The first-ever United Nations global stock take warned that the world is significantly off track in meeting the goals of the Paris Agreement in reaching a maximum of 1.5oC warming by 2050. We need every tool available working at full speed to reduce emissions and secure a liveable future for the planet. A high-integrity voluntary carbon market is an important complementary tool to in house, domestic actions that can help finance and accelerate the net zero transition.
The term net zero means achieving a balance between the carbon (or greenhouse gasses) emitted to the atmosphere, and the carbon removed from it. This balance – or net zero – will happen when the amount of carbon we add to the atmosphere is no more than the amount removed.
Carbon markets are laden with climate change speak/jargon are not generally well-understood, except by industry-insiders. Given that carbon markets are likely to be a topic at the United Nations annual Conference of Parties (COP), the world’s predominant climate change talk-shop and collective decision-making body, it is warranted to unpack the voluntary carbon market, with view to providing a sense of how it came into being, the main issues associated with it, and of its potential as one of the tools for reducing emissions and decarbonising the global economy
In the early 1990s I returned to South Africa, I found work with the Energy and Development Research Centre at UCT and was asked to undertake the development of national energy efficiency policy options – this led me into the world of climate change in its early years.
I joined some networks of colleagues to work on energy policy and climate change and through the networks engaged with an international NGO called Helio International led by a Helene O’Connor, a Canadian economist. Helene teamed me up with Emilio La Rovere, a Professor at the Federal University of Rio de Janeiro amongst others. Emilio and I were tasked with writing a paper on criteria and indicators for Sustainable Development (SD) with specific reference to the Clean Development Mechanism (CDM)[1] proposed in the Kyoto Protocol (KP) under the United Nations Framework Convention on Climate Change (UNFCCC) but not at that stage operational. The paper was published in 1999 and presented to an UNFCCC intercessional side-event in 1999 in Bonn and later the testing of these criteria led to the formation of SouthSouthNorth and contributed to the founding of the Gold Standard Foundation. Around then I was recruited as a UNFCCC small-scale CDM technical panellist, my first experience as a “carbon technical regulator” along with my involvement with the technical side of the Gold Standard Foundation, a career 25 plus years of experience now as a carbon technical regulator. As such I could claim to be a carbon market technical insider. But I am still perplexed by new jargon deciphering this can be a full time job!
The CDM was introduced by the UNFCCC as a “flexible mechanism” and was based on experiences of the “cap and trade” system employed in the US to reach domestically regulated emission caps for airborne pollutants such as sulphur dioxide. The CDM was proposed as a mechanism that would allow developing countries without national emission reduction targets (non-annex 1 ) countries to participate in Green House Gas (GHG) agreed mitigation targets of industrialised (annex 1 countries) at lower cost than domestic action in those countries. The basis of the CDM was to undertake projects and programmes that reduced emissions of GHGs against a baseline of business as usual and contribute to sustainable development, additional to what would have happened in the absence of the project – the interpretation of which took decades to resolve and is still hotly debated.
The Kyoto Protocol (KP) negotiations concluded in 2004 at COP 6-bis in The Hague COP 6-bis in the Netherlands entering into force in February 2005. What proceeded thereafter for years were the development of the rules or modalities and procedures for the implementation of the KP. In the main this was the domain of the nationally mandated delegates of Parties to the COP but behind the scenes the UNFCCC secretariat and the various panels of the CDM worked on methods that codified the menus of the CDM scopes into tight and approved technical methodologies and how these projects or programmes and their emissions would be verified and certified against the approved methodologies. Methodologies are recipes to design projects and programmes in that reduce or remove Green House Gasses, in the scopes of Energy, Afforestation and Reforestation, Land-Use Changes, and Carbon Direct Removals, Carbon Capture and Storage, amongst others.
