The voluntary carbon market has gained popularity in recent years as a way to address climate change. However, it has also faced criticism for issues such as lack of transparency, accessibility, equitability, and quality. Despite broad corporate interest, these problems have led to underuse and fragmentation.6 Historical issues include:
- Lack of Standardised Methodologies: In the early stages, there was a lack of standardised methodologies for measuring and verifying carbon reductions, making it difficult to compare projects.
- Additionality: Determining additionality, the concept that offset projects should result in additional emissions reductions, has been challenging. Some projects were sold for emissions reductions that would have occurred anyway
- Double Counting: This occurs when a carbon offset is claimed by multiple parties, leading to overestimated emissions reductions.
- Lack of Oversight and Transparency: Limited oversight and regulation have raised concerns about the credibility and transparency of offset projects.
- Quality and Effectiveness: Some projects faced criticism for not delivering expected emissions reductions or causing unintended negative impacts.
- Price and Market Fluctuations: Significant price fluctuations and lack of a centralised market make pricing inconsistent.
- Greenwashing and Credibility Concerns: Some companies use carbon offsets to improve their image without substantial emission reduction efforts.
Efforts are being made to address these issues, but ongoing vigilance is necessary. Various stakeholders, including governments, international organizations, and market participants, are working towards solutions.
What Is Being Done To Solve These Issues?
With growing recognition of the importance of tackling climate change, concerted efforts are underway to address issues within the voluntary carbon market. Various stakeholders, including governments, international organizations, and market participants, are actively working towards implementing solutions to enhance the market's quality, integrity, and transparency. These initiatives focus on establishing global market standards, promoting accountability, and leveraging new technologies to verify and measure climate change impact.
New Global Standards Promoting Quality and Integrity
Efforts to promote quality and integrity in the voluntary carbon market have gained momentum through the implementation of global market standards. One notable example is the Paris Agreement's Article 6, which aims to facilitate international cooperation on emissions reductions and sustainable development. Additionally, initiatives like the Science Based Targets Initiative (SBTi) are providing companies with science-based targets to reduce greenhouse gas emissions, promoting credibility and accountability within the market.
Also addressing the need for integrity in the VCM are initiatives and organizations such as the Voluntary Carbon Market Integrity Initiative (VCMI) and The Integrity Council for the Voluntary Carbon Market (ICVCM), both of which have emerged as significant players in this space, representing key stakeholders in the VCM. In June of 2023, the VCMI and ICVCM announced that they would be joining forces to operationalize a high-integrity market to accelerate global climate action.7 Their collaboration is one of several ongoing efforts aimed at establishing a comprehensive market integrity framework for the Voluntary Carbon Market (VCM).
These organizations are dedicated to ensuring the credibility and effectiveness of voluntary carbon offset projects. They establish robust methodologies, evaluate project eligibility, and monitor the market to identify and address potential integrity risks.
What are the Rules Related to Carbon Markets Agreed Upon at COP26?
The Conference of the Parties, also known as COP, is a yearly global event (unless the parties decide otherwise) where representatives from nearly 200 countries gather together to address climate change and develop strategies to combat its effects. The event serves as a platform for nations to discuss and negotiate international efforts to reduce greenhouse gas emissions and adapt to the changing climate.
COP26 took place in Glasgow in 2021 after being postponed from its original date in 2020 due to the outbreak of the COVID-19 pandemic. COP26 is particularly significant because it marks a pivotal moment in the international response to climate change and builds upon previous agreements like the Paris Agreement, which was adopted during COP21 in 2015.
One of the most important outcomes of COP26 was the approval of Article 6, the Paris Agreement’s rulebook governing carbon markets. By approving these rules they helped create an environment for successful international carbon markets that promote private sector investments in voluntary carbon offset projects.
There are two types of carbon markets to be aware of, voluntary markets and compliance markets. Voluntary carbon markets are distinct from compliance markets in that participation is voluntary and driven by individual choice and sustainability commitments, whereas compliance markets are mandatory and governed by government regulations and compliance obligations.
Article 6 of the Paris Agreement introduces two important mechanisms: 6.2 and 6.4. Both of which play a crucial role in international carbon markets.
- Article 6.2 establishes a mechanism for countries to trade emission reductions and removals with one another. It functions like a carbon transfer and trading system between nations. This is done through traded credits called Internationally Transferred Mitigation Outcomes (ITMOs). ITMOs can be quantified in carbon dioxide equivalent (CO2e) or using alternative metrics like kilowatt-hours (KWh) of renewable energy. This enables countries to trade Internationally Transferred Mitigation Outcomes (ITMOs) to help achieve their emissions reduction objectives.
- Article 6.4 will establish a worldwide carbon market under the supervision of a United Nations organization known as the "Article 6.4 Supervisory Body" (6.4SB). Developers of projects will be required to seek registration for their projects from this governing body. For a project to go forward it must be approved by both the Supervisory Body, and the country where it’s implemented before it can begin to issue UN-recognised credits. Prior to issuing UN-recognized credits, known as A6.4ERs, both the country in which the project is executed and the Supervisory Body must grant approval. These credits can be purchased by countries, companies, or even individuals.8
“It's important to note that the VCM operates independently from the UN-regulated carbon markets established under Article 6. However, there is a significant overlap between the two markets, and it is expected that Article 6.4 will strengthen the voluntary carbon market.9”
The primary objective of Article 6 is to make emissions reduction more cost-effective and incentivize countries to set higher emissions reduction targets. By financing carbon projects in the most cost-efficient locations, it becomes cheaper for countries to decarbonize, potentially encouraging them to commit to more ambitious emission reduction goals.
