How Do You Get Carbon Credits?

Carbon Credits
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How Do You Get Carbon Credits?

Wondering how you can get carbon credits?

You’re not alone. Many do – especially after seeing just how rapidly the industry has grown.

There are many reasons carbon credits are booming: increased regulation, improved standards, and accessibility are just a few.

So really, if you’re interested in getting carbon credits, it’s a great time to do so.

First of all, what are carbon credits exactly?

Carbon credits essentially represent metric tons of carbon. Simply put, one carbon credit allows or offsets one metric ton of carbon emissions.

The carbon market is where carbon credits are bought and sold.

There are two kinds of carbon markets: Compliance Carbon Markets (otherwise known as Regulatory Markets) and Voluntary Carbon Markets (VCM).

Compliance Carbon Markets (Regulatory Carbon Markets)

Compliance markets are government regulated. The largest carbon compliance markets are in the European Union, China, Australia, and Canada.

With the compliance carbon market, the government tells various industries how much carbon they can emit. It’s then up to a company within that industry to stay under their allotted carbon amount.

The problem is, for some companies, staying within their permitted carbon threshold is simply not possible.

This doesn’t mean that they’re not committed to reducing their carbon emissions.

It just means that they can’t. Perhaps the tech to reduce or eliminate emissions isn’t available yet, or the tech to reduce or eliminate emissions isn’t accessible (it is too expensive to utilize, at least for now). It could be as simple as the electricity in their country being largely provided by fossil fuels.

That’s where carbon credits come in.

For example, Company A emits 150 metric tons of carbon into the atmosphere, but its government only allows it to emit 50. So, company A must do something to neutralize those extra emissions. It purchases 100 carbon credits (1 carbon credit = 1 metric ton of carbon) to offset that carbon.

Companies can purchase two different types of carbon credits on the compliance carbon market:

  • Permits to pollute; or
  • Project-based reduction credits.

A permit to pollute essentially says, “Hey, we went over our emissions, so we’re paying a fee for every metric ton of carbon above what we were allowed.”

It’s important to note that the fees can be pretty excessive, so this isn’t necessarily a get-out-of-jail-free card. The price for permits increases annually, and the permitted amount also shrinks each year to push industries to go green. The government aims to reduce carbon emissions – not for companies to continue emitting them. So, when companies must purchase permits to pollute, it isn’t exactly favorable for them to do so.

Project-based reduction credits work differently.

With a project-based carbon credit, a company offsets its carbon emissions by investing in environmental projects such as forestry and conservation, improved agriculture practices, and renewable energy. Take a look at the table listed below from Offsetsguide.org to get an idea of how carbon offset projects work:

carbon offset project guide

One metric ton of carbon is offset from the atmosphere through environmental projects for every project-based carbon credit purchased. Therefore, these types of carbon credits are also known as carbon offsets.

This allows companies to do more than just buy permits to pollute. It enables them to do something positive to negate the extra emissions into the atmosphere. In other words, they’re becoming “carbon neutral.”

The good news is that project-based reduction credits aren’t just available on the compliance carbon market. Carbon offsets are the sole credit offered on the voluntary carbon market.

Voluntary Carbon Market (VCM)

What’s great is that when it comes to VCM, it isn’t just limited to companies in regulated areas.

Individuals and NGOs across the globe can purchase offsets too. That means that offsets are available to everyday consumers.

The VCM works differently because it is entirely voluntary. So, no government regulation or government mandate causes companies (or individuals) to purchase credits on the VCM. They’re simply doing so because they want to. They see the value carbon credits and offsets can bring to their organization and lives by making them carbon neutral.

Here is a chart from Climate Care that maps out the different carbon credits and market types.

the different types of carbon credits
(Climate Care is based in Oxford and Nairobi. They finance, develop, and manage carbon reduction projects globally.)

How are carbon credits and offsets verified?

While carbon credits for the compliance market are government regulated, carbon offsets for the VCM are not. That doesn’t mean that they’re not vetted – simply that they’re just verified by third parties.

Critics felt this process wasn’t stringent enough in the past, but verification methods have changed. It has become far more accurate due to new regulations agreed upon at COP26, standardized across the globe.

Third-party entities are non-profit organizations that ensure that customers receive what they are paying for. They measure the amount of carbon offset through an environmental project and interpret the data, giving any offset project with their seal a green light for approval.

Third-party verifications include the Verified Carbon Standard (managed by Verra), the Gold Standard, the American Carbon Registry (managed by Winrock), and Climate Action Reserve.

