The past decade has seen an increasing number of companies pledging their commitment to climate goals. But eliminating carbon emissions or even reducing them poses very real practical challenges for some businesses. For them, carbon credits offer a more viable solution to mitigate their carbon impact through offsets. This has given rise to a burgeoning voluntary carbon market (VCM).
But the concept of VCM is still relatively fuzzy for many people taking an active interest in climate action. This lack of understanding is preventing effective engagement by stakeholders who could otherwise benefit from the various opportunities the market has created while contributing to its continued expansion.
So, what exactly is a voluntary carbon market? Here are 5 things for you to know.
1. VCM facilitates carbon credit trading.
Let’s first understand what is meant by a carbon credit. It’s essentially a certified unit of carbon offset. One carbon credit represents one ton of CO2 removed, reduced or avoided through a carbon reduction project.
So, by purchasing one or more carbon credits, you can offset an equivalent amount of unavoidable emissions from your operations. This gives you the opportunity to meet emission reduction goals or become carbon-neutral, even when the nature of your business makes it difficult to completely eliminate emissions.
These carbon credits are tradable – you can buy and sell them at an agreed price. This has created a carbon credit market.
The voluntary carbon market, in particular supports, companies that proactively seek carbon credits to meet their voluntary climate commitments. It differs from the compliance market, which is organized around mandatory carbon offset requirements.
2. The voluntary carbon market has three main participants.
The three main categories of participants in the VCM include:
1. Project developers/owners
These are the issuers of carbon credit. They run various projects that directly help decarbonize the climate – from hydropower generation to wastewater treatment.
2. Retail traders and brokers
Retail traders buy large volumes of carbon credit from different projects, which they could then sell as bundled deals. Brokers add another trading layer to this process, where they purchase credits from retail traders and sell them to end buyers.
3. End buyers
They typically include companies and individuals looking to voluntarily offset their carbon emissions.
3. Each project is certified by voluntary carbon market standards.
Understandably, some form of oversight is required to ensure that carbon credit projects effectively meet their stated emission volumes.
This is the role of voluntary carbon market standards – organizations that set guidelines to measure the CO2 reduced, removed or avoided by a specific project, thereby, making it eligible to issue an equivalent amount of carbon credit.
4. Many factors affect the carbon credit price.
According to the World Bank’s State and Trends of Carbon Pricing, the average voluntary carbon market prices have risen by over 53% YOY in 2021, reaching USD 3.82.
Of course, an individual credit could be valued anywhere from a few cents to a few hundred dollars. Similar to other commodities, carbon credit prices can vary depending on several factors, including:
- Type of project. Credits from carbon removal projects are generally more expensive than credits issued by carbon avoidance projects. This is because removal projects require higher investments, generate greater demand, and attract more attention.
- Project delivery time.
- Project location.
- Additional social and environmental benefits.
- Trading volume.
5. VCM is still largely unregulated.
The voluntary carbon market is decentralized and self-governed, with little to no central regulatory oversight. While there are independent third-party organizations to certify projects and their carbon reduction volumes, there is no single body tying in these individual efforts into a coherent and consistent ecosystem.
This has created inherent disadvantages, particularly related to quality, credibility, transparency and consistency. As a result, credit issued by the voluntary carbon market is not recognized for compliance-related offsets.
Therefore, due diligence is crucial for any business involved in voluntary carbon credit purchases to ensure high-quality offsets that could support the organization’s emission reduction goals.
Towards net-zero
VCM inarguably has several flaws and is far from perfect. But it offers tremendous potential for businesses looking to play an important role in decarbonizing the economy.
Despite criticism, many are certainly hopeful. The impressive voluntary carbon market growth seen in the recent past reflects the confidence of its diverse proponents.
We may not be able to fully reverse the climate damage inflicted over the last two centuries. But VCM offers an opportunity for us to voluntarily take a proactive stance to mitigate further damage. It allows greater involvement, participation and engagement for companies and individuals in climate responsibilities and action.
FAQ
It’s an unregulated market for voluntary carbon credit trading. It allows companies to purchase carbon credits to offset their emissions and meet voluntary climate goals.
According to Refinitiv Carbon Market Year in Review, the global voluntary carbon market size was valued at over USD 1 billion in 2021. The traded volume amounted to 239.3 MtCO2e within just the first eight months of the year.
The simplest forms of investments in VCM include carbon credit ETFs and futures. You can also invest in companies that operate carbon reduction projects.
There are primarily two types of carbon markets – compliance and voluntary. The compliance or mandatory market supports carbon purchases related to compliance purposes. The voluntary market is organized around climate commitments set by companies or individuals of their own accord.
Unlike compliance markets, voluntary carbon markets are not regulated by governments. This has created room for inconsistencies in quality and transparency.
Besides companies, governments and individuals can also participate in the voluntary carbon credit market to offset their emissions.
