The Sustainability Leader’s Guide to Voluntary Carbon Markets (VCMs)
What will happen if we fail to meet Paris Agreement targets and the Earth’s temperature rises by over 1.5°C? Experts are forecasting a huge increase in natural disasters, famine, species extinction and mass migration, which some parts of the world are already experiencing. Climate change is also a major threat to business and economic stability. In 2021 alone, climate disasters cost the U.S over $1bn.
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.
This guide is intended to help Sustainability Leaders better understand the VCMs, so that you can navigate through some of the questions and complexities surrounding them, and deliver your sustainability goals with confidence.
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.
How do VCMs work?
Carbon credits are tradeable units sold by project developers that have been created with the purpose of reducing, avoiding or removing GHGs in the Earth’s atmosphere. Each carbon credit is measured as one ton of carbon dioxide (CO2) or an equivalent GHG that is or will be avoided or removed from the atmosphere.
There is an ongoing debate about which is more effective, but in reality both are essential in the fight against climate change. Currently removals credits make up 3% of the market and non-removal nature-based solutions make up 45%.
To learn more on avoidance vs. removals, read our deep-dive article.
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 extract, clean, and organize data from project design documentation (PDD) and every monitoring report.
We meticulously build carbon, strength of baseline and financial additionality models from the ground up.
Download the full guide
What are the types of carbon projects?
There are a number of project types in the VCMs. They all fundamentally serve to either avoid, reduce or remove emissions, but may also have additional benefits. By purchasing credits, you are normally funding the project’s activities; however, this is usually not the case for larger-scale renewables. Since the quality of carbon projects can vary, it’s important to understand how they are designed, implemented, and monitored – and whether they align with your organization’s sustainability goals.
These projects make up the vast majority of VCM credits
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Carbon Project Checklist: What you need to know before investing
Carbon Performance
Carbon 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. 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.
Why does this matter?
A single carbon credit is equivalent to one metric ton of CO2e; therefore the number of credits issued by the project must be an accurate reflection of the amount of emissions that have been or can be reduced or avoided, if it is to have any positive impact. There are cases where projects inflate emissions reductions or removals and therefore more credits are issued than should be allowed. Quantifying carbon impacts can be tricky and requires high quality data; a lot of these cases of inflation might not be intentional or done in bad faith by the project developers. It’s also worth noting that complex and inconsistent standards and documentation make it difficult to assess the design and performance of carbon projects.AdditionalityPermanenceCo-benefits
Additionality
The concept of additionality is fundamental to a project’s integrity and to qualify as a carbon offset.
Why does this 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. If credits were awarded to a business-as-usual project, then emissions would not actually be avoided or removed in addition to what would have happened anyway. For example, if there was no risk of a forest being cut down, but credits for a project protecting it were sold anyway, then this wouldn’t be considered additional. Although projects undergo third-party checks before credits are issued, additionality can be difficult to verify and measure without the proper infrastructure and technology.
Permanence
This refers to the time period that carbon will likely remain sequestered or avoided.
Why does this 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. For example, if a forest project is located in a region with a high prevalence of fires, if one occurs the forest could be lost to it and this would release the carbon that had been sequestered to the atmosphere. Permanence can sometimes be difficult to determine when purchasing credits because risk factors may not always be visible and can be subject to rapid change.
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 this 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). Another example would be planting non-native species of trees that are not appropriate for that area or planting monoculture, both of which could be detrimental to local biodiversity. A well designed project will positively impact communities and biodiversity; for instance the project could create income sources for locals, provide them with services.
Policy & regulation implications to consider
While the VCMs are not currently regulated anywhere in the world, they are largely shaped by the broader policy environment relating to climate change and national decarbonization strategies.
Key policy and regulatory initiatives currently shaping the VCMs are:
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.
Download the full guide
You’ve read the highlights, now access the full report for a deeper dive into how carbon credits make it to market, how to evaluate quality and how to prepare your organization for imminent regulatory changes.