They’re committed to ensuring that offset projects are high-quality, so that those purchasing offsets aren’t throwing their money into something that isn’t real. Below are some of their standards.

carbon credits standards

Let’s look at Verra for a moment since many consider them to be the premier standard.

verra carbon credits standard

Verra has a network of auditors on hand to follow up on all Verra-approved offset programs. They oversee all operational aspects, aligning them with stringent standards as set by Verra. More importantly, these auditors are assigned to projects that align with their area of expertise. Because of this process, to date, more than 1,775 certified VCS projects have collectively reduced or removed more than 865 million tons of emissions from the atmosphere.

Where can you purchase carbon offsets?

As an individual, it’s unlikely that you’ll be able to purchase carbon credits directly from the source (ex: a farmer). However, you can buy credits through a third party (through the VCM), so you have a few options.

  • You can choose to offset carbon when you make a purchase.

Many companies allow consumers to add “offsets” to their purchases to offset their emissions. For example, numerous commercial airlines are doing this so that their customers can fly in a green way.

Look at American Airlines, for example. Their non-profit, Cool Effect, allows customers to purchase offsets to reduce the impact of their flight. This is done during the checkout process, making it quite simple for any customer to use.

american airline carbon credits

Other airlines, such as Delta, United, and British Airways, are doing the same.

Nori.

Nori works with individuals, companies, and NGOs, making purchasing offsets simple. For example, on Nori’s website, once you select “remove carbon” on the Nori homepage, you can enter the number of credits you would like to buy. Currently, they cost $15 each, with an additional 15% fee for processing.

buy carbon removals nori

If you’re a business owner, you can even use various tools that Nori has available to calculate your carbon emissions and purchase a subscription of offsets each month.
nori carbon offsets purchase

To date, 75,553 metric tons of carbon have been offset through Nori.

Gold Standard.

Gold standard is one of the oldest marketplaces, developed over a decade ago. They have created 2,300 projects in over 98 countries and have reduced 191 million tons of carbon.

gold standard carbon credits marketplace

What customers love about Gold Standard is the ability to narrow down projects based on what aligns with your own values. This makes the process of purchasing offsets very personalized.

gold standard carbon offset options

South Pole.

South Pole has developed over 700 climate action projects worldwide. They have carbon calculators for individuals (and organizations) to calculate their carbon footprint that also help find projects that align with their needs.

south pole climate action project carbon calculator

  • If you’re a farmer or own land, you can produce carbon credits yourself to sell.

Anyone who owns or operates land can produce and sell carbon offsets to increase their profits while helping the environment. This is especially true of farmers and ranchers. This can be done by:

  • Conservation tillage or no-tillage practices,
  • Nutrient management and precision farming,
  • Returning biomass to the soil as mulch after harvest,
  • Planting cover crops off-season, as well as rotating crops,
  • Promoting forest regrowth and converting acreage into grasslands or woodlands,
  • Using flood irrigation systems instead of surface irrigation systems,
  • Alternating manure management and feeding schedules; and
  • Switching to alternate, renewable fuels that are low carbon.

A third-party expert from one of the verification sites listed above can then verify data from your property and conduct a site visit to see how many offsets your project is eligible to receive. Since the VCM is expected to expand rapidly over the next ten years (and through 2050), these projects have excellent earnings potential.

The price of carbon offsets is increasing.

With most of the world focused on hitting net-zero by 2050, carbon offsets are at an all-time high.

The reason why is that net-zero and neutrality goals can only be achieved with the help of massive carbon offset purchases. Demand is up, and supply is low. As such, the prices continue to increase. In fact, the current E.U. price for carbon offsets is at more than €80/ton.

Here’s the average price for various types of projects that generate carbon credits:

carbon credits pricing by type

California is the only state in the U.S. with a rigid carbon market – which is where most offsets are sourced. But other states are starting to take the lead.

So, the income potential is seemingly endless for farmers throughout Europe and the U.S. – where the carbon offset industry is growing.

What about green investments?

Investing in carbon credits, carbon ETFs, and carbon stocks is an excellent way to diversify your investment portfolio and also do something to help the environment.

The Fossil Free Fund is a great tool that you can use to help you identify mutual funds and ETFs that are environmentally conscious.

fossil free fund tool

In addition to finding top-rated, green funds, you can search for funds that you currently have within your 401K, retirement plan, or personal portfolio to see if they are invested in the fossil fuel industry. This way, you can make changes if need be.

Carbon Market Growth.

According to experts surveyed by the Taskforce for Scaling Voluntary Carbon Markets (TSVCM):

“Based on stated demand for carbon credits, demand projections from experts… and the volume of negative emissions needed to reduce emissions in line with the 1.5-degree warming goal… the market size [for carbon offsets] in 2030 could be between $5 billion and $30 billion at the low end and more than $50 billion at the high end.”

Some experts even believe the VCM could reach $100 billion by 2030 – up from just $300 million in 2018.

