How Voluntary Carbon Markets Work?
The voluntary carbon credit market has taken off. Here is a latecomer’s guide to the Voluntary Carbon Credit Market. Understand how it works to finance the most urgent climate mitigation projects.
Carbon Markets: Regulatory or Wild West?
Over the years two kinds of markets have emerged that kind of resemble siblings: the first born, the regulatory market, is the one whose parents are super strict. Here carbon credits are traded following government regulations. And the youngest child, the Voluntary Carbon Market (VCM), has parents who have a looser parenting style, and trades carbon credits that are unregulated by governments but have their own standards.
The VCM offers a huge growth potential: McKinsey Sustainability released a report citing that the demand for carbon credits in 2030 “could reach 1.5 to 2.0 gigatons of carbon dioxide emissions¹. That’s up to 6 times the annual emissions of France²!
The Stick and the Carrot: The Regulatory Market
To understand the voluntary market, first consider the regulatory market. This market is the OG of carbon credits. The regulatory market uses regional or national trading systems as its marketplace.
1 carbon credit = 1 metric ton of carbon emitted.
Regulating bodies hope this type of carbon market creates a race for companies to cut emissions as fast as possible. More emissions cut, fewer permits to buy, more excess they have to sell.
The Carrot and No Stick: The Voluntary Market
The VCM uses the same principles as the regulatory market, but without the regulations. A typical buyer of carbon credits on the voluntary market might be a beauty company that has promised to become carbon neutral. There is no stick, or financial pain point, driving them to do this. All companies in business today emit carbon somehow.
Many companies, typically large ones, seek to become carbon neutral as part of their environmental social governance (ESG) strategies. Others see going carbon neutral as a great way to get good press (they’re not wrong). The beauty company in our example may plan to go carbon neutral in part by purchasing carbon credits in the form of offsets and “retire” (or “burn”) them from the market.
Usually the projects being financed and certified are quite large in scale, to account for the static prices of certification. Think about it — it makes more financial sense to certify 10,000 hectares of forest at once than 1,000 hectares. The price of certification can block smaller carbon credit projects from receiving financing and certification.
For other companies, carbon credits can act as a second source of revenue. Take wind turbines: a wind turbine company earns money by selling the electricity produced but also by passing a carbon credit certification process and issuing and selling carbon credits. These companies constitute the seller side of this market.
There is No ‘One Stop Shop’
Companies choose to invest in credits anywhere in the world, and there are no binding regulations around how many they must purchase. To buy the offset, they may purchase it directly through a certifying body, like the Verified Carbon Standard (VSC) from Verra, through a digital exchange, like AirCarbon, or directly with CarbonABLE for instance.
So Can Voluntary Markets Help Restore the Climate?
Partially. There is a paradox right now within the VCM around legitimacy, monitoring, access, and speed. While there are many agencies that certify and issue carbon credits, they can be slow-moving and include lots of middlemen. This reduces the amount of investment that actually reaches the project. Or, other credits may be certified quickly, with fewer middlemen, but their evaluation and monitoring practices may be of lower quality.
The solution? More transparency, fewer middlemen, better monitoring, faster. At CarbonABLE we believe in using blockchain technology and the DeFi to support nature-based solutions. This is how we will revolutionize nature-based solutions on the VCM and have a real impact in regenerating nature.