Inside one NGO platform at the UNFCCC, the Climate Action Network (CAN) more than 20 years ago there were increasing concerns around the scope of sources of carbon emissions eligible under the CDM and how the Sustainable Development (SD), the second pillar of the CDM, should be handled. The G77 plus China negotiating block at the UNFCCC had led a call for the SD to be a sovereign issue. The WWF took the lead and included a number of international and regional NGOs, including SouthSouthNorth, in pulling together the concept of the Gold Standard Foundation. This has now changed somewhat with the advent of SDGs, which are still left to sovereign interpretation with some UN guidance if requested.[2]
So what is Sustainable Development? The 5 main pillars of sustainable development applied to projects and programmes include: safeguards, governance, Sustainable Development Goals (SDGs), facilitated and recorded stakeholder and public consultation, and transparency (according to ICAT[3]).
In the New Dehli COP 8 the Gold Standard was launched at a side event in late 2002. The main focus was on a scope limited to Renewable Energy and end-use Energy Efficiency and an appraisal of SD contributions.
Since that time the Gold Standard has evolved and the SD requirements have gone through a number of iterations strengthening the qualitative and quantitative assessments of the indicators to the extent that some of them are now certifiable separately from the carbon attributes as tradable commodities. In the last few years, the GS scope of activities has broadened to include Carbon Direct Removals (CDR) and early closures of fossil fuel extractions both of which have limited SD benefits but are considered necessary in facing the current climate crisis.
Over time two distinct markets for flexible mechanisms emerged: Those dealing with climate actions that were in compliance with Kyoto and those that were considered voluntary emissions reductions for other actions outside of those required by compliance with the KP. The units of credits were Certified Emissions Reductions (CERs) in the compliance market while Voluntary Emissions Reductions (VERs) were units under the voluntary market. Both counted in tonnes of CO2 equivalents.
From the start it was understood that the emissions reductions under the CDM and voluntary market were permitting the offsetting of emissions from other sources and in fact was a market for selling less than nothing or a vacuum into which interested entities could offset their emissions for a variety of purposes. For many this has been a defendable criticism of the CDM and voluntary market as understandably not contributing to the total GHG emissions reductions and therefore not contributing to reaching an absolute zero but rather contributing to net-zero GHG emissions. However, on deeper consideration I realised there would be some benefit, not least the SD benefits for countries and communities and the maturation of technologies and practices and as such these technologies and practices have become the future business as usual. A case in point is the maturation of solar PV and wind technologies that are two clear examples of maturation and in many jurisdictions are no longer considered additional to business as usual because they have become the least cost electricity generation solutions.
However, it is essential that valid voluntary projects remain additional to business as usual for credible emissions reductions to be counted. In the absence of project and programme additionality, emissions reductions will result in leakage or net gains of emissions.
The same architecture applies under the Paris Agreement (PA) with the exception that Internationally Transferred Mitigation Options (ITMOs) replace the Certified Emissions Reductions. Under the PA, countries that are Party to the UNFCCC have presented their Nationally Determined Contributions (NDCs) to provide details on what mitigation of GHGs they plan to undertake and how they intend to adapt to the impacts of Climate Change. The NDCs also include estimates of how these costs are divided between “conditional and unconditional” finance – corresponding to what can be paid for by the host country and what requires external finance. The national approval of Voluntary Carbon Market projects would have to be undertaken by governments. With more attention being paid to the climate emergency – and the power of carbon crediting to help solve it – governments are taking greater notice and are thinking increasingly carefully about how they can establish systems that are attractive to investors while also providing sufficient safeguards that ensure that their jurisdictions, including local communities, truly benefit. This process is not easy or straightforward and often must be jurisdiction-specific. Another sovereign issue is that of corresponding adjustments to the NDC when voluntary credits are allocated that could have contributed to national inventories. The mechanisms for this process are yet to be finalised in many countries.
