiversity benefit.⁵ _{5
PNAS, 2024.} IPs and LCs are critical agents in the implementation and success of nature-based projects that are often developed on these lands and should therefore be compensated fairly for their efforts in line with principles of distributive justice⁶. Relatedly, we feel the term benefit-sharing is a misnomer as explained in more detail in Chapter 2._{6
Land Use Policy, 2018.} ‍

We need more money from all sources flowing to these stakeholders. However, current finance flows to nature-based solutions are only one-third the level needed to reach climate, biodiversity and land degradation targets by 2030.⁷ _{7
UNEP, 2023.}

IPs and LCs are not universally and fairly compensated today by current global mechanisms for the ‘work’ they perform to protect and sustainably manage nature. But they are bearing the cost of doing so and absorb the opportunity cost of alternative land and resource uses. Not only must climate funding increase to nature protection and restoration, but it increasingly must reach IPs and LCs performing this work. However, climate finance is rarely reaching the local level. 7% of climate finance committed from international climate funds historically was allocated to local-level activities, while 93% of climate finance is not sufficiently transparent to be tracked to its end use.⁸ _{8
International Institute for Environment and Development, 2017.} Looking specifically at funding to IPs and LCs, less than 1% of international climate development aid went to funding tenure rights and forest management, equivalent to just $270 million per year.⁹ _{9
Rainforest Foundation Norway, 2021.}

Carbon finance offers a pragmatic and continuously improving compensation mechanism that is already deployed to get capital from the global north to the global south to promote IPs and LCs to protect and restore their land, receive new much needed cash income and access new infrastructure and services. While the VCM is facing continual review over its methods and its role, it can be and is being used as a pipeline to move climate funding to the ground faster.

To do so, the appropriate balance must be struck between both the ‘carbon maths’ and the ‘social maths’. The former involves ensuring the efficacy of the carbon science, the crediting methodologies, all to get a better answer to the question “are all these projects really removing the tonnes of CO2 they say they are from the atmosphere?”. The latter involves ensuring IPs and LCs are being engaged and compensated fairly and transparently, that there is free, prior and informed consent, and that appropriate governance structures are in place to manage compensation. Over the last eighteen months, much work has occurred to improve carbon quantification. Tighter protocols. Dynamic baselines. Higher resolution data. All to get to an atomic level of transparency on exactly how much carbon is being removed.

However, high-accuracy carbon stock and sequestration models also increase the cost and therefore barrier for IPs and LCs to participate in or lead projects. Yet these are often not priced into the community compensation absolute amounts. This is counterintuitive, since carbon sequestration is only a byproduct of participation by IPs and LCs on the ground through land-based activities.

The input and positive incentive to carbon removal is community compensation and engagement, to ensure successful project implementation according to carbon pathways and ultimately storage of carbon without reversal. Consequently, carbon protocols cannot exist in a vacuum from social protocols that assure consent, engagement and compensation in a rigorous manner. Many projects being developed have recognised this in ensuring the community is at the centre of the project in turn ensuring climate objectives are fully achieved, additional and permanent. However, the broader market still needs to scale its standards and infrastructure to replicate such models.

The objective of this paper is to go beyond the headlines of financial transparency, proposing practical solutions for implementing community compensation plans to ensure IPs and LCs are fairly compensated from carbon finance. Drawing on the work Terraspect is doing in financial inclusion and long-term community wealth creation, this paper offers insights into how carbon payments can be effectively directed to IPs and LCs.

However, there are many other parts of the community engagement process. For example, free, prior and informed consent (FPIC) procedures are crucial to support indigenous peoples self-determination and ensure consent is provided for actions that affect their lands, territories or rights. This paper does not itself cover all these areas as there are many resources that already cover this in detail. For reference, we have included links to this content at the end of the paper.

This paper assumes a foundational knowledge of carbon finance, community compensation, and the current state of the carbon market. It is primarily written for buyers and crediting programmes in the hopes this raises the level of understanding and diligence on projects’ social benefits, with an emphasis on fair and equitable compensation. We hope this opens a conversation on social protocols that strive to be on par with carbon protocols in terms of rigour and innovation.

