The Voluntary Carbon Market (VCM): a Dummies Guide

Your company has pledged to try to make a difference in the fight against climate change. You know that greenhouse gases (GHGs), like carbon dioxide (CO2), are a big part of the problem. But reducing them can often come with plentiful regulations and suggestions on best practice, especially if you’re a business with lots of emissions. According to the United Nations Development Program (UNDP) reports, scientists warn that 2°C of warming will be exceeded during the 21st century unless we achieve deep reductions in GHG emissions now. There’s more pressure than ever for companies to reach net zero - meaning they don’t add any more carbon to the atmosphere than they remove. This is where something called the Voluntary Carbon Market (VCM) comes into play; a market-based tool that helps organisations reduce their carbon footprint and achieve their net zero goals. These ‘deep reductions’ will only be possible through investing in voluntary market mechanisms and taking that extra step to mitigate emissions at an individual level. 

Before understanding the inner mechanisms of the VCM, it is important to understand the global emissions reduction scenario. 

So, what exactly is the VCM? And how does it tie into emissions regulations?

There are two kinds of emissions reduction mechanisms - first are the compliance markets or regulated reduction scheme(s), often controlled and overseen by national governments, and the second is a market-based mechanism where firms can volunteer to buy carbon credits. So far, regulated refers to a national emissions trading system or cap-and-trade systems. The government sets a “cap” or limit on the total amount of carbon dioxide (CO2) and other greenhouse gases that certain industries are allowed to emit, and gives or sells ‘allowances’ to companies within specific industries. Each allowance gives them permission to emit a certain amount of CO2, usually one ton per allowance. For example, both the UK and EU have Emissions Trading Systems (called the UK ETS and EU ETS respectively); they work similarly in the above-mentioned process to regulate and reduce carbon emissions. 

Now, think of the voluntary carbon market as a kind of bonus system for businesses that are already cutting down their emissions through the means of these compliance markets. For example, if a firm emits 10 tonnes of CO2 and the national limit is 5 tonnes, they can reduce their emissions through regulated means to 5 tonnes - thus staying below the national emissions limit. However, if they want to reach net zero, they would have to further mitigate these 5 tonnes (despite not being mandated to by regulation). A noteworthy difference here is that while a company can reduce the initial 5 tonnes through compliance, they have to offset the remaining 5 tonnes through VCMs. While a firm can choose to let these 5 tonnes be or offset it to reach net zero, these are both voluntary options. Thus, the voluntary carbon market is required to offset this since it no longer falls within a compliance market jurisdiction. The firm can choose from various carbon dioxide removal projects and design a portfolio that helps them take out the extra emissions from the environment and thus reach net zero.

Hence, the VCM offers a way for companies to go the extra mile by voluntarily purchasing carbon credits. While regulated emissions control ensures that firms and industries are not polluting the environment uncontrollably, they do not ensure that the commitments towards net zero are being met. 

How do the internal mechanisms of VCMs work? 

When a company buys a carbon credit, they’re essentially paying for the removal of one metric ton of CO2 or equivalent gases from the atmosphere. This could come from projects like reforestation, renewable energy, or soil management. So, if a company emits 100 tonnes of CO2 but buys 100 carbon credits, it can be interpreted as they’ve neutralised their emissions because those credits represent actions that removed or avoided 100 tonnes of CO2 elsewhere. Once a company uses one credit to offset their emissions, it’s retired and can’t be used again. The retired credit goes into a register so it’s clear that the company has done their part to reduce GHGs, and no double-counting of credits can occur.

How much importance should I be placing on the VCM?

Since the past half-decade, the VCM industry has been booming with high-integrity projects. Companies are jumping on board because it not only helps the planet but also meets the growing expectations of shareholders, employees, and customers who care about sustainability. 

As the world ramps up its efforts to cut down on carbon emissions, the demand for voluntary carbon credits is expected to soar. These credits can be thought of as a way for companies to go above and beyond for their net zero aims, by investing in projects that remove or sequester CO2 out of the atmosphere. According to experts, the global demand for these credits could skyrocket, reaching between 1.5 to 2.0 gigatonnes of CO2 by 2030 and possibly as much as 7 to 13 gigatonnes by 2050. To put that in perspective, by 2030, the market for these credits could be worth anywhere from $5 billion to over $50 billion, depending on how prices play out. A lot of this interest in voluntary offsets comes from the public’s growing concern about the environment, which in turn pushes companies to step up their game and prove they’re committed to sustainability.

Visit opna.earth to learn more about procuring high-quality carbon removal or speak to our team, Matthew Caudle at hi@opna.earth to learn more about how we can help you meet your ESG and sustainability goals.