Action for Building a Voluntary Carbon Market
Trade carbon credits are tradable permits that allow companies to emit, over a certain period of time, an amount of greenhouse gas that has been reduced, sequestered or avoided. These credits are then traded on a regulated carbon market that limits emissions from companies to a set number.
As global climate change continues to threaten human civilization, more and more organizations are pledging to reduce their greenhouse gas emissions. Despite technological advances, however, many businesses will find it challenging to reduce their emissions as much as they would like.
For these organizations, trade carbon credits represent an important solution to the problem of reducing their own emissions and offsetting those they cannot. This approach is a key component of the transition to net-zero emissions, and it provides an additional incentive for companies to reduce their overall carbon footprints.
Six Areas of Action for Building a Voluntary Carbon Market
The market for trade carbon credits has developed over the past few years. Some large, voluntary carbon markets, such as the European Union’s Emissions Trading System (ETS), have emerged. A new generation of smaller, voluntary credit markets is also emerging. In some cases, these markets are being established to satisfy regional or national policy requirements for limiting greenhouse gas emissions.
While these markets may provide some limited benefits, they are characterized by limited liquidity and scarce financing. Furthermore, their ability to support supply-chain financing is often impeded by a lack of risk-management services and data availability.
In the face of such challenges, building an effective voluntary carbon market requires concerted effort across a number of fronts, from supply to trade. In a report released by the Technical Secretariat for Voluntary Carbon Markets (TSVCM), six areas of action are identified that will support the scaling up of voluntary carbon markets:
A major challenge in today’s voluntary carbon market is the absence of efficient and secure transactions between buyers and suppliers. This is because credits are highly heterogeneous and can have a variety of attributes associated with the underlying project. These attributes impact the value of credits, and can also create a wide range of risks for both parties.
To ensure that carbon credits are genuine emissions reductions, the quality of their underlying projects must be verified. This can be accomplished through an independent verification process and by following a series of “core carbon principles.” Resilient and scalable infrastructure is critical for efficient and effective trade and for ensuring that the market has a sustainable and resilient long-term future. Such infrastructure includes the listing and trading of reference contracts, clearinghouses, meta-registries, and counterparty default protection.
In addition to a strong regulatory framework, the development of an effective voluntary carbon market requires the implementation of credible market integrity assurance mechanisms. These include the development of standards, infrastructure and oversight that support the integrity of trading systems.
Market-based demand signals for a robust, sustainable carbon market A growing number of companies and individuals are purchasing credits to offset their emissions. These offsets are typically used to purchase goods and services that have a low carbon footprint, such as electric vehicles or energy-efficient homes.