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Controversial: the carbon market is growing, but cheap credits can undermine its utility

Purchasing carbon credits can be part of a corporate climate strategy when a company isn’t able to neutralize its emissions due to technological limitations or prohibitive costs

Established a decade ago, the voluntary carbon market (VCM), also known as the market for carbon offsets, aims to finance activities that reduce greenhouse gas emissions (GHG). By purchasing credits from projects around the world that reduce emissions or remove carbon dioxide from the atmosphere, firms offset the greenhouse gas emissions resulting from their activities and support decarburization beyond lowering their own carbon footprint. The voluntary carbon market is going through an era of expansion, as companies set themselves to reduce global greenhouse-gas emissions, and this market provides them with a way of supporting decarburization outside of their scope. The presence on the market of accumulated surplus dated credits, if unmanaged, has the potential to swamp the market driving private capital away from recent norm-compliant projects, undermining companies’ efforts to achieve climate targets and deliver emission reductions in line with the Paris Agreement. Over 1000 firms, including leading multinationals, have made pledges to align their greenhouse gas emissions with the Paris Agreement, a legally binding international treaty on climate change within the United Nations Framework Convention on Climate Change, that set the goal of achieving net-zero emissions by 2050 and limiting global warming to below two degrees Celsius above pre industrial levels at a minimum. To achieve emissions reductions, companies should implement internal strategies to tackle their direct greenhouse gas emissions such as transitioning to renewable energy, bettering energy efficiency, and cutting their value chain emissions. 

Carbon credits are certificates representing one metric ton of carbon dioxide equivalent that has been prevented from being released or removed from the atmosphere thanks to carbon-reduction projects. Purchasing them can be a part of a corporate climate commitment that includes compensating for greenhouse gasses emissions that a firm has not been able to neutralize due to technological limitations or prohibitive costs. «The voluntary carbon market allows companies and individuals to offset their activities’ climate impact. If a company is burning fossil fuels and creating emissions, they can reduce their impact by curbing emissions elsewhere, neutralizing their own. The voluntary market is distinct from any regular trade obligation. We have several regulations like the European Emissions Trading Scheme (EU ETS), which forces firms like power or cement companies and oil refineries to achieve a certain level of emissions reduction. There is public pressure from NGOs and from investors who want to see companies making improvements in their emissions levels. Buying carbon credits is a way of doing it. Buying a carbon credit is the second-best option to reducing emissions, not a substitute. It’s difficult to stop using fossil fuel all at once: purchasing credits is an interim measure». Explained Guy Turner, the founder and CEO of Trove Research, a specialist data, analysis, and advisory firm focused on climate policy, carbon markets, and energy transition. 

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‘Hot Art Exhibition’, Alper Dostal

They have calculated that during the course of the current decade, the value of the voluntary carbon market could rise from $0.4bn/yr in 2020 to $10-25bn/yr in 2030, a twenty times growth in terms of value. According to these projections, calculated under optimistic assumptions, the voluntary carbon market would amount to less than ten percent of the current global annual investment in clean energy and a fraction of the investment needed to comply with the Paris Agreement even at this growth rate. «The market is growing due to a combination of factors. Over the past five years, much has happened at the broadest level. We saw several evidence of climate change: we witnessed the fires in California, the droughts, the floods and the temperature swings. One hundred eighty-nine countries signed the Paris Agreement, an event that was positive for two reasons: they implemented it thanks to countries’ voluntary commitment, which gives it a foundation based on what countries know they can achieve, and it’s a science-based agreement. Since then, countries have adopted Net-Zero 2050 commitments, and so did companies. Five years is not an extended period of time in our world’s history or the history of humanity. We as a species tend to have a recency bias, and if we see that the world has changed in recent memory, we give the issue serious consideration. These circumstances are changing public perception, as shown by the surveys conducted all around the world». Says Turner.     

