In this update, we discuss the latest developments in the voluntary carbon market (VCM). This includes market trends, regulatory changes, best practices and pricing developments.
January 2024: Voluntary Carbon Market Update
Short roundup: market trends & key developments
In the first half of 2024, the voluntary carbon market has seen significant activity, with initiatives from major corporations and support from government policies driving forward. The Science Based Targets initiative (SBTi) proposed including carbon credits in corporate net-zero plans, which has been both praised for its potential to boost climate action and criticized for possibly diverting focus from direct emissions reductions. The Biden-Harris administration endorsed high-integrity voluntary carbon markets, aligning U.S. policies with global standards to ensure that carbon credits effectively contribute to emission reduction efforts.
Corporate action has also been prominent, with the Symbiosus coalition, formed by tech giants like Google, Meta, Microsoft, and Salesforce, committing to removing 20 million tons of carbon through nature-based solutions. This collective effort underscores the private sector's critical role in advancing large-scale carbon removal projects. Moreover, the Integrity Council for the Voluntary Carbon Market (ICVCM) introduced CCP-labelled carbon credits, setting new benchmarks for project integrity and transparency, which are expected to enhance market credibility and attract more investment.
Market dynamics have reflected these advancements, with carbon credit prices experiencing volatility due to increased demand for high-quality offsets and evolving regulatory frameworks. The introduction of stricter standards and the emphasis on high-integrity projects have driven up prices, highlighting the market's shift towards more credible and effective carbon offsetting practices. These developments signify a maturing market that is increasingly seen as a vital tool in global efforts to achieve net-zero emissions and support sustainable development goals.
SBTi controversy about the role of carbon offsetting
The Science Based Targets initiative (SBTi) has stirred significant discussion within the voluntary carbon market by proposing the inclusion of carbon credits in corporate net-zero strategies. The SBTi’s board of trustees announced on April 9 that it plans to revise its flagship Corporate Net-Zero Standard to allow companies to use “environmental attribute certificates” – which includes carbon offsetting schemes – to abate a greater share of their Scope 3 emissions. This proposal aims to bridge a critical gap between immediate emissions reductions and long-term decarbonization efforts. According to Reuters, the SBTi’s move has exposed a schism over corporate climate actions, with some stakeholders arguing that relying on carbon credits might undermine direct emissions reductions efforts.
On the other hand, advocates for the proposal emphasize that high-quality carbon credits are vital for achieving ambitious climate goals, especially for industries where immediate emissions reductions are technologically or economically unfeasible. The debate highlights the need for stringent standards and transparency to ensure that carbon credits genuinely contribute to net-zero targets. As SBTi’s proposal gains traction, it could redefine corporate climate strategies, making carbon credits a critical component of comprehensive climate action plans. This shift is expected to drive demand for high-integrity credits, pushing the market towards greater scrutiny and higher standards.
We Mean Business Coalition report: corporate climate finance
Carbon offsetting has become a crucial strategy in corporate climate finance, as outlined in the We Mean Business Coalition’s report. This approach allows companies to compensate for their emissions by investing in projects that reduce or remove carbon from the atmosphere. The report underscores the importance of integrating carbon markets into corporate climate finance to accelerate decarbonization efforts. Carbon offsetting offers a pragmatic solution for companies striving to meet net-zero targets, particularly when immediate emissions reductions are challenging.
Concretely, 51% of companies indicate that climate finance is a matter of "use it or lose it". That means if they are dissuaded from offsetting, they are not doing something else instead; they are banking the cash. 71% of companies say that the VCM allows them to do more decarbonisation. So not less, not the same, but more. And lastly, 61% of companies say purchasing high quality carbon credits incentivises decarbonisation.
High-integrity offset projects, such as reforestation , provide tangible environmental benefits and support sustainable development goals. The report also highlights the need for robust verification mechanisms to ensure the credibility and effectiveness of offset projects. As corporate commitments to net-zero increase, the demand for high-quality offsets is expected to rise, driving further investments in sustainable projects. The integration of carbon markets into corporate strategies not only helps in achieving climate goals but also fosters innovation and supports the transition to a low-carbon economy.
