Marchés Volontaires du Carbone

What are voluntary carbon offset markets? My aim here is to give you an overview. Let’s start with a carbon offsets project. This is a project that seeks to certifiably reduce emissions or remove them from the atmosphere compared to what would have happened in a baseline scenario. So, to take an example of a project, say that someone wants to develop renewable energy infrastructure in India, they might say to a Private Carbon Standard that this project reduces emissions compared to what would have happened otherwise with fossil fuel infrastructure and so forth.

The Private Standard organization will then say to the project developer “can you show that you meet the various rules and procedures we have in place, so that we could certify this project as genuinely reducing emissions?”. If that can be done, then the private standard organization will issue carbon credits to the project owner. The project owner can then sell them to various intermediaries in the voluntary carbon market. The ultimate buyers tend to be private companies who want to retire the credits so that they can make a claim about some of their activities being carbon neutral. It doesn’t have to be a private company, anyone can purchase these carbon credits should they wish to.

For example, you might have been offered carbon credits to make a flight or some other transportation carbon neutral.

This is a system which has grown in recent years as the voluntary carbon market has expanded, more firms are making claims about their activities being carbon neutral which is to say that they have no overall negative impact on the climate system. However, there are various governance concerns regarding voluntary carbon markets and the quality of carbon credits is often called into question, which makes us wonder how credible these claims about carbon neutrality really are.

As you can see from this graph, the voluntary carbon market has grown in recent years. It began in the early 2000s with a few projects that started in the 1990s and then grew quite significantly in the early 2010s and then grew further in the last few years, that growth trend has continued until 2021. You can also see that the number of issuances of carbon credits to project owners has increased at a greater rate than the number of credits that are retired. The dark blue line indicates the number of issuances, whereas the lower light blue line indicates the number of retirements. That means the supply of carbon credits has outpaced demand and that the prices of carbon credits are relatively low.

Recently, many commentators have argued that voluntary carbon markets should expand in order to meet the aims of the Paris Agreement which are to limit global warming to 1.5C or if not that then 2C. The Taskforce on Scaling Voluntary Carbon Markets, which is a big international private governance initiative to reformulate the governance of the voluntary market, have argued that the carbon market, voluntary carbon market should grow 15-fold by 2030. This is a controversial statement to make because some may argue that the problems with voluntary carbon markets should be ironed out before the market grows, so the other extreme of this Taskforce work is to try and resolve if possible some of the ongoing challenges associated with this practice.

The major types of project that are created in the voluntary carbon market are renewable energy, first of all, and then land use type projects, notably efforts to reduce emissions from deforestation and some projects created also through agricultural change in practices. There are different types of projects as well including energy efficiency, change management of waste, carbon capture and storage, switching fuels, capturing methane gases that are released from coal mines and others, but the primary ones that take up the major market share are renewable energy and avoided deforestation.

The biggest Private Standards in the market are VERRA, which runs a major voluntary carbon standard, and The Gold Standard, which is significantly smaller and also privately run but with more input from environmental NGOs.

The voluntary carbon market has challenges associated with it because of the uncertainties associated with crediting and certifying these carbon credits. There are certain keywords that you should be aware of if you’re planning to talk about voluntary carbon markets.

The first one is additionality: does the project exist only due to the market incentive? And this is a relevant question that we should ask of all the difference types of project that are out there, both in terms of project types and every individual project. So, did this project happen because of the voluntary carbon market incentive? The project developer has an incentive to answer in the affirmative and say yes, I would not have developed this renewable energy infrastructure, for example, or changed the way that waste is managed if it had not been for the ability to attract finance through the voluntary carbon market.

But it could be that the renewable energy project, for example, would have been profitable and attractive to develop on its own terms and many renewable energy projects are now giving a good return on investment, so it is often difficult to assess the claims made by project developers who seek to answer in the affirmative that the project is additional when there is often a murky situation lying underneath. Baseline is another keyword. To generate a carbon credit which is supposed to represent 1 tonne of emissions reductions, 1 tonne of carbon dioxide equivalent that is being reduced, then it has to be reduced compared to the baseline scenario and the baseline scenario is a hypothetical construct.

It is a counterfactual situation where we imagine what would have happened if the project had never existed. So, what would the emission intensity of the electricity network have been if this project did not exist, in the case of renewable energy, or what would the rate of deforestation have been if this project did not exist within a given area. So, these are difficult questions to answer because they’re fundamentally uncertain. We can use data points to try and give a good estimate but we have to recognize the incentives to inflate the baseline so that more credits could be issued against that.

Regarding permanence, this is a particular concern for deforestation reduction projects because the aim is to keep carbon stored in trees over the long run, which means many decades into the future, but because the future is uncertain, we cannot be sure whether those trees will remain standing in perpetuity, it is difficult to establish the permanence of the carbon sequestration. And, lastly, justice and rights. We need to ask questions about whether the projects are respecting the human rights of communities that may be affected by those projects and their implementation and we can seek to incentivize more projects that genuinely promote sustainable development and have good social outcomes. Unfortunately, their track record is not always very positive.

To summarize, the voluntary carbon market isn’t required by regulation, it’s beyond a regulatory sector, that doesn’t mean it doesn’t interact with the policymaking process, it very much does, but this is what makes it voluntary. The market has grown in recent years, and there is more attention on it, especially in the media, but the amount of demand has still not caught up with the amount of supply of carbon credits issued, which means low carbon prices on the voluntary market still. There are proposals to expand the market, but these will need to come with improvements in the governance to manage the issues surrounding the quality of the credits so that the credibility of the carbon market can be improved.

We should always ask questions about the nature of the claims that are being made. For things like renewable energy projects, whether they are genuinely additional, whether they have been caused by the act of a private company retiring a carbon credit, which makes the cause of claim at the heart of the voluntary carbon offset system. And, for instance, in deforestation avoidance projects, which are very popular, we must consider the difficulty of establishing the permanence of the sequestration. These are voluntary markets established through private standards of governance, they are subject to change, but they are typically outwith the formal state-led policymaking process for climate change action. They are of great importance, and will be of great interest in the future.