The UN’s COP29 climate summit in Baku, Azerbaijan this November will focus on climate finance and raising funds for developing countries adapting to the effects of the climate crisis. It will also finalise the modalities and procedures of PA’s Article 6. Countries will debate the details of how to meet their climate goals through non-market and market-based solutions, particularly in the carbon tax credits market. At COP29, nations will discuss how to regulate carbon credits. Some preferring a less restricted market, while others advocating for stronger rules to ensure transparency and protection of human rights. These decisions will be crucial in shaping climate finance and global climate action.
The voluntary carbon market has been growing rapidly in value and diversity of actors. In 2023, carbon pricing revenues reached a record $104 billion, according to the World Bank’s annual “State and Trends of Carbon Pricing 2024” report released in May 2024. There are now 75 carbon pricing instruments in operation worldwide. Over half of the collected revenue was used to fund climate and nature-related programs.[4]
The carbon standards that have issued the most carbon credits (since 2002) are the Verified Carbon Standard (VCS) (1134.6 MTCO2e), the Gold Standard for the Global Goals (GS4GG) (266MtCO2e), American Carbon Registry (ACR), and the Climate Action Reserve (CAR). VCS and GS are the major standards worldwide, issuing 71.3% and 16.7% of credits respectively. ACR (6.3% of credits) and CAR (5.1% of credits) are the third and fourth largest standards and are mainly active in North America. There are smaller boutique standards that issue small shares of credits in the VCM. Plan Vivo (PV, 0.5% of credits) certifies smallholder and community projects in developing countries, with 28 projects actively issuing credits as of July 2023. Climate Forward and Global Carbon Council (GCC) have each issued less than 0.1% of credits in the VCM. There are other small/boutique emerging registries and standards that have issued few or no credits, in Cape Town, Credible Carbon is one such carbon registry.
The Gold Standard issued the following statement: “Our projects and programs led to 32.5B USD in shared value: benefits from climate actions, clean energy access, improved health, forest conservation, and alignment with the Sustainable Development Goals (SDGs). This is the real measure of our success. In carbon markets, we issued 43 million credits and retired 36 million in 2022 – a new high for Gold Standard. This stands as proof of our growing impact and our support for sustainable development and the world’s progress towards net zero.”
Voluntary Carbon Markets can contain multiple priorities and goals. This divide reflects a key theme: voluntary carbon markets are an extremely flexible financing model. Financial flows within voluntary markets can be applied to multiple challenges, including carbon mitigation and financing the energy transition. However, these different challenges and problems require different markets, models, and products to achieve priorities efficiently. In each of the reviewed voluntary initiatives above, carbon crediting and voluntary trade between market participants is organized around a variety of overlapping but distinct goals. These goals involve different actors and jurisdictions that help inform market design. This brief identifies four separate goals that can be pursued through voluntary arrangements:
- Enabling climate finance (e.g., channeling capital into energy transition projects in developing countries);
- Establishing domestic carbon pricing (e.g., driving reductions on covered emissions);
- Achieving NDCs in line with the Paris Climate Agreement; and
- Increasing corporate transparency on climate investments, tax, claims, and targets.
These goals are not mutually exclusive. However, targeting different goals through the use of carbon offsetting can result in very different market configurations and conceptions for the role of government, if any, in voluntary carbon markets.[5]
With the proliferation of standards in this growing market there has rightly been increasing scrutiny of the integrity of the project activities and standards. And with the potential of this market under Paris Agreement and other voluntary settings, there has been a need for guarantees of the probity of credits issued by this market.
The Integrity Council for the Voluntary Carbon Market (ICVCM) is a recently established organization for to evaluate the integrity of the VCM. It’s Core Carbon Principles (CCPs) set out to raise the bar for carbon credit quality and help create transparency in the voluntary carbon market, making it easier for buyers to identify and price high-integrity carbon credits — no matter who issues them, what sort of project they fund, or where it is generated. The CCPs have 10 criteria grouped under pillars of governance, emissions impact and sustainable development. The CCPs are applied to both standards/programmes and methodologies in the VCM.
