The voluntary carbon market enables private investors, governments, non-governmental organisations, and businesses to voluntarily purchase carbon offsets to offset their emissions. The largest category of buyers comprises private firms that purchase carbon offsets for resale or investment. If, for example, an airline company wants to claim carbon neutrality, it first needs to calculate how many carbon emissions cannot be eliminated. A regenerative farming carbon project in Brazil can then be used to purchase equivalent carbon offset credits. This carbon offset project allows the airline company to claim carbon neutrality.
What is the Difference Between the Voluntary Carbon Market and the Compliance Market?
The compliance market is regulated by national, regional or international carbon reduction regimes. These markets operate under a cap-and-trade system where only a certain amount of “allowances” (basically a permit that “allows” you to emit GHGs) are created. This then limits the amount of GHGs that can be emitted by a country or industry.
The cap represents a finite supply of allowances. You can’t create or remove allowances but they can be traded.
The voluntary carbon market (VCM) functions outside of the compliance market. Those that participate in this market are not required to reduce their emissions — it’s entirely voluntary. Many companies participate because they feel it is the socially responsible thing to do or shareholder pressure to address emissions.
Instead of a cap-and-trade system, the VCM uses a project-based system in which there is no finite supply of allowances.
Who participates in the VCM?
There are several key participants actively involved in the VCM. These participants include:
Project developers. Project developers focus on producing the carbon credits that other sectors or industries will buy.
Consumers. This group is made up of private companies, NGOs, governments, universities and individuals who purchase carbon credits from producers.
Retail traders. Traders purchase credits in bulk from suppliers, bundle the credits in portfolios, and then sell them to the end buyer, usually for a commission.
Brokers. A broker will buy carbon credits from a trader and market them to a consumer. A broker will typically charge a commission. It is common for a broker to also act as a trader.
Third-party verifiers. These are organisations, typically NGOs, that verify a project meets its stated objectives and volume of emissions
Examples of the types of projects that can be invested in on the VCM include:
Renewable energy
Industrial gas capture
Energy efficiency
Forestry initiatives (avoiding deforestation)
Clean water
Regenerative agriculture
Wind power
Biogas
Oil recycling
Solar power
Water filters
How is calculated carbon offset price today?
Several variables contribute to how a carbon credit is priced, including:
Size of project. Larger projects that produce higher volumes of carbon credits are often associated with a lower price. Smaller projects are often more expensive to implement but produce fewer carbon credits.
Location of offset. Where does the environmental project take place? Locations where there is conflict and higher risk may make the project more expensive.
Vintage. What year did the emission reduction occur? Older projects are typically priced lower.
Quality. The standard in which the project was certified can affect the price.
Co-benefits. A co-benefit is any positive impact that is produced by the project above and beyond GHG emissions. For instance, if a project creates jobs for local communities or increases biodiversity, these would be considered co-benefits.
1MTN has expertise covering all steps of the development and management of emission reduction projects. We cooperate with technology providers, local partners and private and public organisations to identify and manage emission reduction projects that avoid or reduce the release of greenhouse gases into the atmosphere.
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