A primer on the voluntary carbon market sheds light on the workings of a unique marketplace.
The voluntary carbon market (VCM) has grown rapidly in the last five years—in both the volume of carbon credits and in interest from project developers, investors, and buyers looking to meet corporate climate commitments. The volume of VCM credits could increase by 15 times from 2020 to 2030. Carbon markets were in the spotlight at COP26 in Glasgow, where Parties to the Paris Agreement finally agreed on the long-awaited and debated rulebook for Article 6, determining how carbon credits can be used and traded under the Agreement.
By definition, the VCM is driven by voluntary, private initiatives and not regulated by governments. Governments can, however, harness the VCM to scale-up emission reductions and direct finance into sectors where it is needed most, as Carolina Inclan detailed in a previous blog post. Under the new Article 6 rulebook, governments will be responsible for determining which carbon credits are authorized for use towards mitigation commitments.
However, the VCM is rather opaque. It lacks the regulation and transparency requirements that govern regulated markets while transacting an esoteric commodity—emission reductions or removals. Newcomers to the VCM are confronted with a wall of jargon. Sifting through definitions of carbon credits (1 ton of CO2 emissions removed or avoided) and nature-based solutions, piles of acronyms, and the workings of carbon standards, certification, methodologies, and benefit sharing can be overwhelming. While the Article 6 rulebook provides guidance on how governments can engage with the VCM to meet their Paris Agreement commitments, it also introduced new acronyms and mechanisms that further muddy the VCM waters. Interested policymakers and climate advocates struggle to link the VCM to their existing climate, conservation, and sustainable development priorities. The high barriers to participation hide the opportunities offered by the VCM and engender skepticism. Lack of understanding ultimately limits the effectiveness of both the VCM and public policy, as initiatives may compete rather than complement.
We developed the Voluntary Carbon Market Explained to bridge gaps in understanding. This Primer on the VCM breaks down the jargon, the market structure, and the broader context into bite-sized pieces. Our goal is to provide decision-makers and climate advocates with the information they need to engage with the VCM effectively. It is an interactive digital report with 14 downloadable chapters, each explaining key aspects of the VCM and framed around commonly asked questions.
- THE BASICS: Chapter 1 provides the basics, the background, and the broader context. The VCM is a decentralized market where private actors voluntarily buy and sell carbon credits that represent certified removals or reductions of greenhouse gases (GHGs) in the atmosphere. The VCM started in the 1990s. It grew slowly in volume, types of credits, and participants for two decades, and then took off in 2017, more than doubling in size in the last 5 years. The VCM can mobilize significant investment in climate change mitigation, but the offsetting financed through it must be treated as a supplementary measure in efforts to reduce global emissions rapidly and permanently.
- UNDERSTANDING RELATIONSHIPS: Chapters 2 and 3 discuss the relationships between governments and the VCM. Under the new Paris Agreement Article 6 rulebook, there are opportunities for governments to strategically encourage VCM activities that would complement government climate action. These chapters provide guidance and framing through which the rest of the information in the primer can be applied and understood by decision-makers.
- STRUCTURE OF THE VCM: Chapters 4-9 break down the components of the VCM, explaining what carbon credits are, how they’re accounted for, generated, and used, what makes a high-quality credit, and the role of carbon standards in regulating the VCM. Each chapter points to useful information for policymakers and how governments can interact with the VCM.
- CARBON RIGHTS: Chapters 10 and 11 describe how carbon rights and VCM project benefits are determined and shared, highlighting the essential role of Indigenous Peoples and local communities (IPLCs) in managing carbon stocks. Governments are responsible for defining ownership of resources and activities that underlie carbon rights and ensuring that IPLCs and other stakeholders are consulted and receive appropriate benefits.
- NATURE-BASED SOLUTIONS: Chapters 12-14 focus on nature-based solutions (NbS) activities that generate credits in the VCM, with emphasis on Reducing Emissions from Deforestation and Degradation Plus (REDD+). Private sector demand for NbS credits has grown rapidly in the last five years and standards have developed new certification methodologies for these projects. Governments are involved in many NbS projects, especially those developed through REDD+. REDD+ nesting specifically requires government involvement.
The “Voluntary Carbon Market Explained” is designed as a practical tool to be used by government decision-makers and anyone else seeking to better understand the VCM. All of the chapters are available for download, in high and lower resolutions, and can be read online. Links are provided in the text to other relevant publications.
To remain a relevant and useful tool, the Primer will be updated as the VCM continues to evolve, and we welcome comments and suggestions from users.
Further, detailed information on the VCM can be found in these blogs: