Climate Week has again taken over New York City, and this year’s event has turned the spotlight on one of the climate sphere’s most controversial subjects: the voluntary carbon market, or VCM, where hundreds of millions of dollars change hands annually in the sale of carbon offsets.
Dozens of market leaders — including buyers, sellers and managers of offset portfolios — have descended on the city to network, attend talks and drum up new interest in the VCM. The PR blitz reflects both the promise of the VCM, as well as its continued struggle to gain legitimacy.
The Biden administration recently hatched a plan to use the VCM to supplement U.S. climate aid to developing countries. And Deputy Treasury Secretary Wally Adeyemo is set to headline a Climate Week panel Wednesday that will explore how it can contribute to the climate fight.
But those moves come amid growing skepticism of its utility.
Numerous studies and investigations have found the VCM is littered with projects that do little to actually address the issue of climate change. And critics have warned the sale of offsets may discourage polluters from directly reducing their own carbon emissions.
Amid these concerns, the VCM has seen a sharp drop in value. Ecosystem Marketplace’s State of the Voluntary Carbon Market 2024 found the market shrank from nearly $2 billion in 2022 to about $700 million in 2023.
How the VCM responds to the criticism, and whether it can earn a meaningful place in the broader fight against global warming, are two questions that will consume the conversation at Climate Week — and likely for years afterward.
“We know there’s been a lot of negative press about the VCM, but the fact of the matter is it’s an incredibly important tool, and it’s not going away,” said Alexia Kelly, managing director of the Carbon Policy and Markets Initiative at the High Tide Foundation.
The premise of the VCM is simple.
Companies or individuals that want to counteract their planet-warming emissions can buy offsets from climate-friendly projects, such as protecting a rainforest that would otherwise be destroyed or investing in a low-carbon energy project that wouldn’t otherwise be built. But the VCM has been beset with problems since the first carbon offset projects kicked off in 1988, experts say.
Studies and investigations in recent years have found that many projects on the market aren’t actually reducing emissions that otherwise would be released into the atmosphere. Some protected forests likely would remain standing anyway, while many renewable energy projects likely would be built without financing from the market.
Some groups are trying to address these issues.
Standards bodies, such as the Integrity Council for the Voluntary Carbon Market, or ICVCM, oversee the market and set principles designed to ensure that projects reduce emissions and that standard setters comply with those principles. ICVCM recently has begun approving new carbon crediting methodologies aimed at improving the quality and integrity of new projects on the market.
Meanwhile, the nonprofit Voluntary Carbon Markets Integrity Initiative focuses on buyers of credits and provides guidance so companies can use those credits to achieve their climate targets and understand what those claims mean.
Even the Biden administration has recently weighed in, releasing a joint statement of policy and principles in May highlighting the need for improved transparency and integrity and outlining a set of nonbinding guidelines for the market.
But some experts are skeptical the new standards will have a meaningful effect.
“We don’t know how they’re going to address some of the more difficult project types and how stringent they really will be,” said Barbara Haya, director of the Berkeley Carbon Trading Project at the University of California, Berkeley. “My take is: We don’t know.”
Even if standards for new projects are rigorous, there’s still the problem of existing low-quality projects persisting on the market, warned Danny Cullenward, an energy policy expert and senior fellow at the University of Pennsylvania’s Kleinman Center for Energy Policy.
If low-quality projects are cheap enough, he argued — and they’re not subject to any consequences — only the most discerning buyers will care enough to spend the money on higher-quality outcomes.
“Which is precisely why I think the lack of enforcement for anything that’s not a high-quality outcome promising things it’s not actually delivering is one of the most important gaps even for people who think that the reform of this overall system is a worthwhile and practical effort,” Cullenward said. “They’re not going to succeed, I would argue, if there isn’t a consequence for the people who don’t follow the same path.”
Others are more optimistic about the market’s future.
“The good news is we’re definitely seeing movement from the old, I would say legacy methodologies, to the new, more improved, more transparent, higher-integrity versions,” said Jennifer Jenkins, chief science officer at the carbon credit firm Rubicon Carbon.
“I’m going to push back on the assumption that high price equals high quality,” she added. “Because there are a lot of cost-effective and also very high-quality, high-integrity projects.”
Kelly, who has been deeply involved with ICVCM’s work, says it’s in the middle of an assessment process and that reforms take time to take hold and become visible.
“There’s a lag in the market,” she said. “It takes time to build a new standard and then have those standards applied, and then have the market respond to those standards, because the project developers have to develop whole new projects based on these new methodologies.”