Within the Greenhouse Gas Protocol, co-benefits relate to “the broader environmental, social, and economic impacts of a policy or action, rather than [greenhouse gas] GHG effects only”.¹⁰ _{10
WRI, 2014.}

Community benefits is a commonly used term to indicate the positive impact achieved because of a policy or action. This positive impact may take the form of monetary, social, environmental benefit to the community.

IPs and LCs are performing work for a global benefit and then being compensated for this. This is not a donor-funded or unconditional aid payment, but rather akin to a labour or lease payment with all the associated expectations around assurance. Payments can also be seen as compensation for opportunity and transaction costs incurred for example in the continuation of preservation and protection activities or for the abatement of unsustainable production activities. The term co-benefits can imply the community has a passive role in the project and is granted voluntary benefits for this.

This is a mischaracterisation. The community is an active partner. In some instances, it is the owner of the land and/or carbon stock as well as the proponent of the project. The land it inhabits or depends upon is critical for the project to be created in the first place. Its labour creates the carbon sequestration potential. Its localised domain knowledge ensures project additionality. When community buy-in to the project is layered on top of their knowledge, project permanence is enhanced.

From a community’s perspective, the external technical and financial expertise brought in by project developers and investors serves to bridge the work of the community with the requirements of accessing the voluntary carbon market as a financial mechanism. In conservation projects, many communities will state they are sharing the ecosystem benefits with buyers and the rest of the world. In addition to compensation for project specific activities, communities with tenure rights view themselves as co-investors in the carbon project and view payments they receive not as compensation but as dividends for their investment of land. Consequently, we believe ‘community compensation’ is a better term to capture the active agency the community holds in the project for which they are entitled to compensation. Although this term is used throughout the paper, traditionally accepted nomenclature such as benefit-distribution or benefit-sharing are still referenced in some instances for ease of understanding and external references.

However, it is important to note that the role of the community differs substantially between project categories and land ownership status. Community compensation approaches need to be assessed considering land ownership which will vary based on the local context of a project. This paper draws on project case studies involving restoration projects particularly agroforestry and afforestation, where individual activities can be attributed to project results. However, many community-based projects will operate in a collective governance, legal and social structure, such as on communal land and collective activities.

The compensation structure for such communities will vary significantly from individual activity-based projects to account for ability to calculate, receive and manage funds for the benefit of the collective. It is important to note that while IPs and LCs is a commonly used term, there can be substantial differences between and within the needs of indigenous peoples and local communities. This itself has a material impact on how the community compensation plan is constructed in collaboration and with the consent of the community. Furthermore, for many IPs and LCs, the land holds cultural value beyond the monetary value available from nature resources or carbon payments, which is not quantified or captured as financial compensation.¹¹ _{11
Community Development Journal, 2014.}

Effective community compensation is a core component for project implementation and success. Community compensation is a critical factor in creating the social licence to operate¹² _{12
International Journal of Greenhouse Gas Control, 2020.} for a project. Further, efficacy of compensation drives carbon integrity goals across additionality and permanence. This in turn improves a project’s longevity, financial sustainability and ability to attract participants.

The compensation should account for the transaction, opportunity and implementation costs incurred by the community in providing the ecosystem services.¹³ _{13
CIFOR Infobriefs, 2014.} This will usually be the aggregate of labour, land access, negated value of non-timber forest products (NTFP) and additional transaction costs such as transfer fees, hidden foreign exchange fees and taxes. Collectively, the total compensation is a critical component of the overall direct cost of implementing a project and assuring the carbon removal pathway.

Often left out of this total are the underaccounted or unaccounted for costs community members face when preparing to join a project. For example,

1. Time spent preparing and sharing data to support early project evaluation
2. Labour associated with preparing land, which may not even be performed by direct participants but instead wider relatives or other community members
3. Time spent preparing for and participating in audit interviews or buyer site visits

However, from a participant’s perspective, this is a real cost that they are incurring but often isn’t reimbursed.

