Why the Future of the Voluntary Carbon Market is Bright

Why the Future of the Voluntary Carbon Market is Bright

By Adam Shedletzky
June 21, 2023
How multi-stakeholder global initiatives, leading market participants, and the decline of the ‘carbon neutral’ claim are set to unlock corporate demand.

The Voluntary Carbon Market (VCM), which is expected to experience substantial growth, from $2 billion per year in 2022 to $10 to $40 billion annually by 2030, holds immense potential. With the United Nations Development Programme (UNDP) estimating a massive $330 billion annual financing gap for nature-based solutions alone by 2030, it is not surprising that investors directed over $10 billion worth of investments into the VCM in 2022. 

Yet while corporate commitments to net zero targets continue to climb, the VCM in 2023 has not delivered the type of dramatic growth expected. Some purchasers of carbon credits are hitting ‘pause’ during this unique period of market transformation and public scrutiny as market stakeholders address two key issues:

  • There is a lack of clear guidance for corporations on the appropriate use of carbon credits. A lack of consensus exists regarding what a high quality carbon credit is, and what types of environmental claims corporations should make under what circumstances. While over 5,000 corporations have made long-term ‘net zero’ commitments under a commonly accepted approach championed by the Science-Based Targets Initiative, there is no similar alignment on what a high-integrity approach to utilizing carbon credits should be. This uncertainty both dampens market demand and  leaves corporations open to public criticism.
  • Corporations face increasing criticism in the media regarding their utilization of carbon credits as part of their sustainability strategies. As the VCM has expanded, public scrutiny has intensified, elevating the risk for corporations engaging in this market. The inherent complexity of carbon projects, which entails adherence to detailed methodologies that frequently rely on interpretation-based counterfactual scenarios and additionality tests, has led some academics to scrutinize specific projects as not necessarily delivering on their promised carbon reductions or removals. Several non-governmental organizations (NGOs) are publicly criticizing and, in certain instances, litigating cases of corporate 'greenwashing,' prompting lawmakers worldwide to consider regulating the VCM. Some media outlets are sensationalizing negative claims without providing sufficient context. This public criticism raises the risk level for corporations to actively participate in–and celebrate their participation in–the VCM.

Fortunately, the stars are aligning to unlock the potential of the VCM. In this blog post, Flowcarbon describes the highly encouraging steps being taken by leading market participants to address these fundamental challenges. When coupled with continuous improvement of underlying carbon methodologies and dramatic technological innovation that will fundamentally enhance the efficiency and integrity of the VCM, it is clear that this is a market that is about to scale fast for three key reasons. 

1. Key Carbon Market Initiatives are aligning on a set of recommendations that will provide clarity and confidence to corporations to invest in the VCM

Currently, corporations have access to various guidance documents, but none have gained sufficient market acceptance to be considered a reliable measure of good faith for corporations using carbon credits. This is rapidly changing, as three market leading initiatives advance toward detailed and complementary guidance. 

  • The Integrity Council for the Voluntary Carbon Market (ICVCM) is an independent governance body focused on the supply side of the VCM. Its primary objective is to define the characteristics of high-quality carbon credits. Recently, new 'global threshold' standards have been published, raising the bar for transparency, information disclosure, social safeguards, and governance requirements. In the coming weeks, the ICVCM plans to release the second half of its approach, which entails a detailed framework for evaluating each carbon credit methodology. By the end of 2023, the market is expected to see the introduction of the ICVCM's ‘Core Carbon Principle’ (CCP) quality label–with more complex methodologies anticipated to be completed in 2024. The CCP label will signal to corporations that purchasing CCP-approved credits aligns with a high-integrity sustainability strategy. 
  • The Voluntary Carbon Markets Integrity Initiative (VCMI) is a multi-stakeholder platform aimed at promoting credible and net-zero aligned participation in the VCM. Its primary objective is to address questions about when companies can use voluntary carbon credits credibly and what environmental claims they can make. Following a 'road-testing' phase involving 76 organizations, a refined and usable Claims Code of Practice will be released on June 28th. This Claims Code will serve as the definitive guide for organizations navigating the complex landscape of carbon markets. Starting in November 2023, organizations will be permitted to make formal 'claims' under the VCMI, leveraging the guidance provided by the Claims Code of Practice.
  • The Science-Based Targets Initiative (SBTi) is a partnership between leading international environmental organizations, the United Nations Global Compact and the CDP. Its primary objective is to enable businesses to set ambitious climate mitigation targets in line with the latest climate science. While achieving corporate net zero goals involves utilizing carbon removals to 'neutralize' unabated carbon emissions, the SBTi recognizes the urgent need to invest in 'beyond value chain mitigation' (BVCM), which encompasses various strategies for corporations to fund climate mitigation activities including but not limited to purchasing carbon credits. To clarify SBTi’s recommendations related to BVCM, a comprehensive and highly thoughtful public consultation was launched on June 19th. This consultation aims to articulate the importance of companies investing in BVCM, explore the business case for doing so, and provide valuable recommendations. The insights gathered will contribute to the final guidance expected in Q4.

What is most encouraging about these market-leading initiatives is that they share common objectives and are actively working towards those objectives, together. All initiatives recognize the critical importance of driving finance to both carbon avoidance and removal projects, and support the ‘mitigation hierarchy’in other words, preventing the use of carbon credits as a way to avoid the important internal decarbonization work that corporations must do. Moreover, these initiatives all recognize the importance of having market clarity, and are actively working together to achieve this objective. In fact, just earlier this week, the ICVCM and VCMI announced a formal partnership to ensure investors and corporations can invest confidently in high-integrity carbon credits as part of comprehensive end-to-end climate strategies!

