Political exchange about the environment started some 20 years ago with the Kyoto protocol, but it wasn't until the Paris Agreement that many started taking it seriously. Recent events, like environmental disasters or the pandemic we are still facing, gave momentum to many environment-friendly actions, such as the growth of the "Voluntary Carbon Markets".

To fully understand them, there are several things that should be considered:

1. The difference between carbon credit and carbon offset.
2. The difference between voluntary and compliance markets.
3. What the "Voluntary Carbon Market" looks like today.

The aim of this article is to clarify these three points in the hopes of giving some context and background to our new Voluntary Carbon Market Framework.

1. Carbon Credits vs. Carbon Offsets

Although the two terms are sometimes used interchangeably, and carbon offsets are often referred to as "offset credits", these two concepts differ in that they operate on different mechanisms, and thus, different markets.

Carbon Credits, also known as carbon allowances, work like permission slips for emissions. The credits belong to the regulatory market and are issued by national or international governmental organizations. Depending on the country or state, a company is issued or can buy a certain number of credits - usually from the government. In this sense, carbon revenue flows vertically from companies to regulators. Each credit allows them to generate one ton of CO₂ emissions.

In contrast, Carbon Offsets flow horizontally, trading carbon revenue between companies. When one company avoids/removes a unit of carbon (1 CO₂e ton) from the atmosphere as part of their normal business activity, they can generate a carbon offset that other companies can purchase to reduce their own carbon footprint. There are two main ways to generate a carbon offset: via avoidance / reduction projects (renewable energy, methane capture) or via removal / sequestration projects (reforestation, Direct Air Capture - DAC). In other words, carbon offsets are issued by companies that have lower carbon intensity activities.

2. Voluntary vs. Compliance Markets

In essence, what the carbon markets do is turn CO₂ emissions into a commodity by giving it a price. These emissions fall into one of the two above-mentioned categories: Carbon credits or carbon offsets, and they can both be bought and sold on a carbon market (compliance or voluntary).

Compliance carbon markets are marketplaces through which a certain number of carbon credits are issued per company and per year. These are non-voluntary, and companies must fulfill them. In the case of cap-and-trade (or Emissions Trading Systems - ETS) programs, regulators set a limit on carbon emissions - the "cap", which slowly decreases over time. Then, participants - often including both emitters and financial intermediaries - are allowed to "trade" allowances to make a profit from unused ones or to meet regulatory requirements. The most active compliance carbon offset program is the United Nations Clean Development Mechanism (CDM) that was born from the Kyoto Protocol. But other well-known ones are the cap-and-trade systems from California, Canada, the UK, China, New Zealand, Japan, and South Korea, with many more countries and states considering implementation. According to Refinitiv the total compliance market size is US$261 billion, representing the equivalent of 10.3Gt CO₂ traded on the compliance markets in 2020.

In comparison, Voluntary carbon markets are neither legally mandated nor enforced but self-governed. Organizations/individuals (farmers) with operations that generate carbon offsets, can issue and sell them to companies/individuals who want to measurably decrease the amount of CO₂e they emit. Given the flexibility of these markets, individuals and small organizations can sell their offset and profit from environmentally friendly activities. However, this has also brought about two problems: lack of transparency and monitoring, and a wide range of markets with projects living on several registries that report different data, making it hard to get a sense of the landscape. In the efforts to solve these issues, an increasing number of startups are coming into this space. For this reason, the voluntary carbon market is smaller than the compliance market, with an estimated size of US$400 million in 2020. In any case, it is also expected to grow heavily in the following years up to US$10 - US$25 billion by 2030 - depending on how aggressively countries around the world pursue their climate change targets.

Both the regulatory and voluntary marketplaces complement one another in the professional (and the personal) world. They also make the pool of buyers more accessible to farmers, ranchers, and landowners - those whose operations can often generate carbon offsets for sale.

3. Voluntary Markets Today

As mentioned above, there are several ways in which carbon offsets can be produced among which we can highlight a few:

• REDD+: Reduced Emissions from Deforestation and Degradation is primarily about emissions reductions based on sustainable Forest Management Plans which could simultaneously address climate change and rural poverty, while conserving biodiversity and sustaining vital ecosystem services.
• Reforestation: direct human-induced conversion of non-forested land to forested land through planting, seeding or human-induced promotion of natural seed sources, on land that was forested but that has been converted to non-forested land.
• Regenerative Agriculture: a conservation and rehabilitation approach to food and farming systems. It focuses on topsoil regeneration, increasing biodiversity, improving the water cycle, enhancing ecosystem services, supporting bio-sequestration, increasing resilience to climate change, and strengthening the health and vitality of farm soil.
• Nature Based Solutions: actions for societal challenges that are inspired by processes and functioning of nature.
• Renewable Energy: low carbon intensive energy.
• Carbon and Methane Capture: to reduce emissions generated.
• Energy Efficiency Improvements: lower energy consumptions lead to less emissions.

As mentioned in the section above, voluntary carbon markets opens the door to many that could not trade in the compliance system. This market, however, also faces two main problems: lack of transparency and monitoring; and a wide range of platforms containing datasets, which makes it hard to a sense of the landscape. To solve the former, several companies emerged as standard developers that use third-party verifications to enable transparency. To solve the latter, some companies are struggling to generate a unified registry containing all offsets with their related verified party.

To date, the main standard developers are:

Founded in 1996 in the USA, The American Carbon Registry (ACR) was the first standard developer in the world. ACR oversees the registration and verification of carbon offset projects, following approved carbon accounting protocols or methodologies, and issues offsets on a transparent registry system. To improve transparency, ACR requires project registration and verification documents to be made public to avoid double counting or double selling by serializing offsets and linking to online offset issuance and retirement logs.

The Climate Action Reserve (CAR) was founded in the USA in 2001 and establishes high quality standards for carbon offset projects, oversees independent third-party verification bodies, issues carbon credits generated from such projects, and tracks the transaction of credits over time in a transparent, publicly accessible system. The Reserve uses a standardized approach that promotes a verification program, whose key objectives are: to ensure projects are real, to minimize the risk of invalid creation or double counting of Climate Reserve Tons (CRTs), and to support the transparency and integrity of the data, among others.

Founded in Switzerland in 2003, Gold Standard was established as a best practice standard to ensure projects that reduced carbon emissions featured the highest levels of environmental integrity and contributed to sustainable development. Gold Standard developed "The Climate Finance Transparency Initiative" to encourage prospective buyers to enter the market by providing access to pricing data they need to inform their purchasing decisions and help project developers understand what prices they can expect.

VERRA or Verified Carbon Standards was originally founded in 2009 by a collection of US business and environmental leaders who saw a need for greater quality assurance in voluntary carbon markets. The Initiative for Climate Action Transparency (ICAT) integrates methodological guidance, capacity building and knowledge sharing to strengthen the transparency and effectiveness of climate policies and actions worldwide.

At Darcy, we have gathered information on a great deal of companies playing a role in the voluntary market and have produced a Framework that includes:

• Project Developers
• Marketplaces to buy/sell carbon offsets (with or without blockchain technology)
• Standard / Certification companies
• Consulting firms that provide services to help GHG abatement and eventual carbon offset purchasing
• Financing opportunities for carbon offset-creating projects

Here's a preview of the Voluntary Carbon Market Innovator Landscape

Connect Users with a Darcy (Trial) Membership can find the full framework by clicking in the following button

Comment below if you have any questions or specific topics you want to see from Darcy in our upcoming Carbon coverage!

REFERENCES:

• Compliance Markets
• Carbon credit vs. Carbon Offset
• REDD+, Reforestation
• Verification Entities