Implementation costs vary by project categories due to the resource-intensiveness of the work, geographic access, equipment needs, and labour involved. A study by WWF, WCS and BirdLife International suggests the costs of carbon sequestration through varying forest regeneration methods - when accounting for all opportunity and labour costs - typically ranges from $30 to $60 per tonne of carbon sequestered with an upper bound of $100 closer to the Paris Agreement deadline of 2030.¹⁴ _{14
A Trillion Trees, 2022.}

The efficacy of the carbon removal work will be undermined if the total compensation agreed with the community does not reflect the true cost of implementation. This may occur by undervaluing the labour cost, land value, alternative opportunity costs or by heavily discounting, in real terms, the net present value of the total community compensation. Financial additionality is causally linked to carbon additionality. The community might disengage from the project, resulting in lower additionality, shorter durability and reversal of stored carbon.

In more malicious cases where the community is not being compensated according to what was agreed, participant churn can escalate to whistle-blowing and result in reputational harm, regional government intervention, de-registration of the project, or enforced registry reversal.

The community compensation structure can take multiple forms depending on the local context, community needs, and operational capacity.

Full life cycle accounting of the total monetary value of community compensation is critical to ensure competing land use opportunity costs are being not only addressed but exceeded, both in aggregate and on an annual basis, to guarantee project integrity.

However, attributing implementation and maintenance costs as “benefits” can obscure the true operational costs of the project over the long run. This makes it difficult to clearly understand the actual compensation being provided to project participants for their carbon sequestration activities.

There is growing recognition of the need to increase governing standards around community compensation. The Integrity Council for the Voluntary Carbon Market (ICVCM) establishes and maintains standards of ethics, sustainability, and transparency for the global voluntary carbon market. Their core carbon principles (CCPs) establish ten, science-backed criteria that must be achieved for high-integrity carbon credits to be issued.

The current ICVCM Assessment Framework includes criterion 7.9 which requires greater transparency of the benefit-sharing plan agreed upon with the community, and public disclosure of the benefit-sharing outcomes that have been achieved.¹⁵ _{15
ICVCM, 2024.} Note, this applies where IPs and LCs are a major stakeholder group in the project design, and so non-nature-based project categories such as direct air capture (DAC) or bioenergy with carbon capture and storage (BECCS) may not be subject to this provision.

“Where the carbon-crediting program requires arrangements for benefit-sharing with IPs and LCs, the carbon-crediting program shall require that mitigation activity proponents:
‍
1
‍Include in validated design documents information on how benefit-sharing arrangements that are appropriate to the context and consistent with applicable national rules and regulations will be designed and implemented through a benefit-sharing plan;

2
Confirm in validated design documents that the draft and final benefit-sharing plan have been shared with the affected IPs and LCs in a form, manner, and language understandable to them;

3
Make benefit-sharing outcomes that result from the benefit-sharing plan publicly available, subject to applicable legal restrictions”

The Assessment Framework demonstrates the direction of travel for future work in relation to criterion 7.9, with guidance that the next iteration of the Assessment Framework will mandate the need for: “requirements ensuring…transparency on use and management of revenues for benefit sharing”.¹⁶ _{16
ICVCM, 2024.} As of September 2024, this subject is out for consultation with key actors in the voluntary market space, including members of indigenous peoples within the ICVCM’s Continuous Improvement Working Group (CIWP). The ICVCM has also set up an IP and LC Forum which will be consulted during the CIWP and the process of generating the Assessment Framework Version 2.0.

In the broader VCM ecosystem, operational standards around community compensation are already starting to be implemented. Buyers such as the recently launched Symbiosis Coalition explicitly require projects applying to their RFP to “...demonstrate appropriate level of financial transparency for purposes of evaluating the types and terms of community benefits conferred (whether direct or indirect financial benefit), and the proportion of those benefits that reach the community”.¹⁷ _{17
Quality Standard - Symbiosis Coalition.}

Newer registries such as Ecosystem Restoration Standard are already incorporating higher disclosure requirements of livelihood outcomes achieved by projects.¹⁸ _{18
ERS, 2024.} Some registries already incorporate disclosure standards but do not explicitly specify the acceptable formats for evidence of community compensation in turn reducing the ability to assure revenue-sharing.

