Business leaders are making ever-higher goals to cut the global greenhouse gas (GHG) emissions There is a new market which can assist in achieving these goals by supporting firms’ efforts to reduce their own carbon emissions. This is the rapid growth market for carbon credits that are voluntary.

Carbon credits (often called “offsets”) play an important double role in the fight for climate-related change. They help companies support the decarbonization of their carbon footprint, thus speeding up the process of transitioning to an environmentally friendly future. They also help finance projects for removal of carbon dioxide from the atmosphere–delivering negative emissions, which will be needed to neutralize residual emissions that will persist even under the most optimistic scenarios for decarbonization. While the carbon credit market that is voluntary is currently gaining momentum however, it remains tiny. The report that was recently released by the Taskforce on Scaling Voluntary Carbon Markets is aimed at creating an outline for solutions to overcome any obstacles to its continued expansion.

The double role of carbon credits is to address climate change

Carbon credits are an official certificate that represents one metric tons of equivalent carbon dioxide which can be kept from being released into the atmosphere (emissions reduction or avoidance) or eliminated from the atmosphere as a consequence of a carbon-reduction program. In order for a carbon reduction project to create carbon credits, the project must be able to prove that the emissions cuts or carbon dioxide eliminations are genuine, quantifiable permanent, indefinite, independently verified, and distinctive (see the section on “Criteria to be able to issue carbon credit”). If the project is in compliance with these requirements–as defined by independent standards like Gold Standard and Verified Carbon Standard (VCS)–credits are able to be granted. The carbon impact of a credit is only claimed–that is, it can be counted towards an environmental commitment once the credit is taken off the market (canceled through an official registry) following which it is no longer available for sale. Carbon credits are deemed as a “voluntary carbon credit” when it is purchased and then redeemed on a voluntary basis , rather than as part of a procedure of complying to legal requirements.

The earnings generated by the sales of carbon credits allow the creation of carbon reduction projects in various projects. This includes renewable energy, avoiding emissions of fossil fuels and alternatives and natural climate solutions for example, reforestation or avoided deforestation or agroforestry; energy efficiency and recovery of resources by the reduction of methane emissions coming from landfills or wastewater facilities, to name a few.

Although the majority of these projects kinds, such as renewable energy, avoidance of deforestation and resource recovery are focused on reducing carbon emissions, other types, such as the reforestation project, concentrate on removing carbon dioxide out of the air. This is a significant distinction and demonstrates the two-fold role carbon credits, which are voluntary, could play in tackling climate change

In the short run in the short-term, carbon credits earned through voluntary projects focusing on emissions reduction or avoidance could help speed up the transition towards a decarbonized world economy, such as by promoting investment in green energy sources, efficiency in energy use as well as natural capital. Reducing emissions is often the most cost-effective method to reduce greenhouse gas concentrations in the atmosphere.
In the long-term, carbon credits may serve as a key factor in accelerating carbon dioxide removal (or negative emission) necessary to offset the residual emissions that cannot be reduced further. In a recent study we found that at minimum 5 gigatons of emissions negative would be required each year to achieve net-zero emissions in 2050. This could be achieved by combining natural climate solutions, such as Reforestation (for instance the sequestration of carbon in trees) and emerging technological carbon capture use and storage solutions, such as direct air capture and carbon storage (DACCS) as well as bioenergy that uses carbon storage and capture (BECCS). Carbon credits from voluntary sources can be used to finance the development of these strategies.

The role of carbon credits in climate commitments of corporations

A credible commitment to climate change by a company starts by setting an emissions reduction goal that covers the indirect and direct greenhouse gas emissions. If an organization does not possess an emission baseline to establish a target setting one, it is a must-do first step.

The alignment of a target’s ambition to the most current research on climate science is generally regarded as the best way to go. This means that the goal should match the degree of decarbonization that is required for limiting global warming to less than two degree Celsius higher than preindustrial norms. At a minimum, it should at a minimum, be in line with the 1.5-degree route that, according to scientists, would decrease the likelihood of experiencing the most hazardous and irreparable impacts caused by climate change. This Science Based Targets Initiative has created methods for setting the target. These methods are already being used by over 1,000 companies which includes many of the world’s top multinationals. To attain the required emission reductions, companies are able to take advantage of levers like improving efficiency of energy, switching to renewable energy sources, and addressing the emissions of value chains.

In the next step, companies may decide to decide to commit to a goal which involves the use of carbon credits, either to offset emissions it hasn’t yet been able to completely eliminate or to offset remaining emissions that are not further reduced because of the prohibitive cost or technical limitations. These kinds of targets are available with different names (for instance the carbon-neutral, neutral climate net-zero carbon negative, climate positive) however, they all require a company to supplement reductions within its carbon footprint through financing other reductions through the purchase and redemption of carbon credits that are voluntary (see the sidebar, “Types of carbon targets”). In the event that it offsets its remaining emissions this way the company can claim it is reducing its environmental impact. Some, like Microsoft have gone one step further, setting goals to have a net positive impact in the world’s climate.

A strong momentum, driven primarily by new commitments from corporations and points-of-sale products

After three years of booming growth in the carbon market, the voluntary 2 hit a record in the year 2019, with respect to issuances as well as retirements (exhibit). Issues included 138 million tons of carbon dioxide equivalent–nearly twice the volume of 2018–and retirements 70 million, which is a 33 percent increase over the year prior. The growth is driven by a combination of brand new corporate climate pledges, like carbon neutrality as well as net-zero, and the so-called “point at sale” offering of voluntary carbon credits such as Shell’s carbon neutral fuel and a bundled retail offer of gasoline and carbon credits that are voluntary, as well as airline passenger offset programs that permit passengers to offset their carbon emissions of their flights by using their airline’s web site.

