The voluntary carbon market can supercharge rapid action in reviving ecosystems on a massive scale, drive cutting-edge tech adoption, and funnel big bucks into high-impact projects within our tight timeline for change.

Regrettably, though, the market is still in its infancy and to date has fallen short of attracting the essential financial investments required for significant scaling and innovation.

The profound ramifications of climate change on our planet, society, and economies are becoming increasingly well-understood. The central question revolves around how we can trigger prompt action and expedite our efforts to reduce its impact.

Carbon offsetting is one of the methods making its way to the forefront and voluntary carbon credit could play a pivotal role in achieving our goals.

Carbon credit, carbon offsetting, and its market

A carbon credit is a permit that allows a country or organisation to produce a certain amount of carbon emissions that can be traded if the full allowance is not used. Each credit corresponds to one metric ton of reduced, avoided, or removed CO2 (or equivalent greenhouse gas emissions) and can be used by an organisation to compensate for their unavoidable carbon emissions. When a credit is purchased by an organisation and used for this purpose, it becomes an offset and is moved to a register for retired credits, meaning that it is no longer tradeable.

The money that goes into the purchase of these carbon credits is then funnelled into climate action projects that might not otherwise get off the ground. In addition to carbon offsetting, the projects are likely going to have collateral benefits such as biodiversity protection, pollution prevention, public health improvements, employment creation, or the development of green technology.

The carbon offset market comprises both compliance and voluntary segments. Compliance demand pertains to instances where companies or other entities are obligated to offset a certain amount of carbon emissions to adhere to legal limits on their overall carbon dioxide emissions.

On the other hand, the voluntary market is completely discretionary. It involves individuals and businesses purchasing offsets voluntarily whether it is to compensate for their own greenhouse gas emissions or to contribute to the climate change fight, without any legal requirement to do so.

The whole point of the voluntary carbon market is to provide an investment mechanism for the offsetting of unavoidable carbon emissions.

Carbon credits fund carbon offsetting projects which may produce a variety of other environmental, social, economic, and cultural co-benefits aside from carbon reduction. For example, they can boost biodiversity via the conservation and regeneration of native vegetation, improve soil health and land quality, increase community and environmental resilience to disaster, create new jobs, and more.

How can the voluntary carbon market speed up the journey towards achieving climate goals?

Among the limited financial mechanisms available for the transition to immediate and faster mitigation efforts, the voluntary carbon market has the potential to accelerate action, restore environments at a large scale, facilitate the adoption of emerging technologies, and channel private capital towards projects with substantial potential in the constrained timeframe available.

Investing in these initiatives holds paramount importance, not only for immediate carbon emissions reduction and environmental conservation but also for fortifying financial resources in anticipation of the 2030 targets and future aspirations.

When investments are made with due diligence and towards high-quality nature-based solutions, credits will ensure that emissions reductions or removals happen, that nature is being protected or restored, and that communities are not only receiving benefits but are also active participants.

Voluntary carbon markets bring many benefits:

• Innovation: Compliance carbon markets are typically tightly regulated, burdened by rigorous bureaucratic constraints. In contrast, voluntary carbon markets enjoy greater flexibility, granting more freedom for project developers to foster innovation. For instance, they may undertake projects that might be considered too small or unviable within the confines of the compliance carbon market. This openness can lead to pioneering solutions that contribute to reducing the costs associated with emerging green technologies.
• Complementary: Voluntary carbon markets do not compete with or undermine compliance carbon markets; rather, they complement them by offering an avenue for projects that wouldn't be economically feasible within the compliance framework. Additionally, they empower organisations to surpass their legal obligations, enabling them to take environmental initiatives beyond what is strictly required by law.
• Expansive: Not everyone falls under the purview of compliance carbon market requirements. Therefore, the voluntary carbon market provides an opportunity for organisations (and individuals) to gain valuable experience with carbon markets, including the management of inventories, emissions reductions, and carbon storage, even if they are not obligated to participate in compliance efforts.

Reality is

Regrettably, though, the voluntary carbon market is still in its infancy and has fallen short of attracting the essential financial investments required for significant scaling and innovation. There has been much discussion around the voluntary carbon market and many commentators have argued that allowing corporations to offset greenhouse gases is only palliative and that they shouldn’t be allowed to produce those gases in the first place.

Due to concerns about potential criticism, the intricate nature of the market landscape, and a lack of clear strategic incentives, many organisations have not taken the plunge.

While these legitimate market issues are being addressed, it is important for companies to consider whether to begin utilising carbon markets. Companies can start to work towards achieving their net-zero aspirations and fostering proactive climate risk management and transparent disclosure processes.

Shaping the future of the voluntary carbon market

World Economic Forum and Bain & Company have jointly published a white paper to expedite corporate engagement with the voluntary carbon market, offering insights and guidance for companies looking to embrace this crucial tool in the fight against climate change.

The document identifies four key tracks of action to accelerate participation:

1. Define net-zero role for credits complementary to in-value chain decarbonisation.
2. Create value and recognition - to effectively embrace carbon credits and move beyond mere cost management, it's crucial to adopt a strategic approach. This can be accomplished by integrating carbon costs into financial planning processes and fostering transparent communication regarding the role of carbon credits within a company's comprehensive path to achieving net-zero emissions. Emphasis should be placed on highlighting how carbon credits complement emissions reduction efforts rather than serving as a standalone solution.
3. Tailor a portfolio - in addition to their primary abatement efforts, corporations can construct a diversified portfolio of carbon credits to enhance the effectiveness of their transition strategy. These portfolios should comprise high-quality credits that align with their specific business objectives. Initially, the focus should be on acquiring credits related to avoided emissions, gradually shifting towards investments in carbon removal initiatives over time. This strategic approach helps companies make a meaningful and evolving contribution to carbon reduction and removal efforts.
4. Orchestrate the effort - corporations have the flexibility to tailor their operating models to align with their intended level of participation in the voluntary carbon market. They can take on various roles, such as purchasers, partners, or fully committed business builders, with each level of engagement demanding a corresponding increase in capabilities and full-time equivalent personnel requirements. Additionally, companies should assess the extent of external support they need within this framework.

It's crucial to recognise that without implementing these changes today, corporate boards and investors may lack the justification to invest at the necessary scale, which often amounts to billions of dollars annually rather than mere millions. Failing to act could result in the depletion of natural capital, further harm to communities, and the postponement of critical investments in solutions essential for achieving the path to net-zero emissions.

Sources: https://www.weforum.org/; WEF – Scaling Voluntary Carbon Markets: A Playbook for Corporate Action https://www3.weforum.org/docs/WEF_Scaling_Voluntary_Carbon_Markets_2023.pdf; https://www.greeningaustralia.org.au/; https://www.betacarbon.com/post/australian-carbon-market-explained.