White House endorses the VCM
The Biden-Harris administration has reinforced its commitment to high-integrity voluntary carbon markets through a joint policy statement and principles. This move is part of the broader strategy to achieve the United States' climate goals and support global decarbonization efforts. The policy emphasizes the importance of transparency, integrity, and inclusivity in voluntary carbon markets, aligning with international standards such as the Integrity Council’s Core Carbon Principles (CCPs).
By endorsing high-integrity carbon credits, the White House aims to ensure that these markets contribute effectively to reducing greenhouse gas emissions. The administration’s support is expected to boost confidence in voluntary carbon markets, encouraging more companies to participate and invest in high-quality carbon credits. This alignment with global initiatives underscores the U.S. government’s proactive stance on climate action and its role in shaping the future of carbon markets. The policy statement also highlights the importance of safeguarding environmental and social integrity in carbon credit projects, ensuring that they deliver real and measurable climate benefits while supporting sustainable development goals.
Launch of the Symbiosus Coalition for nature-based impact
The Symbiosus coalition, comprising tech giants Google, Meta, Microsoft, and Salesforce, has pledged to remove 20 million tons of carbon through nature-based solutions. This ambitious initiative underscores the growing role of the private sector in addressing climate change. By investing in projects such as reforestation, soil carbon sequestration, and coastal ecosystem restoration, the coalition aims to enhance natural carbon sinks and promote biodiversity. This collaborative effort not only supports corporate sustainability goals but also contributes to global climate resilience.
The initiative highlights the potential of nature-based solutions to deliver significant climate benefits while addressing ecological and social challenges. By leveraging their resources and influence, these tech companies are setting a precedent for corporate climate action, demonstrating the feasibility and importance of large-scale investments in nature-based carbon removal. The Symbiosus coalition's commitment is expected to drive further interest and investments in nature-based solutions, enhancing their role in global carbon markets and supporting the transition to a sustainable and resilient future.
Revised Oxford Offsetting Principles
The revised Oxford Offsetting Principles provide updated guidelines for carbon offsetting, emphasizing higher-quality and long-term carbon removal solutions. These principles aim to shift the focus from temporary offsets to more permanent and verifiable methods of carbon sequestration. By prioritizing projects that offer lasting climate benefits, the revised principles align with global net-zero goals and enhance the credibility of carbon offset markets. The updates also stress the importance of transparency, robust verification, and continuous improvement in offsetting practices.
The principles encourage companies to integrate offsetting into comprehensive climate strategies, complementing direct emissions reductions with high-quality offsets. This approach ensures that offsetting contributes meaningfully to climate mitigation while fostering innovation and sustainable development. As more organizations adopt these principles, the demand for high-integrity offsets is expected to increase, driving improvements in project quality and market transparency. The revised principles represent a significant step towards more effective and credible carbon offsetting, supporting global efforts to achieve net-zero emissions.
ICVCM announces first CCP-labeled credits
The Integrity Council for the Voluntary Carbon Market (ICVCM) has announced the first CCP-labelled carbon credits, marking a milestone in the market’s evolution. These high-integrity credits adhere to rigorous standards, ensuring that they deliver genuine emissions reductions. Projects such as methane capture and ozone-depleting substances (ODS) destruction have been awarded the CCP label, demonstrating their effectiveness in mitigating climate change.
The introduction of CCP-labelled credits is expected to enhance market credibility, encouraging more companies to invest in high-quality carbon offsets. By setting a high bar for project integrity, the ICVCM aims to address concerns about the environmental impact and legitimacy of carbon credits. This initiative is also likely to drive improvements in project verification and monitoring, ensuring that carbon offsets deliver real and measurable climate benefits. As the first CCP-labelled credits enter the market, they are expected to set a new standard for quality and integrity, fostering greater trust and confidence in voluntary carbon markets.
Price developments in the voluntary carbon market
Carbon credit prices have experienced significant fluctuations in the first half of 2024, driven by increasing demand for high-quality credits and evolving market regulations. According to the World Bank, the introduction of stringent standards and the rising emphasis on high-integrity projects have contributed to price volatility. The market is responding to the growing need for verifiable and impactful carbon reductions, with high-quality credits commanding a premium.
This trend reflects the broader shift towards more credible and effective carbon offsetting practices. As companies and governments tighten their climate commitments, the demand for high-quality offsets is expected to continue rising, driving further price increases. The market dynamics underscore the importance of transparency and robustness in carbon credit projects, as stakeholders seek to ensure that their investments deliver genuine climate benefits. The price developments also highlight the need for continuous innovation and improvement in carbon markets, supporting the transition to a sustainable and resilient low-carbon economy.