Carbon credits help companies and individuals meet emissions goals. They can also help everyday farmers and landowners worldwide earn extra income. So, carbon credits serve both to spark economic development globally as well as a method of fighting climate change.

Carbon credits and offsets are a win for all.

Renewable Energy to Evaluate Options as Carbon Certifiers Tighten Rules

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Renewable Energy to Evaluate Options as Carbon Certifiers Tighten Rules

Renewable energy’s goal has always been decarbonization. But, with renewable energy projects central to the carbon credit industry, the focus has changed.

In the past, companies used renewable energy projects to create carbon credits. These projects differed from their usual operations. Profits made were then put right back into those projects to keep them running.

But now, credits are worth so much more. The voluntary carbon market has reached $1 billion. This is up from just $300 million in 2018. Some experts think it could reach $100 billion.

As such, energy companies consider carbon credits a financial tool. So, they are no longer getting carbon credits for “extra” projects. Instead, companies are obtaining credits for projects that are a part of their original operating plan.

Carbon Certifiers respond with changes.

Some experts feel that the credits issued as a part of regular operations could negatively affect the carbon market. Because of this, many certifiers have said they will only give credits for renewables in countries that aren’t as developed.

Gold Standard said, “any national or a regional grid-connected Renewable Energy project located in an Upper Middle- and High-Income Country (as classified by the World Bank) shall be deemed ineligible for the issuance of GS-VERs or GS-CERs.”

Certified Carbon Standard agreed.

“Where certain project types have moved beyond their need to be supported by carbon financing, it is not appropriate for Verra to continue supporting such project types.”

Because of this shift, many project owners want other options. And the Renewable Energy Certificates market seems to be a good choice.

Renewables are the sole focus of RECs.

The Importance of renewables.

Research has shown that fossil fuels have caused the Earth’s temperature to increase .3 and 1 degree Celcius. In 2018, 89% of carbon emissions were from the fossil fuel industry. In 2019, GHG emissions were at 36.7 metric tons.

Since renewable energy is needed to fight climate change, incentives to switch to and produce renewables are essential.

Gold Standard and Verra have both said that their regulations on renewable energy credits do not apply to REC market certification.

CBON – Ninepoint Carbon Credit ETF

Simon H
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CBON – Ninepoint Carbon Credit ETF


 

The Ninepoint Carbon Credit ETF (CBON) came in hot on the heels of the Horizon ETF (CARB), with the former launching on the NEO exchange just a week after the latter.

Similar to CARB, CBON’s holdings are comprised entirely of carbon allowance futures. Where they differ, however, is that CBON provides exposure to a mix of the three leading carbon emissions trading schemes:

  • The European EUAs,
  • The Californian CCAs, and
  • The RGGIs of the northeastern U.S. states.

This makes CBON more similar to the previously mentioned top U.S. carbon credit ETF KRBN, which also holds a mix of futures for all three types of carbon allowances.

Ninepoint is a leading alternative investment manager focused on the clean energy economy. With this Fund, investors can access the global emissions market, which is expected to grow significantly over the next couple of decades.

An orderly energy transition supports Canada’s long-term energy leadership and is supported by various incentives. The investment community is also contributing to the success of this transition.

For Canadian investors looking for something with more balanced exposure to the compliance carbon markets instead of just the E.U.’s Emissions Trading System like KRBN, CBON is a good choice.

  • In addition, CBON has a second, U.S. Dollar-denominated listing – CBON.U. This is the exact same product as CBON, just trading under U.S. Dollars instead of Canadian Dollars.

For those carbon conscious Canadian investors who already have investments or savings held in USD, choosing CBON.U instead can help eliminate the currency risk associated with making an investment in CBON.

CBON Stock Predictions, Articles, and News

Merger Creates North America’s Largest Carbon Credit Originator and Marketer

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Merger Creates North America’s Largest Carbon Credit Originator and Marketer

Bluesource, a provider of carbon credits, and Element Markets, a distributor of environmental commodities, have joined forces.

The new entity “TPG Rise Climate” will be managed by the alternative asset manager – TPG (NASDAQ: TPG).

TPG Rise Climate will be the largest creator and marketer of carbon credits and environmental credits in North America.

This transaction highlights the potential for consolidation in the market for ESG (environmental, social, and corporate governance) advisory services.

Bluesource advises businesses on how to minimize their carbon footprint by using carbon offsets and initiatives ranging from reforestation to wastewater treatment.

Bluesource previously announced a $500 million partnership with private equity firm Oak Hill Advisors to purchase timber forests for use in offset schemes.

Element Markets assists corporations in producing renewable natural gas while simultaneously providing carbon and other emission credits. Element Markets was acquired by TPG in January 2021.