Due to its size, the voluntary carbon market won’t stop climate change alone, but it can supply a complementary capital source to sustain governments’ investments to reduce climate change vulnerability. The proceeds from the sale of voluntary carbon credits are supporting an array of carbon-reduction projects that includes reduced emissions from deforestation & degradation (REDD+) projects, nature-based solutions centering afforestation and agriculture, fuel switching projects, renewable energy like solar, onshore wind, biofuels and hydro, and energy efficiency, carbon capture, and storage projects. Projects focusing on avoided deforestation and renewable energy aim to reduce and prevent the emission of greenhouse gasses, facilitating the transition to a decarbonized global economy. Other types of projects like reforestation and Carbon Capture and Storage (CCS) seek to remove pre existing carbon dioxide from the atmosphere. Voluntary carbon credits can finance natural and technology-based carbon capture, use, and storage projects that could play a crucial role in neutralizing residual emissions. Around twenty-five percent of corporate offset demand is provided by forest-related projects, which appeal to the voluntary market, as they provide valuable habitats for wildlife and support indigenous communities aside from reducing emissions. Assuming an average carbon absorption rate of 12tCO2/ha/yr, Trove Research’s report ‘the global voluntary carbon market dealing with the problem of historic credits’ highlights that the land area required to meet the current corporate demand for carbon offsets, if new forests were to meet the entire market demand, would amount to an area the size of Scotland. By 2030, the required area would add up to the size of Germany in the low scenario and France in the high scenario. 

Up to January 2021, the five leading registries (Verra, GS, CAR, ACR, Plan Vivo) have issued around 1bntCO2e of voluntary carbon credits, with an average of around 160-180MtCO2e/yr for the last two years, covering about three percent of current US greenhouse gas emissions. For carbon credits to be issued, carbon-reduction projects need to demonstrate that the achieved emission reductions or carbon dioxide removals are real and measurable, permanent and not reversible, additional and traceable, and independently verified by programs like Gold Standard and Verified Carbon Standard (VCS). Renewable energy projects such as onshore wind and solar installations issued about thirty-three percent of the carbon credit, avoided deforestation (REDD+) projects issued a fifth of the carbon credits. Nature-Based (NBS) projects, including afforestation and agriculture, issued eighteen percent of the credits. These two categories combined account for about forty percent of the total credits. 659MtCO2e of carbon credits had been retired for voluntary purposes or due to the California cap and trade scheme by December 2020. Of the credits retired for voluntary purposes, circa half was issued by renewable energy projects (190MtCO2e), and twenty-one percent was REDD+ based. The surplus is the difference between the issued credit volume and the volume of retired and canceled credits. By the end of 2020, the surplus amounted to 360MtCO2e. Twenty-eight percent of the total current surplus of 104 MtCO2e is from REDD+ projects. Sixty percent of the surplus is from cheap credits, like long-dated renewable energy projects and non-CO2 gases. «It’s hypnotized that many of the older projects didn’t need the carbon credits in the first place. If a company or an individual purchases carbon credits from a project that started ten years ago and didn’t need the money from the sale of those carbon credits, people buy them thinking that they are reducing emissions, when in reality emissions are not being reduced». The surplus continues to grow: in 2020, 138Mt were retired or canceled. Around 200Mt of credits were issued, creating 60Mt of surplus in a year. Credits’ age doesn’t represent a problem per se, but it causes criticalities as methodologies and standards are improving, and the criteria under which they are implemented are advancing, while they were issued following more lenient guidelines. If accumulated surplus credits remain on the voluntary carbon market, its function could be undermined as buyers would invest in projects that no longer need the carbon revenues, failing to reduce carbon dioxide emission and provide environmental and societal benefits. Managing legacy credits without discouraging future investments in emission-reduction projects is the industry’s challenge. A way forward could be an approach that includes several actors’ regulatory actions. The registries could amend their contracts selectively, clearing the market of low-quality legacy projects and a consumer-led strategy could be possible thanks to independent organizations’ guidance informing buyers on the credits’ validity.


Trove Research is a specialist data and advisory firm focused on climate policy, carbon markets and the energy transition. Founded by Guy Turner, with 30 years of experience in the climate policy and energy sector.  They work for governments, energy firms, fund managers and investors advising on all aspects of the energy transition.