Jun 28, 2024 7:12:53 AM

Voluntary Carbon Market: 101

In the ever-evolving climate action landscape, the Voluntary Carbon Market (VCM) stands as a beacon of innovation and ambition. As the urgency to mitigate climate change intensifies, the VCM has emerged as a dynamic marketplace for organisations and individuals to take proactive steps to offset their carbon footprints.

Among the various strategies within this market, carbon removal projects hold the most potential to drive significant environmental impact. This insight explores the intricacies of carbon removal within the VCM, shedding light on its mechanisms, benefits, and its pivotal role in scaling climate action.

Understanding the Voluntary Carbon Market

What is the Voluntary Carbon Market?

The Voluntary Carbon Market (VCM) is a decentralised and flexible market where businesses, governments, and individuals can purchase carbon credits to offset their emissions. These carbon credits are "voluntary" as the purchasing of carbon credits to offset its emissions is not legally required or regulated. The VCM is driven by voluntary, private initiatives and is not regulated by governments.

The VCM allows greenhouse gas emitters to offset their emissions by purchasing carbon removal credits emitted by carbon removal projects, which remove greenhouse gases from the atmosphere. Simply put, the VCM allows organisations with ambitious climate targets to buy and sell carbon removal offset credits to become carbon neutral or Net Zero.

Organisations that are unable to reach their greenhouse gas (GHG) emission targets can purchase carbon removal offset credits to remove GHG from the atmosphere. They can also purchase carbon avoidance or carbon reduction credits to avoid additional GHG emissions from being released into the atmosphere or to reduce the amount of GHG being released into the atmosphere.

What is the difference between the Voluntary Carbon Market and the Compliance Market?

A compliance market is regulated by a national, regional, or international governmental organisation. To date, these markets mostly operate under a cap-and-trade system in which only a certain number of 'allowances' are created per organisation per year. This restricts the amount of GHGs that a country or industry can emit.

The cap represents a finite supply, so organisations can't change their allowance, but they can trade it. So, if one organisation doesn't emit as many GHG emissions as it has an allowance for, it can sell that excess allowance to another organisation that has emitted more GHG emissions than its allowance permits.

Some examples of Compliance Carbon Markets include:

The European Union emissions trading system
Kyoto Protocol
Australian emissions trading system
California emissions trading system
British Columbia emissions trading system
New Zealand emissions trading system

Unlike the compliance carbon market, which is regulated by government mandates, the Voluntary Carbon Market (VCM) operates voluntarily. This allows participants to go beyond regulatory requirements and contribute to global emission reduction efforts out of a commitment to corporate social responsibility, environmental stewardship, or consumer demand for greener products and services.

Organisations participating in the VCM don't need to reduce their emissions according to regulations; it's entirely voluntary. Some organisations may participate in the VCM because they feel it is their social responsibility to do so, or it may be due to stakeholder pressure or even to improve their brand reputation.

The VCM uses a project-based system instead of a cap-and-trade system. There is no finite supply of allowances, just the limited supply of carbon credits created by carbon offset projects. In the VCM, more carbon credits can be created by developing carbon offset projects. Organisations can then buy these credits to offset unavoidable emissions and reach their climate targets.

The role of Carbon Credits

Carbon credits are the cornerstone of the Voluntary Carbon Market (VCM). Each carbon offset credit is an instrument that represents the reduction of one metric tonne of carbon dioxide or GHG emissions. Carbon credits represent either an additional removal, reduction or avoidance of one metric tonne of carbon dioxide equivalent from the atmosphere.

These carbon credits can be generated through various projects, including renewable energy, energy efficiency, and, crucially, carbon removal initiatives. Carbon credits are created by calculating the difference in emissions from a baseline scenario and a project scenario. A baseline scenario is the amount of CO2 that would be captured through natural processes. A project scenario is the amount of CO2 removed or avoided by a project like Direct Air Capture (DAC) of Afforestation.