Elephants in the room
VCM-related events are front and center at this year’s Climate Week — many of them brimming with optimism about the industry’s future. Offset firms such as Puro.earth and Xpansiv, and trade associations such as the International Emissions Trading Association, are hosting their own climate summits. Talks and panels sprinkled throughout the week tout the role of carbon markets in financing social impact and achieving net zero.
Industry leaders say much of the hype stems from a growing global anxiety about the countdown to net zero — the point at which scientists say global greenhouse gases must spiral down to zero with any remaining hard-to-abate emissions canceled out by carbon offsets.
The U.N.’s Intergovernmental Panel on Climate Change, the world’s leading authority on climate science, has said the world must reach net zero around the year 2050 to preserve any chance of capping global warming at 1.5 degrees Celsius, the Paris Agreement’s most ambitious climate goal. Yet studies consistently warn that global emissions aren’t falling quickly enough to meet these timelines.
The IPCC’s own models recognize that carbon removal is essential to achieving net zero by 2050, a necessary strategy to offset difficult-to-decarbonize sectors of the economy in a timely fashion.
That’s part of what makes the offset market increasingly relevant as the 1.5 C target draws closer, said Antti Vihavainen, co-founder and CEO of Puro.earth, a carbon crediting platform focused on carbon removal projects, which are aimed at drawing carbon dioxide directly out of the atmosphere through natural or technological means.
“Everybody can do emissions reductions, and they should not be outsourced,” he said. “However, not everybody can do carbon removals, which are absolutely essential to get to net zero.”
At the same time, policymakers are looking to the carbon market as a way to mobilize climate finance while the timeline to 1.5 C narrows.
“Everybody realizes in general for climate action we’re just not mobilizing enough capital,” said Daniel Klier, CEO of the carbon project expert and climate consultancy South Pole. “So many people look at the carbon market as a market-based mechanism to mobilize finance.”
The Biden administration is among them. Government officials recently have backed the voluntary market as a way to supplement growing needs for climate finance and to ensure companies can meet their climate targets.
Adeyemo, of the Treasury Department, will put his imprimatur on reform efforts Wednesday when he headlines an event titled “Delivering High Integrity Carbon Markets.”
The Treasury Department already has highlighted the role voluntary markets can play in delivering money to fund nature restoration. Other Biden administration officials have spoken of the VCM’s importance in pulling in private-sector funding for clean energy efforts in developing countries that struggle to draw investments or enact other carbon-reducing measures.
At the same time, discussions surrounding an international carbon trading system — distinct from the VCM — are expected to take center stage at this year’s annual U.N. climate conference, which will convene in Azerbaijan in mid-November.
These negotiations center on a provision of the Paris Agreement known as Article 6, which would allow companies to offset some of their emissions by funding projects such as renewable energy development or carbon removal schemes. Those emissions are counted as part of a country’s emissions inventory and ultimately go toward helping it meet its pollution-cutting pledges under Paris.
The discussions swirling around the reform of the VCM are relevant to negotiations around Article 6, some experts say. The new standards and methodologies currently being applied to the voluntary market ideally should be similar to the ones the global community agrees on for the international market.
“It will be the worst thing if the U.N. has rules that are very different from where we’re going with ICVCM and reporting standards,” said Klier, the South Pole CEO. “Because then the same confusion occurs that we have at the moment, where different people use different standards.
“I think everything that we’ve been through in the last few years in the carbon market creates the rubric for where the Article 6.4 market should go.”
But the emissions trading mechanism under the Paris Agreement needs finalizing, and some international leaders and finance advisers say the challenges of the voluntary market remain a cause for concern.
“There is inadequate transparency and accountability in terms of what are the common interests between the market and ourselves,” said Yusuf Mkungula, principal secretary at the Ministry of Natural Resources and Climate Change in Malawi, referring to least developed countries and small island states.
“The prices keep on varying at each and every period of time,” he added, “so we believe that is also a frustration to all of us as we try to implement climate action.”
Meanwhile, some experts argue the amount of attention the VCM attracts is disproportionate to its overall role in the climate action arsenal. The market was valued at around $700 million last year, compared to trillions of dollars a year in clean energy investments.
“I don’t mean to write it off or suggest that it’s irrelevant — I work on it way more than I would prefer to because I think it’s very relevant,” Cullenward said. “But I think it’s really important not to lose sight — the financing flows are tiny, they don’t matter in relation to the main financial flows that do matter.”
At the same time, he added, the market continues to be plagued with examples of companies resorting to offsets rather than directly reducing their own emissions — even if those emissions are easy to abate.
“As long as it’s being used as permission to pollute, it’s not actually contributing to climate mitigation,” Cullenward said. “It’s maybe reducing harms a little. And that’s not enough. That’s just the start, and that’s maybe the elephant in the room.”
Clarification: This story has been updated to clarify the description of the company South Pole.