There were no financial details disclosed except that NGP Energy Capital Management, another private equity firm, will also have a stake in TPG Rise Climate.

TPG Rise Climate business unit partner Marc Mezvinsky believes that “combining Element Markets and Bluesource will allow us to channel much-needed capital and solutions to deliver a robust supply of third-party-verified credits via nature-based sequestration, avoided nature loss, methane destruction, low-carbon fuels, and new and innovative pathways,”

Element Chief Executive Angela Schwarz, will lead the combined company and Bluesource co-founder Bill Townsend will serve as chief strategy officer.

TPG Rise Climate will employ approximately 150 people.

Singapore to go NetZero 2050 and Increase Carbon Price

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Singapore to go NetZero 2050 and Increase Carbon Price

To reach net-zero emissions, Singapore will raise the price of carbon. As such, heavy polluters will pay $50-$80 per ton by 2030.

Singapore plans to invest revenue in green technology.

According to Finance Minister Lawrence Wong, “Over the coming decade, we expect to see a greening of traditional sectors of our economy like aviation, energy, and tourism. At the same time, emerging green sectors like green finance and carbon services will grow in prominence.”

Singapore has not released information about who this will impact. However, regulations currently apply to facilities that emit more than 25,000 metric tons of carbon each year.

Singapore will stagger price increases – starting at $25 in 2024 and reaching $45 in 2026.

Though a positive step, some experts believe this isn’t enough to combat climate change. They think prices need to be closer to $160 per metric ton.

Singapore’s commitment to net-zero emissions.

Singapore’s goal is to reach net-zero by or close to 2050.

  • Last year, Singapore invested $55 million in 12 research projects. These projects involve carbon capture and hydrogen fuels.
  • By 2030, Singapore will issue $35 billion worth of green bonds to fund public sector projects.
  • Other projects include phasing out fossil fuel vehicles by 2040 (and setting up more charging stations).
  • Singapore will also auction carbon credits related to Africa, Asia, and Latin America projects through its voluntary global carbon exchange, Climate Impact X.

“We aim to move Singapore into the forefront of green technologies, where new innovations are developed, trialed, scaled up, and eventually exported to the rest of the world. We will work hard to grab the first-mover advantage,” Wong said.

Isaac Neo, a spokesperson for advocacy group Singapore Climate Rally, said that “The climate measures announced today during the Budget are a step in the right direction.”

“High-income countries like Singapore should achieve these goals even earlier to give low-income countries more time to transition,” Neo added.

Singapore plans to release more details over the coming weeks.

The Top Carbon ETF’s of 2022: Investing Ideas for Canadians

Simon H
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The Top Carbon ETF’s of 2022: Investing Ideas for Canadians

With the decarbonization trend in full swing around the world, carbon ETF’s and stocks have become more accessible investments for retail investors than ever before.

In particular, Canadian investors will be pleased to know that options are starting to open up for those without access to the American markets, or those who would rather not deal with currency exchange and associated fees.

Previously, those who wanted exposure to the carbon allowance or offset markets had their choices limited mostly to products listed in the U.S.

However, earlier this February, the first Canadian-listed carbon credits ETFs hit the exchanges up north. We’ll cover the top carbon ETF’s of 2022 options below:

Horizons Carbon Credits ETF (CARB)

Listed on the Toronto Stock Exchange, Horizon’s Carbon Credits ETF (CARB.TSX) is the first carbon-credit-related investment product to list on the Canadian markets.

A passive fund based on the Horizons Carbon Credits Rolling Futures Index, CARB is comprised solely of European Carbon Allowance (EUA) futures, with contracts rolled forward as they expire.

Of the two major types of carbon allowance futures, EUAs had the superior performance last year, as the chart below shows:

carbon credit future prices in 2021, carbon etf

Many of the other leading carbon credit investment products on the U.S. exchanges, such as the KraneShares Global Carbon Strategy ETF (KRBN), have holdings that are heavily weighted towards EUA futures over the other regional carbon credits, or are comprised of EUA futures entirely, like the iPath Series B Carbon ETN (GRN).

As such, CARB is a good choice for Canadian investors looking for an ETF similar to GRN, with an emphasis on European carbon allowances.

  • You can learn more about CARB here.

Ninepoint Carbon Credit ETF (CBON / CBON.U)

The Ninepoint Carbon Credit ETF (CBON) came in hot on the heels of the Horizon ETF (CARB), with the former launching on the NEO exchange just a week after the latter.

Similar to CARB, CBON’s holdings are comprised entirely of carbon allowance futures. Where they differ, however, is that CBON provides exposure to a mix of the three leading carbon emissions trading schemes:

  • The European EUAs,
  • The Californian CCAs, and
  • The RGGIs of the northeastern U.S. states.