Conclusion
The first half of 2024 has seen significant advancements in the voluntary carbon market, driven by new initiatives, evolving standards, and increasing demand for high-quality offsets. The integration of carbon credits into corporate strategies, supported by rigorous verification and robust principles, is enhancing the market's credibility and impact. As high-integrity projects become more prevalent, the market is poised for further growth and development, fostering greater trust and investment. These trends underscore the critical role of voluntary carbon markets in achieving global net-zero goals and supporting sustainable development.
January 2024: Voluntary Carbon Market Update
Short roundup: market trends & key developments
2023 was a tumultuous year for the voluntary carbon market. As described in the previous update, last year saw strong criticism of REDD+ conservation projects, among others. These projects would more often than not fail to deliver on their promise of achieved impact. Each carbon credit is supposed to represent an equivalent of one ton of carbon reduced, avoided or removed. Organizations can purchase these credits to offset their emissions. When it became apparent that a number of projects were not achieving this impact, demand for credits decreased and credit prices dropped.
The question, then, was whether the market turmoil was temporary and whether the market would recover. Meanwhile, there are enough signs to answer these questions in the affirmative. For example, more credits were retired in December than ever before, breaking the previous (December) record by more than 40%. In addition, this year almost 10% more credits were retired than in 2022. In total, more than 372 million credits were issued in 2023 and more than 160 million credits were retired to offset carbon emissions.
Source: Allied Offsets 2023
Carbon markets were also the focus of much attention during COP 28 in Dubai. The COP Presidency hosted a roundtable on progress on VCMs with higher integrity and quality. In it, John Kerry, Special Climate Envoy to the President of the United States, praised the VCM tool and recent developments, "I have become a firm believer in the power of carbonmarkets to drive greater climate ambition and action, and the VCM is an essential tool to keep 1.5C within reach." The importance of inclusive access to VCMs for developing countries was further emphasized by UN Climate Change Secretary Simon Stiell and World Bank President Ajay Banga.
In addition, at COP 28, the six major voluntary standards announced a historic collaboration. The collaboration - between Gold Standard, Verra, the American Carbon Registry, Architecture for REDD+ Transactions (ART), Climate Action Reserve, and Global Carbon Council - aims to "promote integrity in 2024 to take the next step in the reliability of carbon markets."
All in all, it can be said that 2023 posed significant challenges to carbon markets. However, it seems that these challenges have given a positive impetus to the market and made it more mature - or at least awake. There is agreement that the VCM, although imperfect in practice at present, remains a crucial tool for meeting the target of the Paris Climate Agreement.
VCM recap 2023: ups and downs
In 2023, the carbon market faced significant challenges and the effectiveness of carbon markets was questioned by some. However, a closer look reveals that the situation is more nuanced and the market has been able to recover, challenging all stakeholders - project developers, buyers and sellers - to further ensure the quality, integrity and transparency of carbon credits.
Starting with the challenges in 2023. The year began with persistent negative media coverage that focused on a specific project type: REDD+ projects. REDD+ projects focus on the conservation and restoration of forests that act as vital carbon repositories, absorbing and storing significant amounts of carbon. Forests play a crucial role in mitigating climate change by taking carbon from the air and storing it in their biomass and soil. REDD+ initiatives address deforestation and degradation, preserve valuable ecosystems and reduce carbon emissions, while providing financial incentives for forest conservation. These financial incentive benefit local communities and indigenous people.
Research by The Guardian and others revealed that several REDD+ credits did not represent real carbon emission reductions. This affected confidence and drew attention to market integrity initiatives and the publication of long-awaited updates to certification methodologies. The damaged confidence resulted in a drop in prices as demand for credits declined for several months. While some might consider this a "stagnation" of the market, it is also seen as a necessary "regrouping" before an expected "acceleration forward."
Indeed, there were also positive developments in 2023: despite the (justified) negative news coverage, carbon credit retirements did not fall as expected and the total was higher than in 2022. This indicates continued corporate commitment. Research by Allied Offsets found that over 1,200 additional companies chose to offset emissions in 2023 compared to 2022, indicating growing acceptance of the "polluting is paying" standard.
