July 18, 2023

What is the voluntary carbon market?

Learn about the voluntary carbon market (VCM), how it works, and where it's going in the future.
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This article delves into the voluntary carbon market or "VCM". This market provides an avenue for companies to offset their emissions voluntarily as part of their commitment to achieving net-zero emissions.

The voluntary carbon market differs from the compliance carbon market, where certain companies are legally compelled to meet emission limits and trade compliance carbon credits to do so.

Voluntary carbon market 101

The voluntary carbon market involves various parties each playing a different role in the carbon credit cycle.

First up we have projects. Projects use a range of different methods to reduce or offset carbon emissions. They form the engine room of the carbon market, generating the carbon reductions which are the "input" to the rest of the market. The more activity from projects, the less carbon ends up in the atmosphere. The equivalent in the commodities market would be the farmers, miners, fishermen etc producing the raw materials that are the basic products traded within the market.

Then we have registries, like Verra and Gold Standard, which assess the efficacy of these projects. They verify whether the projects have truly achieved the carbon reduction they claim serving as a form of carbon credit auditors. Once the projects meet their criteria these registries issue the carbon credits. This means that any carbon credits issued by these registries have, at minimum, met the issuing registry's standards.

The next group comprises traders who buy and sell carbon credits, either for speculative purposes or on behalf of companies that will use the credits to offset their emissions.

Lastly, we have the end users - primarily companies looking to offset their emissions (although a growing number of private individuals are using carbon credits to offset their personal footprint). These entities purchase and retire carbon credits, using them in their carbon accounting to prove they have offset sufficient carbon to meet their net-zero commitments.

Where are carbon credits traded?

The voluntary carbon market includes firms trading carbon credits for speculation, consultancies sourcing/purchasing credits on behalf of companies and the companies' carbon credit procurement/ESG teams.

There are also exchanges, enabling certain carbon credits to be traded based on standardised contracts creating greater liquidity. However, due to the market's relatively fragmented nature, most trading activity occurs over-the-counter (OTC), involving direct communication between individual entities instead of trading via a standardised exchange.

The future of the voluntary carbon market

The voluntary carbon market is experiencing rapid growth. Over the past few years, it has multiplied in size and is projected to continue growing significantly in the coming years. As more companies pledge to go net-zero the role of carbon credits is expanding. If it follows the trajectory of other emerging asset classes, the market will consolidate and shift towards more exchange-type trading activity.

Attempts to introduce liquidity and standardisation have produced some interesting innovations, and the role of finance is increasingly important in bringing new investors to the market and getting more projects online.

The key focus for the next phase of the voluntary carbon market is on expanding the market, increasing the number of projects coming online, improving transparency and rapidly scaling new carbon capture technologies.

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