The voluntary carbon market (VCM) was created to support programs to reduce greenhouse gas (GHG) emissions. In its infancy, the market was distinguished by innovative new approaches to combating climate change. Over time, the VCM has evolved into a robust and effective system for tackling climate change by directing funds to initiatives that achieve independently verifiable and enhanced global carbon reductions.
The VCM also enables businesses to achieve ambitious climate goals by combining internal emission reductions – an essential first step – with the purchase of carbon offsets. By the end of 2019, the market completed about 608 million tonnes of CO2e in emission reductions or eliminations, which is comparable to more than 131 million automobiles being taken off the road annually.
The world must immediately reduce emissions to limit global warming to 1.5 degrees Celsius. Studies show that we need to cut global emissions in half by 2030 if we want to have net-zero emissions by 2050. In some cases, it has been said that natural climate solutions (NCS), such as protecting and restoring forests and better managing soils and wetlands, can do one-third of the cost-effective emission reductions needed by 2030 (up to 10Gt a year). Businesses, the government, non-governmental organizations, and investors can all benefit from the voluntary carbon market (VCM), which lets them buy carbon credits that show emissions have been cut in a way that can be checked. This is an important tool for the National Center for Science and Mathematics, which has been underfunded and undervalued in the past, to live up to its full potential.
NCSs need to be given a monetary value to reach their full potential. This includes storing carbon, filtering water, making oxygen, and promoting biodiversity, among other things. Additionally, there is a need for private money to flow into the public sector. This can be accomplished by the VCM, as it is the first global private market to accurately value, at scale, the service that an ecosystem provides to the planet, in this case storing carbon. It is much easier to get large amounts of private capital with a strong VCM today than a few years ago. The VCM is not the only way to pay for the National Center for Science and Technology, but it is a vital and immediately useful option.
It is important to distinguish between the voluntary carbon market (seen below the x-axis line in the infographic) and the compliance cap-and-trade market (like the EU Emissions Trading System), which is meant to drive deeper emissions reductions by firms (shown above the x-axis line). These two markets may likely converge under new Article 6 rules approved in Glasgow during COP26. In addition, as compliance regimes such as the Carbon Offsetting and Reduction Scheme for International Aviation scale up towards the end of 2020.
CO2 offsets are available on the voluntary carbon markets. Businesses can buy offsets created by the voluntary or compliance markets. In a voluntary market, purchasers (corporations, institutions, and individuals) create demand, but in a compliant market, regulators create demand.
In compliance markets, voluntary offset credits are more expensive. Many elements influence a buyer’s interest in a project to best depict a firm or organization as a climate actor. Voluntary offset markets’ pricing reflects the fact that buyers’ aims vary. Voluntary market credits are priced depending on project charisma and marketing potential, project kind, location, and co-benefits that purchasers value.
Voluntary offset schemes, entities, standards, and protocols abound. Voluntary market offsets have been pushed as a means for experimentation and innovation. They have a lower transaction cost than offsets generated for obligatory compliance. Also, micro-scale projects that are too small to bear the administrative overhead of compliance offset programs or initiatives not covered by compliance schemes can use voluntary marketplaces. In the early phases of the voluntary market, the lack of established quality criteria worried the broader offset market.
As a result, stakeholders in the carbon market set out to develop norms and protocols to increase voluntary offset quality. The purposes and services supplied by these standards and protocols vary greatly. Completion of offset programs has established standards and administrative procedures for accounting, quantifying, and reporting offset projects and credits. These full-fledged programs tend to expand on existing compliance laws and procedures, most notably the CDM. These initiatives are intended to increase consumer confidence in the reliability and integrity of certified offsets by providing quality assurance certification for offset credit suppliers.
On the other hand, standards like ISO 14064-2 and guideline documents like the WRI GHG Protocol for Project Accounting exist. Individual offset programs can use these guidelines and recommendations to create their own definitions, accounting frameworks, and quantification alternatives.
Local community and biodiversity benefits are important factors in this project. The Climate, Community & Biodiversity Standards and SocialCarbon establish criteria for robust project design.
A corporation can buy carbon credits to offset emissions it cannot eradicate. Carbon credits are certificates for quantities of greenhouse gases avoided or eliminated from the atmosphere. Carbon credits have been used for decades, but the voluntary market has risen rapidly in recent years. According to McKinsey, buyers retired carbon credits worth around 95 million tonnes of CO2e in 2020, more than double the amount in 2017.
As worldwide efforts to decarbonize the economy increase, voluntary carbon credits may gain popularity. Experts forecast that the annual worldwide demand for carbon credits may reach 1.5 – 2.0 gigatons of CO2 by 2030 and 7 to 13 CO2 by 2050. (Refer to Exhibit 3). Depending on price estimates and underlying circumstances, the market size in 2030 might range from $5 billion to $30 billion to more than $50 billion.
Despite the immense growth in demand for carbon credits, it is estimated that supply might match demand in 2030: 8 to 12 GtCO2, primarily from four areas, Averted nature loss (including deforestation), nature-based sequestration (such as reforestation), prevented or reduced emissions (such as landfill methane), and technology-based removal of carbon dioxide from the atmosphere.
Several variables may make it challenging to organize and market the total potential supply. Project development would have to accelerate dramatically. Most potential prevented nature loss and natural sequestration supply are concentrated in a few countries. Risks abound in all ventures, and the time it takes from initial investment to final credit sale may deter some investors. A new action plan is needed to scale voluntary carbon markets. Building a viable voluntary carbon market will take collaborative work on many fronts. The voluntary carbon market can be expanded in six areas along the carbon credit value chain:
Creating agreed standards for defining and validating carbon credits:
Creating standard contracts:
Building a trading and post-trading system:
Getting agreement on how to use carbon credits:
Putting systems in place to protect the market integrity:
Sending clear demand signals
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