Source: Allied Offsets 2023
Cooperation between certification standards
At COP 28, the six major voluntary standards announced a major collaboration. The collaboration - between Gold Standard, Verra, the American Carbon Registry, ART (Architecture for REDD+ Transactions), Climate Action Reserve, and Global Carbon Council - aims to "promote integrity by 2024 to take the next step in the reliability of carbon markets”.
These organizations signed a document to: (1) act together to learn from each other in order to strengthen programs; (2) pursue alignment on common principles for quantification and accounting; (3) jointly pursue permanence and related measures; (4) ensure robust benefit sharing; (5) identify and encourage disclosures around deployment of carbon credits; and (6) enable financial flows to developing countries.
In addition to certification standards taking an additional step in ensuring quality, a significant development is the creation of an end-to-end integrity framework by SBTi (Science-Based Targets Initiative), the VCMI and ICVCM. These organizations agreed to establish harmonized guidelines for corporate decarbonization, including the role of carbon credits in corporate transition to Net Zero. This end-to-end framework was supported by a joint statement signed by 17 international NGOs. The statement highlights the role of transparent carbon credits as part of a broader corporate transition, in line with scientific understanding.
The fact that SBTi sees a more active role for credits is significant. SBTi is a leading framework for setting net-zero targets for companies in line with climate science and includes thousands of companies that have publicly committed to science-based net-zero targets.
In 2023, SBTi launched an open consultation on its Beyond Value Chain Mitigation Guidance Paper. Beyond value chain mitigation refers to mitigation actions or investments made outside a company's value chain, for example, the purchase of carbon credits. The purpose of the consultation is to provide companies with benchmarks and best practices where mitigation efforts 'outside the value chain' are concerned. By providing clear guidelines, it will make it easier for companies to support carbon projects as part of their strategy in a way that is credible and transparent. Trust in the VCM will increase as a result. This creates a foundation for hundreds of new potential participants in the VCM.
Source & Copyright: COP28
Emphasis on quality
The past year has seen - against the backdrop of negative publicity - an emergence of independent quality assurance initiatives. These include the Core Carbon Principles of the Integrity Council of the Voluntary Carbon Market and the Carbon Credit Quality Initiative announced.
These organizations have established a set of quality characteristics for carbon credit projects. The various quality characteristics are as follows:
Additionality: the emission reductions or removals would not have occurred without the added incentive of carbon credits.
Measurement, Reporting and Verification: the project or program uses robust principles, provisions and methodologies to quantify emission reductions and removals.
Permanence: the credit carries no risk of losing the underlying climate benefit (e.g., from stored carbon - released due to natural or man-made impacts), or it has adequate provisions to mitigate those risks.
Leakage: the project or program considers the extent to which reductions or removals from a mitigation activity are offset by increased emissions elsewhere.
Transparency: the project or program facilitates access to relevant non-confidential information, including ensuring that sufficiently detailed information on all projects is publicly available and that program requirements and decision-making are transparent.
Ancillary benefits: the project or program promotes significant positive socioeconomic benefits for the UN Sustainable Development Goals beyond greenhouse gas emission reductions.
Social and Environmental Protection: the project or program establishes safeguards to ensure that there is no worse than a "no harm" approach to social and development impact, especially by enabling global, regional and local stakeholders affected by the effort to voice concerns, demand fair treatment and, where appropriate, pursue legal redress or compensation.
Revenue sharing: the project or program establishes a mechanism for fair distribution of revenues and other benefits in consultation with local stakeholders.
There are also developments on the side of companies buying credits to clarify how companies can best claim credits for their climate action strategies. A good example of this is the Claims Code of Practice of the Voluntary Carbon Markets Integrity Initiative.
New research: companies that offset reduce faster
In our previous update, we wrote that on average, companies that offset carbon reduce twice as fast compared to those that don't. New research recently published again suggests that companies that offset are leading the way when it comes to climate action. Across the board, they outperform companies that do not buy carbon credits. The research relies on transactions in voluntary carbon markets and climate pledges from 7,415 companies.
Companies participating in voluntary carbon markets show significant acceleration in reducing their own emissions compared to their competitors. These companies show a 1.8 times greater likelihood of annual carbon reductions. In addition, they are found to be 1.3 times more likely to actively involve suppliers in their climate strategy. Purchasing carbon credits thus involves active collaboration between companies, suppliers, employees and customers to address climate change impacts. In addition, the average buyer of voluntary credits invests three times more in emission reduction efforts within their value chain. These investments include activities such as the use of renewable energy and the purchase of Renewable Energy Certificates (RECs).
