Kate Kyriakopoulou
In the context of intensified global efforts to combat climate change, the emerging tool of the voluntary carbon market (VCM) is crucial in the fight against rising emissions. This market, where companies and individuals can purchase carbon credits to offset their greenhouse gas emissions, plays a vital role in supporting projects that reduce or remove carbon from the atmosphere. With the Paris Agreement setting ambitious climate goals, the VCM has gained significant traction to accelerate decarbonization efforts and help organizations achieve their net zero targets.
The year 2024 brings new integrity guidelines for the voluntary carbon market, addressing key challenges that have hindered its effectiveness and credibility. These guidelines aim to enhance transparency, ensure the quality of carbon credits, and strengthen the overall impact of VCM initiatives. By tackling issues such as additionality, permanence, and the accurate measurement of emissions reductions, the new framework seeks to boost confidence in the market and drive greater participation from businesses and investors. In this article, we explore the importance of voluntary carbon markets and the integrity challenges they face while breaking down the comprehensive approach of the 2024 guidelines.
Voluntary carbon markets (VCMs) enable organizations to compensate for or neutralize emissions that have not yet been eliminated by financing projects that reduce or avoid emissions from other sources, or that remove greenhouse gasses from the atmosphere. The significance of VCMs lies in their ability to accelerate climate action and support the transition to a net-zero economy.
Role in global decarbonization
VCMs play a significant role in global decarbonization efforts by providing a mechanism for non-state actors such as companies, cities, and regions to voluntarily offset their emissions. This approach allows participants to achieve mitigation targets such as climate neutrality or net-zero emissions without being under formal obligations. The 2021 Emissions Gap Report highlighted the importance of carbon markets, finding that full use of market mechanisms can enable cost savings in the order of 40-60% in 2030.
Financing climate action
One of the greatest contributions of VCMs is their ability to mobilize capital for climate action. The value of the global voluntary carbon market exceeded USD 2 billion for the first time in 2021, marking a notable milestone in its growth . Projections suggest that the market could be worth between USD 5-30 billion per year by 2030, with potentially two-thirds of this amount channelled into nature-based solutions.
This financial flow has the potential to fill existing gaps in climate finance, particularly for nature-based solutions. VCMs can help address the USD 4.1 trillion financing gap in nature by 2050, providing additional resources beyond those pledged by national governments.
Supporting developing economies
VCMs support developing economies and vulnerable regions. The market can direct carbon finance to where it is most needed, potentially unlocking USD 50 billion by 2030 . This finance can provide valuable new funding to low and middle-income countries to implement climate solutions, support local stewards of nature and biodiversity hotspots, and positively impact local communities.
Furthermore, VCMs can facilitate investments in nature and land-use change, areas that currently receive a disproportionately small share of global climate finance relative to their contribution to climate mitigation. For instance, funding for forests is currently less than 1% of what is needed to halt and reverse deforestation by 2030.
By channelling resources to these critical areas, VCMs not only contribute to climate action but also support the achievement of multiple Sustainable Development Goals, including good health, biodiversity conservation, and reduced inequalities.
Additionality and permanence concerns
The voluntary carbon market (VCM) faces considerable challenges in ensuring the integrity of carbon credits. Additionality, an acute concept, requires that carbon credits come from projects that would not have occurredwithout the incentive provided by carbon credit revenues. This property is typically assessed when a project is submitted for approval and registration. However, evaluating additionality can be deceptively difficult, as it involves comparing a proposed project to a hypothetical scenario without carbon credit revenue.
Permanence, another critical factor, refers to the degree of confidence that a project will keep carbon out of the atmosphere for a given period. The benchmark for permanence is typically 100 years, although this differs from the scientific definition of permanence (until infinity) . All carbon offsetting projects face the risk of reversal, which can be particularly damaging for projects that sequester carbon from the atmosphere and store it in trees, soil, or artificially.
