The carbon market is a voluntary platform that allows companies to offset their emissions. This is in contrast to a compliance market, which involves companies being required to reduce their own emissions as part of a regulatory scheme (such as the Clean Air Act). The VCM provides finance to critical climate mitigation activities that would not otherwise be viable. As such, it is a critical component of the global effort to lower greenhouse gas emissions and limit climate change.
Our research on the Fortune Global 500 shows that reducing carbon dioxide has a significant financial payoff for companies, with those who reduced their reported emissions year over year earning on average nearly $1 billion more in profit than their peers. Increasingly, organizations are making commitments to reduce their carbon footprint and support the fight against climate change. Some of these efforts are based on internal initiatives, others are aimed at contributing to external initiatives by purchasing high-integrity carbon credits. Those purchasing carbon credits are often individuals, but can also be companies or governments.
Regardless of the motivation, those buying carbon.credit are seeking to demonstrate their environmental credentials. The global voluntary carbon market is therefore a key opportunity to lower carbon impacts. The VCM is a complex ecosystem with a wide variety of standards, organizations, and certification bodies that define project standards, host registries, verify projects, and issue carbon credits. While the VCM is a private and non-governmental market, it is not without its challenges. The current state of the market is plagued by large information asymmetries between project developers, standards organizations, and certifiers. In addition, reputational concerns from companies who use carbon credits may limit demand.
There are two types of carbon credit in the market: reduction credits and removal credits. Reduction credits are created through activities that reduce fossil fuel use, such as improved energy efficiency or programs that cut methane emissions from livestock and landfills. These types of projects account for the majority of certified credits in the market.
Removal credits, on the other hand, are created through nature-based solutions that capture and sequester carbon from the atmosphere, such as reforesting degraded land or planting trees. These projects are more commonly used to offset a company’s unavoidable emissions. In the voluntary market, credits can be bought and sold before they are "retired," and each credit has a unique serial number to ensure that it cannot be double-claimed.
To qualify for a credit, projects must pass stringent quality assurance requirements and be verified by an independent third party that the avoided or removed carbon is real, quantifiable, and permanent. Projects must also meet a range of criteria, including ensuring that they are sustainable and that the benefits they provide to local communities outweigh the cost of the emissions reductions. These rigorous checks are what makes the VCM different from other carbon markets that are driven by government-mandated emission reductions, such as the Clean Air Act and emissions trading programs.