Source: Ecosystem Marketplaces 2023
Buyers of voluntary carbon credits show a greater propensity to set goals to address climate change, with their goals being significantly more ambitious. They show a 3.4 times greater likelihood of having science-based climate goals, a 1.2 times greater likelihood of having managerial oversight of their climate transition plans, and a three times greater likelihood of including Scope 3 emissions in their climate target. This is notable because Scope 3 emissions make up the lion's share (91%) of carbon buyers' emissions and are the most difficult for companies to control, as these emissions are generated by upstream suppliers, downstream customers and other companies in the value chain.
Interested in learning more about the role of carbon offsetting in a sustainability strategy? Follow this link.
Price developments in the voluntary carbon market
As described above, the controversy surrounding some projects has had a negative impact on rising prices in recent years. Indeed, in principle, rising prices are a good thing since it means a greater cost for companies, which in turn gives a greater incentive to reduce emissions. The hope (and long-term expectation) that prices in the voluntary carbon market will move closer to the "true price" of a ton of emissions in the future, or close to the European Trading System, remains intact but is still some years away.
REDD+ projects in particular have shown flattening and in some cases decline in price. By extension, stagnation was seen for other projects, such as Nature-based Solutions and renewable energy projects. Toward the end of the year, a slight increase in prices was noticeable, with hopes within the market that this is one of the signs of further recovery.
Looking ahead, there is hope and expectation in the market that the recovery will continue. For this, it is particularly important that all integrity and quality initiatives get off the ground, that awareness around the role of offsets increases, and that business and governments act together in the development of future-proof (compliance and voluntary) CO2 markets.
July 2023: Voluntary Carbon Market Update
Short roundup: market trends & key developments
In recent months, the VCM and its stakeholders – project developers, local communities, sellers, and buyers – have been challenged to further safeguard carbon credit quality, integrity and transparency. The need has been highlighted for carbon credits to deliver on their promise of either avoiding or removing carbon from the atmosphere.
Projects focusing on ‘Reducing emissions from deforestation and forest degradation’ (REDD+) have particularly been under scrutiny. Many agree that REDD+ projects are one of the most efficient mechanisms for financing forest communities and preserving biodiversity while locking away irrecoverable carbon. To ensure continued funding and support, the VCM architecture incorporates baseline updates and technological advancements to maintain quality requirements in line with best practices. Verra, the main issuer of REDD+ credits, released a new draft methodology for REDD+ projects on 19 April 2023, calling it the ‘’most significant revision" of its practices, as it looks to restore the integrity and quality of its forest carbon credits.
To add to that, market bodies like the Integrity Council for the Voluntary Carbon Market (ICVCM) and the Voluntary Carbon Markets Integrity Initiative (VCMI) have made impactful announcements that will influence the quality of supply and effective use of carbon credits. One of these announcements is the collaboration between both bodies on 20 June 2023.
While continuously improving on current methodologies is important, it is equally important to also shed a light on the role that credits already play. Trove Research has shared a detailed report analysis of over 4,000 global companies and the link between emissions performance and the use of carbon credits. The conclusion was that companies that use material quantities of carbon credits are decarbonising at twice the rate of companies that do not use carbon credits.
REDD+: to credit or not to credit
REDD+ projects focus on conserving and restoring forests that act as vital carbon sinks, absorbing and storing significant amounts of carbon dioxide. Forests play a crucial role in mitigating climate change by removing CO2 from the air and storing it in their biomass and soil. REDD+ initiatives address deforestation and degradation, preserving valuable ecosystems and reducing carbon emissions while offering financial incentives for forest conservation, benefiting local communities and indigenous people.
These projects not only contribute to climate goals set in the Paris Agreement but also promote biodiversity conservation, protect watersheds, and enhance resilience to climate change impacts. They foster environmental protection, support local livelihoods, and offer social and economic benefits to forest-dependent communities. Overall, REDD+ projects are instrumental in the global fight against climate change, preserving natural carbon sinks and contributing to a sustainable future for our planet.For an example of how projects can support the goals of the Paris Agreement, visit our project page. Explore the sustainable development goals they endorse and discover their impact beyond tree planting.
