Carbon markets, whether regulated or voluntary, have emerged from global efforts to combat climate change. The regulated carbon market was primarily initiated by international agreements such as the Kyoto Protocol (in 1997) and the Paris Agreement (in 2015), which established legally binding emission reduction mechanisms. In contrast, the voluntary carbon market has evolved from private initiatives and voluntary commitments by businesses willing to achieve their net-zero goals, supported by rigorous certification standards to ensure the integrity of carbon credits.
REGULATED CARBON MARKETS
The regulated carbon market emerged in response to international initiatives such as the Kyoto Protocol and the Paris Agreement, which imposed legally binding obligations on developed countries to reduce their greenhouse gas (GHG) emissions. These agreements introduced flexibility mechanisms, such as the Clean Development Mechanism (CDM), and encouraged the development of cap-and-trade systems, thus laying the groundwork for the regulated carbon market. Entities within these jurisdictions must comply with these limits, either by reducing their emissions or purchasing allowances or credits. The most notable examples of regulated carbon markets include the European Union Emissions Trading System (EU ETS), the California Cap-and-Trade Program, and the Regional Greenhouse Gas Initiative (RGGI) in the northeastern United States.
Key characteristics of regulated carbon markets:
Legal mandate: participation in regulated carbon markets is compulsory for entities that fall under the jurisdiction of the respective regulations. These entities are usually large industrial emitters, power plants, and sometimes airlines.
Cap-and-trade mechanism: most regulated markets operate on a cap-and-trade principle, where a cap is set on the total amount of GHG emissions. Companies receive or buy emission allowances, which they can trade with each other as needed.
Strict monitoring and reporting: regulated markets have stringent monitoring, reporting, and verification (MRV) requirements to ensure compliance and integrity. Penalties for non-compliance are typically severe.
Limited scope and coverage: regulated carbon markets are limited to certain geographies that have taken such legally binding regulations, such as the EU, Switzerland or China.
VOLUNTARY CARBON MARKETS
The voluntary carbon market has developed alongside international initiatives, but operates independently of government mandates. It allows businesses, organizations, and individuals to proactively and voluntarily offset their emissions. Since the 2000s, many companies have started making voluntary commitments to reduce their carbon footprint as part of their Corporate Social Responsibility (CSR) strategies. These commitments have led to the creation of an OTC or over-the-counter market (transactions negotiated directly between the buyer and seller, offering greater flexibility and freedom compared to regulated markets), where companies purchase carbon credits to offset emissions they cannot directly reduce. These credits are generated by climate contribution projects such as reforestation, renewable energy, and energy efficiency. As a reminder, a carbon credit is a unit of measurement used to quantify the reduction, elimination, or capture of one tonne of carbon dioxide equivalent (CO2eq) or other greenhouse gases in the atmosphere.
The voluntary carbon market is booming. According to a McKinsey study, this market is expected to reach $40 billion by 2030 and $250 billion by 2050.
Key characteristics of the voluntary carbon market (VCM):
Voluntary participation: entities participate in the VCM out of a commitment to corporate social responsibility (CSR), environmental stewardship, or to meet consumer and investor expectations.
Diverse project types: the VCM supports a wide array of projects, including, among others, reforestation and afforestation, blue carbon, clean cookstoves, biochar, renewable energy, methane capture, and energy efficiency. This diversity allows for innovation and the development of new methodologies for carbon reduction.
Flexible standards and certifiers: unlike regulated markets, the VCM has multiple standards and certifying bodies, such as Verra’s Verified Carbon Standard (VCS), the Gold Standard, and the Climate Action Reserve. These standards ensure the credibility and quality of the carbon credits but vary in their specific requirements.
Market dynamics: the VCM is more susceptible to fluctuations in demand and supply, influenced by corporate strategies, consumer preferences, and broader economic conditions. This can lead to variability in carbon credit prices.
Recent developments in the Voluntary Carbon Market
The voluntary carbon market has been undergoing significant changes and growth, driven by increased corporate commitments to net-zero targets and the growing recognition of carbon offsets as a tool for climate action.
Surge in corporate net-zero pledges: there has been a marked increase in companies making net-zero commitments, leading to higher demand for carbon credits. Notably, large corporations such as Microsoft, Google, and Amazon have made substantial investments in carbon offset projects. To date, over 5,000 businesses across regions and industries have set emissions reduction targets grounded in climate science through the Science Based Targets initiative (SBTi).
Enhanced transparency and integrity: in response to criticisms about the quality and impact of some carbon offset projects, there has been a push towards greater transparency and integrity. Initiatives like the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), led by Mark Carney, former Governor of the Bank of England, aim to improve standardization and trust in the VCM. In addition, The International Carbon Reduction and Offset Alliance (ICROA) and the Voluntary Carbon Markets Integrity Initiative (VCMI) enhance the transparency and integrity of the voluntary carbon market by setting high standards, ensuring third-party verification, promoting transparency, preventing greenwashing, and supporting high-quality carbon offsets.
Technological innovations: advances in technology, including blockchain and remote sensing, are being integrated into the VCM to enhance the tracking, verification, and reporting of carbon credits. This technological shift aims to address issues of double-counting and ensure the genuine environmental impact of projects.
Focus on nature-based solutions: there is increasing interest in nature-based solutions (NBS), such as reforestation and afforestation, blue carbon and soil carbon sequestration. These projects not only reduce carbon but also offer co-benefits like biodiversity conservation and improved livelihoods for local communities.
At Apolownia, we stand as a reliable partner on the Voluntary Carbon Market, supporting our clients on their net-zero journey by providing nature-based high-quality projects certified by the highest integrity standards. With our approach based on a combination of cutting-edge scientific research, technological innovation and strategic partnerships, we commit to excellence and aspire to enhance the trustworthiness and integrity of the voluntary carbon market.
Regulated v. Voluntary Carbon Markets
Notes:
(1) Besides ETS, some countries have implemented a tax on carbon emissions (mainly fuels) to meet their decarbonization goals, such as Sweden, Norway, Canada, Finland, France, New Zealand, South Africa, Singapore and Colombia.
(2) As well as South Korea, Quebec, New Zealand, Mexico.
(3)(4) Harnessing the power of voluntary carbon markets, Accenture, 2023
(5) Credit Suisse estimation
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