However, in many cases, carbon credit projects miscalculate the amount of carbon dioxide equivalent they have removed from or prevented from being emitted into the atmosphere. Because the VCM is not regulated by a national, regional, or international governmental organisation, it relies on voluntary standards and third-party verifiers to validate the credibility of carbon credits.

Carbon Removal: a Cornerstone of Climate Action

Defining Carbon Removal

Carbon removal refers to the process of extracting CO2 from the atmosphere and sequestering it in a way that prevents it from re-entering the atmospheric cycle. This can be achieved through natural processes, such as afforestation and soil carbon sequestration, or through technological solutions like direct air capture and bioenergy with carbon capture and storage (BECCS).

Importance of Carbon Removal

While reducing emissions is essential, due to our inaction over the last few decades, it is no longer sufficient to prevent the global temperature from rising above 1.5 degrees C (2.7 degrees F) above pre-industrial levels. We must remove carbon dioxide from the atmosphere, and a lot of it. Quickly.

To meet the ambitious targets of international climate agreements like the Paris Accord and prevent the negative implications of climate change, the world will need to reach Net Zero carbon emissions by 2050 and remain net negative thereafter.

Today, humanity produces more than 35 billion tons of CO2 each year. Earth's natural sinks, such as the ocean, plants, and soil, soak up and store just under half of that. However, as global temperatures rise, the ability of natural carbon sinks to absorb and store carbon diminishes.

To be Net Zero today, we would need to remove around 20 billion tones of carbon dioxide each year. In 2023, a technology-based carbon dioxide removal project removed and permanently stored ~10,000 tons of GHG emissions from the atmosphere. That's 0.00005% of the way there.

Mechanisms of Carbon Removal in the Voluntary Carbon Market (VCM)

Natural Carbon Removal methods

Afforestation and Reforestation:

Afforestation involves planting trees on previously non-forested land, while reforestation focuses on replanting trees in deforested areas. Trees act as carbon sinks, absorbing CO2 during photosynthesis and storing it in their biomass.

Soil Carbon Sequestration:

This method enhances the natural ability of soil to store carbon through practices such as no-till farming, cover cropping, and the application of organic fertilisers. Healthy soils can store significant amounts of carbon, reducing atmospheric CO2 levels.

Biochar:

Biochar is a stable form of carbon produced by heating organic material in the absence of oxygen (pyrolysis). When added to soil, biochar can sequester carbon for hundreds to thousands of years while also improving soil health and fertility.

Technological Carbon Removal methods

Direct Air Capture (DAC):

DAC involves using chemical processes to capture CO2 directly from the ambient air. The captured CO2 can then be stored underground or used in various industrial applications. DAC is a highly scalable solution that can potentially remove large volumes of CO2 if it is heavily invested in.

Bioenergy with Carbon Capture and Storage (BECCS):

BECCS combines biomass energy production with carbon capture and storage. Biomass is converted into energy, and the resulting CO2 emissions are captured and stored underground, resulting in a net reduction of atmospheric CO2.

Ocean-based Carbon Removal methods:

This includes techniques like ocean fertilisation and enhancing the alkalinity of seawater to increase the ocean's capacity to absorb and store CO2. These methods leverage the natural carbon absorption capabilities of the world's oceans.

Benefits and Challenges of Carbon Removal Projects

Benefits of Carbon Removal

Permanent and scalable solutions:

Carbon removal offers the potential for permanent sequestration of CO2, particularly through technological methods like DAC and BECCS. This ensures that the removed carbon does not re-enter the atmosphere, providing long-term climate benefits.

Co-benefits for ecosystems and communities:

Many carbon removal projects, especially those based on natural methods, offer significant co-benefits. Afforestation and soil carbon sequestration can enhance biodiversity, improve water quality, and support sustainable agriculture. These projects often provide socio-economic benefits to local communities through job creation and improved livelihoods.

Challenges of Carbon Removal

Verification and permanence:

Ensuring the permanence of carbon removal and accurately verifying the amount of CO2 sequestered are key challenges. Robust monitoring, reporting, and verification (MRV) frameworks are essential to guarantee the integrity of future carbon removal projects.