In recent months, research from amongst others The Guardian has claimed that various REDD+ credits do not represent genuine carbon emission reductions. The consensus about the recent scrutiny REDD+ projects have caught within the carbon market consists of two elements:
Highlighting the importance of protecting and conserving forests is essential. Yes, carbon credits are imperfect – but we need them. The truth is nuanced. To stand a chance of preventing catastrophic global warming, Credits must be one of several tools in our arsenal.If you are interested in obtaining carbon credits, check out our carbon credit page.
Constructive feedback and critique are essential to improve existing methodologies, foster innovation and maximize impact. This applies to REDD+ projects but also to other climate solutions, be it nature-based on technological.
Core Carbon Principles by the IVCCM
To raise the bar for carbon credits and foster a greater sense of transparency within the voluntary carbon market, the ICVCM has taken a significant step forward by introducing the Core Carbon Principles (CCPs) and the Program-level Assessment Framework. These initiatives aim to set rigorous criteria for high-integrity carbon credits and promote sustainability. Developed with valuable input from numerous organizations within the voluntary carbon market, the CCPs establish fundamental principles based on the latest science and best practices, ensuring that carbon credits create genuine and verifiable climate impact.
With a core objective of establishing trust and driving investment towards effective climate solutions, the CCPs create a universally recognizable standard for high-integrity carbon credits, regardless of their origin, type, or issuing program. In doing so, the CCPs eliminate confusion and bridge market fragmentation, instilling confidence in buyers that their investments support projects making a genuine and significant impact on reducing emissions. By providing this consistent benchmark, the CCPs open doors to increase investment opportunities, accelerating the funding of essential climate initiatives on a large scale and with rapid speed.
To attain the CCP label, carbon credits must undergo a thorough assessment and meet the rigorous criteria for high climate, environmental, and social integrity set forth by the Integrity Council. Both the carbon-crediting program responsible for issuing the credits and the specific credit category must meet these stringent standards, as outlined in the CCPs and Assessment Framework. Only upon successful assessment of both aspects will the carbon credits receive the distinguished CCP label, signifying their elevated level of integrity and credibility in advancing climate solutions.
The CCPs outline additional criteria for carbon credits to be considered high-integrity. Apart from the requirements on transparency and sustainable development, the CCPs specify that carbon credits must fulfill the following conditions:
Additional: the emission reductions and removals funded by the credits should be generated by projects that would not have taken place without the financing from carbon credits.
Permanent: the impact of the emissions reductions and removals must be lasting and not subject to reversal in the future.
Measured robustly and conservatively: the quantification of emissions reductions and removals must be accurately and conservatively measured to ensure credibility and avoid overestimations.
Counted only once: the carbon credits should not be double counted, ensuring that the claimed emission reductions are only attributed to a single entity.
Supporting transition to Net Zero: the funded projects must contribute to the overall transition to a net-zero emissions future. The projects should not perpetuate or support activities that are incompatible with achieving a net-zero emissions goal.support activities that are incompatible with achieving a net-zero emissions goal. If you're unsure about what Net Zero means and how it differs from carbon neutrality, check out our blog here.
Regarding the carbon-crediting programs, they must adhere to the following criteria:
High standards of governance: the programs must maintain strong governance practices to ensure the overall quality and integrity of the issued carbon credits.
Use of registry: a registry should be utilized to uniquely identify and track each carbon credit from issuance to retirement or cancellation, enhancing transparency and accountability.
Independent verification: the emission reductions and removals claimed by the programs must be verified by independent third-party experts to confirm their accuracy and reliability.
Partnership between ICVCM and VCMI The collaboration between the ICVCM and the VCMI is paving the way for an integrated market integrity framework. This framework will empower companies to contribute significantly to the global effort of limiting temperature rise to 1.5°C. The focus will be on critical elements, including:
1. Decarbonizing the value chain: companies will be urged to prioritize decarbonization throughout their value chain by investing in clean energy, sustainable transport, and environmentally friendly industrial processes. Alongside preserving natural ecosystems.
2. Emphasizing the complementary role of high-integrity credits: the role of high-integrity carbon credits in a credible corporate climate strategy will be clarified through clear guidelines. The Core Carbon Principles (CCPs) and VCMI Claims Code of Practice will set global standards, ensuring that these credits create real and verifiable climate impact based on the latest scientific insights and best practices.
