A Primer on the VCMs
Rejecting offsets is no longer an option if we are to stay within our 1.5C target. This is particularly the case for industries where decarbonization is still proving difficult to achieve, such as aviation and shipping.
This is one of many reasons that we are seeing more organizations tap into the voluntary carbon markets (VCMs). VCMs are international markets where organizations have the option to trade carbon credits that are verified by certification bodies such as Verra, but there is currently no centralized regulation system. These are contrasted with compliance or mandatory carbon markets, which are established and regulated by a centralized authority, such as a government.
With participation in the VCMs growing as organizations set ambitious climate commitments, the temptation to favor price over quality or failing to conduct the necessary due diligence to seek out quality carbon credit investments, is a risky strategy that can have detrimental repercussions. That said, how do you identify high quality carbon credits?
First, get an idea of how VCMs work
This is easier said than done because the market is loaded with jargon and methodologies, but there are a few fundamentals that can help navigate your understanding of the market:
- Carbon credits are tradeable units sold by project developers on the market. The credits have been created with the purpose of reducing, avoiding or removing GHGs in the Earth’s atmosphere and by purchasing project credits you are normally funding a project's activities.
- Owners of carbon credits can retire these credits, meaning they can never be sold on and as a result, have a sole claim to the CO2 avoided or removed, so they can claim to have offset, or compensated, the CO2 they have emitted. The other option would be to trade the credits through a carbon exchange platform
- Carbon credit projects can be broadly divided into 2 areas: carbon avoidance and carbon removals
Engage in high quality projects that align with your organization’s sustainability goals
There are a number of project types that make up the VCMs, but it’s important to decide which ones reflect your company’s goals. For example, if you are looking for credits that offer co-benefits that go beyond carbon avoidance and removal, then nature-based solutions like REDD+, or cookstove projects would be the ideal option.
Here is an overview of some well-known carbon project types:
Reduce Emissions from Deforestation and forest Degradation (REDD+)
As one of the several nature-based carbon credit project types, REDD+ attaches financial value to the carbon stored in forests and adds an incentive to reduce human impact that results in greenhouse gases (GHGs).
There are two project types that fall under REDD+:
- Avoided unplanned deforestation (AUD) projects: These aim to protect forests from highly localized agents of deforestation, such as deforestation caused by local communities growing crops for local consumption or deforestation due to illegal logging.
Examples of AUD projects could include financial support to local communities so they have the means to boost yields from existing farmland or increased patrols to monitor deforestation from illegal activity.
- Avoided planned deforestation (APD) projects: These primarily seek to protect forests from large-scale, commercial agents of legally permitted deforestation for alternative use, such as for crop plantations or cattle ranches. These projects protect the forest from secondary agents of deforestation, which are primarily local communities.
An example of an APD project is preventing the entire project area from being cleared over 5-10 years by a global corporation that has well-documented plans to convert the forested area to a commercial palm oil plantation.
Afforestation, Reforestation & Revegetation (ARR)
ARR projects are designed to increase carbon stocks by planting or assisting the natural regeneration of woody biomass. ARR activities are diverse and can include: agroforestry, commercial plantations, farmer-assisted natural regeneration, and mangrove restoration (one type of blue carbon project).
Improved Forest Management (IFM)
IFM projects can increase net carbon stocks or reduce greenhouse gas (GHG) emissions through changes in existing, or business as usual (BAU), forest management practices. Forest management activities could include rotation extension, thinning and change in harvesting techniques. Exactly which management activities are allowed in the projects is determined by registry methodologies.
Jurisdictional and Nested REDD+
The fundamental difference between Jurisdictional REDD to project-level REDD+ is that all the forest in a national (i.e. whole country) or subnational (e.g. state or province) jurisdiction must be considered when setting a baseline and monitoring deforestation. With the advent of remote-sensing and artificial intelligence in recent years, this can realistically be done to a high level of accuracy. Nested REDD+ projects are aligned with jurisdictional baselines and deforestation monitoring.
