Voluntary Carbon Market: An Overview

Voluntary Carbon Market: An Overview

To achieve net-zero targets, foster sustainability, and fulfill corporate social responsibility (CSR), many companies are actively reducing their greenhouse gas (GHG) emissions through various technologies and practices. When direct reductions aren't sufficient or cost-effective, they turn to purchasing carbon credits through the voluntary carbon market (VCM). The funds generated from carbon credit sales support carbon dioxide removal (CDR) or GHG mitigation projects, such as forestry, sustainable agriculture, renewable energy, energy efficiency, soil carbon sequestration, and biochar production.

Compliance vs. Voluntary Markets

Carbon markets operate under two broad categories: compliance markets and voluntary markets. Compliance markets are governed by national, regional, or global carbon reduction agreements, such as cap-and-trade or emissions trading schemes. Under these regulations, authorities set emission limits (caps) for companies, and those exceeding their allowance must purchase additional emission credits.

In contrast, the Voluntary Carbon Market (VCM) is entirely decentralized and driven by voluntary participation. Here, companies proactively purchase carbon credits without regulatory obligations. Each carbon credit purchased represents the verified removal or avoidance of one metric tonne of carbon dioxide equivalent (CO₂e) from the atmosphere.

Participants in the VCM

Participants in the voluntary carbon market span a broad spectrum of stakeholders, each playing distinct roles:

  • Buyers of Carbon Credits:
    • Governmental organizations
    • Non-Governmental Organizations (NGOs)
    • Private companies
    • Individuals
    • Event organizers
  • Project Developers and Providers:
    • Landowners & local communities
    • Energy developers
    • Project developers responsible for initiating carbon offset projects
  • Verification & Intermediary Entities:
    • Third-party verifiers ensuring the credibility and legitimacy of credits
    • Traders and brokers facilitating transactions
  • Other Participants:
    • Climate investors
    • Regulators & policymakers
    • Environmental authorities
    • Private equity funds
    • Asset managers
    • Aviation sector and manufacturing industries
    • Educational institutions, charities, and philanthropists
    • Scientists conducting research and improving project methodologies

These diverse stakeholders collaborate at various stages, enhancing transparency, trust, and efficiency in the voluntary carbon market.

Key Sectors and Project Types

The voluntary carbon market encompasses diverse sectors and project types, including:

  • Renewable Energy: Solar, wind, geothermal, hydropower, ocean-based renewables, bioenergy
  • Agriculture: Sustainable and regenerative farming practices
  • Forestry: Afforestation, reforestation, sustainable forest management
  • Energy Efficiency: Improved cookstoves, efficient lighting, and building insulation
  • Carbon Removal & Capture: Direct Air Capture (DAC), Direct Ocean Capture (DOC), Bioenergy with Carbon Capture and Storage (BECCS), Industrial Gas Capture, soil carbon sequestration, and biochar production
  • Other Initiatives: Water purification projects, mangrove restoration, landfill gas management, waste management, blue carbon projects, livestock emission reductions, biodiversity conservation, wildfire mitigation, and urban environmental services.

Carbon mitigation projects broadly fall into two categories:

  • Removal Projects: Actively remove CO₂ from the atmosphere (e.g., DAC, BECCS, afforestation, reforestation)
  • Avoidance Projects: Prevent CO₂ emissions through renewable energy deployment, energy-efficient technologies, waste management initiatives or sustainable agricultural practices.

While removal-based carbon credits are relatively straightforward to measure and verify, credits from avoidance projects often involve complex methodologies due to difficulties in quantifying emissions prevented. A systematic review published in Nature Communications suggests that carbon credits generated through the emission reduction projects were significantly lower than estimated.

Trends in the Voluntary Carbon Market

According to research conducted by reswit.com, renewable energy and forestry are the dominant sectors within the VCM. Solar and wind energy projects have become increasingly prevalent due to their declining costs, which are driven by technological advancements and scalability. Forestry projects, particularly afforestation and reforestation, are essential elements of nature-based solutions, significantly contributing to carbon mitigation efforts. Moreover, emerging carbon removal technologies like DAC and BECCS, along with soil sequestration and biochar production, are gaining momentum as viable options for carbon offsetting.

Currently, over 300 companies worldwide are actively involved in the voluntary carbon market, either independently or through strategic partnerships (Global Database of VCM).

Carbon Credit Pricing Dynamics

The pricing of carbon credits in the VCM varies significantly depending on the nature and quality of projects. According to a recent report published by the World Bank Group, the price was higher for carbon removal projects compared to carbon avoidance projects, such as renewable energy. In 2023, the average price for a voluntary carbon credit was approximately $7.12 USD, slightly below the 2022 average of $7.53 USD. This decrease is primarily attributed to market oversupply coupled with moderate demand growth, only 2% year-over-year, as highlighted in Bloomberg's report.

Future carbon credit pricing will continue to be influenced by several factors, including market supply-demand dynamics, evolving climate policies, project quality, verification standards, technological advancements, and investor sentiment.

Conclusion

As carbon removal and avoidance technologies advance, and credit verification and transparency in the market improve, collaboration among governments, NGOs, businesses, and individuals will play a crucial role in driving sustainable growth in the voluntary carbon market. Through collective efforts, the VCM will increasingly become a vital tool in the global strategy to mitigate climate change, protect ecosystems, and achieve international climate goals.

Back to blog