3. Aligning with Paris Agreement: encouraging companies to commit to quantified and independently verified science-based emissions reduction targets in line with the UNFCCC Paris Agreement and the 1.5-degree pathway. This involves enhancing reporting requirements, disclosure mechanisms, and providing clear guidelines on the usage of high-quality carbon credits as they work towards achieving net-zero emissions.
Evidence shows that investing in high-quality carbon credits, when complemented with science-based internal decarbonization efforts, can effectively accelerate progress towards the 1.5°C temperature goal. These credits also unlock vital financial resources for urgently needed climate solutions that may not be feasible otherwise. By integrating these principles and practices, companies can make a significant and positive impact on combatting climate change and driving the world closer to its temperature limitation targets.
Trove Research: the value of carbon credits
As mentioned earlier, a recent analysis of Trove has highlighted the importance of carbon credits. According to its recent report, companies that are material users of carbon credits decarbonize twice as fast as those that do not use carbon credits.
The analysis examined emissions data from 4,156 companies over the past five years using the Trove Intelligence platform. It revealed a significant trend where companies using a 'material' amount of carbon credits showed faster emission reductions compared to those that did not use such credits. This trend held across all time periods, nearly all sectors and regions, and all scopes of emissions, even when considering different thresholds for 'material' credit usage.
Moreover, 'heavier' users of credits were found, on average, to decarbonize more rapidly than 'lighter' users, and those using higher integrity or higher-priced credits also demonstrated quicker emission reductions, although this correlation was somewhat weaker in comparison to other patterns.
The findings debunk the notion that companies buying carbon credits are simply obtaining a 'license to pollute.' Instead, they suggest that the voluntary purchase of carbon credits provides companies with an incentive to accelerate their emission reduction efforts. By attaching a price to their emissions through credit purchases, companies create an annual cash expenditure that motivates them to reduce costs and strengthen the business case for emission reduction initiatives in their budget approval processes.
Firms engaging with carbon credits are also likely to be committed to addressing their climate impact seriously and have well-developed mitigation and carbon credit strategies.
Ultimately, the analysis indicates that while it's essential to improve credit quality over time, carbon credits can effectively aid companies in mitigating their emissions impact and encouraging a reduction in their overall carbon footprint.
Carbon price developments
Over the last five years, the VCM has shown remarkable expansion. In 2022, the VCM is projected to have attracted approximately USD 1.3 billion in investments, contributing to the mitigation of around 161 million metric tons of greenhouse gas emissions. The significance of rising prices of carbon credits is twofold:
Incentivizing emission reduction: higher carbon credit prices result in increased penalties that companies must pay for their emissions. This creates a stronger incentive for companies to expedite the reduction of their own carbon emissions. When the cost of emitting carbon rises, it becomes financially advantageous for companies to invest in cleaner and more sustainable practices, technologies, and processes. This, in turn, contributes to accelerated efforts in combatting climate change.
Driving climate action financing: rising carbon credit prices attract more financing towards climate action projects. As prices increase, the potential return on investment becomes more appealing to investors and companies alike. Consequently, more capital flows into a greater number of climate action initiatives. These projects can then become more ambitious and innovative, as higher revenues from carbon credits allow for larger-scale and more groundbreaking endeavors. This positive feedback loop further encourages the development of effective solutions to address climate challenges on a broader scale.
Despite this impressive progress, the growth momentum of the VCM encountered a slowdown in 2022, likely due to the impact of the invasion of Ukraine, in contrast to the positive trajectory established in 2021. However, the average prices of various technology types in the carbon market remained notably higher than the five-year average.
Since the invasion of Ukraine, prices have been readjusting downward as the market seeks to find a new balance. The scrutiny around REDD+ has also contributed to a recalibration of carbon prices in general. In June, a slight market recovery is noticeable although it is too early to tell whether this will continue in the coming months.
Interestingly, community-based projects, like efficient cookstoves, have emerged as a relatively stable and resilient category alongside Nature-Based Solutions (NBS) removal credits. This observation, coupled with supply and demand patterns, indicates a growing preference for projects that offer substantial co-benefits beyond simply reducing carbon emissions. Investors and market participants seem increasingly interested in supporting projects that have positive social and environmental impacts in addition to their carbon reduction potential.