This makes CBON more similar to the previously mentioned top U.S. carbon credit ETF KRBN, which also holds a mix of futures for all three types of carbon allowances.

Ninepoint is a leading alternative investment manager focused on the clean energy economy. With this Fund, investors can access the global emissions market, which is expected to grow significantly over the next couple of decades.

An orderly energy transition supports Canada’s long-term energy leadership and is supported by various incentives. The investment community is also contributing to the success of this transition.

For Canadian investors looking for something with more balanced exposure to the compliance carbon markets instead of just the E.U.’s Emissions Trading System like KRBN, CBON is a good choice.

  • In addition, CBON has a second, U.S. Dollar-denominated listing – CBON.U. This is the exact same product as CBON, just trading under U.S. Dollars instead of Canadian Dollars.

For those carbon conscious Canadian investors who already have investments or savings held in USD, choosing CBON.U instead can help eliminate the currency risk associated with making an investment in CBON.

  • You can learn more about CBON here.

The NEO ETF Tracker

The NEO exchange has launched user-friendly market intelligence portal to track all things ETF. It’s a place where investors can sort and filter for any particular ETF, providing a one stop location for real-time institutional grade market data.

This market expands the ESG and net zero markets by covering ETF’s from all across the Canadian market landscape.

Powering the NEO ETF portal is Trackinsight, which provides news data and analytics to many tier 1 digital media companies and platforms.

Most Canadians have access to online brokerage accounts and can easily access the following US based ETF as well.

KraneShares Global Carbon Strategy ETF (KRBN.NYSE)

KRBN is the world’s largest carbon ETF with a mix of carbon allowances from various compliance markets. It’s also one of the largest dollar volume ETF’s trading in the carbon markets.

KRBN is focused on providing exposure to the performance of various compliance markets. Retail investors and other financial institutions are already using these funds to invest in the carbon markets.

The ETF contains various types of carbon allowances available in different regions. Some of these include the European Union Allowances and the California Carbon Allowances.

Through its holdings, KRBN allows investors to add exposure to the performance of the compliance markets without having to purchase futures.

Those who believe that carbon allowance prices will continue to rise in 2022 will want to keep an eye on this ticker.

Carbon Streaming Corporation (NETZ.NEO and OFSTF)

It would be remiss to talk about Canadian carbon investments and not bring up NETZ, trading on the NEO exchange.

Not only was NETZ the first carbon-related investment of any kind to hit the Canadian markets, it also still remains the only listed company of its kind on any exchange.

carbon etf netz price performance since inception

In addition to being the first streaming/royalty type company in the carbon space, NETZ is also still one of the only companies focusing on carbon offset credits – the voluntary carbon market – as opposed to carbon allowances, which are tied to the compliance markets.

Since it’s an individual company as opposed to an investment product like an ETF, NETZ is a much higher risk investment than something like CBON or CARB. In addition, the voluntary carbon markets are still in their early stages, which further compounds the risk factors.

However, for Canadian investors with a greater appetite for risk, NETZ offers unique exposure to the voluntary carbon offset markets with a business model already previously proven to work in other sectors.

  • You can learn more about NETZ here.

Strong Carbon Net Zero Mandates

Due to the large number of companies that have announced their intention to be net-zero, and the amount of money that’s going into renewable energy, it’s becoming a major theme in the financial markets.

Among the tech companies that are leading this charge are Microsoft, Facebook, Netflix, and Apple. Mining and energy companies like Barrick, ConocoPhillips and Exxon are also making major corporate moves to go net zero.

The increasing number of investors interested in carbon will accelerate as 2025 and 2030 net zero target gets closer.

CARB – Horizons Carbon Credits ETF

Simon H
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CARB – Horizons Carbon Credits ETF


 

Listed on the Toronto Stock Exchange, Horizon’s Carbon Credits ETF (CARB.TSX) is the first carbon-credit-related investment product to list on the Canadian markets.

A passive fund based on the Horizons Carbon Credits Rolling Futures Index, CARB is comprised solely of European Carbon Allowance (EUA) futures, with contracts rolled forward as they expire.

Of the two major types of carbon allowance futures, EUAs had the superior performance last year, as the chart below shows:

carbon credit future prices in 2021, carbon etf

Many of the other leading carbon credit investment products on the U.S. exchanges, such as the KraneShares Global Carbon Strategy ETF (KRBN), have holdings that are heavily weighted towards EUA futures over the other regional carbon credits, or are comprised of EUA futures entirely, like the iPath Series B Carbon ETN (GRN).

As such, CARB is a good choice for Canadian investors looking for an ETF similar to GRN, with an emphasis on European carbon allowances.

