Powering the voluntary carbon market

The urgency with which tackling climate change needs to happen requires, as the UN Secretary-General António Guterres has said, an ‘everything, everywhere, all at once’ approach.¹

Carbon markets can provide one way to incentivise emission reductions, including via the nascent voluntary carbon credit market.

With some analysis forecasting that voluntary carbon credits could reduce greenhouse gas emissions (GHG) by up to 2 Gt per year by 2030² – over twice the annual carbon dioxide emissions produced by all flights in 2022³ – the use of voluntary carbon credits is poised for rapid growth.

The primary focus for any organisation’s climate strategy should be reducing greenhouse gas emissions in their own operations, supply chain and downstream value chain. Only then can voluntary carbon credits play a role in supporting an organisation’s climate strategy, where they are perhaps most often used to ‘offset’ residual emissions (i.e. those emissions that remain after all other efforts to eliminate them have been exhausted). This can be particularly true for hard-to-abate sectors such as aviation, with very limited economically viable options to decarbonise in the near term.

However, this is only the case where those carbon credits are robust and of high integrity.

Carbon credits are generated by projects designed specifically with the goal of lowering greenhouse gas emissions, such as planting trees or installing additional renewable energy capacity. These types of projects can also have an important role in supporting local economic development, particularly in developing and emerging economies.

The voluntary carbon market is not regulated by governments. To give buyers confidence of its intended impact, projects can follow one of the voluntary carbon accounting standards (such as the Verified Carbon Standard and Gold Standard), which lay out the methods to measure and track how much greenhouse gas is removed or avoided from a project – and therefore how many carbon credits each project can produce.

As the voluntary carbon market has grown to new levels over the last few years, so too has the attention it has received from the media and wider society – often challenging the definition of what constitutes a ‘high-integrity’ carbon credit and whether the diversity of standards in the voluntary market is hampering its ability to deliver.

Given this, much of the activity to date in 2023 has therefore seen a continued focus on how to ensure growth is delivered with integrity, with a number of global, voluntary, multi-stakeholder initiatives having now reached significant milestones.

The first of these is the Integrity Council for Voluntary Carbon Markets (ICVCM) – an independent governance body⁴ – which issued its Core Carbon Principles (CCPs) framework in March 2023.⁵ The CCP framework outlines the key elements required for “high-integrity carbon credits that create real, verifiable climate impact, based on the latest science and best practice”.⁶

The ICVCM will provide governance and oversight of standards and their adherence to the CCPs. In doing so, it hopes to provide a single view on what constitutes the threshold for a high integrity carbon credit. This could reduce the complexity for carbon credit buyers and spur on the creation of standardised contracts of CCP-compliant credits, bringing further liquidity and price transparency to the market.

We also saw the publication of the Claims Code by the Voluntary Carbon Market Integrity Initiative (VCMI)⁷ – an international non-profit organisation that is focussed on the demand-side of the market. The Claims Code aims to clarify when – and how – companies can use carbon credits and the associated claims they can then make. It also includes pre-requisite criteria such as publicly committing to reaching net zero emissions no later than 2050 and demonstrating progress towards near-term greenhouse gas reduction targets.

Having a market-wide standard or benchmark on how companies can make voluntary use of carbon credits as part of net zero decarbonisation pathways could build more trust and confidence in the voluntary carbon market.

Related to this, the first half of 2023 saw the publication of two studies (one by Sylvera, a carbon credit rating and data company, and the other by Trove Research, a voluntary carbon market data and intelligence company) that indicated companies who use carbon credits, on average, decarbonise their own operations at a rate that is twice as fast as those who do not.^8,9 That does not, however, mean that every company using carbon credits is also pursuing systematic decarbonisation of their operations. Continued vigilance is, therefore, required to ensure carbon credits are used as an addition to driving down a company’s own GHG emissions. Nonetheless, these studies provide much needed data and analysis to support the view that carbon credits can be part of a more ambitious corporate climate strategy.

There are hopes from the market that the ICVCM and VCMI will see companies start to use their frameworks in early 2024.

We will also be looking out for further momentum behind projects that remove GHGs from the atmosphere, both nature-based and from nascent but rapidly growing engineered solutions such as direct air capture and storage.

Looking to COP28 in the United Arab Emirates, we note that the country has already made a series of announcements this year, including the formation of the UAE Carbon Alliance¹⁰ and, separately, memoranda of understanding to enhance co-operation in developing carbon projects between the UAE and both Zambia and Tanzania.¹¹ As per previous COPs, we may see organisations from around the world looking to use the conference as an opportunity to galvanise new or raised commitments and action to advance the voluntary carbon market.

We will also be closely monitoring the outcome of the climate negotiations themselves at COP28, and whether governments will make further progress on the technical rules that will enable the operationalisation of the international carbon markets as envisaged within the Paris Climate Agreement, marking a potentially significant moment for discussions that have been advancing since 2016.