Carbon markets may serve as a powerful mechanism to help the global economy decarbonize. Still, they are far from perfect, and this past year cemented this into fact after experiencing an unprecedented surge in attention from late 2021 into 2022.
With this increased attention came increased scrutiny, and for good reason. With the voluntary carbon market hitting $2 billion in market capitalization in 2022 with a potential 200-fold increase to over $400 billion by 2050, the variable carbon project quality and lack of universal standards have become critical areas of concern for credit purchasers.
Even John Oliver joined in on the fun with a piece covering some significant flaws in carbon offsetting. While Oliver lacked the nuanced understanding that the topic deserved, he raised some valid concerns about carbon markets that must be addressed appropriately.
The voluntary carbon market will need to evolve to meet its potential and avoid a fall from grace as bad actors may increasingly seek to take advantage of an immature, fledgling system. To start, it’ll be essential to understand the key stakeholders in the voluntary carbon markets world.
Lay of the Land: An Updated View of the Voluntary Carbon Markets
The voluntary carbon markets are painfully complex, and the plethora of stakeholders is not easily digestible for newcomers (see: jargon decoder). I built out an updated stakeholder map below that reflects how I view the market today:
Left to right goes across the value chain, starting with the supply side of the market, made up of project originators across the spectrum of nature-based to engineered removal solutions, to the demand side, composed of corporate buyers of varying sophistication levels. To add another layer of complexity, many of these market actors play several roles across the value chain. A project developer, such as South Pole or Native, may also play the role of broker and financier of carbon projects. Some companies, such as Pachama, have expanded their scope from digital verification of forest-based carbon credits into supporting on-the-ground carbon projects through their new Pachama Originals initiative.
The registries and standards bodies, with incumbents such as Verra and Gold Standard now notorious for creating significant bottlenecks for the supply of carbon credits, are now being challenged to either modernize or risk becoming irrelevant. As engineered removal solutions still struggle to make their way through the roadblocks set forward by policymakers and the incumbent registries, organizations such as Puro.earth and Nori have served as an alternative to their laggard incumbent peers. In addition, Digital MRV technologies are on the rise as a potential tonic to the black box of credit verification. Initiatives such as the Climate Warehouse by the World Bank are now seeking to create a universal registry for carbon credits built on blockchain technologies for improved traceability and transparency.
Quasi-regulatory bodies have muddied the waters this past year as well. With the release of its first draft of the Core Carbon Principles, an attempt to set a baseline standard for high-quality carbon credits, the IC-VCM sparked outrage among the incumbent registries that fear overreach and the inability for many of their credits to meet the criteria set forth. On the demand side, organizations such as the CDP and the Science-Based Targets Initiative new forest, land, and agricultural (FLAG) emissions reduction guidance for land-intensive companies such as those in the food and forestry industries.
This landscape will undoubtedly continue to evolve. Several critical pain points will limit the carbon market's potential to be a valuable mitigation tool. The Taskforce on Scaling Voluntary Carbon Markets highlights some of the most severe growing pains below:
Several themes emerge:
Lack of high-quality supply. With renewable energy projects becoming cost competitive with fossil fuels, the business case for carbon finance is ending is will ultimately disqualify these projects from being able to sell carbon credits. Nature-based solution projects vary in quality, making it risky for corporate buyers to procure carbon credits without conducting proper due diligence. Engineered removal has a long journey down the cost curve to become bankable and financially attractive at scale.
Lack of transparency and visibility into credit validity. While many carbon credit rating agencies have emerged, determining credit validity and quality remains a ‘black box’ for corporate buyers. Most carbon credit buyers are not equipped to run their own due diligence processes, and concerns over project quality are hurting the reputation of nature-based solutions in particular.
Regulatory uncertainty, systematic risks, and price volatility impact bankability and access to financing. The voluntary carbon markets operate outside the jurisdiction of regulators, leaving the VCMs floundering in the murky waters of regulatory ambiguity and a void of standards and quality control. While nature-based solutions offer huge potential to protect and restore ecosystems, particularly in the Global South, the political and economic risks in many of these regions will require creative ways to improve access to finance. Moreover, the volatility in carbon credit pricing and market demand raises additional concerns about the bankability of many of these projects.
Irresponsible demand-side carbon offsetting practices may do more harm than good. Recent private sector pushback against the SEC’s climate disclosure requirements has resulted in turmoil that does little to help prioritize better carbon accounting standards. Responsible private sector engagement in carbon markets is critical to prevent carbon offsetting from devolving into an “easy way out” for corporations to avoid decarbonizing their businesses rife with moral hazard. The market has already seen quick accounting tricks tarnish the carbon credits space, and without proper oversight, this will likely only worsen as more players enter the arena.
There are undoubtedly big problems that must be addressed, but on the other side of these challenges lies enormous opportunities. Solutions are on the rise, but it will take a combination of savvy business leaders, policymakers, scientists, technologists, and responsible engagement of frontline communities to make these markets work.
Some good further reading:
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