In response to the demand for greater assurance of social impact, supplemental labels have been developed by standards bodies and third parties to certify projects with high social impact, such as SDVISta, W+, HIFOR and CCB. While these labels strive to demonstrate higher social impact rigour, there remains a need for fundamental thresholds and independent verification around compensation and benefit-sharing.¹⁹ _{19
Carbon Credit Quality Initiative, 2021.}

As highlighted by the Tropical Forest Credit Integrity guide: “standard-setting bodies should provide for the full and effective participation of IPs and LCs in standard-setting processes to support equitable and transparent benefit-sharing and movement toward direct access to crediting”²⁰. _{20
Tropical Forest Credit Integrity, 2023.}The Peoples Forests Partnership provides specific revenue-sharing transparency requirements within their PFP Principles²¹ _{21
Peoples Forests Partnership.} and underlying membership criteria.

Increasing supply-side and demand-side standards (such as through the VCMI Claims Code) for community compensations is crucial in demonstrating that the carbon market is addressing a previous lack of clear, explicit requirements regarding community compensation. This in turn can help ensure bad actors remain outside market guardrails, and that high-quality projects benefit from greater buyer confidence and appropriately reflected credit prices. Finally, the community that relies upon carbon revenues as a source of income is safeguarded and compensated.

However, there is a growing recognition of the need for greater regulatory enforcement to establish governance guardrails and sanction mechanisms to assure the integrity of the market for all participants. In December 2023, the Commodity Futures Trading Commission (CFTC) issued for public comment proposed guidance on the listing of voluntary carbon credit derivatives contracts,²² _{22
CFTC, December 2023.} commenting:

“The CFTC oversees voluntary carbon credit derivatives listed and trading on CFTC-registered exchanges. In addition to regulatory authority over derivatives, the CFTC also has antifraud authority in the spot voluntary carbon credit markets given the potential for impact to the derivatives markets… In response to our public consultation, various market participants, public interest groups, and U.S. Senators have asked the CFTC to take a leading role in promoting the integrity of the voluntary carbon market.”

The launch of the CFTC’s Environmental Fraud Task Force was reiterated which will pursue “…individual cases of fraud related to carbon credits, weeding out bad actors, and promoting market integrity”.²³ _{23
CFTC, March 2023.}

Verifying that community compensation has adhered to the initial plan relies on the transparency of the end-to-end funds flow from credit sale to disbursement and receipt. However, the funds’ flow itself is open to a range of structuring which can make it challenging for auditors, registries and buyers to calculate the total results-based payments for services rendered and revenue-sharing determinants.

For example, the use of project special purpose vehicles (SPVs) and credit distribution holding companies (HoldCos) can offer advantages to attract institutional investors to manage project, political and capital risk. This can in turn increase the pool of bankable nature-based projects in the market.

However, such intermediary structures can also introduce greater complexity in calculating and recognising appropriate community payments. For example, it is necessary to determine at what point in the credit transfer process – between a project SPV, broker or HoldCo – the price determinant is established for applying the revenue share. This is to ensure the appropriate determinant is used to calculate what percentage has been passed to the community to prevent internal credit transfers at a suppressed price to artificially inflate the community compensation that is declared.

If pre-finance is included with the project, key variables to be determined include the calculation of the minimum revenue share, and how a milestone-based staircase progresses with the project through credit issuance and sale. Managing local taxation and transfer fees - which the community may inadvertently incur can drastically reduce the net amount received should be fully quantified from the outset of design and through-life of a project.

These questions are now arising with greater frequency with the institutionalisation of the voluntary carbon market and, whilst market standards will arise with the maturation of projects, the community may inadvertently be overlooked in this conversation given the pace of market evolution.

