Carbon Markets

The voluntary carbon market (VCM) is emerging as a dynamic and evolving mechanism with the primary purpose of mitigating rising greenhouse gas (GHG) levels, with the ultimate goal of achieving global net-zero emissions.

The VCM extends its impact beyond combating climate change by promoting broader environmental and social benefits. By prioritizing projects with a variety of co-benefits that can protect and empower vulnerable communities, create jobs, and conserve biodiversity, the VCM fosters equitable development strategies.

Net-zero refers to achieving a balance between GHG emissions released into the atmosphere and those removed. A key part of achieving net-zero is finding cost-effective ways to tackle emissions that are difficult or expensive to reduce directly. This is where the VCM and offsetting emissions become crucial. By supporting projects that reduce, avoid or remove GHG, the VCM provides a cost-effective market-driven mechanism to achieve net-zero.

With rising consumer and societal pressures, an ever-increasing number of corporates are pursuing decarbonization strategies to achieve net-zero. To reach net-zero, corporates need to prioritize avoiding and reducing their own value chain emissions. However, a portion of emissions will remain ‘hard-to-abate’, meaning these emissions are either prohibitively costly or impossible to reduce with currently available abatement technology.

By offsetting their residual emissions using high-quality carbon credits, corporates can achieve scientifically aligned net-zero. Additionally, corporates can use high-quality carbon credits to contribute toward effective climate solutions beyond their own value chains. Most carbon crediting programs also generate tangible co-benefits that support the advancement of the United Nations Sustainable Development Goals (SDGs), allowing corporates to simultaneously support other initiatives of their choice.

Carbon credits are tradable units representing one tonne of carbon dioxide (CO2) equivalent removed, avoided, or reduced from the atmosphere. Ideally, each credit signifies a real-world climate benefit. However, the effectiveness of carbon credits hinges on several factors:

• Project Quality: Credits should come from verified projects from reputable developers. This ensures the emissions reductions or removals are real and measurable.

• Additionality: The project wouldn’t have happened without the carbon revenue, guaranteeing extra emission reductions beyond what would have happened anyway.

• Permanence: Projects should have low likelihood of ‘reversal’ (when the carbon removed or avoided is released back into the atmosphere). This risk is dependent on the project type and specific project conditions. For example, nature-based projects have risks posed by natural disasters.

The VCM operates on the principle of voluntary participation by businesses, organizations, and individuals seeking to offset their GHG emissions. At its core, the VCM facilitates the trade of carbon credits, which represent verified emission reductions, avoidance or removals from the atmosphere. The market comprises various stakeholders, including:

• Buyers: Entities seeking to mitigate their carbon footprint through the purchase of carbon credits.

• Sellers: Entities that generate carbon credits through emission reduction, avoidance or removal activities, such as efficient cookstove or reforestation projects.

• Intermediaries: Brokers, aggregators, and platforms that facilitate transactions between buyers and sellers, providing market access and ensuring compliance with standards and protocols.

The VCM also relies on the following mechanisms:

• Project Development: At the heart of the VCM lies project development. Viable projects seeking participation in the VCM must adhere to established standards and methodologies, guaranteeing their effectiveness.

• Certification and Verification: Carbon credits generated by eligible projects are certified by accredited independent third-party auditors, verifying the quantity and quality of emission reductions achieved and then listed on registries like Gold Standard and Verra. This process provides credibility and transparency to the carbon market.

• Trading and Transactions: Once certified, carbon credits are traded on VCM platforms between buyers and sellers. Transactions involve the transfer of credits from sellers to buyers in exchange for financial compensation, thereby providing a revenue stream for projects that would not have occurred otherwise. Carbon credits are retired by the end buyer or retired on behalf of the end buyer in order for the buyer to claim the carbon benefit, and the credits are labelled as ‘retired’ in the respective registry.

• Emission Offsetting: By facilitating offsetting, the VCM allows entities to take responsibility for their hard-to-abate residual carbon emissions and contribute to global climate mitigation efforts. This allows businesses to demonstrate their commitment to environmental stewardship, enhance their brand reputation, and meet stakeholder expectations regarding sustainability.

• Innovation: The VCM stimulates innovation in cutting-edge technologies such as carbon capture and storage or novel sustainable techniques like regenerative agriculture. It accelerates research and continuous improvement, ensuring the most efficient and effective techniques and technologies are implemented across a range of decarbonisation levers.

• Investment: The VCM provides critical financing for projects that would not otherwise be financially viable. A good example is the transition to clean cooking, where high-quality clean cookstoves are not affordable to millions of people in developing countries.

• Compliance Markets: These are mandatory for companies and organizations exceeding emission caps set by government regulations, also known as cap-and-trade markets. When companies or organizations exceed the emission caps established by government regulations, they are obligated to participate in compliance markets. These markets operate on the principle of emissions trading, wherein entities can buy and sell emission allowances or credits.

• Voluntary Carbon Markets (VCMs): Participation here is entirely voluntary. Businesses and individuals can choose to offset their emissions beyond any legal requirements. VCMs offer more flexibility in choosing specific projects they want to support, allowing them to go beyond mandated reductions and potentially contribute to additional environmental or social benefits.