Voluntary Carbon Market: An Overview and Future Prospects

Understanding the Voluntary Carbon Market (VCM)

The Voluntary Carbon Market (VCM) is a platform where individuals, businesses, and organizations voluntarily buy carbon credits to offset their greenhouse gas (GHG) emissions. Unlike mandatory emissions trading schemes, engaging in the VCM is a voluntary choice. For instance, a company may purchase carbon credits from a reforestation project to offset its emissions and claim carbon neutrality. Similarly, airlines might offer passengers the option to buy credits to offset their flight emissions through investments in renewable energy projects.

Operation of the VCM

The VCM comprises several key stakeholders:

• Project Developers: These entities initiate and manage projects that reduce or remove carbon emissions, such as renewable energy installations and afforestation initiatives.
• Registries: Organizations that set standards for carbon credits and issue them, with examples including Verra and Gold Standard.
• Certifiers/Verifiers: Independent bodies that assess and confirm the actual emission reductions achieved by projects.
• Buyers: Entities like corporations, NGOs, and individuals that purchase carbon credits to meet their sustainability goals or offset their emissions.
• Traders/Brokers: Intermediaries facilitating the buying and selling of carbon credits, linking project developers with buyers.

For example, a solar power project in a developing country might register with a registry and undergo verification, allowing a company in another country to purchase the resulting carbon credits.

Differences Between VCM and Emissions Trading Systems (ETS)

Key distinctions between the VCM and an Emissions Trading System (ETS) include:

• Participation: VCM is voluntary, while ETS is mandatory due to regulatory requirements.
• Price Discovery: VCM relies on market/project-based pricing, whereas ETS is market-based.
• Project Types: VCM encompasses diverse projects, including renewable energy and forestry, while ETS typically involves large industrial emitters.
• Oversight: VCM follows private registry standards, while ETS is governed by government authorities.
• Purpose: VCM focuses on voluntary emissions offsetting, while ETS is designed for mandatory compliance.

Projects Generating Carbon Credits in the VCM

A variety of projects can generate carbon credits in the VCM, including:

• Afforestation and Reforestation: Planting new trees or restoring forests that absorb carbon dioxide (CO₂).
• Renewable Energy: Projects such as wind, solar, and hydro that replace fossil fuel electricity generation.
• Methane Capture: Technologies that capture methane (CH₄) from sources such as landfills or livestock.
• Improved Cookstoves: Initiatives providing cleaner cookstoves that reduce biomass use and emissions.
• Waste Management: Projects involving composting or biogas generation from organic waste, lowering methane emissions from landfills.

For example, a project distributing fuel-efficient cookstoves in rural areas reduces deforestation and generates carbon credits by decreasing wood consumption.

Challenges Facing the VCM

The VCM currently faces several significant challenges:

• Integrity and Transparency: Concerns exist about projects overstating emission reductions and the lack of accessible data.
• Overestimation of Benefits: Some projects may have proceeded without carbon credit funding, raising questions about their "additionality."
• Lack of Permanence: Carbon sequestration from forestry projects can be reversed by logging or wildfires.
• Price Volatility: Fluctuating carbon credit prices can deter investments in projects.
• Poor Financing: Many projects struggle financially without additional funding beyond carbon credit revenues.

India's Engagement with the VCM

According to a 2023 report, India has a substantial presence in the VCM:

• Approximately 1,450 VCM projects are registered, with 61% being renewable energy projects.
• These projects have issued around 0.3 billion carbon credits, each representing one tonne of CO₂ equivalent.
• However, many Indian VCM projects lack financial viability without supplementary funding.

For example, a wind farm in Gujarat generating carbon credits might face operational risks if carbon prices remain low without external financial support.

Future Prospects for the VCM

The future of the VCM is uncertain and influenced by various factors:

• Optimistic Scenario: Increased global climate ambition could drive carbon credit prices up to $75–$125 per tonne by 2035.
• Challenges: Fewer than 20 countries have updated their national climate targets, and declining corporate enthusiasm for voluntary net-zero targets pose risks.
• Likely Outcome: While Emissions Trading Systems (ETS) may grow due to regulatory support, the VCM could continue to face credibility challenges.