Differences between Compliance and Voluntary Carbon Credits
Global Context
In the current global context, carbon markets play a crucial role in efforts to combat climate change. By putting a price on carbon, these markets encourage reductions in greenhouse gas emissions and spur innovation in clean technologies. It is important to understand how different approaches to carbon markets, whether mandatory or voluntary, contribute to global sustainability goals and the Paris Agreement.
What is the Voluntary Carbon Market (VCM)?
The Voluntary Carbon Market offers companies, non-profit organizations, governments and individuals the opportunity to buy and sell carbon credits. A carbon credit represents the reduction of one metric ton of carbon dioxide or greenhouse gas emissions. Companies like Microsoft, Google and Starbucks are using VCM to achieve their carbon neutrality goals. By 2022, the actual value of VCM was approximately $2 billion¹.
Case studies
An illustrative example is the reforestation project in Costa Rica, financed through the VCM, which contributed not only to the absorption of CO2, but also to the conservation of biodiversity and the development of local communities. On the other hand, the EU ETS (European Union Emissions Trading Scheme) has demonstrated how strict regulations and well-managed allocations can lead to significant emissions reductions in the industrial sector.
The difference between the Voluntary Carbon Market and the Compliance Market
The compliance market is regulated by governments or international institutions with a role in carbon reduction. It operates under a cap-and-trade system, limiting the amount of greenhouse gases a country or industry can emit.
On the other hand, the voluntary carbon market operates outside the compliance market. Participants are not required to reduce their emissions, but do so voluntarily, often out of social responsibility or public image.
Volunteer vs. Conformity
- Voluntary Market: Trades Carbon Credits by issuing voluntary carbon offset certificates through a project-based system (offset projects mean compensation).
- Compliance Market: Trades the allocations available to countries through the cap-and-trade system.
Prices in VCM vs Compliance Markets
Prices of carbon credits in the VCM vary widely depending on project type, location, co-benefits and vintage. The 2020 World Bank report shows that VCM prices start at less than $1/ton CO2e and can go up to $119/ton CO2e². In the compliance market, the weighted average carbon price is USD 34.99³, higher than in the VCM, but still below the threshold recommended by the High Level Commission on Carbon Pricing.
Types of Projects in VCM
VCM projects range from afforestation, biodiversity conservation or community activities such as efficient cooking or heating systems, education, etc. Community projects produce fewer carbon credits, but generate additional socio-economic and environmental benefits⁴.
Participants in VCM
Important participants in the voluntary carbon credit market include companies from all industries and fields, suppliers, project developers, consumers, retailers and public authorities.
Verification of Carbon Credits from VCM
When purchasing carbon credits, buyers should only consider relevant projects that can provide full documentation and a rigorous process. It is necessary to have a register of credits where the number of certificates available and those withdrawn (purchased) appear. Some projects may also use various standards from Verra, Plan Vivo, Gold Standard, American Carbon Registry and Climate Action Reserve⁶.
Investments in Voluntary Credits
VCM is open to everyone from businesses and governments to individual investors. Many flight operators now offer customers the opportunity to offset the carbon emissions of their flights⁷.
Conclusion
Voluntary carbon credits are here to stay. More and more companies and individuals feel the need to reduce their carbon footprint. For companies that want to achieve carbon neutrality, VCM is often a necessary tool.
Implications for the Future
Looking ahead, it is essential to develop and integrate more carbon market mechanisms, both nationally and internationally. This could include setting higher carbon prices and expanding compliance markets to include more sectors. It is also crucial to ensure the transparency and verifiability of VCM projects to maximize their positive impact on the environment and society.
References used in the article
- Climate Neutral Group. What Exactly is 1 Tonne of CO2?
- Carbon Offset Guide. Voluntary Offset Program.
- Carbon Offset Guide. Mandatory & Voluntary Offset Markets.
- UN Climate Change. Emissions Trading.
- S&P Global. Voluntary Carbon Markets.
- World Bank. State and Trends of Carbon Pricing 2020.
- Rabobank. Can voluntary carbon markets change the game for climate change?
- World Bank. Report of the High-Level Commission on Carbon Prices.
- UN Environment Programme. Discussion Paper on Governmental Carbon-Pricing.
- Carbon Credit Capital. Value of Carbon Market Update 2021.
- White & Case. Voluntary Carbon Markets:A Blueprint.