Voluntary carbon markets: A pathway to decarbonization

Voluntary carbon markets have long been touted as an important mechanism for driving emissions reductions. By allowing businesses to purchase carbon credits, which represent verified reductions in greenhouse gases, voluntary carbon markets can theoretically accelerate the transition to a low-carbon economy. But the efficacy of these markets has been marred by concerns over the integrity and transparency of carbon credits.

Now, the Biden administration is trying to address these concerns. In May, the administration unveiled the Voluntary Carbon Markets Joint Policy Statement and Principles, which are intended to bolster transparency and strengthen confidence in the markets.

The joint policy statement emphasizes the need for what it calls high-integrity carbon credits, underpinned by rigorous standards for measuring, monitoring and verifying emissions reductions.

This move is essential for restoring confidence in VCMs. When buyers can trust that one carbon credit truly equates to one ton of carbon dioxide removed or reduced, a market’s credibility—and its effectiveness—improves.

A blueprint for corporate decarbonization

For corporations, the implications of this policy are significant. Many companies have committed to achieving net-zero emissions by midcentury, aligning with global efforts to limit warming to 1.5 degrees Celsius. VCMs can play a vital role in these corporate decarbonization strategies, offering a way to offset emissions that are difficult to eliminate.

But the policy statement makes it clear that carbon offsets should complement, not replace, direct emissions reductions. Companies are encouraged to prioritize their own measurable reductions before turning to carbon credits.

This aligns with a principle known as additionality, ensuring that carbon credits represent genuine reductions beyond what would have occurred in the absence of the credit.

Enhancing market integrity

A key theme of the policy statement is market integrity. It calls for robust standards to ensure the validity of carbon credits, including third-party verification and transparent reporting.

This is crucial for preventing issues such as double counting, where the same reduction is claimed by multiple parties, and ensuring that credits deliver real, quantifiable benefits.

In addition, the statement highlights the need for environmental and social safeguards. Carbon offset projects should not only reduce emissions but also avoid damaging local communities and ecosystems. By supporting co-benefits like biodiversity conservation and sustainable economic development, VCMs can deliver broader positive outcomes.

The role of government

The U.S. government’s involvement in shaping VCMs marks a significant step forward. Federal regulators are now incorporating carbon credit standards into securities regulations and proposing guidelines to ensure the integrity of carbon credit derivatives. This governmental oversight is crucial for creating a stable and trustworthy market environment.

Additionally, the policy statement acknowledges the importance of multilateral cooperation. The integration of VCMs with mechanisms like Article 6 of the Paris Agreement can enhance the global impact of carbon markets. By aligning national and international standards, the policy fosters a more cohesive and effective approach to global decarbonization.

Addressing market challenges

Despite their potential, VCMs face several challenges. The policy statement identifies issues like high transaction costs, market opacity and the risk of fraud. To address these, it advocates for enhanced transparency, improved market infrastructure and the development of tools to reduce monitoring and verification costs.

For example, the use of advanced technologies like satellite monitoring and blockchain can enhance the accuracy and efficiency of carbon credit verification. By reducing costs and improving transparency, these innovations can make VCMs more accessible and attractive.

Looking ahead

The future of voluntary carbon markets holds significant potential for growth. As the demand for carbon credits increases, driven by more stringent climate policies and corporate net-zero commitments, the market size is expected to expand substantially.

BloombergNEF estimates that annual demand for carbon offsets could reach 5.9 billion tons by 2050, with prices peaking at $243 per ton, creating a market valued at over $1.1 trillion annually​​.

This growth will be fueled by the increasing recognition of the role that carbon credits can play in achieving net-zero goals. The joint policy statement plays a critical role in enabling this market expansion. By setting clear principles and standards, the policy provides a road map for developing a high-integrity market that can attract greater investment and participation.

Implications for businesses

For businesses, the policy statement provides a clear road map for engaging with VCMs. Companies are encouraged to integrate carbon credits into their broader sustainability strategies, using them to complement direct emissions reductions. This approach not only supports corporate climate goals but also enhances corporate reputation and stakeholder trust.

In addition, businesses can help shape the market. By demanding high-integrity credits and supporting transparent reporting, companies can drive improvements in market standards. This, in turn, can enhance the overall effectiveness and credibility of VCMs.

Additional actions

The Biden administration also announced new actions to develop the voluntary carbon markets.  These include:

• The U.S. Department of Agriculture published a request for information asking for public input relating to the protocols used in VCMs. This RFI is the USDA’s next step in implementing the Greenhouse Gas Technical Assistance Provider and Third-Party Verifier Program as part of the Growing Climate Solutions Act.
• The U.S. Department of Energy announced the semifinalists for its $35 million Carbon Dioxide Removal Purchase Pilot Prize, a program in which the DOE will purchase carbon removal credits directly from sellers on a competitive basis. The prize will support technologies that remove carbon emissions directly from the atmosphere, including direct air capture with storage, biomass with carbon removal and storage, enhanced weathering and mineralization, and planned or managed carbon sinks. The program supports technology advancement for decarbonization with a focus on incorporating environmental justice, community benefits planning and engagement, equity, and workforce development.
• The DOE also issued a notice of intent for a Voluntary Carbon Dioxide Removal Purchasing Challenge, which proposes to create a public leaderboard for voluntary carbon removal purchases while helping to connect buyers and sellers.

The takeaway

The Biden administration’s announcement represents a turning point for VCMs and corporate decarbonization. By establishing rigorous standards and promoting transparency, the policy aims to unlock the full potential of carbon markets as a tool for combating climate change. For businesses, it provides a clear framework for integrating carbon credits into sustainable strategies, enhancing their role in the global transition to a low-carbon economy.