Understanding Voluntary and Regulated Carbon Credits
In the last few years, the popularity (and scrutiny!) of the global carbon market has exploded, empowering environmentally conscious businesses to go beyond governmental requirements in reducing and offsetting their emissions. As explained by Greening Australia, this market enables individuals and corporations to balance out their greenhouse gas emissions without any legal mandate.
Is it one big carbon market?
Credits from specific carbon abatement projects comprise the voluntary carbon market, while compliance markets are overseen by Governmental or regional bodies, and are primarily cap-and-trade systems.
Within the voluntary market, several registries, such as Verra, Gold Standard, Climate Action Reserve and American Carbon Registry, ensure project adherence to methodology requirements, manage the issuance of credits and their eventual retirement/cancellation. The voluntary carbon market is centred around creating projects that are additional, permanent, and manage leakage risk.
Wait, what is a carbon project?
Carbon projects are initiatives set up specifically to reduce and remove emissions from the earth’s atmosphere, improve livelihoods, and protect nature. Carbon credits are awarded to the project developer for each tonne of CO2-equivalent that is abated.
Once carbon abatement is measured and verified, businesses and individuals purchase these credits to offset and balance their inevitable emissions. A notable instance was when AES Corporation, a U.S. utility firm, funded the first documented voluntary carbon offset program in the U.S., planting 52 million trees Guatemala in 1989.
On the contrary, regulated carbon credits are subject to government and regulatory scrutiny, and often requires businesses to participate. In countries like Australia, bodies such as ASIC (Australian Securities and Investments Commission) have the authority to outline and oversee carbon trading activities and the Clean Energy Regulator governs the scheme by determining methodologies, overseeing the scheme, and developing policy.
What is different about compliance markets?
The compliance market is dominated in volume and value by the European Union Emissions Trading Scheme, aiming to reduce emissions by at least 55% (with recent reforms increasing ambition further still) by 2030 compared to 1990 levels. To achieve this, they employ cap and trade systems. These systems set an emissions limit and offer incentives for staying below that limit. Such a setup promotes decarbonisation by making polluters pay while rewarding those who reduce emissions beyond their targets. Annually, the overseeing body decreases the supply to align with emissions reduction goals.
The compliance market holds a significant share of the carbon credit market. Both markets, however, play a crucial role in combating climate change. The compliance market focuses on reducing overall emissions. In contrast the voluntary market emphasises removing carbon from the atmosphere and allows those outside of the regulatory scope to participate for the good of the environment.
How does the global market work together?
Imagine Earth's atmosphere as a container. While allowances can reduce the inflow, the container remains full - the Earth's temperature is still above desired levels. To truly make a difference, carbon removal projects are particularly crucial. Experts believe that as allowances become scarce, efforts to ‘clear the container’ will ultimately intensify – this is already underway in Europe.
The beauty of carbon markets is their global impact. Their net effect remains the same regardless of where greenhouse gas emissions are reduced, contributing to a healthier planet. That is not without acknowledging the tremendous impact to community, biodiversity, society in those places where some projects operate.
So why the skepticism?
With the plethora of options in the voluntary market, it's understandable that many businesses are confused by the options, and turned away by the negative news media. Challenges arise when the quality of carbon credits in the market may vary due to inconsistent standards, ageing methodologies, and bad actors. Commensurately to some disappointing news, voluntary markets and their believers continually progress and raise the standard. Further, the complementary robust presence of regulated options is essential to ensure the reliability and quality of carbon credits utilised by the highest emitting corporations.