Measurement and verification issues
Accurate measurement and verification of carbon reductions are essential for maintaining the integrity of VCMs. However, these processes often rely on modeling and baseline assumptions, which can lead to inaccuracies. Baseline-related risks arise when project baseline assumptions or modelling are incorrect, potentially resulting in overstated project impacts.
Monitoring risk throughout a project’s operation is crucial to ensure that projects deliver the carbon-related results they claim. However, when counterfactuals or evidence of performance are based on weak data, it can result in difficult-to-substantiate baselines or achieved reductions and removals.
Greenwashing risks
The credibility of VCMs is quite challenged though from the risk of greenwashing. Greenwashing can occur when carbon credits are issued to projects that are not additional, making climate change worse as total emissions to the atmosphere would be lower if the purchaser had simply reduced their emissions.
Leakage is another form of greenwashing, occurring when a VCC project displaces emission-creating activities to areas outside the project’s boundaries. Physical reversal, such as forest fires in reforestation projects, can also undermine the emission-mitigating claims based on those VCCs.
To address these challenges, market reforms and industry-led efforts are underway to minimize the risk of greenwashing and enhance the integrity of VCMs. These efforts aim to boost confidence in the market and drive greater participation from businesses and investors.
Supply-side measures
The Integrity Council for the Voluntary Carbon Market (ICVCM) has established Core Carbon Principles (CCPs) as a global benchmark for high-integrity carbon credits. These principles ensure that emissions reductions are additional, permanent, real, verifiable, and unique. The ICVCM’s assessment framework evaluates projects against these CCPs, with decisions published on their website for market transparency.
In April 2024, the ICVCM approved three major carbon credit programs: Gold Standard, ACR, and Climate Action Reserve, which collectively account for about 25% of the credits on the voluntary carbon market (VCM) . Verra, the largest standard, is still under review.
Demand-side initiatives
The Science Based Targets initiative (SBTi) launched the Net Zero Standard (NZS) to establish a clear, science-based definition of net-zero. As of March 2024, over 3,000 companies have committed to this standard . The NZS requires companies to reduce their scope 1, 2, and 3 emissions to zero or a residual level consistent with 1.5°C-aligned pathways.
The Voluntary Carbon Markets Integrity Initiative (VCMI) has introduced a four-stage process for making carbon credit claims, including compliance with foundational criteria, selection of a VCMI claim, retirement of eligible carbon credits, and third-party assurance.
Market infrastructure improvements
To enhance market functionality, stakeholders are working to improve transparency, create incentives for high-integrity credits, and promote fair treatment of suppliers. Efforts are being made to address barriers facing credit-generating suppliers, including farmers, ranchers, forest owners, and developing country jurisdictions.
The U.S. Government is playing an increasingly important role in carbon credit markets by incorporating disclosure standards into securities regulation and proposing guidance for voluntary carbon credit derivatives. These efforts aim to strengthen market infrastructure and advance responsible market practices.
The 2024 integrity guidelines for the voluntary carbon market represent a noteworthy step forward to address long-standing challenges. These guidelines have a profound impact on enhancing transparency, ensuring credit quality, and strengthening the overall effectiveness of VCM initiatives. By tackling issues such as additionality, permanence, and accurate measurement, the new framework aims to boost confidence in the market and drive greater participation from businesses and investors. This comprehensive approach, including supply-side measures, demand-side initiatives, and market infrastructure improvements, sets the stage for a more robust and credible voluntary carbon market.
As the VCM continues to evolve, its role in global decarbonization efforts and climate finance becomes increasingly important. The market’s potential to channel resources to developing economies and support nature-based solutions highlights its importance in the fight against climate change.
EcoSkills always aims to highlight all the sustainability news that is in the limelight and reflect the essence of sustainability involving the environment, economy, and society. Stay tuned for all the insightful news that we bring to our blog each week about sustainability and ESG. With ongoing efforts to improve integrity and transparency, the voluntary carbon market is poised to play a pivotal role in achieving global climate goals and supporting sustainable development.