Based on year-to date volumes and an extrapolation that is in accordance with the historical patterns of seasonality and trends, we anticipate that the market will set a new record in 2019 in which issuances and retires each increasing by around one-third over the course of the previous year. After years of falling costs (from an average of about $7 per ton back in 2008, to approximately $3 per ton by 2019) 3 as a result of the fact that demand is outpacing supply which is why we expect prices to rise in the near and medium long term, due to a strong increase in demand particularly for projects with higher costs like reforestation or carbon dioxide removal projects generally (see the sidebar under “Issuances or retirees”). Although still quite tiny, the voluntary carbon market is currently gaining acceleration and its effect (and its potential) is receiving more and more attention.

The Natural Climate Solutions (NCS) is a class comprising project types like the reforestation process, avoidance of deforestation better forest management, and Agroforestry, have seen the most growth than any other category of project and significantly contributed to the growth of the voluntary carbon market direction. In the period 2016-19, the issuances in this category have more than doubled each year, in average. And in the year 2019, NCS accounted for 53 percent of all issues. In addition, retirements within this sector have also increasing (close to 50% each year, in average). We believe that this could be due to increasing awareness of the potential of NCS (they could provide about one-third of the reductions in emissions required to meet the Paris Agreement between now and 2030) as well as a growing attention to carbon dioxide removal (of of which NCS can be the most efficient and established method) and the customers’ preferences for benefits in addition to climate change mitigation including biodiversity and impacts upon local community.

What’s next? Challenges and opportunities

To accelerate the carbon market’s growth and fully realize its potential, it is crucial to tackle a number of significant issues. This includes the need to improve the quality and impact of the market and to ensure that all stakeholders are aligned on the criteria that will allow for the use of carbon credits offered by voluntary organizations in the context of an overall climate strategy, develop a an infrastructure for market development, and decrease the risk of regulatory uncertainty. We believe that developing new and innovative solutions to these issues can lead to additional growth. The recently established Taskforce on Scaling Voluntary Carbon Markets is aiming to develop an outline for the solutions.

Quality assurance and strengthening impact

While reliable standards like Gold Standard as well as VCS confirm projects’ conformity to the standards of their respective methods buyers usually have limited information about the status of carbon reduction projects within their portfolio. There are also times when stakeholders raise concerns about specific types of projects, like ones that involve the additionality of large-scale renewable energy initiatives; biodiversity issues in afforestation projects that plant monocultures and non-native species, leakage and lack of local community involvement in the event of forest management that is not done; or the permanence in the case of solutions to natural climate in general (see sidebar “Additionality leakage, additionality and permanent definition”).

While respected standards have implemented measures to deal with these concerns but the insufficiency of transparency and a persistent skepticism from stakeholders has led to buyers demanding an increase in the impact of quality assurance and. In the end, we anticipate innovation in measurement, reporting and verification practices to increase in the next few years.

Inspiring stakeholders to agree on the utilization of carbon credits for voluntary use

There is there is no consensus among all stakeholders regarding how to utilize carbon credits that are voluntary in the context of an overall climate strategy. So, different companies could differ on the role that carbon credits from voluntary sources could play in their progress towards net-zero. The most important points to consider are the degree that a company is able to depend on carbon credits that are voluntary in lieu of reducing its own footprint, the kind of credits (for instance, emissions reduction or avoidance or the removal of carbon dioxide) to choose from and how their function could change as time passes. There is a distinct distinction between the purpose of carbon credits that are voluntary currently and the role they’ll play in the future when the company has completely eliminated carbon emissions and only needs to offset the residual emissions.

Building a new market infrastructure

The present day, carbon credits that are voluntary are mostly traded through the internet, which results in the lack of transparency in market information (for instance, transactions volume, price levels) as well as a dearth of information on the market that was a significant limitation to market development during the previous time. Tradeable, standardized products and contracts can improve liquidity and increase the scale of transactions, as long as the quality of the credit traded and the integrity of the market participants are guaranteed.

Reduced the uncertainty of regulation

The talks on The Paris Agreement’s Article 6, which introduces the first international carbon market or mechanism currently in progress. The consequences from Article 6 for the voluntary carbon market remain unclear. Do the voluntary purchase of carbon credits made by private sector players help countries to meet their climate goals post 2020 (which are known as contributions that are deemed to be national) or are they merely incremental to the goals? Are governments going to continue to permit projects to sell carbon credits for free? What is the problem with double-counting and how can that be prevented? The less uncertain regulatory environment could encourage more buyers to take long-term commitments and developers to invest in large-scale projects.

Voluntary carbon credit can play an important role in helping the world reach the 1.5-degree path. They could both speed up the process of transitioning to a low-carbon future through enabling businesses to contribute to decarbonization that goes beyond their carbon footprints and assist in neutralizing residual emissions through financing projects to remove carbon dioxide. To make this a reality massive effort is required to solve the present challenges and to expand the market for carbon emissions that is voluntary. The achievement of this will result in substantial benefits, not only in fighting climate change, but also in conserving nature and the many benefits it can bring to all of humanity.