Seek confidence in voluntary carbon markets

Voluntary carbon markets are growing fast, but a lack of integrity and quality in loans or claims from buyers could undermine global climate change mitigation and development. Rob Macquarie explains how businesses and policymakers who want VCM to succeed can make a meaningful contribution to sustainable development and a just global transition.


This article is part of a series on climate change and the environment from the LSE’s Grantham Research Institute (see website).

Christiana Figueres, a key architect of the Paris Agreement, recently wrote that trust is still in short supply as an essential resource in our collective response to climate change. This observation is particularly true when it comes to voluntary carbon markets (VCMs).

The volume of carbon credits traded by private organizations or individuals who trade voluntarily (without any need to comply with regulations) is growing rapidly. VCM activity surpassed $1 billion in 2021 and has more than doubled since 2020. Approval of rules for carbon trading includes Countries pursuant to Article 6 of the Paris Agreement granted at COP26 last November, VCM has given impetus.

For their proponents, VCMs are an important mechanism for expanding climate finance. As more net-zero commitments and shorter-term targets are made, the demand for carbon credits to offset emissions will increase. By enabling this, VCMs could hugely increase funding for climate and nature-friendly investments. This could complement other forms of financing and help direct inflows from potential buyers in the Global North to meet significant investment needs in emerging and developing economies. However, great doubts remain as to whether VCMs can deliver on their expansive promise.

integrity and quality

On the supply side, the true nature of the funded projects is difficult to verify. Topics include ‘additionality’ (whether the activity would have happened anyway), ‘permanence’ and ‘leakage’ (whether emissions are partially displaced elsewhere).

In the past, CO2 certificates were often awarded on shaky foundations. Recent research into the Clean Development Mechanism – which enabled carbon trading under the Kyoto Protocol – found that most of India’s loan-funded wind farms would likely have been built anyway. A study of forest offsets under California’s Cap-and-Trade program found that nearly 30 percent of projects were credited with greater emissions savings than they actually achieved. Forestry projects account for a majority of the VCM credits awarded in 2021, while renewable energy accounts for most of the remainder.

Information gaps and asymmetries make matters worse. Although there are several organizations that certify VCM credits (e.g. Verra and Gold Standard), the social and environmental impacts of accredited projects vary widely. Many nuances in how projects work and their context are not known to buyers or, in some cases, even to intermediaries acting as sellers. There is also an underestimated difference between to reduce and remove Carbon. Reductions achieved, for example, by avoiding deforestation or by using renewable energy can contribute to global decarbonization, but alone will not be enough to reach net zero; Removals through nature-based and engineering solutions must be much more common than they are now.

However, quality also means contributing to climate resilience, biodiversity and community well-being. Many credits fail these points. For example, when Compensate, a non-profit organization that helps buyers find “good” offsets, is reviewed accredited Carbon capture projects according to its own evaluation criteria developed with scientific experts, nine out of ten failed the test.

solution or problem?

Buyers should first reduce their own emissions as much as possible and then offset where other options are not available; Credit must not replace investments in mitigation within corporate operations and value chains. Quality credit should fetch higher prices and help incentivize deep decarbonization.

Early indications are that many companies’ emission reduction plans are not robust. Of approximately 4,000 organizations surveyed in the Net Zero Tracker, the vast majority did not specify conditions for using offsets. Of the 10 percent who indicated their intention to use offsets, almost three quarters made no special conditions.

Concerns that Offset’s companies are merely helping to embellish their public image have meant that VCMs have struggled to establish a credible reputation. Activists protested at an event at COP26 hosted by the industry-led Taskforce for Scaling Voluntary Carbon Markets (TSVCM), calling the taskforce a “fraud” for the way offsetting gives polluters a path to avoid deep emissions cuts. Other critics have called offsets “wrong solutions”, both because of doubts about the quality of most loans and the damage they can cause through deterrent measures to reduce emissions.

Some indigenous communities oppose markets, while those seeking finance may be perversely excluded by additionality standards, as their stewardship of resources can be assumed to have taken place anyway. Quality projects should always seek local approval and scrutiny, but affected communities are rarely consulted or involved. Systemic factors also play a role: for example, the impact on land use and food prices of carbon depletion caused by mass afforestation could exacerbate poverty.

burden of proof

VCMs must demonstrate their potential for global development. Several coalitions have been set up to provide reassurance on credible best practices, with key milestones expected in the first half of 2022. The Integrity Council for Voluntary Carbon Markets, supported by TSVCM, will define “Core Carbon Principles” to demonstrate integrity and aim to drive alignment with all accreditation standards. The Voluntary Carbon Markets Integrity Initiative (VCMI) is also developing guidance on legitimate claims by offset users. A group of NGOs is pushing for a consensus on high-value offsets in tropical forests.

Participants in the VCMs can also make their contribution by at least supporting organizations that sell high quality credits. The London School of Economics and Political Science used Compensate’s service to purchase offsets for their own carbon neutral claim. Bigger players can be braver. For example, Microsoft launched a call for proposals for carbon removal projects it would fund in 2020. It then published the lessons learned and assessment criteria for CO2 removal, which are renewed annually. Companies can discuss and emulate best practices and support formal benchmarks. In an imperfect marketplace, transparency and collaboration are powerful tools.

Governance and security on both sides of the market will be crucial. The Integrity Council for VCMs will consider how credit issuers’ compliance with standards can be investigated and enforced. If consumers and investors do not know how to distinguish between good and bad climate claims, companies and institutions will not have strong incentives to use high-quality offsets. The guidelines published by VCMI are not final; What counts as a valid claim should ultimately be a matter for the national authorities that regulate climate claims.

To achieve quality, proponents must also answer what role markets should play within the broader global net-zero transition. A study of pre-Paris CDM credits argued that credits should be “temporary and niche” and focused on areas where integrity is most likely. In the VCM era, when all forms of climate finance must grow rapidly — including national public budgets, bilateral and multilateral development finance, and other private lending and investment — this niche should ideally be where others cannot.

Therefore, beyond standards, VCMs could benefit from mechanisms to match buyers with projects at the frontier of countries’ climate strategies. The governing bodies could consider how to encourage this type of coordination. By funding effective, sustainable development, buyers can prove their offsets are worth more than a boost to their own promotion.

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Remarks:

  • The author thanks Danae Kyriakopoulou for her comments on an earlier draft.
  • This blog post expresses the views of its author, not necessarily the position of the Grantham Research Institute on Climate Change and the Environment, the LSE Business Review, or the London School of Economics.
  • Featured image by Marcin Jozwiak on Unsplash
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