  • Click here to learn about the other top canadian ETF: CBON.

CARB.TO Stock Predictions, Articles, and News

NASDAQ’s Puro.earth Launch Carbon Registry

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NASDAQ’s Puro.earth Launch Carbon Registry

Puro.earth launched Puro Registry, a public registry dedicated to carbon removal and CO2 Removal Certificates (CORCs).

Puro.earth is a B2B marketplace, standard, and registry focused solely on verifiable carbon removal. The platform currently provides carbon removal services to some of the world’s leading corporations, including Shopify, Microsoft and others.

On the Puro Registry individuals can view CORCs that have been retired.

Retirement occurs when a beneficiary makes a net-zero or carbon neutrality claim that is supported by the CORCs’ carbon sequestration properties.

Carbon sequestration is when carbon has been captured from the atmosphere and stored in a durable carbon sink.

Marianne Tikkanen, Head of Carbon Removal Supply at Puro.earth commented:

“The carbon market is evolving quickly, but it lacks transparency – which is paramount for trust”.

“During the transition period from carbon offsets to removals, it is the media and the general public that will validate the truthfulness of corporate claims. Now you can go to registry.puro.earth and verify these claims for yourself by searching for corporates that have made carbon removal claims based on CORCs,”

Nasdaq last year announced it had acquired a majority stake in the company.

Carbonplace Gets More Banks to Scale Carbon Trading

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Carbonplace Gets More Banks to Scale Carbon Trading

Last year, Project Carbon (as it was called at the time) was launched by 4 major banks NatWest Group, CIBC, National Australia Bank, and Itaú Unibanco.

The goal is to develop a new technology platform, (now called Carbonplace), to provide trading of voluntary carbon credits.

UBS, Standard Chartered, and BNP Paribas have recently joined the Carbonplace project to help scale and build secure infrastructure.

They expect to have it fully operational by the end of 2022, with the goal of:

  • Increased delivery of high-quality carbon offset projects
  • Create a liquid carbon credit marketplace with price certainty and transparency
  • Develop a strong ecosystem to support the offset market
  • Create tools to help clients manage climate risk

Last Sept, they announced that they did their first transaction on the platform.

“Carbonplace will reduce barriers to entry in the voluntary carbon market, and give project developers in the global south direct access to large numbers of customers looking to fund carbon reduction and removal projects,” said Chris Leeds, head of carbon markets development at Standard Chartered.

The voluntary carbon market is growing at a record pace as more and more companies are setting net-zero pledges.

The easiest way for companies to reach those carbon-neutral targets is by purchasing carbon credits from a verified source such as Verra, Gold Standard, Climate Action Reserve, and the American Carbon Registry.

What is the Voluntary Carbon Market?

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What is the Voluntary Carbon Market?
What is the size of the voluntary carbon market?In an effort to curb climate change, big companies like Microsoft, Google, and Starbucks are setting ambitious goals to achieve carbon neutrality and the Voluntary Carbon Market (VCM) is helping them to do so.

The VCM gives companies, non-profit organizations, governments, and individuals the opportunity to buy and sell carbon offset credits. A carbon offset is an instrument that represents the reduction of one metric tonne of carbon dioxide or GHG emissions.

To put this in perspective, to capture one ton of CO2 emissions you would have to grow approximately 50 trees for one-year ¹.

Companies that are unable to reach their greenhouse gas (GHG) emission targets can purchase carbon offset credits by investing in environmental projects that can avoid, reduce, or remove carbon emissions.

For instance, an airline company that wants to claim carbon neutrality can calculate how many carbon emissions they are unable to get rid of. They can then purchase an equivalent amount of carbon offset credits by investing in a regenerative farming project in Brazil using the VCM. In doing so, the airline company can claim carbon neutrality.

As of 2022, the real voluntary carbon market is valued at around $2 billion.

What is the Difference Between the Voluntary Carbon Market and the Compliance Market? 

The compliance market is regulated by national, regional, or international carbon reduction regimes. These markets operate under a cap-and-trade system where only a certain amount of ‘allowances’ (basically a permit that ‘allows’ you to emit GHGs) are created. This then limits the amount of GHGs that a country or industry can emit.

The cap represents a finite supply of allowances. You can’t create or remove allowance but they can be traded.

If an industry is able to achieve its mandated targets or, better yet, if they emit less than their allowance, it can sell the extra credits to someone else. The ability to trade surplus credits can financially motivate participants to reduce their overall emissions.

Examples of compliance carbon markets include the Kyoto Protocol, The European Union emissions trading system, the California emissions trading system, the Australia emissions trading system, the British Columbia emissions trading system, and the New Zealand emissions trading system.