Nature-based projects and carbon finance offer a mechanism to support climate mitigation and mitigate the underlying drivers such as deforestation and intensive farming through increased financial inclusion, access to capital and encouraging social enterprise within the community. Historically, the distribution of community compensation from carbon finance has relied upon an architecture developed through international aid or development mechanisms, though many recently developed projects are experimenting with mechanisms that are more direct to include the community directly in a more transparent manner. Similarly, initiatives such as the Shandia Forum aim to systematise traceable funding to IP and LC partners from donor-funded and carbon-finance models.²⁴ _{24
Global Alliance of Territorial Communities, 2023.}

Generally, current community compensation mechanisms have several design elements that are determined through engagement and consultation with the community, grassroots organisations, local partners and the buyer or project investor.²⁵ _{25
USAID, 2023.}

It is important to note that many of these guiding principles have been established over an extensive period through on-the-ground development, and implementation in not only carbon projects but also broader international developer and aid projects. There are many contexts in which applying such principles is the most appropriate decision for the community being served.

These principles try to balance the trade-offs between compensation flowing to the community versus imposing external requirements that reshape the internal structure. However, further development of criteria that are responsive to the reality on the ground could help to make sure that these principles are achieving their intended objectives.

Determining community needs and therefore compensation that meets all constituents are thorny issues that require an intimate understanding of the local context.

The community itself is best placed to understand its own needs. External advisors, developers and social consultants should support the community as it determines its own development needs. In-kind compensation is meant to be determined during formal FPIC procedures, which use democratic request-gathering procedures to guide community consultation and consent. However, these may be influenced by cultural norms and not always accurately followed in every instance.

Community needs, which are heterogeneous, may also change over time and, if in-kind compensation is chosen, there needs to be the flexibility to change this over time with the community’s input. Without clear community buy-in and autonomy of choice the ongoing maintenance and ultimate sustainability of in-kind compensation may be undermined over time.

Further, deploying in-kind compensation without strong governance, transparent accounting and regular auditing presents resource misappropriation risk, while making it easier for bad actors developing projects to obfuscate the real share of revenue going to the community.

“…pointing to a physical building like a school here or a health clinic there makes it easier to assert the community is clearly benefiting from our projects, and keeps the government out of our way…”

Comment from one project developer known for their project’s social impact

Added to this is challenging national contexts where, in some countries, systemic accountability and rule of law is weak, meaning it is not always possible to fully rely upon existing institutions to be effective in managing resource misappropriation risk.

It is critical to ensure an appropriate budget has been established for all in-kind contributions, with the funding earmarked to cover not only initial outlay but lifetime maintenance costs. For example, if providing a funded health clinic, the project should include the cost of construction (materials/labour), operations (staff/equipment) and maintenance (improvements/fixtures/materials) over the project’s lifetime, and demonstrate that this ‘total cost of ownership’ funding has been set-aside and accounted for within an escrow or bank structure.

IPs and LCs are not a monolith. Their needs, behaviours and interests vary from region to region. At a local level, a community will have a multitude of stakeholders with a range of interests and needs. Leaders within the community may be representative of these interests but this cannot be taken as a given. There are two main risks with using existing governance structures which are determined or legislated by a small select group of leaders. Firstly, elite capture via leadership council presents the possibility of misappropriation of funding that is meant to go to the whole community. Secondly, reinforcing historical power structures that act against the interests of marginalised community members, particularly women and young people who structurally may already lack direct financial resources or access. In this case, there may be additional support required for these groups whilst respecting and operating within the existing cultural norms of the community. This can sometimes present a dichotomy which projects must be aware of and sensitive to, in order to ensure appropriate consultation.

IPs and LCs in different regions may have varying governance structures, legal recognition, geographic disbursement, leadership models, connection to the formal economy, legal land status, patterns of movement, access to finance, etc. Therefore, what works in one place may not work in another. IPs and LCs may have varying maturity of infrastructure such as connectivity, geographic proximity to towns and access to banks. This is an area that needs further discussion and innovation to allow for the scaling of the market while respecting the right for self-determination of communities and allow nature guarding and restoring communities to receive funding that serves the resilience and prosperity of the collective.

