Working Paper | October 04, 2024

Scaling Voluntary Carbon Markets: A Market-Based Mechanism for Corporates to Meet Their Net-Zero Commitments

By: Sujit Chakravorti, Nick Cook, Emily DeAlto, and Bertrand Rioux
Source: SSRN

Today, corporates are facing increasing pressure to make net-zero commitments whereby their residual greenhouse gas (GHG) emissions are completely offset. By purchasing offsets in voluntary carbon markets (VCMs), corporates fund projects globally that avoid GHG emissions or remove CO2 equivalents (CO2e) from the atmosphere. However, VCMs are fragmented and relatively unregulated. Furthermore, some offset projects have not removed or avoided GHG emissions as claimed. Even with these challenges, VCMs provide a market-based mechanism for corporates to fund climate projects globally to enable us to meet our climate goals. 

Based on interviews with market participants and our own research, we make several recommendations to improve transparency, efficiency, and trust in VCMs. First, international standards on measuring and disclosing corporate GHG emissions should be further developed and standardized. Corporates should disclose steps taken to reduce their emissions and the types of offsets purchased. Furthermore, we would recommend exploring what is the optimal mix of types of offsets in terms of avoidance, reduction, and removal; and nature-based versus technology-based. Second, to address integrity issues, we suggest greater adoption of monitoring, recording and verification (MRV) tools such as smart sensors, satellite technology, AI, and blockchain technology. Third, based on our interviews, intermediaries have started to offer innovative products that would enable greater scaling of these markets such as bundling of offset projects and greater use of forward contracts. Fourth, the availability of real-time information to market participants on offset projects and market developments provided by third parties should be encouraged. Fifth, the implementation of a framework or set of principles that incentivizes good behavior by market participants should be discussed. Sixth, greater funding from governments for research and implementation of promising technologies should be encouraged. Finally, policymakers along with market participants should explore synergistic benefits between VCMs and Compliance Carbon Markets.

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In this blog, Chakravorti discusses voluntary carbon markets (VCMs) and their potentially important role to enable us to meet the goals of the Paris Agreement. Carbon offsets allow corporates to negate their residual greenhouse gas emissions including indirect emissions in corporates upstream and downstream value chain, commonly referred to as scope 3 emissions. While this market has been around for 30 years, policymakers have recently focused their attention VCMs as necessary step to meet our climate challenge. However, policymakers warn that purchasing offsets should not be the first step for corporates but only used after steps to reduce emissions have taken place. Some recommendations are made that are critical for these markets to scale.