Without the private sector, net zero isn’t possible. Taken together, countries’ national emissions reductions targets, known as Nationally Determined Contributions (NDCs) under the Paris Agreement, are currently not sufficient to limit global temperature increases to 2°C, let alone 1.5°C. As a global community, we need to increase ambition and accelerate emissions reductions and removals. Here the private sector can lead the charge. The net zero transition is inevitable—it presents massive opportunities for organizations that are well prepared and massive risks for those that drag their feet.

We need to use every available resource that will make a meaningful difference. Many of us realize that Voluntary Carbon Markets (VCMs) are a valuable tool to tackle climate change – in fact annual trading exceeded $1bn for the first time in 2021 – but we also understand that the market is complex.

What are Voluntary Carbon Markets (VCMs)?

Voluntary Carbon Markets are international markets that allow the sale and purchase of carbon credits. Often credits are bought by emitters, including individuals and organizations, to allow them to offset their greenhouse gas (GHG) emissions. Unlike compliance carbon markets, VCMs are not currently regulated by a centralized authority, such as a government. Compliance and voluntary markets have developed in parallel, with key developments such as the Kyoto Protocol in 1997 and the Paris Agreement in 2015. At COP26, the rules relating to Article 6, concerning carbon markets, were agreed. Both types of carbon markets have the potential to incentivize positive environmental outcomes and finance projects that cap, reduce or remove GHGs. However, VCMs lack the regulation and transparency of compliance markets like the EU ETS.

This can make VCMs difficult to navigate, especially for those who lack the experience or resources to properly evaluate carbon project performance. However, VCMs also present a number of opportunities when approached with the appropriate expertise.

Over the years, companies have been called out for “greenwashing” when they used carbon offsetting instead of prioritizing emissions reductions from their business activities. We have also seen examples of substandard projects receiving investment from organizations, which resulted in high profile scandals. This has given the market a reputation of being risky and highlighted that today not all carbon credits are created equal.

In 2022, Sylvera surveyed 500 ESG decision makers at UK and US corporations with over 10,000 employees, and asked them what they considered to be the biggest risks and benefits associated with carbon offsetting.

Avoidance and reduction projects

Fund activities to reduce GHG emissions, for example protecting a forest from deforestation, or improving renewable energy generation on the grid.

Removals projects

We don't sell carbon credits, and we aren’t paid by developers to rate carbon projects.This means we avoid conflicts of interest, and you can trust that our ratings and reports are unbiased.

Avoidance and reduction projects

Fund activities to reduce GHG emissions, for example protecting a forest from deforestation, or improving renewable energy generation on the grid.

1. REDD+

The initiative to Reduce Emissions from Deforestation and Forest Degradation was originally introduced in 1997 at Kyoto. REDD+ attaches financial value to the carbon stored in forests and adds an incentive to reduce human impact that results in greenhouse gas (GHGs) emissions. The ‘plus’ in REDD+ refers to the role of conservation, sustainable management of forests and enhancement of forest carbon stocks in developing countries. Unlike some other project types, REDD+ is readily available and can offer co-benefits for local communities, such as additional income streams. Understanding the scope and impact of these activities can help buyers determine whether the project is aligned with their own priorities. These are avoidance/reduction projects as they assess the relative avoidance of emissions in a pre-project scenario of high deforestation compared with lower deforestation during the project’s lifetime.

1.1 REDD+ :
AUD (Avoided Unplanned Deforestation)

These projects aim to protect forests from localized agents of deforestation, such as deforestation caused by local communities growing crops for subsistence agriculture, or deforestation due to illegal logging. Examples of AUD project activities could include financial support to local communities so they have the means to boost yields from existing farmland, or training locals in patrolling for illegal deforestation activities.

1.2 REDD+ :
APD (Avoided Planned Deforestation)

An APD project primarily seeks to protect forests from commercial agents of legally permitted deforestation, such as for forest conversion to crop plantations or cattle ranches. These projects also aim to protect the forest from secondary agents of deforestation, i.e. illegal loggers.An example of an APD project might be protecting an entire project area from being cleared by a company or landowner that has well-documented plans to convert the forest into a commercial palm oil plantation.

2. ARR (Afforestation, Reforestation, Revegetation)

These projects fall under the “removals” category. They tend to convert degraded and barren land through tree-planting.An example would be restoring a rainforest and ecosystem by replanting trees. These projects can also offer numerous co-benefits for local communities and biodiversity since they can provide jobs and increase biodiversity. This long-term ambition can span from 20 years, up to 100 years.

3. IFM (Improved Forest Management)

IFM projects aim to better maintain current forest stock during logging activities. For instance, managing a mature forest with selective timber harvesting in combination with activities to maintain the mature forest cover, increasing the carbon sequestration. 90% of these projects are located in the USA and Mexico, with over 65% based in the US.

4. Jurisdictional and Nested REDD+

Jurisdictional initiatives aim to establish forest baselines at jurisdictional (i.e. region or country) levels, in order to enable more accuracy and a greater scale of impact.

Jurisdictional crediting mechanisms include ART TREES (used by the LEAF Coalition), Verra JNR and the California Tropical Forest Standard; and results-based financing mechanisms like FCPF World Bank and Green Climate Fund also operate at the jurisdictional scale. To date no jurisdictional credits have entered the market, but issuances are expected to grow very significantly in the years ahead.

5. Regenerative agriculture

These projects implement soil-enhancing agricultural techniques capturing carbon in the soil and converting it into a more stable carbon sink.

For example, stopping the use of synthetic pesticides and fertilizers or improving biodiversity and crop rotation by moving away from monocultures.

6. Blue carbon projects

These projects focus on the restoration and conservation of coastal and marine ecosystems, such as mangroves. These ecosystems sequester large amounts of carbon, making them powerful and biodiverse carbon sinks.

Carbon Project Checklist: What you need to know before investing

The Paris Agreement, which sets the global goal to decarbonise all human activity, and is the ultimate driver for all climate action. The Paris Agreement operates on a cycle whereby every five years each country is expected to submit an updated and more ambitious national climate action plan (a Nationally Determined Contribution, or NDC). The next round of updated NDCs are due by 2025.

The Task Force on Climate-related Financial Disclosures, or TCFD, describes a set of global principles for climate-related disclosures which a growing number of national regulators are enshrining. This includes all members of the G7. Companies’ TCFD reporting is becoming more detailed every year, and increasingly covers companies’ use of carbon credits.

The US Securities and Exchange Commission (SEC) recently released a draft rule on climate disclosures, along the lines of the TCFD. However, the draft SEC rule includes substantial disclosure requirements on the details of carbon credits being retired, which would bring a new level of transparency to the markets.

What are Voluntary Carbon Markets (VCMs)?

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What are the types of carbon projects?

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