Greetings! Previously, we looked at how governments restrict emissions from businesses through the regulated carbon market. Today, we will dive into what is the voluntary carbon market.

The voluntary market is an over-the-counter market for the sale of certificates received for implementing projects to reduce emissions or removals of CO2 that non-profit organizations regulate. It allows businesses and individuals to offset their emissions on a voluntary basis by purchasing voluntary carbon certificates from the OTC market.

What is the process behind this voluntary mechanism of emissions reduction?

The carbon credits or offsets generated in the voluntary market result from green projects implemented by businesses. What are these projects? They vary vastly in scope, geography, and activity. However, all follow the same criteria:

1. Real (confirmation of the activities taking place)

2. Measurable (all reductions must be quantifiable)

3. Permanent (all reductions must not be released back into the atmosphere for at least 100 years)

4. Incremental effect (scalability)

5. Verifiable (outside audit)

6. Additionality (crucial criteria and baseline for price formation of carbon credits)

What is Additionality?

It refers to the fact that the offsets achieved by a project need to be additional to what would have happened if the project did not occur. To elaborate, let's look at an example: biochar is a form of refined agricultural waste that stores CO2 for hundreds of years and increases soil fertility when used as an additive. In the Middle East, developing countries often burn agricultural waste creating an alarming amount of emissions. That means when a project that produces biochar from agri-waste is introduced in the Middle East, it will have a lot more additionality, rather than a project using agri-waste and producing biochar in North America, where the waste isn't burnt and is used more ecologically friendly than in certain countries of Middle East.

Another example of a project generating voluntary carbon credits is The India Cookstove program in which it distributes new-generation energy-efficient cookstoves across India to reduce the region's emissions. Through participating in such a project, companies in any industry can offset emissions globally, despite their polluting activities that cannot be avoided. Overall, in 2021, forestry projects became the most popular project type based on transaction volumes, while between 2015-2017, renewable energy was at its peak.

Who determines if a project is green and eligible for generating carbon credits?

Non-profit organizations such as Verra and Gold Standard are responsible for setting the standards for carbon reduction projects, as they do extensive testing of the most effective ways of saving the planet. They have a strict and tedious verification process for all applicants (projects). The process is illustrated below:

Simplified Verification Process by Verra

Once the project is verified, it will start generating credits or offsets, usually on a yearly basis. However, voluntary credits cannot be used toward the compliance obligations discussed in the previous publication.

What is the demand for carbon credits?

As mentioned, the voluntary market is an OTC market and hence is open to anyone, brokers, retail traders, end consumers and even individuals wanting to partake in the market. From a business perspective, let's take a look at airlines. The largest airlines now offer at checkout an increased price for the ticket for a net-zero flight. This, of course, does not mean that the flight will run on a magic type of fuel that reduces CO2 in the atmosphere. However, it does mean that the airline's customer has participated in purchasing a carbon offset somewhere in the world through the airline at hand, and their project is reducing the same amount of emissions that a person would be producing by buying a plane ticket. This is just one out of a million examples of their use, and the demand is vastly growing, as the pledge of various businesses and even whole industries to the globe's net zero plans. According to McKinsey, the market is expected to grow fifteen times by 2030 and 100 times by 2050. We can see the yearly growth in the chart below. 2022 marked the first year in a long time of the decline of carbon credits emitted due to the stricter regulation procedures to eliminate “junk” or useless carbon credits from existence.

Carbon Credit Issuances and Retirements 2017-2022

In conclusion, the voluntary market is an important development for the world of reduction of carbon emissions, as it gives companies the platform to reduce emissions globally regardless of their day-to-day operations. Furthermore, the voluntary market is used by companies to become profitable when it comes to a development or a technology that aids the world greatly but doesn't generate significant profits to cover the costs. Next week we will take a closer look at the pricing of the voluntary carbon market, stay tuned for updates!