Mobile connectivity, financial access and participation in the formal economy are all generally trending upward in the Global South, and a project designed based on best practices from just two years ago may no longer be relevant for the local context. It is important to ensure the distribution method does meet the changing community’s desires and isn’t inadvertently working against its stated long-term interests.

Using existing financial infrastructure within a project community can facilitate the implementation of results-based performance payments to the advantage of projects and individual participants. This ensures project budgets are fairly allocated by performance, ensuring permanence and additionality.

Payment methods can also themselves support broader community financial goals. Reliable, recurring payments can serve to offer participants the forward financial stability to plan their budget around needs with greater certainty, for example within a subsistence farming context. This can support participant decisions such as budgeting for education needs, healthcare (such as paying to access preventative care), crop or drought insurance to protect against income instability and more.

In other instances, being able to present an assured income stream to third party financial service providers such as banks, microfinance institutions, and insurers, can unlock financial inclusion for communities which were previously excluded from the formal financial sector, in turn increasing the financial infrastructure of the community.

For example, in Senegal, just 6% of women saved money using a traditional bank or other financial account in 2021 but around four times more women chose to use mobile money to save. In Kenya, Uganda and Zambia, the share of women using mobile money accounts to save money was more than double that of women using bank or other financial accounts.²⁸ _{28
GSMA, 2024.} In Niger, distributing government payments through a mobile phone instead of cash helped give women who received the transfers more decision-making power in their households.²⁹ _{29
Economic Development and Cultural Change 65, October 2016.}

At project commencement, as part of the community engagement, consultation and consent process, the community compensation plan will usually be designed and agreed with the community and will be documented.

Following project implementation, projects are audited by third-party certifiers to ensure they are adhering to their carbon pathways, to estimate carbon stocks sequestered and to ensure community engagement and compliance against the set-out community compensation plan. These validation and verification bodies (VVBs) are typically private companies whose audits are paid for by project developers. VVB audits are not foolproof as a means of ensuring community compensation is occurring properly. VVB audits often occur in a highly constrained time (1-3 days), involve auditors flying in from other regions with minimal local context, and ultimately are paid for by the developer being audited.

The ICVCM will be hosting a continuous improvement work programme which will be focused on addressing gaps in the VVB process.

Without granular standards and clear benchmarks, buyers of high-integrity carbon credits are struggling to navigate how to evaluate community compensation plans when buying credits.

When contextual guidance or clear protocols are lacking, these decisions are left to developers. While rating agencies may support buyers to assess the social impact expected or demonstrable from a project, without deep local context, it can be difficult to present a full assessment of the relevance of the localised social impact. Buyers should look for through-life monitoring and assurance of the delivery of a project’s community compensation plan.

Transparent and verifiable fund distribution is a strong signal of project governance efficacy and community engagement whether through individual payments or group-level accounting for community projects. Ensuring the distribution of funds requires a higher bar of evidence and disclosure by a project and community leaders, which itself can serve as a quality measure around appropriate community engagement.

Although there are limitations to this such as requiring financial access (bank/mobile wallet), often such connectivity is possible.

Pre-issuance buyers can significantly influence how a project is designed at an early stage, together with the community involved, by specifying the level of monitoring and evaluation reporting expected. To support the pre-issuance due diligence process, the table below offers a non-exhaustive due diligence framework for community compensation:

In addition to the above, innovative approaches to structuring community compensation in a direction that ensures greater financial inclusion and security, and that aims for long-term community wealth creation are being tested.

What ‘good’ looks like in the long term is a complex question. It requires a lot of actors to work together to solve for greater transparency in community compensation, and standardisation around this through protocols and regulation.

There are many examples of projects that currently demonstrate high community payment transparency that can serve as benchmarks, some of which are highlighted below.

