Why Carbon? Voluntary Markets History

The market for carbon credits, which represent greenhouse gas (GHG) emission reductions or deposits equal to 1 metric ton (mt) of carbon dioxide equivalent (CO2e), is growing rapidly. In this article, the second of a series on why carbon markets exist, we will look at the historical milestones of non-regulated carbon market initiatives and their results. Previous article on the history of compliance markets can be found here.

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The history of carbon markets can be seen as an evolutionary response to the global challenge of anthropogenic climate change. As societal pressure has ratcheted up in recent years, responses of some market participants have been to make public commitments to reduce corporate carbon footprints, or the total net GHG emissions of the company. These promises may create obligations to shareholders to meet or attempt to fulfill those commitments.

An Alternative Path for Credit Development

While compliance markets, like the European Union Emissions Trading System and California’s cap-and-trade program, among others, have been driven by mandatory regulations, a voluntary carbon market (VCM) has emerged in response to a growing demand from individuals, corporations, and other entities to offset their carbon footprint even without any formal legal obligation to do so.

Here is a deeper look into the development and evolution of the VCM:

• Emergence: In the late 1980s and 1990s, as climate change began to emerge as a global concern, a few forward-thinking businesses started to offset their emissions as a part of their corporate responsibility or sustainability initiatives. These actions were more about goodwill and less about a structured market.
• Standardization: As interest grew, there was a need to ensure the credibility of carbon credits in the voluntary market. Multiple standards emerged seeking to verify the quality and authenticity of carbon offsets. Some of the most recognized standards include:
• Gold Standard: Founded by World Wildlife Fund and other NGOs in 2003, it not only looks at carbon reduction but also includes sustainable development criteria. The Gold Standard has stood out with projects focusing on Cookstove innovations.
• Verified Carbon Standard (VCS): Established in 2006, it’s one of the most widely used carbon accounting standards globally, focusing heavily on nature-based projects.
• Puro.earth: Established in 2019, has become a leading standard for biochar and terrestrial carbon storage projects. Nasdaq became majority owner in 2021.
• Capturiant: Registry and exchange formed in 2023 with a focus on engineered solutions to offer expertise bridging the gap between energy producing industries and carbon markets.
• Growth: The 2000s saw a surge in interest in voluntary carbon offsets, driven in part by a growing awareness of climate change, coupled with the desire of corporations to present a green image to their stakeholders. Events, products, and even celebrities began to make claims to offset their carbon footprints. Many companies have made public commitments to address corporate emissions, and some even began making direct investments in carbon market activities.
• Types of Projects: A wide variety of projects have been developed under the voluntary market. These include but aren’t limited to:
• Improved cookstove projects
• Reforestation and afforestation
• Biochar and soil amendments
• Renewable energy projects
• Methane capture from landfills
• Methane abatement from orphaned wells
• Innovations and Challenges: As this market has matured, both nature-based solutions and engineered solutions have had innovations and challenges.
• Nature-Based Solutions: Initially, there was a significant push by established registries towards nature-based solutions such as reforestation, blue carbon (carbon captured by coastal and marine ecosystems), and regenerative agriculture, to the exclusion of major emitting sectors.
• Concerns About Authenticity: The voluntary market has been criticized for potentially funding projects that would have happened anyway (lack of “additionality”) or not providing the environmental benefits they claim. Nature-based projects have been the major culprits in being exposed for faulty calculations and mismanagement. This has highlighted the importance of rigorous third-party verification processes and transparency.
• Technological Solutions: Recognizing the opportunity to capitalize on a nascent market, some technologies aiming to reduce atmospheric CO2 levels through innovative means of supplementing natural carbon sinks and emissions reduction efforts. These technologies provide additional tools to meet global climate targets, especially for sectors where reducing emissions is particularly challenging. They also open new investment and development avenues in the VCM.
• Concerns on Implementation: High costs, technological maturity, scalability, and environmental or social side effects are common challenges to these solutions. There is also the issue of ensuring that investments in these technologies do not divert attention or resources from essential emissions reductions and existing solutions.
• Taskforce on Scaling Voluntary Carbon Markets (TSVCM): Recognizing the potential of VCMs and the need to scale, in 2020, the TSVCM was initiated by Mark Carney, UN Special Envoy for Climate Action and Finance. The taskforce aims to create a transparent, verifiable, and robust VCM.
• Integration with Compliance Markets: In some cases, the lines between some voluntary and compliance markets have blurred. Some companies buy voluntary offsets as a hedge against future regulations or as a cheaper alternative to compliance credits. Conversely, some voluntary credits have been used in compliance markets, particularly when a regulated entity is allowed to use offsets for a portion of their regulatory obligations.

Overcoming Criticisms of VCM:

VCMs have evolved as a critical complementary tool to compliance markets, allowing for more flexible and diverse ways to address climate change. The ongoing challenge is ensuring that this market delivers genuine, lasting environmental benefits while addressing industries that can make a scalable impact.

Carbon markets have faced various criticisms over the years. Concerns include the potential for carbon leakage (whereby emissions are just shifted to regions without caps), the efficacy of offset projects (especially in the unregulated voluntary market), and potential adverse impacts on vulnerable communities. Market participants continue to find ways to address these challenges by identifying and instituting best practices, incorporating feedback from affected communities, and seeking standards that focus on quality over popularity.

In summary, carbon markets have and continue to evolve as a tool to encourage the reduction of GHG emissions. While they have faced challenges and criticisms, carbon markets remain an integral part of the global strategy to address climate change now and into the future.

The next article will go over how these markets currently function, with insight into participants, processes, classifications, governance, and objectives.

This article was written by Nathan Murphy, Registry Manager.

Disclaimer: This blog post is for informational purposes only and should not be considered as financial or investment advice.