Voluntary Carbon Market

What Is Voluntary Carbon Market?

Voluntary Carbon Markets (VCMs) enable entities to buy and sell carbon credits to neutralize the carbon emissions released during the course of business operations. By buying carbon credits, companies can invest in projects that seek to reduce the detrimental effects of carbon emissions. Governments, non-profit organizations, multinational companies, and individuals strive to accomplish the goal of carbon neutrality.

Voluntary carbon markets follow varying regulations, as they are not managed or governed by governments. Participants voluntarily engage in the buying and selling of carbon credits. A single carbon credit equals reducing or eliminating one metric tonne of carbon dioxide or GHG emissions. Public reputation and corporate social responsibility are the two important reasons businesses collect carbon credits. It is a measure to reduce their carbon footprint through relevant environmental projects.

• The Voluntary Carbon Market (VCM) is a marketplace where individuals, companies, and other entities can trade (buying and selling) carbon offset credits.
• The Integrity Council for the Voluntary Carbon Market is an independent governance body in this domain.
• Carbon credit markets are of two types. While voluntary carbon markets allow independent participants to trade at their discretion, compliance in carbon markets are administered by government agencies.
• VCM projects include oil recycling, renewable energy, water filters, clean water, energy efficiency, biogas, industrial gas capture, forest initiatives, and wind and solar power.

Voluntary Carbon Market Explained

Voluntary carbon markets are decentralized markets for trading or exchanging carbon credits. It refers to the efforts companies make to reduce the harmful effects of carbon dioxide or greenhouse gas emissions they release during the course of business. To accomplish this goal, companies invest in environmental projects that mitigate or eliminate carbon emissions. Multinational corporations and global conglomerates choose to contribute to climate change initiatives and set corporate goals to achieve carbon neutrality.

The Taskforce on Scaling Voluntary Carbon Markets, a private sector initiative, works for the growth of structured, streamlined VMCs to help corporations meet climate change goals defined under the Paris Agreement. Businesses unable to achieve the GHG emission targets buy carbon credits by investing in climate change initiatives and environmental sustainability projects. For instance, to neutralize one ton of CO2 emissions, an individual or a corporation will need to plant approximately 50 trees a year.

The voluntary carbon market prices vary depending on project size and category. The project goals and size range from basic community-based activities such as community services, cleaning drives, household energy conservation, etc., to considerable industrial projects like high-volume hydro plants, energy harvesting, agricultural innovation, and reforestation. The smaller the project, the lower the volume of carbon credit that will be generated and vice versa.

The voluntary carbon market size depends on the number of projects and is aligned with the United Nations Sustainable Development Goals (SDGs). If an environmental or carbon offset project is linked to the SDGs, the value of its carbon credits increases. Variables like location, co-benefits, project types, size, & cost, vintage (the year of credits issue), and project quality play a key role in determining carbon credit prices.

The Voluntary Carbon Markets Integrity Initiative aims to control global temperature rise, ensuring it does not rise above 1.5°C. For this, the organization promotes crucial and urgent climate change projects. As an independent governance body, the council sets global threshold standards to ensure high-quality carbon credits are mobilized for climate-resilient development.

Participants

The participants in a voluntary carbon market are:

• Consumers: They can be anyone from NGOs, private firms, universities, governments, or individuals looking to buy carbon credits from producers.
• Brokers: A broker may charge a commission for buying carbon credits from producers and making it available to consumers. Traders can act as brokers.
• Project developers: Project developers usually belong to different industries and sectors focused on collecting carbon credits and initiating the sale of these credits in voluntary carbon markets.
• Retail traders: They buy credits in bulk, create credit portfolios, and sell them to the end buyer. A commission is typically payable when such transactions conclude.
• Third-party verifiers: They evaluate projects and verify if defined goals and obligations will be met. The emission volume is a key consideration during assessment.

Importance

Many entities consider carbon offsets critical for reducing the carbon footprint their operations or actions generate. The importance of a voluntary carbon market has been discussed below:

• Companies undertake such trading as part of their corporate social responsibility (CSR) initiatives.
• Businesses voluntarily participate in VCMs to meet their social obligations, in addition to using it as a good PR strategy.
• More carbon credits can be created across markets through environmental projects.
• Corporations buy carbon credits from VCMs to achieve their targets and adhere to company or internal goals.

Voluntary Carbon Market vs Compliance Carbon Market

Let us have a quick look at the difference between compliance carbon markets and voluntary carbon markets below:

• The government establishes compliance markets. In contrast, voluntary carbon markets are not introduced or established by governments.
• The compliance market is mandated by governments. However, VCMs attract participants interested in buying and selling carbon credits. They operate voluntarily.
• The compliance market enables the exchange of allowances, but VCMs allow traders to exchange carbon offsets.
• Compliance carbon markets are important government tools to achieve their carbon reduction targets. On the other hand, VCMs voluntarily let companies and other organizations offset their carbon emissions.
• It uses a cap and trade system, but the voluntary carbon market follows a project-based system.
• Compliance credits are expensive. On the other hand, voluntary credits are cheap.
• Compliance carbon markets function in regional, national, or international carbon regimes like California Carbon Market or Kyoto Protocol. Voluntary carbon markets operate outside the regions that house compliance markets.

Frequently Asked Questions (FAQs)

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