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19 August 2022

The mission to mend the voluntary carbon offset market

A new initiative aims to turn carbon offsets from a cheap "get out of jail free card" on climate action, into a key tool on our journey to net zero.

By Nick Ferris

Voluntary carbon offsets have always been the Wild West of climate solutions. On paper, what they offer feels nothing short of miraculous: pay a company a small fee, and whatever you have done – whether a flight, construction project or other service – will have its emissions neutralised. But a complicated, largely unregulated market means there have long been accusations of ineffectiveness in the voluntary carbon offset market, whether due to offsets being lost, sold multiple times or simply being inaccurately measured. 

Most climate scientists therefore advise that carbon mitigation is the most reliable means of tackling climate change. But most will also now acknowledge that offsets and carbon trading will play a major role in reaching net zero. And the voluntary market is booming: nearly $2bn worth of voluntary carbon credits were traded last year, according to the non-profit Ecosystem Marketplace, nearly quadruple the figure for the previous year.

Seedlings at the nursery of Instituto Terra in Brazil, which over the last 20 years has reforested more than 2.5 million Atlantic seedlings. The institute partly funds its activities by issuing carbon credits to the voluntary offset market. (Photo by Christian Ender/Getty Images)

The voluntary carbon offset market can be expected to increase more than 100-fold by 2050 in a 1.5°C warming scenario, according to separate analysis from the Taskforce on Scaling Voluntary Carbon Markets, which has been shared in a 2021 report by consultancy McKinsey & Company. The authors of that same report say what the world will require is a “a voluntary carbon market that is large, transparent, verifiable, and environmentally robust”, but that what we currently have is one that is “fragmented and complex”. 

The Integrity Council for the Voluntary Carbon Market (ICVCM) is on a mission to change this. They were established in response to recommendations from the Taskforce on Scaling the Voluntary Carbon Markets, which is an initiative backed by UN climate envoy Mark Carney and more than 250 institutions in the voluntary offset sector. Their mission is to “ensure the voluntary carbon market accelerates a just transition to 1.5ºC”, and to do this they have drafted a set of Core Carbon Principles (CCPs), which as of a few weeks ago are undergoing public consultation

The CCPs set out how to establish “high-quality carbon credits” that create “real, verifiable climate impact, based on solid science and best practice, with social and environmental safeguards”. But with only a few hazy principles laid out so far, and no clear implementation policy, what impact can they really have on the rapidly growing offset business? 

Understanding the voluntary offset market

At its core, a carbon offset is very simple: it is the legal ownership of a set volume of carbon emissions, typically a tonne, which is transferred, traded and used to balance emissions generated elsewhere. Many political entities like the EU, UK, China and the state of California have a mandatory (or "compliance") carbon market, which force companies in highly emitting industries (think power, oil, chemicals or steel) to reduce their emissions by trading allocated, but ever-diminishing, carbon allowances between each other. 

These cap-and-trade schemes have been largely successful. They have provided companies with flexibility in their decarbonisation paths, have tapped into the ability of markets to meet supply and demand at least cost, and have also provided incentives for emitters to exceed their targets.

The voluntary market exists for entities that wish to use offsets to meet their climate targets, but are not party to a compliance carbon market. The growth of this market has created a sprawling ecosystem, which includes project developers, who issue carbon credits from projects like renewable energy developments or forestry protection schemes, to brokers or exchanges, who allow the trade of those credits with other companies, to consumers who buy up those credits. 

Last year 98% of purchased (or "retired") offsets were in Asia Pacific, Latin America and Africa, according to research company BloombergNEF, while 83.7% were purchased by companies in North America and Europe.

There is no central regulator in the voluntary offset market. Instead, offset standards, including Verra's Verified Carbon Standard and the Gold Standard, exist to verify the offset projects, and ensure they follow strict rules and maintain generally high standards of environmental integrity. 

But these standards are not enough to regulate the market, as they only assess the original offsetting project and not the broader ecosystem. Moreover, there is no obligation to purchase offset credits purchased that meet the standards. “If you leave companies up to their own devices, they will typically only prioritise whatever makes the most sense for them financially,” explains Kyle Harrison, from BloombergNEF.

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A number of factors are now generally understood to determine quality in the offset market. Offsets must not overestimate the volume of carbon they absorb; and they also must not be sold more than once (i.e. "double-selling"), with clear proof of credit retirement issued once that has taken place. The impact of offset projects on emissions must also be permanent, and the projects that issue carbon credits must also be "additional", which means that a project must drive decarbonisation that would not have occurred had the offsets had not been issued.

There have time and again been reports of offsets failing to meet these criteria. Last year, for example, non-profit research group CarbonPlan revealed that six forest projects in California’s carbon trading system had released millions of tonnes of carbon over the past five years as a result of forest fires, upending the notion that offsets should be "permanent". 

The question of additionality also remains thorny: Verra and the Gold Standard have recently banned the tokening of new renewable energy supply projects as offsets (unless in the least developed countries), due to the fact that renewable energy is now generally cheaper than fossil energy, and therefore is likely to be developed regardless of money from offset schemes.