Renewable Energy Source (RES)
Renewable energy is energy from sources that are cyclic and naturally replenished on a human time scale. The most common renewable energy sources are: solar, wind, hydro, geothermal, and biomass. Renewable power generation costs have fallen dramatically over the past decade driven by technological innovation, economies of scale, and competitive supply chains. Declining costs have driven adoption of renewable technologies in upper and middle income countries, where diverse sources of financing are readily available.
Direct Air Capture (DAC)
Direct air capture (DAC) or direct air carbon capture (DACC) is a method of removing carbon dioxide (CO2) from the atmosphere. Rather than attempt to stop carbon emissions reaching the atmosphere, or use natural environments (such as forests and soil) to absorb atmospheric carbon, DAC uses technology to remove the carbon we’ve already released into the atmosphere.
Keep on top of policy & regulations that are shaping the market
Although the voluntary carbon markets are not regulated, they are influenced by the broader policy environment relating to climate change. This is expected to evolve in the coming years as the interest in the market grows. Here are some of the key policy and regulatory initiatives that you and your company should be aware of:
Invest in due diligence
Determining carbon credit quality is no easy feat. It takes time and resources to not only understand what makes projects high quality, but to also gather information specific to each project; for example determining if an ARR project is using monocultures which could make it more vulnerable to fires or pest outbreaks.
Before you buy credits, it’s vital to interrogate the following project attributes:
- Carbon performance: credits issued are based on a project’s emissions reductions or removals. This information comes from the verified audits of projects, following the developer’s monitoring.
Why does carbon performance matter: As a buyer, it’s vital to know if the project is accurately reporting on its activities which directly translate to its overall avoidance or removal of CO2 or CO2e.
- Additionality: The concept of additionality is fundamental to a project’s integrity and to qualify as a carbon offset. A carbon credit project should result in emissions avoided or reduced that would not have otherwise occurred if the project didn’t exist.
Why does additionality matter: Carbon reductions achieved with the funds from credits need to be over and above any business-as-usual activities that would have happened without credits being sold and the project being developed.
- Permanence: This refers to the time period that carbon will likely remain sequestered or avoided.
Why does permanence matter: Risk factors such as human activity and disasters can affect the longevity of a project’s impact, which will ultimately affect its emissions reductions.
- Co-benefits: Some carbon projects, such as nature-based ones, go beyond emission reductions by implementing activities that benefit local communities and biodiversity.
Why does co-benefits matter: If a project were to protect a forest, but disrupt the livelihood of local communities by cutting off an essential income supply then it is a poorly designed project and does not align with UN Sustainable Development Goals (SDGs).
Our independent carbon ratings platform analyzes these four areas amongst other key project information to provide sustainability teams, organizations and their stakeholders with a transparent picture of specific carbon credit investments, their potential impact and how to best manage the risks associated with the VCMs.
To get more information on VCMs and how to conduct carbon credit due diligence, download our guide.
The VCMs Glossary
At Sylvera, it’s our goal to build confidence in Voluntary Carbon Markets by providing clarity. Since the VCMs are full of terms you won’t find anywhere else, which can make it challenging to participate in them, we'd like to summarize with a glossary that will guide you through the alphabet soup of abbreviations and labyrinths of long-lettered phrases.
- Agriculture, forestry, and other land use (AFOLU) carbon credits or nature-based solution (NBS) carbon credits: These carbon credits relate to projects that improve the use of land to reduce emissions, according to the IPCC as “an enhancement of removals of greenhouse gases (GHG), as well as reduction of emissions through management of land and livestock”.
- Article 6: The rule book for carbon markets that was finally agreed at COP26. Key outcomes included the concept of Corresponding Adjustments (CA) and some rules for Clean Development Mechanism (CDMs) being clarified. To understand more about Article and the Paris Agreement, we recommend downloading our e-book
- Beyond Value Chain Mitigation: The Science-Based Targets initiative (SBTi) net zero targets rightly focus on rapid reductions in scope 1, 2 and 3 emissions. But, in line with the mitigation hierarchy, SBTi also encourages companies to contribute to societal net zero: thinking beyond their own value chains when decarbonizing, referring to this as BVCM, or beyond value chain mitigation.