It is important to take a step back and remember why the equitable distribution of compensation to and within IPs and LCs is significant. We are facing a serious climate crisis and as a society, humanity needs solutions to address this existential threat. We need to use every tool at our disposal in this fight to continue to have a planet with a liveable climate. And we especially need tools that are already deployed and ready to be scaled up.

The voluntary carbon market is one of the few functioning, deployable financing mechanisms that is currently working to restore nature, remove carbon and help those at the frontline of climate change. Although there are issues within it that some believe are unfixable, they are not. However, transparent community compensation must be embedded to rebuild trust in carbon finance, as a tool that provides direct social benefit through ecosystem services and a crucial additional income source to communities on the frontlines of climate change. Failing to solve this poses a systemic risk which can undermine an existing mechanism for channeling money from the global north to the global south and supporting those on the frontlines of the climate crisis. This also matters in setting a precedent for broader nature finance mechanisms.

Carbon sequestration and nature restoration only occurs as a byproduct of a community participating on the ground through activities on the land it relies upon. Carbon removal is the output from the input of community labour and land. However, without the assurance to IPs and LCs that they will be properly engaged, consulted and compensated, the positive climate effects cannot scale. Transparent and equitable community compensation is not just an ethical consideration, it is the cornerstone of long-term success in nature-based carbon projects. IPs and LCs play a critical role in these projects, and ensuring their fair compensation is essential for carbon integrity, social justice, and climate impact.

This paper has outlined the key challenges and necessary actions to ensure transparent and fair payment mechanisms for communities. Transparent community compensation is essential to both the market's success and the integrity of climate solutions for several reasons:

1. Equitable, fair and traceable compensation is critical to carbon integrity
   
   Carbon sequestration hinges on the ongoing participation of local communities, which requires equitable, fair and traceable compensation. Without this, the risk of disengagement or project reversal increases, potentially undermining additionality and permanence. Proper compensation ensures that IPs and LCs remain invested in the long-term management of the land that facilitates carbon sequestration.
2. Transparency and accountability drive project success
   
   Transparent distribution of community compensation not only ensures fairness but also fosters trust. Buyers must seek clear evidence of fund flows and engage with projects to verify that the right mechanisms are in place. Documentation of agreements, outcomes, and verification processes is essential to ensure accountability.
3. Compensation must be context-specific
   
   Every community is unique, and compensation strategies must reflect this. What works in one region may not apply in another, and both monetary and in-kind compensation should be tailored to fit local needs. It is crucial to involve marginalised groups in governance and financial decisions, ensuring that compensation reaches all segments of the community.
4. Effective distribution mechanisms are key
   
   The method of distributing payments, whether direct, via mobile wallets, or through group-trusts, must align with local capacities. Ensuring efficiency and transparency in these mechanisms prevents disenfranchisement and fosters continued community support.
5. Strengthening standards ensures clear guardrails and benchmarks
   
   Clearer benchmarks, public reporting requirements, and standardised formats are necessary to prevent exploitation and ensure community compensation meets globally accepted standards.
6. Buyers have a critical role in ensuring fair compensation
   
   Credit buyers cannot solely rely on labels and certifications. They must actively participate in verifying compensation processes, ensuring transparency, and seeking financial accountability through detailed information on the flow of funds, governance structures, and community engagement processes. By doing so, they help ensure the long-term success of projects, their credibility and the robustness of the voluntary carbon market.

A path forward for the voluntary carbon market

Transparent, equitable community compensation is the lynchpin for the future of carbon markets. By embedding these principles into the fabric of the voluntary carbon market, we ensure not only a more sustainable planet but also a fairer one for all. The success of carbon markets depends on strong partnerships between project developers, local communities, buyers, and regulators each committed to creating a just and transparent system at scale.

As the market evolves, it is imperative that we raise the bar for what constitutes fair and effective community compensation. Through collective action, we can ensure that carbon finance not only mitigates climate change but also delivers meaningful, lasting impact to the communities that are integral to its success.