The future of the Voluntary Carbon Market (Grantham Research Institute on Climate Change and the Environment)

Our key takeaway: The future of the Voluntary Carbon Market (VCM) may be in jeopardy. The uncertainty in the market is affecting buyers’ confidence - with average prices falling during 2022 to less than $10 per tonne of carbon dioxide equivalent (tCO2e) (whereas a price of $16 per tonne of carbon dioxide equivalent is needed for 50% of investments in nature-based solutions to be viable globally). There are potential benefits to carbon credits that companies buy, but also a range of challenges to overcome. The Grantham Research Institute on Climate Change and the Environment has issued a call to action: two paradigm shifts are needed to enable a viable Voluntary Carbon Market. Companies need to stop their “faulty emissions accounting” of matching credits (of uncertain quality) to actual residual unabated emissions to claim that they are ‘carbon neutral.’ And companies need to prioritize human rights within their VCM programmes and projects - with a focus on empowering women, Indigenous Peoples and other affected communities. The scrutiny of the VCM is not going anywhere and there is work to build on by the Integrity Council for the Voluntary Carbon Market (ICVCM) on credit supply, and the Voluntary Carbon Markets Integrity Initiative (VCMI) and Science Based Targets initiative (SBTi) on credit demand. We need to crack this one for international climate action.

Grantham Research Institute on Climate Change and the Environment published ‘The voluntary carbon market and sustainable development’ (March 2023):

• VCM and their potential benefits: The voluntary carbon market (VCM) “refers to the global trade in carbon credits that takes place outside the scope of legally mandated (compliance) instruments. Credits represent reductions or avoidance of ongoing greenhouse gas emissions, or removals of past emissions from the atmosphere.” The VCM allows companies to “invest in activities that reduce or remove carbon emissions beyond their own value chains to support the global transition to net zero emissions and sustainable development.” It “facilitates investments in nature and land-use change as well as technological carbon removals.” The paper highlights that to support the goals of the Paris Agreement and advance global sustainable development, “the sale of carbon credits must finance real emissions reductions and removals, achieve co-benefits wherever possible, and not undermine companies’ own decarbonisation efforts.” “If the VCM can address questions over its credibility, it could make two critical contributions to a sustainable transition: (i) pave the way to a net zero and sustainable economy; and (ii) help close finance gaps in sectors such as nature and land use that are critical to the transition.”
  

• Challenges for the VCM to overcome: First, “market norms are in flux, with efforts to improve the VCM’s integrity and enhance benefits to the climate still ongoing.” We need clear and common standards and guidelines, as well as scrutiny from a wide range of stakeholders - building on work that has started from the Integrity Council for the Voluntary Carbon Market (ICVCM) on credit supply, and the Voluntary Carbon Markets Integrity Initiative (VCMI) and Science Based Targets initiative (SBTi) on credit demand. Second, “several factors complicate how the VCM should operate in the context of governments’ responsibilities and voluntary cooperation under the Paris Agreement.” There is a distinction between the VCM, which as its name indicates is voluntary, and the carbon trading arrangements between countries provided for in Article 6 of the Paris Agreement. A number of countries are building their capacity to manage carbon markets. The report notes that “Country governments must decide whether and how to permit the VCM to operate in their jurisdiction” since “unpredictability harms confidence to invest.” In short, how does the VCM work with the government’s carbon trading arrangements which companies can also access. According to the report: “The VCM should target key investment needs that the Article 6 mechanisms are unlikely to cover, especially while those mechanisms are being implemented.”
  

• Two needed paradigm shifts for a viable VCM: The report recommends two changes which “would help the VCM to carve out a new role in international climate action.” The first priority is “a shift in the carbon neutrality claims made by buyers.” The report describes how carbon credits are used to offset companies’ residual emissions, which in turn leads companies to claim that they are ‘carbon neutral.’ “However, matching credits of uncertain quality to actual residual (unabated) emissions reflects faulty emissions accounting.” With time, the market will shift toward offsetting using more permanent carbon removals with robust Measurement, Reporting, and Verification (MRV). In the meantime, companies should move away from ‘carbon neutral’ language and prefer language of contribution: that through their participation in the VCM, they have contributed “to securing a net zero economy by supporting outcomes elsewhere.” The second priority is “ensuring benefits for sustainable development.” This includes ensuring that VCM programmes and projects incorporate SDG impact measurement and management; benefit from strengthened representation of women, Indigenous Peoples and other affected communities; and are carried out across an entire country or subnational region. The report concludes with recommendations based on these findings, noting that “[w]ithout a significant shift in how private actors take wider responsibility for global public goods, including action on climate change, the future of the VCM – and the sustainable transition – may be in jeopardy.”