- Carbon credit: A carbon credit is a tradable unit representing one metric ton of carbon dioxide (CO2), or an equivalent amount of another greenhouse gas (GHG), avoided or removed from Earth's atmosphere.
- Carbon neutral: When an organization is carbon neutral, it means that they have compensated for all their carbon dioxide (CO2) or other greenhouse gas (GHG) emissions through carbon offsetting, the purchasing and retirement of carbon credits.
- Carbon offset: A carbon offset is a name given to a carbon credit when it is retired by an organization to make the claim that it is compensating for its greenhouse gas (GHG) emissions.
- Carbon project developer or developer: The organization that develops a carbon project and submits documentation to a verification body such as Verra so that it, the carbon developer, can issue verified carbon credits.
- Carbon project sponsor: A party that sponsors a carbon project to be developed.
- Carbon sequestration: This is when carbon is taken out of the atmosphere and trapped in biological or geological stores. This might include a tree taking in CO2 and carbon becoming part of its biomass. Other forms of life, including people, also store carbon in their biomass. Over time, when they die, what remains of their bodies, shells and bones, become covered in sediment and are stored in the rock formations of the Earth.
- Carbon credit inventory: The remaining number of permitted credits that have not been issued or retired. Arithmetically: inventory = permitted - issued - retired.
- Corresponding Adjustment (CA): The accounting mechanism built into Article 6 to avoid double counting. The amount of emissions traded are subtracted from the buyer’s NDC and added to the seller’s NDC.
- Gold Standard: An organization that has verified and issued the second largest number of voluntary carbon credits to date.
- Issued and issuance: After Verra permits a potential number of credits to be issued, the developer can request for credits to actually be issued. It can be assumed that when credits are requested to be issued and are issued that the project developer has a direct buyer for them, in other words, the credits are being sold on the primary market. Issued credits are constantly being converted into retired credits.
- mtCO2e: This refers to carbon dioxide equivalent measured in metric tons. CO2e means that the amount of greenhouse gas under consideration has the same global warming potential as one metric ton of carbon dioxide. For example, according to the United Nations Environmental Protection Agency (EPA), 1 metric ton of methane has a CO2e of 25 metric tons. Ms refers to millions.
- Net zero: Net zero means causing no overall increase in greenhouse gases (GHGs) in the atmosphere; therefore not contributing to climate change. Net zero can apply to a range of entities, such as a company, country, product, city or individual family, within a given period (usually a calendar year).
- Permitted, permittance and permittance events: When Verra verifies a project, they permit the project to issue a potential number of credits. This is referred to as permittance. A verification body such as Verra can also update the number of credits a project can issue. The time at which this is done can be referred to as a “permittance event.” It is important to note that Verra permittance event information only becomes publicly available once new vintages of carbon credits trade. This is revealed at the beginning of every year, which leads to the step formation in Figure 3.
- Registry: Once a carbon project is verified by an organization such as Verra, it is added to the organization’s registry of verified carbon projects.
- Retired: This means that when a buyer purchases a carbon credit a note is made in the registry, of an organization such as Verra, that it has been taken off the market. It cannot be bought or traded again. The benefit here is that only the buyer will be able to claim the emissions reduction.
- Verified Carbon Standard (VCS): A Verra program that certifies voluntary carbon credit projects allowing these projects to trade verified carbon units (VCUs). The VCS is the largest supply of voluntary carbon credits.
- Verified Carbon Units (VCUs) Ms: This is the name of a verified carbon credit registered by Verra through their VCS program. It “represents a reduction or removal of one [metric ton] of carbon dioxide equivalent (CO2e) achieved by a project.” Ms refers to Millions.
- Verra: An organization that has verified and issued the largest number of voluntary carbon credits to date.
- Vintage: Carbon credits from the same carbon project can be issued at different times. The date a carbon credit is issued can be referred to as its “vintage”. Different vintages of carbon credits may be perceived as having differing levels of quality by the market.
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