Cartoon graphic of hand holding scales, balancing bushes and trees with currency

Marie Kemplay explores significant developments underway within the voluntary carbon markets.

Voluntary carbon markets (VCMs) stand to play a big role in the shift to a net-zero global economy by enabling companies to offset certain emissions during the transition. They also have the potential to channel significant and much-needed investment towards initiatives that will have a positive climate impact.

These markets are distinct from the compliance carbon markets managed by governments, such as the EU’s Emissions Trading System, and are already growing rapidly. According to non-profit Ecosystem Marketplace, VCMs almost quadrupled in value from around $500m at the end of 2020 to almost $2bn at the end of 2021. Research by the management firm McKinsey suggests that could increase to more than $50bn by 2030.

Their potential is clear. However, there also continues to be significant debate about how to ensure the integrity of both the carbon credits being created and in how companies are using them. Coming to a common understanding on these key issues and building trust with the wider world — many of whom regard these markets with scepticism and worry about greenwashing — will be crucial for their further growth.

Existing standards

At a basic level, VCMs function by enabling projects that either remove carbon from the atmosphere (such as carbon capture technology), or that prevent or reduce carbon being released into the atmosphere (for example via reforestation), to issue carbon credits which can be sold to organisations who wish to offset emissions.

Although these markets are to a large extent unregulated, there are several well-established voluntary standards bodies that support the verification of carbon projects and their associated carbon credits, and manage the registries where their details are published. The Verified Carbon Standard (VCS), managed by non-profit Verra, is the biggest, but there are others such as Gold Standard and American Carbon Registry. A common thread is the concept that each carbon credit should represent one tonne of removed or avoided carbon emissions.

In the case of VCS, for a project to be validated and carbon credits issued, a validation/verification body (VVB) — a qualified and independent third-party auditor — determines if it meets VCS standards. Verra-approved accounting methodologies are used to quantify the impact of the project being assessed. The non-profit then facilitates a process where new methodologies can be proposed and approved following public consultation and independent assessment by a VVB.

For Steve Zwick, senior manager for media relations at Verra, the fact that VCS methodologies go through a transparent, public process of expert review and consultation is important because it means they represent the concurrent views of multiple experts.

New quality standards

Nonetheless, there are efforts underway to establish a set of globally agreed baseline standards for carbon credit quality. In October 2021, the Integrity Council for Voluntary Carbon Markets (ICVCM) was launched — a successor body to the Taskforce on Scaling Voluntary Carbon Markets, which was launched in 2020.

Pedro Martins Barata, co-chair of the ICVCM’s expert panel, comments: “The name ‘the Taskforce on Scaling Voluntary Carbon Markets’ gave the impression that the stress was on scaling up. For those of us who believe in the carbon markets, it’s really important to stress the integrity aspect — that we want bigger carbon markets, but it can’t be at the cost of bad credits and greenwashing.”

We need to embed integrity from end to end in the market. That will create trust

Mark Kenber

Mark Kenber, executive director of the VCM Integrity Initiative (VCMI) and a member of the governing board of the ICVCM, says: “We need to embed integrity from end to end in the market. That will create trust and will lead to scale because buyers will know what they’re getting, and that they’re not going to get rubbished in public for purchasing a credit. Project developers will also have confidence there is a market and therefore will invest.”

A principal goal of the ICVCM is to create “core carbon principles” (CCPs), alongside an assessment framework (AF), which will act as a set of global baseline standards. It published draft CCPs in July 2022 based around core components such as: additionality (that a carbon credit should support additional carbon reduction or removal than would otherwise have happened); permanence (that reductions or removals are permanent, or any reversals are compensated for); and robust quantification of emission reductions and removals. The draft CCPs have had a mixed reception.

Questioning quality

Robin Rix, chief legal, policy and markets officer at Verra, says that while the non-profit supports the ICVCM’s objectives and “welcomes scrutiny of crediting programmes and the need to be held accountable, we think that the current drafts of the CCPs and AF are not suited to this task.

“Fundamentally, a principles-based review of programmes has been supplanted with a blunt, one-size-fits-all approach that duplicates the existing work of crediting programmes, prescribes operationally infeasible measures, and — if forced upon the market — would drastically limit the amount of carbon finance that could flow to activities on the ground.”

