Voluntary carbon markets – current problems and emerging solutions

Total cost estimates for 2050 net-zero targets vary a lot – between $110-$240 trillion – but there is clear consensus that public sector alone cannot deliver this. More than 2/3 must come from private sector. 1 While most adjustment are hoped to come from emission reductions, rapid, forced transitions are always inefficient. Furthermore, in certain sectors total net-zero is simply not possible. Therefore a well-functioning private carbon offset market is critical for the net-zero target, and it can mobilize tens of billions of dollars annually for efficient carbon removal programs.

Now, while it has vast potential, today the Voluntary Carbon Market (VCM) is at best around $ 2-3 billion – a number several magnitudes too small. 2 The simple reason is that this “market” simply does not function – it is not a credible marketplace.

Today’s carbon offset platforms are unregulated, highly fragmented, and merely arrange transactions by appointment, rather than acting as a marketplace. This means that today’s carbon credits have highly varying quality, their prices are opaque and volatile, and most buyers remain unwilling to commit due to concerns about quality, credibility and legitimacy.

Therefore, as with all markets, what is needed is standardization and good governance. IN carbon credits this is particularly important as the underlying is intangible and very hard to measure.

First requirement is on the demand side: standardize emission measurements, reduction targets and their communication.

Second requirement is on the supply side:

Standardize emission measurements and reduction targets

Initiatives to ensure high-integrity Voluntary Carbon Markets

First requirement is to standardize emission measurements and reduction targets:

  1. how to measure actual emissions
  2. how corporations’ reduction targets are defined
  3. how to disseminate these consistently and publicly.

These demand side standardization problems are being addressed by three main organizations:

  1. Standardise on how emissions are measured – Greenhouse Gas Protocol (GHG).  To ensure worldwide consistency and comparability this is done by Greenhouse Gas Protocol (GHG) initiative, a global standard for measuring, accounting, and reporting emissions for companies, value chains, and products. The protocol also includes sector-specific guidance to address industry specific challenges. In order to facilitate its use, GHG provides ready-made calculators and data resources, as well as practical training on how to use them.
  2. Standardise how reduction targets are defined – Science Based Targets Initiative (SBTi). Science Based Targets Initiative (SBTi) defines standards for setting true science-based targets and tools for computing them. They are distributed in the form of best practices, guidance notes, and detailed calculators. SBTi also offers a service of an independent review, assessment, and validation for those companies desiring to signal their adherence to science base targets.
  3. Standardise how these emission measures and reduction targets are publicly and collectively communicated – Climate Disclosure Project (CDP). Climate Disclosure Project (CDP) is a digital platform designed to disseminate all the data in standardized, consistent, and comparable form. CDP also collects data on detailed questionnaires, which are then scored and benchmarked.

Once the real emissions and achievable reductions are cleanly defined, the residual can then be effectively compensated. For this offsetting to be of any worth, it must occur using real, high-quality carbon credits that truly reduce the carbon as claimed.

Supply sides

This task of ensuring high integrity of these carbon credits is achieved by establishing well-functioning and trusted governance bodies on:

  1. Demand and usage
  2. Market places
  3. Supply and creation.

The first governance need is on the demand side – how carbon credits should be used and what categories of credits qualify. Voluntary Carbon Markets Integrity Initiative (VCMI) is a demand side governance body that establishes Claims Code of Practice and rules on how corporates use carbon credits and make associated climate claims. VCMI also support national strategies for engaging in private sector high-integrity voluntary carbon markets, which will support national climate goals.

One of the main industry specific organisations under the demand side umbrella is CORSIA, body for International Civil Aviation Organization members. It aims to stabilize flight emissions to 2020 levels and requires carbon credits to be purchased for offsetting additional emissions. CORSIA also defines what types of credits can be used.

The second governance need is on the marketplace side – how the markets and market participants should conduct themselves in buying and selling the credits. International Carbon Reduction and Offset Alliance (ICROA) is the governance body which monitors and accredits carbon offset market providers and market participants. ICROA has a Code of Best Practice which defines requirements for carbon management and crediting, and then Accreditation Programme which certifies organizations adhering to these best practices. Carbon Crediting Endorsement Procedure is used to assess how markets and registries operate on basis of good governance, open access, and robust validation and verification of carbon projects.

The final and by far the most important step is the governance body for the supply side – what categories and types of credits are allowed, who can issue them, how exactly are actual carbon credits created. In essence, it defines what a high-quality offset is. The governance body for this is main, overarching role is the Integrity Council for Voluntary Carbon Markets (ICVCM). First ICVCM defines the Core Carbon Principles (CCPs) which defines global requirements for high-integrity carbon credits.

ICVCM

The governance body for this is main, overarching role is the Integrity Council for Voluntary Carbon Markets (ICVCM). First ICVCM defines the Core Carbon Principles (CCPs) which defines global requirements for high-integrity carbon credits to be 1. real, 2. verifiable, 3. science based. Based on codified CCPs, the governance body then runs detailed assessments evaluating

  1. Carbon Credit Programs
  2. Carbon Credit Categories
  3. Methodologies that define and verify each carbon credit

Provided that all – the program, the category, and the exact methodology – pass the required tests, the issued carbon credits can then be labelled as “CCP-Approved”. ICVCM aims to be the highest standard and thereby signal high-integrity of the carbon credit – something that the buyers and marketplaces can finally safely settle on. Table 20 gives the Carbon Credit Programs which have applied for ICVCM assessment, and so far, Integrity Council has approved five programs (with aggregate 98% market share) as CCP-Eligible.[1]

Table 20. Carbon Credit Programs applying for ICVCM assessment.

The full list of approve (and denied!) Carbon Credit Categories can be found on ICVCM’s website (www.icvcm.org/assessment-status/). Of these four are geared toward forestry and are listed in Table 21.[2]

Table 21. Carbon Credit Categories

Finally, the key component – and what ultimately everything relies on – is for each category the exact methodology that defines a credit. According to the Core Carbon Principles these methods have to ensure that the credits are:

  1. Additional
  2. Permanent
  3. Single-counted
  4. Demonstrate robust quantification of emission removals

It is really this last component, robust quantification, which determines whether the carbon credits – and the entire market – will work. It is defined as

“The GHG emission reductions or removals from the mitigation activity shall be robustly quantified, based on conservative approaches, completeness, and scientific methods.”

In reality, this is very, very difficult to do, and are continuously being refined by ICVCM’s Continuous Improvement Work Programs on Permanence and Digital Measurement, Reporting and Validation)

[1] based on retirements in 2023.

[2] Of these, the first two are REDD+ oriented, and therefore more related to the tropical forest biome. The ones important for boreal forests are Afforestation, Reforestation and Revegetation and especially Improved Forest Management.