Voluntary carbon markets 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 $500mn (£410mn) at the end of 2020, to almost $2bn at the end of 2021. Research by management company McKinsey in 2021 suggested that this could rise to more than $50bn by 2030 after 15-fold growth in the demand for credits.

Although consultancy Climate Focus noticed a reduction in the issuance of carbon credits in the first half of 2022 compared with the same period a year earlier, recent announcements continue to point to an upwards trajectory for VCMs.

At the latest UN climate conference, COP27, in November, US climate envoy John Kerry announced the creation of a new platform that will allow companies to buy carbon credit offsets and use the proceeds to finance the green transition in developing countries. While the Africa Carbon Markets Initiative, also launched at COP27, will work to support Africa’s participation in international voluntary markets.

The potential for VCMs is clear. However, there 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 – where many parties 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 prevent or reduce carbon being released into the atmosphere (for example, via reforestation) to issue carbon credits, which can be sold to organisations that wish to offset emissions.

Although these markets are largely 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, 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 the VCS, for a project to be validated and carbon credits issued, a validation/verification body – that is, 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 an independent assessment by a validation/verification body.

A Verra spokesperson says the fact that VCS methodologies go through a transparent and public process of expert review and consultation is important because it means they represent the concurrent views of multiple experts.

Nonetheless, criticism abound about the credibility of the VCM, with many observers, including Pinsent Masons senior associate Fiona Ross, describing them as “the wild west”.

“One of the criticisms of the voluntary market has always been that it’s unregulated,” she says. “There’s been a lot of interest in how to make that a more credible market.”

More broadly, Ashurst partner Eleanor Reeves notes the wider concerns about the use of carbon offsets to tackle climate change, instead of focusing on emissions reductions and the risks of providing misleading information to the market. “Getting quality right is critical,” she adds.

Focus on integrity

There are efforts under way to establish a set of globally agreed baseline standards for carbon credit quality. The Integrity Council for the Voluntary Carbon Market was launched in October 2021 as a successor body to the Taskforce on Scaling Voluntary Carbon Markets, which was launched in 2020. (McKinsey advised and conducted research for the TSVCM.)

Pedro Martins Barata, expert panel co-chair at the ICVCM, says: “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.”

“For those of us who believe in the carbon markets, it’s really important to stress the integrity aspect, but it can’t be at the cost of bad credits and greenwashing”

PEDRO MARTINS BARATA, ICVCM

Mark Kenber, executive director of the VCM Integrity Initiative and a member of the ICVCM governing board, 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” alongside an assessment framework that 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. These draft CCPs have had a mixed reception.

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