Niklas Kaskeala, chief impact officer at Compensate, a company which offers individuals and businesses the ability to offset their carbon emissions via what it calls the “highest quality carbon projects”, takes a different view. He says: “We really need to work hard to improve quality. The core carbon principles would be a huge leap ahead, if and when they got supported by a lot of market actors.”

Since 2020, Compensate has evaluated carbon projects via its own criteria, developed with input from environmental scientists. It has since screened more than 170 nature-based carbon projects (mostly forest conservation or forestation projects) which had been verified by VCS and Gold Standard. It says these were typically deemed in the “top tier” for impact and robustness, and only around 10% passed its criteria for inclusion in its portfolio.

“That says a lot about the market, in my opinion,” says Mr Kaskeala. “It’s not that 90% of the projects are bad, but I wouldn’t want to use them for offset claims … there are issues with demonstrating additionality, appropriate baselines for measuring improvement and, in some cases, there are problems with biodiversity or the rights of local communities.”

Mr Rix maintains that its “VCS programme upholds a set of quality assurance principles to ensure all Verified Carbon Units represent emission reductions or removals that are real, measurable, additional, permanent, independently verified, conservatively estimated, uniquely numbered and transparently listed”, with documentation for each project publicly available. He adds without Compensate publishing more detailed project analysis data, it is not possible for him to comment any further.

Guaranteed impact

Gilles Dufrasne, global carbon markets lead at the non-profit Carbon Market Watch and a member of the ICVCM’s expert panel, says the ICVCM has a significant task in working through “a lot of different opinions” and deciding the way forward. “The version that was published is quite stringent”, and he suggests it is unlikely that credits already in the market would be able to meet those standards.

“This creates a broader question for the initiative,” he says. “It becomes a question of is it possible to find a balance between having very strong integrity versus it being possible for credits to hit the bar.”

Mr Martins Barata says the ICVCM received “thousands of comments” and is aiming to produce an updated AF by the end of the first quarter of 2023, with updated to CCPs to follow, potentially in July or August.

For Mr Dufrasne, one potential remedy to the tension could be to move away from the concept that carbon credits must guarantee a tonne of carbon emissions removed or avoided, something that he describes as implying “an unrealistic level of precision in measuring impacts”, and instead focus on credits as a vehicle for financing climate action.

“This does not mean that we should do away with key quality criteria such as permanence and additionality,” said Mr Dufrasne in an October 2022 article on the Carbon Markets Watch website. “Instead, we can approach these with a more realistic aim. For example, requiring minimum storage of around 100 years, while acknowledging that this is not permanent.”

However, others are sceptical about such an approach. Mr Rix says: “Money spent is no guarantee of impact. You can spend $1m and have no impact, or you can spend $100 and have lots of impact. In either scenario, you have to quantify the impacts of your actions. Carbon credits [as currently framed] provide a robust way of quantifying the impacts of actions.”

Demand side concerns

On the other side of the transaction, there are also concerns about how companies are able to use carbon credits.

The VCMI is a multi-stakeholder group launched in 2021 which is examining these issues and seeking to create a Claims Code of Practice. It published a provisional version in June 2022, which Mr Kenber says provides guidance on “when companies (and other non-state actors, but principally companies) can credibly make voluntary use of carbon credits. And what can they credibly say about their use of them.”

The code includes a set of prerequisites firms should achieve in order to use the VCMs. For instance, in addition to creating long-term net-zero plans, “companies must set clear science-aligned interim targets to reduce emissions in the near term” and also maintain a public greenhouse gas emissions inventory. On climate claims, for either company-wide performance or a specific brand or product, the code categorises them into three levels — VCMI gold, silver and bronze — with gold having the most demanding criteria.

The code was put out to consultation and road-tested by almost 70 businesses since June. Much like with feedback to the ICVCM, Mr Kenber says that, while the overall response was positive, there have been “varied” comments, with striking the right balance between robust standards and enabling a meaningful degree of participation a key challenge.

One of the more contentious issues is that VCMI bronze allows companies to use carbon credits to partially meet Scope 3 emission reduction obligations, which he suggests is a deviation from Science Based Targets Initiative guidance.

“This is the challenge we face,” Mr Kenber says. “Do we support what is absolutely in line with science-based targets, or do we say ‘yes, we need to get there, but actually we’re not going to get there at the moment; so, what can we do in the short term to encourage more companies to take action’?” He expects there to be an updated version of the code in the second quarter of 2023.