The voluntary carbon market functions outside of the compliance market. Those that participate in this market don’t need to reduce their emissions, it’s entirely voluntary. Many companies participate because they feel it is the socially responsible thing to do, because of shareholder pressure, or because it’s a good PR move.

Instead of a cap-and-trade system, the VCM uses a project-based system in which there is no finite supply of allowances.

Within the VCM more carbon credits can be created through the development of environmental projects. Companies can buy these credits to offset unavoidable emissions and reach their targets.

Voluntary vs. Compliance Market

Voluntary Market Compliance Market 
Exchanged Commodity Carbon offsets. Facilitated by the project-based system Allowances. Facilitated by the cap-and-trade system.
How is the market regulated? Functions outside of the compliance market. National, regional or international carbon reduction regimes E.g. Kyoto Protocol, California Carbon Market
What is the price? Voluntary credits tend to be cheaper because they cannot be used in compliance markets.2 Several factors impact the price such as project type, project size, location, co-benefits, and vintage. Compliance credits tend to be more expensive because they are driven by regulatory obligations.3
Who can purchase credits? Businesses, governments, NGOs, and individuals Companies and governments have adopted emission limits established by the United Nations Convention on Climate change
Where do credits trade? Currently no centralized voluntary carbon credit market. Project developers can sell credits directly to buyers, through a broker or an exchange, or sell to a retailer who then resells to a buyer. Companies that surpass their emission targets can sell their surplus credits to those looking to offset emissions. Credits can be sold under the Kyoto Protocols emissions trading scheme.4

What Type of Environmental Projects are Found in the VCM? 

The VCM offers a wide variety of environmental projects to interested investors. The goal of all of these projects is to reduce or remove GHG emissions or carbon dioxide from the atmosphere.

Projects range from small community-based activities such as clean-cookstoves, to large industrial-style projects including high-volume hydro plants and commercial reforestation.

Community-based projects typically produce smaller volumes of carbon credits but also generate more additional socio-economic and environmental co-benefits.5

A co-benefit can include anything from saving endangered animals from extinction to improving local water quality or creating sustainable jobs. Project developers often align co-benefits with the UN’s Sustainable Development Goals (SDGs) as these co-benefits can help to increase the overall value of a credit.

Large industrial projects are capable of producing larger volumes of carbon credits but don’t always generate strong co-benefits. As a result, credits from these large projects may trade at a discount compared to the projects that achieve SDGs.

voluntary carbon market vcm mechanisms

While there are a wide variety of projects to choose from, they all have one thing in common. To be part of the VCM, each project must be “additional.”

This means that the removal or reduction of carbon or GHGs would not have occurred without the offset project.

For instance, a project developer looking to preserve a forest that is to be clear cut in Vietnam will have to prove that if the proposed project did not occur, the forest would be cut down.

Examples of the types of projects that are investable in the VCM include:

  • Renewable energy
  • Industrial gas capture
  • Energy efficiency
  • Forestry initiatives (avoiding deforestation)
  • Clean water
  • Regenerative agriculture
  • Wind power
  • Biogas
  • Oil recycling
  • Solar power
  • Water filters

Who participates in the VCM?

There are several key participants that are actively part of the VCM. These participants include:

  • Project developers. Project developers work to produce the carbon credits that other sectors or industries will buy.
  • Consumers. This group includes private companies, NGOs, governments, universities, and individuals that purchase carbon credits from producers.
  • Retail traders. Traders purchase credits in bulk from suppliers, bundle the credits in portfolios, and then sell them to the end buyer, usually for a commission.
  • Brokers. A broker will buy carbon credits from a trader and market them to a consumer. A broker will typically charge a commission. It is common for a broker to also act as a trader.
  • Third-party verifiers. These are organizations, typically NGOs, that verify that a project meets its stated objectives and volume of emissions.

What is the pricing for VCM vs the compliance markets?

The pricing of carbon credits in the VCM is not as straightforward as it is in the compliance market. This is due to the many types of environmental projects that are available. Prices vary widely according to the category of the project (e.g. renewable energy vs. forestry) and even within a particular category. You can follow live carbon prices right here.

Several other variables also contribute to how a carbon credit is priced, including:

  • Size of project. Larger projects that produce higher volumes of carbon credits often have a lower price. Smaller projects are often more expensive to implement but produce fewer carbon credits.
  • Location of offset. Where does the environmental project take place? Locations where there is conflict and higher risk may make the project more expensive.
  • Vintage. What year did the emission reduction occur? Older projects are typically priced lower.
  • Quality. The standard in which the project was certified can affect the price.
  • Co-benefits. A co-benefit is any positive impact that is produced by the project above and beyond GHG emissions. For instance, if a project creates jobs for local communities or increases biodiversity, these are types of co-benefits.

