Viewpoint: Investing in the future through the voluntary carbon market

To avoid catastrophic climate change, the world’s greenhouse gas (GHG) emissions must be curbed as soon as possible. We need to cut global emissions in half by 2030 and reach net zero (where GHG emissions are balanced by removing the same amount out of the atmosphere) by 2050.

However, the GHG mitigations promised by each country’s Nationally Determined Contributions alone won’t result in the necessary reductions. Much more action – and more finance – is needed. That’s where the voluntary carbon market (VCM) comes in.

Achieving net zero requires a substantial investment into carbon projects: up to $100trn (€94bn) between now and 2050. However, the current funding deficit is estimated at between 60% and 85%. The VCM can help fill this gap by unlocking private capital at scale.

Unlike government-regulated compliance carbon markets where permits allow companies to emit up to agreed levels and total emissions are reduced gradually, the VCM works with tangible projects. Corporations can voluntarily compensate for their carbon footprint by purchasing carbon credits which finance climate projects. Each credit represents one metric tonne of verified emissions mitigation.

Using voluntary carbon credits as part of a company’s decarbonisation strategy in a strategic, credible way is an essential tool if we are to meet the Paris targets. Nature-based solutions (NBS) – protecting and restoring forests, grasslands and wetlands – are a particularly good example of this.

They also drive north to south investment and are materially more affordable than technological solutions such as direct air capture.

In the last decade, the VCM has improved dramatically on several criteria

NBS are available now and can provide up to one third of the emissions reductions required by 2030. In addition, investing in nature provides immense benefits for biodiversity, water, clean air and crucially local livelihoods.

We estimate that to achieve their potential requires at least $300bn of investment annually by 2030, a similar amount to that invested in renewable energy in 2019 ($280bn), but 100 times what was invested in NBS in the same year.

There are two types of carbon credits: removal and reduction (also called avoidance). Removal projects sequester carbon dioxide, either via NBS such as reforestation or by technological solutions. Reduction projects prevent further emissions, either via NBS such as the conservation of existing forests, or via technology.

Quality and integrity paramount

In both categories, quality and integrity are paramount to counteract accusations of ‘greenwashing’. Projects have to be additional (i.e. they wouldn’t have happened without VCM funding); emissions mitigations must be measurable and permanent; and carbon credit issuance should be conservative. In the last decade, the VCM has improved dramatically on all of these criteria.

Rigorous standards which assess carbon credits’ permanence and additionality are imposed by leading certification agencies such as Verra and Gold Standard. Scientific methodologies, accurate surveillance and regular verification ensure project credibility.

Additionally, the Integrity Council for the VCM, a group of cross sectoral industry experts, are currently agreeing global threshold standards for high-quality carbon credits.

Importantly, companies must avoid or reduce their own emissions first. However, these net zero transition strategies take time, and some remaining emissions may still be inevitable. That’s where high-quality credits come in, by creating impact immediately and compensating for unavoidable residual carbon footprint along the pathway to net zero.

In the past 10 years almost 850 million tonnes of GHG emissions have been removed or avoided thanks to the VCM, according to a report from South Pole.

Alongside climate mitigation, nature-based VCM projects often have additional benefits, such as maintaining and enhancing biodiversity, building climate resilience, encouraging sustainable development, and supporting local communities.

There is mounting pressure on companies to make a positive environmental and societal difference. Apart from providing a vital mechanism for businesses to mitigate unavoidable carbon footprint, the VCM also enables companies to go even further, by becoming carbon negative and compensating for historical emissions.

A rapidly growing market

Although the VCM’s market size has traditionally been relatively small, annual trading turnover topped $1bn in 2021, reflecting a dramatic increase over recent years. Last year alone the market grew by 190% and in 2022 it’s forecast to increase a further 50-80%.

Around 60% of Fortune 500 companies have already set climate targets and many of the world’s largest companies – including Amazon and Shell – have pledged to reach net zero by mid-century.

These commitments point to a substantial increase in demand for voluntary carbon credits: 10 times by 2030, 20 times by 2040, and 26 times by 2050.

Projected demand suggests credit prices will rise significantly. VCM credits are currently being traded for between $5 and $18 /tCO₂e, with high-quality nature-based credits reaching top of that range[9].

By 2030, average VCM prices are expected to be at least $20- 50/tCO₂e, whilst further increases in demand should see prices over $50/tCO₂e by 2040.

Price increases drive corporate commitments towards decarbonisation as they wish to lock in carbon credits and encourage companies to invest in permanently reducing emissions. Along this path, they will need to utilise high-quality credits as part of their investment and emissions mitigation strategies.

This is the moment for commercial logic and global interests to coincide: create a positive impact that also makes compelling business sense.