There is no fixed carbon price for the voluntary market, with cheaper offsets often available from countries with less rigorous regulatory standards. The lack of regulation and the ongoing risk of double-selling offsets means the market is also currently heavily oversupplied, with supply increasing 66% annually since 2018, according to a January 2022 report from BloombergNEF. 

The same report anticipates offsets will be "unsustainably cheap", if current trends continue. This may be seen as a good outcome for corporations looking for a "get out of jail free card", but will set the market up for further criticism from investors and the media, and lead to its failure. 

The Core Carbon Principles (CCPs)

Given the array of concerns over voluntary offsets, as well as the breakneck speed with which the market is growing, ICVCM has no time to lose in trying to impose its CCPs on the offset market. 

The CCPs will establish "interlinked, fundamental principles for high-quality carbon credits", based around ten core values that include "Additionality", "No double counting", "Permanence", "Robust quantification of emissions", and "Sustainable development impacts and safeguards". ICVCM claims the ten principles "each address a point of contention", and will provide "a benchmark for quality and foster continual improvement in the market by making high-integrity credits readily identifiable". 

Once the consultation is complete and the CCPs are released into the world, ICVCM’s mandate will be to "provide governance and oversight" to standard-setting organisations and other sector players on how to meet the CCPs. ICVCM aims to better coordinate different parts of the voluntary offset ecosystem, and ultimately "define a roadmap for the responsible growth of the Voluntary Carbon Market". 

The assessment framework for the CCPs is to be released via two stringency thresholds. The first of these will denote "consistent atmospheric, environmental and social integrity", while the second will denote "full stringency requirements based on current best practices". 

“If both of these thresholds were applied today, not a single carbon credit would meet the core carbon principles,” explains Sam Van den plas, from the think tank Carbon Market Watch. “This shows how big the integrity problem within the voluntary carbon market sphere currently is.”

A profound challenge

But is a list of airy principles really enough to bring a vast global network under control? There are reasons to be doubtful. 

The CCPs take no clear stance on how to address the double-selling of offsets, with a particular risk around whether companies and countries can buy the same offset twice (UN rules under Article 6 of the Paris Agreement will prevent multiple countries buying the same offsets). It also remains unclear how ICVCM will handle difficult issues like additionality and permanence on a practical level.

“The language in the draft CCPs does not really do justice to a lot of the long-term issues in the voluntary carbon markets,” says Van den plas. “Addressing double-counting, for example, should not be optional: it is absolutely critical to the effective functioning of the market.” 

Van den plas also believes a greater emphasis should be placed on social issues related to the offset market. “Issues such as allocated funding for climate adaptation as well as stewardship of indigenous lands, which are absolutely crucial to many developing nations, may be mentioned in the CCPs, but I don’t think they are addressed in a way that does their importance justice,” he says. Addressing the needs of all stakeholders in the carbon offset ecosystem will be vital for its effective functioning, he adds. 

At the same time, there is also risk attached to over-defining responses to particular issues, as quality can often only be defined on a case-by-case basis, and not by broad categorisation. 

“It is important that the final CCPs do not paint too broad strokes in how they define high-quality offsets,” says Harrison. “For example: avoided deforestation is a sector that often gets picked up on for criticism, because there are quite a few offset projects around forests that were never at risk.” But, he adds, there are also lots of really meaningful avoided deforestation projects, which should be encouraged, and not told they will no longer count.

A good first step

The fact that the CCPs remain under early development, and are far from implementation or upkeep, means that it is hard to say if they are good enough right now, says Van den plas. But he believes they do represent a good, small first step to bringing the existing voluntary market under control, as well as a benchmark to inspire governments and the United Nations Framework Convention on Climate Change to develop other carbon markets that have integrity from the outset.

For its part, the ICVCM anticipates that the current consultation will lead to high expectations being realised. In a statement, the group’s Chair Annette Nazareth told Energy Monitor there is “incredible appetite” from “all the different stakeholder groups in the market… [to] bring integrity to the voluntary carbon market and we are optimistic that there will be genuine engagement and buy-in to this effort“.

If the CCPs are successful, they could catalyse the development of the voluntary offset market. “We anticipate that the voluntary market could develop into a much more liquid and dynamic market once more comprehensive standards are adopted,” says Harrison. “With thousands of companies getting involved, it is likely this will be the next big exciting commodity market.” He adds that as inter-country carbon markets begin to take shape under the terms of Article 6 of the Paris Agreement, the way the voluntary carbon market operates could transform from a market dictated by companies selling offsets to each other, to one determined by countries trading carbon credits. 

But for any of this to take place, the final CCPs released following the public consultation need to be successful, navigating the fine line between targeted regulation, and the acknowledgment that this is an inherently complicated market where every single offset – unlike a commodity like oil – is by its very nature different. 

“We cannot afford another decade of implementing projects that on paper claim to have a very different result to their actual impact on the climate,” says Van den plas. “The voluntary market needs to get its act together, and this is a chance to do so.” 

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