High costs and technological barriers:

Technological carbon removal methods like DAC and BECCS require significant capital investment and advanced infrastructure. Reducing costs and improving efficiency are necessary to make these solutions viable at scale.

Land and resource competition:

Natural carbon removal methods, such as afforestation and bioenergy crops, compete for land and resources that could otherwise be used for food production or conservation. Balancing these competing needs is a complex challenge that requires careful planning and sustainable practices.

Navigating the Voluntary Carbon Market

Ensuring quality and integrity

The quality and integrity of carbon credits are paramount in the VCM. High-quality carbon removal projects must be permanent, measurable, additional, safe, and legal. They must also meet rigorous MRV standards and be third-party validated by organisations that aren't incentivised to certify a carbon project, as is the case in some certification bodies today.

Buyers should also perform their own due diligence and choose credits from reputable projects and certification bodies. If organisations don't have a dedicated sustainability team, which includes some climate scientists, this should be done via a third party to ensure quality.

The role of certification standards

Certification standards such as Verra's Verified Carbon Standard (VCS), the Gold Standard, and the Climate Action Reserve provide frameworks for assessing and certifying carbon removal projects. These standards ensure that projects meet stringent criteria for environmental and social benefits, enhancing the credibility of carbon credits in the VCM.

However, unlike in a Compliant Carbon Market, which is regulated by a national, regional, or international governmental organisation, these third-party certification bodies are sometimes incentivised to approve carbon projects. This means they could fail to uphold the rigorous standards they advertise to improve their financial performance.

Leveraging market tools and platforms

Innovative platforms and tools are emerging to facilitate transactions and enhance transparency in the VCM. Digital marketplaces, blockchain technology, and advanced data analytics are being used to streamline the buying and selling of carbon credits, ensuring traceability and insurability while also reducing the risk of fraud.

The Future of Carbon Removal in the VCM

Scaling up ambition

As the climate crisis accelerates, the demand for carbon removal is expected to grow exponentially. Governments, corporations, and individuals are increasingly recognising the need for ambitious climate action that includes both emission reductions and carbon removal.

However, the required emission reductions aren’t happening, and global emissions are still rising. Governments will have no choice but to regulate organisations to offset their e-liabilities with e-assets that meet regulatory standards for Compliant Removal Assets: permanent, measurable, additional, safe and legal.

Scaling up the production of Compliant Removal Assets will require significant investment, policy support, and international collaboration.

Integrating Carbon Removal into corporate strategies

Forward-thinking organisations incorporate carbon removal into their sustainability strategies to achieve carbon neutral or Net Zero and enhance their environmental credibility. By investing in high-quality carbon removal projects, organisations can demonstrate their commitment to climate action and differentiate themselves in a competitive market.

In doing so, they anticipate future regulations and can invest in what will become Compliant Removal Assets to increase the value of their businesses. They understand the business case for owning Compliant Removal Assets as early as possible and know the high cost of inaction or getting their actions wrong: value destruction.

Conclusion: Embracing Carbon Removals to Achieve Climate Targets

Carbon removal in the Voluntary Carbon Market represents an extraordinary opportunity to drive meaningful climate action during this early stage of the carbon removal market. By understanding the different mechanisms and benefits of carbon removal, stakeholders can make informed decisions contributing to a sustainable and resilient future. The ambitious integration of carbon removal into the VCM not only helps mitigate climate change but also fosters environmental stewardship and socio-economic development.

As we navigate the complexities of the VCM, we must uphold the highest standards of quality and integrity, ensuring that carbon removal projects deliver genuine and lasting climate benefits. By leveraging innovative tools, fostering collaboration, and scaling up ambition, we can harness the full potential of carbon removal to create a legacy of hope, resilience, and prosperity for generations to come.

CaptureNow can take on the risk and complexity of buying compliant carbon removals, so you don't have to. Talk with on of our removal consultants to start your journey toward owning compliant e-assets today.

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