The Role of Technology in Solving Issues Within the VCM
Alongside the criticism of historical issues within the VCM (and an ever-increasing demand for high-quality carbon credits) there has also been a growing recognition and enthusiasm for how emerging technologies and new approaches can expand the reach, credibility, and scalability of carbon markets. 10
“Emerging digital technologies will play a vital role in creating more streamlined, trusted, and transparent carbon markets. Capacity-building and knowledge-sharing will be crucial, particularly in developing countries, to effectively deploy market infrastructure and ensure carbon markets are game-changers in the fight against climate change.11’’
Utilizing Technology for Verification and Measurement
The success and integrity of the VCM is dependent upon the reliability and accuracy of the methods used for measuring reductions in greenhouse gas (GHG) emissions. Measurement, Reporting, and Verification (MRV) is a comprehensive and iterative process designed to measure the extent to which GHG emissions have been reduced by a specific mitigation activity. However, it’s a complex undertaking that can be costly and time-consuming, especially when it relies on manual operations.
By harnessing technological innovation, digital MRV is able to streamline data collection, processing time, and quality control in MRV operations, reducing the time and money it takes to issue verified carbon credits. Remote sensing techniques, such as satellite and drone imagery, enable the collection of accurate and comprehensive data on carbon sinks and emission sources. These technologies provide objective and verifiable information, enhancing transparency and reducing the potential for inaccuracies or fraudulent claims.
While the implementation of digital MRV systems remains complex and costly, their long-term benefits are significant. These systems have the potential to reduce the overall cost of generating carbon credits while simultaneously enhancing transparency and security. They enable more efficient verification processes and pave the way for the real-time generation of carbon credits. The ongoing innovations in MRV have the power to drive global climate action and unlock the full potential of climate finance and the carbon marketplace in combating climate change.12
How Blockchain Technology is Solving Issues Within the VCM
Blockchain technology has emerged as a promising solution to address the historical challenges of the VCM. By leveraging blockchain's transparent and tamper-proof nature, it enhances the credibility and traceability of carbon credits.13 Blockchain enables secure and immutable recording of carbon transactions, reducing the risk of double counting. Moreover, smart contracts and decentralised applications streamline carbon credit verification and trading, making the VCM more accessible and efficient.
Blockchain technology has the potential to address several challenges in the current voluntary carbon market. Here are a few ways in which blockchain can help14:
- Transparency, and Trust: Blockchain is a decentralised and transparent ledger that records all transactions. This ensures that each carbon credit has a unique and tamper-proof record, reducing the risk of fraud or double counting.
- Enhanced Accountability: With blockchain, all participants in the voluntary carbon market can have a shared source of truth. Smart contracts, which are self-executing contracts with predefined rules, can automate verification and ensure that all parties involved fulfil their obligations. This improves accountability and trust among market participants.
- Efficient Verification: Blockchain can streamline the verification process for carbon offsets. By recording project data, methodologies, and third-party audits on the blockchain, it becomes easier to verify the legitimacy and quality of carbon credits. This reduces the time and cost associated with lengthy manual verification processes, making it more efficient for buyers and sellers.
- Streamlining Funding for Projects: Digital carbon markets have the potential to channel more funding towards project developers by streamlining asset discovery and purchase processes (which sits in stark contrast to the historically analogous and inefficient transactions of traditional carbon markets). This helps eliminate the need for intermediaries that traditionally collect and process data, reducing transaction costs. By leveraging blockchain technology, intermediaries can be removed from carbon value chains, allowing more financing to reach project developers directly.
- Democratising Access to the Carbon Market: Traditional carbon finance markets primarily cater to large institutions due to the prevailing practice of selling carbon credits in quantities of at least one tonne of carbon sequestered. Blockchain, however, allows for the fractionalisation of carbon credits, enabling smaller investors to participate in the market. By tokenizing carbon credits on the blockchain, they can be divided into smaller units, making them more accessible to a broader range of tokens, increasing liquidity in the market. investors. While blockchain holds promise, its adoption and implementation in the voluntary carbon market are still ongoing processes. Various initiatives and projects are exploring the integration of blockchain to address the challenges and improve the overall functioning of the market.
Beyond The Voluntary Carbon Market
The Voluntary Carbon Market plays a pivotal role in empowering companies and investors to engage in carbon emissions trading and contribute to a more sustainable future. By understanding the mechanics of the VCM, its benefits, and the transformative role of blockchain technology, businesses can actively engage in carbon offsetting and enhance their environmental reputation. As global efforts to combat climate change intensify, the VCM offers a pathway to unlock sustainability and drive meaningful change. Together, we can create a greener and more resilient world.
8. COP27 FAQ: Article 6 of the Paris Agreement explained - Carbon Market Watch https://carbonmarketwatch.org
9. WHAT DOES THE COP26 OUTCOME ON ARTICLE 6 MEAN FOR NON-PARTY STAKEHOLDERS? https://www.c2es.org
11. Why data infrastructure is key for a transparent carbon market https://blogs.worldbank.org
12. What You Need to Know About the Measurement, Reporting, and Verification (MRV) of Carbon Credits https://www.worldbank.org
14. Blockchain for Scaling Climate Action https://www3.weforum.org