The ICVCM should help reduce confusion, overcome market fragmentation, and give buyers confidence that they are funding projects which make a genuine impact on emissions, protect and promote nature and biodiversity, and put vital funding into the hands of the Indigenous Peoples and local communities, who are critical stewards of our core carbon sinks.[6]
The World Bank has been tracking carbon markets for around two decades and has recently published their eleventh annual carbon pricing report in 2024. When the first report was released (circa 2003), carbon taxes and Emission Trading Systems (ETS) covered only 7% of the world’s emissions. According to the 2024 report, 24% of global emissions are now covered by this growing market.[7]
Despite record revenues and growth, global carbon price coverage and levels of ambition remain too low to meet the Paris Agreement goals. Currently, less than 1% of global greenhouse emissions are covered by a direct carbon price at or above the range recommended by the High-level Commission on Carbon Prices. The Commission concluded that a $40-$80 range in 2020, rising to $50-$100 by 2030, is consistent with the core objective of the Paris Agreement.[8]
With the market growing and increasing calls for integrity of this market, initiatives such as ICVCM, as an uber yet voluntary market “regulator” are attempting to ensure the increasing quality of credits issued by the voluntary carbon market under Paris. More should be known about this still nascent and formalizing market after the UNFCCC’s COP29 climate summit in Baku, Azerbaijan this November where it is scheduled for formal discussion along with the finalization of modalities and procedures for Article 6 of the Paris Agreement.
About the author
Steve Is a South African Chemical and Energy Engineer who began his career in the early 1980s in the paper Industry implying a career extending more than 30 years. In the mid-1980s He became a UNHCR refugee for 7 years before repatriating to South Africa in 1991 to research and craft South African Energy Policy focusing on energy efficiency in the context of adequate and affordable energy services for energy solutions to household and for productive energy. His career has spanned energy efficiency, renewable energy, sustainable development and climate change challenge and in Sub-Saharan Africa and Internationally. In that period he worked in a professional capacity in academia, for multiple bi and multilateral development agencies, Development Banks as well as for private sector.
Steve was the founder of SouthSouthNorth and co-founder of the Gold Standard Foundation. He has enjoyed 25 years as a carbon regulator both in the UNFCCC CDM Small-Scale Panel and the Gold Standard Foundation’s Energy Technical Advisory Committee.
[1] The central feature of the Kyoto Protocol (66 kB) is its requirement that countries limit or reduce their greenhouse gas emissions. By setting such targets, emission reductions took on economic value. To help countries meet their emission targets, and to encourage the private sector and developing countries to contribute to emission reduction efforts, negotiators of the Protocol included three market-based mechanisms – emissions trading, the clean development mechanism (CDM) and Joint Implementation (JI). (ref: https://cdm.unfccc.int/about/index.html)
[2] It is interesting to note that Sustainable Development was mentioned 3 times in the Kyoto Protocol and near 20 times in the Paris Agreement highlighting the increased prominence of SD under the UNFCCC.
[3] International institute for Climate Transparency, (ref: https://climateactiontransparency.org)
[4] https://www.worldbank.org/en/news/press-release/2024/05/21/global-carbon-pricing-revenues-top-a-record-100-billion
[5] https://www.csis.org/analysis/voluntary-carbon-markets-review-global-initiatives-and-evolving-models
[6] ref: https://icvcm.org/core-carbon principles/?gad_source=1&gclid=Cj0KCQjwo8S3BhDeARIsAFRmkOPzhWGjKMhsZk7aBfYpZJyGdRshn9hrII-5fa8QHeRiPgLuds5BTIAaAvGjEALw_wcB
[7] https://www.worldbank.org/en/news/press-release/2024/05/21/global-carbon-pricing-revenues-top-a-record-100-billion
[8] https://scnat.ch/en/uuid/i/b9dba35e-8754-5b52-8780-282a6a4baa83-Report_of_the_High-Level_Commission_on_Carbon_Prices
Energy in Demand - Sustainable Energy - Rod Janssen 