According to a 2020 report by the World Bank, carbon prices on the VCM start at less than US$1/ton CO2e and increase to US$119/ton CO2e. And the price for almost half of emissions are at less than US$10/tCO2e.6

Rabobank, a Dutch multinational banking financial services company, reports that renewable energy projects have the lowest average prices at US$ 1.4/ton CO2e while projects in forestry and land use are on the higher end of the scale at US$ 4.3/ton CO2e.7

Pricing can also be affected by the co-benefits generated by the project. Projects that meet the UN’s SDGs can help to increase the value of the carbon credits.

Larger scale projects that don’t generate as many co-benefits or don’t meet the additional SDGs may trade at a discount.

To meet the temperature goals outlined in the Paris Agreement, the High-Level Commission on Carbon Prices stated that prices of at least US$40-80/tCO2 were necessary by 2020 and US$50 to $100/tCO2e by 2030.8 The OECD estimates a price of US$147 is needed by 2030 to reach net-zero emissions by 2050.9 

In the compliance market, the current weighted carbon price is $34.99.10 This is higher than the VCM pricing but still below the High-Level Commission threshold.

The bottom line when looking at both the VCM and compliance markets is that the current carbon prices are too low to meet targets.

Where do these Credits Trade?

There is currently no centralized voluntary carbon market.11 Instead, project developers, or companies can sell their credits directly to buyers or through a broker. Project developers can also sell their credits to a retailer who can then resell the credits to a buyer. All voluntary credits must be verified by an independent third party and must adhere to existing standards.

Voluntary Demand Scenarios

There is incredible demand projected for the voluntary market. According to the Taskforce on Scaling Voluntary Markets, the market will grow to around 15-fold from 0.1 to 1.5-2 GtCO2 of carbon credits per year in 2030.

And that will sacle up to a maximum of 100-fold by 2050 (7-13 GtCO2 of carbon credits per year).

Producing this incredible scale of carbon elimination will be a massive challenge. And it will provide many nations and corporations with incredible opportunities. As the taskforce mentions in their 2021 report,

“This underlines the need for emissions reduction to be implemented as urgently as possible, and likely at a faster pace than identified in the NGFS scenarios.”

voluntary carbon market demand scenarios

Who verifies the Variable Carbon Market Credits? 

When purchasing carbon offset credits, consumers should only consider offsets that are third-party verified.

There are a number of standards that use different methodologies for measuring and verifying carbon emission reduction. These standards provide a robust verification process to ensure the credibility of emission reduction projects. The most widely used standard include:

  • Verra (The Verified Carbon Standard)
  • Plan Vivo
  • The Gold Standard
  • The American Carbon Registry
  • Climate Action Reserve
  • The Verified Carbon Standard Program

Click Here to read more detail on who verifies carbon credits.

Can regular Mom-and-Pop Investors Invest in Voluntary Credits?

The VCM is open to anyone who wants to participate. From businesses to governments, non-profits, universities, and even individual investors.

If you are taking a long flight or vacationing on a luxury yacht and you want to absolve your environmental sins, you can buy carbon credits to offset your emissions. In fact, many airlines are making it easy for individuals to offset their flights. They list the amount of CO2 emitted by the flight and then give customers the opportunity to fly net-zero for a price which is offered at checkout.

The Bottom Line

Voluntary carbon credits are here to stay. More and more companies and individuals are feeling the need to do their part to reduce their carbon footprint. And, for companies that want to achieve carbon neutrality, the VCM is often a necessary tool.

References

¹ Climate Neutral Group. What Exactly is 1 Tonne of CO2? Accessed Aug 4, 2021
2 Carbon Offset Guide. Voluntary Offset Program. Accessed Aug 3, 2021
3 Carbon Offset Guide. Mandatory & Voluntary Offset Markets. Accessed Aug 3, 2021
4 UN Climate Change. Emissions Trading. Accessed Aug 3, 2021
5 S&P Global. Voluntary Carbon Markets. Accessed Aug 3, 2021
6 World Bank. State and Trends of Carbon Pricing 2020. Accessed Aug 4, 2021
7 Rabobank. Can voluntary carbon markets change the game for climate change? Accessed Aug 5, 2021
8 World Bank. Report of the High-Level Commission on Carbon Prices. Accessed Aug 5, 2021
9 UN Environment Programme. Discussion Paper on Governmental Carbon-Pricing. Accessed Aug 5, 2021
10 Carbon Credit Capital. Value of Carbon Market Update 2021. Accessed Aug 5, 2021
11 White & Case. Voluntary Carbon Markets:A Blueprint. Accessed Aug 5, 2021

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