2. The ‘carbon neutral’ claim–a lightning rod for public criticism–may finally be losing traction

Although there is alignment that corporations should be incentivized to invest in BVCM and make compelling environmental claims, there is a growing consensus that we need a more robust and less controversial approach than relying solely on the 'carbon neutral' claim.

Gold Standard–the second largest carbon credit issuing standards body–recently unveiled a Climate Mitigation Framework for discussion and feedback that clearly advises against the use of the ‘carbon neutral’ claim for the first time. And in a recent panel discussion, previewing the forthcoming release of the VCMI’s revised Claims Code, Executive Director Mark Kenber revealed that the VCMI will not be recommending the ‘carbon neutral’ claim be made as it stands today. 

After months of increasing criticism of and regulatory action regarding this controversial claim, this critical decision by the VCMI will likely put an end to the common use of organization-wide ‘carbon neutrality’ claims once and for all, and for good reason. The ‘carbon neutral’ claim, as Mr. Kenber eloquently states, has the “great advantage of being intuitive and the great disadvantage of having been used and abused”. While corporations await the result of a multi-year process to define a carbon neutrality standard from the International Organization of Standardization (ISO), and the SBTi leaves open the possibility of making a ‘carbon neutral’ claim under certain conditions, it would be advantageous to all if a new market-leading approach could be aligned upon.

In hindsight, the ‘carbon neutral’ claim was never an ideal ‘carrot’ to provide to corporations. Claiming that an organization has no negative environmental impact because it invests in important climate projects that are, in many cases, inherently based on counterfactual scenarios and complex baseline and additionality requirements that are rife for detractors to attack, is a recipe for disaster. Corporations that act with the best of intentions are smeared in the press, and while some nefarious actors engage in greenwashing to the detriment of the entire market, the majority stay fearful on the sidelines.

As clear and aligned guidance enters the market, it will be up to us all to ensure that corporations are properly celebrated for–perhaps even compelled to–voluntarily invest in BVCM as they concurrently make progress toward their net zero targets.

3. Leading market participants are publishing compelling research publicly advocating for, and making significant financial commitments to, the VCM

While a minority of academics, NGOs and media outlets lob criticisms, leading political figures, industry associations, global environmental NGOs and expert advisory firms are clearly and forcefully advocating for the VCM. 

Trove Research–a specialist data, analysis and advisory firm focused on climate policy, carbon markets and the energy transition–recently released a compelling report dispelling the notion that corporations that buy carbon credits do so to ‘greenwash’ the public rather than decarbonize their own value chain. Trove's analysis of over 4,000 companies revealed a clear and statistically significant finding: corporations that purchase a material amount of carbon credits demonstrate a faster rate of emissions reduction compared to those that do not. This holds true for all time periods, nearly all sectors and regions, and all scopes of emissions. 

The International Emissions Trading Association–whose mission it is to be the trusted business voice on market-based climate solutions, with members including leading global banks, investors, consultants, energy firms, and industrial and technology firms–recently published “The Evolving Voluntary Carbon Market”. This member-led paper makes a compelling case for the importance of a high-integrity VCM to meaningfully contribute to the global goal of net zero by 2050. Anticipate further effective advocacy on this front over the coming months and years.

Prominent corporations are reinforcing the significance of the VCM. JPMorgan Chase recently signed long-term agreements to purchase over $200 million worth of credits and published a white paper summarizing its approach to strengthening the VCM. Stripe, Alphabet, Shopify, McKinsey and Meta more have collectively committed to spend more than $900 million on carbon removal credits. Microsoft continues to execute against its historic $1 billion commitment to the VCM, transparently supporting innovative and high quality carbon projects.

John Kerry–the United States’ climate envoy–has partnered with the Rockefeller Foundation and the Bezos Earth Fund to help deliver trillions of dollars of investment to help poorer countries transition to renewables by launching a VCM-based ‘Energy Transition Accelerator’.

“We have to win the battle against the climate crisis, not give in to business as usual,” Kerry said. “I’ve been doing this [talking about climate change] since 1988 and I don’t know about you but I’m tired about talking about the same stuff – we have to break the mould. If we don’t come up with creative ways to mobilize money, we are going to blow through 1.5C [of global warming].”

Conclusion and What’s Next

The urgent and overwhelming need to mobilize capital to preserve nature and reduce carbon emissions will win the day. Although the VCM has seen a slower start in 2023 than many hoped for, the long-term imperative remains clear, and the market is rapidly witnessing crucial steps to unlock its potential.

Corporations will soon have clarity on what a high quality carbon credit is and what type of environmental claims they should make. This will not only unlock greater purchase of spot carbon credits, but also an ability for corporations to plan their long-term engagement with the VCM, which will lead to more forward offtake commitments, more ‘bankable’ projects, and more capital flowing into the VCM. 

For further insights on how investors and corporations can maximize their engagement with the voluntary carbon market, please reach out to us here.

About Flowcarbon

Flowcarbon develops climate solutions leveraging new technologies and innovative financing solutions to scale the voluntary carbon market. 

Adam Shedletzky is the Director of Policy at Flowcarbon, where he contributes to the development and growth of a high-integrity voluntary carbon market.

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