Better data

Fragmentation of market data has been another area of concern, with data held in various different registries. In December 2022, a new open-source data platform, the Climate Action Data Trust (CAD Trust), launched with the aim of consolidating all major carbon registry data on a single distributed ledger platform.

There are existing private data platforms that aggregate carbon trading data on a mass scale, but it is the first open-source and free resource doing this, according to the CAD Trust. The CAD Trust is spearheaded by founding partners the International Emissions Trading Association (IETA), the World Bank and the government of Singapore. Carbon registries are expected to begin integrating their data with the CAD Trust from early 2023.

Dirk Forrister, IETA president and CEO, suggests that the platform will be invaluable in the development of digital carbon markets infrastructure. “We’re going to harmonise data from registries so that carbon credits from multiple sources can be represented in a common way,” he says. 

“[This] will help alleviate concerns about double counting [multiple entities counting the same carbon credits against emissions targets], it will ease the movement of credits from one account to another and because it is built using distributed ledger technologies, there are safeguards on security and transparency.”

[the cad trust platform has] the potential for digitising monitoring, reporting and verification functions

Dirk Forrister

He also suggests it will be beneficial as supervision and regulation grows. “It’s part of a broader digital transformation of the carbon markets, with the potential for digitising monitoring, reporting and verification functions”, as well as making it easier to monitor the size of the market and market trends.

Market infrastructure

The evolution of digital infrastructure and trading platforms for VCMs is a hot topic more broadly, with new players expected to enter the marketplace. For instance, Carbonplace, a global carbon credit transaction network backed by nine major global banks, is due to become operational in early 2023. It says it will offer “instant, secure and traceable settlement of carbon credit transactions via a secure distribution network”. At present, it says, the majority of transactions are bilateral, although there already some other exchanges such as CBL and AirCarbon Exchange.

The benefit of Carbonplace being backed by banks, it suggests, is not only that creates a large and ready network of potential clients, “we feel it is a very efficient way to scale the market”, says Robin Green, a Carbonplace spokesperson, but also that “the banks will have done know-your-customer checks on those clients and have anti-money laundering processes in place, which will help to ensure market integrity”.

Creating a more liquid marketplace will also have a wider positive impact, suggests Dan Wynne, another Carbonplace spokesperson.

“The ultimate aim is to channel finance towards climate action, which will include small projects that may otherwise struggle to access finance,” he explains. “And one of the most effective ways of doing that [is] to support the development of efficient markets. We know that the most efficient markets have people in them that are willing to trade on both sides. It’s not always just about bringing the end producer and the end buyer together. To support those financial flows, you need the broader infrastructure and trading network.”

As VCMs continue to grow, they are also likely to attract greater regulatory interest. The International Organization of Securities Commissions (IOSCO) is one body that is looking with increasing interest at both compliance and VCMs. On November 9, it announced it was opening a 90-day consultation to examine “key considerations for enhancing the resilience and integrity of VCMs”.

Lack of integrity will bring a lack of trust and impede the environmental objectives of these markets

Martin Moloney

Martin Moloney, secretary-general of IOSCO, says: “These markets in many ways function like any other financial market, so we hope to bring … regulatory expertise to the fore, to assist with their sound development. Lack of integrity will otherwise bring a lack of trust and impede the environmental objectives of these markets — both compliance and voluntary alike.”

Maturing market

Others are sceptical about whether greater regulatory involvement is likely to be major factor in the development of VCMs in the coming years. Henrik Hasselknippe is head of XMarkets and head of European operations at Xpansiv, a carbon markets infrastructure provider that provides the technology for several leading carbon registries and runs the CBL exchange for environmental commodities.

He comments that while Xpansiv is in active dialogue with regulators and will always seek any necessary regulatory approvals, he does not believe that regulation will fundamentally be what drives progress in these markets. “I’m having conversations with major financial institutions that are looking to invest hundreds of millions, if not billions, of dollars into the space,” he says. “They’re not doing it because of international regulation or because of international policy. They’re doing it largely because of shareholder pressure.”

He also believes concerns about market standards are to some extent out of date and don’t reflect the current market reality, “When we speak to market participants, literally nobody is asking ‘where can we get the cheapest credits?’.

“It’s always around, ‘how can we make sure that we can buy offsets where there is a demonstrable impact?’. Not only has the market grown significantly over the past couple of years, it has also matured significantly. And I feel that there is an overhang of criticism, which was relevant maybe two or three years ago.” 


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